The Journal of Finance

Financial Distress and the Cross‐section of Equity Returns

Published: 5/23/2011,  Volume: 66,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2011.01652.x  |  Cited by: 245

LORENZO GARLAPPI, HONG YAN

We explicitly consider financial leverage in a simple equity valuation model and study the cross‐sectional implications of potential shareholder recovery upon resolution of financial distress. Our model is capable of simultaneously explaining lower returns for financially distressed stocks, stronger book‐to‐market effects for firms with high default likelihood, and the concentration of momentum profits among low credit quality firms. The model further predicts (i) a hump‐shaped relationship between value premium and default probability, and (ii) stronger momentum profits for nearly distressed firms with significant prospects for shareholder recovery. Our empirical analysis strongly confirms these novel predictions.

Participation Costs and the Sensitivity of Fund Flows to Past Performance

Published: 5/8/2007,  Volume: 62,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2007.01236.x  |  Cited by: 437

JENNIFER HUANG, KELSEY D. WEI, HONG YAN

We present a simple rational model to highlight the effect of investors' participation costs on the response of mutual fund flows to past fund performance. By incorporating participation costs into a model in which investors learn about managers' ability from past returns, we show that mutual funds with lower participation costs have a higher flow sensitivity to medium performance and a lower flow sensitivity to high performance than their higher‐cost peers. Using various fund characteristics as proxies for the reduction in participation costs, we provide empirical evidence supporting the model's implications for the asymmetric flow‐performance relationship.

Government Credit, a Double‐Edged Sword: Evidence from the China Development Bank

Published: 11/7/2017,  Volume: 73,  Issue: 1  |  DOI: 10.1111/jofi.12585  |  Cited by: 189

HONG RU

Using proprietary data from the China Development Bank (CDB), this paper examines the effects of government credit on firm activities. Tracing the effects of government credit across different levels of the supply chain, I find that CDB industrial loans to state‐owned enterprises (SOEs) crowd out private firms in the same industry but crowd in private firms in downstream industries. On average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in private firms' assets. Moreover, CDB infrastructure loans crowd in private firms. I use exogenous timing of municipal politicians' turnover as an instrument for CDB credit flows.

A Model of Returns and Trading in Futures Markets

Published: 4/2000,  Volume: 55,  Issue: 2  |  DOI: 10.1111/0022-1082.00233  |  Cited by: 41

Harrison Hong

This paper develops an equilibrium model of a competitive futures market in which investors trade to hedge positions and to speculate on their private information. Equilibrium return and trading patterns are examined. (1) In markets where the information asymmetry among investors is small, the return volatility of a futures contract decreases with time‐to‐maturity (i.e., the Samuelson effect holds). (2) However, in markets where the information asymmetry among investors is large, the Samuelson effect need not hold. (3) Additionally, the model generates rich time‐to‐maturity patterns in open interest and spot price volatility that are consistent with empirical findings.

Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets

Published: 2/2004,  Volume: 59,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2004.00634.x  |  Cited by: 249

Hong Liu

We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature.

INFLATION AND THE MARKET VALUE OF THE FIRM: THEORY AND TESTS

Published: 9/1977,  Volume: 32,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1977.tb03307.x  |  Cited by: 29

Hai Hong

Rational Inattention and Portfolio Selection

Published: 8/2007,  Volume: 62,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2007.01263.x  |  Cited by: 130

LIXIN HUANG, HONG LIU

Costly information acquisition makes it rational for investors to obtain important economic news with only limited frequency or limited accuracy. We show that this rational inattention to important news may make investors over‐ or underinvest. In addition, the optimal trading strategy is “myopic” with respect to future news frequency and accuracy. We find that the optimal news frequency is nonmonotonic in news accuracy and investment horizon. Furthermore, when both news frequency and news accuracy are endogenized, an investor with a higher risk aversion or a longer investment horizon chooses less frequent but more accurate periodic news updates.

Trading and Returns under Periodic Market Closures

Published: 2/2000,  Volume: 55,  Issue: 1  |  DOI: 10.1111/0022-1082.00207  |  Cited by: 144

Harrison Hong, Jiang Wang

This paper studies how market closures affect investors' trading policies and the resulting return‐generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U‐shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open‐to‐open returns than close‐to‐close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs.

Speculative Betas

Published: 9/14/2016,  Volume: 71,  Issue: 5  |  DOI: 10.1111/jofi.12431  |  Cited by: 252

HARRISON HONG, DAVID A. SRAER

The risk and return trade‐off, the cornerstone of modern asset pricing theory, is often of the wrong sign. Our explanation is that high‐beta assets are prone to speculative overpricing. When investors disagree about the stock market's prospects, high‐beta assets are more sensitive to this aggregate disagreement, experience greater divergence of opinion about their payoffs, and are overpriced due to short‐sales constraints. When aggregate disagreement is low, the Security Market Line is upward‐sloping due to risk‐sharing. When it is high, expected returns can actually decrease with beta. We confirm our theory using a measure of disagreement about stock market earnings.

A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets

Published: 12/1999,  Volume: 54,  Issue: 6  |  DOI: 10.1111/0022-1082.00184  |  Cited by: 3202

Harrison Hong, Jeremy C. Stein

We model a market populated by two groups of boundedly rational agents: “newswatchers” and “momentum traders.” Each newswatcher observes some private information, but fails to extract other newswatchers' information from prices. If information diffuses gradually across the population, prices underreact in the short run. The underreaction means that the momentum traders can profit by trend‐chasing. However, if they can only implement simple (i.e., univariate) strategies, their attempts at arbitrage must inevitably lead to overreaction at long horizons. In addition to providing a unified account of under‐ and overreactions, the model generates several other distinctive implications.

Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts

Published: 2/2003,  Volume: 58,  Issue: 1  |  DOI: 10.1111/1540-6261.00526  |  Cited by: 1138

Harrison Hong, Jeffrey D. Kubik

We examine security analysts' career concerns by relating their earnings forecasts to job separations. Relatively accurate forecasters are more likely to experience favorable career outcomes like moving up to a high‐status brokerage house. Controlling for accuracy, analysts who are optimistic relative to the consensus are more likely to experience favorable job separations. For analysts who cover stocks underwritten by their houses, job separations depend less on accuracy and more on optimism. Job separations were less sensitive to accuracy and more sensitive to optimism during the recent stock market mania. Brokerage houses apparently reward optimistic analysts who promote stocks.

Creditor Rights, Enforcement, and Bank Loans

Published: 3/13/2009,  Volume: 64,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2009.01450.x  |  Cited by: 687

KEE‐HONG BAE, VIDHAN K. GOYAL

We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.

The Economics of Hedge Fund Startups: Theory and Empirical Evidence

Published: 3/5/2021,  Volume: 76,  Issue: 3  |  DOI: 10.1111/jofi.13009  |  Cited by: 19

CHARLES CAO, GRANT FARNSWORTH, HONG ZHANG

This paper examines how market frictions influence the managerial incentives and organizational structure of new hedge funds. We develop a stylized model in which new managers search for accredited investors and have stronger incentives to acquire managerial skill when encountering low investor demand. Fund families endogenously arise to mitigate frictions and weaken the performance incentives of affiliated new funds. Empirically, based on a TASS‐HFR‐BarclayHedge merged database, we find that ex ante identified cold inceptions facing low investor demand outperform existing hedge funds and hot inceptions facing high demand and that cold stand‐alone inceptions outperform all types of family‐affiliated inceptions.

Asset Float and Speculative Bubbles

Published: 5/16/2006,  Volume: 61,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2006.00867.x  |  Cited by: 366

HARRISON HONG, JOSÉ SCHEINKMAN, WEI XIONG

We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors with heterogeneous beliefs and short‐sales constraints trade a stock with limited float because of insider lockups. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lockup expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, turnover, and volatility decrease with float and prices drop on the lockup expiration date.

The Interim Trading Skills of Institutional Investors

Published: 3/21/2011,  Volume: 66,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2010.01643.x  |  Cited by: 409

ANDY PUCKETT, XUEMIN (STERLING) YAN

Using a large proprietary database of institutional trades, this paper examines the interim (intraquarter) trading skills of institutional investors. We find strong evidence that institutional investors earn significant abnormal returns on their trades within the trading quarter and that interim trading performance is persistent. After transactions costs, our estimates suggest that interim trading skills contribute between 20 and 26 basis points per year to the average fund's abnormal performance. Our findings also indicate that any trading skills documented by previous studies that use quarterly data are biased downwards because of their inability to account for interim trades.

False (and Missed) Discoveries in Financial Economics

Published: 6/16/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12951  |  Cited by: 106

CAMPBELL R. HARVEY, YAN LIU

Multiple testing plagues many important questions in finance such as fund and factor selection. We propose a new way to calibrate both Type I and Type II errors. Next, using a double‐bootstrap method, we establish a t ‐statistic hurdle that is associated with a specific false discovery rate (e.g., 5%). We also establish a hurdle that is associated with a certain acceptable ratio of misses to false discoveries (Type II error scaled by Type I error), which effectively allows for differential costs of the two types of mistakes. Evaluating current methods, we find that they lack power to detect outperforming managers.

Luck versus Skill in the Cross Section of Mutual Fund Returns: Reexamining the Evidence

Published: 4/17/2022,  Volume: 77,  Issue: 3  |  DOI: 10.1111/jofi.13123  |  Cited by: 39

CAMPBELL R. HARVEY, YAN LIU

While Kosowski et al. (2006, Journal of Finance 61, 2551–2595) and Fama and French (2010, Journal of Finance 65, 1915–1947) both evaluate whether mutual funds outperform, their conclusions are very different. We reconcile their findings. We show that the Fama‐French method suffers from an undersampling problem that leads to a failure to reject the null hypothesis of zero alpha, even when some funds generate economically large risk‐adjusted returns. In contrast, Kosowski et al. substantially overreject the null hypothesis, even when all funds have a zero alpha. We present a novel bootstrapping approach that should be useful to future researchers choosing between the two approaches.

Earnings Management and the Long‐Run Market Performance of Initial Public Offerings

Published: 12/1998,  Volume: 53,  Issue: 6  |  DOI: 10.1111/0022-1082.00079  |  Cited by: 1663

Siew Hong Teoh, Ivo Welch, T.J. Wong

Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive” quartile of earnings managers have a three‐year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications.

Are Overconfident CEOs Better Innovators?

Published: 7/19/2012,  Volume: 67,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2012.01753.x  |  Cited by: 1671

DAVID HIRSHLEIFER, ANGIE LOW, SIEW HONG TEOH

Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason: overconfidence can benefit shareholders by increasing investment in risky projects. Using options‐ and press‐based proxies for CEO overconfidence, we find that over the 1993–2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development expenditures. However, overconfident managers achieve greater innovation only in innovative industries. Our findings suggest that overconfidence helps CEOs exploit innovative growth opportunities.

Simple Forecasts and Paradigm Shifts

Published: 5/8/2007,  Volume: 62,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2007.01234.x  |  Cited by: 119

HARRISON HONG, JEREMY C. STEIN, JIALIN YU

We study the asset pricing implications of learning in an environment in which the true model of the world is a multivariate one, but agents update only over the class of simple univariate models. Thus, if a particular simple model does a poor job of forecasting over a period of time, it is discarded in favor of an alternative simple model. The theory yields a number of distinctive predictions for stock returns, generating forecastable variation in the magnitude of the value‐glamour return differential, in volatility, and in the skewness of returns. We validate several of these predictions empirically.

Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies

Published: 2/2000,  Volume: 55,  Issue: 1  |  DOI: 10.1111/0022-1082.00206  |  Cited by: 2092

Harrison Hong, Terence Lim, Jeremy C. Stein

Various theories have been proposed to explain momentum in stock returns. We test the gradual‐information‐diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm‐specific information, especially negative information, diffuses only gradually across the investing public.

Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies

Published: 9/21/2011,  Volume: 66,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2011.01685.x  |  Cited by: 1485

ULRIKE MALMENDIER, GEOFFREY TATE, JON YAN

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity financing. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.

The Real and Financial Implications of Corporate Hedging

Published: 9/21/2011,  Volume: 66,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2011.01683.x  |  Cited by: 336

MURILLO CAMPELLO, CHEN LIN, YUE MA, HONG ZOU

We study the implications of hedging for corporate financing and investment. We do so using an extensive, hand‐collected data set on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby reducing the expected costs of financial distress. In theory, this should ease a firm's access to credit. Using a tax‐based instrumental variable approach, we show that hedgers pay lower interest spreads and are less likely to have capital expenditure restrictions in their loan agreements. These favorable financing terms, in turn, allow hedgers to invest more. Our tests characterize two exact channels—cost of borrowing and investment restrictions—through which hedging affects corporate outcomes. The analysis shows that hedging has a first‐order effect on firm financing and investment, and provides new insights into how hedging affects corporate value. More broadly, our study contributes novel evidence on the real consequences of financial contracting.

Social Interaction and Stock‐Market Participation

Published: 2/2004,  Volume: 59,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2004.00629.x  |  Cited by: 1477

Harrison Hong, Jeffrey D. Kubik, Jeremy C. Stein

We propose that stock‐market participation is influenced by social interaction. In our model, any given “social” investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households—those who interact with their neighbors, or attend church—are substantially more likely to invest in the market than non‐social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer‐effects story, the impact of sociability is stronger in states where stock‐market participation rates are higher.

Thy Neighbor's Portfolio: Word‐of‐Mouth Effects in the Holdings and Trades of Money Managers

Published: 11/10/2005,  Volume: 60,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2005.00817.x  |  Cited by: 805

HARRISON HONG, JEFFREY D. KUBIK, JEREMY C. STEIN

A mutual fund manager is more likely to buy (or sell) a particular stock in any quarter if other managers in the same city are buying (or selling) that same stock. This pattern shows up even when the fund manager and the stock in question are located far apart, so it is distinct from anything having to do with local preference. The evidence can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

Yesterday's Heroes: Compensation and Risk at Financial Firms

Published: 3/12/2015,  Volume: 70,  Issue: 2  |  DOI: 10.1111/jofi.12225  |  Cited by: 235

ING‐HAW CHENG, HARRISON HONG, JOSÉ A. SCHEINKMAN

Many believe that compensation, misaligned from shareholders’ value due to managerial entrenchment, caused financial firms to take risks before the financial crisis of 2008. We argue that, even in a classical principal‐agent setting without entrenchment and with exogenous firm risk, riskier firms may offer higher total pay as compensation for the extra risk in equity stakes borne by risk‐averse managers. Using long lags of stock price risk to capture exogenous firm risk, we confirm our conjecture and show that riskier firms are also more productive and more likely to be held by institutional investors, who are most able to influence compensation.

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.

Driven to Distraction: Extraneous Events and Underreaction to Earnings News

Published: 9/28/2009,  Volume: 64,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2009.01501.x  |  Cited by: 1432

DAVID HIRSHLEIFER, SONYA SEONGYEON LIM, SIEW HONG TEOH

Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The investor distraction hypothesis holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post‐announcement drift much stronger, when a greater number of same‐day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry‐unrelated news and large earnings surprises have a stronger distracting effect.

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: 939

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.

Does Investor Misvaluation Drive the Takeover Market?

Published: 3/9/2006,  Volume: 61,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2006.00853.x  |  Cited by: 733

MING DONG, DAVID HIRSHLEIFER, SCOTT RICHARDSON, SIEW HONG TEOH

This paper uses pre‐offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder and target valuations (price‐to‐book, or price‐to‐residual‐income‐model‐value) are related to means of payment, mode of acquisition, premia, target hostility, offer success, and bidder and target announcement‐period returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre‐1990 period than in the 1990–2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990–2000 period than in the pre‐1990 period.

Outsourcing Mutual Fund Management: Firm Boundaries, Incentives, and Performance

Published: 3/7/2013,  Volume: 68,  Issue: 2  |  DOI: 10.1111/jofi.12006  |  Cited by: 142

JOSEPH CHEN, HARRISON HONG, WENXI JIANG, JEFFREY D. KUBIK

We investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms. These funds underperform those run internally by about 52 basis points per year. After instrumenting for a fund's outsourcing status, the estimated underperformance is three times larger. We hypothesize that contractual externalities due to firm boundaries make it difficult to extract performance from an outsourced relationship. Consistent with this view, outsourced funds face higher powered incentives; they are more likely to be closed after poor performance and excessive risk‐taking.

Sensation Seeking and Hedge Funds

Published: 11/9/2018,  Volume: 73,  Issue: 6  |  DOI: 10.1111/jofi.12723  |  Cited by: 79

STEPHEN BROWN, YAN LU, SUGATA RAY, MELVYN TEO

We show that, motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation‐seeking managers trade more frequently, actively, and unconventionally, and prefer lottery‐like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation‐seeking investors fuel the demand for sensation‐seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation‐avoiding fund managers.

Are Liquidity and Information Risks Priced in the Treasury Bond Market?

Published: 1/23/2009,  Volume: 64,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01439.x  |  Cited by: 94

HAITAO LI, JUNBO WANG, CHUNCHI WU, YAN HE

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure‐based measures of liquidity. Information risk is measured by the probability of information‐based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.

Liquidity Premia and Transaction Costs

Published: 9/4/2007,  Volume: 62,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2007.01277.x  |  Cited by: 139

BONG‐GYU JANG, HYENG KEUN KOO, HONG LIU, MARK LOEWENSTEIN

Standard literature concludes that transaction costs only have a second‐order effect on liquidity premia. We show that this conclusion depends crucially on the assumption of a constant investment opportunity set. In a regime‐switching model in which the investment opportunity set varies over time, we explicitly characterize the optimal consumption and investment strategy. In contrast to the standard literature, we find that transaction costs can have a first‐order effect on liquidity premia. However, with reasonably calibrated parameters, the presence of transaction costs still cannot fully explain the equity premium puzzle.

Inalienable Customer Capital, Corporate Liquidity, and Stock Returns

Published: 7/24/2020,  Volume: 76,  Issue: 1  |  DOI: 10.1111/jofi.12960  |  Cited by: 83

WINSTON WEI DOU, YAN JI, DAVID REIBSTEIN, WEI WU

We develop a model in which customer capital depends on key talents' contribution and pure brand recognition. Customer capital guarantees stable demand but is fragile to financial constraints risk if retained mainly by talents, who tend to quit financially constrained firms, damaging customer capital. Using a proprietary, granular brand‐perception survey, we construct a firm‐level measure of the inalienability of customer capital (ICC) that captures the degree to which customer capital depends on talents. Firms with higher ICC have higher average returns, higher talent turnover, and more precautionary financial policies. The ICC‐sorted long‐short portfolio's spread comoves with financial constraints factor.

Anomalies and the Expected Market Return

Published: 12/21/2021,  Volume: 77,  Issue: 1  |  DOI: 10.1111/jofi.13099  |  Cited by: 205

XI DONG, YAN LI, DAVID E. RAPACH, GUOFU ZHOU

We provide the first systematic evidence on the link between long‐short anomaly portfolio returns—a cornerstone of the cross‐sectional literature—and the time‐series predictability of the aggregate market excess return. Using 100 representative anomalies from the literature, we employ a variety of shrinkage techniques (including machine learning, forecast combination, and dimension reduction) to efficiently extract predictive signals in a high‐dimensional setting. We find that long‐short anomaly portfolio returns evince statistically and economically significant out‐of‐sample predictive ability for the market excess return. The predictive ability of anomaly portfolio returns appears to stem from asymmetric limits of arbitrage and overpricing correction persistence.

Robust Measures of Earnings Surprises

Published: 1/15/2019,  Volume: 74,  Issue: 2  |  DOI: 10.1111/jofi.12746  |  Cited by: 41

CHIN‐HAN CHIANG, WEI DAI, JIANQING FAN, HARRISON HONG, JUN TU

Event studies of market efficiency measure earnings surprises using the consensus error ( CE ), given as actual earnings minus the average professional forecast. If a subset of forecasts can be biased, the ideal but difficult to estimate parameter‐dependent alternative to CE is a nonlinear filter of individual errors that adjusts for bias. We show that CE is a poor parameter‐free approximation of this ideal measure. The fraction of misses on the same side ( FOM ), which discards the magnitude of misses, offers a far better approximation. FOM performs particularly well against CE in predicting the returns of U.S. stocks, where bias is potentially large.

Does Idiosyncratic Risk Really Matter?

Published: 3/2/2005,  Volume: 60,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2005.00750.x  |  Cited by: 340

TURAN G. BALI, NUSRET CAKICI, XUEMIN (STERLING) YAN, ZHE ZHANG

Goyal and Santa‐Clara (2003) find a significantly positive relation between the equal‐weighted average stock volatility and the value‐weighted portfolio returns on the NYSE/AMEX/Nasdaq stocks for the period of 1963:08 to 1999:12. We show that this result is driven by small stocks traded on the Nasdaq, and is in part due to a liquidity premium. In addition, their result does not hold for the extended sample of 1963:08 to 2001:12 and for the NYSE/AMEX and NYSE stocks. More importantly, we find no evidence of a significant link between the value‐weighted portfolio returns and the median and value‐weighted average stock volatility.

Nonstandard Errors

Published: 4/17/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13337  |  Cited by: 111

ALBERT J. MENKVELD, ANNA DREBER, FELIX HOLZMEISTER, JUERGEN HUBER, MAGNUS JOHANNESSON, MICHAEL KIRCHLER, SEBASTIAN NEUSÜß, MICHAEL RAZEN, UTZ WEITZEL, DAVID ABAD‐DÍAZ, MENACHEM (MENI) ABUDY, TOBIAS ADRIAN, YACINE AIT‐SAHALIA, OLIVIER AKMANSOY, JAMIE T. ALCOCK, VITALI ALEXEEV, ARASH ALOOSH, LIVIA AMATO, DIEGO AMAYA, JAMES J. ANGEL, ALEJANDRO T. AVETIKIAN, AMADEUS BACH, EDWIN BAIDOO, GAETAN BAKALLI, LI BAO, ANDREA BARBON, OKSANA BASHCHENKO, PARAMPREET C. BINDRA, GEIR H. BJØNNES, JEFFREY R. BLACK, BERNARD S. BLACK, DIMITAR BOGOEV, SANTIAGO BOHORQUEZ CORREA, OLEG BONDARENKO, CHARLES S. BOS, CIRIL BOSCH‐ROSA, ELIE BOURI, CHRISTIAN BROWNLEES, ANNA CALAMIA, VIET NGA CAO, GUNTHER CAPELLE‐BLANCARD, LAURA M. CAPERA ROMERO, MASSIMILIANO CAPORIN, ALLEN CARRION, TOLGA CASKURLU, BIDISHA CHAKRABARTY, JIAN CHEN, MIKHAIL CHERNOV, WILLIAM CHEUNG, LUDWIG B. CHINCARINI, TARUN CHORDIA, SHEUNG‐CHI CHOW, BENJAMIN CLAPHAM, JEAN‐EDOUARD COLLIARD, CAROLE COMERTON‐FORDE, EDWARD CURRAN, THONG DAO, WALE DARE, RYAN J. DAVIES, RICCARDO DE BLASIS, GIANLUCA F. DE NARD, FANY DECLERCK, OLEG DEEV, HANS DEGRYSE, SOLOMON Y. DEKU, CHRISTOPHE DESAGRE, MATHIJS A. VAN DIJK, CHUKWUMA DIM, THOMAS DIMPFL, YUN JIANG DONG, PHILIP A. DRUMMOND, TOM DUDDA, TEODOR DUEVSKI, ARIADNA DUMITRESCU, TEODOR DYAKOV, ANNE HAUBO DYHRBERG, MICHAŁ DZIELIŃSKI, ASLI EKSI, IZIDIN EL KALAK, SASKIA TER ELLEN, NICOLAS EUGSTER, MARTIN D. D. EVANS, MICHAEL FARRELL, ESTER FELEZ‐VINAS, GERARDO FERRARA, EL MEHDI FERROUHI, ANDREA FLORI, JONATHAN T. FLUHARTY‐JAIDEE, SEAN D. V. FOLEY, KINGSLEY Y. L. FONG, THIERRY FOUCAULT, TATIANA FRANUS, FRANCESCO FRANZONI, BART FRIJNS, MICHAEL FRÖMMEL, SERVANNA M. FU, SASCHA C. FÜLLBRUNN, BAOQING GAN, GE GAO, THOMAS P. GEHRIG, ROLAND GEMAYEL, DIRK GERRITSEN, JAVIER GIL‐BAZO, DUDLEY GILDER, LAWRENCE R. GLOSTEN, THOMAS GOMEZ, ARSENY GORBENKO, JOACHIM GRAMMIG, VINCENT GRÉGOIRE, UFUK GÜÇBILMEZ, BJÖRN HAGSTRÖMER, JULIEN HAMBUCKERS, ERIK HAPNES, JEFFREY H. HARRIS, LAWRENCE HARRIS, SIMON HARTMANN, JEAN‐BAPTISTE HASSE, NIKOLAUS HAUTSCH, XUE‐ZHONG (TONY) HE, DAVIDSON HEATH, SIMON HEDIGER, TERRENCE HENDERSHOTT, ANN MARIE HIBBERT, ERIK HJALMARSSON, SETH A. HOELSCHER, PETER HOFFMANN, CRAIG W. HOLDEN, ALEX R. HORENSTEIN, WENQIAN HUANG, DA HUANG, CHRISTOPHE HURLIN, KONRAD ILCZUK, ALEXEY IVASHCHENKO, SUBRAMANIAN R. IYER, HOSSEIN JAHANSHAHLOO, NAJI JALKH, CHARLES M. JONES, SIMON JURKATIS, PETRI JYLHÄ, ANDREAS T. KAECK, GABRIEL KAISER, ARZÉ KARAM, EGLE KARMAZIENE, BERNHARD KASSNER, MARKKU KAUSTIA, EKATERINA KAZAK, FEARGHAL KEARNEY, VINCENT VAN KERVEL, SAAD A. KHAN, MARTA K. KHOMYN, TONY KLEIN, OLGA KLEIN, ALEXANDER KLOS, MICHAEL KOETTER, ALEKSEY KOLOKOLOV, ROBERT A. KORAJCZYK, ROMAN KOZHAN, JAN P. KRAHNEN, PAUL KUHLE, AMY KWAN, QUENTIN LAJAUNIE, F. Y. ERIC C. LAM, MARIE LAMBERT, HUGUES LANGLOIS, JENS LAUSEN, TOBIAS LAUTER, MARKUS LEIPPOLD, VLADIMIR LEVIN, YIJIE LI, HUI LI, CHEE YOONG LIEW, THOMAS LINDNER, OLIVER LINTON, JIACHENG LIU, ANQI LIU, GUILLERMO LLORENTE, MATTHIJS LOF, ARIEL LOHR, FRANCIS LONGSTAFF, ALEJANDRO LOPEZ‐LIRA, SHAWN MANKAD, NICOLA MANO, ALEXIS MARCHAL, CHARLES MARTINEAU, FRANCESCO MAZZOLA, DEBRAH MELOSO, MICHAEL G. MI, ROXANA MIHET, VIJAY MOHAN, SOPHIE MOINAS, DAVID MOORE, LIANGYI MU, DMITRIY MURAVYEV, DERMOT MURPHY, GABOR NESZVEDA, CHRISTIAN NEUMEIER, ULF NIELSSON, MAHENDRARAJAH NIMALENDRAN, SVEN NOLTE, LARS L. NORDEN, PETER O'NEILL, KHALED OBAID, BERNT A. ØDEGAARD, PER ÖSTBERG, EMILIANO PAGNOTTA, MARCUS PAINTER, STEFAN PALAN, IMON J. PALIT, ANDREAS PARK, ROBERTO PASCUAL, PAOLO PASQUARIELLO, LUBOS PASTOR, VINAY PATEL, ANDREW J. PATTON, NEIL D. PEARSON, LORIANA PELIZZON, MICHELE PELLI, MATTHIAS PELSTER, CHRISTOPHE PÉRIGNON, CAMERON PFIFFER, RICHARD PHILIP, TOMÁŠ PLÍHAL, PUNEET PRAKASH, OLIVER‐ALEXANDER PRESS, TINA PRODROMOU, MARCEL PROKOPCZUK, TALIS PUTNINS, YA QIAN, GAURAV RAIZADA, DAVID RAKOWSKI, ANGELO RANALDO, LUCA REGIS, STEFAN REITZ, THOMAS RENAULT, REX W. RENJIE, ROBERTO RENO, STEVEN J. RIDDIOUGH, KALLE RINNE, PAUL RINTAMÄKI, RYAN RIORDAN, THOMAS RITTMANNSBERGER, IÑAKI RODRÍGUEZ LONGARELA, DOMINIK ROESCH, LAVINIA ROGNONE, BRIAN ROSEMAN, IOANID ROŞU, SAURABH ROY, NICOLAS RUDOLF, STEPHEN R. RUSH, KHALADDIN RZAYEV, ALEKSANDRA A. RZEŹNIK, ANTHONY SANFORD, HARIKUMAR SANKARAN, ASANI SARKAR, LUCIO SARNO, OLIVIER SCAILLET, STEFAN SCHARNOWSKI, KLAUS R. SCHENK‐HOPPÉ, ANDREA SCHERTLER, MICHAEL SCHNEIDER, FLORIAN SCHROEDER, NORMAN SCHÜRHOFF, PHILIPP SCHUSTER, MARCO A. SCHWARZ, MARK S. SEASHOLES, NORMAN J. SEEGER, OR SHACHAR, ANDRIY SHKILKO, JESSICA SHUI, MARIO SIKIC, GIORGIA SIMION, LEE A. SMALES, PAUL SÖDERLIND, ELVIRA SOJLI, KONSTANTIN SOKOLOV, JANTJE SÖNKSEN, LAIMA SPOKEVICIUTE, DENITSA STEFANOVA, MARTI G. SUBRAHMANYAM, BARNABAS SZASZI, OLEKSANDR TALAVERA, YUEHUA TANG, NICK TAYLOR, WING WAH THAM, ERIK THEISSEN, JULIAN THIMME, IAN TONKS, HAI TRAN, LUCA TRAPIN, ANDERS B. TROLLE, M. ANDREEA VADUVA, GIORGIO VALENTE, ROBERT A. VAN NESS, AURELIO VASQUEZ, THANOS VEROUSIS, PATRICK VERWIJMEREN, ANDERS VILHELMSSON, GRIGORY VILKOV, VLADIMIR VLADIMIROV, SEBASTIAN VOGEL, STEFAN VOIGT, WOLF WAGNER, THOMAS WALTHER, PATRICK WEISS, MICHEL VAN DER WEL, INGRID M. WERNER, P. JOAKIM WESTERHOLM, CHRISTIAN WESTHEIDE, HANS C. WIKA, EVERT WIPPLINGER, MICHAEL WOLF, CHRISTIAN C. P. WOLFF, LEONARD WOLK, WING‐KEUNG WONG, JAN WRAMPELMEYER, ZHEN‐XING WU, SHUO XIA, DACHENG XIU, KE XU, CAIHONG XU, PRADEEP K. YADAV, JOSÉ YAGÜE, CHENG YAN, ANTTI YANG, WOONGSUN YOO, WENJIA YU, YIHE YU, SHIHAO YU, BART Z. YUESHEN, DARYA YUFEROVA, MARCIN ZAMOJSKI, ABALFAZL ZAREEI, STEFAN M. ZEISBERGER, LU ZHANG, S. SARAH ZHANG, XIAOYU ZHANG, LU ZHAO, ZHUO ZHONG, Z. IVY ZHOU, CHEN ZHOU, XINGYU S. ZHU, MARIUS ZOICAN, REMCO ZWINKELS

In statistics, samples are drawn from a population in a data‐generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence‐generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for more reproducible or higher rated research. Adding peer‐review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.