Rewarding Trading Skills without Inducing Gambling
Pages: 925-962 | Published: 5/2015 | DOI: 10.1111/jofi.12257 | Cited by: 33
IGOR MAKAROV, GUILLAUME PLANTIN
This paper develops a model of active asset management in which fund managers may forgo alpha‐generating strategies, preferring instead to make negative‐alpha trades that enable them to temporarily manipulate investors' perceptions of their skills. We show that such trades are optimally generated by taking on hidden tail risk, and are more likely to occur when fund managers are impatient and when their trading skills are scalable, and generate a high profit per unit of risk. We propose long‐term contracts that deter this behavior by dynamically adjusting the dates on which the manager is compensated in response to her cumulative performance.
Change You Can Believe In? Hedge Fund Data Revisions
Pages: 963-999 | Published: 5/2015 | DOI: 10.1111/jofi.12240 | Cited by: 64
ANDREW J. PATTON, TARUN RAMADORAI, MICHAEL STREATFIELD
We analyze the reliability of voluntary disclosures of financial information, focusing on widely‐employed publicly‐available hedge fund databases. Tracking changes to statements of historical performance recorded between 2007 and 2011, we find that historical returns are routinely revised. These revisions are not merely random or corrections of earlier mistakes; they are partly forecastable by fund characteristics. Funds that revise their performance histories significantly and predictably underperform those that have never revised, suggesting that unreliable disclosures constitute a valuable source of information for investors. These results speak to current debates about mandatory disclosures by financial institutions to market regulators.
Innovation, Growth, and Asset Prices
Pages: 1001-1037 | Published: 5/2015 | DOI: 10.1111/jofi.12241 | Cited by: 214
HOWARD KUNG, LUKAS SCHMID
We examine the asset pricing implications of a production economy whose long‐term growth prospects are endogenously determined by innovation and R&D. In equilibrium, R&D endogenously drives a small, persistent component in productivity that generates long‐run uncertainty about economic growth. With recursive preferences, households fear that persistent downturns in economic growth are accompanied by low asset valuations and command high‐risk premia in asset markets. Empirically, we find substantial evidence for innovation‐driven low‐frequency movements in aggregate growth rates and asset market valuations. In short, equilibrium growth is risky.
Pages: 1039-1080 | Published: 5/2015 | DOI: 10.1111/jofi.12248 | Cited by: 81
CASEY DOUGAL, JOSEPH ENGELBERG, CHRISTOPHER A. PARSONS, EDWARD D. VAN WESEP
This paper documents that the path of credit spreads since a firm's last loan influences the level at which it can currently borrow. If spreads have moved in the firm's favor (i.e., declined), it is charged a higher interest rate than is justified by current fundamentals, whereas if spreads have moved to the firm's detriment, it is charged a lower rate. We evaluate several possible explanations for this finding, and conclude that anchoring to past deal terms is most plausible.
Is a VC Partnership Greater Than the Sum of Its Partners?
Pages: 1081-1113 | Published: 5/2015 | DOI: 10.1111/jofi.12249 | Cited by: 114
MICHAEL EWENS, MATTHEW RHODES‐KROPF
This paper investigates whether individual venture capitalists have repeatable investment skill and the extent to which their skill is impacted by the venture capital (VC) firm where they work. We examine a unique data set that tracks the performance of individual venture capitalists' investments over time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partners' human capital is two to five times more important than the VC firm's organizational capital in explaining performance.
Dividend Dynamics and the Term Structure of Dividend Strips
Pages: 1115-1160 | Published: 5/2015 | DOI: 10.1111/jofi.12242 | Cited by: 101
FREDERICO BELO, PIERRE COLLIN‐DUFRESNE, ROBERT S. GOLDSTEIN
Many leading asset pricing models are specified so that the term structure of dividend volatility is either flat or upward sloping. These models predict that the term structures of expected returns and volatilities on dividend strips (i.e., claims to dividends paid over a prespecified interval) are also upward sloping. However, the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their proposed dividend dynamics with processes that generate stationary leverage ratios. Under such policies, shareholders are forced to divest (invest) when leverage is low (high), which shifts risk from long‐ to short‐horizon dividend strips.
The Effect of Providing Peer Information on Retirement Savings Decisions
Pages: 1161-1201 | Published: 5/2015 | DOI: 10.1111/jofi.12258 | Cited by: 246
JOHN BESHEARS, JAMES J. CHOI, DAVID LAIBSON, BRIGITTE C. MADRIAN, KATHERINE L. MILKMAN
Using a field experiment in a 401(k) plan, we measure the effect of disseminating information about peer behavior on savings. Low‐saving employees received simplified plan enrollment or contribution increase forms. A randomized subset of forms stated the fraction of age‐matched coworkers participating in the plan or age‐matched participants contributing at least 6% of pay to the plan. We document an oppositional reaction: the presence of peer information decreased the savings of nonparticipants who were ineligible for 401(k) automatic enrollment, and higher observed peer savings rates also decreased savings. Discouragement from upward social comparisons seems to drive this reaction.
CEO Connectedness and Corporate Fraud
Pages: 1203-1252 | Published: 5/2015 | DOI: 10.1111/jofi.12243 | Cited by: 438
VIKRAMADITYA KHANNA, E. HAN KIM, YAO LU
We find that connections CEOs develop with top executives and directors through their appointment decisions increase the risk of corporate fraud. Appointment‐based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases the expected costs of fraud by helping conceal fraudulent activity, making CEO dismissal less likely upon discovery, and lowering the coordination costs of carrying out illegal activity. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on fraud. Appointment‐based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.
The WACC Fallacy: The Real Effects of Using a Unique Discount Rate
Pages: 1253-1285 | Published: 5/2015 | DOI: 10.1111/jofi.12250 | Cited by: 105
PHILIPP KRÜGER, AUGUSTIN LANDIER, DAVID THESMAR
In this paper, we test whether firms properly adjust for risk in their capital budgeting decisions. If managers use a single discount rate within firms, we expect that conglomerates underinvest (overinvest) in relatively safe (risky) divisions. We measure division relative risk as the difference between the division's asset beta and a firm‐wide beta. We establish a robust and significant positive relationship between division‐level investment and division relative risk. Next, we measure the value loss due to this behavior in the context of acquisitions. When the bidder's beta is lower than that of the target, announcement returns are significantly lower.
Corporate Taxes and Securitization
Pages: 1287-1321 | Published: 5/2015 | DOI: 10.1111/jofi.12157 | Cited by: 66
JOONGHO HAN, KWANGWOO PARK, GEORGE PENNACCHI
Most banks pay corporate income taxes, but securitization vehicles do not. Our model shows that, when a bank faces strong loan demand but limited deposit market power, this tax asymmetry creates an incentive to sell loans despite less‐efficient screening and monitoring of sold loans. Moreover, loan‐selling increases as a bank's corporate income tax rate and capital requirement rise. Our empirical tests show that U.S. commercial banks sell more of their mortgages when they operate in states that impose higher corporate income taxes. A policy implication is that tax‐induced loan‐selling will rise if banks’ required equity capital increases.