The Journal of Finance

Household Finance

Published: 8/2006,  Volume: 61,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2006.00883.x  |  Cited by: 2100

JOHN Y. CAMPBELL

The study of household finance is challenging because household behavior is difficult to measure, and households face constraints not captured by textbook models. Evidence on participation, diversification, and mortgage refinancing suggests that many households invest effectively, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations and avoid financial strategies for which they feel unqualified. Some financial products involve a cross‐subsidy from naive to sophisticated households, and this can inhibit welfare‐improving financial innovation.

A Defense of Traditional Hypotheses about the Term Structure of Interest Rates

Published: 3/1986,  Volume: 41,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1986.tb04498.x  |  Cited by: 92

JOHN Y. CAMPBELL

Expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. I present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity. Furthermore, I argue that differences among expectations theories are second‐order effects of bond yield variability. I develop an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes.

Asset Pricing at the Millennium

Published: 8/2000,  Volume: 55,  Issue: 4  |  DOI: 10.1111/0022-1082.00260  |  Cited by: 447

John Y. Campbell

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade‐off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor (SDF) that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas patterns of risk premia restrict its conditional volatility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross‐sectional patterns in stock returns have stimulated new research on optimal portfolio choice, intertemporal equilibrium models, and behavioral finance.

THE MANAGEMENT OF CORPORATE LIQUID ASSETS*

Published: 9/1963,  Volume: 18,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1963.tb02853.x  |  Cited by: 0

John Campbell Burton

What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns

Published: 3/1993,  Volume: 48,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1993.tb04700.x  |  Cited by: 370

JOHN Y. CAMPBELL, JOHN AMMER

This paper uses a vector autoregressive model to decompose excess stock and 10‐year bond returns into changes in expectations of future stock dividends, inflation, short‐term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short‐term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond returns.

Explaining the Poor Performance of Consumption‐based Asset Pricing Models

Published: 12/2000,  Volume: 55,  Issue: 6  |  DOI: 10.1111/0022-1082.00310  |  Cited by: 203

John Y. Campbell, John H. Cochrane

We show that the external habit‐formation model economy of Campbell and Cochrane (1999) can explain why the Capital Asset Pricing Model (CAPM) and its extensions are betterapproximate asset pricing models than is the standard onsumption‐based model. The model economy produces time‐varying expected eturns, tracked by the dividend–price ratio. Portfolio‐based models capture some of this variation in state variables, which a state‐independent function of consumption cannot capture. Therefore, though the consumption‐based model and CAPM are both perfect conditional asset pricing models, the portfolio‐based models are better approximate unconditional asset pricing models.

Predictable Stock Returns in the United States and Japan: A Study of Long‐Term Capital Market Integration

Published: 3/1992,  Volume: 47,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1992.tb03978.x  |  Cited by: 227

JOHN Y. CAMPBELL, YASUSHI HAMAO

This paper uses the predictability of monthly excess returns on U.S. and Japanese equity portfolios over the U.S. Treasury bill rate to study the integration of long‐term capital markets in these two countries. During the period 1971–1990 similar variables, including the dividend‐price ratio and interest rate variables, help to forecast excess returns in each country. In addition, in the 1980's U.S. variables help to forecast excess Japanese stock returns. There is some evidence of common movement in expected excess returns across the two countries, which is suggestive of integration of long‐term capital markets.

Equity Volatility and Corporate Bond Yields

Published: 11/7/2003,  Volume: 58,  Issue: 6  |  DOI: 10.1046/j.1540-6261.2003.00607.x  |  Cited by: 988

John Y. Campbell, Glen B. Taksler

AbstractThis paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm‐level volatility can explain as much cross‐sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields.

A Model of Mortgage Default

Published: 7/23/2015,  Volume: 70,  Issue: 4  |  DOI: 10.1111/jofi.12252  |  Cited by: 294

JOHN Y. CAMPBELL, JOÃO F. COCCO

In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero‐profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan‐to‐value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable‐rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.

Stock Prices, Earnings, and Expected Dividends

Published: 7/1988,  Volume: 43,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1988.tb04598.x  |  Cited by: 1906

JOHN Y. CAMPBELL, ROBERT J. SHILLER

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871–1986), a vector‐autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving‐average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present‐value model of stock prices and for recent results that long‐horizon stock returns are highly forecastable.

In Search of Distress Risk

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01416.x  |  Cited by: 1866

JOHN Y. CAMPBELL, JENS HILSCHER, JAN SZILAGYI

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small‐cap risk factors than stocks with low failure risk. These patterns are more pronounced for stocks with possible informational or arbitrage‐related frictions. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

Structuring Mortgages for Macroeconomic Stability

Published: 6/3/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13056  |  Cited by: 56

JOHN Y. CAMPBELL, NUNO CLARA, JOÃO F. COCCO

We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of borrowers and an infinitely lived risk‐averse representative lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable‐rate mortgage with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. The option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and enhances welfare. The cyclical properties of the contract are attractive to a risk‐averse lender so that the mortgage can be provided at a relatively low cost.

Who Owns What? A Factor Model for Direct Stockholding

Published: 3/27/2023,  Volume: 78,  Issue: 3  |  DOI: 10.1111/jofi.13220  |  Cited by: 55

VIMAL BALASUBRAMANIAM, JOHN Y. CAMPBELL, TARUN RAMADORAI, BENJAMIN RANISH

We build a cross‐sectional factor model for investors' direct stockholdings and estimate it using data from almost 10 million retail accounts in the Indian stock market. Our model identifies strong investor clienteles for stock characteristics, most notably firm age and share price, and for particular clusters of stock characteristics. These clienteles are intuitively associated with investor attributes such as account age, size, and diversification. Coheld stocks tend to have higher return covariance, inconsistent with simple models of diversification but suggestive that clientele demands influence stock returns.

Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk

Published: 2/2001,  Volume: 56,  Issue: 1  |  DOI: 10.1111/0022-1082.00318  |  Cited by: 1767

John Y. Campbell, Martin Lettau, Burton G. Malkiel, Yexiao Xu

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period from 1962 to 1997 there has been a noticeable increase in firm‐level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, whereas the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.

Global Currency Hedging

Published: 1/13/2010,  Volume: 65,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2009.01524.x  |  Cited by: 218

JOHN Y. CAMPBELL, KARINE SERFATY‐DE MEDEIROS, LUIS M. VICEIRA

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar), the euro, and the Swiss franc (particularly in the second half of the period) moved against world equity markets. Thus, these currencies should be attractive to risk‐minimizing global equity investors despite their low average returns. The risk‐minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk‐minimizing investors should adjust their currency positions in response to movements in interest differentials.

A MODEL OF THE MARKET FOR LINES OF CREDIT

Published: 3/1978,  Volume: 33,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1978.tb03401.x  |  Cited by: 41

Tim S. Campbell

Presidential Address: The Scientific Outlook in Financial Economics

Published: 8/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12530  |  Cited by: 446

CAMPBELL R. HARVEY

Given the competition for top journal space, there is an incentive to produce “significant” results. With the combination of unreported tests, lack of adjustment for multiple tests, and direct and indirect p‐hacking, many of the results being published will fail to hold up in the future. In addition, there are basic issues with the interpretation of statistical significance. Increasing thresholds may be necessary, but still may not be sufficient: if the effect being studied is rare, even t > 3 will produce a large number of false positives. Here I explore the meaning and limitations of a p‐value. I offer a simple alternative (the minimum Bayes factor). I present guidelines for a robust, transparent research culture in financial economics. Finally, I offer some thoughts on the importance of risk‐taking (from the perspective of authors and editors) to advance our field.SUMMARY Empirical research in financial economics relies too much on p‐values, which are poorly understood in the first place. Journals want to publish papers with positive results and this incentivizes researchers to engage in data mining and “p‐hacking.” The outcome will likely be an embarrassing number of false positives—effects that will not be repeated in the future. The minimum Bayes factor (which is a function of the p‐value) combined with prior odds provides a simple solution that can be reported alongside the usual p‐value. The Bayesianized p‐value answers the question: What is the probability that the null is true? The same technique can be used to answer: What threshold of t‐statistic do I need so that there is only a 5% chance that the null is true? The threshold depends on the economic plausibility of the hypothesis.

Report of the Editor of The Journal of Finance for the Year 2007

Published: 7/19/2008,  Volume: 63,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2008.01381.x  |  Cited by: 0

CAMPBELL R. HARVEY

Report of the Editor of The Journal of Finance for the Year 2008

Published: 7/16/2009,  Volume: 64,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2009.01485.x  |  Cited by: 0

CAMPBELL R. HARVEY

Report of the Editor of the Journal of Finance for the Year 2011

Published: 7/19/2012,  Volume: 67,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2012.01755.x  |  Cited by: 3

CAMPBELL R. HARVEY

TRUE PROPERTY TAX RATES IN THE UNITED STATES, 1922–49*

Published: 3/1953,  Volume: 8,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1953.tb01140.x  |  Cited by: 0

Colin D. Campbell

Report of the Editor of The Journal of Finance for the Year 2009

Published: 7/15/2010,  Volume: 65,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2010.01580.x  |  Cited by: 0

CAMPBELL R. HARVEY

Report of the Editor of The Journal of Finance for the Year 2006

Published: 8/2007,  Volume: 62,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2007.01264.x  |  Cited by: 0

CAMPBELL R. HARVEY

Report of the Editor of The Journal of Finance for the Year 2010

Published: 7/19/2011,  Volume: 66,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2011.01672.x  |  Cited by: 0

CAMPBELL R. HARVEY

RESTRICTIONS ON THE FORWARD EXCHANGE MARKET: IMPLICATIONS OF THE GOLD‐EXCHANGE STANDARD*

Published: 12/1968,  Volume: 23,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1968.tb00335.x  |  Cited by: 0

Eric Campbell Williams

The Demand for Life Insurance: An Application of the Economics of Uncertainty

Published: 12/1980,  Volume: 35,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1980.tb02201.x  |  Cited by: 110

RITCHIE A. CAMPBELL

Financial economists typically assume that capital income uncertainty, derived from investments in uncertain returned marketable securities, represents the major source of household consumption uncertainty. But, for many households, if not most, labor income uncertainty dominates capital income uncertainty.This study analyzes households optimal reactions to labor income (human capital) uncertainty that is derived from the possibility of their wage earners' non–survival. By introducing a risk resolution mechanism—an insurance market—and allowing for the possibility that future tastes may be state–dependent, simple demand–for–insurance equations are mathematically derived to explicitly describe households optimal responses to human capital uncertainty.

The World Price of Covariance Risk

Published: 3/1991,  Volume: 46,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1991.tb03747.x  |  Cited by: 532

CAMPBELL R. HARVEY

In a financially integrated global market, the conditionally expected return on a portfolio of securities from a particular country is determined by the country's world risk exposure. This paper measures the conditional risk of 17 countries. The reward per unit of risk is the world price of covariance risk. Although the tests provide evidence on the conditional mean variance efficiency of the benchmark portfolio, the results show that countries' risk exposures help explain differences in performance. Evidence is also presented which indicates that these risk exposures change through time and that the world price of covariance risk is not constant.

THE IMPACT OF COMPENSATING BALANCE REQUIREMENTS ON THE CASH BALANCES OF MANUFACTURING CORPORATIONS: AN EMPIRICAL STUDY*

Published: 3/1977,  Volume: 32,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1977.tb03239.x  |  Cited by: 4

Tim Campbell, Leland Brendsel

Time‐Varying World Market Integration

Published: 6/1995,  Volume: 50,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1995.tb04790.x  |  Cited by: 956

GEERT BEKAERT, CAMPBELL R. HARVEY

We propose a measure of capital market integration arising from a conditional regime‐switching model. Our measure allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. We find that a number of emerging markets exhibit time‐varying integration. Some markets appear more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets. While there is a perception that world capital markets have become more integrated, our country‐specific investigation suggests that this is not always the case.

Conditional Skewness in Asset Pricing Tests

Published: 6/2000,  Volume: 55,  Issue: 3  |  DOI: 10.1111/0022-1082.00247  |  Cited by: 2257

Campbell R. Harvey, Akhtar Siddique

If asset returns have systematic skewness, expected returns should include rewards for accepting this risk. We formalize this intuition with an asset pricing model that incorporates conditional skewness. Our results show that conditional skewness helps explain the cross‐sectional variation of expected returns across assets and is significant even when factors based on size and book‐to‐market are included. Systematic skewness is economically important and commands a risk premium, on average, of 3.60 percent per year. Our results suggest that the momentum effect is related to systematic skewness. The low expected return momentum portfolios have higher skewness than high expected return portfolios.

False (and Missed) Discoveries in Financial Economics

Published: 6/16/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12951  |  Cited by: 101

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.

Deposit Insurance in a Deregulated Environment

Published: 7/1984,  Volume: 39,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1984.tb03669.x  |  Cited by: 9

TIM S. CAMPBELL, DAVID GLENN

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: 38

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.

STOCK PRICE BEHAVIOR ON EX‐DIVIDEND DATES

Published: 12/1955,  Volume: 10,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1955.tb01295.x  |  Cited by: 58

James A. Campbell, William Beranek

Foreign Speculators and Emerging Equity Markets

Published: 4/2000,  Volume: 55,  Issue: 2  |  DOI: 10.1111/0022-1082.00220  |  Cited by: 1353

Geert Bekaert, Campbell R. Harvey

We propose a cross‐sectional time‐series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other economic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points.

Information Production, Market Signalling, and the Theory of Financial Intermediation: A Reply

Published: 9/1982,  Volume: 37,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1982.tb03602.x  |  Cited by: 3

TIM S. CAMPBELL, WILLIAM A. KRACAW

Seasonality and Consumption‐Based Asset Pricing

Published: 6/1992,  Volume: 47,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1992.tb04400.x  |  Cited by: 71

WAYNE E. FERSON, CAMPBELL R. HARVEY

Most of the evidence on consumption‐based asset pricing is based on seasonally adjusted consumption data. The consumption‐based models have not worked well for explaining asset returns, but with seasonally adjusted data there are reasons to expect spurious rejections of the models. This paper examines asset pricing models using not seasonally adjusted aggregate consumption data. We find evidence against models with time‐separable preferences, even when the models incorporate seasonality and allow seasonal heteroskedasticity. A model that uses not seasonally adjusted consumption data and nonseparable preferences with seasonal effects works better according to several criteria. The parameter estimates imply a form of seasonal habit persistence in aggregate consumption expenditures.

Conditioning Variables and the Cross Section of Stock Returns

Published: 8/1999,  Volume: 54,  Issue: 4  |  DOI: 10.1111/0022-1082.00148  |  Cited by: 640

Wayne E. Ferson, Campbell R. Harvey

Previous studies identify predetermined variables that predict stock and bond returns through time. This paper shows that loadings on the same variables provide significant cross‐sectional explanatory power for stock portfolio returns. The loadings are significant given the three factors advocated by Fama and French (1993) and the four factors of Elton, Gruber, and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The results carry implications for risk analysis, performance measurement, cost‐of‐capital calculations, and other applications.

The Determinants of Default on Insured Conventional Residential Mortgage Loans

Published: 12/1983,  Volume: 38,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1983.tb03841.x  |  Cited by: 172

TIM S. CAMPBELL, J. KIMBALL DIETRICH

This paper presents empirical evidence on the determinants of default for insured residential mortgages. A multinomial logit model is specified and estimated for regional aggregates constructed from cross sectional and time series data. The results document the independent statistical significance of contemporaneous payment/income and loan/ value ratios and unemployment rates as well as more commonly studied determinants of default such as age and the original loan/value ratio.

Corporate Risk Management and the Incentive Effects of Debt

Published: 12/1990,  Volume: 45,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1990.tb03736.x  |  Cited by: 69

TIM S. CAMPBELL, WILLIAM A. KRACAW

This paper demonstrates how the incentive of manager‐equityholders to substitute toward riskier assets, commonly referred to as the “asset substitution problem,” is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager‐equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager‐equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level.

A Comment on Bank Funding Risks, Risk Aversion, and the Choice of Futures Hedging Instrument

Published: 12/1990,  Volume: 45,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1990.tb03738.x  |  Cited by: 2

TIM S. CAMPBELL, WILLIAM A. KRACAW

S&P 100 Index Option Volatility

Published: 9/1991,  Volume: 46,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1991.tb04631.x  |  Cited by: 75

CAMPBELL R. HARVEY, ROBERT E. WHALEY

Using transaction data on the S&P 100 index options, we study the effect of valuation simplifications that are commonplace in previous research on the timeseries properties of implied market volatility. Using an American‐style algorithm that accounts for the discrete nature of the dividends on the S&P 100 index, we find that spurious negative serial correlation in implied volatility changes is induced by nonsimultaneously observing the option price and the index level. Negative serial correlation is also induced by a bid/ask price effect if a single option is used to estimate implied volatility. In addition, we find that these same effects induce spurious (and unreasonable) negative cross‐correlations between the changes in call and put implied volatility.

Tax Shields, Sample‐Selection Bias, and the Information Content of Conversion‐Forcing Bond Calls

Published: 9/1991,  Volume: 46,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1991.tb04619.x  |  Cited by: 42

CYNTHIA J. CAMPBELL, LOUIS H. EDERINGTON, PRASHANT VANKUDRE

The information content of conversion‐forcing bond calls depends on the after‐tax cash flow to bondholders. If the dividend after conversion exceeds the after‐tax coupon but is less than the before‐tax coupon, the call reveals unanticipated decreases in dividends and/or earnings that reduce the tax shield from interest payments. In contrast, a call when the dividend is less than the after‐tax coupon reveals the timing of an anticipated shift from exceptional firm‐specific positive growth to the industry norm. Efforts to document properties of convertible calls are subject to sample‐selection bias because calls are disproportionately associated with positive pre‐call firm‐specific growth.

Utility Bond Rates and Tax Normalization

Published: 12/1979,  Volume: 34,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1979.tb00066.x  |  Cited by: 0

ERNST R. BERNDT, KAREN CHANT SHARP, G. CAMPBELL WATKINS

Global Growth Opportunities and Market Integration

Published: 5/8/2007,  Volume: 62,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2007.01231.x  |  Cited by: 276

GEERT BEKAERT, CAMPBELL R. HARVEY, CHRISTIAN LUNDBLAD, STEPHAN SIEGEL

We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings (PE) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth.

Top‐Management Compensation and Capital Structure

Published: 7/1993,  Volume: 48,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1993.tb04026.x  |  Cited by: 407

TERESA A. JOHN, KOSE JOHN

The interrelationship between top‐management compensation and the design and mix of external claims issued by a firm is studied. The optimal managerial compensation structures depend on not only the agency relationship between shareholders and management, but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus. We analyze in detail the optimal management compensation for the cases when the external claims are (1) equity and risky debt, and (2) equity and convertible debt. In addition to the role of aligning managerial incentives with shareholder interests, managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt. The optimal management compensation derived has low pay‐performance sensitivity. With convertible debt, instead of straight debt, the corresponding optimal managerial compensation has high pay‐to‐performance sensitivity. A negative relationship between pay‐performance sensitivity and leverage is derived. Our results provide a reconciliation of the puzzling evidence of Jensen and Murphy (1990) with agency theory. Other testable implications include (1) a relationship between the risk premium in corporate bond yields and top‐management compensation structures, and (2) the announcement effect of adoption of executive stock option plans on bond prices. The model yields implications for management compensation in banks and Federal Deposit Insurance reform. Our results explain the dynamics of top‐management compensation in firms going through financial distress and reorganization.

Asset Writedowns: Managerial Incentives and Security Returns

Published: 7/1987,  Volume: 42,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1987.tb04574.x  |  Cited by: 239

JOHN S. STRONG, JOHN R. MEYER

Evaluating and Comparing Projects: Simple Detection of False Alarms

Published: 12/1979,  Volume: 34,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1979.tb00068.x  |  Cited by: 11

JOHN W. PRATT, JOHN S. HAMMOND

SECURITY PRICES, RISK, AND MAXIMAL GAINS FROM DIVERSIFICATION*

Published: 12/1965,  Volume: 20,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1965.tb02930.x  |  Cited by: 437

John Lintner

BANK RESERVE REQUIREMENTS AND HOW THEIR EFFECTIVENESS AS AN INSTRUMENT OF MONETARY CONTROL MAY BE ENHANCED*

Published: 3/1956,  Volume: 11,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1956.tb00690.x  |  Cited by: 0

John Livingston