The Journal of Finance

Do Demand Curves for Stocks Slope Down?

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04518.x

ANDREI SHLEIFER

Since September, 1976, stocks newly included into the Standard and Poor's 500 Index have earned a significant positive abnormal return at the announcement of the inclusion. This return does not disappear for at least ten days after the inclusion. The returns are positively related to measures of buying by index funds, consistent with the hypothesis that demand curves for stocks slope down. The returns are not related to S & P's bond ratings, which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock.

A Survey of Corporate Governance

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04820.x

Andrei Shleifer, Robert W. Vishny

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

The Limits of Arbitrage

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03807.x

Andrei Shleifer, Robert W. Vishny

Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.

Family Firms

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00601

Mike Burkart, Fausto Panunzi, Andrei Shleifer

We present a model of succession in a firm owned and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on what fraction of the company to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder's decision is shaped by the legal environment. This theory of separation of ownership from management includes the Anglo‐Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross‐country evidence.

Diagnostic Expectations and Credit Cycles

Published: 09/26/2017   |   DOI: 10.1111/jofi.12586

PEDRO BORDALO, NICOLA GENNAIOLI, ANDREI SHLEIFER

We present a model of credit cycles arising from diagnostic expectations—a belief formation mechanism based on Kahneman and Tversky's representativeness heuristic. Diagnostic expectations overweight future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, and thus is immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified framework. In our model, credit spreads are excessively volatile, overreact to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.

Liquidation Values and Debt Capacity: A Market Equilibrium Approach

Published: 09/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04661.x

ANDREI SHLEIFER, ROBERT W. VISHNY

We explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets. When a firm in financial distress needs to sell assets, its industry peers are likely to be experiencing problems themselves, leading to asset sales at prices below value in best use. Such illiquidity makes assets cheap in bad times, and so ex ante is a significant private cost of leverage. We use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s.

A Model of Shadow Banking

Published: 01/30/2013   |   DOI: 10.1111/jofi.12031

NICOLA GENNAIOLI, ANDREI SHLEIFER, ROBERT W. VISHNY

We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry‐ups when investors neglect tail risks.

Money Doctors

Published: 07/03/2014   |   DOI: 10.1111/jofi.12188

NICOLA GENNAIOLI, ANDREI SHLEIFER, ROBERT VISHNY

We present a new model of investors delegating portfolio management to professionals based on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge fees. Money managers compete for investor funds by setting fees, but because of trust, fees do not fall to costs. In equilibrium, fees are higher for assets with higher expected return, managers on average underperform the market net of fees, but investors nevertheless prefer to hire managers to investing on their own. When investors hold biased expectations, trust causes managers to pander to investor beliefs.

Do Managerial Objectives Drive Bad Acquisitions?

Published: 03/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05079.x

RANDALL MORCK, ANDREI SHLEIFER, ROBERT W. VISHNY

In a sample of 326 US acquisitions between 1975 and 1987, three types of acquisitions have systematically lower and predominantly negative announcement period returns to bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target, and when its managers performed poorly before the acquisition. These results suggest that managerial objectives may drive acquisitions that reduce bidding firms' values.

Contrarian Investment, Extrapolation, and Risk

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04772.x

JOSEF LAKONISHOK, ANDREI SHLEIFER, ROBERT W. VISHNY

For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier.

What Works in Securities Laws?

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00828.x

RAFAEL PORTA, FLORENCIO LOPEZ‐DE‐SILANES, ANDREI SHLEIFER

We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets.

Diagnostic Expectations and Stock Returns

Published: 07/06/2019   |   DOI: 10.1111/jofi.12833

PEDRO BORDALO, NICOLA GENNAIOLI, RAFAEL LA PORTA, ANDREI SHLEIFER

We revisit La Porta's finding that returns on stocks with the most optimistic analyst long‐term earnings growth forecasts are lower than those on stocks with the most pessimistic forecasts. We document the joint dynamics of fundamentals, expectations, and returns of these portfolios, and explain the facts using a model of belief formation based on the representativeness heuristic. Analysts forecast fundamentals from observed earnings growth, but overreact to news by exaggerating the probability of states that have become more likely. We find support for the model's predictions. A quantitative estimation of the model accounts for the key patterns in the data.

Good News for Value Stocks: Further Evidence on Market Efficiency

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04825.x

RAFAEL LA PORTA, JOSEF LAKONISHOK, ANDREI SHLEIFER, ROBERT VISHNY

This article examines the hypothesis that the superior return to so‐called value stocks is the result of expectational errors made by investors. We study stock price reactions around earnings announcements for value and glamour stocks over a 5‐year period after portfolio formation. The announcement returns suggest that a significant portion of the return difference between value and glamour stocks is attributable to earnings surprises that are systematically more positive for value stocks. The evidence is inconsistent with a risk‐based explanation for the return differential.

Government Ownership of Banks

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00422

Rafael La Porta, Florencio Lopez‐De‐Silanes, Andrei Shleifer

We assemble data on government ownership of banks around the world. The data show that such ownership is large and pervasive, and higher in countries with low levels of per capita income, backward financial systems, interventionist and inefficient governments, and poor protection of property rights. Higher government ownership of banks in 1970 is associated with slower subsequent financial development and lower growth of per capita income and productivity. This evidence supports “political” theories of the effects of government ownership of firms.

Corporate Ownership Around the World

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00115

Rafael Porta, Florencio Lopez‐De‐Silanes, Andrei Shleifer

We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means's image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.

Investor Protection and Corporate Valuation

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00457

Rafael Porta, Florencio Lopez‐De‐Silanes, Andrei Shleifer, Robert Vishny

We present a model of the effects of legal protection of minority shareholders and of cash‐flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders and in firms with higher cash‐flow ownership by the controlling shareholder.

Predictable Financial Crises

Published: 01/27/2022   |   DOI: 10.1111/jofi.13105

ROBIN GREENWOOD, SAMUEL G. HANSON, ANDREI SHLEIFER, JAKOB AHM SØRENSEN

Using historical data on postwar financial crises around the world, we show that the combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth is elevated. Our evidence challenges the view that financial crises are unpredictable “bolts from the sky” and supports the Kindleberger‐Minsky view that crises are the byproduct of predictable, boom‐bust credit cycles. This predictability favors policies that lean against incipient credit‐market booms.

Investor Sentiment and the Closed‐End Fund Puzzle

Published: 03/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03746.x

CHARLES M. C. LEE, ANDREI SHLEIFER, RICHARD H. THALER

This paper examines the proposition that fluctuations in discounts of closed‐end funds are driven by changes in individual investor sentiment. The theory implies that discounts on various funds move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts are correlated with prices of other securities affected by the same investor sentiment. The evidence supports these predictions. In particular, we find that both closed‐end funds and small stocks tend to be held by individual investors, and that the discounts on closed‐end funds narrow when small stocks do well.

Legal Determinants of External Finance

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02727.x

RAFAEL PORTA, FLORENCIO LOPEZ‐DE‐SILANES, ANDREI SHLEIFER, ROBERT W. VISHNY

Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.

Positive Feedback Investment Strategies and Destabilizing Rational Speculation

Published: 06/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03695.x

J. BRADFORD DE LONG, ANDREI SHLEIFER, LAWRENCE H. SUMMERS, ROBERT J. WALDMANN

Analyses of rational speculation usually presume that it dampens fluctuations caused by “noise” traders. This is not necessarily the case if noise traders follow positive‐feedback strategies—buy when prices rise and sell when prices fall. It may pay to jump on the bandwagon and purchase ahead of noise demand. If rational speculators' early buying triggers positive‐feedback trading, then an increase in the number of forward‐looking speculators can increase volatility about fundamentals. This model is consistent with a number of empirical observations about the correlation of asset returns, the overreaction of prices to news, price bubbles, and expectations.