The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Presidential Address: Pension Policy and the Financial System
Published: 08/24/2018 | DOI: 10.1111/jofi.12710
DAVID S. SCHARFSTEIN
In this paper, I examine the effect of pension policy on the structure of financial systems around the world. In particular, I explore the hypothesis that policies that promote pension savings also promote the development of capital markets. I present a model that endogenizes the extent to which savings are intermediated through banks or capital markets, and derive implications for corporate finance, household finance, banking, and the size of the financial sector. I then present a number of facts that are broadly consistent with the theory and examine a variety of alternative explanations of my findings.
The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00299
David S. Scharfstein, Jeremy C. Stein
We develop a two‐tiered agency model that shows how rent‐seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent‐seeking, division managers can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra compensation may take the form not of cash wages, but rather of preferential capital budgeting allocations. One interesting feature of our model is that it implies a kind of “socialism” in internal capital allocation, whereby weaker divisions get subsidized by stronger ones.
Herd on the Street: Informational Inefficiencies in a Market with Short‐Term Speculation
Published: 09/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb04665.x
KENNETH A. FROOT, DAVID S. SCHARFSTEIN, JEREMY C. STEIN
Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals.
LDC Debt: Forgiveness, Indexation, and Investment Incentives
Published: 12/01/1989 | DOI: 10.1111/j.1540-6261.1989.tb02656.x
KENNETH A. FROOT, DAVID S. SCHARFSTEIN, JEREMY C. STEIN
We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment. This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.
Risk Management: Coordinating Corporate Investment and Financing Policies
Published: 12/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb05123.x
KENNETH A. FROOT, DAVID S. SCHARFSTEIN, JEREMY C. STEIN
This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving “nonlinear” instruments like options.