The Journal of Finance

Is COVID Revealing a Virus in CMBS 2.0?

Published: 03/30/2023   |   DOI: 10.1111/jofi.13228

JOHN M. GRIFFIN, ALEX PRIEST

Commercial loan valuations crucially depend on accurate loan income, but underwritten income on commercial mortgage‐backed securities (CMBS) loans is commonly overstated relative to actual property income. Consistent with these differences being originator‐specific, income overstatement in CMBS 2.0 deals varies widely and persistently across originators, is priced by originators, is related across property types within an originator, is predictable ex ante, and is accompanied by inflation of past financials. Risk retention and associated regulation had no discernible effect on income overstatement. Originator income overstatement is highly predictive of pre‐ and COVID‐period loan distress. Overall, recent market stresses reveal large systemic differences in underwriting standards across originators.

Is Bitcoin Really Untethered?

Published: 06/15/2020   |   DOI: 10.1111/jofi.12903

JOHN M. GRIFFIN, AMIN SHAMS

This paper investigates whether Tether, a digital currency pegged to the U.S. dollar, influenced Bitcoin and other cryptocurrency prices during the 2017 boom. Using algorithms to analyze blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month‐ends. Rather than demand from cash investors, these patterns are most consistent with the supply‐based hypothesis of unbacked digital money inflating cryptocurrency prices.

Did Subjectivity Play a Role in CDO Credit Ratings?

Published: 07/19/2012   |   DOI: 10.1111/j.1540-6261.2012.01748.x

JOHN M. GRIFFIN, DRAGON YONGJUN TANG

Analyzing 916 collateralized debt obligations (CDOs), we find that a top credit rating agency frequently made positive adjustments beyond its main model that amounted to increasingly larger AAA tranche sizes. These adjustments are difficult to explain by likely determinants, but exhibit a clear pattern: CDOs with smaller model‐implied AAA sizes receive larger adjustments. CDOs with larger adjustments experience more severe subsequent downgrading. Additionally, prior to April 2007, 91.2% of AAA‐rated CDOs only comply with the credit rating agency's own AA default rate standard. Accounting for adjustments and the criterion deviation indicates that on average AAA tranches were structured to BBB support levels.

Book‐to‐Market Equity, Distress Risk, and Stock Returns

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00497

John M. Griffin, Michael L. Lemmon

This paper examines the relationship between book‐to‐market equity, distress risk, and stock returns. Among firms with the highest distress risk as proxied by Ohlson's (1980) O‐score, the difference in returns between high and low book‐to market securities is more than twice as large as that in other firms. This large return differential cannot be explained by the three‐factor model or by differences in economic fundamentals. Consistent with mispricing arguments, firms with high distress risk exhibit the largest return reversals around earnings announcements, and the book‐to‐market effect is largest in small firms with low analyst coverage.

Do Municipal Bond Dealers Give Their Customers “Fair and Reasonable” Pricing?

Published: 02/07/2023   |   DOI: 10.1111/jofi.13214

JOHN M. GRIFFIN, NICHOLAS HIRSCHEY, SAMUEL KRUGER

Municipal bonds exhibit considerable retail pricing variation, even for same‐size trades of the same bond on the same day, and even from the same dealer. Markups vary widely across dealers. Trading strongly clusters on eighth price increments, and clustered trades exhibit higher markups. Yields are often lowered to just above salient numbers. Machine learning estimates exploiting the richness of the data show that dealers that use strategic pricing have systematically higher markups. Recent Municipal Securities Rulemaking Board rules have had only a limited impact on markups. While a subset of dealers focus on best execution, many dealers appear focused on opportunistic pricing.

Did FinTech Lenders Facilitate PPP Fraud?

Published: 02/07/2023   |   DOI: 10.1111/jofi.13209

JOHN M. GRIFFIN, SAMUEL KRUGER, PRATEEK MAHAJAN

In the $793 billion Paycheck Protection Program, we examine metrics related to potential misreporting including nonregistered businesses, multiple businesses at residential addresses, abnormally high implied compensation per employee, and large inconsistencies with jobs reported in another government program. These measures consistently concentrate in certain FinTech lenders and are cross‐verified by seven additional measures. FinTech market share increased significantly over time, and suspicious lending by FinTechs in 2021 is four times the level at the start of the program. Suspicious loans are being overwhelmingly forgiven at rates similar to other loans.

The Dynamics of Institutional and Individual Trading

Published: 11/07/2003   |   DOI: 10.1046/j.1540-6261.2003.00606.x

John M. Griffin, Jeffrey H. Harris, Selim Topaloglu

We study the daily and intradaily cross‐sectional relation between stock returns and the trading of institutional and individual investors in Nasdaq 100 securities. Based on the previous day's stock return, the top performing decile of securities is 23.9% more likely to be bought in net by institutions (and sold by individuals) than those in the bottom performance decile. Strong contemporaneous daily patterns can largely be explained by net institutional (individual) trading positively (negatively) following past intradaily excess stock returns (or the news associated therein). In comparison, evidence of return predictability and price pressure are economically small.

Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole

Published: 11/07/2003   |   DOI: 10.1046/j.1540-6261.2003.00614.x

John M. Griffin, Xiuqing Ji, J. Spencer Martin

We examine whether macroeconomic risk can explain momentum profits internationally. Neither an unconditional model based on the Chen, Roll, and Ross (1986) factors nor a conditional forecasting model based on lagged instruments provides any evidence that macroeconomic risk variables can explain momentum. In addition, momentum profits around the world are economically large and statistically reliable in both good and bad economic states. Further, these momentum profits reverse over 1‐ to 5‐year horizons, an action inconsistent with existing risk‐based explanations of momentum.

Who Drove and Burst the Tech Bubble?

Published: 07/19/2011   |   DOI: 10.1111/j.1540-6261.2011.01663.x

JOHN M. GRIFFIN, JEFFREY H. HARRIS, TAO SHU, SELIM TOPALOGLU

From 1997 to March 2000, as technology stocks rose more than five‐fold, institutions bought more new technology supply than individuals. Among institutions, hedge funds were the most aggressive investors, but independent investment advisors and mutual funds (net of flows) actively invested the most capital in the technology sector. The technology stock reversal in March 2000 was accompanied by a broad sell‐off from institutional investors but accelerated buying by individuals, particularly discount brokerage clients. Overall, our evidence supports the bubble model of Abreu and Brunnermeier (2003), in which rational arbitrageurs fail to trade against bubbles until a coordinated selling effort occurs.