The Journal of Finance

Visibility Bias in the Transmission of Consumption Beliefs and Undersaving

Published: 4/4/2023,  Volume: 78,  Issue: 3  |  DOI: 10.1111/jofi.13223  |  Cited by: 16

BING HAN, DAVID HIRSHLEIFER, JOHAN WALDEN

We model visibility bias in the social transmission of consumption behavior. When consumption is more salient than nonconsumption, people perceive that others are consuming heavily, and infer that future prospects are favorable. This increases aggregate consumption in a positive feedback loop. A distinctive implication is that disclosure policy interventions can ameliorate undersaving. In contrast with wealth‐signaling models, information asymmetry about wealthreducesoverconsumption. The model predicts that saving is influenced by social connectedness, observation biases, and demographic structure, and provides new insight into savings rates. These predictions are distinct from other common models of consumption distortions.

Financial Flexibility, Bank Capital Flows, and Asset Prices

Published: 9/12/2012,  Volume: 67,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2012.01770.x  |  Cited by: 21

CHRISTINE A. PARLOUR, RICHARD STANTON, JOHAN WALDEN

In our parsimonious general‐equilibrium model of banking and asset pricing, intermediaries have the expertise to monitor and reallocate capital. We study financial development, intraeconomy capital flows, the size of the banking sector, the value of intermediation, expected market returns, and the risk of bank crashes. Asset pricing implications include: a market's dividend yield is related to its financial flexibility, and capital flows should be important in explaining expected returns and the risk of bank crashes. Our predictions are broadly consistent with the aggregate behavior of U.S. capital markets since 1950.

Payment System Externalities

Published: 2/21/2022,  Volume: 77,  Issue: 2  |  DOI: 10.1111/jofi.13110  |  Cited by: 32

CHRISTINE A. PARLOUR, UDAY RAJAN, JOHAN WALDEN

We examine how the payment processing role of banks affects their lending activity. In our model, banks operate in separate zones, and issue claims to entrepreneurs who purchase some inputs outside their own zone. Settling bank claims across zones incurs a cost. In equilibrium, a liquidity externality arises when zones are sufficiently different in their outsourcing propensities—a bank may restrict its own lending because it needs to hold liquidity against claims issued by another bank. Our work highlights that the disparate motives for interbank borrowing (investing in productive projects and managing liquidity) can have different effects on efficiency.

Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

Published: 7/12/2018,  Volume: 73,  Issue: 5  |  DOI: 10.1111/jofi.12691  |  Cited by: 287

JOHAN HOMBERT, ADRIEN MATRAY

We study whether R&D‐intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax‐induced changes to R&D costs. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained by R&D allowing firms to increase product differentiation. As a result, while firms in import‐competing industries cut capital expenditures and employment, R&D‐intensive firms downsize considerably less.

News Trading and Speed

Published: 1/14/2016,  Volume: 71,  Issue: 1  |  DOI: 10.1111/jofi.12302  |  Cited by: 295

THIERRY FOUCAULT, JOHAN HOMBERT, IOANID ROŞU

We compare the optimal trading strategy of an informed speculator when he can trade ahead of incoming news (is “fast”), versus when he cannot (is “slow”). We find that speed matters: the fast speculator's trades account for a larger fraction of trading volume, and are more correlated with short‐run price changes. Nevertheless, he realizes a large fraction of his profits from trading on long‐term price changes. The fast speculator's behavior matches evidence about high‐frequency traders. We predict that stocks with more informative news are more liquid even though they attract more activity from informed high‐frequency traders.

The Geography of Financial Misconduct

Published: 10/2018,  Volume: 73,  Issue: 5  |  DOI: 10.1111/jofi.12704  |  Cited by: 389

CHRISTOPHER A. PARSONS, JOHAN SULAEMAN, SHERIDAN TITMAN

Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of 3. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city‐level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city.

Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France

Published: 2/5/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12880  |  Cited by: 131

JOHAN HOMBERT, ANTOINETTE SCHOAR, DAVID SRAER, DAVID THESMAR

We evaluate the effect of downside insurance on self‐employment. We exploit a large‐scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one‐for‐one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.