The Journal of Finance

Multi‐Beta CAPM or Equilibrium‐APT?: A Reply

Published: 9/1985,  Volume: 40,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1985.tb02371.x  |  Cited by: 44

JAY SHANKEN

The Current State of the Arbitrage Pricing Theory

Published: 9/1992,  Volume: 47,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1992.tb04671.x  |  Cited by: 71

JAY SHANKEN

This paper provides a simple proof of a recent theorem presented by Reisman (1992), concerning the use of proxies for the factors in the return‐generating process of the arbitrage pricing theory (APT). In the single‐factor case, the theorem asserts that any variable correlated with the factor can serve as the benchmark in an approximate APT expected return relation. The significance of this result is considered and a new direction for empirical work on “arbitrage pricing” is outlined.

On the Exclusion of Assets from Tests of the Mean Variance Efficiency of the Market Portfolio: An Extension

Published: 6/1986,  Volume: 41,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1986.tb05039.x  |  Cited by: 6

JAY SHANKEN

This paper extends Kandel's [3] analysis of the testability of the mean‐variance efficiency of a market index when the return on some component of the index is not perfectly observable. In addition to information about the mean and variance of the missing asset, considered by Kandel, we explore the usefulness of information about the beta of the missing asset on the observed sub‐portfolio in an economy with a riskless asset. The results are somewhat more supportive of the notion that mean‐variance efficiency is testable on a subset of the assets.

The Arbitrage Pricing Theory: Is it Testable?

Published: 12/1982,  Volume: 37,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1982.tb03607.x  |  Cited by: 134

JAY SHANKEN

This paper challenges the view that the Arbitrage Pricing Theory (APT) is inherently more susceptible to empirical verification than the Capital Asset Pricing Model (CAPM). The usual formulation of the testable implications of the APT is shown to be inadequate, as it precludes the very expected return differentials which the theory attempts to explain. A recent competitive‐equilibrium extension of the APT may be testable in principle. In order to implement such a test, however, observation of the return on the true market portfolio appears to be necessary.

Testing Portfolio Efficiency when the Zero‐Beta Rate is Unknown: A Note

Published: 3/1986,  Volume: 41,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1986.tb04506.x  |  Cited by: 30

JAY SHANKEN

A lower bound on the distribution function of the likelihood ratio test of portfolio efficiency is derived. An empirical application demonstrates that the bound may sometimes be used to infer rejection of the null hypothesis without appeal to asymptotic statistical approximations. A procedure for incorporating partial information about the zero‐beta intercept, in the multivariate framework, is also developed and applied.

Nonsynchronous Data and the Covariance‐Factor Structure of Returns

Published: 6/1987,  Volume: 42,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1987.tb02565.x  |  Cited by: 26

JAY SHANKEN

Evidence is presented that indicates that the standard estimator of the covariance matrix of daily returns provides a distorted view of the true covariance‐factor structure. An alternative estimator, based on a model of the price‐adjustment delay process, reveals roughly twice as much covariation in individual security returns. The number of factors identified also appears to increase when this estimator is employed. Since the linear space spanned by the estimated factor‐loading vectors is quite sensitive to the estimator used, it is important that the consistent estimator be considered in the usual two‐stage empirical investigations of the APT.

Learning, Asset‐Pricing Tests, and Market Efficiency

Published: 6/2002,  Volume: 57,  Issue: 3  |  DOI: 10.1111/1540-6261.00456  |  Cited by: 288

Jonathan Lewellen, Jay Shanken

This paper studies the asset‐pricing implications of parameter uncertainty. We show that, when investors must learn about expected cash flows, empirical tests can find patterns in the data that differ from those perceived by rational investors. Returns might appear predictable to an econometrician, or appear to deviate from the Capital Asset Pricing Model, but investors can neither perceive nor exploit this predictability. Returns may also appear excessively volatile even though prices react efficiently to cash‐flow news. We conclude that parameter uncertainty can be important for characterizing and testing market efficiency.

Comparing Asset Pricing Models

Published: 3/31/2018,  Volume: 73,  Issue: 2  |  DOI: 10.1111/jofi.12607  |  Cited by: 425

FRANCISCO BARILLAS, JAY SHANKEN

A Bayesian asset pricing test is derived that is easily computed in closed form from the standard F ‐statistic. Given a set of candidate traded factors, we develop a related test procedure that permits the computation of model probabilities for the collection of all possible pricing models that are based on subsets of the given factors. We find that the recent models of Hou, Xue, and Zhang (2015a, 2015b) and Fama and French (2015, 2016) are dominated by a variety of models that include a momentum factor, along with value and profitability factors that are updated monthly.

Pricing Model Performance and the Two‐Pass Cross‐Sectional Regression Methodology

Published: 11/12/2013,  Volume: 68,  Issue: 6  |  DOI: 10.1111/jofi.12035  |  Cited by: 236

RAYMOND KAN, CESARE ROBOTTI, JAY SHANKEN

Over the years, many asset pricing studies have employed the sample cross‐sectional regression (CSR) R 2 as a measure of model performance. We derive the asymptotic distribution of this statistic and develop associated model comparison tests, taking into account the impact of model misspecification on the variability of the CSR estimates. We encounter several examples of large R 2 differences that are not statistically significant. A version of the intertemporal capital asset pricing model (CAPM) exhibits the best overall performance, followed by the Fama–French three‐factor model. Interestingly, the performance of prominent consumption CAPMs is sensitive to variations in experimental design.

Another Look at the Cross‐section of Expected Stock Returns

Published: 3/1995,  Volume: 50,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1995.tb05171.x  |  Cited by: 407

S. P. KOTHARI, JAY SHANKEN, RICHARD G. SLOAN

Our examination of the cross‐section of expected returns reveals economically and statistically significant compensation (about 6 to 9 percent per annum) for beta risk when betas are estimated from time‐series regressions of annual portfolio returns on the annual return on the equally weighted market index. The relation between book‐to‐market equity and returns is weaker and less consistent than that in Fama and French (1992). We conjecture that past book‐to‐market results using COMPUS‐TAT data are affected by a selection bias and provide indirect evidence.

The Long‐Run Performance of initial Public Offerings

Published: 3/1991,  Volume: 46,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1991.tb03743.x  |  Cited by: 1765

JAY R. RITTER

The underpricing of initial public offerings (IPOs) that has been widely documented appears to be a short‐run phenomenon. Issuing firms during 1975–84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three‐year anniversaries. There is substantial variation in the underperformance year‐to‐year and across industries, with companies that went public in high‐volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these “windows of opportunity.”

Signaling and the Valuation of Unseasoned New Issues: A Comment

Published: 9/1984,  Volume: 39,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1984.tb03907.x  |  Cited by: 112

JAY R. RITTER

EROSION OF THE PERSONAL INCOME TAX BASE IN CANADA AND THE UNITED STATES*

Published: 12/1960,  Volume: 15,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1960.tb02774.x  |  Cited by: 0

Irving Jay Goffman

Report of the Membership Chair

Published: 7/1997,  Volume: 52,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1997.tb02734.x  |  Cited by: 1

Jay R. Ritter

DETERMINANTS OF COMMON STOCK PRICES*

Published: 12/1966,  Volume: 21,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1966.tb00282.x  |  Cited by: 1

Martin Jay Gruber

The Buying and Selling Behavior of Individual Investors at the Turn of the Year

Published: 7/1988,  Volume: 43,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1988.tb04601.x  |  Cited by: 240

JAY R. RITTER

The average returns on low‐capitalization stocks are unusually high relative to those on large‐capitalization stocks in early January, a phenomenon known as the turn‐of‐the‐year effect. This paper finds that the ratio of stock purchases to sales by individual investors displays a seasonal pattern, with individuals having a below‐normal buy/sell ratio in late December and an above‐normal ratio in early January. Year‐to‐year variation in the early January buy/sell ratio explains forty‐six percent of the year‐to‐year variation in the turn‐of‐the‐year effect during 1971–1985.

A FINANCIAL SECTOR ANALYSIS OF THE EURODOLLAR MARKET

Published: 3/1974,  Volume: 29,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1974.tb00027.x  |  Cited by: 0

Jay H. Levin

The Operating Performance of Firms Conducting Seasoned Equity Offerings

Published: 12/1997,  Volume: 52,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1997.tb02743.x  |  Cited by: 747

TIM LOUGHRAN, JAY R. RITTER

Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run‐up in the year prior to the offering. This article documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then deteriorates. The multiples at the time of the offering, however, do not reflect an expectation of deteriorating performance. Issuing firms are disproportionately high‐growth firms, but issuers have much lower subsequent stock returns than nonissuers with the same growth rate.

Portfolio Rebalancing and the Turn‐of‐the‐Year Effect

Published: 3/1989,  Volume: 44,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1989.tb02409.x  |  Cited by: 74

JAY R. RITTER, NAVIN CHOPRA

This paper finds that, for the 1935–1986 period, the market's risk‐return relation does not have a January seasonal. The findings differ from those of other studies due to the use of value‐weighted, rather than equally weighted, portfolios. Inferences are sensitive to the weighting procedure because of the small‐firm return patterns in January. In particular, even in those Januaries for which the market return is negative, small‐firm returns are positive, and they are more positive the higher is beta. This is consistent with the portfolio rebalancing explanation of the turn‐of‐the‐year effect.

A Review of IPO Activity, Pricing, and Allocations

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/1540-6261.00478  |  Cited by: 1802

Jay R. Ritter, Ivo Welch

We review the theory and evidence on IPO activity: why firms go public, why they reward first‐day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from nonrational and agency conflict explanations. We describe some promising such alternatives.

The New Issues Puzzle

Published: 3/1995,  Volume: 50,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1995.tb05166.x  |  Cited by: 2549

TIM LOUGHRAN, JAY R. RITTER

Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long‐run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book‐to‐market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date.

Long‐Term Market Overreaction: The Effect of Low‐Priced Stocks

Published: 12/1996,  Volume: 51,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1996.tb05234.x  |  Cited by: 65

TIM LOUGHRAN, JAY R. RITTER

Conrad and Kaul (1993) report that most of De Bondt and Thaler's (1985) long‐term overreaction findings can be attributed to a combination of bid‐ask effects when monthly cumulative average returns (CARs) are used, and price, rather than prior returns. In direct tests, we find little difference in test‐period returns whether CARs or buy‐and‐hold returns are used, and that price has little predictive ability in cross‐sectional regressions. The difference in findings between this study and Conrad and Kaul's is primarily due to their statistical methodology. They confound cross‐sectional patterns and aggregate time‐series mean reversion, and introduce a survivor bias. Their procedures increase the influence of price at the expense of prior returns.

The Seven Percent Solution

Published: 6/2000,  Volume: 55,  Issue: 3  |  DOI: 10.1111/0022-1082.00242  |  Cited by: 559

Hsuan‐Chi Chen, Jay R. Ritter

Gross spreads received by underwriters on initial public offerings (IPOs) in the United States are much higher than in other countries. Furthermore, in recent years more than 90 percent of deals raising $20–80 million have spreads of exactly seven percent, three times the proportion of a decade earlier. Investment bankers readily admit that the IPO business is very profitable, and that they avoid competing on fees because they ‘don't want to turn it into a commodity business.’ We examine several features of the IPO underwriting business that result in a market structure where spreads are high.

Limited Attention and the Allocation of Effort in Securities Trading

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01420.x  |  Cited by: 208

SHANE A. CORWIN, JAY F. COUGHENOUR

While limited attention has been analyzed in a variety of economic and psychological settings, its impact on financial markets is not well understood. In this paper, we examine individual NYSE specialist portfolios and test whether liquidity provision is affected as specialists allocate their attention across stocks. Our results indicate that specialists allocate effort toward their most active stocks during periods of increased activity, resulting in less frequent price improvement and increased transaction costs for their remaining assigned stocks. Thus, the allocation of effort due to limited attention has a significant impact on liquidity provision in securities markets.

Institutional Investors and Executive Compensation

Published: 11/7/2003,  Volume: 58,  Issue: 6  |  DOI: 10.1046/j.1540-6261.2003.00608.x  |  Cited by: 1623

Jay C. Hartzell, Laura T. Starks

Abstract We find that institutional ownership concentration is positively related to the pay‐for‐performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences.

Liquidity Provision and the Organizational Form of NYSE Specialist Firms

Published: 4/2002,  Volume: 57,  Issue: 2  |  DOI: 10.1111/1540-6261.00444  |  Cited by: 34

Jay F. Coughenour, Daniel N. Deli

We examine the influence of NYSE specialist firm organizational form on the nature of liquidity provision. We compare closely held firms whose specialists provide liquidity with their own capital to widely held firms whose specialists provide liquidity with diffusely owned capital. We argue that specialists using their own capital have a greater incentive and ability to reduce adverse selection costs, but face a greater cost of capital. Differences in the proportion of spreads due to adverse selection costs, large trade frequency, the sensitivity between depth and spreads, and price stabilization support this argument.

Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements

Published: 7/16/2009,  Volume: 64,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2009.01475.x  |  Cited by: 189

STUART L. GILLAN, JAY C. HARTZELL, ROBERT PARRINO

We report evidence on the determinants of whether the relationship between a firm and its Chief Executive Officer (CEO) is governed by an explicit (written) or an implicit agreement. We find that fewer than half of the CEOs of S&P 500 firms have comprehensive explicit employment agreements. Consistent with contracting theory, explicit agreements are more likely to be observed and are likely to have a longer duration in situations in which the sustainability of the relationship is less certain and where the expected loss to the CEO is greater if the firm fails to honor the agreement.

The Cadbury Committee, Corporate Performance, and Top Management Turnover

Published: 2/2002,  Volume: 57,  Issue: 1  |  DOI: 10.1111/1540-6261.00428  |  Cited by: 366

Jay Dahya, John J. McConnell, Nickolaos G. Travlos

In 1992, the Cadbury Committee issued the Code of Best Practice which recommends that boards of U.K. corporations include at least three outside directors and that the positions of chairman and CEO be held by different individuals. The underlying presumption was that these recommendations would lead to improved board oversight. We empirically analyze the relationship between CEO turnover and corporate performance. CEO turnover increased following issuance of the Code; the negative relationship between CEO turnover and performance became stronger following the Code's issuance; and the increase in sensitivity of turnover to performance was concentrated among firms that adopted the Code.

On Enhancing Shareholder Control: A (Dodd‐) Frank Assessment of Proxy Access

Published: 7/13/2016,  Volume: 71,  Issue: 4  |  DOI: 10.1111/jofi.12402  |  Cited by: 79

JONATHAN B. COHN, STUART L. GILLAN, JAY C. HARTZELL

We use events related to a proxy access rule passed by the Securities and Exchange Commission in 2010 as natural experiments to study the valuation effects of changes in shareholder control. We find that valuations increase (decrease) following increases (decreases) in perceived control, especially for firms that are poorly performing, have shareholders likely to exercise control, and where acquiring a stake is relatively inexpensive. These results suggest that an increase in shareholder control from its current level would generally benefit shareholders. However, we find that the benefits of increased control are muted for firms with shareholders whose interests may deviate from value maximization.

The Quiet Period Goes out with a Bang

Published: 2/2003,  Volume: 58,  Issue: 1  |  DOI: 10.1111/1540-6261.00517  |  Cited by: 225

Daniel J. Bradley, Bradford D. Jordan, Jay R. Ritter

We examine the expiration of the IPO quiet period, which occurs after the 25th calendar day following the offering. For IPOs during 1996 to 2000, we find that analyst coverage is initiated immediately for 76 percent of these firms, almost always with a favorable rating. Initiated firms experience a five‐day abnormal return of 4.1 percent versus 0.1 percent for firms with no coverage. The abnormal returns are concentrated in the days just before the quiet period expires. Abnormal returns are much larger when coverage is initiated by multiple analysts. It does not matter whether a recommendation comes from the lead underwriter or not.

Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure

Published: 3/1995,  Volume: 50,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1995.tb05178.x  |  Cited by: 287

HENDRIK BESSEMBINDER, JAY F. COUGHENOUR, PAUL J. SEGUIN, MARGARET MONROE SMOLLER

We use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices. The empirical results indicate mean reversion in each market we examine. For agricultural commodities and crude oil the magnitude of the estimated mean reversion is large; for example, point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months. For metals, the degree of mean reversion is substantially less, but still statistically significant. We detect only weak evidence of mean reversion in financial asset prices.