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Volume 79: Issue 2 (April 2024)


ISSUE INFORMATION

Pages: 789-792  |  Published: 3/2024  |  DOI: 10.1111/jofi.13144  |  Cited by: 0


BRATTLE GROUP AND DIMENSIONAL FUND ADVISORS PRIZES FOR 2023

Pages: 793-793  |  Published: 3/2024  |  DOI: 10.1111/jofi.13328  |  Cited by: 0


Political Polarization Affects Households' Financial Decisions: Evidence from Home Sales

Pages: 795-841  |  Published: 2/2024  |  DOI: 10.1111/jofi.13315  |  Cited by: 0

W. BEN MCCARTNEY, JOHN ORELLANA‐LI, CALVIN ZHANG

Political identity and partisanship are salient features of today's society. Using deeds records and voter rolls, we show that current residents are more likely to sell their homes when opposite‐party neighbors move in nearby than when unaffiliated or same‐party neighbors do. This is especially true when the new neighbors are politically active, consistent with an animosity between parties mechanism. We conclude that affective polarization is not limited to purely political settings and affects one of the household's most important financial decisions, their home transactions.


Measuring “Dark Matter” in Asset Pricing Models

Pages: 843-902  |  Published: 3/2024  |  DOI: 10.1111/jofi.13317  |  Cited by: 1

HUI CHEN, WINSTON WEI DOU, LEONID KOGAN

We formalize the concept of “dark matter” in asset pricing models by quantifying the additional informativeness of cross‐equation restrictions about fundamental dynamics. The dark‐matter measure captures the degree of fragility for models that are potentially misspecified and unstable: a large dark‐matter measure indicates that the model lacks internal refutability (weak power of optimal specification tests) and external validity (high overfitting tendency and poor out‐of‐sample fit). The measure can be computed at low cost even for complex dynamic structural models. To illustrate its applications, we provide quantitative examples applying the measure to (time‐varying) rare‐disaster risk and long‐run risk models.


Informed Trading Intensity

Pages: 903-948  |  Published: 2/2024  |  DOI: 10.1111/jofi.13320  |  Cited by: 0

VINCENT BOGOUSSLAVSKY, VYACHESLAV FOS, DMITRIY MURAVYEV

We train a machine learning method on a class of informed trades to develop a new measure of informed trading, informed trading intensity (ITI). ITI increases before earnings, mergers and acquisitions, and news announcements, and has implications for return reversal and asset pricing. ITI is effective because it captures nonlinearities and interactions between informed trading, volume, and volatility. This data‐driven approach can shed light on the economics of informed trading, including impatient informed trading, commonality in informed trading, and models of informed trading. Overall, learning from informed trading data can generate an effective informed trading measure.


How Integrated are Credit and Equity Markets? Evidence from Index Options

Pages: 949-992  |  Published: 1/2024  |  DOI: 10.1111/jofi.13300  |  Cited by: 1

PIERRE COLLIN‐DUFRESNE, BENJAMIN JUNGE, ANDERS B. TROLLE

We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit‐risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. The model captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option prices, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX volatility yields significantly higher excess returns than selling SPX volatility.


Dissecting the Long‐Term Performance of the Chinese Stock Market

Pages: 993-1054  |  Published: 3/2024  |  DOI: 10.1111/jofi.13312  |  Cited by: 0

FRANKLIN ALLEN, JUN (QJ) QIAN, CHENYU SHAN, JULIE LEI ZHU

Domestically listed Chinese (A‐share) firms have lower stock returns than externally listed Chinese, developed, and emerging country firms during 2000 to 2018. They also have lower net cash flows than matched unlisted Chinese firms. The underperformance of both stock and accounting returns is more pronounced for large A‐share firms, while small firms show no underperformance along either dimension. Investor sentiment explains low stock returns in the cross‐country and within‐A‐share samples. Institutional deficiencies in listing and delisting processes and weak corporate governance in terms of shareholder value creation are consistent with the underperformance in stock returns and net cash flows.


The Narrow Channel of Quantitative Easing: Evidence from YCC Down Under

Pages: 1055-1085  |  Published: 12/2023  |  DOI: 10.1111/jofi.13307  |  Cited by: 0

DAVID O. LUCCA, JONATHAN H. WRIGHT

We study the recent Australian experience with yield curve control (YCC) as perhaps the best evidence of how this policy might work in other developed economies. YCC seemingly worked well in 2020, when the market expected short rates to stay at zero for a long period of time. As the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, the Reserve Bank of Australia purchased most of the targeted government bond outstanding, and the target bond's yield dislocated from other financial market instruments. The evidence suggests that central bank bond purchase programs can operate more narrowly than previously considered.


Overconfidence and Preferences for Competition

Pages: 1087-1121  |  Published: 2/2024  |  DOI: 10.1111/jofi.13314  |  Cited by: 0

ERNESTO REUBEN, PAOLA SAPIENZA, LUIGI ZINGALES

We study when preferences for competition are a positive economic trait among high earners and the extent to which this trait can explain the gender gap in income among a master's degree in business administration (MBAs). Consistent with the experimental evidence, preferences for competition are a positive economic trait only for individuals who are not overconfident. Preferences for competition correlate with income only at graduation when bonuses are guaranteed and not a function of performance. Overconfident competition‐loving MBAs observe lower compensation and income growth, and experience greater exit from high‐reward industries and more frequent job interruptions. Preferences for competition do not explain the gender pay gap among MBAs.


Disclosing a Random Walk

Pages: 1123-1146  |  Published: 11/2023  |  DOI: 10.1111/jofi.13290  |  Cited by: 0

ILAN KREMER, AMNON SCHREIBER, ANDRZEJ SKRZYPACZ

We examine a dynamic disclosure model in which the value of a firm follows a random walk. Every period, with some probability, the manager learns the firm's value and decides whether to disclose it. The manager maximizes the market perception of the firm's value, which is based on disclosed information. In equilibrium, the manager follows a threshold strategy with thresholds below current prices. He sometimes reveals pessimistic information that reduces the market perception of the firm's value. He does so to reduce future market uncertainty, which is valuable even under risk‐neutrality.


A q$q$ Theory of Internal Capital Markets

Pages: 1147-1197  |  Published: 2/2024  |  DOI: 10.1111/jofi.13318  |  Cited by: 0

MIN DAI, XAVIER GIROUD, WEI JIANG, NENG WANG

We propose a tractable model of dynamic investment, spinoffs, financing, and risk management for a multidivision firm facing costly external finance. Our analysis formalizes the following insights: (i) Within‐firm resource allocation is based not only on divisions' productivity, as in winner‐picking models, but also their risk; (ii) firms may voluntarily spin off productive divisions to increase liquidity; (iii) diversification can reduce firm value in low‐liquidity states, as it increases the spinoff cost and hampers liquidity management; (iv) corporate socialism makes liquidity less valuable; and (v) division investment is determined by the ratio between marginal q$q$ and marginal value of cash.


Fee Variation in Private Equity

Pages: 1199-1247  |  Published: 2/2024  |  DOI: 10.1111/jofi.13319  |  Cited by: 0

JULIANE BEGENAU, EMIL N. SIRIWARDANE

We study how investment fees vary within private equity funds. Net‐of‐fee return clustering suggests that most funds have two tiers of fees, and we decompose differences across tiers into both management‐ and performance‐based fees. Managers of venture capital funds and those in high demand are less likely to use multiple fee schedules. Some investors consistently pay lower fees relative to others within their funds. Investor size, experience, and past performance explain some but not all of this effect, suggesting that unobserved traits like negotiation skill or bargaining power materially impact the fees that investors pay to access private markets.


Aversion to Student Debt? Evidence from Low‐Wage Workers

Pages: 1249-1295  |  Published: 12/2023  |  DOI: 10.1111/jofi.13297  |  Cited by: 0

RADHAKRISHNAN GOPALAN, BARTON H. HAMILTON, JORGE SABAT, DAVID SOVICH

We combine state minimum wage changes with individual‐level income and credit data to estimate the effect of wage gains on the debt of low‐wage workers. In the three years following a $0.88 minimum wage increase, low‐wage workers experience a $2,712 income increase and a $856 decrease in debt. The entire decline in debt comes from less student loan borrowing among enrolled college students. Credit constraints, buffer‐stock behavior, and other rational channels cannot explain the reduction in student debt. Our results are consistent with students perceiving a utility cost of borrowing student debt arising from mental accounting.


The Equilibrium Size and Value‐Added of Venture Capital

Pages: 1297-1352  |  Published: 2/2024  |  DOI: 10.1111/jofi.13313  |  Cited by: 0

FRANCESCO SANNINO


Auctions with Endogenous Initiation

Pages: 1353-1403  |  Published: 12/2023  |  DOI: 10.1111/jofi.13288  |  Cited by: 0

ALEXANDER S. GORBENKO, ANDREY MALENKO

We study initiation of takeover auctions by potential buyers and the seller. A bidder's indication of interest reveals that she is optimistic about the target. If bidders' values have a substantial common component, as in takeover battles between financial bidders, this effect disincentivizes bidders from indicating interest, and auctions are seller‐initiated. Conversely, in private‐value auctions, such as battles between strategic bidders, equilibria can feature both seller‐ and bidder‐initiated auctions, with the likelihood of the latter decreasing in commonality of values and the probability of a forced sale by the seller. We also relate initiation to bids and auction outcomes.


The Dark Side of Circuit Breakers

Pages: 1405-1455  |  Published: 2/2024  |  DOI: 10.1111/jofi.13310  |  Cited by: 2

HUI CHEN, ANTON PETUKHOV, JIANG WANG, HAO XING

Market‐wide circuit breakers are trading halts aimed at stabilizing the market during dramatic price declines. Using an intertemporal equilibrium model, we show that a circuit breaker significantly alters market dynamics and affects investor welfare. As the market approaches the circuit breaker, price volatility rises drastically, accelerating the chance of triggering the circuit breaker—the so‐called “magnet effect,” returns exhibit increasing negative skewness, and trading activity spikes up. Our empirical analysis supports the model's predictions. Circuit breakers can affect overall welfare negatively or positively, depending on the relative significance of investors' trading motives for risk sharing versus irrational speculation.


Lender Automation and Racial Disparities in Credit Access

Pages: 1457-1512  |  Published: 1/2024  |  DOI: 10.1111/jofi.13303  |  Cited by: 1

SABRINA T. HOWELL, THERESA KUCHLER, DAVID SNITKOF, JOHANNES STROEBEL, JUN WONG

Process automation reduces racial disparities in credit access by enabling smaller loans, broadening banks' geographic reach, and removing human biases from decision making. We document these findings in the context of the Paycheck Protection Program (PPP), where private lenders faced no credit risk but decided which firms to serve. Black‐owned firms obtained PPP loans primarily from automated fintech lenders, especially in areas with high racial animus. After traditional banks automated their loan processing procedures, their PPP lending to Black‐owned firms increased. Our findings cannot be fully explained by racial differences in loan application behaviors, preexisting banking relationships, firm performance, or fraud rates.


Disclosing to Informed Traders

Pages: 1513-1578  |  Published: 12/2023  |  DOI: 10.1111/jofi.13296  |  Cited by: 1

SNEHAL BANERJEE, IVÁN MARINOVIC, KEVIN SMITH

We develop a model in which a firm's manager can voluntarily disclose to privately informed investors. In equilibrium, the manager only discloses sufficiently favorable news. If the manager is known to be informed but disclosure is costly, the probability of disclosure increases with market liquidity and the stock trades at a discount relative to expected cash flows. However, when investors are uncertain about whether the manager is informed, disclosure can decrease with market liquidity and the stock can trade at a premium relative to expected cash flows. Moreover, contrary to common intuition, public information can crowd in more voluntary disclosure.


Leverage Is a Double‐Edged Sword

Pages: 1579-1634  |  Published: 2/2024  |  DOI: 10.1111/jofi.13316  |  Cited by: 0

AVANIDHAR SUBRAHMANYAM, KE TANG, JINGYUAN WANG, XUEWEI YANG

We use proprietary data on intraday transactions at a futures brokerage to analyze how implied leverage influences trading performance. Across all investors, leverage is negatively related to performance, due partly to increased trading costs and partly to forced liquidations resulting from margin calls. Defining skill out‐of‐sample, we find that relative performance differentials across unskilled and skilled investors persist. Unskilled investors' leverage amplifies losses from lottery preferences and the disposition effect. Leverage stimulates liquidity provision by skilled investors, and enhances returns. Although regulatory increases in required margins decrease skilled investors' returns, they enhance overall returns, and attenuate return volatility.


Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets

Pages: 1635-1695  |  Published: 2/2024  |  DOI: 10.1111/jofi.13311  |  Cited by: 0

SNEHAL BANERJEE, JESSE DAVIS, NAVEEN GONDHI

The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.


Report of the Editor of The Journal of Finance for the Year 2023

Pages: 1697-1706  |  Published: 3/2024  |  DOI: 10.1111/jofi.13329  |  Cited by: 0

ANTOINETTE SCHOAR


Report of the 2024 Annual Membership Meeting

Pages: 1707-1708  |  Published: 3/2024  |  DOI: 10.1111/jofi.13326  |  Cited by: 0


Report of the Executive Secretary and Treasurer for the Fiscal Year Ending June 30, 2023

Pages: 1709-1709  |  Published: 3/2024  |  DOI: 10.1111/jofi.13327  |  Cited by: 0


ANNOUNCEMENTS

Pages: 1711-1711  |  Published: 3/2024  |  DOI: 10.1111/jofi.13330  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 1712-1713  |  Published: 3/2024  |  DOI: 10.1111/jofi.13145  |  Cited by: 0