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Volume 79: Issue 1 (February 2024)


ISSUE INFORMATION

Pages: 1-3  |  Published: 1/2024  |  DOI: 10.1111/jofi.13141  |  Cited by: 0


Front‐Page News: The Effect of News Positioning on Financial Markets

Pages: 5-33  |  Published: 11/2023  |  DOI: 10.1111/jofi.13287  |  Cited by: 2

ANASTASSIA FEDYK

This paper estimates the effect of news positioning on the speed of price discovery, using exogenous variation in prominent (“front‐page”) positioning of news articles on the Bloomberg terminal. Front‐page articles see 240% higher trading volume and 176% larger absolute excess returns during the first 10 minutes after publication than equally important non‐front‐page articles. Overall, the information in front‐page articles is fully incorporated into prices within an hour of publication. The response to non‐front‐page information of similar importance eventually converges but takes more than two days to be fully reflected in prices.


The Decline of Secured Debt

Pages: 35-93  |  Published: 1/2024  |  DOI: 10.1111/jofi.13308  |  Cited by: 0

EFRAIM BENMELECH, NITISH KUMAR, RAGHURAM RAJAN

The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high‐quality borrowers will respect their claims even if creditors do not obtain security upfront. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently—when a firm approaches distress. This also explains why, superimposed on the secular decline, the share of secured debt issued is countercyclical.


Liquidation Value and Loan Pricing

Pages: 95-128  |  Published: 11/2023  |  DOI: 10.1111/jofi.13291  |  Cited by: 0

FRANCESCA BARBIERO, GLENN SCHEPENS, JEAN‐DAVID SIGAUX

This paper shows that the liquidation value of collateral depends on the interdependency between borrower and collateral risk. Using transaction‐level data on short‐term repurchase agreements (repo), we show that borrowers pay a premium of 1.1 to 2.6 basis points when their default risk is positively correlated with the risk of the collateral that they pledge. Moreover, we show that borrowers internalize this premium when making their collateral choices. Loan‐level credit registry data suggest that the results extend to the corporate loan market as well.


Neglected Risks in the Communication of Residential Mortgage‐Backed Securities Offerings

Pages: 129-172  |  Published: 9/2023  |  DOI: 10.1111/jofi.13278  |  Cited by: 0

HAROLD H. ZHANG, FENG ZHAO, XIAOFEI ZHAO

Examining the contractual disclosures during the sale of private‐label residential mortgage‐backed securities before the 2008 financial crisis, we find that textual contents in the risk‐factor section predict subsequent losses and yet were not reflected in pricing. Insurance companies, especially life insurers and insurers with low regulatory capital ratios, are more exposed to textual risks. Consistent with issuers hedging litigation risks with disclosure, we find that textual contents are associated with second‐lien underreporting and preissuance written communications. Overall, we find that investors neglected risks in the purportedly safe assets before the crisis.


Interest Rate Skewness and Biased Beliefs

Pages: 173-217  |  Published: 9/2023  |  DOI: 10.1111/jofi.13276  |  Cited by: 1

MICHAEL BAUER, MIKHAIL CHERNOV

Conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward‐sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high‐frequency interest rate changes around Federal Open Market Committee announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous‐beliefs model in which one of the agents is wrong about consumption growth.


Financing the Gig Economy

Pages: 219-256  |  Published: 11/2023  |  DOI: 10.1111/jofi.13292  |  Cited by: 0

GREG BUCHAK

Unlike traditional firm production, gig economy workers provide their own physical capital. As a consequence, the low‐income households for whom gig economy opportunities are most valuable often borrow to participate. In the context of ride share, difference‐in‐difference analysis reveals increased vehicle purchases, borrowing, utilization, and employment around entry, but financially constrained individuals cannot participate. To assess the equilibrium importance of financing, I build and estimate a structural model of the gig economy. Access to finance proves critical for the gig economy's growth: without finance, equilibrium quantities would be 40% lower and prices 90% higher, and only higher‐income households could participate as drivers.


Trading and Shareholder Democracy

Pages: 257-304  |  Published: 11/2023  |  DOI: 10.1111/jofi.13289  |  Cited by: 1

DORON LEVIT, NADYA MALENKO, ERNST MAUG

We study shareholder voting in a model in which trading affects the composition of the shareholder base. Trading and voting are complementary, which gives rise to self‐fulfilling expectations about proposal acceptance and multiple equilibria. Prices and shareholder welfare can move in opposite directions, so the former may be an invalid proxy for the latter. Relaxing trading frictions can reduce welfare because it allows extreme shareholders to gain more weight in voting. Delegating decision‐making to the board can help overcome collective action problems at the voting stage. We also analyze the role of index investors and social concerns of shareholders.


Legal Risk and Insider Trading

Pages: 305-355  |  Published: 12/2023  |  DOI: 10.1111/jofi.13299  |  Cited by: 1

MARCIN KACPERCZYK, EMILIANO S. PAGNOTTA

Do illegal insiders internalize legal risk? We address this question with hand‐collected data from 530 SEC (the U.S. Securities and Exchange Commission) investigations. Using two plausibly exogenous shocks to expected penalties, we show that insiders trade less aggressively and earlier and concentrate on tips of greater value when facing a higher risk. The results match the predictions of a model where an insider internalizes the impact of trades on prices and the likelihood of prosecution and anticipates penalties in proportion to trade profits. Our findings lend support to the effectiveness of U.S. regulations' deterrence and the long‐standing hypothesis that insider trading enforcement can hamper price informativeness.


Intervention with Screening in Panic‐Based Runs

Pages: 357-412  |  Published: 11/2023  |  DOI: 10.1111/jofi.13295  |  Cited by: 0

LIN SHEN, JUNYUAN ZOU

Policymakers frequently use guarantees to mitigate panic‐based runs in the financial system. We analyze a binary‐action coordination game under the global games framework and propose a novel intervention program that screens investors based on their heterogeneous beliefs about the system's stability. The program only attracts investors who are at the margin of running, and their participation boosts all investors' confidence in the financial system. Compared with government guarantee programs, our proposed program is as effective at mitigating runs but features two advantages: it costs less to implement and it is robust to moral hazard.


The Global Impact of Brexit Uncertainty

Pages: 413-458  |  Published: 11/2023  |  DOI: 10.1111/jofi.13293  |  Cited by: 1

TAREK A. HASSAN, STEPHAN HOLLANDER, LAURENCE VAN LENT, AHMED TAHOUN

We propose a text‐based method for measuring the cross‐border propagation of large shocks at the firm level. We apply this method to estimate the expected costs, benefits, and risks of Brexit and find widespread reverberations in listed firms in 81 countries. International (i.e., non‐U.K.) firms most exposed to Brexit uncertainty (the second moment) lost significant market value and reduced hiring and investment. International firms also overwhelmingly expected negative first‐moment impacts from the U.K.'s decision to leave the European Union (EU), particularly related to regulation, asset prices, and labor market impacts of Brexit.


The Virtue of Complexity in Return Prediction

Pages: 459-503  |  Published: 12/2023  |  DOI: 10.1111/jofi.13298  |  Cited by: 1

BRYAN KELLY, SEMYON MALAMUD, KANGYING ZHOU

Much of the extant literature predicts market returns with “simple” models that use only a few parameters. Contrary to conventional wisdom, we theoretically prove that simple models severely understate return predictability compared to “complex” models in which the number of parameters exceeds the number of observations. We empirically document the virtue of complexity in U.S. equity market return prediction. Our findings establish the rationale for modeling expected returns through machine learning.


Prestige, Promotion, and Pay

Pages: 505-540  |  Published: 12/2023  |  DOI: 10.1111/jofi.13301  |  Cited by: 0

DANIEL FERREIRA, RADOSLAWA NIKOLOWA

We develop a theory in which financial (and other professional services) firms design career structures to “sell” prestigious jobs to qualified candidates. Firms create less prestigious entry‐level jobs, which serve as currency for employees to pay for the right to compete for the more prestigious jobs. In optimal career structures, entry‐level employees (“associates”) compete for better‐paid and more prestigious positions (“managing directors” or “partners”). The model provides new implications relating job prestige to compensation, employment, competition, and the size of the financial sector.


Foreign Exchange Fixings and Returns around the Clock

Pages: 541-578  |  Published: 1/2024  |  DOI: 10.1111/jofi.13306  |  Cited by: 0

INGOMAR KROHN, PHILIPPE MUELLER, PAUL WHELAN

The U.S. dollar appreciates in the run‐up to foreign exchange (FX) fixes and depreciates thereafter, tracing a W‐shaped return pattern around the clock. Return reversals for the top nine traded currencies over a 21‐year period are pervasive and highly statistically significant, and they imply daily swings of more than one billion U.S. dollars based on spot volumes. Using natural experiments, we document the existence of a published reference rate determines the timing of intraday return reversals. We present evidence consistent with an inventory risk explanation whereby FX dealers intermediate unconditional demand for U.S. dollars at the fixes.


Information Cascades and Threshold Implementation: Theory and an Application to Crowdfunding

Pages: 579-629  |  Published: 11/2023  |  DOI: 10.1111/jofi.13294  |  Cited by: 1

LIN WILLIAM CONG, YIZHOU XIAO

Economic interactions often involve sequential actions, observational learning, and contingent project implementation. We incorporate all‐or‐nothing thresholds in a canonical model of information cascades. Early supporters effectively delegate their decisions to a “gatekeeper,” resulting in unidirectional cascades without herding on rejections. Project proposers can consequently charge higher prices. Proposal feasibility, project selection, and information aggregation all improve, even when agents can wait. Equilibrium outcomes depend on crowd size, and project implementation and information aggregation achieve efficiency in the large‐crowd limit. Our key insights hold under thresholds in dollar amounts and alternative equilibrium selection, among other model extensions.


Artificial Intelligence, Education, and Entrepreneurship

Pages: 631-667  |  Published: 12/2023  |  DOI: 10.1111/jofi.13302  |  Cited by: 0

MICHAEL GOFMAN, ZHAO JIN

We document an unprecedented brain drain of Artificial Intelligence (AI) professors from universities from 2004 to 2018. We find that students from the affected universities establish fewer AI startups and raise less funding. The brain‐drain effect is significant for tenured professors, professors from top universities, and deep‐learning professors. Additional evidence suggests that unobserved city‐ and university‐level shocks are unlikely to drive our results. We consider several economic channels for the findings. The most consistent explanation is that professors' departures reduce startup founders' AI knowledge, which we find is an important factor for successful startup formation and fundraising.


ANNOUNCEMENTS

Pages: 669-669  |  Published: 1/2024  |  DOI: 10.1111/jofi.13309  |  Cited by: 0


Preliminary Program AFA 2024 ANNUAL MEETING EIGHTY‐FOURTH ANNUAL MEETING AMERICAN FINANCE ASSOCIATION

Pages: 670-714  |  Published: 1/2024  |  DOI: 10.1111/jofi.13305  |  Cited by: 0


Participant Schedule for the AFA 2024 Preliminary Program January 5–7, 2024

Pages: 715-786  |  Published: 1/2024  |  DOI: 10.1111/jofi.13304  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 787-788  |  Published: 1/2024  |  DOI: 10.1111/jofi.13142  |  Cited by: 0