Search results: 50.
The Illiquidity of Corporate Bonds
Published: 5/23/2011, Volume: 66, Issue: 3 | DOI: 10.1111/j.1540-6261.2011.01655.x | Cited by: 910
JACK BAO, JUN PAN, JIANG WANG
This paper examines the illiquidity of corporate bonds and its asset‐pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid–ask spreads. We establish a strong link between bond illiquidity and bond prices. In aggregate, changes in market‐level illiquidity explain a substantial part of the time variation in yield spreads of high‐rated (AAA through A) bonds, overshadowing the credit risk component. In the cross‐section, the bond‐level illiquidity measure explains individual bond yield spreads with large economic significance.
Noise as Information for Illiquidity
Published: 11/12/2013, Volume: 68, Issue: 6 | DOI: 10.1111/jofi.12083 | Cited by: 414
GRACE XING HU, JUN PAN, JIANG WANG
We propose a market‐wide liquidity measure by exploiting the connection between the amount of arbitrage capital in the market and observed “noise” in U.S. Treasury bonds—the shortage of arbitrage capital allows yields to deviate more freely from the curve, resulting in more noise in prices. Our noise measure captures episodes of liquidity crises of different origins across the financial market, providing information beyond existing liquidity proxies. Moreover, as a priced risk factor, it helps to explain cross‐sectional returns on hedge funds and currency carry trades, both known to be sensitive to the general liquidity conditions of the market.
Corporate Financing: An Artificial Agent‐based Analysis
Published: 5/6/2003, Volume: 58, Issue: 3 | DOI: 10.1111/1540-6261.00554 | Cited by: 35
Thomas H. Noe, Michael J. Rebello, Jun Wang
AbstractWe examine corporate security choice by simulating an economy populated by adaptive agents who learn about the structure of security returns and prices through experience. Through a process of evolutionary selection, each agent gravitates toward strategies that generate the highest payoffs. Despite the fact that markets are perfect and agents maximize value, a financing hierarchy emerges in which straight debt dominates other financing choices. Equity and convertible debt display significant underpricing. In general, the smaller the probability of loss to outside investors, the more likely the firm is to issue the security and the smaller the security's underpricing.
The Evolution of Security Designs
Published: 9/19/2006, Volume: 61, Issue: 5 | DOI: 10.1111/j.1540-6261.2006.01052.x | Cited by: 12
THOMAS H. NOE, MICHAEL J. REBELLO, JUN WANG
We consider a competitive and perfect financial market in which agents have heterogeneous cash flow valuations. Instead of assuming that agents are endowed with rational expectations, we model their behavior as the product of adaptive learning. Our results demonstrate that adaptive learning affects security design profoundly, with securities mispriced even in the long run and optimal designs trading off underpricing against intrinsic value maximization. The evolutionary dominant security design calls for issuing securities that engender large losses with a small but positive probability, but that otherwise produce stable payoffs, almost the exact opposite of the pure state claims that are optimal in the rational expectations framework.
Dynamic Asset Allocation with Event Risk
Published: 2/2003, Volume: 58, Issue: 1 | DOI: 10.1111/1540-6261.00523 | Cited by: 338
Jun Liu, Francis A. Longstaff, Jun Pan
Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event‐risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy‐and‐hold strategies. Jumps in prices and volatility both have important effects.
Venture Capital and Startup Agglomeration
Published: 4/2025, Volume: 80, Issue: 4 | DOI: 10.1111/jofi.13451 | Cited by: 22
JUN CHEN, MICHAEL EWENS
This paper examines venture capital's (VC) role in the geographic clustering of high‐growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one‐standard‐deviation increase in VCs' exposure to the rule led to a 20% decline in fund size and a 10% decrease in the likelihood of raising a follow‐on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship.
The SOE Premium and Government Support in China's Credit Market
Published: 8/14/2024, Volume: 79, Issue: 5 | DOI: 10.1111/jofi.13380 | Cited by: 126
ZHE GENG, JUN PAN
Studying China's credit market using a structural default model that integrates credit risk, liquidity, and bailout, we document improved price discovery and a deepening divide between state‐owned enterprises (SOEs) and non‐SOEs. Amidst liquidity deterioration, the presence of government bailout helps alleviate the heightened liquidity‐driven default, making SOE bonds more valuable and widening the SOE premium. Meanwhile, the increased importance of government support makes SOEs more sensitive to bailout, while the heightened default risk increases non‐SOEs' sensitivity to credit quality. Examining the real impact, we find severe performance deteriorations of non‐SOEs relative to SOEs, reversing the long‐standing trend of non‐SOEs outperforming SOEs.
How to Discount Cashflows with Time‐Varying Expected Returns
Published: 12/2004, Volume: 59, Issue: 6 | DOI: 10.1111/j.1540-6261.2004.00715.x | Cited by: 118
ANDREW ANG, JUN LIU
While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time‐varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk‐free rates, predictable risk premiums, and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analytic term structure of discount rates, with different discount rates applied to expected cashflows at different horizons. Using constant discount rates can produce large misvaluations, which, in portfolio data, are mostly driven at short horizons by market risk premiums and at long horizons by time variation in risk‐free rates and factor loadings.
How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans
Published: 11/28/2007, Volume: 62, Issue: 6 | DOI: 10.1111/j.1540-6261.2007.01293.x | Cited by: 952
JUN QIAN, PHILIP E. STRAHAN
Legal and institutional differences shape the ownership and terms of bank loans across the world. We show that under strong creditor protection, loans have more concentrated ownership, longer maturities, and lower interest rates. Moreover, the impact of creditor rights on loans depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment, with their ownership declining relative to domestic banks as creditor protection falls. Our multidimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.
Loan Terms and Collateral: Evidence from the Bilateral Repo Market
Published: 10/18/2022, Volume: 77, Issue: 6 | DOI: 10.1111/jofi.13184 | Cited by: 20
JUN KYUNG AUH, MATTIA LANDONI
We study secured lending contracts using a proprietary, loan‐level database of bilateral repurchase agreements containing groups of simultaneous loans backed by multiple tranches within a securitization. We show that lower‐quality loans (i.e., loans backed by lower‐rated collateral) have higher margins and spreads. We calibrate a model using collateral asset prices and find that lower‐quality loans are riskier despite the higher margins, yet cheaper for the borrower. This finding is consistent with a combination of lender optimism and reaching for yield. We also show that lower‐quality loans have longer maturity, consistent with models of rollover concerns with asymmetric information.
Default and Recovery Implicit in the Term Structure of Sovereign
CDS
Spreads
Published: 9/10/2008, Volume: 63, Issue: 5 | DOI: 10.1111/j.1540-6261.2008.01399.x | Cited by: 668
JUN PAN, KENNETH J. SINGLETON
This paper explores the nature of default arrival and recovery implicit in the term structures of sovereign
CDS
spreads. We argue that term structures of spreads reveal not only the arrival rates of credit events , but also the loss rates given credit events. Applying our framework to Mexico, Turkey, and Korea, we show that a single‐factor model with following a lognormal process captures most of the variation in the term structures of spreads. The risk premiums associated with unpredictable variation in are found to be economically significant and co‐vary importantly with several economic measures of global event risk, financial market volatility, and macroeconomic policy.
Number of Shareholders and Stock Prices: Evidence from Japan
Published: 6/1999, Volume: 54, Issue: 3 | DOI: 10.1111/0022-1082.00141 | Cited by: 157
Yakov Amihud, Haim Mendelson, Jun Uno
AbstractMerton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit—the number of shares in a “round lot”—which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders.
The Debt‐Equity Spread
Published: 6/9/2026, Volume: 81, Issue: 4 | DOI: 10.1111/jofi.70060 | Cited by: 1
HUI CHEN, ZHIYAO CHEN, JUN LI
We propose a measure of the valuation gap between debt and equity—debt‐equity spread (DES)—based on the difference between actual and equity‐implied credit spreads. DES predicts cross‐sectional stock and bond returns in opposite directions. This predictability is unique compared to existing mispricing measures and cannot be explained by exposures to various risk factors. High‐DES firms are more likely to issue equity and retire debt, and have more insider equity selling. These findings are consistent with DES capturing relative mispricing between debt and equity, and provide empirical support for the model of partially segmented markets in Greenwood, Hanson, and Liao (2018,
Review of Financial Studies
31, 3307–3343).
The Geography of Block Acquisitions
Published: 11/11/2008, Volume: 63, Issue: 6 | DOI: 10.1111/j.1540-6261.2008.01414.x | Cited by: 348
JUN‐KOO KANG, JIN‐MO KIM
Using a large sample of partial block acquisitions, we examine the importance of geographic proximity in corporate governance and target returns. We find that block acquirers have a strong preference for geographically proximate targets and acquirers that purchase shares in such targets are more likely to engage in post‐acquisition target governance activities than are remote block acquirers. Moreover, the targets of these acquirers realize higher announcement returns and better post‐acquisition operating performance than do targets of other types of acquirers, particularly when they face greater information asymmetries.
Operating Hedge and Gross Profitability Premium
Published: 9/27/2023, Volume: 78, Issue: 6 | DOI: 10.1111/jofi.13275 | Cited by: 31
LEONID KOGAN, JUN LI, HAROLD H. ZHANG
We show theoretically that variable production costs reduce systematic risk of firms' cash flows if capital and variable inputs are complementary in firms' production and input prices are procyclical. In our dynamic model, this operating hedge effect is weaker for more profitable firms, giving rise to a gross profitability premium. Moreover, gross profitability and value factors are distinct and negatively correlated, and their premia are not captured by the capital asset pricing model (CAPM). We estimate the model by simulated method of moments, and find that its main implications for stock returns and cash flow dynamics are quantitatively consistent with the data.
The Effect of Bank Relations on Investment Decisions: An Investigation of Japanese Takeover Bids
Published: 10/2000, Volume: 55, Issue: 5 | DOI: 10.1111/0022-1082.00284 | Cited by: 133
Jun‐Koo Kang, Anil Shivdasani, Takeshi Yamada
We study 154 domestic mergers in Japan during 1977 to 1993. In contrast to U.S. evidence, mergers are viewed favorably by investors of acquiring firms. We document a two‐day acquirer abnormal return of 1.2 percent and a mean cumulative abnormal return of 5.4 percent for the duration of the takeover. Announcement returns display a strong positive association with the strength of acquirer's relationships with banks. The benefits of bank relations appear to be greater for firms with poor investment opportunities and when the banking sector is healthy. We conclude that close ties with informed creditors, such as banks, facilitate investment policies that enhance shareholder wealth.
Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols
Published: 9/19/2006, Volume: 61, Issue: 5 | DOI: 10.1111/j.1540-6261.2006.01062.x | Cited by: 448
JAE‐SEUNG BAEK, JUN‐KOO KANG, INMOO LEE
We examine whether equity‐linked private securities offerings are used as a mechanism for tunneling among firms that belong to a Korean chaebol. We find that chaebol issuers involved in intragroup deals set the offering prices to benefit their controlling shareholders. We also find that chaebol issuers (member acquirers) realize an 8.8% (5.8%) higher (lower) announcement return than do other types of issuers (acquirers) if they sell private securities at a premium to other member firms, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. These results are consistent with tunneling within business groups.
Volatility Information Trading in the Option Market
Published: 5/9/2008, Volume: 63, Issue: 3 | DOI: 10.1111/j.1540-6261.2008.01352.x | Cited by: 236
SOPHIE X. NI, JUN PAN, ALLEN M. POTESHMAN
This paper investigates informed trading on stock volatility in the option market. We construct non‐market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40% as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.
The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending
Published: 7/23/2015, Volume: 70, Issue: 4 | DOI: 10.1111/jofi.12251 | Cited by: 179
JUN (QJ) QIAN, PHILIP E. STRAHAN, ZHISHU YANG
In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank's internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information production and use.
Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage‐Backed Securities
Published: 11/19/2012, Volume: 67, Issue: 6 | DOI: 10.1111/j.1540-6261.2012.01782.x | Cited by: 196
JIE (JACK) HE, JUN (QJ) QIAN, PHILIP E. STRAHAN
Initial yields on both AAA‐rated and non‐AAA rated mortgage‐backed security (MBS) tranches sold by large issuers are higher than yields on similar tranches sold by small issuers during the market boom years of 2004 to 2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004 to 2006. These results suggest that investors price the risk that large issuers received more inflated ratings than small issuers, especially during boom periods.
Tunneling or Value Added? Evidence from Mergers by Korean Business Groups
Published: 12/2002, Volume: 57, Issue: 6 | DOI: 10.1111/1540-6261.00510 | Cited by: 943
Kee‐Hong Bae, Jun‐Koo Kang, Jin‐Mo Kim
We examine whether firms belonging to Korean business groups (chaebols) benefit from acquisitions they make or whether such acquisitions provide a way for controlling shareholders to increase their wealth by increasing the value of other group firms (tunneling). We find that when a chaebol‐affiliated firm makes an acquisition, its stock price on average falls. While minority shareholders of a chaebol‐affiliated firm making an acquisition lose, the controlling shareholder of that firm on average benefits because the acquisition enhances the value of other firms in the group. This evidence is consistent with the tunneling hypothesis.
Discussion
Published: 8/2001, Volume: 56, Issue: 4 | DOI: 10.1111/0022-1082.00366 | Cited by: 4
Zhenyu Wang
Banks, Low Interest Rates, and Monetary Policy Transmission
Published: 3/9/2025, Volume: 80, Issue: 3 | DOI: 10.1111/jofi.13436 | Cited by: 31
OLIVIER WANG
I study how the secular decline in interest rates affects banks' intermediation spreads and credit supply. Following a permanent decrease in rates, bank lending may rise initially but contracts in the long run. As lower rates compress deposit spreads even well above the zero lower bound, banks' retained earnings, equity, and lending fall until loan spreads have risen enough to offset the reduction in deposit spreads. A higher inflation target can support bank lending at the cost of higher liquidity premia. I find support for the model's predictions in U.S. aggregate and bank‐level data.
Dissecting the Long‐Term Performance of the Chinese Stock Market
Published: 3/2024, Volume: 79, Issue: 2 | DOI: 10.1111/jofi.13312 | Cited by: 129
FRANKLIN ALLEN, JUN (QJ) QIAN, CHENYU SHAN, JULIE LEI ZHU
Domestically listed Chinese (A‐share) firms have lower stock returns than externally listed Chinese, developed, and emerging country firms during 2000 to 2018. They also have lower net cash flows than matched unlisted Chinese firms. The underperformance of both stock and accounting returns is more pronounced for large A‐share firms, while small firms show no underperformance along either dimension. Investor sentiment explains low stock returns in the cross‐country and within‐A‐share samples. Institutional deficiencies in listing and delisting processes and weak corporate governance in terms of shareholder value creation are consistent with the underperformance in stock returns and net cash flows.
Lender Automation and Racial Disparities in Credit Access
Published: 1/25/2024, Volume: 79, Issue: 2 | DOI: 10.1111/jofi.13303 | Cited by: 65
SABRINA T. HOWELL, THERESA KUCHLER, DAVID SNITKOF, JOHANNES STROEBEL, JUN WONG
Process automation reduces racial disparities in credit access by enabling smaller loans, broadening banks' geographic reach, and removing human biases from decision making. We document these findings in the context of the Paycheck Protection Program (PPP), where private lenders faced no credit risk but decided which firms to serve. Black‐owned firms obtained PPP loans primarily from automated fintech lenders, especially in areas with high racial animus. After traditional banks automated their loan processing procedures, their PPP lending to Black‐owned firms increased. Our findings cannot be fully explained by racial differences in loan application behaviors, preexisting banking relationships, firm performance, or fraud rates.
Robust Measures of Earnings Surprises
Published: 1/15/2019, Volume: 74, Issue: 2 | DOI: 10.1111/jofi.12746 | Cited by: 41
CHIN‐HAN CHIANG, WEI DAI, JIANQING FAN, HARRISON HONG, JUN TU
Event studies of market efficiency measure earnings surprises using the consensus error (
CE
), given as actual earnings minus the average professional forecast. If a subset of forecasts can be biased, the ideal but difficult to estimate parameter‐dependent alternative to
CE
is a nonlinear filter of individual errors that adjusts for bias. We show that
CE
is a poor parameter‐free approximation of this ideal measure. The fraction of misses on the same side (
FOM
), which discards the magnitude of misses, offers a far better approximation.
FOM
performs particularly well against
CE
in predicting the returns of U.S. stocks, where bias is potentially large.
Asset Pricing with Conditioning Information: A New Test
Published: 2/2003, Volume: 58, Issue: 1 | DOI: 10.1111/1540-6261.00521 | Cited by: 125
Kevin Q. Wang
This paper presents a new test of conditional versions of the Sharpe‐Lintner CAPM, the Jagannathan and Wang (1996) extension of the CAPM, and the Fama and French (1993) three‐factor model. The test is based on a general nonparametric methodology that avoids functional form misspecification of betas, risk premia, and the stochastic discount factor. Our results provide a novel view of empirical performance of these models. In particular, we find that a nonparametric version of the Fama and French model performs well, even when challenged by momentum portfolios.
Did Structured Credit Fuel the LBO Boom?
Published: 7/19/2011, Volume: 66, Issue: 4 | DOI: 10.1111/j.1540-6261.2011.01667.x | Cited by: 164
ANIL SHIVDASANI, YIHUI WANG
The leveraged buyout (LBO) boom of 2004 to 2007 was fueled by growth in collateralized debt obligations (CDOs) and other forms of securitization. Banks active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through structured credit markets did not lead to worse LBOs, overpayment, or riskier deal structures. Securitization markets altered banks' access to capital, affected their lending policies, and fueled the recent LBO boom.
Regulating Over‐the‐Counter Markets
Published: 5/30/2025, Volume: 80, Issue: 4 | DOI: 10.1111/jofi.13461 | Cited by: 6
TOMY LEE, CHAOJUN WANG
Over‐the‐counter (OTC) trading thrives despite competition from exchanges. We let OTC dealers cream skim from exchanges in an otherwise standard Glosten and Milgrom framework. Restricting the dealer's ability to cream skim induces “cheap substitution”: some traders exit while others with larger gains from trade enter. Cheap substitution implies trading costs, trade volumes, and market shares are poor policy indicators. In a benchmark case, restricting the dealer raises welfare only if trading cost increases, volume falls, and OTC market share is high. By contrast, the restriction improves welfare when adverse selection risk is low. A simple procedure implements the optimal Pigouvian tax.
Trading and Returns under Periodic Market Closures
Published: 2/2000, Volume: 55, Issue: 1 | DOI: 10.1111/0022-1082.00207 | Cited by: 144
Harrison Hong, Jiang Wang
This paper studies how market closures affect investors' trading policies and the resulting return‐generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U‐shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open‐to‐open returns than close‐to‐close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs.
A Note on the Asymptotic Covariance in Fama‐MacBeth Regression
Published: 4/1998, Volume: 53, Issue: 2 | DOI: 10.1111/0022-1082.334095 | Cited by: 8
Ravi Jagannathan, Zhenyu Wang
The Conditional CAPM and the Cross‐Section of Expected Returns
Published: 3/1996, Volume: 51, Issue: 1 | DOI: 10.1111/j.1540-6261.1996.tb05201.x | Cited by: 1159
RAVI JAGANNATHAN, ZHENYU WANG
Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the value‐weighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the cross‐section of average returns on stocks. We assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. We include the return on human capital when measuring the return on aggregate wealth. Our specification performs well in explaining the cross‐section of average returns.
Agency Conflicts, Investment, and Asset Pricing
Published: 1/10/2008, Volume: 63, Issue: 1 | DOI: 10.1111/j.1540-6261.2008.01309.x | Cited by: 196
RUI ALBUQUERUE, NENG WANG
The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's
q
, higher return volatility, larger risk premia, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.
The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment
Published: 11/17/2019, Volume: 75, Issue: 1 | DOI: 10.1111/jofi.12851 | Cited by: 214
CARY FRYDMAN, BAOLIAN WANG
We test whether the display of information causally affects investor behavior in a high‐stakes trading environment. Using investor‐level brokerage data from China and a natural experiment, we estimate the impact of a shock that increased the salience of a stock's purchase price but did not change the investor's information set. We employ a difference‐in‐differences approach and find that the salience shock causally increased the disposition effect by 17%. We use microdata to document substantial heterogeneity across investors in the treatment effect. A previously documented trading pattern, the “rank effect,” explains heterogeneity in the change in the disposition effect.
Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions
Published: 5/13/2023, Volume: 78, Issue: 4 | DOI: 10.1111/jofi.13235 | Cited by: 14
YI CHEN, ZHE WANG
We study the dynamic profit‐maximizing selling mechanism in a merger and acquisitions (M&A) environment with costly bidder entry and without entry fees. Depending on the parameters, the optimal mechanism is implemented by a standard auction or by a two‐stage procedure with exclusive offers to one bidder followed by an auction potentially favoring that bidder. The optimal mechanism may involve common deal protections like termination fees, asset lockups, or stock option lockups. Our proposed procedures resemble sales of targets filing Chapter 11 bankruptcy or M&A involving public targets, and they shed light on how to use deal protections in practice.
Does Corporate Headquarters Location Matter for Stock Returns?
Published: 8/2006, Volume: 61, Issue: 4 | DOI: 10.1111/j.1540-6261.2006.00895.x | Cited by: 724
CHRISTO PIRINSKY, QINGHAI WANG
We document strong comovement in the stock returns of firms headquartered in the same geographic area. Moreover, stocks of companies that change their headquarters location experience a decrease in their comovement with stocks from the old location and an increase in their comovement with stocks from the new location. The local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents. We argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents.
Model Misspecification and Underdiversification
Published: 11/7/2003, Volume: 58, Issue: 6 | DOI: 10.1046/j.1540-6261.2003.00612.x | Cited by: 382
Raman Uppal, Tan Wang
AbstractIn this paper, we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification. We develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio, but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks. We find that when the overall ambiguity about the joint distribution of returns is high, then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean‐variance portfolio.
Optimal CEO Compensation with Search: Theory and Empirical Evidence
Published: 9/10/2013, Volume: 68, Issue: 5 | DOI: 10.1111/jofi.12069 | Cited by: 38
MELANIE CAO, RONG WANG
We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay‐to‐performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay‐to‐performance sensitivity depends positively on a firm's idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.
Empirical Evaluation of Asset‐Pricing Models: A Comparison of the SDF and Beta Methods
Published: 10/2002, Volume: 57, Issue: 5 | DOI: 10.1111/1540-6261.00498 | Cited by: 92
Ravi Jagannathan, Zhenyu Wang
The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset‐pricing models. There have been concerns that, compared to the classical beta method, the generality of the SDF method comes at the cost of efficiency in parameter estimation and power in specification tests. We establish the correct framework for comparing the two methods and show that the SDF method is as efficient as the beta method for estimating risk premiums. Also, the specification test based on the SDF method is as powerful as the one based on the beta method.
Agency Conflicts, Investment, and Asset Pricing: Erratum
Published: 9/3/2015, Volume: 70, Issue: 5 | DOI: 10.1111/jofi.12307 | Cited by: 2
RUI ALBUQUERUE, NENG WANG
Lazy Investors, Discretionary Consumption, and the Cross‐Section of Stock Returns
Published: 8/2007, Volume: 62, Issue: 4 | DOI: 10.1111/j.1540-6261.2007.01253.x | Cited by: 269
RAVI JAGANNATHAN, YONG WANG
When consumption betas of stocks are computed using year‐over‐year consumption growth based upon the fourth quarter, the consumption‐based asset pricing model (CCAPM) explains the cross‐section of stock returns as well as the Fama and French (1993) three‐factor model. The CCAPM's performance deteriorates substantially when consumption growth is measured based upon other quarters. For the CCAPM to hold at any given point in time, investors must make their consumption and investment decisions simultaneously at that point in time. We suspect that this is more likely to happen during the fourth quarter, given investors' tax year ends in December.
Corporate Financial Policy and the Value of Cash
Published: 8/2006, Volume: 61, Issue: 4 | DOI: 10.1111/j.1540-6261.2006.00894.x | Cited by: 1262
MICHAEL FAULKENDER, RONG WANG
We examine the cross‐sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi‐quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.
On the Design of Contingent Capital with a Market Trigger
Published: 3/12/2015, Volume: 70, Issue: 2 | DOI: 10.1111/jofi.12134 | Cited by: 153
SURESH SUNDARESAN, ZHENYU WANG
Contingent capital (CC), which aims to internalize the costs of too‐big‐to‐fail in the capital structure of large banks, has been under intense debate by policy makers and academics. We show that CC with a market trigger, in which direct stakeholders are unable to choose optimal conversion policies, does not lead to a unique competitive equilibrium unless value transfer at conversion is not expected ex ante. The “no value transfer” restriction precludes penalizing bank managers for taking excessive risk. Multiplicity or absence of equilibrium introduces the potential for price uncertainty, market manipulation, inefficient capital allocation, and frequent conversion errors.
An Asymptotic Theory for Estimating Beta‐Pricing Models Using Cross‐Sectional Regression
Published: 8/1998, Volume: 53, Issue: 4 | DOI: 10.1111/0022-1082.00053 | Cited by: 259
Ravi Jagannathan, Zhenyu Wang
Without the assumption of conditional homoskedasticity, a general asymptotic distribution theory for the two‐stage cross‐sectional regression method shows that the standard errors produced by the Fama–MacBeth procedure do not necessarily overstate the precision of the risk premium estimates. When factors are misspecified, estimators for risk premiums can be biased, and the
t
‐value of a premium may converge to infinity in probability even when the true premium is zero. However, when a beta‐pricing model is misspecified, the
t
‐values for firm characteristics generally converge to infinity in probability, which supports the use of firm characteristics in cross‐sectional regressions for detecting model misspecification.
Idiosyncratic Consumption Risk and the Cross Section of Asset Returns
Published: 10/2004, Volume: 59, Issue: 5 | DOI: 10.1111/j.1540-6261.2004.00697.x | Cited by: 90
KRIS JACOBS, KEVIN Q. WANG
This paper investigates the importance of idiosyncratic consumption risk for the cross‐sectional variation in asset returns. We find that besides the rate of aggregate consumption growth, the cross‐sectional variance of consumption growth is also a priced factor. This suggests that consumers are not fully insured against idiosyncratic consumption risk, and that asset returns reflect their attempts to reduce their exposure to this risk. The resulting two‐factor consumption‐based asset pricing model significantly outperforms the CAPM, and its performance compares favorably with that of the Fama–French three‐factor model.
Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry
Published: 3/2024, Volume: 79, Issue: 3 | DOI: 10.1111/jofi.13321 | Cited by: 16
ALICE BONAIMÉ, YE (EMMA) WANG
Using novel data from the pharmaceutical industry, we study product prices and innovation around mergers. Exploiting within‐deal variation in product market consolidation, we show that prices increase more for drugs in consolidating markets than for matched control drugs. Estimates indicate a 2% average price effect that persists for about one year. Price increases expand with acquirer‐target product similarity and are more pronounced within less competitive product markets with fewer players and no generic competition. Examination of trade‐offs reveals these deals generate significant shareholder value. They also spur labeling and other manufacturing‐related innovation, but not the development of new drugs.
Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model
Published: 12/2006, Volume: 61, Issue: 6 | DOI: 10.1111/j.1540-6261.2006.01005.x | Cited by: 90
ANDREW W. LO, JIANG WANG
We derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. We show that investors trade in only two portfolios: the market portfolio, and a hedging portfolio that is used to hedge the risk of changing market conditions. We empirically identify the hedging portfolio using weekly volume and returns data for U.S. stocks, and then test two of its properties implied by the theory: Its return should be an additional risk factor in explaining the cross section of asset returns, and should also be the best predictor of future market returns.
Corporate Scandals and Household Stock Market Participation
Published: 11/10/2016, Volume: 71, Issue: 6 | DOI: 10.1111/jofi.12399 | Cited by: 395
MARIASSUNTA GIANNETTI, TRACY YUE WANG
We show that, after the revelation of corporate fraud in a state, household stock market participation in that state decreases. Households decrease holdings in fraudulent as well as nonfraudulent firms, even if they do not hold stocks in fraudulent firms. Within a state, households with more lifetime experience of corporate fraud hold less equity. Following the exogenous increase in fraud revelation due to Arthur Andersen's demise, states with more Arthur Andersen clients experience a larger decrease in stock market participation. We provide evidence that the documented effect is likely to reflect a loss of trust in the stock market.
Implementing Option Pricing Models When Asset Returns Are Predictable
Published: 3/1995, Volume: 50, Issue: 1 | DOI: 10.1111/j.1540-6261.1995.tb05168.x | Cited by: 159
ANDREW W. LO, JIANG WANG
The predictability of an asset's returns will affect the prices of options on that asset, even though predictability is typically induced by the drift, which does not enter the option pricing formula. For discretely‐sampled data, predictability is linked to the parameters that do enter the option pricing formula. We construct an adjustment for predictability to the Black‐Scholes formula and show that this adjustment can be important even for small levels of predictability, especially for longer maturity options. We propose several continuous‐time linear diffusion processes that can capture broader forms of predictability, and provide numerical examples that illustrate their importance for pricing options.
Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital
Published: 3/25/2019, Volume: 74, Issue: 3 | DOI: 10.1111/jofi.12761 | Cited by: 116
PATRICK BOLTON, NENG WANG, JINQIANG YANG
A risk‐averse entrepreneur with access to a profitable venture needs to raise funds from investors. She cannot indefinitely commit her human capital to the venture, which limits the firm's debt capacity, distorts investment and compensation, and constrains the entrepreneur's risk sharing. This puts dynamic liquidity and state‐contingent risk allocation at the center of corporate financial management. The firm balances mean‐variance investment efficiency and the preservation of financial slack. We show that in general the entrepreneur's net worth is overexposed to idiosyncratic risk and underexposed to systematic risk. These distortions are greater the closer the firm is to exhausting its debt capacity.