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Volume 75: Issue 2 (April 2020)


ISSUE INFORMATION FM

Pages: 585-587  |  Published: 3/2020  |  DOI: 10.1111/jofi.12659  |  Cited by: 0


DIMENSIONAL FUND ADVISORS PRIZES FOR 2019

Pages: 589-589  |  Published: 3/2020  |  DOI: 10.1111/jofi.12872  |  Cited by: 0


Risk Management in Financial Institutions

Pages: 591-637  |  Published: 2/2020  |  DOI: 10.1111/jofi.12868  |  Cited by: 1

ADRIANO A. RAMPINI, S. VISWANATHAN, GUILLAUME VUILLEMEY

We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to declines in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise‐similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.


What Is a Patent Worth? Evidence from the U.S. Patent “Lottery”

Pages: 639-682  |  Published: 12/2019  |  DOI: 10.1111/jofi.12867  |  Cited by: 0

JOAN FARRE‐MENSA, DEEPAK HEGDE, ALEXANDER LJUNGQVIST

We provide evidence on the value of patents to startups by leveraging the quasi‐random assignment of applications to examiners with different propensities to grant patents. Using unique data on all first‐time applications filed at the U.S. Patent Office since 2001, we find that startups that win the patent “lottery” by drawing lenient examiners have, on average, 55% higher employment growth and 80% higher sales growth five years later. Patent winners also pursue more, and higher quality, follow‐on innovation. Winning a first patent boosts a startup’s subsequent growth and innovation by facilitating access to funding from venture capitalists, banks, and public investors.


Relationship Trading in Over‐the‐Counter Markets

Pages: 683-734  |  Published: 12/2019  |  DOI: 10.1111/jofi.12864  |  Cited by: 4

TERRENCE HENDERSHOTT, DAN LI, DMITRY LIVDAN, NORMAN SCHÜRHOFF

We examine the network of trading relationships between insurers and dealers in the over‐the‐counter (OTC) corporate bond market. Regulatory data show that one‐third of insurers use a single dealer, whereas other insurers have large dealer networks. Execution prices are nonmonotone in network size, initially declining with more dealers but increasing once networks exceed 20 dealers. A model of decentralized trade in which insurers trade off the benefits of repeat business and faster execution quantitatively fits the distribution of insurers' network size and explains the price–network size relationship. Counterfactual analysis shows that regulations to unbundle trade and nontrade services can decrease welfare.


Tax‐Efficient Asset Management: Evidence from Equity Mutual Funds

Pages: 735-777  |  Published: 11/2019  |  DOI: 10.1111/jofi.12843  |  Cited by: 0

CLEMENS SIALM, HANJIANG ZHANG

We investigate the relation between tax burdens and mutual fund performance from both a theoretical and an empirical perspective. The theoretical model introduces heterogeneous tax clienteles in an environment with decreasing returns to scale and shows that the equilibrium performance of mutual funds depends on the size of the tax clienteles. Our empirical results show that the performance of U.S. equity mutual funds is related to their tax burdens. We find that tax‐efficient funds exhibit not only superior after‐tax performance, but also superior before‐tax performance due to lower trading costs, favorable style exposures, and better selectivity.


Measuring Innovation and Product Differentiation: Evidence from Mutual Funds

Pages: 779-823  |  Published: 11/2019  |  DOI: 10.1111/jofi.12853  |  Cited by: 0

LEONARD KOSTOVETSKY, JEROLD B. WARNER

We study innovation and product differentiation using a uniqueness measure based on textual analysis of prospectuses. We find that small and start‐up families have higher start rates than larger families, and their products are more unique. Unique strategies attract more inflows in the first three years, and investors respond more to text‐based uniqueness than other measures such as holdings or returns uniqueness. For established funds, word uniqueness has weak negative power for explaining returns, so investors in competitive equilibrium do not sacrifice much performance to get specialized products. Uniqueness attenuates the flow‐performance relation, reducing the risk of investor outflows.


Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

Pages: 825-866  |  Published: 12/2019  |  DOI: 10.1111/jofi.12862  |  Cited by: 2

CHRISTOPHER A. HENNESSY, ILYA A. STREBULAEV

We derive analytical relationships between shock responses and theory‐implied causal effects (comparative statics) in dynamic settings with linear profits and linear‐quadratic stock accumulation costs. For permanent profitability shocks, responses can have incorrect signs, undershoot, or overshoot depending on the size and sign of realized changes. For profitability shocks that are i.i.d., uniformly distributed, binary, or unanticipated and temporary, there is attenuation bias, which exceeds 50% under plausible parameterizations. We derive a novel sufficient condition for profitability shock responses to equal causal effects: martingale profitability. We establish a battery of sufficient conditions for correct sign estimation, including stochastic monotonicity. Simple extrapolation/error correction formulas are presented.


The Market for Conflicted Advice

Pages: 867-903  |  Published: 11/2019  |  DOI: 10.1111/jofi.12848  |  Cited by: 2

BRIANA CHANG, MARTIN SZYDLOWSKI

We present a model of the market for advice in which advisers have conflicts of interest and compete for heterogeneous customers through information provision. The competitive equilibrium features information dispersion and partial disclosure. Although conflicted fees lead to distorted information, they are irrelevant for customers' welfare: banning conflicted fees improves only the information quality, not customers' welfare. Instead, financial literacy education for the least informed customers can improve all customers' welfare because of a spillover effect. Furthermore, customers who trade through advisers realize lower average returns, which rationalizes empirical findings.


Does Borrowing from Banks Cost More than Borrowing from the Market?

Pages: 905-947  |  Published: 10/2019  |  DOI: 10.1111/jofi.12849  |  Cited by: 4

MICHAEL SCHWERT

This paper investigates the pricing of bank loans relative to capital market debt. The analysis uses a novel sample of loans matched with bond spreads from the same firm on the same date. After accounting for seniority, lenders earn a large premium relative to the bond‐implied credit spread. In a sample of secured term loans to noninvestment‐grade firms, the average premium is 140 to 170 bps or about half of the all‐in‐drawn spread. This is the first direct evidence of firms' willingness to pay for bank credit and raises questions about the nature of competition in the loan market.


How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

Pages: 949-994  |  Published: 2/2020  |  DOI: 10.1111/jofi.12869  |  Cited by: 1

ATIF MIAN, AMIR SUFI, EMIL VERNER

Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. In this study, we develop a test to determine if the household demand channel is present, and we implement the test using both a natural experiment in the United States in the 1980s and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle and lead to more severe recessions.


Shorting in Speculative Markets

Pages: 995-1036  |  Published: 1/2020  |  DOI: 10.1111/jofi.12871  |  Cited by: 0

MARCEL NUTZ, JOSÉ A. SCHEINKMAN

In models of trading with heterogeneous beliefs following Harrison‐Kreps, short selling is prohibited and agents face constant marginal costs‐of‐carry. The resale option guarantees that prices exceed buy‐and‐hold prices and the difference is identified as a bubble. We propose a model where risk‐neutral agents face asymmetric increasing marginal costs on long and short positions. Here, agents also value an option to delay, and a Hamilton‐Jacobi‐Bellman equation quantifies the influence of costs on prices. An unexpected decrease in shorting costs may deflate a bubble, linking financial innovations that facilitated shorting of mortgage‐backed securities to the collapse of prices.


Securitization, Ratings, and Credit Supply

Pages: 1037-1082  |  Published: 12/2019  |  DOI: 10.1111/jofi.12866  |  Cited by: 1

BRENDAN DALEY, BRETT GREEN, VICTORIA VANASCO

We develop a framework to explore the effect of credit ratings on loan origination. We show that ratings endogenously shift the economy from a signaling equilibrium, in which banks inefficiently retain loans to signal quality, toward an originate‐to‐distribute equilibrium with zero retention and inefficiently low lending standards. Ratings increase overall efficiency, provided that the reduction in costly retention more than compensates for the origination of some negative net present value loans. We study how banks' ability to screen loans affects these predictions and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”


Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

Pages: 1083-1133  |  Published: 2/2020  |  DOI: 10.1111/jofi.12863  |  Cited by: 3

JOEL PERESS, DANIEL SCHMIDT

In this paper, we study the impact of noise traders’ limited attention on financial markets. Specifically, we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes.


Informed Trading and Intertemporal Substitution

Pages: 1135-1156  |  Published: 11/2019  |  DOI: 10.1111/jofi.12857  |  Cited by: 0

YIZHOU XIAO

I examine the possibility of information‐based trading in a multiperiod consumption setting. I develop a necessary and sufficient condition for trade to occur. Intertemporal substitution introduces a desire to correlate current consumption with future aggregate shocks. When agents have heterogeneous time‐inseparable preferences, information differentially affects relative preferences for current and future consumption, making information‐based trading mutually acceptable. The no‐trade result continues to hold if there is no aggregate shock, or if agents have either homogeneous or time‐separable preferences.


Report of the Editor of The Journal of Finance for the Year 2019

Pages: 1157-1172  |  Published: 3/2020  |  DOI: 10.1111/jofi.12881  |  Cited by: 0

STEFAN NAGEL


Minutes of the 2020 Annual Membership Meeting

Pages: 1173-1175  |  Published: 3/2020  |  DOI: 10.1111/jofi.12886  |  Cited by: 0


Report of the Executive Secretary and Treasurer for the Fiscal Year Ending June 30, 2019

Pages: 1177-1178  |  Published: 3/2020  |  DOI: 10.1111/jofi.12887  |  Cited by: 0


MISCELLANEA

Pages: 1179-1180  |  Published: 3/2020  |  DOI: 10.1111/jofi.12891  |  Cited by: 0


ANNOUNCEMENTS

Pages: 1181-1181  |  Published: 3/2020  |  DOI: 10.1111/jofi.12892  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 1182-1183  |  Published: 3/2020  |  DOI: 10.1111/jofi.12660  |  Cited by: 0