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Volume 70: Issue 4 (August 2015)


Presidential Address: Does Finance Benefit Society?

Pages: 1327-1363  |  Published: 7/2015  |  DOI: 10.1111/jofi.12295  |  Cited by: 74

LUIGI ZINGALES

Academics’ view of the benefits of finance vastly exceeds societal perception. This dissonance is at least partly explained by an underappreciation by academia of how, without proper rules, finance can easily degenerate into a rent‐seeking activity. I outline what finance academics can do, from a research point of view and from an educational point of view, to promote good finance and minimize the bad.


Does Going Public Affect Innovation?

Pages: 1365-1403  |  Published: 7/2015  |  DOI: 10.1111/jofi.12275  |  Cited by: 154

SHAI BERNSTEIN

This paper investigates the effects of going public on innovation by comparing the innovation activity of firms that go public with firms that withdraw their initial public offering (IPO) filing and remain private. NASDAQ fluctuations during the book‐building phase are used as an instrument for IPO completion. Using patent‐based metrics, I find that the quality of internal innovation declines following the IPO, and firms experience both an exodus of skilled inventors and a decline in the productivity of the remaining inventors. However, public firms attract new human capital and acquire external innovation. The analysis reveals that going public changes firms' strategies in pursuing innovation.


The Value of Control and the Costs of Illiquidity

Pages: 1405-1455  |  Published: 7/2015  |  DOI: 10.1111/jofi.12207  |  Cited by: 18

RUI ALBUQUERQUE, ENRIQUE SCHROTH

We develop a search model of block trades that values the illiquidity of controlling stakes. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives. Using a structural estimation approach and U.S. data on trades of controlling blocks of public corporations, we estimate the value of control, blockholders' marketability discount, and dispersed shareholders' illiquidity‐spillover discount.


The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending

Pages: 1457-1493  |  Published: 7/2015  |  DOI: 10.1111/jofi.12251  |  Cited by: 45

JUN QJ QIAN, PHILIP E. STRAHAN, ZHISHU YANG

In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank's internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information production and use.


A Model of Mortgage Default

Pages: 1495-1554  |  Published: 7/2015  |  DOI: 10.1111/jofi.12252  |  Cited by: 100

JOHN Y. CAMPBELL, JOÃO F. COCCO

In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero‐profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan‐to‐value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable‐rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.


Do Prices Reveal the Presence of Informed Trading?

Pages: 1555-1582  |  Published: 7/2015  |  DOI: 10.1111/jofi.12260  |  Cited by: 79

PIERRE COLLIN-DUFRESNE, VYACHESLAV FOS

Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we study how measures of adverse selection respond to informed trading. We find that on days when activists accumulate shares, measures of adverse selection and of stock illiquidity are lower, even though prices are positively impacted. Two channels help explain this phenomenon: (1) activists select times of higher liquidity when they trade, and (2) activists use limit orders. We conclude that, when informed traders can select when and how to trade, standard measures of adverse selection may fail to capture the presence of informed trading.


Investment Decisions of Nonprofit Firms: Evidence from Hospitals

Pages: 1583-1628  |  Published: 7/2015  |  DOI: 10.1111/jofi.12234  |  Cited by: 8

MANUEL ADELINO, KATHARINA LEWELLEN, ANANT SUNDARAM

This paper examines investment choices of nonprofit hospitals. It tests how shocks to cash flows caused by the performance of the hospitals’ financial assets affect hospital expenditures. Capital expenditures increase, on average, by 10 to 28 cents for every dollar received from financial assets. The sensitivity is similar to that found earlier for shareholder‐owned corporations. Executive compensation, other salaries, and perks do not respond significantly to cash flow shocks. Hospitals with an apparent tendency to overspend on medical procedures do not exhibit higher investment‐cash flow sensitivities. The sensitivities are higher for hospitals that appear financially constrained.


The Brain Gain of Corporate Boards: Evidence from China

Pages: 1629-1682  |  Published: 7/2015  |  DOI: 10.1111/jofi.12198  |  Cited by: 83

MARIASSUNTA GIANNETTI, GUANMIN LIAO, XIAOYUN YU

We study the impact of directors with foreign experience on firm performance in emerging markets. Using a unique data set from China, we exploit the introduction of policies to attract talented emigrants and increase the supply of individuals with foreign experience in different provinces at different times. We document that performance increases after firms hire directors with foreign experience and identify the channels through which the emigration of talent may lead to a brain gain. Our findings provide evidence on how directors transmit knowledge about management practices and corporate governance to firms in emerging markets.


A Comparative-Advantage Approach to Government Debt Maturity

Pages: 1683-1722  |  Published: 7/2015  |  DOI: 10.1111/jofi.12253  |  Cited by: 45

ROBIN GREENWOOD, SAMUEL G. HANSON, JEREMY C. STEIN

We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short‐term securities. In a setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short‐term debt against the refinancing risk implied by the need to roll over its debt more often. We extend the model to allow private financial intermediaries to compete with the government in the provision of short‐term money‐like claims. We argue that, if there are negative externalities associated with private money creation, the government should tilt its issuance more toward short maturities, thereby partially crowding out the private sector's use of short‐term debt.


Information Diversity and Complementarities in Trading and Information Acquisition

Pages: 1723-1765  |  Published: 7/2015  |  DOI: 10.1111/jofi.12226  |  Cited by: 61

ITAY GOLDSTEIN, LIYAN YANG

We analyze a model in which different traders are informed of different fundamentals that affect the security value. We identify a source for strategic complementarities in trading and information acquisition: aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental, encouraging more trading and information acquisition on that fundamental. This tends to amplify the effect of exogenous changes in the underlying information environment. Due to complementarities, greater diversity of information in the economy improves price informativeness. We discuss the relation between our model and recent financial phenomena and derive testable empirical implications.


Capital and Labor Reallocation within Firms

Pages: 1767-1804  |  Published: 7/2015  |  DOI: 10.1111/jofi.12254  |  Cited by: 51

XAVIER GIROUD, HOLGER M. MUELLER

We document how a positive shock to investment opportunities at one plant (“treated plant”) spills over to other plants within the same firm, but only if the firm is financially constrained. To provide the treated plant with resources, the firm's headquarters withdraws capital and labor from other plants, especially plants that are relatively less productive, not part of the firm's core industries, and located far away from headquarters. As a result of the resource reallocation, aggregate firm‐wide productivity increases. We do not find evidence of capital or labor spillovers among plants of financially unconstrained firms.


Transparency in the Financial System: Rollover Risk and Crises

Pages: 1805-1837  |  Published: 7/2015  |  DOI: 10.1111/jofi.12270  |  Cited by: 27

MATTHIEU BOUVARD, PIERRE CHAIGNEAU, ADOLFO DE MOTTA

We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank‐specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency during crises. Under this policy, however, information disclosure signals a deterioration of economic fundamentals, which gives the regulator ex post incentives to withhold information. This commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks, and can result in excess opacity that increases the likelihood of a systemic crisis.


Report of the Editor of theJournal of Financefor the Year 2014

Pages: 1839-1854  |  Published: 7/2015  |  DOI: 10.1111/jofi.12290  |  Cited by: 0

KENNETH J. SINGLETON, BRUNO BIAIS, MICHAEL ROBERTS


Minutes of the 2015 Annual Membership Meeting

Pages: 1855-1856  |  Published: 7/2015  |  DOI: 10.1111/jofi.12292  |  Cited by: 0


Report of the Executive Secretary and Treasurer

Pages: 1857-1858  |  Published: 7/2015  |  DOI: 10.1111/jofi.12291  |  Cited by: 0


MISCELLANEA

Pages: 1859-1860  |  Published: 7/2015  |  DOI: 10.1111/jofi.12293  |  Cited by: 0


ANNOUNCEMENTS

Pages: 1861-1861  |  Published: 7/2015  |  DOI: 10.1111/jofi.12294  |  Cited by: 0


Change You Can Believe In? Hedge Fund Data Revisions: Erratum

Pages: 1862-1862  |  Published: 7/2015  |  DOI: 10.1111/jofi.12306  |  Cited by: 0

ANDREW J. PATTON, TARUN RAMADORAI, MICHAEL STREATFIELD