Corporate Control around the World
Pages: 1191-1246 | Published: 2/2020 | DOI: 10.1111/jofi.12889 | Cited by: 96
GUR AMINADAV, ELIAS PAPAIOANNOU
We study corporate control tracing controlling shareholders for thousands of listed firms from 127 countries over 2004 to 2012. Government and family control is pervasive in civil‐law countries. Blocks are commonplace, but less so in common‐law countries. These patterns apply to large, medium, and small firms. In contrast, the development‐control nexus is heterogeneous; strong for large but absent for small firms. Control correlates strongly with shareholder protection, the stringency of employment contracts and unions power. Conversely, the correlations with creditor rights, legal formalism, and entry regulation appear weak. These patterns support both legal origin and political theories of financial development.
Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France
Pages: 1247-1285 | Published: 2/2020 | DOI: 10.1111/jofi.12880 | Cited by: 56
JOHAN HOMBERT, ANTOINETTE SCHOAR, DAVID SRAER, DAVID THESMAR
We evaluate the effect of downside insurance on self‐employment. We exploit a large‐scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one‐for‐one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.
Pages: 1287-1325 | Published: 3/2020 | DOI: 10.1111/jofi.12884 | Cited by: 28
ERIK P. GILJE, ELENA LOUTSKINA, DANIEL MURPHY
This paper documents a previously unrecognized debt‐related investment distortion. Using detailed project‐level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long‐run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long‐run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations.
Taming the Factor Zoo: A Test of New Factors
Pages: 1327-1370 | Published: 2/2020 | DOI: 10.1111/jofi.12883 | Cited by: 357
GUANHAO FENG, STEFANO GIGLIO, DACHENG XIU
We propose a model selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high‐dimensional set of existing factors explains. Our methodology accounts for model selection mistakes that produce a bias due to omitted variables, unlike standard approaches that assume perfect variable selection. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are shown to be redundant relative to the existing factors, a few have statistically significant explanatory power beyond the hundreds of factors proposed in the past.
Pages: 1371-1415 | Published: 2/2020 | DOI: 10.1111/jofi.12885 | Cited by: 185
LAUREN COHEN, CHRISTOPHER MALLOY, QUOC NGUYEN
Using the complete history of regular quarterly and annual filings by U.S. corporations, we show that changes to the language and construction of financial reports have strong implications for firms’ future returns and operations. A portfolio that shorts “changers” and buys “nonchangers” earns up to 188 basis points per month in alpha (over 22% per year) in the future. Moreover, changes to 10‐Ks predict future earnings, profitability, future news announcements, and even future firm‐level bankruptcies. Unlike typical underreaction patterns, we find no announcement effect, suggesting that investors are inattentive to these simple changes across the universe of public firms.
Pages: 1417-1455 | Published: 2/2020 | DOI: 10.1111/jofi.12876 | Cited by: 40
LARS A. LOCHSTOER, PAUL C. TETLOCK
We decompose the returns of five well‐known anomalies into cash flow and discount rate news. Common patterns emerge across the five factor portfolios and their mean‐variance efficient (MVE) combination. Whereas discount rate news predominates in market returns, systematic cash flow news drives the returns of anomaly portfolios and their MVE combination with the market portfolio. Anomaly cash flow and discount rate shocks are largely uncorrelated with market cash flow and discount rate shocks and with business cycle fluctuations. These rich empirical patterns restrict the joint dynamics of firm cash flows and the pricing kernel, thereby informing models of stocks' expected returns.
Necessary and Sufficient Conditions for Existence and Uniqueness of Recursive Utilities
Pages: 1457-1493 | Published: 1/2020 | DOI: 10.1111/jofi.12877 | Cited by: 19
JAROSLAV BOROVIČKA, JOHN STACHURSKI
We obtain exact necessary and sufficient conditions for existence and uniqueness of solutions of a class of homothetic recursive utility models postulated by Epstein and Zin. The conditions center on a single test value with a natural economic interpretation. The test sheds light on the relationship between valuation of cash flows, impatience, risk adjustment, and intertemporal substitution of consumption. We propose two methods to compute the test value when an analytical solution is not available. We further provide several applications.
High‐Frequency Trading and Market Performance
Pages: 1495-1526 | Published: 2/2020 | DOI: 10.1111/jofi.12882 | Cited by: 96
MARKUS BALDAUF, JOSHUA MOLLNER
We study the consequences of, and potential policy responses to, high‐frequency trading (HFT) via the tradeoff between liquidity and information production. Faster speeds facilitate HFT, with consequences for this tradeoff: Information production decreases because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid‐ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book with one of two alternative mechanisms: delaying all orders except cancellations or implementing frequent batch auctions.
Venturing beyond the IPO: Financing of Newly Public Firms by Venture Capitalists
Pages: 1527-1577 | Published: 2/2020 | DOI: 10.1111/jofi.12879 | Cited by: 38
PETER ILIEV, MICHELLE LOWRY
Contrary to conventional wisdom, we document that approximately 15% of venture capitalist (VC)‐backed firms raise additional capital from VCs in the five years after going public. We propose two explanations for why firms revert to VC financing post‐IPO (initial public offering). First, we hypothesize that VC participation in post‐IPO financing represents an efficient solution to informational problems that would otherwise constrain firms’ abilities to exploit value‐increasing investments. Analyses of firm and VC characteristics, together with the finding that these investments are value‐increasing for both VCs and the underlying companies, support this hypothesis. We find no support for the alternative that agency conflicts motivate these investments.
Pages: 1579-1627 | Published: 2/2020 | DOI: 10.1111/jofi.12878 | Cited by: 47
FERHAT AKBAS, CHAO JIANG, PAUL D. KOCH
We examine the relation between insiders’ investment horizon and the information content of their trades with respect to future stock returns. We conjecture that an insider's investment horizon establishes a benchmark for expected patterns of continued trading behavior and thus helps identify unexpected insider trades, which should be more informative in efficient markets. Consistent with this conjecture, the trades of short‐horizon insiders are both more unexpected and more informed, on average, than those of long‐horizon insiders. Short‐horizon insiders and their firms also tend to display characteristics that are associated with a greater focus on short‐termism.
How Skilled Are Security Analysts?
Pages: 1629-1675 | Published: 2/2020 | DOI: 10.1111/jofi.12890 | Cited by: 31
ALAN CRANE, KEVIN CROTTY
The majority of security analysts are identified as skilled when the cross‐section of analyst performance is modeled as a mixture of multiple skill distributions. Analysts exhibit heterogeneous skill—some are high‐type, and some are low‐type. On average, the recommendation revisions of both types exhibit positive abnormal returns. The heterogeneity stems from differential ability to produce new information; all analysts can profitably process news. Top analysts outperform because more of their recommendations are influential (i.e., associated with statistically significant returns) and both their influential and noninfluential recommendations are more informative. A majority of research firms are also identified as skilled.
Consumption Fluctuations and Expected Returns
Pages: 1677-1713 | Published: 1/2020 | DOI: 10.1111/jofi.12870 | Cited by: 46
VICTORIA ATANASOV, STIG V. MØLLER, RICHARD PRIESTLEY
This paper introduces a novel consumption‐based variable, cyclical consumption, and examines its predictive properties for stock returns. Future expected stock returns are high (low) when aggregate consumption falls (rises) relative to its trend and marginal utility from current consumption is high (low). We show that the empirical evidence ties consumption decisions of agents to time variation in returns in a manner consistent with asset pricing models based on external habit formation. The predictive power of cyclical consumption is not confined to bad times and subsumes the predictability of many popular forecasting variables.
Star Ratings and the Incentives of Mutual Funds
Pages: 1715-1765 | Published: 2/2020 | DOI: 10.1111/jofi.12888 | Cited by: 30
CHONG HUANG, FEI LI, XI WENG
We propose a theory of reputation to explain how investors rationally respond to mutual fund star ratings. A fund's performance is determined by its information advantage, which can be acquired but decays stochastically. Investors form beliefs about whether the fund is informed based on its past performance. We refer to such beliefs as fund reputation, which determines fund flows. As performance changes continuously, equilibrium fund reputation may take discrete values only and thus can be labeled with stars. Star upgrades thus imply reputation jumps, leading to discrete increases in flows and expected performance, although stars do not provide new information.
Pages: 1771-1772 | Published: 5/2020 | DOI: 10.1111/jofi.12665 | Cited by: 0