The Journal of Finance

The Selection and Termination of Investment Management Firms by Plan Sponsors

Published: 7/19/2008,  Volume: 63,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2008.01375.x  |  Cited by: 170

AMIT GOYAL, SUNIL WAHAL

We examine the selection and termination of investment management firms by 3,400 plan sponsors between 1994 and 2003. Plan sponsors hire investment managers after large positive excess returns but this return‐chasing behavior does not deliver positive excess returns thereafter. Investment managers are terminated for a variety of reasons, including but not limited to underperformance. Excess returns after terminations are typically indistinguishable from zero but in some cases positive. In a sample of round‐trip firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be no different from those delivered by newly hired managers. We uncover significant variation in pre‐ and post‐hiring and firing returns that is related to plan sponsor characteristics.

Idiosyncratic Risk Matters!

Published: 5/6/2003,  Volume: 58,  Issue: 3  |  DOI: 10.1111/1540-6261.00555  |  Cited by: 845

Amit Goyal, Pedro Santa‐Clara

Abstract This paper takes a new look at the predictability of stock market returns with risk measures. We find a significant positive relation between average stock variance (largely idiosyncratic) and the return on the market. In contrast, the variance of the market has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market. The evidence is consistent with models of time‐varying risk premia based on background risk and investor heterogeneity. Alternatively, our findings can be justified by the option value of equity in the capital structure of the firms.

Equity Misvaluation and Default Options

Published: 1/20/2019,  Volume: 74,  Issue: 2  |  DOI: 10.1111/jofi.12748  |  Cited by: 28

ASSAF EISDORFER, AMIT GOYAL, ALEXEI ZHDANOV

We study whether default options are mispriced in equity values by employing a structural equity valuation model that explicitly takes into account the value of the option to default (or abandon the firm) and uses firm‐specific inputs. We implement our model on the entire cross section of stocks and identify both over‐ and underpriced equities. An investment strategy that buys undervalued stocks and shorts overvalued stocks generates an annual four‐factor alpha of about 11% for U.S. stocks. The model's performance is stronger for stocks with a higher value of the default option, such as distressed or highly volatile stocks.

Liquidity and Autocorrelations in Individual Stock Returns

Published: 9/19/2006,  Volume: 61,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2006.01060.x  |  Cited by: 402

DORON AVRAMOV, TARUN CHORDIA, AMIT GOYAL

This paper documents a strong relationship between short‐run reversals and stock illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in high turnover, low liquidity stocks, as the price pressures caused by non‐informational demands for immediacy are accommodated. However, the contrarian trading strategy profits are smaller than the likely transactions costs. This lack of profitability and the fact that the overall findings are consistent with rational equilibrium paradigms suggest that the violation of the efficient market hypothesis due to short‐term reversals is not so egregious after all.

Performance and Persistence in Institutional Investment Management

Published: 3/19/2010,  Volume: 65,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2009.01550.x  |  Cited by: 260

JEFFREY A. BUSSE, AMIT GOYAL, SUNIL WAHAL

Using new, survivorship bias‐free data, we examine the performance and persistence in performance of 4,617 active domestic equity institutional products managed by 1,448 investment management firms between 1991 and 2008. Controlling for the Fama–French (1993) three factors and momentum, aggregate and average estimates of alphas are statistically indistinguishable from zero. Even though there is considerable heterogeneity in performance, there is only modest evidence of persistence in three‐factor models and little to none in four‐factor models.

Creditor Rights, Enforcement, and Bank Loans

Published: 3/13/2009,  Volume: 64,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2009.01450.x  |  Cited by: 685

KEE‐HONG BAE, VIDHAN K. GOYAL

We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.

Fund Manager Use of Public Information: New Evidence on Managerial Skills

Published: 3/20/2007,  Volume: 62,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2007.01215.x  |  Cited by: 343

MARCIN KACPERCZYK, AMIT SERU

We show theoretically that the responsiveness of a fund manager's portfolio allocations to changes in public information decreases in the manager's skill. We go on to estimate this sensitivity (RPI) as the R2 of the regression of changes in a manager's portfolio holdings on changes in public information using a panel of U.S. equity funds. Consistent with RPI containing information related to managerial skills, we find a strong inverse relationship between RPI and various existing measures of performance, and between RPI and fund flows. We also document that both fund‐ and manager‐specific attributes affect RPI.

Are Incentive Contracts Rigged by Powerful CEOs?

Published: 9/21/2011,  Volume: 66,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2011.01687.x  |  Cited by: 377

ADAIR MORSE, VIKRAM NANDA, AMIT SERU

We argue that some powerful CEOs induce boards to shift the weight on performance measures toward the better performing measures, thereby rigging incentive pay. A simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of CEO wage function. Using U.S. data, we find support for the model's predictions: rigging accounts for at least 10% of the compensation to performance sensitivity and it increases with CEO human capital and firm volatility. Moreover, a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4.8% in firm value and 7.5% in operating return on assets.

Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market

Published: 11/12/2015,  Volume: 70,  Issue: 6  |  DOI: 10.1111/jofi.12271  |  Cited by: 241

TOMASZ PISKORSKI, AMIT SERU, JAMES WITKIN

We document that contractual disclosures by intermediaries during the sale of mortgages contained false information about the borrower's housing equity in 7–14% of loans. The rate of misrepresented loan default was 70% higher than for similar loans. These misrepresentations likely occurred late in the intermediation and exist among securities sold by all reputable intermediaries. Investors—including large institutions—holding securities with misrepresented collateral suffered severe losses due to loan defaults, price declines, and ratings downgrades. Pools with misrepresentations were not issued at a discount. Misrepresentation on another easy‐to‐quantify dimension shows that these effects are a conservative lower bound.

Selling Failed Banks

Published: 6/20/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12512  |  Cited by: 139

JOÃO GRANJA, GREGOR MATVOS, AMIT SERU

The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.

Advertising Expensive Mortgages

Published: 9/14/2016,  Volume: 71,  Issue: 5  |  DOI: 10.1111/jofi.12423  |  Cited by: 162

UMIT G. GURUN, GREGOR MATVOS, AMIT SERU

Using information on advertising and mortgages originated by subprime lenders, we study whether advertising helped consumers find cheaper mortgages. Lenders that advertise more within a region sell more expensive mortgages, measured as the excess rate of a mortgage after accounting for borrower, contract, and regional characteristics. These effects are stronger for mortgages sold to less sophisticated consumers. We exploit regional variation in mortgage advertising induced by the entry of Craigslist and other tests to demonstrate that these findings are not spurious. Analyzing advertising content reveals that initial/introductory rates are frequently advertised in a salient fashion, where reset rates are not.

Do Women Receive Worse Financial Advice?

Published: 7/5/2024,  Volume: 79,  Issue: 5  |  DOI: 10.1111/jofi.13366  |  Cited by: 25

UTPAL BHATTACHARYA, AMIT KUMAR, SUJATA VISARIA, JING ZHAO

We arranged for trained undercover men and women to pose as potential clients and visit all 65 local financial advisory firms in Hong Kong. At financial planning firms, but not at securities firms, women were more likely than men to receive advice to buy only individual or only local securities. Female clients who signaled high confidence, high risk tolerance, or a domestic outlook were especially likely to receive this suboptimal advice. Our theoretical model explains these patterns as a result of statistical discrimination interacting with advisors’ incentives. Taste‐based discrimination is unlikely to explain the results.