The Journal of Finance

The Paradox of Financial Fire Sales: The Role of Arbitrage Capital in Determining Liquidity

Published: 11/16/2017,  Volume: 73,  Issue: 1  |  DOI: 10.1111/jofi.12584  |  Cited by: 38

JAMES DOW, JUNGSUK HAN

How can fire sales for financial assets happen when the economy contains well‐capitalized but nonspecialist investors? Our explanation combines rational expectations equilibrium and “lemons” models. When specialist (informed) market participants are liquidity‐constrained, prices become less informative. This creates an adverse selection problem, decreasing the supply of high‐quality assets, and lowering valuations by nonspecialist (uninformed) investors, who become unwilling to supply capital to support the price. In normal times, arbitrage capital can “multiply” itself by making uninformed capital function as informed capital, but in a crisis, this stabilizing mechanism fails.

A Horizon‐Based Decomposition of Mutual Fund Value Added Using Transactions

Published: 4/4/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13331  |  Cited by: 15

JULES VAN BINSBERGEN, JUNGSUK HAN, HONGXUN RUAN, RAN XING

We decompose mutual fund value added by the length of funds' holdings using transaction‐level data. We motivate our decomposition with a model featuring horizon‐specific investment ideas, where short‐term ideas are less scalable because the associated trades cannot be spread over time. Fund turnover correlates negatively with the horizon over which value is added and positively with price impact costs. As predicted, holdings of high‐turnover funds add a substantial amount of value in the first two weeks, of which more than 80% is earned on Federal Open Market Committee (FOMC) and earnings announcement days. Holdings of low‐turnover funds add value only over longer horizons.

Stochastic Volatilities and Correlations of Bond Yields

Published: 5/8/2007,  Volume: 62,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2007.01242.x  |  Cited by: 52

BING HAN

I develop an interest rate model with separate factors driving innovations in bond yields and their covariances. It features a flexible and tractable affine structure for bond covariances. Maximum likelihood estimation of the model with panel data on swaptions and discount bonds implies pricing errors for swaptions that are almost always lower than half of the bid–ask spread. Furthermore, market prices of interest rate caps do not deviate significantly from their no‐arbitrage values implied by the swaptions under the model. These findings support the conjectures of Collin‐Dufresne and Goldstein (2003), Dai and Singleton (2003), and Jagnnathan, Kaplin, and Sun (2003).

DISCUSSION

Published: 6/1978,  Volume: 33,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1978.tb00767.x  |  Cited by: 0

E. Han Kim

A MEAN‐VARIANCE THEORY OF OPTIMAL CAPITAL STRUCTURE AND CORPORATE DEBT CAPACITY

Published: 3/1978,  Volume: 33,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1978.tb03388.x  |  Cited by: 191

E. Han Kim

DISCUSSION

Published: 5/1982,  Volume: 37,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1982.tb00890.x  |  Cited by: 0

E. HAN KIM

Miller's Equilibrium, Shareholder Leverage Clienteles, and Optimal Capital Structure

Published: 5/1982,  Volume: 37,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1982.tb03552.x  |  Cited by: 38

E. HAN KIM

To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation

Published: 5/3/2005,  Volume: 60,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2005.00767.x  |  Cited by: 1080

ART DURNEV, E. HAN KIM

Data on corporate governance and disclosure practices reveal wide within‐country variation that decreases with the strength of investors' legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm‐level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor‐friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices.

Financial Contracting and Leverage Induced Over‐ and Under‐Investment Incentives

Published: 7/1990,  Volume: 45,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1990.tb05105.x  |  Cited by: 90

ELAZAR BERKOVITCH, E. HAN KIM

This paper investigates the effects of seniority rules and restrictive dividend convenants on the over‐ and under‐investment incentives associated with risky debt. We show that increasing seniority of new debt decreases the incidence of under‐investment but increases over‐investment, and vice versa. Under symmetric information, the optimal seniority rule is to give new debtholders first claim on a new project without recourse to existing assets (i.e., project financing). Under asymmetric information, the optimal debt contract requires equating the expected return to new debtholders in the default state to the new project's cash flow in the same rate. If this is not possible, the optimal seniority rule calls for strict subordination of new debt if the expected cash flow in default is small and full seniority if it is large. With regard to dividend convenants, we show that their effect depends on whether or not dividend payments are conditioned on future investments. When they are unconditioned, allowing more dividends increases the under‐investment incentive. In contrast, conditional dividends decrease the underinvestment incentive and increase the over‐investment incentive.

Labor and Corporate Governance: International Evidence from Restructuring Decisions

Published: 1/23/2009,  Volume: 64,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01436.x  |  Cited by: 306

JULIAN ATANASSOV, E. HAN KIM

Our results highlight the importance of interaction among management, labor, and investors in shaping corporate governance. We find that strong union laws protect not only workers but also underperforming managers. Weak investor protection combined with strong union laws are conducive to worker–management alliances, wherein poorly performing firms sell assets to prevent large‐scale layoffs, garnering worker support to retain management. Asset sales in weak investor protection countries lead to further deteriorating performance, whereas in strong investor protection countries they improve performance and lead to more layoffs. Strong union laws are less effective in preventing layoffs when financial leverage is high.

The Impact of Merger Bids on the Participating Firms' Security Holders

Published: 12/1982,  Volume: 37,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1982.tb03613.x  |  Cited by: 118

PAUL ASQUITH, E. HAN KIM

This paper investigates whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. Monthly and daily bond and stock returns are calculated relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results show that while the stockholders of target firms gain from a merger bid, no other securityholders either gain or lose. To provide direct evidence on the existence of “diversification effects” and “incentive effects,” we test whether the bondholders' returns are dependent upon the correlation between the returns of the merging firms and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. The results are consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.

Broad‐Based Employee Stock Ownership: Motives and Outcomes

Published: 5/8/2014,  Volume: 69,  Issue: 3  |  DOI: 10.1111/jofi.12150  |  Cited by: 278

E. HAN KIM, PAIGE OUIMET

Firms initiating broad‐based employee share ownership plans often claim employee stock ownership plans (ESOPs) increase productivity by improving employee incentives. Do they? Small ESOPs comprising less than 5% of shares, granted by firms with moderate employee size, increase the economic pie, benefiting both employees and shareholders. The effects are weaker when there are too many employees to mitigate free‐riding. Although some large ESOPs increase productivity and employee compensation, the average impacts are small because they are often implemented for nonincentive purposes such as conserving cash by substituting wages with employee shares or forming a worker‐management alliance to thwart takeover bids.

Sentiment Trading and Hedge Fund Returns

Published: 4/29/2021,  Volume: 76,  Issue: 4  |  DOI: 10.1111/jofi.13025  |  Cited by: 62

YONG CHEN, BING HAN, JING PAN

In the presence of sentiment fluctuations, arbitrageurs may engage in different strategies leading to dispersed sentiment exposures. We find that hedge funds in the top decile ranked by sentiment beta outperform those in the bottom decile by 0.59% per month on a risk‐adjusted basis, with the spread being larger among skilled funds. We also find that about 10% of hedge funds have sentiment timing skill that positively correlates with fund sentiment beta and contributes to fund performance. Our findings show that skilled hedge funds can earn high returns by predicting and exploiting sentiment changes rather than betting against mispricing.

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: 14

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.

Corporate Taxes and Securitization

Published: 5/11/2015,  Volume: 70,  Issue: 3  |  DOI: 10.1111/jofi.12157  |  Cited by: 73

JOONGHO HAN, KWANGWOO PARK, GEORGE PENNACCHI

Most banks pay corporate income taxes, but securitization vehicles do not. Our model shows that, when a bank faces strong loan demand but limited deposit market power, this tax asymmetry creates an incentive to sell loans despite less‐efficient screening and monitoring of sold loans. Moreover, loan‐selling increases as a bank's corporate income tax rate and capital requirement rise. Our empirical tests show that U.S. commercial banks sell more of their mortgages when they operate in states that impose higher corporate income taxes. A policy implication is that tax‐induced loan‐selling will rise if banks’ required equity capital increases.

Theories of Corporate Debt Policy: A Synthesis

Published: 5/1979,  Volume: 34,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1979.tb02098.x  |  Cited by: 56

ANDREW H. CHEN, E. HAN KIM

CORPORATE MERGERS AND THE CO‐INSURANCE OF CORPORATE DEBT

Published: 5/1977,  Volume: 32,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1977.tb03275.x  |  Cited by: 111

E. Han Kim, John J. McConnell

The U.S. Treasury Buyback Auctions: The Cost of Retiring Illiquid Bonds

Published: 11/28/2007,  Volume: 62,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2007.01289.x  |  Cited by: 37

BING HAN, FRANCIS A. LONGSTAFF, CRAIG MERRILL

We study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its illiquid off‐the‐run debt. The Treasury was successful in buying back large amounts of illiquid debt while suffering only a small market‐impact cost. The Treasury included the most‐illiquid bonds more frequently in the auctions, but tended to buy back the least‐illiquid of these bonds. Although the Treasury had the option to cherry pick from among the bonds offered, we find that the Treasury was actually penalized for being spread too thinly in the buybacks.

CEO Connectedness and Corporate Fraud

Published: 5/11/2015,  Volume: 70,  Issue: 3  |  DOI: 10.1111/jofi.12243  |  Cited by: 624

VIKRAMADITYA KHANNA, E. HAN KIM, YAO LU

We find that connections CEOs develop with top executives and directors through their appointment decisions increase the risk of corporate fraud. Appointment‐based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases the expected costs of fraud by helping conceal fraudulent activity, making CEO dismissal less likely upon discovery, and lowering the coordination costs of carrying out illegal activity. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on fraud. Appointment‐based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.

On the Existence of an Optimal Capital Structure: Theory and Evidence

Published: 7/1984,  Volume: 39,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1984.tb03680.x  |  Cited by: 1415

MICHAEL BRADLEY, GREGG A. JARRELL, E. HAN KIM

Time‐Series Variation in Dividend Pricing

Published: 12/1994,  Volume: 49,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1994.tb04775.x  |  Cited by: 38

KENNETH M. EADES, PATRICK J. HESS, E. HAN KIM

Ex‐dividend day returns vary over time. The ex‐day returns of high‐yield stocks are persistently positive for some time periods and negative for others; in contrast, ex‐day returns of low‐yield stocks are always positive and less variable. We are unable to explain the variation with changes in the tax code, but we do find a strong effect for the introduction of negotiated commissions. We find evidence that corporate dividend capturing is affecting ex‐day returns and confirm the findings of Gordon and Bradford (1980) that the price of dividends is countercyclical.

CAPITAL STRUCTURE REARRANGEMENTS AND ME‐FIRST RULES IN AN EFFICIENT CAPITAL MARKET

Published: 6/1977,  Volume: 32,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1977.tb01989.x  |  Cited by: 37

E. Han Kim, John J. McConnell, Paul R. Greenwood

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.