The Anatomy of the Transmission of Macroprudential Policies
Pages: 2533-2575 | Published: 8/2022 | DOI: 10.1111/jofi.13170 | Cited by: 32
VIRAL V. ACHARYA, KATHARINA BERGANT, MATTEO CROSIGNANI, TIM EISERT, FERGAL MCCANN
We analyze how regulatory constraints on household leverage—in the form of loan‐to‐income and loan‐to‐value limits—affect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Loan‐level data suggest that mortgage credit is reallocated from low‐ to high‐income borrowers and from urban to rural counties. This reallocation weakens the feedback between credit and house prices and slows house price growth in “hot” housing markets. Banks whose lending to households is more affected by the regulatory constraint drive this reallocation, but also substitute their risk‐taking into holdings of securities and corporate credit.
The Cost of Capital for Banks: Evidence from Analyst Earnings Forecasts
Pages: 2577-2611 | Published: 7/2022 | DOI: 10.1111/jofi.13168 | Cited by: 9
JENS DICK‐NIELSEN, JACOB GYNTELBERG, CHRISTOFFER THIMSEN
We extract cost of capital measures for banks using analyst earnings forecasts, which we show are unbiased. We find that the cost of equity and the cost of debt decrease in the Tier 1 ratio, whereas total cost of capital is uncorrelated with the Tier 1 ratio. These findings suggest that investors adjust their return expectations for banks in accordance with the Modigliani–Miller conservation‐of‐risk principle. Hence, increased capital requirements are not made socially costly based on a notion that market pricing violates risk conservation. Equity can nevertheless still be privately costly for banks because of reduced subsidies.
Commodity Financialization and Information Transmission
Pages: 2613-2667 | Published: 7/2022 | DOI: 10.1111/jofi.13165 | Cited by: 32
ITAY GOLDSTEIN, LIYAN YANG
We provide a model to understand the effects of commodity futures financialization on various market variables. We distinguish between financial speculators and financial hedgers and study their separate and combined effects on the informativeness of futures prices, the futures price bias, the comovement of futures prices with other markets, and the predictiveness of financial trading. We capture the interactions between commodity futures financialization and the real economy through spot prices and production decisions. A dynamic extension illustrates how key variables change over time in a period of acute financialization in a way that is consistent with observed empirical patterns.
When Should Bankruptcy Law Be Creditor‐ or Debtor‐Friendly? Theory and Evidence
Pages: 2669-2717 | Published: 8/2022 | DOI: 10.1111/jofi.13171 | Cited by: 8
DAVID SCHOENHERR, JAN STARMANS
We examine how creditor protection affects firms with different levels of owners' and managers' personal costs of bankruptcy (PCB). Theoretically, we show that firms with high PCB borrow and invest more under a more debtor‐friendly management stay system, whereas firms with low PCB borrow and invest more under a more creditor‐friendly receivership system. Intuitively, stronger creditor protection relaxes financial constraints but reduces credit demand. Which effect dominates depends on owners' and managers' PCB. Empirically, we find support for these predictions using a Korean bankruptcy reform that replaced receivership with management stay.
Rare Disasters, Financial Development, and Sovereign Debt
Pages: 2719-2764 | Published: 8/2022 | DOI: 10.1111/jofi.13175 | Cited by: 9
SERGIO REBELO, NENG WANG, JINQIANG YANG
We propose a model of sovereign debt in which countries vary in their level of financial development, defined as the extent to which they can issue debt denominated in domestic currency in international capital markets. We show that low levels of financial development generate the “debt intolerance” phenomenon that plagues emerging markets: it reduces overall debt capacity, increases credit spreads, and limits the country's ability to smooth consumption.
Common Ownership Does Not Have Anticompetitive Effects in the Airline Industry
Pages: 2765-2798 | Published: 9/2022 | DOI: 10.1111/jofi.13176 | Cited by: 26
PATRICK DENNIS, KRISTOPHER GERARDI, CAROLA SCHENONE
Institutions often own equity in multiple firms that compete in the same product market. Prior research has shown that these institutional “common owners” induce anticompetitive pricing behavior in the airline industry. This paper reevaluates this evidence and shows that the documented positive correlation between common ownership and airline ticket prices stems from the market share component of the common ownership measure, and not the ownership and control components. We further show that the results are sensitive to measures of investor control and to assumptions about equity holders' ownership and control during bankruptcy.
Rising Intangible Capital, Shrinking Debt Capacity, and the U.S. Corporate Savings Glut
Pages: 2799-2852 | Published: 8/2022 | DOI: 10.1111/jofi.13174 | Cited by: 59
ANTONIO FALATO, DALIDA KADYRZHANOVA, JAE SIM, ROBERTO STERI
This paper explores the connection between rising intangible capital and the secular upward trend in U.S. corporate cash holdings. We calibrate a dynamic model with two productive assets—tangible and intangible capital—in which only tangible capital can serve as collateral. We highlight the following points: (i) a shift toward intangible capital shrinks firms' debt capacity and leads them to hold more cash, (ii) the effect accounts for three‐quarters of the observed trend in average cash ratios, and (iii) it also accounts for the upward trend of cash ratios in the cross‐section of small and large firms and in the aggregate.
A Theory of Equivalent Expectation Measures for Contingent Claim Returns
Pages: 2853-2906 | Published: 8/2022 | DOI: 10.1111/jofi.13172 | Cited by: 2
SANJAY K. NAWALKHA, XIAOYANG ZHUO
This paper introduces a dynamic change of measure approach for computing analytical solutions of expected future prices (and therefore, expected returns) of contingent claims over a finite horizon. The new approach constructs hybrid probability measures called equivalent expectation measures (EEMs) that provide the physical expectation of the claim's future price before the horizon date, and serve as pricing measures on or after the horizon date. The EEM theory can be used for empirical investigations of both the cross‐section and the term structure of returns of contingent claims, such as Treasury bonds, corporate bonds, and financial derivatives.
Pages: 2907-2947 | Published: 7/2022 | DOI: 10.1111/jofi.13169 | Cited by: 0
DUNHONG JIN, THOMAS NOE
The rewards received by financial managers depend on both relative performance (e.g., fund inflows based on fund rankings, promotions based on peer comparisons) and absolute performance (e.g., bonus payments for meeting accounting targets, hedge‐fund incentive fees). Both relative and absolute performance rewards engender risk‐taking. In this paper, we show that these two sources of risk‐taking, relative and absolute performance rewards, mitigate the risk‐taking incentives produced by the other. This mutual incentive‐reduction effect generates a number of novel predictions about the relationship of managerial risk‐taking with the structure of relative and absolute performance rewards.
Pages: 2949-2986 | Published: 8/2022 | DOI: 10.1111/jofi.13173 | Cited by: 21
JOHN M. BIZJAK, SWAMINATHAN L. KALPATHY, VASSIL T. MIHOV, JUE REN
Maintaining economic output during the COVID‐19 pandemic results in benefits for firm shareholders but comes at a potential cost to public health. Using store‐level data, we examine how a CEO's political leaning impacts this trade‐off. We document that firms with a Republican‐leaning CEO experience a relative increase in store visits compared to firms with a Democratic‐leaning CEO. The increase in store visits is associated with higher sales and positive abnormal stock returns. However, we also document higher COVID‐19 transmission rates and more employee safety complaints in communities where establishments with higher store traffic are managed by a Republican‐leaning CEO.
Pages: 2987-2987 | Published: 8/2022 | DOI: 10.1111/jofi.13164 | Cited by: 0
The Accepted Article version of the above article from The Journal of Finance, published online on 30 May 2022 in Wiley Online Library (wileyonlinelibrary.com), has been withdrawn by agreement between the journal's editors and Wiley Periodicals LLC on behalf of the American Finance Association. The withdrawal has been agreed after an additional review of the article revealed that the authors did not properly characterize the relationship of their work to the earlier literature.