The Journal of Finance

The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate

Published: 12/1989,  Volume: 44,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1989.tb02662.x  |  Cited by: 11

CHANG MO AHN

This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate, depending on the nature of the nonseparability.

Jump‐Diffusion Processes and the Term Structure of Interest Rates

Published: 3/1988,  Volume: 43,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1988.tb02595.x  |  Cited by: 107

CHANG MO AHN, HOWARD E. THOMPSON

The authors investigate the term structure of interest rates when the underlying state variables and production technologies follow the jump‐diffusion processes. Even in some cases where the traditional expectations theory about the term structure is consistent with general equilibrium under diffusion processes, the traditional theory is not consistent under jump‐diffusion processes. It is shown that bond prices are strictly higher under jump risks than otherwise and that consumers with logarithmic utility functions will develop hedge portfolios in the presence of jump diffusion.

Corporate M&As and Labor Market Concentration: Efficiency Gains or Power Grabs?

Published: 4/1/2026,  Volume: 81,  Issue: 3  |  DOI: 10.1111/jofi.70035  |  Cited by: 1

DAVID CICERO, MO SHEN, JAIDEEP SHENOY

Mergers of firms that share labor markets increase labor market concentration which can lead to labor efficiency gains and/or create labor market power for the merged firms. Using a novel measure based on establishment‐level employment data, we find that merger‐induced increases in labor market concentration explain value creation in a sample of completed U.S. public firm mergers from 1991 to 2016. Analysis of the stock market reactions of rival, supplier, and customer firms, as well as firm‐ and establishment‐level real effects in the merging firms, supports a labor efficiency explanation of these merger gains.

The Geography of Block Acquisitions

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01414.x  |  Cited by: 346

JUN‐KOO KANG, JIN‐MO KIM

Using a large sample of partial block acquisitions, we examine the importance of geographic proximity in corporate governance and target returns. We find that block acquirers have a strong preference for geographically proximate targets and acquirers that purchase shares in such targets are more likely to engage in post‐acquisition target governance activities than are remote block acquirers. Moreover, the targets of these acquirers realize higher announcement returns and better post‐acquisition operating performance than do targets of other types of acquirers, particularly when they face greater information asymmetries.

Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong

Published: 4/2001,  Volume: 56,  Issue: 2  |  DOI: 10.1111/0022-1082.00345  |  Cited by: 228

Hee‐Joon Ahn, Kee‐Hong Bae, Kalok Chan

We investigate the role of limit orders in the liquidity provision in a pure order‐driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit‐order traders who enter the market and place orders when liquidity is needed.

Forward and Futures Prices: Evidence from the Foreign Exchange Markets

Published: 9/1990,  Volume: 45,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1990.tb02442.x  |  Cited by: 14

CAROLYN W. CHANG, JACK S. K. CHANG

Cornell and Reinganum (1981), hereafter CR, report that price differentials for future contracts and forward contracts are statistically insignificant in foreign exchange markets. Based on this finding, CR conclude that marking‐to‐market is insignificant in the formulation of currency futures prices. This note identifies two potential concerns with the CR tests. One problem relates to the timing of delivery dates for “matched” contracts. A second problem relates to the time period for the CR study. We show that correcting for these problems does not affect the overall conclusions of the CR study; marking‐to‐market does not appear to have a significant effect on currency futures prices.

Capital Structure as an Optimal Contract Between Employees and Investors

Published: 7/1992,  Volume: 47,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1992.tb04008.x  |  Cited by: 34

CHUN CHANG

The ex ante optimal contract between investors and employees is derived endogenously and is interpreted in terms of debt, equity, and employees' compensation. Although public equity financing is feasible in this model through verified accounting income, debt is needed to force value‐enhancing restructuring before the income realizes. The optimal debt level, however, is lower than that which maximizes the value of the firm when there is nonmonetary restructuring‐related cost to employees. The paper explains how stock prices react to exchange offers, how earnings can be diluted by a decrease in leverage, and why employees' claims are generally senior to those of investors. New testable implications about leverage and compensation levels are derived.

Takeovers of Privately Held Targets, Methods of Payment, and Bidder Returns

Published: 4/1998,  Volume: 53,  Issue: 2  |  DOI: 10.1111/0022-1082.315138  |  Cited by: 563

Saeyoung Chang

We examine bidder returns at the announcement of a takeover proposal when the target firm is privately held. In stock offers, bidders experience a positive abnormal return, which contrasts with the negative abnormal return typically found for bidders acquiring a publicly traded target. On the other hand, bidders experience no abnormal return in cash offers. Our analysis suggests that the positive wealth effect is related to monitoring activities by target shareholders and, to an extent, reduced information asymmetries.

Tunneling or Value Added? Evidence from Mergers by Korean Business Groups

Published: 12/2002,  Volume: 57,  Issue: 6  |  DOI: 10.1111/1540-6261.00510  |  Cited by: 936

Kee‐Hong Bae, Jun‐Koo Kang, Jin‐Mo Kim

We examine whether firms belonging to Korean business groups (chaebols) benefit from acquisitions they make or whether such acquisitions provide a way for controlling shareholders to increase their wealth by increasing the value of other group firms (tunneling). We find that when a chaebol‐affiliated firm makes an acquisition, its stock price on average falls. While minority shareholders of a chaebol‐affiliated firm making an acquisition lose, the controlling shareholder of that firm on average benefits because the acquisition enhances the value of other firms in the group. This evidence is consistent with the tunneling hypothesis.

Returns to Speculators and the Theory of Normal Backwardation

Published: 3/1985,  Volume: 40,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1985.tb04944.x  |  Cited by: 132

ERIC C. CHANG

A nonparametric statistical procedure is employed to examine the returns to speculators in wheat, corn, and soybeans futures markets. We find that the theory of normal backwardation is supported. Moreover, the presence of the risk premiums to speculators tends to be more prominent in recent years than in earlier years. We also find that large wheat speculators as a whole possessed some superior forecasting ability. The evidence is inconsistent with the hypothesis that commodity futures prices are unbiased estimates of the corresponding future spot prices.

Optimal Risk Management Using Options

Published: 2/1999,  Volume: 54,  Issue: 1  |  DOI: 10.1111/0022-1082.00108  |  Cited by: 88

Dong‐Hyun Ahn, Jacob Boudoukh, Matthew Richardson, Robert F. Whitelaw

This article provides an analytical solution to the problem of an institution optimally managing the market risk of a given exposure by minimizing its Value‐at‐Risk using options. The optimal hedge consists of a position in a single option whose strike price is independent of the level of expense the institution is willing to incur for its hedging program. This optimal strike price depends on the distribution of the asset exposure, the horizon of the hedge, and the level of protection desired by the institution. Moreover, the costs associated with a suboptimal choice of exercise price are economically significant.

Target Behavior and Financing: How Conclusive Is the Evidence?

Published: 7/16/2009,  Volume: 64,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2009.01479.x  |  Cited by: 242

XIN CHANG, SUDIPTO DASGUPTA

The notion that firms have a debt ratio target that is a primary determinant of financing behavior is influential in finance. Yet, how definitive is the evidence? We address this issue by generating samples where financing is unrelated to a firm's current debt ratio or a target. We find that much of the available evidence in favor of target behavior based on leverage ratio changes can be reproduced for these samples. Taken together, our findings suggest that a number of existing tests of target behavior have no power to reject alternatives.

The Market for Conflicted Advice

Published: 11/8/2019,  Volume: 75,  Issue: 2  |  DOI: 10.1111/jofi.12848  |  Cited by: 22

BRIANA CHANG, MARTIN SZYDLOWSKI

We present a model of the market for advice in which advisers have conflicts of interest and compete for heterogeneous customers through information provision. The competitive equilibrium features information dispersion and partial disclosure. Although conflicted fees lead to distorted information, they are irrelevant for customers' welfare: banning conflicted fees improves only the information quality, not customers' welfare. Instead, financial literacy education for the least informed customers can improve all customers' welfare because of a spillover effect. Furthermore, customers who trade through advisers realize lower average returns, which rationalizes empirical findings.

Option Momentum

Published: 10/3/2023,  Volume: 78,  Issue: 6  |  DOI: 10.1111/jofi.13279  |  Cited by: 51

STEVEN L. HESTON, CHRISTOPHER S. JONES, MEHDI KHORRAM, SHUAIQI LI, HAITAO MO

This paper investigates the performance of option investments across different stocks by computing monthly returns on at‐the‐money straddles on individual equities. We find that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from 6 to 36 months. This phenomenon is robust to including out‐of‐the‐money options or delta‐hedging the returns. Unlike stock momentum, option return continuation is not followed by long‐run reversal. Significant returns remain after factor risk adjustment and after controlling for implied volatility and other characteristics. Across stocks, trading costs are unrelated to the magnitude of momentum profits.

Analyst Coverage and Financing Decisions

Published: 12/2006,  Volume: 61,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2006.01010.x  |  Cited by: 463

XIN CHANG, SUDIPTO DASGUPTA, GILLES HILARY

We provide evidence that analyst coverage affects security issuance. First, firms covered by fewer analysts are less likely to issue equity as opposed to debt. They issue equity less frequently, but when they do so, it is in larger amounts. Moreover, these firms depend more on favorable market conditions for their equity issuance decisions. Finally, debt ratios of less covered firms are more affected by Baker and Wurgler's (2002) “external finance‐weighted” average market‐to‐book ratio. These results are consistent with market timing behavior associated with information asymmetry, as well as behavior implied by dynamic adverse selection models of equity issuance.

Intra‐Day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets

Published: 3/1992,  Volume: 47,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1992.tb03990.x  |  Cited by: 24

S. GHON RHEE, ROSITA P. CHANG

We have two primary objectives in this study. First, we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets. Second, we measure the profitability of covered interest arbitrage and one‐way arbitrage. Our empirical analysis has been conducted using real‐time quotations. The empirical results indicate that: (a) the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available; and (b) the frequency of attaining simultaneous market equilibrium is surprisingly low, thus opening the door for one‐way arbitrage.

A Fundamental Study of the Seasonal Risk‐Return Relationship: A Note

Published: 9/1988,  Volume: 43,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1988.tb02621.x  |  Cited by: 7

ERIC C. CHANG, J. MICHAEL PINEGAR

Bonds versus Equities: Information for Investment

Published: 10/20/2024,  Volume: 79,  Issue: 6  |  DOI: 10.1111/jofi.13396  |  Cited by: 8

HUIFENG CHANG, ADRIEN D'AVERNAS, ANDREA L. EISFELDT

We provide a simple model of investment by a firm funded with debt and equity and empirical evidence to demonstrate that, once we control for the debt overhang problem with credit spreads, asset volatility is an unambiguously positive signal for investment, while equity volatility sends a mixed signal: Elevated volatility raises the option value of equity and increases investment for financially sound firms, but exacerbates debt overhang and decreases investment for firms close to default. Our study provides a simple unified understanding of the structural and empirical relationships between investment, credit spreads, equity versus asset volatility, leverage, and Tobin's .

Testing the Expectations Hypothesis on the Term Structure of Volatilities in Foreign Exchange Options

Published: 6/1995,  Volume: 50,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1995.tb04794.x  |  Cited by: 61

JOSÉ MANUEL CAMPA, P. H. KEVIN CHANG

This article tests the expectations hypothesis in the term structure of volatilities in foreign exchange options. In particular, it addresses whether long‐dated volatility quotes are consistent with expected future short‐dated volatility quotes, assuming rational expectations. For options observed daily from December 1, 1989 to August 31, 1992 on dollar exchange rates against the pound, mark, yen, and Swiss franc, we are unable to reject the expectations hypothesis in the great majority of cases. The current spread between long‐ and short‐dated volatility rates proves to be a significant predictor of the direction of future short‐dated rates.

Short‐Sales Constraints and Price Discovery: Evidence from the Hong Kong Market

Published: 9/4/2007,  Volume: 62,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2007.01270.x  |  Cited by: 370

ERIC C. CHANG, JOSEPH W. CHENG, YINGHUI YU

Short‐sales practices in the Hong Kong stock market are unique in that only stocks on a list of designated securities can be sold short. By analyzing the price effects following the addition of individual stocks to the list, we find that short‐sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists. These findings are consistent with Miller's (1977) intuition and other optimism models. We also document higher volatility and less positive skewness of individual stock returns when short sales are allowed.

Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis

Published: 11/12/2015,  Volume: 70,  Issue: 6  |  DOI: 10.1111/jofi.12309  |  Cited by: 330

HEITOR ALMEIDA, CHANG‐SOO KIM, HWANKI BRIAN KIM

This paper examines capital reallocation among firms in Korean business groups () in the aftermath of the 1997 Asian financial crisis, and the consequences of this capital reallocation for the investment and performance of firms. We show that transferred cash from low‐growth to high‐growth member firms, using cross‐firm equity investments. This capital reallocation allowed chaebol firms with greater investment opportunities to invest more than control firms after the crisis. These firms also showed higher profitability and lower declines in valuation than control firms following the crisis. Our results suggest that chaebol internal capital markets helped them mitigate the negative effects of the Asian crisis on investment and performance.

Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect

Published: 1/14/2016,  Volume: 71,  Issue: 1  |  DOI: 10.1111/jofi.12311  |  Cited by: 261

TOM Y. CHANG, DAVID H. SOLOMON, MARK M. WESTERFIELD

We analyze brokerage data and an experiment to test a cognitive dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect—the propensity to realize past gains more than past losses—applies only to nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse‐disposition effect. In an experiment, we show that increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and a larger reverse‐disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse‐disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual fund management, and intermediation.

Testing Disagreement Models

Published: 6/8/2022,  Volume: 77,  Issue: 4  |  DOI: 10.1111/jofi.13137  |  Cited by: 104

YEN‐CHENG CHANG, PEI‐JIE HSIAO, ALEXANDER LJUNGQVIST, KEVIN TSENG

We provide plausibly identified evidence for the role of investor disagreement in asset pricing. Our natural experiment exploits the staggered implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, which induces a reduction in investor disagreement. Consistent with models of investor disagreement, EDGAR inclusion helps resolve disagreement around information events, leading to stock price corrections. The reduction in disagreement following EDGAR inclusion also reduces stock price crash risk, especially among stocks with binding short‐sale constraints and high investor optimism.