The Journal of Finance

Information Diversity and Complementarities in Trading and Information Acquisition

Published: 12/02/2014   |   DOI: 10.1111/jofi.12226

ITAY GOLDSTEIN, LIYAN YANG

We analyze a model in which different traders are informed of different fundamentals that affect the security value. We identify a source for strategic complementarities in trading and information acquisition: aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental, encouraging more trading and information acquisition on that fundamental. This tends to amplify the effect of exogenous changes in the underlying information environment. Due to complementarities, greater diversity of information in the economy improves price informativeness. We discuss the relation between our model and recent financial phenomena and derive testable empirical implications.

Demand–Deposit Contracts and the Probability of Bank Runs

Published: 05/03/2005   |   DOI: 10.1111/j.1540-6261.2005.00762.x

ITAY GOLDSTEIN, ADY PAUZNER

Diamond and Dybvig (1983) show that while demand–deposit contracts let banks provide liquidity, they expose them to panic‐based bank runs. However, their model does not provide tools to derive the probability of the bank‐run equilibrium, and thus cannot determine whether banks increase welfare overall. We study a modified model in which the fundamentals determine which equilibrium occurs. This lets us compute the ex ante probability of panic‐based bank runs and relate it to the contract. We find conditions under which banks increase welfare overall and construct a demand–deposit contract that trades off the benefits from liquidity against the costs of runs.

Government Intervention and Information Aggregation by Prices

Published: 06/17/2015   |   DOI: 10.1111/jofi.12303

PHILIP BOND, ITAY GOLDSTEIN

Governments intervene in firms' lives in a variety of ways. To enhance the efficiency of government intervention, many researchers and policy makers call for governments to make use of information contained in stock market prices. However, price informativeness is endogenous to government policy. We analyze government policy in light of this endogeneity. In some cases, it is optimal for a government to commit to limit its reliance on market prices to avoid harming the aggregation of information into market prices. For similar reasons, it is optimal for a government to limit transparency in some dimensions.

Credit Rating Inflation and Firms' Investments

Published: 07/10/2020   |   DOI: 10.1111/jofi.12961

ITAY GOLDSTEIN, CHONG HUANG

We analyze credit rating effects on firm investments in a rational bond financing game that features a feedback loop. The credit rating agency (CRA) inflates the rating, providing a biased but informative signal to creditors. Creditors' response to the rating affects the firm's investment decision and thus its credit quality, which is reflected in the rating. The CRA might reduce ex ante economic efficiency, which results solely from its strategic effect: the CRA assigns more firms high ratings and allows them to gamble for resurrection. We derive empirical predictions on the determinants of rating standards and inflation and discuss policy implications.

Commodity Financialization and Information Transmission

Published: 06/14/2022   |   DOI: 10.1111/jofi.13165

ITAY GOLDSTEIN, LIYAN YANG

We provide a model to understand the effects of commodity futures financialization on various market variables. We distinguish between financial speculators and financial hedgers and study their separate and combined effects on the informativeness of futures prices, the futures price bias, the comovement of futures prices with other markets, and the predictiveness of financial trading. We capture the interactions between commodity futures financialization and the real economy through spot prices and production decisions. A dynamic extension illustrates how key variables change over time in a period of acute financialization in a way that is consistent with observed empirical patterns.

Utility Tokens as a Commitment to Competition

Published: 10/10/2024   |   DOI: 10.1111/jofi.13389

ITAY GOLDSTEIN, DEEKSHA GUPTA, RUSLAN SVERCHKOV

We show that utility tokens can limit the rent‐seeking activities of two‐sided platforms with market power while preserving efficiency gains due to network effects. We model platforms where buyers and sellers can meet to exchange services. Tokens serve as the sole medium of exchange on a platform and can be traded in a secondary market. Tokenizing a platform commits a firm to give up monopolistic rents associated with the control of the platform, leading to long‐run competitive prices. We show how the threat of entrants can incentivize developers to tokenize and discuss cases where regulation is needed to enforce tokenization.

The Real Effects of Financial Markets: The Impact of Prices on Takeovers

Published: 05/21/2012   |   DOI: 10.1111/j.1540-6261.2012.01738.x

ALEX EDMANS, ITAY GOLDSTEIN, WEI JIANG

Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the “trigger effect”). An interquartile decrease in valuation leads to a seven percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the “anticipation effect”). Our results overturn prior literature that finds a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: They impose discipline on managers by triggering takeover threats.

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

Published: 11/11/2008   |   DOI: 10.1111/j.1540-6261.2008.01410.x

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.

Liquidity Transformation and Fragility in the U.S. Banking Sector

Published: 10/13/2024   |   DOI: 10.1111/jofi.13390

QI CHEN, ITAY GOLDSTEIN, ZEQIONG HUANG, RAHUL VASHISHTHA

Liquidity transformation, a key role of banks, is thought to increase fragility, as uninsured depositors face an incentive to withdraw money before others (a so‐called panic run). Despite much theoretical work, however, there is little empirical evidence establishing this mechanism. In this paper, we provide the first large‐scale evidence of this mechanism. Banks that engage in more liquidity transformation exhibit higher fragility, as captured by stronger sensitivities of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk.