Pages: 2153-2199 | Published: 6/2019 | DOI: 10.1111/jofi.12785 | Cited by: 71
SAMUEL M. HARTZMARK, DAVID H. SOLOMON
Many individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g., the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if dividends are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend‐paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend‐paying stocks.
Stock Returns over the FOMC Cycle
Pages: 2201-2248 | Published: 6/2019 | DOI: 10.1111/jofi.12818 | Cited by: 164
ANNA CIESLAK, ADAIR MORSE, ANNETTE VISSING‐JORGENSEN
We document that since 1994, the equity premium is earned entirely in weeks 0, 2, 4, and 6 in Federal Open Market Committee (FOMC) cycle time, that is, even weeks starting from the last FOMC meeting. We causally tie this fact to the Fed by studying intermeeting target changes, Fed funds futures, and internal Board of Governors meetings. The Fed has affected the stock market via unexpectedly accommodating policy, leading to large reductions in the equity premium. Evidence suggests systematic informal communication of Fed officials with the media and financial sector as a channel through which news about monetary policy has reached the market.
Foreclosure Contagion and the Neighborhood Spillover Effects of Mortgage Defaults
Pages: 2249-2301 | Published: 6/2019 | DOI: 10.1111/jofi.12821 | Cited by: 72
ARPIT GUPTA
In this paper, I identify shocks to interest rates resulting from two administrative details in adjustable‐rate mortgage contract terms: the choice of financial index and the choice of lookback period. I find that a 1 percentage point increase in interest rate at the time of adjustable‐rate mortgage (ARM) reset results in a 2.5 percentage increase in the probability of foreclosure in the following year, and that each foreclosure filing leads to an additional 0.3 to 0.6 completed foreclosures within a 0.10‐mile radius. In explaining this result, I emphasize price effects, bank‐supply responses, and borrower responses arising from peer effects.
Limited Investment Capital and Credit Spreads
Pages: 2303-2347 | Published: 5/2019 | DOI: 10.1111/jofi.12777 | Cited by: 78
EMIL N. SIRIWARDANE
Using proprietary credit default swap (CDS) data, I investigate how capital shocks at protection sellers impact pricing in the CDS market. Seller capital shocks—measured as CDS portfolio margin payments—account for 12% of the time‐series variation in weekly spread changes, a significant amount given that standard credit factors account for 18% during my sample. In addition, seller shocks possess information for spreads that is independent of institution‐wide measures of constraints. These findings imply a high degree of market segmentation, and suggest that frictions within specialized financial institutions prevent capital from flowing into the market at shorter horizons.
How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme
Pages: 2349-2389 | Published: 6/2019 | DOI: 10.1111/jofi.12822 | Cited by: 43
VILLE RANTALA
A unique data set from a large Ponzi scheme allows me to study word‐of‐mouth diffusion of investment information. Investors could join the scheme only by invitation from an existing member, which allows me to observe how the idea spreads from one person to the next based on inviter‐invitee relationships. I find that the observed social network has a scale‐free connectivity structure, which significantly facilitates the diffusion of the investment idea and contributes to the growth and survival of the socially spreading Ponzi scheme. I further find that investors invest more if their inviter has comparatively higher age, education, and income.
The Globalization Risk Premium
Pages: 2391-2439 | Published: 5/2019 | DOI: 10.1111/jofi.12780 | Cited by: 50
JEAN‐NOËL BARROT, ERIK LOUALICHE, JULIEN SAUVAGNAT
In this paper, we investigate how globalization is reflected in asset prices. We use shipping costs to measure firms' exposure to globalization. Firms in low shipping cost industries carry a 7% risk premium, suggesting that their cash flows covary negatively with investors' marginal utility. We find that the premium emanates from the risk of displacement of least efficient firms triggered by import competition. These findings suggest that foreign productivity shocks are associated with times when consumption is dear for investors. We discuss conditions under which a standard model of trade with asset prices can rationalize this puzzle.
Proxy Advisory Firms: The Economics of Selling Information to Voters
Pages: 2441-2490 | Published: 5/2019 | DOI: 10.1111/jofi.12779 | Cited by: 52
ANDREY MALENKO, NADYA MALENKO
We analyze how proxy advisors, which sell voting recommendations to shareholders, affect corporate decision‐making. If the quality of the advisor's information is low, there is overreliance on its recommendations and insufficient private information production. In contrast, if the advisor's information is precise, it may be underused because the advisor rations its recommendations to maximize profits. Overall, the advisor's presence leads to more informative voting only if its information is sufficiently precise. We evaluate several proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or decreasing litigation pressure, can have negative effects.
Personal Experiences and Expectations about Aggregate Outcomes
Pages: 2491-2542 | Published: 7/2019 | DOI: 10.1111/jofi.12819 | Cited by: 198
THERESA KUCHLER, BASIT ZAFAR
Using novel survey data, we document that individuals extrapolate from recent personal experiences when forming expectations about aggregate economic outcomes. Recent locally experienced house price movements affect expectations about future U.S. house price changes and higher experienced house price volatility causes respondents to report a wider distribution over expected U.S. house price movements. When we exploit within‐individual variation in employment status, we find that individuals who personally experience unemployment become more pessimistic about future nationwide unemployment. The extent of extrapolation is unrelated to how informative personal experiences are, is inconsistent with risk adjustment, and is more pronounced for less sophisticated individuals.
Do Portfolio Manager Contracts Contract Portfolio Management?
Pages: 2543-2577 | Published: 7/2019 | DOI: 10.1111/jofi.12823 | Cited by: 25
JUNG HOON LEE, CHARLES TRZCINKA, SHYAM VENKATESAN
Most mutual fund managers have performance‐based contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid‐year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk‐shifting only for managers with performance contracts. Deviation from the benchmark dominates incentives from the flow‐performance relation, suggesting that risk‐shifting is motivated more by management contracts than by a tournament to capture flows.
The Best of Both Worlds: Accessing Emerging Economies via Developed Markets
Pages: 2579-2617 | Published: 6/2019 | DOI: 10.1111/jofi.12817 | Cited by: 30
JOON WOO BAE, REDOUANE ELKAMHI, MIKHAIL SIMUTIN
A growing body of evidence suggests that the benefits of international diversification via developed markets have declined dramatically. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of emerging countries' economic activity. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries' overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.
Ratings Quality and Borrowing Choice
Pages: 2619-2665 | Published: 6/2019 | DOI: 10.1111/jofi.12820 | Cited by: 16
DOMINIQUE C. BADOER, CEM DEMIROGLU, CHRISTOPHER M. JAMES
Past studies document that incentive conflicts may lead issuer‐paid credit rating agencies to provide optimistically biased ratings. In this paper, we present evidence that investors question the quality of issuer‐paid ratings and raise corporate bond yields where the issuer‐paid rating is more positive than benchmark investor‐paid ratings. We also find that some firms with favorable issuer‐paid ratings substitute public bonds with borrowings from informed intermediaries to mitigate the “lemons discount” associated with poor quality ratings. Overall, our results suggest that the quality of issuer‐paid ratings has significant effects on borrowing costs and the choice of debt.
Reassessing False Discoveries in Mutual Fund Performance: Skill, Luck, or Lack of Power?
Pages: 2667-2688 | Published: 5/2019 | DOI: 10.1111/jofi.12784 | Cited by: 41
ANGIE ANDRIKOGIANNOPOULOU, FILIPPOS PAPAKONSTANTINOU
Barras, Scaillet, and Wermers propose the false discovery rate (FDR) to separate skill (alpha) from luck in fund performance. Using simulations with parameters informed by the data, we find that this methodology is conservative and underestimates the proportion of nonzero‐alpha funds. For example, 65% of funds with economically large alphas of ±2% are misclassified as zero alpha. This bias arises from the low signal‐to‐noise ratio in fund returns and the resulting low statistical power. Our results question FDR's applicability in performance evaluation and other domains with low power, and can materially change the conclusion that most funds have zero alpha.
A Note on “Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps”
Pages: 2689-2696 | Published: 7/2019 | DOI: 10.1111/jofi.12824 | Cited by: 1
RAVI JAGANNATHAN, TONGSHU MA, JIAQI ZHANG
This note corrects an error in the proof of Proposition 2 of “Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraint Helps” that appeared in the Journal of Finance, August 2003.