Barbarians at the Store? Private Equity, Products, and Consumers
Pages: 1439-1488 | Published: 4/2022 | DOI: 10.1111/jofi.13134 | Cited by: 35
CESARE FRACASSI, ALESSANDRO PREVITERO, ALBERT SHEEN
We investigate the effects of private equity firms on product markets using price and sales data for an extensive number of consumer products. Following a private equity deal, target firms increase retail sales of their products 50% more than matched control firms. Price increases—roughly 1% on existing products—do not drive this growth; the launch of new products and geographic expansion do. Competitors reduce their product offerings and marginally raise prices. Cross‐sectional results on target firms, private equity firms, the economic environment, and product categories suggest that private equity generates growth by easing financial constraints and providing managerial expertise.
The Wisdom of the Robinhood Crowd
Pages: 1489-1527 | Published: 4/2022 | DOI: 10.1111/jofi.13128 | Cited by: 103
IVO WELCH
Robinhood investors increased their holdings in the March 2020 COVID bear market, indicating an absence of collective panic and margin calls. This steadfastness was rewarded in the subsequent bull market. Despite unusual interest in some “experience” stocks (e.g., cannabis stocks), they tilted primarily toward stocks with high past share volume and dollar‐trading volume (themselves mostly big stocks). From mid‐2018 to mid‐2020, an aggregated crowd consensus portfolio (a proxy for the household‐equal‐weighted portfolio) had both good timing and good alpha.
Fully Closed: Individual Responses to Realized Gains and Losses
Pages: 1529-1585 | Published: 4/2022 | DOI: 10.1111/jofi.13122 | Cited by: 7
STEFFEN MEYER, MICHAELA PAGEL
We analyze how individuals reinvest realized capital gains and losses exploiting plausibly exogenous sales due to mutual fund liquidations. Individuals reinvest 83% if a forced sale results in a gain relative to the initial investment; but reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months and arises because many individuals forced to realize a loss choose not to reinvest anything and some even exit the stock market altogether. Individuals treat realized losses differently from paper losses and are discouraged from investing more and participating in the stock market.
Pages: 1587-1633 | Published: 4/2022 | DOI: 10.1111/jofi.13126 | Cited by: 13
YUKUN LIU, BEN MATTHIES
This paper documents the existence of a persistent component in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons—our measure explains between 23% and 38% of cumulative future consumption growth at the five‐year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross section and our one‐factor model outperforms many benchmark macro‐ and return‐based multifactor models.
The Limits of Model‐Based Regulation
Pages: 1635-1684 | Published: 4/2022 | DOI: 10.1111/jofi.13124 | Cited by: 39
MARKUS BEHN, RAINER HASELMANN, VIKRANT VIG
Using loan‐level data from Germany, we investigate how the introduction of model‐based capital regulation affected banks' ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks “optimized” model‐based regulation to lower their capital requirements. Banks systematically underreported risk, with underreporting more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.
Resource Allocation in Bank Supervision: Trade‐Offs and Outcomes
Pages: 1685-1736 | Published: 6/2022 | DOI: 10.1111/jofi.13127 | Cited by: 17
THOMAS M. EISENBACH, DAVID O. LUCCA, ROBERT M. TOWNSEND
We estimate a structural model of resource allocation on work hours of Federal Reserve bank supervisors to disentangle how supervisory technology, preferences, and resource constraints impact bank outcomes. We find a significant effect of supervision on bank risk and large technological scale economies with respect to bank size. Consistent with macroprudential objectives, revealed supervisory preferences disproportionately weight larger banks, especially post‐2008 when a resource reallocation to larger banks increased risk on average across all banks. Shadow cost estimates show tight resources around the financial crisis and counterfactuals indicate that binding constraints have large effects on the distribution of bank outcomes.
Learning by Owning in a Lemons Market
Pages: 1737-1785 | Published: 4/2022 | DOI: 10.1111/jofi.13125 | Cited by: 1
JORDAN MARTEL, KENNETH MIRKIN, BRIAN WATERS
We study market dynamics when an owner learns about the quality of her asset over time. Since this information is private, the owner sells strategically to a less informed buyer following sufficient negative information. In response, market prices feature a “U‐shape” and trading probabilities a “hump‐shape” with respect to the time to sale. As the owner initially acquires greater information, buyers suffer greater adverse selection, and prices fall accordingly. Eventually, the probability of an informed sale shrinks, and prices rebound. We provide evidence consistent with our model in markets for residential real estate, venture capital investments, and construction equipment.
Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options
Pages: 1787-1828 | Published: 4/2022 | DOI: 10.1111/jofi.13129 | Cited by: 18
DMITRIY MURAVYEV, NEIL D. PEARSON, JOSHUA M. POLLET
Recent research argues that uncertainty about future stock borrowing fees hinders short‐selling, and this risk explains the performance of short strategies. One possible mechanism is that borrowing fee risk carries a risk premium. Since the present value of the uncertain borrowing fee is reflected in options prices, the difference between option‐implied and realized fees estimates this premium. We find that the risk premium is small. Moreover, if the risk premium is substantial, it should be reflected in the returns to short‐selling stock after adjusting for stock borrowing fees. However, borrowing fee risk does not predict fee‐adjusted returns.
Are Analyst Short‐Term Trade Ideas Valuable?
Pages: 1829-1875 | Published: 6/2022 | DOI: 10.1111/jofi.13130 | Cited by: 10
JUSTIN BIRRU, SINAN GOKKAYA, XI LIU, RENÉ M. STULZ
Short‐term trade ideas are a component of analyst research highly valued by institutional investors. Using a novel and comprehensive database, we find that trade ideas have a stock price impact at least as large as recommendation and target price changes. Trade ideas based on expectations of future events are more informative than those identifying incomplete incorporation of past information in stock prices. Analysts with better access to a firm's management produce better trade ideas. Institutional investors trade in the direction of trade ideas. Investors following trade ideas can earn significant abnormal returns, consistent with analysts possessing valuable short‐term stock‐picking skills.
Factor Momentum and the Momentum Factor
Pages: 1877-1919 | Published: 4/2022 | DOI: 10.1111/jofi.13131 | Cited by: 91
SINA EHSANI, JUHANI T. LINNAINMAA
Momentum in individual stock returns relates to momentum in factor returns. Most factors are positively autocorrelated: the average factor earns a monthly return of six basis points following a year of losses and 51 basis points following a positive year. We find that factor momentum concentrates in factors that explain more of the cross section of returns and that it is not incidental to individual stock momentum: momentum‐neutral factors display more momentum. Momentum found in high‐eigenvalue principal component factors subsumes most forms of individual stock momentum. Our results suggest that momentum is not a distinct risk factor—it times other factors.
Luck versus Skill in the Cross Section of Mutual Fund Returns: Reexamining the Evidence
Pages: 1921-1966 | Published: 4/2022 | DOI: 10.1111/jofi.13123 | Cited by: 10
CAMPBELL R. HARVEY, YAN LIU
While Kosowski et al. (2006, Journal of Finance 61, 2551–2595) and Fama and French (2010, Journal of Finance 65, 1915–1947) both evaluate whether mutual funds outperform, their conclusions are very different. We reconcile their findings. We show that the Fama‐French method suffers from an undersampling problem that leads to a failure to reject the null hypothesis of zero alpha, even when some funds generate economically large risk‐adjusted returns. In contrast, Kosowski et al. substantially overreject the null hypothesis, even when all funds have a zero alpha. We present a novel bootstrapping approach that should be useful to future researchers choosing between the two approaches.
Pages: 1968-1969 | Published: 6/2022 | DOI: 10.1111/jofi.12928 | Cited by: 0