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Volume 76: Issue 6 (December 2021)


Pages: 2715-2718  |  Published: 11/2021  |  DOI: 10.1111/jofi.12815  |  Cited by: 0

Do Intermediaries Matter for Aggregate Asset Prices?

Pages: 2719-2761  |  Published: 10/2021  |  DOI: 10.1111/jofi.13086  |  Cited by: 44


Poor financial health of intermediaries coincides with low asset prices and high risk premiums. Is this because intermediaries matter for asset prices, or because their health correlates with economy‐wide risk aversion? In the first case, return predictability should be more pronounced for asset classes in which households are less active. We provide evidence supporting this prediction, suggesting that a quantitatively sizable fraction of risk premium variation in several large asset classes such as credit or mortgage‐backed securities (MBS) is due to intermediaries. Movements in economy‐wide risk aversion create the opposite pattern, and we find this channel also matters.

Currency Mispricing and Dealer Balance Sheets

Pages: 2763-2803  |  Published: 10/2021  |  DOI: 10.1111/jofi.13079  |  Cited by: 20


We find dealer‐level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity. Our analysis uses a unique data set of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the U.K. leverage ratio framework. Dealers who are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients' demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a preexisting relationship.

Partisan Professionals: Evidence from Credit Rating Analysts

Pages: 2805-2856  |  Published: 10/2021  |  DOI: 10.1111/jofi.13083  |  Cited by: 74


Partisan perception affects the actions of professionals in the financial sector. Linking credit rating analysts to party affiliations from voter records, we show that analysts not affiliated with the U.S. president's party downward‐adjust corporate credit ratings more frequently. Since we compare analysts with different party affiliations covering the same firm in the same quarter, differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results show that analysts' partisan perception has price effects and may influence firms' investment policies.

Inequality Aversion, Populism, and the Backlash against Globalization

Pages: 2857-2906  |  Published: 9/2021  |  DOI: 10.1111/jofi.13081  |  Cited by: 23


Motivated by the recent rise of populism in Western democracies, we develop a tractable equilibrium model in which a populist backlash emerges endogenously in a strong economy. In the model, voters dislike inequality, especially the high consumption of “elites.” Economic growth exacerbates inequality due to heterogeneity in preferences , which leads to heterogeneity in returns on capital. In response to rising inequality, voters optimally elect a populist promising to end globalization. Equality is a luxury good. Countries with more inequality, higher financial development, and trade deficits are more vulnerable to populism, both in the model and in the data.

Talent in Distressed Firms: Investigating the Labor Costs of Financial Distress

Pages: 2907-2961  |  Published: 10/2021  |  DOI: 10.1111/jofi.13077  |  Cited by: 42


The importance of skilled labor and the inalienability of human capital expose firms to the risk of losing talent at critical times. Using Swedish microdata, we document that firms lose workers with the highest cognitive and noncognitive skills as they approach bankruptcy. In a quasi‐experiment, we confirm that financial distress drives these results: following a negative export shock caused by exogenous currency movements, talent abandons the firm, but only if the exporter is highly leveraged. Consistent with talent dependence being associated with higher labor costs of financial distress, firms that rely more on talent have more conservative capital structures.

Negative Home Equity and Household Labor Supply

Pages: 2963-2995  |  Published: 8/2021  |  DOI: 10.1111/jofi.13070  |  Cited by: 10


Using U.S. household‐level data and plausibly exogenous variation in the location‐timing of home purchases with a single lender, I find that negative home equity causes a 2% to 6% reduction in household labor supply. Supporting causality, households are observationally equivalent at origination and equally sensitive to local housing shocks that do not cause negative equity. Results also hold comparing purchases within the same year‐metropolitan statistical area that differ by only a few months. Though multiple channels are likely at work, evidence of nonlinear effects is broadly consistent with costs associated with housing lock and financial distress.

Leverage Regulation and Market Structure: A Structural Model of the U.K. Mortgage Market

Pages: 2997-3053  |  Published: 8/2021  |  DOI: 10.1111/jofi.13072  |  Cited by: 32


I develop a structural model of mortgage demand and lender competition to study how leverage regulation affects the U.K. mortgage market. Using variation in risk‐weighted capital requirements across lenders and mortgages with different loan‐to‐values (LTVs), I show that a 1‐percentage‐point increase in risk‐weighted capital requirements increases lenders' marginal cost of originating mortgages by about 26 basis points (11%) on average. I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration by about 20%, and suggest that banning high‐LTV mortgages may reduce large lenders' equity buffer.

Fire‐Sale Spillovers in Debt Markets

Pages: 3055-3102  |  Published: 9/2021  |  DOI: 10.1111/jofi.13078  |  Cited by: 44


Fire sales induced by investor redemptions have powerful spillover effects among funds that hold the same assets, hurting peer funds' performance and flows, and leading to further asset sales with negative bond price impact. A one‐standard‐deviation increase in our fire‐sale spillover measure leads to a 45 (90) bp decrease in peer fund returns (flows) and a two percentage point increase in the likelihood of a large bond price drop. The results hold in a regression‐discontinuity design addressing identification concerns. Timing, heterogeneity, instrumental‐variable, and placebo tests further support the price‐impact mechanism. Model‐based counterfactual and stress‐test analyses quantify the financial stability implications.

Intermediation Variety

Pages: 3103-3152  |  Published: 10/2021  |  DOI: 10.1111/jofi.13084  |  Cited by: 13


We explain why banks and nonbank intermediaries coexist in a model based only on differences in their funding costs. Banks enjoy a low cost of capital due to safety nets and money‐like liabilities. We show that this can actually be a disadvantage: it generates a soft‐budget‐constraint problem that makes it difficult for banks to credibly threaten to withhold additional funding to failed projects. Nonbanks emerge to solve this problem. Their high cost of capital is an advantage: it allows them to commit to terminate funding. Still, nonbanks never take over the entire market, but other coexist with banks in equilibrium.

Asset Pricing and Sports Betting

Pages: 3153-3209  |  Published: 10/2021  |  DOI: 10.1111/jofi.13082  |  Cited by: 19


Sports betting markets offer a novel laboratory to test theories of cross‐sectional asset pricing anomalies. Two features of this market—no systematic risk and terminal values exogenous to betting activity—evade the joint hypothesis problem, allowing mispricing to be detected. Examining a large and diverse set of liquid betting contracts, I find strong evidence of momentum, consistent with delayed overreaction and inconsistent with underreaction and rational pricing. Returns are a fraction of those in financial markets and fail to overcome transactions costs, preventing arbitrage from eliminating them. An insight from betting also predicts value and momentum returns in U.S. equities.

Volatility, Valuation Ratios, and Bubbles: An Empirical Measure of Market Sentiment

Pages: 3211-3254  |  Published: 8/2021  |  DOI: 10.1111/jofi.13068  |  Cited by: 26


We define a sentiment indicator based on option prices, valuation ratios, and interest rates. The indicator can be interpreted as a lower bound on the expected growth in fundamentals that a rational investor would have to perceive to be happy to hold the market. The bound was unusually high in the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. Our approach exploits two key ingredients. First, we derive a new valuation ratio decomposition that is related to the Campbell–Shiller loglinearization but that resembles the Gordon growth model more closely and has certain other advantages. Second, we introduce a volatility index that provides a lower bound on the market's expected log return.

Valuing Private Equity Investments Strip by Strip

Pages: 3255-3307  |  Published: 8/2021  |  DOI: 10.1111/jofi.13073  |  Cited by: 30


We propose a new valuation method for private equity (PE) investments. It constructs a replicating portfolio using cash flows on listed equity and fixed‐income instruments (strips). It then values the strips using an asset pricing model that captures the risk in the cross‐section of bonds and equity factors. The method delivers a risk‐adjusted profit on each PE investment and a time series for the expected return on each fund category. We find negative risk‐adjusted profits for the average PE fund, with substantial heterogeneity and some persistence in the performance. Expected returns and risk‐adjusted profit decline in the later part of the sample.

Real Estate Shocks and Financial Advisor Misconduct

Pages: 3309-3346  |  Published: 7/2021  |  DOI: 10.1111/jofi.13067  |  Cited by: 20


We test whether personal real estate shocks affect professional misconduct by financial advisors. We use a panel of advisors' home addresses and examine within‐advisor variation relative to other advisors who work at the same firm and live in the same ZIP code. We find a negative relation between housing returns and misconduct. We show that advisors' housing returns explain misconduct against out‐of‐state customers, breaking the link between customer and advisor housing shocks. Furthermore, the results are stronger for advisors with lower career risk from committing misconduct, and for advisors with greater borrowing constraints.

Economic Stimulus at the Expense of Routine‐Task Jobs

Pages: 3347-3399  |  Published: 10/2021  |  DOI: 10.1111/jofi.13080  |  Cited by: 11


Do investment tax incentives improve job prospects for workers? We explore states' adoption of a major federal tax incentive that accelerates the depreciation of equipment investments for eligible firms but not for ineligible ones. Analyzing massive establishment‐level data sets on occupational employment and computer investment, we find that when states expand investment incentives, eligible firms immediately increase their equipment and skilled employees; whereas they reduce routine‐task employees after a delay of up to two years. These opposing effects constitute an overall insignificant effect on the firms' total employment and shed light on the nuances of job creation through investment incentives.

Information Asymmetry, Mispricing, and Security Issuance

Pages: 3401-3446  |  Published: 8/2021  |  DOI: 10.1111/jofi.13066  |  Cited by: 8


I examine the effects of information asymmetry–driven mispricing on security issuance. Using predisclosure changes in purchase obligations as a proxy for information asymmetry–driven mispricing, I find that managers avoid (prefer) issuing securities when they perceive their firms to be undervalued (overvalued). The effects of information asymmetry–driven mispricing are stronger on equity issuance than debt issuance. Consequently, undervaluation (overvaluation) causes an increase (decrease) in leverage. These effects are more pronounced for firms, periods, and securities associated with greater information asymmetry. The stock‐trading patterns that managers follow suggest that their perceived mispricing is an important factor in both private and firm‐level decisions.


Pages: 3447-3447  |  Published: 11/2021  |  DOI: 10.1111/jofi.13091  |  Cited by: 0


Pages: 3448-3448  |  Published: 11/2021  |  DOI: 10.1111/jofi.13092  |  Cited by: 0


Pages: 3449-3450  |  Published: 11/2021  |  DOI: 10.1111/jofi.12816  |  Cited by: 0