Johannes Stroebel: Winner of the 2023 Fischer Black Prize
Pages: 2417-2420 | Published: 9/2023 | DOI: 10.1111/jofi.13269 | Cited by: 0
STIJN VAN NIEUWERBURGH
Moral Hazard versus Liquidity in Household Bankruptcy
Pages: 2421-2464 | Published: 7/2023 | DOI: 10.1111/jofi.13263 | Cited by: 8
SASHA INDARTE
This paper studies the role of moral hazard and liquidity in driving household bankruptcy. First, I estimate that increases in potential debt forgiveness have a positive, but small, effect on filing using a regression kink design. Second, exploiting quasi‐experimental variation in mortgage payment reductions, I estimate that filing is five times more responsive to cash‐on‐hand than relief generosity. Using a sufficient statistic, I show the estimates imply large consumption‐smoothing benefits of bankruptcy for the marginal filer. Finally, I conclude that 83% of the filing response to dischargeable debt comes from liquidity effects rather than a moral hazard response to financial incentives.
Is There a Replication Crisis in Finance?
Pages: 2465-2518 | Published: 6/2023 | DOI: 10.1111/jofi.13249 | Cited by: 70
THEIS INGERSLEV JENSEN, BRYAN KELLY, LASSE HEJE PEDERSEN
Several papers argue that financial economics faces a replication crisis because the majority of studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions. The majority of asset pricing factors (i) can be replicated; (ii) can be clustered into 13 themes, the majority of which are significant parts of the tangency portfolio; (iii) work out‐of‐sample in a new large data set covering 93 countries; and (iv) have evidence that is strengthened (not weakened) by the large number of observed factors.
Pages: 2519-2562 | Published: 8/2023 | DOI: 10.1111/jofi.13264 | Cited by: 3
ANDREA L. EISFELDT, HANNO LUSTIG, LEI ZHANG
Investors' individual arbitrage models introduce idiosyncratic risk into complex asset strategies, driving up average returns and Sharpe ratios. However, despite the attractive risk‐return trade‐off, participation is limited. This is because effective Sharpe ratios in complex asset markets vary with investors' expertise. Investors with higher expertise, better models, and lower resulting idiosyncratic risk exposures realize higher Sharpe ratios. Their demand deters entry by less sophisticated investors. As predicted by our model, market dislocations are characterized by an increase in idiosyncratic risk, investor exit, and persistently elevated alphas and Sharpe ratios. The selection effect from higher expertise agents' more favorable Sharpe ratios is unique to our model and key to our main results.
Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets
Pages: 2563-2620 | Published: 7/2023 | DOI: 10.1111/jofi.13266 | Cited by: 9
HUI CHEN, ZHUO CHEN, ZHIGUO HE, JINYU LIU, RENGMING XIE
We provide causal evidence on the value of asset pledgeability by exploiting a unique feature of Chinese corporate bond markets: bonds with identical fundamentals are traded on two segmented markets with different rules for repo transactions. Using a policy shock that rendered AA+ and AA bonds ineligible for repo on one market only, we compare how bond prices changed across markets and rating classes around this event. When the haircut increases from 0% to 100%, bond yields increase by 39 bps to 85 bps. These estimates help us infer the magnitude of the shadow cost of capital in China.
Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
Pages: 2621-2671 | Published: 8/2023 | DOI: 10.1111/jofi.13267 | Cited by: 7
MATTHEW DENES, SABRINA T. HOWELL, FILIPPO MEZZANOTTI, XINXIN WANG, TING XU
Angel investor tax credits are used globally to spur high‐growth entrepreneurship. Exploiting their staggered implementation in 31 U.S. states, we find that they increase angel investment yet have no significant impact on entrepreneurial activity. Two mechanisms explain these results: crowding out of alternative financing and low sensitivity of professional investors to tax credits. With a large‐scale survey and a stylized model, we show that low responsiveness among professional angels may reflect the fat‐tailed return distributions that characterize high‐growth startups. The results contrast with evidence that direct subsidies to firms have positive effects, raising concerns about promoting entrepreneurship with investor subsidies.
Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds
Pages: 2673-2723 | Published: 6/2023 | DOI: 10.1111/jofi.13258 | Cited by: 7
JONATHAN A. PARKER, ANTOINETTE SCHOAR, YANG SUN
Target date funds (TDFs) are designed to provide unsophisticated or inattentive investors with age‐appropriate exposures to different asset classes like stocks and bonds. The rise of TDFs has moved a significant share of retirement investors into macrocontrarian strategies that sell stocks after relatively good stock market performance. This rebalancing drives contrarian flows across equity mutual funds held by TDFs, stabilizing their funding, and reduces stock returns for stocks disproportionately held by these funds when stock market returns are relatively high. Continued growth in TDFs and similar investment products may dampen stock market volatility and increase the transmission of shocks across asset classes.
Pages: 2725-2778 | Published: 7/2023 | DOI: 10.1111/jofi.13260 | Cited by: 3
PETER M. DEMARZO, RON KANIEL
We consider multiagent multifirm contracting when agents benchmark their wages to those of their peers, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals, a “rat race” emerges: agents are more productive, with effort that can exceed the first best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.
Dynamic Contracting with Intermediation: Operational, Governance, and Financial Engineering
Pages: 2779-2836 | Published: 7/2023 | DOI: 10.1111/jofi.13265 | Cited by: 3
SEBASTIAN GRYGLEWICZ, SIMON MAYER
Private equity funds intermediate investment and affect portfolio firm performance by actively engaging in operational, governance, and financial engineering. We study this type of intermediation in a dynamic agency model in which an active intermediary raises funds from outside investors and invests in a firm run by an agent. Optimal contracting addresses moral hazard at the intermediary and firm levels. The intermediary's incentives to affect firm performance are strongest after poor performance, while the agent's incentives are strongest after good performance. We also show how financial engineering, that is, financial contracting with outside investors, interacts with operational and governance engineering.
Stealth Acquisitions and Product Market Competition
Pages: 2837-2900 | Published: 6/2023 | DOI: 10.1111/jofi.13256 | Cited by: 3
JOHN D. KEPLER, VIC NAIKER, CHRISTOPHER R. STEWART
We examine whether and how firms structure their merger and acquisition deals to avoid antitrust scrutiny. There are approximately 40% more mergers and acquisitions (M&As) than expected just below deal value thresholds that trigger antitrust review. These “stealth acquisitions” tend to involve financial and governance contract terms that afford greater scope for negotiating and assigning lower deal values. We also show that the equity values, gross margins, and product prices of acquiring firms and their competitors increase following such acquisitions. Our results suggest that acquirers manipulate M&As to avoid antitrust scrutiny, thereby benefiting their own shareholders but potentially harming other corporate stakeholders.
Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality
Pages: 2901-2943 | Published: 7/2023 | DOI: 10.1111/jofi.13261 | Cited by: 3
MARTIJN BOONS, GIORGIO OTTONELLO, ROSSEN VALKANOV
The response of corporate bond credit spreads to three exogenous macro shocks—oil supply, investment‐specific technology, and government spending—is large, significant, and a mirror image of macroeconomic activity. This countercyclicality is driven largely by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro shocks to credit markets is scarce and recent work highlights the real effects of credit fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy.
Monetary Policy and Inequality
Pages: 2945-2989 | Published: 7/2023 | DOI: 10.1111/jofi.13262 | Cited by: 3
ASGER LAU ANDERSEN, NIELS JOHANNESEN, MIA JØRGENSEN, JOSÉ‐LUIS PEYDRÓ
We analyze the distributional effects of monetary policy on income, wealth, and consumption. We use administrative household‐level data covering the entire population in Denmark over the period 1987 to 2014 and exploit a long‐standing currency peg as a source of exogenous variation in monetary policy. We find that gains from softer monetary policy in terms of income, wealth, and consumption are monotonically increasing in ex ante income. The distributional effects reflect systematic differences in exposure to the various channels of monetary policy, especially nonlabor channels (e.g., leverage and risky assets). Our estimates imply that softer monetary policy increases income inequality.
(Why) Do Central Banks Care about Their Profits?
Pages: 2991-3045 | Published: 7/2023 | DOI: 10.1111/jofi.13257 | Cited by: 9
IGOR GONCHAROV, VASSO IOANNIDOU, MARTIN C. SCHMALZ
We document that central banks are discontinuously more likely to report slightly positive profits than slightly negative profits, especially when political pressure is greater, the public is more receptive to extreme political views, and central bank governors are eligible for reappointment. The propensity to report small profits over small losses is correlated with higher inflation and lower interest rates. We conclude that there are agency problems at central banks, which give rise to discontinuous profit incentives that correlate with central banks’ policy choices and outcomes. These findings inform the debate about the political economy of central banking and central bank design.
Pages: 3048-3049 | Published: 9/2023 | DOI: 10.1111/jofi.13051 | Cited by: 0