The Journal of Finance

The Evolution of a Financial Crisis: Collapse of the Asset‐Backed Commercial Paper Market

Published: 5/20/2013,  Volume: 68,  Issue: 3  |  DOI: 10.1111/jofi.12023  |  Cited by: 300

DANIEL COVITZ, NELLIE LIANG, GUSTAVO A. SUAREZ

This paper documents “runs” on asset‐backed commercial paper (ABCP) programs in 2007. We find that one‐third of programs experienced a run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to program‐level and macro‐financial risks. These findings are consistent with the asymmetric information framework used to explain banking panics, have implications for commercial paper investors’ degree of risk intolerance, and inform empirical predictions of recent papers on dynamic coordination failures.

Bank Leverage and Monetary Policy's Risk‐Taking Channel: Evidence from the United States

Published: 3/21/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12467  |  Cited by: 396

GIOVANNI DELL'ARICCIA, LUC LAEVEN, GUSTAVO A. SUAREZ

We present evidence of a risk‐taking channel of monetary policy for the U.S. banking system. We use confidential data on banks’ internal ratings on loans to businesses over the period 1997 to 2011 from the Federal Reserve's Survey of Terms of Business Lending. We find that ex ante risk‐taking by banks (measured by the risk rating of new loans) is negatively associated with increases in short‐term interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods of financial distress.

How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

Published: 3/7/2013,  Volume: 68,  Issue: 2  |  DOI: 10.1111/jofi.12011  |  Cited by: 145

BURCU DUYGAN‐BUMP, PATRICK PARKINSON, ERIC ROSENGREN, GUSTAVO A. SUAREZ, PAUL WILLEN

The events following Lehman's failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short‐term credit markets and the role of central banks as back‐stop liquidity providers. The Federal Reserve's response to financial disruptions in the United States importantly included the creation of liquidity facilities. Using a differences‐in‐differences approach, we evaluate one of the most unusual of these interventions—the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. We find that this facility helped stabilize asset outflows from money market funds and reduced asset‐backed commercial paper yields significantly.

Entrenchment and Severance Pay in Optimal Governance Structures

Published: 3/21/2003,  Volume: 58,  Issue: 2  |  DOI: 10.1111/1540-6261.00536  |  Cited by: 325

Andres Almazan, Javier Suarez

This paper explores how motivating an incumbent CEO to undertake actions that improve the effectiveness of his management interacts with the firm's policy on CEO replacement. Such policy depends on the presence and the size of severance pay in the CEO's compensation package and on the CEO's influence on the board of directors regarding his own replacement (i.e., entrenchment). We explain when and why the combination of some degree of entrenchment and a sizeable severance package is desirable. The analysis offers predictions about the correlation between entrenchment, severance pay, and incentive compensation.

Motivating Innovation

Published: 9/21/2011,  Volume: 66,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2011.01688.x  |  Cited by: 1885

GUSTAVO MANSO

Motivating innovation is important in many incentive problems. This paper shows that the optimal innovation‐motivating incentive scheme exhibits substantial tolerance (or even reward) for early failure and reward for long‐term success. Moreover, commitment to a long‐term compensation plan, job security, and timely feedback on performance are essential to motivate innovation. In the context of managerial compensation, the optimal innovation‐motivating incentive scheme can be implemented via a combination of stock options with long vesting periods, option repricing, golden parachutes, and managerial entrenchment.

Risk Aversion Revisited

Published: 9/1983,  Volume: 38,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1983.tb02291.x  |  Cited by: 248

ROGER‐A. MORIN, A. FERNANDEZ SUAREZ

In order to supply additional empirical evidence of the effect of wealth on relative risk aversion, this study investigates households' demand for risky assets, using analysis of covariance techniques applied to the asset holdings of Canadian individual households. The extent and pattern of life‐cycle effects are also examined. Results generally point to decreasing relative risk aversion when housing is either excluded from the definition of wealth or treated as a riskless asset. The investor's life‐cycle plays a prominent role in portfolio selection behavior, with risk aversion increasing uniformly with age. Tax differentials do not seem to be an important element in investment decisions with respect to risk. When the sample and wealth definitions are censored in order to approximate those of previous empirical studies, their findings on relative risk aversion are generally corroborated.

Dividends, Share Repurchases, and the Substitution Hypothesis

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/1540-6261.00474  |  Cited by: 985

Gustavo Grullon, Roni Michaely

We show that repurchases have not only became an important form of payout for U.S. corporations, but also that firms finance their share repurchases with funds that otherwise would have been used to increase dividends. We find that young firms have a higher propensity to pay cash through repurchases than they did in the past and that repurchases have become the preferred form of initiating a cash payout. Although large, established firms have generally not cut their dividends, they also show a higher propensity to pay out cash through repurchases. These findings indicate that firms have gradually substituted repurchases for dividends. Our results also suggest that before 1983, regulatory constraints inhibited firms from aggressively repurchasing shares.

The Information Content of Share Repurchase Programs

Published: 3/25/2004,  Volume: 59,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2004.00645.x  |  Cited by: 577

Gustavo Grullon, Roni Michaely

Contrary to the implications of many payout theories, we find that announcements of open‐market share repurchase programs are not followed by an increase in operating performance. However, we find that repurchasing firms experience a significant reduction in systematic risk and cost of capital relative to non‐repurchasing firms. Further, consistent with the free cash‐flow hypothesis, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in cost of capital.

Excess Capacity, Marginal q, and Corporate Investment

Published: 3/11/2025,  Volume: 80,  Issue: 3  |  DOI: 10.1111/jofi.13439  |  Cited by: 6

GUSTAVO GRULLON, DAVID L. IKENBERRY

Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital reduces the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin's q substantially improves in time‐series and cross‐sectional regressions as well as in out‐of‐sample tests. These findings, together with a secular erosion in capacity utilization, help explain why corporate investment rates have been declining for decades despite average q increasing significantly. Our analysis indicates that economic rigidities have contributed to the persistent erosion in capacity utilization.

Real Options, Volatility, and Stock Returns

Published: 7/19/2012,  Volume: 67,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2012.01754.x  |  Cited by: 204

GUSTAVO GRULLON, EVGENY LYANDRES, ALEXEI ZHDANOV

We provide evidence that the positive relation between firm‐level stock returns and firm‐level return volatility is due to firms’ real options. Consistent with real option theory, we find that the positive volatility‐return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines significantly after firms exercise their real options. We reconcile the evidence at the aggregate and firm levels by showing that the negative relation at the aggregate level may be due to aggregate market conditions that simultaneously affect both market returns and return volatility.

Twin Defaults and Bank Capital Requirements

Published: 6/25/2026,  Volume: ,  Issue:   |  DOI: 10.1111/jofi.70058  |  Cited by: 0

CATERINA MENDICINO, KALIN NIKOLOV, JUAN RUBIO‐RAMIREZ, JAVIER SUAREZ, DOMINIK SUPERA

We examine optimal capital requirements in a quantitative general equilibrium model with banks exposed to nondiversifiable borrower default risk. Contrary to standard models of bank default risk, our framework captures the limited upside, but significant downside risk of loan portfolio returns. This helps to reproduce the frequency and severity of twin defaults : simultaneously high firm and bank defaults. Hence, the optimal bank capital requirement, which trades off a lower frequency of twin defaults against restricting credit provision, is higher than under default risk models which underestimate the impact of borrower default on bank solvency.

Can Managers Forecast Aggregate Market Returns?

Published: 3/2/2005,  Volume: 60,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2005.00752.x  |  Cited by: 101

ALEXANDER W. BUTLER, GUSTAVO GRULLON, JAMES P. WESTON

Previous studies have found that the proportion of equity in total new debt and equity issues is negatively correlated with future equity market returns. Researchers have interpreted this finding as evidence that corporate managers are able to predict the systematic component of their stock returns and to issue equity when the market is overvalued. In this article we show that the predictive power of the share of equity in total new issues stems from pseudo‐market timing and not from any abnormal ability of managers to time the equity markets.

Biased Auctioneers

Published: 2/2/2023,  Volume: 78,  Issue: 2  |  DOI: 10.1111/jofi.13203  |  Cited by: 33

MATHIEU AUBRY, ROMAN KRÄUSSL, GUSTAVO MANSO, CHRISTOPHE SPAENJERS

We construct a neural network algorithm that generates price predictions for art at auction, relying on both visual and nonvisual object characteristics. We find that higher automated valuations relative to auction house presale estimates are associated with substantially higher price‐to‐estimate ratios and lower buy‐in rates, pointing to estimates' informational inefficiency. The relative contribution of machine learning is higher for artists with less dispersed and lower average prices. Furthermore, we show that auctioneers' prediction errors are persistent both at the artist and at the auction house level, and hence directly predictable themselves using information on past errors.

Can Managers Successfully Time the Maturity Structure of Their Debt Issues?

Published: 8/2006,  Volume: 61,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2006.00888.x  |  Cited by: 39

ALEXANDER W. BUTLER, GUSTAVO GRULLON, JAMES P. WESTON

This paper provides a rational explanation for the apparent ability of managers to successfully time the maturity of their debt issues. We show that a structural break in excess bond returns during the early 1980s generates a spurious correlation between the fraction of long‐term debt in total debt issues and future excess bond returns. Contrary to Baker, Taliaferro, and Wurgler (2006), we show that the presence of structural breaks can lead to nonsense regressions, whether or not there is any small sample bias. Tests using firm‐level data further confirm that managers are unable to time the debt market successfully.