Presidential Address: How Much “Rationality” Is There in Bond‐Market Risk Premiums?
Pages: 1611-1654 | Published: 7/2021 | DOI: 10.1111/jofi.13062 | Cited by: 13
KENNETH J. SINGLETON
Beliefs of professional forecasters are benchmarked against those of a Bayesian econometrician BE who is learning about the unknown dynamics of the bond risk factors. Consistent with rational Bayesian learning, the forecast errors of individual professionals and BE are comparably predictable over the business cycle. The secular and cyclical patterns of professionals' forecasts relative to those of BE are explored in depth. Inconsistent with many models with belief dispersion, the relationship between professionals' yield disagreement and their matched disagreements about macroeconomic fundamentals is very weak.
What Explains Differences in Finance Research Productivity during the Pandemic?
Pages: 1655-1697 | Published: 5/2021 | DOI: 10.1111/jofi.13028 | Cited by: 56
BRAD M. BARBER, WEI JIANG, ADAIR MORSE, MANJU PURI, HEATHER TOOKES, INGRID M. WERNER
Based on a survey of American Finance Association members, we analyze how demographics, time allocation, production mechanisms, and institutional factors affect research production during the pandemic. Consistent with the literature, research productivity falls more for women and faculty with young children. Independently, and novel, extra time spent on teaching (much more likely for women) negatively affects research productivity. Also novel, concerns about feedback, isolation, and health have large negative research effects, which disproportionately affect junior faculty and PhD students. Finally, faculty who express greater concerns about employers’ finances report larger negative research effects and more concerns about feedback, isolation, and health.
Don't Take Their Word for It: The Misclassification of Bond Mutual Funds
Pages: 1699-1730 | Published: 4/2021 | DOI: 10.1111/jofi.13023 | Cited by: 44
HUAIZHI CHEN, LAUREN COHEN, UMIT G. GURUN
We provide evidence that bond fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. The problem is widespread, resulting in up to 31.4% of funds being misclassified with safer profiles, compared to their true, publicly reported holdings. “Misclassified funds”—those that hold risky bonds but claim to hold safer bonds—appear to on‐average outperform lower risk funds in their peer groups. Within category groups, misclassified funds receive more Morningstar stars and higher investor flows. However, when we correctly classify them based on actual risk, these funds are mediocre performers.
Pages: 1731-1772 | Published: 5/2021 | DOI: 10.1111/jofi.13024 | Cited by: 100
JAMES R. BROWN, MATTHEW T. GUSTAFSON, IVAN T. IVANOV
Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank‐borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower‐friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the nonfundamental component of cash flow volatility, especially for solvent, small bank borrowers.
Pages: 1773-1811 | Published: 4/2021 | DOI: 10.1111/jofi.13019 | Cited by: 35
STEVEN N. KAPLAN, MORTEN SORENSEN
Using 2,603 executive assessments, we study how CEO candidates differ from candidates for other top management positions, particularly CFOs. More than half of the variation in the 30 assessed characteristics is explained by four factors that we interpret as general ability, execution (vs. interpersonal), charisma (vs. analytical), and strategic (vs. managerial). CEO candidates have more extreme factor scores that differ significantly from those of CFO candidates. Conditional on being considered, candidates with greater general ability and interpersonal skills are more likely to be hired. These and our previous results on CEO success suggest that boards overweight interpersonal skills in hiring CEOs.
Pages: 1813-1867 | Published: 4/2021 | DOI: 10.1111/jofi.13022 | Cited by: 35
YUNZHI HU, FELIPE VARAS
An entrepreneur borrows from a relationship bank or the market. The bank has a higher cost of capital but produces private information over time. While the entrepreneur accumulates reputation as the lending relationship continues, asymmetric information is also developed between the bank/entrepreneur and the market. In this setting, zombie lending is inevitable: Once the entrepreneur becomes sufficiently reputable, the bank will roll over loans even after learning bad news, for the prospect of future market financing. Zombie lending is mitigated when the entrepreneur faces financial constraints. Finally, the bank stops producing information too early if information production is costly.
Rent Extraction with Securities Plus Cash
Pages: 1869-1912 | Published: 4/2021 | DOI: 10.1111/jofi.13018 | Cited by: 12
TINGJUN LIU, DAN BERNHARDT
In our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.
How Debit Cards Enable the Poor to Save More
Pages: 1913-1957 | Published: 5/2021 | DOI: 10.1111/jofi.13021 | Cited by: 43
PIERRE BACHAS, PAUL GERTLER, SEAN HIGGINS, ENRIQUE SEIRA
We study an at‐scale natural experiment in which debit cards were given to cash transfer recipients who already had a bank account. Using administrative account data and household surveys, we find that beneficiaries accumulated a savings stock equal to 2% of annual income after two years with the card. The increase in formal savings represents an increase in overall savings, financed by a reduction in current consumption. There are two mechanisms. First, debit cards reduce transaction costs of accessing money. Second, they reduce monitoring costs, which led beneficiaries to check their account balances frequently and build trust in the bank.
Time Variation of the Equity Term Structure
Pages: 1959-1999 | Published: 4/2021 | DOI: 10.1111/jofi.13020 | Cited by: 61
NIELS JOACHIM GORMSEN
I study the term structure of one‐period expected returns on dividend claims with different maturity. I find that the slope of the term structure is countercyclical. The countercyclical variation is consistent with theories of long‐run risk and habit, but these theories cannot explain the average downward slope. At the same time, the cyclical variation is inconsistent with recent models constructed to match the average downward slope. More generally, the average and cyclicality of the slope are hard to reconcile with models with a single risk factor. I introduce a model with two priced factors to solve the puzzle.
Sentiment Trading and Hedge Fund Returns
Pages: 2001-2033 | Published: 4/2021 | DOI: 10.1111/jofi.13025 | Cited by: 27
YONG CHEN, BING HAN, JING PAN
In the presence of sentiment fluctuations, arbitrageurs may engage in different strategies leading to dispersed sentiment exposures. We find that hedge funds in the top decile ranked by sentiment beta outperform those in the bottom decile by 0.59% per month on a risk‐adjusted basis, with the spread being larger among skilled funds. We also find that about 10% of hedge funds have sentiment timing skill that positively correlates with fund sentiment beta and contributes to fund performance. Our findings show that skilled hedge funds can earn high returns by predicting and exploiting sentiment changes rather than betting against mispricing.
Asset Managers: Institutional Performance and Factor Exposures
Pages: 2035-2075 | Published: 5/2021 | DOI: 10.1111/jofi.13026 | Cited by: 29
JOSEPH GERAKOS, JUHANI T. LINNAINMAA, ADAIR MORSE
Using data on $18 trillion of assets under management, we show that actively managed institutional accounts outperformed strategy benchmarks by 75 (31) bps on a gross (net) basis during the period 2000 to 2012. Estimates from a Sharpe model imply that asset managers' outperformance came from factor exposures. If institutions had instead implemented mean‐variance efficient portfolios using index and institutional mutual funds available during the sample period, they would not have earned higher Sharpe ratios. Our results are consistent with the average asset manager having skill, managers competing for institutional capital, and institutions engaging in costly search to identify skilled managers.
Corrigendum: Diagnostic Expectations and Credit Cycles
Pages: 2077-2077 | Published: 7/2021 | DOI: 10.1111/jofi.13060 | Cited by: 0
Pages: 2080-2081 | Published: 7/2021 | DOI: 10.1111/jofi.12806 | Cited by: 0