The Journal of Finance

What's Not There: Odd Lots and Market Data

Published: 9/12/2014,  Volume: 69,  Issue: 5  |  DOI: 10.1111/jofi.12185  |  Cited by: 227

MAUREEN O'HARA, CHEN YAO, MAO YE

We investigate odd‐lot trades in equity markets. Odd lots are increasingly used in algorithmic and high‐frequency trading, but are not reported to the consolidated tape or in databases such as TAQ. In our sample, the median number of odd‐lot trades is 24% but in some stocks odd lots are 60% or more of trading. Odd‐lot trades contribute 35% of price discovery, consistent with informed traders using odd lots to avoid detection. Omitting odd‐lot trades leads to inaccuracies in order imbalance measures and makes sentiment measures unreliable. Excluding odd lots from the consolidated tape raises important regulatory issues.

FinTech Lending and Cashless Payments

Published: 12/18/2025,  Volume: 81,  Issue: 2  |  DOI: 10.1111/jofi.70003  |  Cited by: 15

PULAK GHOSH, BORIS VALLEE, YAO ZENG

Borrowers' use of cashless payments improves their access to capital from FinTech lenders and predicts a lower probability of default. These relationships are stronger for cashless technologies providing more precise information, and for outflows. Cashless payment usage complements other signals of borrower quality. We rationalize these empirical findings using a framework in which borrowers signal their lower likelihood of diverting cash flows through payment technology choice, and screening accuracy is further strengthened by informational complementarities. The informational synergy we uncover provides a rationale for the joint rise of cashless payments and FinTech lending, as well as for open banking.

Second Chance: Life with Less Student Debt

Published: 12/14/2025,  Volume: 81,  Issue: 1  |  DOI: 10.1111/jofi.70002  |  Cited by: 2

MARCO DI MAGGIO, ANKIT KALDA, VINCENT YAO

We exploit an episode of plausibly random debt discharge due to the loss of paperwork for thousands of defaulted borrowers to examine the effects of private student debt relief on borrower outcomes. We find that borrowers who receive debt relief (treated) experience declines in debt balances and delinquency rates on other accounts, and increases in mobility and income relative to those who bear the costs of default like wage garnishment and collections (control). Borrowers in both groups contribute to our findings through different mechanisms. While our estimates may not directly apply to blanket student loan forgiveness, they speak to the benefits of forgiveness in reducing the consequences of debt burden for distressed borrowers.

CEO Connectedness and Corporate Fraud

Published: 5/11/2015,  Volume: 70,  Issue: 3  |  DOI: 10.1111/jofi.12243  |  Cited by: 624

VIKRAMADITYA KHANNA, E. HAN KIM, YAO LU

We find that connections CEOs develop with top executives and directors through their appointment decisions increase the risk of corporate fraud. Appointment‐based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases the expected costs of fraud by helping conceal fraudulent activity, making CEO dismissal less likely upon discovery, and lowering the coordination costs of carrying out illegal activity. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on fraud. Appointment‐based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.

ESG News, Future Cash Flows, and Firm Value

Published: 9/30/2025,  Volume: 80,  Issue: 6  |  DOI: 10.1111/jofi.13498  |  Cited by: 55

FRANÇOIS DERRIEN, PHILIPP KRÜGER, AUGUSTIN LANDIER, TIANHAO YAO

We investigate the expected consequences of negative environmental, social, and governance (ESG) news on firms' future profits. After learning about negative ESG news, analysts significantly downgrade their forecasts at short and longer horizons. Negative ESG news affects forecasts more strongly at longer horizons than other types of negative corporate news. The negative revisions of earnings forecasts following negative ESG news largely reflect expectations of lower future sales, rather than higher future costs. Quantitatively, forecast revisions can explain most of the negative impacts of ESG news on firm value. Analysts are correct to revise forecasts downward following negative ESG news.

The Debt‐Equity Spread

Published: 6/9/2026,  Volume: 81,  Issue: 4  |  DOI: 10.1111/jofi.70060  |  Cited by: 0

HUI CHEN, ZHIYAO CHEN, JUN LI

We propose a measure of the valuation gap between debt and equity—debt‐equity spread (DES)—based on the difference between actual and equity‐implied credit spreads. DES predicts cross‐sectional stock and bond returns in opposite directions. This predictability is unique compared to existing mispricing measures and cannot be explained by exposures to various risk factors. High‐DES firms are more likely to issue equity and retire debt, and have more insider equity selling. These findings are consistent with DES capturing relative mispricing between debt and equity, and provide empirical support for the model of partially segmented markets in Greenwood, Hanson, and Liao (2018, Review of Financial Studies 31, 3307–3343).

Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure

Published: 11/9/2010,  Volume: 65,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2010.01613.x  |  Cited by: 487

HUI CHEN

I build a dynamic capital structure model that demonstrates how business cycle variation in expected growth rates, economic uncertainty, and risk premia influences firms' financing policies. Countercyclical fluctuations in risk prices, default probabilities, and default losses arise endogenously through firms' responses to macroeconomic conditions. These comovements generate large credit risk premia for investment grade firms, which helps address the credit spread puzzle and the under‐leverage puzzle in a unified framework. The model generates interesting dynamics for financing and defaults, including market timing in debt issuance and credit contagion. It also provides a novel procedure to estimate state‐dependent default losses.

Firm Performance Pay as Insurance against Promotion Risk

Published: 8/12/2024,  Volume: 79,  Issue: 5  |  DOI: 10.1111/jofi.13379  |  Cited by: 5

ALVIN CHEN

The prevalence of pay based on risky firm outcomes for nonexecutive workers presents a puzzling departure from conventional contract theory, which predicts insurance provision by the firm. When workers at the same firm compete against each other for promotions, the optimal contract features pay based on firm outcomes as insurance against promotion risk. The model's predictions are consistent with many observed phenomena, such as performance‐based vesting and overvaluation of equity pay by nonexecutive workers. It also generates novel predictions linking a firm's hierarchy to its workers' pay structure.

Do Cash Flows of Growth Stocks Really Grow Faster?

Published: 6/20/2017,  Volume: 72,  Issue: 5  |  DOI: 10.1111/jofi.12518  |  Cited by: 38

HUAFENG (JASON) CHEN

Contrary to conventional wisdom, growth stocks (i.e., low book‐to‐market stocks) do not have substantially higher future cash‐flow growth rates than value stocks, in both rebalanced and buy‐and‐hold portfolios. Efficiency growth, survivorship and look‐back biases, and the rebalancing effect help explain the results. These findings suggest that duration alone is unlikely to explain the value premium.

THE ECONOMIC IMPLICATIONS AND CONSEQUENCES OF THE FEDERAL OLD AGE AND SURVIVORS INSURANCE TRUST FUND*

Published: 3/1962,  Volume: 17,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1962.tb04257.x  |  Cited by: 0

Yung‐Ping Chen

RECENT DEVELOPMENTS IN THE COST OF DEBT CAPITAL

Published: 6/1978,  Volume: 33,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1978.tb02027.x  |  Cited by: 21

Andrew H. Chen

Some Empirical Tests of the Theory of Arbitrage Pricing

Published: 12/1983,  Volume: 38,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1983.tb03831.x  |  Cited by: 213

NAI‐FU CHEN

We estimate the parameters of Ross's Arbitrage Pricing Theory (APT). Using daily return data during the 1963–78 period, we compare the evidence on the APT and the Capital Asset Pricing Model (CAPM) as implemented by market indices and find that the APT performs well. The theory is further supported in that estimated expected returns depend on estimated factor loadings, and variables such as own variance and firm size do not contribute additional explanatory power to that of the factor loadings.

DISCUSSION

Published: 7/1984,  Volume: 39,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1984.tb03685.x  |  Cited by: 0

ANDREW H. CHEN

Financial Investment Opportunities and the Macroeconomy

Published: 6/1991,  Volume: 46,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1991.tb02673.x  |  Cited by: 578

NAI‐FU CHEN

This paper studies the relation between changes in financial investment opportunities and changes in the macroeconomy. States variables such as the lagged production growth rate, the default premium, the term premium, the short‐term interest rate and the market dividend‐price ratio are shown to be indicators of recent and future economic growth. Further, the market excess return is negatively correlated with recent economic growth and positively correlated with expected future economic growth. These results offer straightforward interpretations of recent evidence on the forecasts of the market excess return by state variable via their forecasts on the macroeconomy.

Executive Option Repricing, Incentives, and Retention

Published: 6/2004,  Volume: 59,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2004.00659.x  |  Cited by: 71

Mark A. Chen

While many firms grant executive stock options that can be repriced, other firms systematically restrict or prohibit repricing. This article investigates the determinants of firms' repricing policies and the consequences of such policies for executive turnover and retention. Firms that have better internal governance, that use more powerful stock‐based incentives, or that face less shareholder scrutiny are more likely to maintain repricing flexibility. Firms that restrict repricing are more vulnerable to voluntary executive turnover following stock price declines. When share price declines are severe, restricting firms appear to award unusually large numbers of new options.

The Limits of p‐Hacking: Some Thought Experiments

Published: 5/17/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13036  |  Cited by: 55

ANDREW Y. CHEN

Suppose that the 300+ published asset pricing factors are all spurious. How much p‐hacking is required to produce these factors? If 10,000 researchers generate eight factors every day, it takes hundreds of years. This is because dozens of published t‐statistics exceed 6.0, while the corresponding p‐value is infinitesimal, implying an astronomical amount of p‐hacking in a general model. More structure implies that p‐hacking cannot address 100 published t‐statistics that exceed 4.0, as they require an implausibly nonlinear preference for t‐statistics or even more p‐hacking. These results imply that mispricing, risk, and/or frictions have a key role in stock returns.

Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets

Published: 7/29/2023,  Volume: 78,  Issue: 5  |  DOI: 10.1111/jofi.13266  |  Cited by: 70

HUI CHEN, ZHUO CHEN, ZHIGUO HE, JINYU LIU, RENGMING XIE

We provide causal evidence on the value of asset pledgeability by exploiting a unique feature of Chinese corporate bond markets: bonds with identical fundamentals are traded on two segmented markets with different rules for repo transactions. Using a policy shock that rendered AA+ and AA bonds ineligible for repo on one market only, we compare how bond prices changed across markets and rating classes around this event. When the haircut increases from 0% to 100%, bond yields increase by 39 bps to 85 bps. These estimates help us infer the magnitude of the shadow cost of capital in China.

A MODEL OF WARRANT PRICING IN A DYNAMIC MARKET

Published: 12/1970,  Volume: 25,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1970.tb00867.x  |  Cited by: 15

Andrew H. Y. Chen

Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions

Published: 5/13/2023,  Volume: 78,  Issue: 4  |  DOI: 10.1111/jofi.13235  |  Cited by: 14

YI CHEN, ZHE WANG

We study the dynamic profit‐maximizing selling mechanism in a merger and acquisitions (M&A) environment with costly bidder entry and without entry fees. Depending on the parameters, the optimal mechanism is implemented by a standard auction or by a two‐stage procedure with exclusive offers to one bidder followed by an auction potentially favoring that bidder. The optimal mechanism may involve common deal protections like termination fees, asset lockups, or stock option lockups. Our proposed procedures resemble sales of targets filing Chapter 11 bankruptcy or M&A involving public targets, and they shed light on how to use deal protections in practice.

Role of Speculative Short Sales in Price Formation: The Case of the Weekend Effect

Published: 3/21/2003,  Volume: 58,  Issue: 2  |  DOI: 10.1111/1540-6261.00541  |  Cited by: 148

Honghui Chen, Vijay Singal

We argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: The inability to trade over the weekend is likely to cause these short sellers to close their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays. We find evidence in support of this hypothesis based on a comparison of high short‐interest stocks and low short‐interest stocks, stocks with and without actively traded options, IPOs, zero short‐interest stocks, and highly volatile stocks.

A DYNAMIC PROGRAMMING APPROACH TO THE VALUATION OF WARRANTS*

Published: 12/1969,  Volume: 24,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1969.tb01708.x  |  Cited by: 0

Andrew Houng‐Yhi Chen

Venture Capital and Startup Agglomeration

Published: 4/2025,  Volume: 80,  Issue: 4  |  DOI: 10.1111/jofi.13451  |  Cited by: 18

JUN CHEN, MICHAEL EWENS

This paper examines venture capital's (VC) role in the geographic clustering of high‐growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one‐standard‐deviation increase in VCs' exposure to the rule led to a 20% decline in fund size and a 10% decrease in the likelihood of raising a follow‐on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship.

An Economic Analysis of Interest Rate Swaps

Published: 7/1986,  Volume: 41,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1986.tb04527.x  |  Cited by: 71

JAMES BICKSLER, ANDREW H. CHEN

Interest rate swaps, a financial innovation in recent years, are based upon the principle of comparative advantage. An interest rate swap is a useful tool for active liability management and for hedging against interest rate risk. The purpose of this paper is to provide a simple economic analysis of interest rate swaps. Alternative uses of and the appropriate valuation procedure for interest rate swaps are described.

Equilibrium Valuation of Foreign Exchange Claims

Published: 6/1997,  Volume: 52,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1997.tb04822.x  |  Cited by: 59

GURDIP S. BAKSHI, ZHIWU CHEN

This article studies the equilibrium valuation of foreign exchange contingent claims. Within a continuous‐time Lucas (1982) two‐country model, exchange rates, interest rates and, in particular, factor risk prices are all endogenously and jointly determined. This guarantees the internal consistency of these price processes with a general equilibrium. In the same model, closed‐form valuation formulas are presented for currency options and currency futures options. Common to these formulas is that stochastic volatility and stochastic interest rates are admitted. Hedge ratios and other comparative statics are also provided analytically. It is shown that most existing currency option models are included as special cases.

The Integration of Insurance and Taxes in Corporate Pension Strategy

Published: 7/1985,  Volume: 40,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1985.tb05022.x  |  Cited by: 33

JAMES L. BICKSLER, ANDREW H. CHEN

This paper examines the implications of the joint effects of insurance and taxes for the optimal corporate pension strategy. It is shown that neither the “mini‐max” nor the “maxi‐min” strategy advocated by previous authors is necessarily best in corporate pension management. In the presence of capital market imperfections, the analysis via a single‐period contingent‐claims model indicates that optimal corporate pension strategy in both asset‐allocation and funding decisions can be a noncorner interior solution.

Why Do Firms Evade Taxes? The Role of Information Sharing and Financial Sector Outreach

Published: 3/17/2014,  Volume: 69,  Issue: 2  |  DOI: 10.1111/jofi.12123  |  Cited by: 185

THORSTEN BECK, CHEN LIN, YUE MA

Tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis. We show that firms in countries with better credit information–sharing systems and higher branch penetration evade taxes to a lesser degree. This effect is stronger for smaller firms, firms in smaller cities and towns, firms in industries relying more on external financing, and firms in industries and countries with greater growth potential. This effect is robust to instrumental variable analysis, controlling for firm fixed effects in a smaller panel data set of countries, and many other robustness tests.

Sentiment Trading and Hedge Fund Returns

Published: 4/29/2021,  Volume: 76,  Issue: 4  |  DOI: 10.1111/jofi.13025  |  Cited by: 62

YONG CHEN, BING HAN, JING PAN

In the presence of sentiment fluctuations, arbitrageurs may engage in different strategies leading to dispersed sentiment exposures. We find that hedge funds in the top decile ranked by sentiment beta outperform those in the bottom decile by 0.59% per month on a risk‐adjusted basis, with the spread being larger among skilled funds. We also find that about 10% of hedge funds have sentiment timing skill that positively correlates with fund sentiment beta and contributes to fund performance. Our findings show that skilled hedge funds can earn high returns by predicting and exploiting sentiment changes rather than betting against mispricing.

Exact Pricing in Linear Factor Models with Finitely Many Assets: A Note

Published: 6/1983,  Volume: 38,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1983.tb02512.x  |  Cited by: 49

NAI‐FU CHEN, JONATHAN E. INGERSOLL

Risk Decomposition and Portfolio Diversification When Beta is Nonstationary: A Note

Published: 9/1981,  Volume: 36,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1981.tb04895.x  |  Cited by: 27

SON‐NAN CHEN, ARTHUR J. KEOWN

An Analysis of Divestiture Effects Resulting from Deregulation

Published: 12/1986,  Volume: 41,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1986.tb02527.x  |  Cited by: 15

ANDREW H. CHEN, LARRY J. MERVILLE

Capital market data were used to examine the divestiture effects pertaining to deregulation, the dropping of antitrust charges, and the reversing of the co‐insurance effect associated with the recent breakup of AT&T. The empirical results of the study indicate that significant economic events took place during the breakup process, which led to transfers of wealth from various parties to the securityholders of AT&T. The results also indicate that the buffering effect of regulation was reduced as AT&T went through the total deregulation process. This is in accordance with Peltzman's prediction.

Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments

Published: 6/1985,  Volume: 40,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1985.tb04973.x  |  Cited by: 27

CHUN H. LAM, ANDREW H. CHEN

The 1980 Depository Institution Deregulation and Monetary Control Act (DIDMCA) mandates that Regulation Q be phased out by 1986. With deregulation of interest rate ceilings, the cost of raising capital funds for commercial banks would become more volatile and more closely related with interest rates in the money and capital markets. Thus, value‐maximizing bank managers would need to be concerned not only with the internal risk, but also with the external risk in bank portfolio management decisions. Based upon the cash flow version of the capital asset pricing model, this paper analyzes the joint impact of interest rate deregulation and capital requirements on the portfolio behavior of a banking firm.

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

Published: 8/18/2017,  Volume: 72,  Issue: 5  |  DOI: 10.1111/jofi.12526  |  Cited by: 14

ANDRES ALMAZAN, ZHAOHUI CHEN, SHERIDAN TITMAN

This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation

Published: 8/2004,  Volume: 59,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2004.00683.x  |  Cited by: 470

Honghui Chen, Gregory Noronha, Vijay Singal

We study the price effects of changes to the S&P 500 index and document an asymmetric price response: There is a permanent increase in the price of added firms but no permanent decline for deleted firms. These results are at odds with extant explanations of the effects of index changes that imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from the changes in investor awareness. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.

Estimation Risk and Simple Rules for Optimal Portfolio Selection

Published: 9/1983,  Volume: 38,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1983.tb02284.x  |  Cited by: 34

SON‐NAN CHEN, STEPHEN J. BROWN

Structural and Return Characteristics of Small and Large Firms

Published: 9/1991,  Volume: 46,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1991.tb04626.x  |  Cited by: 521

K. C. CHAN, NAI‐FU CHEN

We examine differences in structural characteristics that lead firms of different sizes to react differently to the same economic news. We find that a small firm portfolio contains a large proportion of marginal firms‐firms with low production efficiency and high financial leverage. We construct two size‐matched return indices designed to mimic the return behavior of marginal firms and find that these return indices are important in explaining the time‐series return difference between small and large firms. Furthermore, risk exposures to these indices are as powerful as log(size) in explaining average returns of size‐ranked portfolios.

Excess Asset Reversions and Shareholder Wealth

Published: 3/1986,  Volume: 41,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1986.tb04501.x  |  Cited by: 23

MICHAEL J. ALDERSON, K. C. CHEN

The ownership of pension assets in a defined benefit pension plan is an unresolved issue in corporate finance. The issue is important because it defines the appropriate investment policy for a pension fund. In this paper, we summarize the ownership debate in the form of two mutually exclusive theories. We then focus on a recently popular event in pension finance, excess asset reversions. Our paper demonstrates the valuation effects associated with this event in a stochastic dominance framework. Under certain conditions, a reversion constitutes an expropriation of wealth from the participants and beneficiaries of the plan to the firm. Using data provided by the Pension Benefit Guaranty Corporation and the Center for Research in Security Prices tape, we examine the returns to the shareholders of 58 companies which conducted excess asset reversions between 1980 and 1984. Our results show that large abnormal returns accrued to these shareholders around the time of the reversion. These findings have implications both for the appropriate investment policy of pension funds and for public policy with respect to plan terminations.

Empirical Performance of Alternative Option Pricing Models

Published: 12/1997,  Volume: 52,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1997.tb02749.x  |  Cited by: 2107

Gurdip Bakshi, Charles Cao, Zhiwu Chen

Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. We fill this gap by first deriving an option model that allows volatility, interest rates and jumps to be stochastic. Using S&P 500 options, we examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant time‐series data, (2) out‐of‐sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance.

Directors' Ownership in the U.S. Mutual Fund Industry

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01410.x  |  Cited by: 80

QI CHEN, ITAY GOLDSTEIN, WEI JIANG

This paper empirically investigates directors' ownership in the mutual fund industry. Our results show that, contrary to anecdotal evidence, a significant portion of directors hold shares in the funds they oversee. Ownership patterns are broadly consistent with an optimal contracting equilibrium. That is, ownership is positively and significantly correlated with most variables that are predicted to indicate greater value from directors' monitoring. For example, directors' ownership is more prevalent in actively managed funds and in funds with lower institutional ownership. We also show considerable heterogeneity in ownership across fund families, suggesting family‐wide policies play an important role.

A Unified Theory of Tobin's  q , Corporate Investment, Financing, and Risk Management

Published: 9/21/2011,  Volume: 66,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2011.01681.x  |  Cited by: 651

PATRICK BOLTON, HUI CHEN, NENG WANG

We propose a model of dynamic investment, financing, and risk management for financially constrained firms. The model highlights the central importance of the endogenous marginal value of liquidity (cash and credit line) for corporate decisions. Our three main results are: (1) investment depends on the ratio of marginal  q  to the marginal value of liquidity, and the relation between investment and marginal  q  changes with the marginal source of funding; (2) optimal external financing and payout are characterized by an endogenous double‐barrier policy for the firm's cash‐capital ratio; and (3) liquidity management and derivatives hedging are complementary risk management tools.

An Unconditional Asset‐Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk

Published: 6/1988,  Volume: 43,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1988.tb03941.x  |  Cited by: 121

K. C. CHAN, NAI‐FU CHEN

In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size‐portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm‐size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size‐ranked portfolios.

An Examination of the Relationship between Pure Residual and Market Risk: A Note

Published: 12/1981,  Volume: 36,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1981.tb01088.x  |  Cited by: 6

SON‐NAN CHEN, ARTHUR J. KEOWN

EFFECTS OF UNCERTAIN INFLATION ON THE INVESTMENT AND FINANCING DECISIONS OF A FIRM

Published: 5/1975,  Volume: 30,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1975.tb01823.x  |  Cited by: 52

A. H. Chen, A. J. Boness

A Note on Optimal Credit and Pricing Policy under Uncertainty: A Contingent‐Claims Approach

Published: 12/1986,  Volume: 41,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1986.tb02536.x  |  Cited by: 2

CHUN H. LAM, ANDREW H. CHEN

The Seven Percent Solution

Published: 6/2000,  Volume: 55,  Issue: 3  |  DOI: 10.1111/0022-1082.00242  |  Cited by: 558

Hsuan‐Chi Chen, Jay R. Ritter

Gross spreads received by underwriters on initial public offerings (IPOs) in the United States are much higher than in other countries. Furthermore, in recent years more than 90 percent of deals raising $20–80 million have spreads of exactly seven percent, three times the proportion of a decade earlier. Investment bankers readily admit that the IPO business is very profitable, and that they avoid competing on fees because they ‘don't want to turn it into a commodity business.’ We examine several features of the IPO underwriting business that result in a market structure where spreads are high.

Theories of Corporate Debt Policy: A Synthesis

Published: 5/1979,  Volume: 34,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1979.tb02098.x  |  Cited by: 56

ANDREW H. CHEN, E. HAN KIM

Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty

Published: 11/7/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12842  |  Cited by: 94

HUI CHEN, MICHAEL MICHAUX, NIKOLAI ROUSSANOV

Mortgage refinancing activity associated with extraction of home equity contains a strongly countercyclical component consistent with household demand for liquidity. We estimate a structural model of liquidity management featuring countercyclical idiosyncratic labor income uncertainty, long‐ and short‐term mortgages, and realistic borrowing constraints. We empirically evaluate its predictions for households' choices of leverage, liquid assets, and mortgage refinancing using microlevel data. Taking the observed historical paths of house prices, aggregate income, and interest rates as given, the model accounts for many salient features in the evolution of balance sheets and consumption in the cross‐section of households over 2001 to 2012.

Climate Change, Demand Uncertainty, and Firms' Investments: Evidence from Planned Power Plants

Published: 7/23/2026,  Volume: ,  Issue:   |  DOI: 10.1111/jofi.70071  |  Cited by: 0

CHEN LIN, THOMAS SCHMID, MICHAEL S. WEISBACH

How does demand uncertainty affect firms' investment decisions? We examine this question in the context of electricity‐producing firms' planned investments in new power plants. We measure uncertainty about future electricity demand using plausibly exogenous variation in temperature projections across scientific climate models. The results show that uncertainty increases investment in power plants with flexible production technologies, while reducing investment in less flexible technologies. Overall, the net effect of uncertainty on investment is positive when firms have access to flexible investment opportunities. These findings are consistent with models in which production flexibility shapes the investment response to demand uncertainty.

Corporate Yield Spreads and Bond Liquidity

Published: 1/11/2007,  Volume: 62,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2007.01203.x  |  Cited by: 892

LONG CHEN, DAVID A. LESMOND, JASON WEI

We find that liquidity is priced in corporate yield spreads. Using a battery of liquidity measures covering over 4,000 corporate bonds and spanning both investment grade and speculative categories, we find that more illiquid bonds earn higher yield spreads, and an improvement in liquidity causes a significant reduction in yield spreads. These results hold after controlling for common bond‐specific, firm‐specific, and macroeconomic variables, and are robust to issuers' fixed effect and potential endogeneity bias. Our findings justify the concern in the default risk literature that neither the level nor the dynamic of yield spreads can be fully explained by default risk determinants.

Regulatory Arbitrage and International Bank Flows

Published: 9/12/2012,  Volume: 67,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2012.01774.x  |  Cited by: 306

JOEL F. HOUSTON, CHEN LIN, YUE MA

We study whether cross‐country differences in regulations have affected international bank flows. We find strong evidence that banks have transferred funds to markets with fewer regulations. This form of regulatory arbitrage suggests there may be a destructive “race to the bottom” in global regulations, which restricts domestic regulators’ ability to limit bank risk‐taking. However, we also find that the links between regulation differences and bank flows are significantly stronger if the recipient country is a developed country with strong property rights and creditor rights. This suggests that, while differences in regulations have important influences, without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.

Measuring “Dark Matter” in Asset Pricing Models

Published: 3/3/2024,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13317  |  Cited by: 32

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.