The Journal of Finance

Intermediation Variety

Published: 10/28/2021,  Volume: 76,  Issue: 6  |  DOI: 10.1111/jofi.13084  |  Cited by: 37

JASON RODERICK DONALDSON, GIORGIA PIACENTINO, ANJAN THAKOR

We explain why banks and nonbank intermediaries coexist in a model based only on differences in their funding costs. Banks enjoy a low cost of capital due to safety nets and money‐like liabilities. We show that this can actually be a disadvantage: it generates a soft‐budget‐constraint problem that makes it difficult for banks to credibly threaten to withhold additional funding to failed projects. Nonbanks emerge to solve this problem. Their high cost of capital is an advantage: it allows them to commit to terminate funding. Still, nonbanks never take over the entire market, but other coexist with banks in equilibrium.

Conflicting Priorities: A Theory of Covenants and Collateral

Published: 4/9/2025,  Volume: 80,  Issue: 3  |  DOI: 10.1111/jofi.13445  |  Cited by: 10

JASON RODERICK DONALDSON, DENIS GROMB, GIORGIA PIACENTINO

We develop a theory of secured debt, unsecured debt, and debt with anti‐dilution covenants. We assume that, as in practice, covenants convey the right to accelerate if violated, but the new secured debt retains its priority even if issued in violation of covenants. We find that such covenants are nonetheless useful: They provide state‐contingent financing flexibility, balancing over‐ and underinvestment incentives. The optimal debt structure is multilayered, combining secured and unsecured debt with and without covenants. Our results are consistent with observations about debt structure, covenant violations, and waivers. They speak to a policy debate about debt priority.

Household Debt Overhang and Unemployment

Published: 3/18/2019,  Volume: 74,  Issue: 3  |  DOI: 10.1111/jofi.12760  |  Cited by: 67

JASON RODERICK DONALDSON, GIORGIA PIACENTINO, ANJAN THAKOR

We use a labor‐search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household‐debt‐overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy posting effect implies that high household debt leads to high unemployment. Even though households borrow from banks via bilaterally optimal contracts, the equilibrium level of household debt is inefficiently high due to a household‐debt externality . We analyze the role that a financial regulator can play in mitigating this externality.

The Impact of Large Portfolio Insurers on Asset Prices

Published: 12/1993,  Volume: 48,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1993.tb05135.x  |  Cited by: 18

R. GLEN DONALDSON, HARALD UHLIG

We develop a simple model in which the presence of portfolio insurers in a market of risk‐averse traders leads to multiple equilibria for the pricing of financial assets and can cause an increase in volatility, including insurance‐induced price drops. We demonstrate, however, that centralized portfolio insurance firms may actually reduce, not increase, volatility, even if the existence of these firms increases the total amount of funds under insurance.

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.

Liquidity Provision and Noise Trading: Evidence from the “Investment Dartboard” Column

Published: 10/1999,  Volume: 54,  Issue: 5  |  DOI: 10.1111/0022-1082.00171  |  Cited by: 66

Jason Greene, Scott Smart

How does increased noise trading affect market liquidity and trading costs? We use The Wall Street Journal's “Investment Dartboard” column, which stimulates noise trading, as a natural experiment to evaluate models of the bid‐ask spread. We find that substantial increases in trading volume and significant but temporary abnormal returns occur when analysts recommend stocks in this column, especially when recommendations come from analysts with successful contest track records. We also find an increase in liquidity and a decrease in the adverse selection component of the bid‐ask spread.

Earnings Announcements and the Components of the Bid‐Ask Spread

Published: 9/1996,  Volume: 51,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1996.tb04078.x  |  Cited by: 197

ITZHAK KRINSKY, JASON LEE

This study investigates the behavior of the components of the bid‐ask spread around earnings announcements. We find that the adverse selection cost component significantly increases surrounding the announcements, while the inventory holding and order processing components significantly decline during the same periods. Our results suggest that the directional change in the total bid‐ask spread depends on the relative magnitudes of the changes in these three components. Specifically, the decreases in inventory holding costs and order processing costs imply that earnings announcements may have an insignificant impact on the total bid‐ask spread, even when they result in increased information asymmetry.

Dynamic Competition in Negotiated Price Markets

Published: 12/13/2024,  Volume: 80,  Issue: 1  |  DOI: 10.1111/jofi.13408  |  Cited by: 7

JASON ALLEN, SHAOTENG LI

Using contract‐level data for the Canadian mortgage market, this paper provides evidence of an “invest‐and‐harvest” pricing pattern. We build a dynamic model of price negotiation with search and switching frictions to capture key market features. We estimate the model and use it to investigate the effects of market frictions and the resulting dynamic competition on borrowers' and banks' payoffs. We show that dynamic pricing and the presence of search and switching costs have important implications for public policies.

Forest through the Trees: Building Cross‐Sections of Stock Returns

Published: 9/2/2025,  Volume: 80,  Issue: 5  |  DOI: 10.1111/jofi.13477  |  Cited by: 50

SVETLANA BRYZGALOVA, MARKUS PELGER, JASON ZHU

We build cross‐sections of asset returns for a given set of characteristics, that is, managed portfolios serving as test assets, as well as building blocks for tradable risk factors. We use decision trees to endogenously group similar stocks together by selecting optimal portfolio splits to span the stochastic discount factor, projected on individual stocks. Our portfolios are interpretable and well diversified, reflecting many characteristics and their interactions. Compared to combinations of dozens (even hundreds) of single/double sorts, as well as machine‐learning prediction‐based portfolios, our cross‐sections are low‐dimensional yet have up to three times higher out‐of‐sample Sharpe ratios and alphas.

The Impact of Bank Consolidation on Commercial Borrower Welfare

Published: 8/2005,  Volume: 60,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2005.00787.x  |  Cited by: 132

JASON KARCESKI, STEVEN ONGENA, DAVID C. SMITH

We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favoring acquiring borrowers. Bank mergers lead to higher relationship exit rates among borrowers of target banks. Larger merger‐induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that firms with low switching costs switch banks, while similar firms with high switching costs are locked into their current relationship.

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: 894

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.

The Level and Persistence of Growth Rates

Published: 3/21/2003,  Volume: 58,  Issue: 2  |  DOI: 10.1111/1540-6261.00540  |  Cited by: 248

Louis K. C. Chan, Jason Karceski, Josef Lakonishok

Expectations about long‐term earnings growth are crucial to valuation models and cost of capital estimates. We analyze historical long‐term growth rates across a broad cross section of stocks using several indicators of operating performance. We test for persistence and predictability in growth. While some firms have grown at high rates historically, they are relatively rare instances. There is no persistence in long‐term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. Specifically, IBES growth forecasts are overly optimistic and add little predictive power. Valuation ratios also have limited ability to predict future growth.

The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market

Published: 9/3/2015,  Volume: 70,  Issue: 5  |  DOI: 10.1111/jofi.12284  |  Cited by: 171

REENA AGGARWAL, PEDRO A. C. SAFFI, JASON STURGESS

This paper investigates voting preferences of institutional investors using the unique setting of the securities lending market. Investors restrict lendable supply and/or recall loaned shares prior to the proxy record date to exercise voting rights. Recall is higher for investors with greater incentives to monitor, for firms with poor performance or weak governance, and for proposals where returns to governance are likely higher. At the subsequent vote, recall is associated with less support for management and more support for shareholder proposals. Our results indicate that institutions value their vote and use the proxy process to affect corporate governance.

The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market: Erratum

Published: 11/12/2015,  Volume: 70,  Issue: 6  |  DOI: 10.1111/jofi.12360  |  Cited by: 3

REENA AGGARWAL, PEDRO A. C. SAFFI, JASON STURGESS

When Financial Institutions Are Large Shareholders: The Role of Macro Corporate Governance Environments

Published: 12/2006,  Volume: 61,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2006.01009.x  |  Cited by: 173

DONGHUI LI, FARIBORZ MOSHIRIAN, PETER KIEN PHAM, JASON ZEIN

While financial institutions' aggregate investments have grown substantially worldwide, the size of their individual shareholdings, and ultimately their incentive to monitor, may be limited by the free‐rider problem, regulations, and a preference for diversification and liquidity. We compare institutions' shareholding patterns across countries and find vast differences in the extent to which they are large shareholders. These variations are largely determined by macro corporate governance factors such as shareholder protection, law enforcement, and corporate disclosure requirements. This suggests that strong governance environments act to strengthen monitoring ability such that more institutions are encouraged to hold concentrated equity positions.