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Volume 69: Issue 3 (June 2014)

Refinancing Risk and Cash Holdings

Pages: 975-1012  |  Published: 5/2014  |  DOI: 10.1111/jofi.12133  |  Cited by: 422


We find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity of firms’ long‐term debt has shortened markedly, and this shortening explains a large fraction of the increase in cash holdings over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial policy decisions.

CEO Ownership, Stock Market Performance, and Managerial Discretion

Pages: 1013-1050  |  Published: 5/2014  |  DOI: 10.1111/jofi.12139  |  Cited by: 87


We examine the relationship between CEO ownership and stock market performance. A strategy based on public information about managerial ownership delivers annual abnormal returns of 4% to 10%. The effect is strongest among firms with weak external governance, weak product market competition, and large managerial discretion, suggesting that CEO ownership can reverse the negative impact of weak governance. Furthermore, owner‐CEOs are value increasing: they reduce empire building and run their firms more efficiently. Overall, our findings indicate that the market does not correctly price the incentive effects of managerial ownership, suggesting interesting feedback effects between corporate finance and asset pricing.

The Cross‐Section of Managerial Ability, Incentives, and Risk Preferences

Pages: 1051-1098  |  Published: 5/2014  |  DOI: 10.1111/jofi.12140  |  Cited by: 79


I estimate a dynamic investment model for mutual managers to study the cross‐sectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time‐varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay‐for‐performance sensitivities that relates to observable fund characteristics.

Connected Stocks

Pages: 1099-1127  |  Published: 5/2014  |  DOI: 10.1111/jofi.12149  |  Cited by: 287


We connect stocks through their common active mutual fund owners. We show that the degree of shared ownership forecasts cross‐sectional variation in return correlation, controlling for exposure to systematic return factors, style and sector similarity, and many other pair characteristics. We argue that shared ownership causes this excess comovement based on evidence from a natural experiment—the 2003 mutual fund trading scandal. These results motivate a novel cross‐stock‐reversal trading strategy exploiting information contained in ownership connections. We show that long‐short hedge fund index returns covary negatively with this strategy, suggesting these funds may exacerbate this excess comovement.

Legal Investor Protection and Takeovers

Pages: 1129-1165  |  Published: 5/2014  |  DOI: 10.1111/jofi.12142  |  Cited by: 32


This paper examines the role of legal investor protection for the efficiency of the market for corporate control when bidders are financially constrained. In the model, stronger legal investor protection increases bidders' outside funding capacity. However, absent effective bidding competition, this does not improve efficiency, as the bid price, and thus bidders' need for funds, increases one‐for‐one with the pledgeable income. In contrast, under effective competition for the target, the increased outside funding capacity improves efficiency by making it less likely that more efficient but less wealthy bidders are outbid by less efficient but wealthier rivals.

Thirty Years of Shareholder Rights and Firm Value

Pages: 1167-1196  |  Published: 5/2014  |  DOI: 10.1111/jofi.12138  |  Cited by: 162


This paper introduces a new hand‐collected data set that tracks restrictions on shareholder rights at approximately 1,000 firms from 1978 to 1989. In conjunction with the 1990 to 2006 IRRC data, we track shareholder rights over 30 years. Most governance changes occurred during the 1980s. We find a robustly negative association between restrictions on shareholder rights (using G‐Index as a proxy) and Tobin's Q. The negative association only appears after judicial approval of antitakeover defenses in the 1985 landmark Delaware Supreme Court decision of Moran v. Household. This decision was an unanticipated exogenous shock that increased the importance of shareholder rights.

Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks

Pages: 1197-1233  |  Published: 5/2014  |  DOI: 10.1111/jofi.12131  |  Cited by: 310


This paper quantifies how variation in economic activity and inflation in the United States influences the market prices of level, slope, and curvature risks in Treasury markets. We develop a novel arbitrage‐free dynamic term structure model in which bond investment decisions are influenced by output and inflation risks that are unspanned by (imperfectly correlated with) information about the shape of the yield curve. Our model reveals that, between 1985 and 2007, these risks accounted for a large portion of the variation in forward terms premiums, and there was pronounced cyclical variation in the market prices of level and slope risks.

The Market Value of Corporate Votes: Theory and Evidence from Option Prices

Pages: 1235-1271  |  Published: 5/2014  |  DOI: 10.1111/jofi.12132  |  Cited by: 58


This paper proposes a new method using option prices to estimate the market value of the shareholder voting rights associated with a stock. The method consists of synthesizing a nonvoting share using put‐call parity, and comparing its price to that of the underlying stock. Empirically, we find this measure of the value of voting rights to be positive and increasing in the time to expiration of synthetic stocks. The measure also increases around special shareholder meetings, periods of hedge fund activism, and M&A events. The method is likely useful in studies of corporate control and also has asset pricing implications.

Broad‐Based Employee Stock Ownership: Motives and Outcomes

Pages: 1273-1319  |  Published: 5/2014  |  DOI: 10.1111/jofi.12150  |  Cited by: 166


Firms initiating broad‐based employee share ownership plans often claim employee stock ownership plans (ESOPs) increase productivity by improving employee incentives. Do they? Small ESOPs comprising less than 5% of shares, granted by firms with moderate employee size, increase the economic pie, benefiting both employees and shareholders. The effects are weaker when there are too many employees to mitigate free‐riding. Although some large ESOPs increase productivity and employee compensation, the average impacts are small because they are often implemented for nonincentive purposes such as conserving cash by substituting wages with employee shares or forming a worker‐management alliance to thwart takeover bids.

Labor Mobility: Implications for Asset Pricing

Pages: 1321-1346  |  Published: 5/2014  |  DOI: 10.1111/jofi.12141  |  Cited by: 179


Labor mobility is the flexibility of workers to walk away from an industry in response to better opportunities. I develop a model in which labor flows make bad times worse for shareholders who are left with capital that is less productive. The model shows that firms face greater operating leverage by providing flexibility to mobile workers. I construct an empirical measure of labor mobility consistent with the model and document an economically significant cross‐sectional relation between mobility, operating leverage, and stock returns. I find that firms in mobile industries earn returns over 5% higher than those in less mobile industries.

The Real Impact of Improved Access to Finance: Evidence from Mexico

Pages: 1347-1376  |  Published: 5/2014  |  DOI: 10.1111/jofi.12091  |  Cited by: 366


This paper provides new evidence on the impact of access to finance on poverty. It highlights an important channel through which access affects poverty—the labor market. The paper exploits the opening of Banco Azteca in Mexico, a unique “natural experiment” in which over 800 bank branches opened almost simultaneously in preexisting Elektra stores. Importantly, the bank has focused on previously underserved low‐income clients. Our key finding is a sizeable effect of access to finance on labor market activity and income levels, especially among low‐income individuals and those located in areas with lower preexisting bank penetration.

The Business Cycle, Investor Sentiment, and Costly External Finance

Pages: 1377-1409  |  Published: 5/2014  |  DOI: 10.1111/jofi.12047  |  Cited by: 211


The recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time‐varies and, if so, what are the real effects. Consistent with time‐varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.


Pages: 1411-1412  |  Published: 5/2014  |  DOI: 10.1111/jofi.12169  |  Cited by: 0


Pages: 1413-1413  |  Published: 5/2014  |  DOI: 10.1111/jofi.12171  |  Cited by: 0