Brokers and Order Flow Leakage: Evidence from Fire Sales
Pages: 2707-2749 | Published: 8/2019 | DOI: 10.1111/jofi.12840 | Cited by: 58
ANDREA BARBON, MARCO DI MAGGIO, FRANCESCO FRANZONI, AUGUSTIN LANDIER
Using trade‐level data, we study whether brokers play a role in spreading order flow information in the stock market. We focus on large portfolio liquidations that result in temporary price drops, and identify the brokers who intermediate these trades. These brokers’ clients are more likely to predate on the liquidating funds than to provide liquidity. Predation leads to profits of about 25 basis points over 10 days and increases the liquidation costs of the distressed fund by 40%. This evidence suggests a role of information leakage in exacerbating fire sales.
Information Revelation in Decentralized Markets
Pages: 2751-2787 | Published: 8/2019 | DOI: 10.1111/jofi.12838 | Cited by: 18
BJÖRN HAGSTRÖMER, ALBERT J. MENKVELD
How does information get revealed in decentralized markets? We test several hypotheses inspired by recent dealer‐network theory. To do so, we construct an empirical map of information revelation where two dealers are connected based on the synchronicity of their quote changes. The tests, based on the euro to Swiss franc spot rate (EUR/CHF) quote data including the 2015 crash, largely support theory: strongly connected (i.e., central) dealers are more informed. Connections are weaker when there is less to be learned. The crash serves to identify how a network forms when dealers are transitioned from no‐learning to learning, that is, from a fixed to a floating rate.
Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows
Pages: 2789-2837 | Published: 8/2019 | DOI: 10.1111/jofi.12841 | Cited by: 701
SAMUEL M. HARTZMARK, ABIGAIL B. SUSSMAN
Examining a shock to the salience of the sustainability of the U.S. mutual fund market, we present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high‐sustainability funds outperform low‐sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and nonpecuniary motives influencing investment decisions.
Diagnostic Expectations and Stock Returns
Pages: 2839-2874 | Published: 7/2019 | DOI: 10.1111/jofi.12833 | Cited by: 201
PEDRO BORDALO, NICOLA GENNAIOLI, RAFAEL LA PORTA, ANDREI SHLEIFER
We revisit La Porta's finding that returns on stocks with the most optimistic analyst long‐term earnings growth forecasts are lower than those on stocks with the most pessimistic forecasts. We document the joint dynamics of fundamentals, expectations, and returns of these portfolios, and explain the facts using a model of belief formation based on the representativeness heuristic. Analysts forecast fundamentals from observed earnings growth, but overreact to news by exaggerating the probability of states that have become more likely. We find support for the model's predictions. A quantitative estimation of the model accounts for the key patterns in the data.
Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt
Pages: 2875-2914 | Published: 7/2019 | DOI: 10.1111/jofi.12832 | Cited by: 21
FELIPE RESTREPO, LINA CARDONA‐SOSA, PHILIP E. STRAHAN
In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short‐term bank credit more than long‐term credit. Firms responded by cutting short‐term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit provides an alternative source of liquidity that can insulate some firms from bank liquidity shocks.
Women's Liberation as a Financial Innovation
Pages: 2915-2956 | Published: 7/2019 | DOI: 10.1111/jofi.12829 | Cited by: 17
MOSHE HAZAN, DAVID WEISS, HOSNY ZOABI
In one of the greatest extensions of property rights in human history, common law countries began giving rights to married women in the 1850s. Before this “women's liberation,” the doctrine of coverture strongly incentivized parents of daughters to hold real estate, rather than financial assets such as money, stocks, or bonds. We exploit the staggered nature of coverture's demise across U.S. states to show that women's rights led to shifts in household portfolios, a positive shock to the supply of credit, and a reallocation of labor toward nonagriculture and capital‐intensive industries. Investor protection thus deepened financial markets, aiding industrialization.
YOLO: Mortality Beliefs and Household Finance Puzzles
Pages: 2957-2996 | Published: 7/2019 | DOI: 10.1111/jofi.12828 | Cited by: 104
RAWLEY Z. HEIMER, KRISTIAN OVE R. MYRSETH, RAPHAEL S. SCHOENLE
We study the effect of subjective mortality beliefs on life‐cycle behavior. With new survey evidence, we document that survival is underestimated (overestimated) by the young (old). We calibrate a canonical life‐cycle model to elicited beliefs. Relative to calibrations using actuarial probabilities, the young undersave by 26%, and retirees draw down their assets 27% slower, while the model's fit to consumption data improves by 88%. Cross‐sectional regressions support the model's predictions: Distorted mortality beliefs correlate with savings behavior while controlling for risk preferences, cognitive, and socioeconomic factors. Overweighting the likelihood of rare events contributes to mortality belief distortions.
Thinking about Prices versus Thinking about Returns in Financial Markets
Pages: 2997-3039 | Published: 9/2019 | DOI: 10.1111/jofi.12835 | Cited by: 40
MARKUS GLASER, ZWETELINA ILIEWA, MARTIN WEBER
Prices and returns are alternative ways to present information and to elicit expectations in financial markets. But do investors think of prices and returns in the same way? We present three studies in which subjects differ in the level of expertise, amount of information, and type of incentive scheme. The results are consistent across all studies: asking subjects to forecast returns as opposed to prices results in higher expectations, whereas showing them return charts rather than price charts results in lower expectations. Experience is not a useful remedy but cognitive reflection mitigates the impact of format changes.
Nonfinancial Firms as Cross‐Market Arbitrageurs
Pages: 3041-3087 | Published: 8/2019 | DOI: 10.1111/jofi.12837 | Cited by: 53
YUERAN MA
I demonstrate that nonfinancial corporations act as cross‐market arbitrageurs in their own securities. Firms use one type of security to replace another in response to shifts in relative valuations, inducing negatively correlated financing flows in different markets. Net equity repurchases and net debt issuance both increase when expected excess returns on debt are particularly low, or when expected excess returns on equity are relatively high. Credit valuations affect equity financing as much as equity valuations do, and vice versa. Cross‐market corporate arbitrage is most prevalent among large, unconstrained firms, and helps account for aggregate financing patterns.
Measuring Institutional Investors’ Skill at Making Private Equity Investments
Pages: 3089-3134 | Published: 6/2019 | DOI: 10.1111/jofi.12783 | Cited by: 35
DANIEL R. CAVAGNARO, BERK A. SENSOY, YINGDI WANG, MICHAEL S. WEISBACH
Using a large sample of institutional investors’ investments in private equity funds raised between 1991 and 2011, we estimate the extent to which investors’ skill affects their returns. Bootstrap analyses show that the variance of actual performance is higher than would be expected by chance, suggesting that some investors consistently outperform. Extending the Bayesian approach of Korteweg and Sorensen, we estimate that a one‐standard‐deviation increase in skill leads to an increase in annual returns of between one and two percentage points. These results are stronger in the earlier part of the sample period and for venture funds.
Where Is the Risk in Value? Evidence from a Market‐to‐Book Decomposition
Pages: 3135-3186 | Published: 8/2019 | DOI: 10.1111/jofi.12836 | Cited by: 59
ANDREY GOLUBOV, THEODOSIA KONSTANTINIDI
We study the value premium using the multiples‐based market‐to‐book decomposition of Rhodes‐Kropf, Robinson, and Viswanathan (2005). The market‐to‐value component drives all of the value strategy return, while the value‐to‐book component exhibits no return predictability in either portfolio sorts or firm‐level regressions. Existing results linking market‐to‐book to operating leverage, duration, exposure to investment‐specific technology shocks, and analysts’ risk ratings derive from the unpriced value‐to‐book component. In contrast, results on expectation errors, limits to arbitrage, and certain types of cash flow risk and consumption risk exposure are due to the market‐to‐value component. Overall, our evidence casts doubt on several value premium theories.
A Dynamic Model of Characteristic‐Based Return Predictability
Pages: 3187-3216 | Published: 8/2019 | DOI: 10.1111/jofi.12839 | Cited by: 12
AYDOĞAN ALTI, SHERIDAN TITMAN
We present a dynamic model that links characteristic‐based return predictability to systematic factors that determine the evolution of firm fundamentals. In the model, an economy‐wide disruption process reallocates profits from existing businesses to new projects and thus generates a source of systematic risk for portfolios of firms sorted on value, profitability, and asset growth. If investors are overconfident about their ability to evaluate the disruption climate, these characteristic‐sorted portfolios exhibit persistent mispricing. The model generates predictions about the conditional predictability of characteristic‐sorted portfolio returns and illustrates how return persistence increases the likelihood of observing characteristic‐based anomalies.
Over‐the‐Counter Market Frictions and Yield Spread Changes
Pages: 3217-3257 | Published: 7/2019 | DOI: 10.1111/jofi.12827 | Cited by: 74
NILS FRIEWALD, FLORIAN NAGLER
We empirically study whether systematic over‐the‐counter (OTC) market frictions drive the large unexplained common factor in yield spread changes. Using transaction data on U.S. corporate bonds, we find that marketwide inventory, search, and bargaining frictions explain 23.4% of the variation in the common component. Systematic OTC frictions thus substantially improve the explanatory power of yield spread changes and account for one‐third of their total explained variation. Search and bargaining frictions combined explain more in the common dynamics of yield spread changes than inventory frictions. Our findings support the implications of leading theories of intermediation frictions in OTC markets.
Pages: 3262-3317 | Published: 11/2019 | DOI: 10.1111/jofi.12859 | Cited by: 0
Participant Schedule for the AFA 2020 San Diego Meetings January 3–5, 2020
Pages: 3318-3389 | Published: 11/2019 | DOI: 10.1111/jofi.12858 | Cited by: 0
Pages: 3390-3390 | Published: 11/2019 | DOI: 10.1111/jofi.12850 | Cited by: 0
John Graham