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Volume 71: Issue 2 (April 2016)


Issue Information - Ed Board

Pages: 501-501  |  Published: 3/2016  |  DOI: 10.1111/jofi.12321  |  Cited by: 0


Issue Information - Help Desk

Pages: 502-502  |  Published: 3/2016  |  DOI: 10.1111/jofi.12322  |  Cited by: 0


Issue Information - TOC

Pages: 503-504  |  Published: 3/2016  |  DOI: 10.1111/jofi.12320  |  Cited by: 0


ANNOUNCEMENT OF 2015 AMUNDI SMITH BREEDEN AND BRATTLE GROUP PRIZES

Pages: 505-506  |  Published: 3/2016  |  DOI: 10.1111/jofi.12394  |  Cited by: 0


Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms

Pages: 507-550  |  Published: 3/2016  |  DOI: 10.1111/jofi.12367  |  Cited by: 37

JENNIFER BROWN, DAVID A. MATSA

We use novel data from a leading online job search platform to examine the impact of corporate distress on firms’ ability to attract job applicants. Survey responses suggest that job seekers accurately perceive firms’ financial condition, as measured by companies’ credit default swap prices and accounting data. Analyzing responses to job postings by major financial firms during the Great Recession, we find that an increase in an employer's distress results in fewer and lower quality applicants. These effects are particularly evident when the social safety net provides workers with weak protection against unemployment and for positions requiring a college education.


Learning about Consumption Dynamics

Pages: 551-600  |  Published: 3/2016  |  DOI: 10.1111/jofi.12246  |  Cited by: 33

MICHAEL JOHANNES, LARS A. LOCHSTOER, YIQUN MOU

This paper characterizes U.S. consumption dynamics from the perspective of a Bayesian agent who does not know the underlying model structure but learns over time from macroeconomic data. Realistic, high‐dimensional macroeconomic learning problems, which entail parameter, model, and state learning, generate substantially different subjective beliefs about consumption dynamics compared to the standard, full‐information rational expectations benchmark. Beliefs about long‐run dynamics are volatile, with counter‐cyclical conditional volatility, and drift over time. Embedding these beliefs in a standard asset pricing model significantly improves the model's ability to match the stylized facts, as well as the sample path of the market price‐dividend ratio.


Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

Pages: 601-634  |  Published: 3/2016  |  DOI: 10.1111/jofi.12378  |  Cited by: 26

LUKAS MENKHOFF, LUCIO SARNO, MAIK SCHMELING, ANDREAS SCHRIMPF

We study the information in order flows in the world's largest over‐the‐counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross‐section of currencies and different customer segments of FX end‐users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.


Conglomerate Investment, Skewness, and the CEO Long-Shot Bias

Pages: 635-672  |  Published: 3/2016  |  DOI: 10.1111/jofi.12379  |  Cited by: 18

CHRISTOPH SCHNEIDER, OLIVER SPALT

Do behavioral biases of executives matter for corporate investment decisions? Using segment‐level capital allocation in multisegment firms (“conglomerates”) as a laboratory, we show that capital expenditure is increasing in the expected skewness of segment returns. Conglomerates invest more in high‐skewness segments than matched stand‐alone firms, and trade at a discount, which indicates overinvestment that is detrimental to shareholder wealth. Using geographical variation in gambling norms, we find that the skewness‐investment relation is particularly pronounced when CEOs are likely to find long shots attractive. Our findings suggest that CEOs allocate capital with a long‐shot bias.


Order Flow and Expected Option Returns

Pages: 673-708  |  Published: 3/2016  |  DOI: 10.1111/jofi.12380  |  Cited by: 25

DMITRIY MURAVYEV

I show that the inventory risk faced by market‐makers has a first‐order effect on option prices. I introduce a simple approach that decomposes the price impact of trades into inventory risk and asymmetric information components. While both components are large for option trades, the inventory risk component is larger. Using the full panel of daily option returns, I find that option order imbalances attributable to inventory risk have five times larger impact on option prices than previously thought. Finally, I find that past order imbalances have greater predictive power than any other commonly used predictor of option returns.


Cream-Skimming in Financial Markets

Pages: 709-736  |  Published: 3/2016  |  DOI: 10.1111/jofi.12385  |  Cited by: 33

PATRICK BOLTON, TANO SANTOS, JOSE A. SCHEINKMAN

We propose a model in which investors may choose to acquire costly information that identifies good assets and purchase these assets in opaque (OTC) markets. Uninformed investors access an asset pool that has been cream‐skimmed by informed investors. When the quality composition of assets for sale is fixed, there is too much information acquisition and the financial industry extracts excessive rents. In the presence of moral hazard in origination, the social value of information varies inversely with information acquisition. Low quality origination is associated with large rents in the financial sector. Equilibrium acquisition of information is generically inefficient.


Does It Pay to Bet Against Beta? On the Conditional Performance of the Beta Anomaly

Pages: 737-774  |  Published: 3/2016  |  DOI: 10.1111/jofi.12383  |  Cited by: 19

SCOTT CEDERBURG, MICHAEL S. O'DOHERTY

Prior studies find that a strategy that buys high‐beta stocks and sells low‐beta stocks has a significantly negative unconditional capital asset pricing model (CAPM) alpha, such that it appears to pay to “bet against beta.” We show, however, that the conditional beta for the high‐minus‐low beta portfolio covaries negatively with the equity premium and positively with market volatility. As a result, the unconditional alpha is a downward‐biased estimate of the true alpha. We model the conditional market risk for beta‐sorted portfolios using instrumental variables methods and find that the conditional CAPM resolves the beta anomaly.


The Labor Market for Directors and Externalities in Corporate Governance

Pages: 775-808  |  Published: 3/2016  |  DOI: 10.1111/jofi.12287  |  Cited by: 38

DORON LEVIT, NADYA MALENKO

This paper studies how directors' reputational concerns affect board structure, corporate governance, and firm value. In our setting, directors affect their firms' governance, and governance in turn affects firms' demand for new directors. Whether the labor market rewards a shareholder‐friendly or management‐friendly reputation is determined in equilibrium and depends on aggregate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance across firms. Directors' reputational concerns amplify the governance system: strong systems become stronger and weak systems become weaker. We derive implications for multiple directorships, board size, transparency, and board independence.


An Information-Based Theory of Time-Varying Liquidity

Pages: 809-870  |  Published: 3/2016  |  DOI: 10.1111/jofi.12272  |  Cited by: 25

BRENDAN DALEY, BRETT GREEN

We propose an information‐based theory to explain time variation in liquidity and link it to a variety of patterns in asset markets. In “normal times,” the market is fully liquid and gains from trade are realized immediately. However, the equilibrium also involves periods during which liquidity “dries up,” which leads to endogenous liquidation costs. Traders correctly anticipate such costs, which reduces their willingness to pay. This foresight leads to a novel feedback effect between prices and market liquidity, which are jointly determined in equilibrium. The model also predicts that contagious sell‐offs can occur after sufficiently bad news.


Indirect Incentives of Hedge Fund Managers

Pages: 871-918  |  Published: 3/2016  |  DOI: 10.1111/jofi.12384  |  Cited by: 20

JONGHA LIM, BERK A. SENSOY, MICHAEL S. WEISBACH

Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow‐performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.


Procyclical Capital Regulation and Lending

Pages: 919-956  |  Published: 3/2016  |  DOI: 10.1111/jofi.12368  |  Cited by: 42

MARKUS BEHN, RAINER HASELMANN, PAUL WACHTEL

We use a quasi‐experimental research design to examine the effect of model‐based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model‐based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects.


Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Pages: 957-1010  |  Published: 3/2016  |  DOI: 10.1111/jofi.12273  |  Cited by: 19

RALPH S.J. KOIJEN, STIJN VAN NIEUWERBURGH, MOTOHIRO YOGO

We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life‐cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long‐term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.


MISCELLANEA

Pages: 1011-1012  |  Published: 3/2016  |  DOI: 10.1111/jofi.12395  |  Cited by: 0


ANNOUNCEMENTS

Pages: 1013-1013  |  Published: 3/2016  |  DOI: 10.1111/jofi.12401  |  Cited by: 0


To Those Seeking Permissions for Academic Classroom Use

Pages: 1014-1014  |  Published: 3/2016  |  DOI: 10.1111/jofi.12326  |  Cited by: 0


Issue Information - Style Instuctions

Pages: 1015-1015  |  Published: 3/2016  |  DOI: 10.1111/jofi.12323  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 1016-1016  |  Published: 3/2016  |  DOI: 10.1111/jofi.12324  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 1017-1017  |  Published: 3/2016  |  DOI: 10.1111/jofi.12325  |  Cited by: 0