View All Issues

Volume 65: Issue 5 (October 2010)


Front Matter

Pages: i-iii  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01603.x  |  Cited by: 0


Outline of the Program
SEVENTY FIRST ANNUAL MEETING AMERICAN FINANCE ASSOCIATION

Pages: iv-v  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01608.x  |  Cited by: 0


FELLOW OF THE AMERICAN FINANCE ASSOCIATION FOR 2010

Pages: iv-v  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01605.x  |  Cited by: 0


AFA 2011 DENVER MEETINGS
SEVENTY FIRST ANNUAL MEETING AMERICAN FINANCE ASSOCIATION

Pages: vi-xxxiv  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01607.x  |  Cited by: 0


Participant Schedule Report
Participants in the AFA 2011 Denver Meetings
January 7-9, 2011

Pages: xxxv-lxv  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01606.x  |  Cited by: 1


Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States

Pages: 1637-1667  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01589.x  |  Cited by: 149

THORSTEN BECK, ROSS LEVINE, ALEXEY LEVKOV

We assess the impact of bank deregulation on the distribution of income in the United States. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved bank performance. Exploiting the cross‐state, cross‐time variation in the timing of branch deregulation, we find that deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Bank deregulation tightened the distribution of income by increasing the relative wage rates and working hours of unskilled workers.


Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?

Pages: 1669-1702  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01590.x  |  Cited by: 35

RICHARD C. GREEN, DAN LI, NORMAN SCHÜRHOFF

We study price discovery in municipal bonds, an important OTC market. As in markets for consumer goods, prices “rise faster than they fall.” Round‐trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Further, effective half‐spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to Treasuries also adjust with asymmetric speed in rising and falling markets. Finally, intraday price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.


Exploring the Nature of “Trader Intuition”

Pages: 1703-1723  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01591.x  |  Cited by: 42

ANTOINE J. BRUGUIER, STEVEN R. QUARTZ, PETER BOSSAERTS

Experimental evidence has consistently confirmed the ability of uninformed traders, even novices, to infer information from the trading process. After contrasting brain activation in subjects watching markets with and without insiders, we hypothesize that Theory of Mind (ToM) helps explain this pattern, where ToM refers to the human capacity to discern malicious or benevolent intent. We find that skill in predicting price changes in markets with insiders correlates with scores on two ToM tests. We document GARCH‐like persistence in transaction price changes that may help investors read markets when there are insiders.


Genetic Variation in Financial Decision-Making

Pages: 1725-1754  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01592.x  |  Cited by: 109

DAVID CESARINI, MAGNUS JOHANNESSON, PAUL LICHTENSTEIN, ÖRJAN SANDEWALL, BJÖRN WALLACE

Individuals differ in how they construct their investment portfolios, yet empirical models of portfolio risk typically account only for a small portion of the cross‐sectional variance. This paper asks whether genetic variation can explain some of these individual differences. Following a major pension reform Swedish adults had to form a portfolio from a large menu of funds. We match data on these investment decisions with the Swedish Twin Registry and find that approximately 25% of individual variation in portfolio risk is due to genetic variation. We also find that these results extend to several other aspects of financial decision‐making.


Diversification and Its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status

Pages: 1755-1788  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01593.x  |  Cited by: 71

NIKOLAI ROUSSANOV

Social status concerns influence investors' decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks. I model such concerns by emphasizing the desire to “get ahead of the Joneses,” which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk. The model predicts that investors hold concentrated portfolios in equilibrium, which helps rationalize the small premium for undiversified entrepreneurial risk. In the model, status concerns are more important for wealthier households. Consequently, these households own a disproportionate share of risky assets, particularly private equity, and experience greater volatility of consumption, consistent with empirical evidence.


Hedge Fund Contagion and Liquidity Shocks

Pages: 1789-1816  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01594.x  |  Cited by: 187

NICOLE M. BOYSON, CHRISTOF W. STAHEL, RENÉ M. STULZ

Defining contagion as correlation over and above that expected from economic fundamentals, we find strong evidence of worst return contagion across hedge fund styles for 1990 to 2008. Large adverse shocks to asset and hedge fund liquidity strongly increase the probability of contagion. Specifically, large adverse shocks to credit spreads, the TED spread, prime broker and bank stock prices, stock market liquidity, and hedge fund flows are associated with a significant increase in the probability of hedge fund contagion. While shocks to liquidity are important determinants of performance, these shocks are not captured by commonly used models of hedge fund returns.


Microstructure and Ambiguity

Pages: 1817-1846  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01595.x  |  Cited by: 58

DAVID EASLEY, MAUREEN O'HARA

A goal for stock exchanges is to increase participation by firms and investors. We show how specific features of the microstructure can reduce perceived ambiguity, and induce participation by both investors and issuers. We develop a model with sophisticated traders, who we view as expected utility maximizers with rational expectations, and unsophisticated traders, who we view as rational traders facing ambiguity about the payoffs to participating in the market. We show how designing markets to reduce ambiguity can benefit investors through greater liquidity, exchanges through greater volume, and issuing firms through a lower cost of capital.


“Time for a Change”: Loan Conditions and Bank Behavior when Firms Switch Banks

Pages: 1847-1877  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01596.x  |  Cited by: 116

VASSO IOANNIDOU, STEVEN ONGENA

This paper studies loan conditions when firms switch banks. Recent theoretical work on bank–firm relationships motivates our matching models. The dynamic cycle of the loan rate that we uncover is as follows: a loan granted by a new (outside) bank carries a loan rate that is significantly lower than the rates on comparable new loans from the firm's current (inside) banks. The new bank initially decreases the loan rate further but eventually ratchets it up sharply. Other loan conditions follow a similar economically relevant pattern. This bank strategy is consistent with the existence of hold‐up costs in bank–firm relationships.


Short Sellers and Financial Misconduct

Pages: 1879-1913  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01597.x  |  Cited by: 159

JONATHAN M. KARPOFF, XIAOXIA LOU

We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time‐to‐discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values.


Luck versus Skill in the Cross-Section of Mutual Fund Returns

Pages: 1915-1947  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01598.x  |  Cited by: 532

EUGENE F. FAMA, KENNETH R. FRENCH

The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark‐adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true α) in the extreme tails of the cross‐section of mutual fund α estimates.


A Bayesian Approach to Real Options: The Case of Distinguishing between Temporary and Permanent Shocks

Pages: 1949-1986  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01599.x  |  Cited by: 28

STEVEN R. GRENADIER, ANDREY MALENKO

Traditional real options models demonstrate the importance of the “option to wait” due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional “option to learn.” The implied investment behavior differs significantly from that in standard models. For example, investment may occur at a time of stable or decreasing cash flows, respond sluggishly to cash flow shocks, and depend on the timing of project cash flows.


Individual Investors and Local Bias

Pages: 1987-2010  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01600.x  |  Cited by: 196

MARK S. SEASHOLES, NING ZHU

The paper tests whether individuals have value‐relevant information about local stocks (where “local” is defined as being headquartered near where an investor lives). Our methodology uses two types of calendar‐time portfolios—one based on holdings and one based on transactions. Portfolios of local holdings do not generate abnormal performance (alphas are zero). When studying transactions, purchases of local stocks significantly underperform sales of local stocks. The underperformance remains when focusing on stocks with potentially high levels of information asymmetries. We conclude that individuals do not help incorporate information into stock prices. Our conclusions directly contradict existing studies.


MISCELLANEA

Pages: 2011-2011  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01601.x  |  Cited by: 0


Back Matter

Pages: 2013-2013  |  Published: 9/2010  |  DOI: 10.1111/j.1540-6261.2010.01602.x  |  Cited by: 0