The Journal of Finance

Investor Inattention and Friday Earnings Announcements

Published: 3/13/2009,  Volume: 64,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2009.01447.x  |  Cited by: 1465

STEFANO DELLAVIGNA, JOSHUA M. POLLET

Does limited attention among investors affect stock returns? We compare the response to earnings announcements on Friday, when investor inattention is more likely, to the response on other weekdays. If inattention influences stock prices, we should observe less immediate response and more drift for Friday announcements. Indeed, Friday announcements have a 15% lower immediate response and a 70% higher delayed response. A portfolio investing in differential Friday drift earns substantial abnormal returns. In addition, trading volume is 8% lower around Friday announcements. These findings support explanations of post‐earnings announcement drift based on underreaction to information caused by limited attention.

Capital Budgeting versus Market Timing: An Evaluation Using Demographics

Published: 1/11/2013,  Volume: 68,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2012.01799.x  |  Cited by: 18

STEFANO DELLAVIGNA, JOSHUA M. POLLET

Using demand shifts induced by demographics, we evaluate capital budgeting and market timing. Capital budgeting implies that industries anticipating positive demand shifts in the near future should issue more equity to finance greater capacity. To the extent that demand shifts in the distant future are not incorporated into equity prices, market timing implies that industries anticipating positive shifts in the distant future should issue less equity due to undervaluation. The evidence supports both theories: new listings and equity issuance respond positively to demand shifts during the next 5 years and negatively to demand shifts further in the future.

How Does Size Affect Mutual Fund Behavior?

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01417.x  |  Cited by: 328

JOSHUA M. POLLET, MUNGO WILSON

If actively managed mutual funds suffer from diminishing returns to scale, funds should alter investment behavior as assets under management increase. Although asset growth has little effect on the behavior of the typical fund, we find that large funds and small‐cap funds diversify their portfolios in response to growth. Greater diversification, especially for small‐cap funds, is associated with better performance. Fund family growth is related to the introduction of new funds that hold different stocks from their existing siblings. Funds with many siblings diversify less rapidly as they grow, suggesting that the fund family may influence a fund's portfolio strategy.

Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options

Published: 4/25/2022,  Volume: 77,  Issue: 3  |  DOI: 10.1111/jofi.13129  |  Cited by: 58

DMITRIY MURAVYEV, NEIL D. PEARSON, JOSHUA M. POLLET

Recent research argues that uncertainty about future stock borrowing fees hinders short‐selling, and this risk explains the performance of short strategies. One possible mechanism is that borrowing fee risk carries a risk premium. Since the present value of the uncertain borrowing fee is reflected in options prices, the difference between option‐implied and realized fees estimates this premium. We find that the risk premium is small. Moreover, if the risk premium is substantial, it should be reflected in the returns to short‐selling stock after adjusting for stock borrowing fees. However, borrowing fee risk does not predict fee‐adjusted returns.

Anomalies and Their Short‐Sale Costs

Published: 9/30/2025,  Volume: 80,  Issue: 6  |  DOI: 10.1111/jofi.13501  |  Cited by: 17

DMITRIY MURAVYEV, NEIL D. PEARSON, JOSHUA M. POLLET

Short‐sale costs eliminate the abnormal returns on asset pricing anomaly portfolios. While many anomalies persist out‐of‐sample before accounting for short‐sale costs, they cannot be exploited with long‐short strategies due to stock borrow fees. Using a comprehensive sample of 162 anomalies, the average long‐short portfolio return is a significant 0.14% per month before short‐sale costs, and the returns are due to the short leg. However, the average is −0.01% once returns are adjusted for borrow fees. Moreover, anomalies are not profitable even before fees if the high‐fee observations, representing 12% of stock dates, are excluded from the analysis.

Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans

Published: 1/20/2006,  Volume: 61,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2006.00829.x  |  Cited by: 674

JOSHUA D. RAUH

I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to DB pension plans, even when controlling for correlations between the pension funding status itself and the firm's unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.

Stock Returns and Volatility: Pricing the Short‐Run and Long‐Run Components of Market Risk

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01419.x  |  Cited by: 356

TOBIAS ADRIAN, JOSHUA ROSENBERG

We explore the cross‐sectional pricing of volatility risk by decomposing equity market volatility into short‐ and long‐run components. Our finding that prices of risk are negative and significant for both volatility components implies that investors pay for insurance against increases in volatility, even if those increases have little persistence. The short‐run component captures market skewness risk, which we interpret as a measure of the tightness of financial constraints. The long‐run component relates to business cycle risk. Furthermore, a three‐factor pricing model with the market return and the two volatility components compares favorably to benchmark models.

High‐Frequency Trading and Market Performance

Published: 2/8/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12882  |  Cited by: 143

MARKUS BALDAUF, JOSHUA MOLLNER

We study the consequences of, and potential policy responses to, high‐frequency trading (HFT) via the tradeoff between liquidity and information production. Faster speeds facilitate HFT, with consequences for this tradeoff: Information production decreases because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid‐ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book with one of two alternative mechanisms: delaying all orders except cancellations or implementing frequent batch auctions.

Option Mispricing around Nontrading Periods

Published: 1/16/2018,  Volume: 73,  Issue: 2  |  DOI: 10.1111/jofi.12603  |  Cited by: 35

CHRISTOPHER S. JONES, JOSHUA SHEMESH

We find that option returns are significantly lower over nontrading periods, the vast majority of which are weekends. Our evidence suggests that nontrading returns cannot be explained by risk, but rather are the result of widespread and highly persistent option mispricing driven by the incorrect treatment of stock return variance during periods of market closure. The size of the effect implies that the broad spectrum of finance research involving option prices should account for nontrading effects. Our study further suggests how alternative industry practices could improve the efficiency of option markets in a meaningful way.

Public Pension Promises: How Big Are They and What Are They Worth?

Published: 7/19/2011,  Volume: 66,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2011.01664.x  |  Cited by: 293

ROBERT NOVY‐MARX, JOSHUA RAUH

We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the value of liabilities is much larger. Using zero‐coupon Treasury yields, which are default‐free but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for salary growth and future service.

Expected Option Returns

Published: 6/2001,  Volume: 56,  Issue: 3  |  DOI: 10.1111/0022-1082.00352  |  Cited by: 640

Joshua D. Coval, Tyler Shumway

This paper examines expected option returns in the context of mainstream asset‐pricing theory. Under mild assumptions, expected call returns exceed those of the underlying security and increase with the strike price. Likewise, expected put returns are below the risk‐free rate and increase with the strike price. S&P index option returns consistently exhibit these characteristics. Under stronger assumptions, expected option returns vary linearly with option betas. However, zero‐beta, at‐the‐money straddle positions produce average losses of approximately three percent per week. This suggests that some additional factor, such as systematic stochastic volatility, is priced in option returns.

Is Sound Just Noise?

Published: 10/2001,  Volume: 56,  Issue: 5  |  DOI: 10.1111/0022-1082.00393  |  Cited by: 93

Joshua D. Coval, Tyler Shumway

We analyze the information content of the ambient noise level in the Chicago Board of Trade's 30‐year Treasury Bond futures trading pit. Controlling for a variety of other variables, including lagged price changes, trading volumes, and news announcements, we find that the sound level conveys information which is highly economically and statistically significant. Specifically, changes in the sound level forecast changes in the cost of transacting. Following a rise in the sound level, prices become more volatile, depth declines, and information asymmetry increases. Our results offer important implications for the future of open outcry and floor‐based trading mechanisms.

Do Behavioral Biases Affect Prices?

Published: 2/2005,  Volume: 60,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2005.00723.x  |  Cited by: 450

JOSHUA D. COVAL, TYLER SHUMWAY

This paper documents strong evidence for behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss‐averse, regularly assuming above‐average afternoon risk to recover from morning losses. This behavior has important short‐term consequences for afternoon prices, as losing traders actively purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, the market appears to distinguish these risk‐seeking trades from informed trading. Prices set by loss‐averse traders are reversed significantly more quickly than those set by unbiased traders.

Home Bias at Home: Local Equity Preference in Domestic Portfolios

Published: 12/1999,  Volume: 54,  Issue: 6  |  DOI: 10.1111/0022-1082.00181  |  Cited by: 2301

Joshua D. Coval, Tobias J. Moskowitz

The strong bias in favor of domestic securities is a well‐documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well‐documented asset pricing anomalies.

Autoregressive Modeling of Earnings‐Investment Causality

Published: 3/1987,  Volume: 42,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1987.tb02547.x  |  Cited by: 26

SASSON BAR‐YOSEF, JEFFREY L. CALLEN, JOSHUA LIVNAT

The purpose of this paper is to empirically test the relationships between corporate earnings and investment. In particular, the study investigates whether knowledge of past investments improves the prediction of future earnings beyond predictions that are based on past earnings alone. Similarly, it investigates whether knowledge of past earnings improves the prediction of future investments beyond knowledge of past investments alone. This is the empirical definition of Granger causality. The empirical results show that the bivariate past series of earnings and investments is superior to the univariate series in predicting future investments but not in predicting future earnings.

Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds

Published: 9/25/2018,  Volume: 73,  Issue: 5  |  DOI: 10.1111/jofi.12706  |  Cited by: 147

ALEKSANDAR ANDONOV, YAEL V. HOCHBERG, JOSHUA D. RAUH

Representation on pension fund boards by state officials—often determined by statute decades past—is negatively related to the performance of private equity investments made by the pension fund, despite state officials’ relatively strong financial education and experience. Their underperformance appears to be partly driven by poor investment decisions consistent with political expediency, and is also positively related to political contributions from the finance industry. Boards dominated by elected rank‐and‐file plan participants also underperform, but to a smaller extent and due to these trustees’ lesser financial experience.

Judging Fund Managers by the Company They Keep

Published: 5/3/2005,  Volume: 60,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2005.00756.x  |  Cited by: 251

RANDOLPH B. COHEN, JOSHUA D. COVAL, ĽUBOŠ PÁSTOR

We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which the manager's investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures use historical returns and holdings of many funds to evaluate the performance of a single fund. Simulations demonstrate that our measures are particularly useful in ranking managers. In an application that relies on such ranking, our measures reveal strong predictability in the returns of U.S. equity funds. Our measures provide information about future fund returns that is not contained in the standard measures.

Trading Against the Random Expiration of Private Information: A Natural Experiment

Published: 11/12/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12844  |  Cited by: 41

MOHAMMADREZA BOLANDNAZAR, ROBERT J. JACKSON, WEI JIANG, JOSHUA MITTS

For years, the Securities and Exchange Commission (SEC) accidentally distributed securities disclosures to some investors before the public. We exploit this setting, which is unique because the delay until public disclosure was exogenous and the private information window was well defined, to study informed trading with a random stopping time. Trading intensity and the pace at which prices incorporate information decrease with the expected delay until public release, but the relation between trading intensity and time elapsed varies with traders' learning process. Noise trading and relative information advantage play similar roles as in standard microstructure theories assuming a fixed time window.

Estimating the Gains from Trade in Limit‐Order Markets

Published: 12/2006,  Volume: 61,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2006.01004.x  |  Cited by: 106

BURTON HOLLIFIELD, ROBERT A. MILLER, PATRIK SANDÅS, JOSHUA SLIVE

We present a method to estimate the gains from trade in limit‐order markets and provide empirical evidence that the limit‐order market is a good market design. Using observations on order submissions and execution and cancellation histories, we estimate both the distribution of traders' unobserved valuations for the stock and latent trader arrival rates. We use the resulting estimates to compute the current gains from trade, the gains from trade in a perfectly liquid market, and the gains from trade with a monopoly liquidity supplier. The current gains are 90% of the maximum gains and 150% of the monopolist gains.