The Journal of Finance

The Stock Market and Bank Risk‐Taking

Published: 10/6/2025,  Volume: 80,  Issue: 6  |  DOI: 10.1111/jofi.13502  |  Cited by: 5

ANTONIO FALATO, DAVID SCHARFSTEIN

Using confidential supervisory risk ratings, we document that banks increase risk after going public compared to a control group of banks that filed to go public but withdrew their filings for plausibly exogenous reasons. The increase in risk improves short‐term performance at the expense of long‐term performance. We argue that the increase in risk stems from pressure to maximize short‐term stock prices and earnings once the bank is publicly traded. After going public, banks owned by investors that place greater value on short‐term performance increase risk more, and those managed by CEOs with more short‐term compensation also increase risk more.

Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants

Published: 11/10/2016,  Volume: 71,  Issue: 6  |  DOI: 10.1111/jofi.12435  |  Cited by: 256

ANTONIO FALATO, NELLIE LIANG

Using a regression discontinuity design, we provide evidence that there are sharp and substantial employment cuts following loan covenant violations, when creditors gain rights to accelerate, restructure, or terminate a loan. The cuts are larger at firms with higher financing frictions and with weaker employee bargaining power, and during industry and macroeconomic downturns, when employees have fewer job opportunities. Union elections that create new labor bargaining units lead to higher loan spreads, consistent with creditors requiring compensation when employees gain bargaining power. Overall, binding financial contracts have a large impact on employees and are an amplification mechanism of economic downturns.

The Loan Covenant Channel: How Bank Health Transmits to the Real Economy

Published: 8/23/2021,  Volume: 77,  Issue: 1  |  DOI: 10.1111/jofi.13074  |  Cited by: 118

GABRIEL CHODOROW‐REICH, ANTONIO FALATO

We document the importance of covenant violations in transmitting bank health to nonfinancial firms. Roughly one‐third of loans in our supervisory data breach a covenant during the 2008 to 2009 period, allowing lenders to force a renegotiation of loan terms or to accelerate repayment of otherwise long‐term credit. Lenders in worse health are more likely to force a reduction in the loan commitment following a violation. The reduction in credit to borrowers who violate a covenant can account for the majority of the cross‐sectional variation in credit supply during the 2008 to 2009 crisis.

Rising Intangible Capital, Shrinking Debt Capacity, and the U.S. Corporate Savings Glut

Published: 8/31/2022,  Volume: 77,  Issue: 5  |  DOI: 10.1111/jofi.13174  |  Cited by: 214

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.

Fire‐Sale Spillovers in Debt Markets

Published: 9/27/2021,  Volume: 76,  Issue: 6  |  DOI: 10.1111/jofi.13078  |  Cited by: 109

ANTONIO FALATO, ALI HORTAÇSU, DAN LI, CHAEHEE SHIN

Fire sales induced by investor redemptions have powerful spillover effects among funds that hold the same assets, hurting peer funds' performance and flows, and leading to further asset sales with negative bond price impact. A one‐standard‐deviation increase in our fire‐sale spillover measure leads to a 45 (90) bp decrease in peer fund returns (flows) and a two percentage point increase in the likelihood of a large bond price drop. The results hold in a regression‐discontinuity design addressing identification concerns. Timing, heterogeneity, instrumental‐variable, and placebo tests further support the price‐impact mechanism. Model‐based counterfactual and stress‐test analyses quantify the financial stability implications.

The Cyclical Behavior of Interest Rates

Published: 9/1997,  Volume: 52,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1997.tb01119.x  |  Cited by: 15

ANTONIO ROMA, WALTER TOROUS

This article investigates the behavior of the term structure of interest rates over the business cycle. In contrast to prior studies that measure the business cycle by the simple growth in aggregate economic activity, we consider the deviation of aggregate economic activity from its potentially stochastic trend. We show that incorporating both an independent trend and cyclical component in consumption improves the efficiency in estimating consumption‐based asset pricing models. We also find that the term spread is more informative about future changes in stochastically detrended real gross domestic product (GDP) than future growth rates in real GDP.

The Valuation of Complex Derivatives by Major Investment Firms: Empirical Evidence

Published: 6/1997,  Volume: 52,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1997.tb04821.x  |  Cited by: 31

ANTONIO E. BERNARDO, BRADFORD CORNELL

This article examines the auction of a portfolio of collateralized mortgage obligations (CMOs) to major broker dealers and institutional investors. The unique data set allows us to analyze a number of important empirical questions related to the valuation of CMOs by the bidders and the elasticity of demand for the securities. The results reveal that the valuations differ substantially implying a significant elasticity of demand.

Goal Setting and Saving in the FinTech Era

Published: 4/11/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13339  |  Cited by: 33

ANTONIO GARGANO, ALBERTO G. ROSSI

We study the effectiveness of saving goals in increasing individuals' savings using data from a Fintech app. Using a difference‐in‐differences identification strategy that randomly assigns users into a group of beta testers who can set goals and a group of users who cannot, we find that setting goals increases individuals' savings rate. The increased savings within the app do not reduce savings outside the app. Moreover, goal setting helps those individuals previously identified as having the lowest propensity to save. Matching App user survey responses to their behavior highlights the relative merits of monitoring and concreteness channels in explaining our findings.

Local Experiences, Search, and Spillovers in the Housing Market

Published: 2/20/2023,  Volume: 78,  Issue: 2  |  DOI: 10.1111/jofi.13208  |  Cited by: 22

ANTONIO GARGANO, MARCO GIACOLETTI, ELVIS JARNECIC

Recent local price growth explains differences in search behavior across prospective homebuyers. Those experiencing higher growth in their postcode of residence search more broadly across locations and house characteristics, without changing attention devoted to individual sales listings, and have shorter search duration. Effects are stronger for homeowners, in particular those living in less wealthy areas and looking for a new primary residence. We use reduced‐form analysis and a quantitative equilibrium model to show that the expansion of search breadth translates into widespread spillovers onto house sales prices and inventories of listings across postcodes within a metropolitan area.

The Default Risk of Swaps

Published: 6/1991,  Volume: 46,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1991.tb02676.x  |  Cited by: 86

IAN A. COOPER, ANTONIO S. MELLO

We characterize the exchange of financial claims from risky swaps. These transfers are among three groups: shareholders, debtholders, and the swap counterparty. From this analysis we derive equilibrium swap rates and relate them to debt market spreads. We then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders. In a simplified case, we obtain closed‐form solutions for the value of the default risk in the swap. For interest‐rate swaps, we obtain numerical solutions for the equilibrium swap rate, including default risk. We compare these with equilibrium debt market default risk spreads.

Investment Policy and Exit‐Exchange Offers Within Financially Distressed Firms

Published: 7/1996,  Volume: 51,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1996.tb02710.x  |  Cited by: 22

ANTONIO E. BERNARDO, ERIC L. TALLEY

This article examines the conflict of interest between shareholders and bondholders in a setting in which firms can renegotiate the terms of existing debt with public debtholders. In particular, we consider one of the most common types of debt restructuring: the exit‐exchange offer. Our analysis explores the relation between exit‐exchange offers and investment choice by the manager, and it concludes that managers, acting strategically on behalf of shareholders, may select inefficient investment projects in order to enhance their bargaining position vis‐a‐vis creditors. Holding the upside potential of an investment project fixed, managers/shareholders prefer projects with lower payoffs in states of bankruptcy because it induces individual bondholders to accept poorer terms in a debt‐for‐debt exit‐exchange offer, thus generating a greater residual for shareholders in states of solvency. Additionally, we show how the investment inefficiencies in our analysis depend on (i) the inability of bondholders to coordinate their actions; (ii) the ability of managers to commit to suboptimal investment projects; and (iii) the coupling of an individual bondholder's decision to tender and her decision to consent to allow the firm to strip fiduciary covenants. We suggest conditions under which a ban on coupled exit‐exchange offers—or alternatively, constraints on “debt‐for‐debt” exchanges—would be efficiency‐enhancing.

Common Stock Returns and Rating Changes: A Methodological Comparison

Published: 3/1982,  Volume: 37,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1982.tb01098.x  |  Cited by: 115

PAUL A. GRIFFIN, ANTONIO Z. SANVICENTE

This paper examines the adjustments in a firm's common stock price during the eleven months before and during the month of announcement of a bond rating change. Based on several different measures of abnormal security return, the findings are consistent with the proposition that bond downgradings convey information to common stockholders. For bond upgradings, the price adjustments were statistically insignificant in the month of announcement, although in the eleven preceding months, upgraded firms exhibited positive abnormal returns. While the results do not fully support earlier research, we stress that the main contribution of this article lies in the scrutiny it gives to issues of methodology in assessing the possible price effects of bond reclassifications.

Measuring the Agency Cost of Debt

Published: 12/1992,  Volume: 47,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1992.tb04687.x  |  Cited by: 256

ANTONIO S. MELLO, JOHN E. PARSONS

We adapt a contingent claims model of the firm to reflect the incentive effects of the capital structure and thereby to measure the agency costs of debt. An underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen. We identify the change in operating policy created by leverage and value this change. The model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt.

A Theory of Dividends Based on Tax Clienteles

Published: 12/2000,  Volume: 55,  Issue: 6  |  DOI: 10.1111/0022-1082.00298  |  Cited by: 624

Franklin Allen, Antonio E. Bernardo, Ivo Welch

This paper explains why some firms prefer to pay dividends rather than repurchase shares. When institutional investors are relatively less taxed than individual investors, dividends induce “ownership clientele” effects. Firms paying dividends attract relatively more institutions, which have a relative advantage in detecting high firm quality and in ensuring firms are well managed. The theory is consistent with some documented regularities, specifically both the presence and stickiness of dividends, and offers novel empirical implications, e.g., a prediction that it is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.

Arbitraging Arbitrageurs

Published: 9/16/2005,  Volume: 60,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2005.00805.x  |  Cited by: 66

MUKARRAM ATTARI, ANTONIO S. MELLO, MARTIN E. RUCKES

This paper develops a theory of strategic trading in markets with large arbitrageurs. If arbitrageurs are not well capitalized, capital constraints make their trades predictable. Other market participants can exploit this by trading against them. Competitors may find it optimal to lend to arbitrageurs that are financially fragile; additional capital makes the arbitrageurs more viable, and lenders can reap profits from trading against them for a longer time. The strategic behavior of these market participants has implications for the functioning of financial markets. Strategic trading may produce significant price distortions, increase price manipulation, and trigger forced liquidations of large traders.

Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility

Published: 3/17/2014,  Volume: 69,  Issue: 2  |  DOI: 10.1111/jofi.12126  |  Cited by: 188

CARY FRYDMAN, NICHOLAS BARBERIS, COLIN CAMERER, PETER BOSSAERTS, ANTONIO RANGEL

We conduct a study in which subjects trade stocks in an experimental market while we measure their brain activity using functional magnetic resonance imaging. All of the subjects trade in a suboptimal way. We use the neural data to test a “realization utility” explanation for their behavior. We find that activity in two areas of the brain that are important for economic decision‐making exhibit activity consistent with the predictions of realization utility. These results provide support for the realization utility model. More generally, they demonstrate that neural data can be helpful in testing models of investor behavior.