Presidential Address: Collateral and Commitment
Pages: 1587-1619 | Published: 7/2019 | DOI: 10.1111/jofi.12782 | Cited by: 52
PETER M. DEMARZO
Optimal dynamic capital structure choice is fundamentally a problem of commitment. In a standard trade‐off setting with shareholder‐debtholder agency conflicts, full commitment counterfactually predicts the firm would rely almost exclusively on debt financing. Conversely, absent commitment a Modigliani‐Miller‐like value irrelevance and policy indeterminacy result holds. Thus, the content of dynamic trade‐off theory must depend on the commitment technology. In this context, collateral is valuable as a low‐cost commitment device. Because ex ante optimal commitments are likely to be suboptimal ex post, observed capital structure dynamics will exhibit hysteresis and depart significantly from standard predictions.
Price Discovery without Trading: Evidence from Limit Orders
Pages: 1621-1658 | Published: 4/2019 | DOI: 10.1111/jofi.12769 | Cited by: 149
JONATHAN BROGAARD, TERRENCE HENDERSHOTT, RYAN RIORDAN
We analyze the contribution to price discovery of market and limit orders by high‐frequency traders (HFTs) and non‐HFTs. While market orders have a larger individual price impact, limit orders are far more numerous. This results in price discovery occurring predominantly through limit orders. HFTs submit the bulk of limit orders and these limit orders provide most of the price discovery. Submissions of limit orders and their contribution to price discovery fall with volatility due to changes in HFTs’ behavior. Consistent with adverse selection arising from faster reactions to public information, HFTs’ informational advantage is partially explained by public information.
Pages: 1659-1706 | Published: 4/2019 | DOI: 10.1111/jofi.12771 | Cited by: 60
JULES H. van BINSBERGEN, CHRISTIAN C. OPP
We examine the importance of cross‐sectional asset pricing anomalies (alphas) for the real economy. To this end, we develop a novel quantitative model of the cross‐section of firms that features lumpy investment and informational inefficiencies, while yielding distributions in closed form. Our findings indicate that anomalies can cause material real inefficiencies, which raises the possibility that agents who help eliminate them add significant value to the economy. The model shows that the magnitude of alphas alone is a poor indicator of real outcomes, and highlights the importance of the alpha persistence, the amount of mispriced capital, and the Tobin's q of firms affected.
Capital Share Dynamics When Firms Insure Workers
Pages: 1707-1751 | Published: 4/2019 | DOI: 10.1111/jofi.12773 | Cited by: 34
BARNEY HARTMAN‐GLASER, HANNO LUSTIG, MINDY Z. XIAOLAN
Although the aggregate capital share of U.S. firms has increased, capital share at the firm‐level has decreased. This divergence is due to mega‐firms that produce a larger output share without a proportionate increase in labor compensation. We develop a model in which firms insure workers against firm‐specific shocks, with more productive firms allocating more rents to shareholders, while less productive firms endogenously exit. Increasing firm‐level risk delays exit and increases the measure of mega‐firms, raising (lowering) the aggregate (average) capital share. An increase in the level of rents magnifies this effect. We present evidence that supports this mechanism.
Capital Share Risk in U.S. Asset Pricing
Pages: 1753-1792 | Published: 5/2019 | DOI: 10.1111/jofi.12772 | Cited by: 46
MARTIN LETTAU, SYDNEY C. LUDVIGSON, SAI MA
A single macroeconomic factor based on growth in the capital share of aggregate income exhibits significant explanatory power for expected returns across a range of equity characteristic portfolios and nonequity asset classes, with risk price estimates that are of the same sign and similar in magnitude. Positive exposure to capital share risk earns a positive risk premium, commensurate with recent asset pricing models in which redistributive shocks shift the share of income between the wealthy, who finance consumption primarily out of asset ownership, and workers, who finance consumption primarily out of wages and salaries.
Labor‐Technology Substitution: Implications for Asset Pricing
Pages: 1793-1839 | Published: 3/2019 | DOI: 10.1111/jofi.12766 | Cited by: 54
MIAO BEN ZHANG
This paper studies the asset pricing implications of a firm's opportunities to replace routine‐task labor with automation. I develop a model in which firms optimally undertake such replacement when their productivity is low. Hence, firms with routine‐task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment‐level occupational data, I construct a measure of firms' share of routine‐task labor. Compared to their industry peers, firms with a higher share of routine‐task labor (i) invest more in machines and reduce more routine‐task labor during economic downturns, and (ii) have lower expected stock returns.
Time‐Varying Asset Volatility and the Credit Spread Puzzle
Pages: 1841-1885 | Published: 4/2019 | DOI: 10.1111/jofi.12765 | Cited by: 58
DU DU, REDOUANE ELKAMHI, JAN ERICSSON
Most extant structural credit risk models underestimate credit spreads—a shortcoming known as the credit spread puzzle. We consider a model with priced stochastic asset risk that is able to fit medium‐ to long‐term spreads. The model, augmented by jumps to help explain short‐term spreads, is estimated on firm‐level data and identifies significant asset variance risk premia. An important feature of the model is the significant time variation in risk premia induced by the uncertainty about asset risk. Various extensions are considered, among them optimal leverage and endogenous default.
What Is the Expected Return on a Stock?
Pages: 1887-1929 | Published: 5/2019 | DOI: 10.1111/jofi.12778 | Cited by: 137
IAN W. R. MARTIN, CHRISTIAN WAGNER
We derive a formula for the expected return on a stock in terms of the risk‐neutral variance of the market and the stock's excess risk‐neutral variance relative to that of the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.
Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds
Pages: 1931-1973 | Published: 6/2019 | DOI: 10.1111/jofi.12776 | Cited by: 95
TOBIAS ADRIAN, RICHARD K. CRUMP, ERIK VOGT
We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits variation in the cross‐section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight‐to‐safety: expected returns increase for stocks when volatility increases from moderate to high levels while they decline for Treasuries. These findings provide support for dynamic asset pricing theories in which the price of risk is a nonlinear function of market volatility.
Costly Information Acquisition, Social Networks, and Asset Prices: Experimental Evidence
Pages: 1975-2010 | Published: 3/2019 | DOI: 10.1111/jofi.12768 | Cited by: 29
EDWARD HALIM, YOHANES E. RIYANTO, NILANJAN ROY
We design an experiment to study the implications of information networks for incentives to acquire costly information, market liquidity, investors' earnings, and asset price characteristics in a financial market. Social communication crowds out information production as a result of an agent's temptation to free ride on the signals purchased by her neighbors. Although information exchange among traders increases trading volume, improves liquidity, and enhances the ability of asset prices to reflect the available information in the market, it fails to improve price informativeness. Net earnings and social welfare are higher with information sharing due to reduced acquisition of costly signals.
CEO Horizon, Optimal Pay Duration, and the Escalation of Short‐Termism
Pages: 2011-2053 | Published: 3/2019 | DOI: 10.1111/jofi.12770 | Cited by: 75
IVAN MARINOVIC, FELIPE VARAS
This paper studies optimal contracts when managers manipulate their performance measure at the expense of firm value. Optimal contracts defer compensation. The manager's incentives vest over time at an increasing rate, and compensation becomes very sensitive to short‐term performance. This generates an endogenous horizon problem whereby managers intensify performance manipulation in their final years in office. Contracts are designed to encourage effort while minimizing the adverse effects of manipulation. We characterize the optimal mix of short‐ and long‐term compensation along the manager's tenure, the optimal vesting period of incentive pay, and the dynamics of short‐termism over the CEO's tenure.
Income Hedging, Dynamic Style Preferences, and Return Predictability
Pages: 2055-2106 | Published: 5/2019 | DOI: 10.1111/jofi.12775 | Cited by: 8
JAWAD M. ADDOUM, STEFANOS DELIKOURAS, GEORGE M. KORNIOTIS, ALOK KUMAR
We propose a theoretical measure of income hedging demand and show that it affects asset prices. We focus on the value factor and first demonstrate that our demand estimates are correlated with the actual demands of retail and mutual fund investors. We then show that the aggregate high‐minus‐low (HML) demand predicts HML returns. Exploiting the state‐level variation in income risk, we demonstrate that state‐level hedging demands predict state‐level HML returns. A long‐short portfolio that exploits this hedging‐induced predictability earns an annualized risk‐adjusted return of 6%.
Corrigendum for Dividend Dynamics, Learning, and Expected Stock Index Returns
Pages: 2107-2116 | Published: 5/2019 | DOI: 10.1111/jofi.12786 | Cited by: 0
RAVI JAGANNATHAN, BINYING LIU, JIAQI ZHANG
Report of the Editor of The Journal of Finance for the Year 2018
Pages: 2117-2132 | Published: 5/2019 | DOI: 10.1111/jofi.12781 | Cited by: 0
STEFAN NAGEL
Minutes of the 2019 Annual Membership Meeting
Pages: 2133-2135 | Published: 7/2019 | DOI: 10.1111/jofi.12825 | Cited by: 0
Report of the Executive Secretary and Treasurer
Pages: 2137-2137 | Published: 7/2019 | DOI: 10.1111/jofi.12826 | Cited by: 0