The Journal of Finance

The Geography of Block Acquisitions

Published: 11/11/2008,  Volume: 63,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2008.01414.x  |  Cited by: 346

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.

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: 444

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.

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: 936

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.

TOWARD A WORLD PAYMENTS SYSTEM: A REVIEW ARTICLE

Published: 3/1967,  Volume: 22,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1967.tb01654.x  |  Cited by: 0

Anthony Y. C. Koo

Bailout Stigma

Published: 8/23/2024,  Volume: 79,  Issue: 5  |  DOI: 10.1111/jofi.13386  |  Cited by: 5

YEON‐KOO CHE, CHONGWOO CHOE, KEEYOUNG RHEE

We develop a model of bailout stigma in which accepting a bailout signals a firm's balance‐sheet weakness and reduces its funding prospects. To avoid stigma, high‐quality firms withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short‐lived stimulation followed by a market freeze even worse than if there were no bailout. The latter revives the funding market, albeit with delay, to the level achievable without any stigma and implements a constrained optimal outcome. A menu of multiple bailout programs compounds bailout stigma and exacerbates the market freeze.

Liquidity Premia and Transaction Costs

Published: 9/4/2007,  Volume: 62,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2007.01277.x  |  Cited by: 139

BONG‐GYU JANG, HYENG KEUN KOO, HONG LIU, MARK LOEWENSTEIN

Standard literature concludes that transaction costs only have a second‐order effect on liquidity premia. We show that this conclusion depends crucially on the assumption of a constant investment opportunity set. In a regime‐switching model in which the investment opportunity set varies over time, we explicitly characterize the optimal consumption and investment strategy. In contrast to the standard literature, we find that transaction costs can have a first‐order effect on liquidity premia. However, with reasonably calibrated parameters, the presence of transaction costs still cannot fully explain the equity premium puzzle.

Dynamic Asset Allocation with Event Risk

Published: 2/2003,  Volume: 58,  Issue: 1  |  DOI: 10.1111/1540-6261.00523  |  Cited by: 336

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.

Inflation Risk in Corporate Bonds

Published: 1/19/2015,  Volume: 70,  Issue: 1  |  DOI: 10.1111/jofi.12195  |  Cited by: 109

JOHNNY KANG, CAROLIN E. PFLUEGER

We argue that corporate bond yields reflect fears of debt deflation. When debt is nominal, unexpectedly low inflation increases real liabilities and default risk. In a real business cycle model with optimal but infrequent capital structure choice, more uncertain or procyclical inflation leads to quantitatively important increases in corporate log yields in excess of default‐free log yields. A panel of credit spread indexes from six developed countries shows that credit spreads rise by 14 basis points if inflation volatility or the inflation‐stock correlation increases by one standard deviation.

Stock Market Declines and Liquidity

Published: 1/13/2010,  Volume: 65,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2009.01529.x  |  Cited by: 501

ALLAUDEEN HAMEED, WENJIN KANG, S. VISWANATHAN

Consistent with recent theoretical models where binding capital constraints lead to sudden liquidity dry‐ups, we find that negative market returns decrease stock liquidity, especially during times of tightness in the funding market. The asymmetric effect of changes in aggregate asset values on liquidity and commonality in liquidity cannot be fully explained by changes in demand for liquidity or volatility effects. We document interindustry spillover effects in liquidity, which are likely to arise from capital constraints in the market making sector. We also find economically significant returns to supplying liquidity following periods of large drops in market valuations.

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: 111

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.

Venture Capital and Startup Agglomeration

Published: 4/2025,  Volume: 80,  Issue: 4  |  DOI: 10.1111/jofi.13451  |  Cited by: 20

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.

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: 117

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.

A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets

Published: 11/12/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12845  |  Cited by: 186

WENJIN KANG, K. GEERT ROUWENHORST, KE TANG

This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short‐term position changes are driven mainly by the liquidity demands of noncommercial traders, while long‐term variation is driven primarily by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance.

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.

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: 940

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.

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: 661

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: 0

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 Illiquidity of Corporate Bonds

Published: 5/23/2011,  Volume: 66,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2011.01655.x  |  Cited by: 901

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.

Operating Hedge and Gross Profitability Premium

Published: 9/27/2023,  Volume: 78,  Issue: 6  |  DOI: 10.1111/jofi.13275  |  Cited by: 30

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.

Noise as Information for Illiquidity

Published: 11/12/2013,  Volume: 68,  Issue: 6  |  DOI: 10.1111/jofi.12083  |  Cited by: 408

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.

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: 177

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.

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.

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: 234

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 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.

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: 194

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.

Dissecting the Long‐Term Performance of the Chinese Stock Market

Published: 3/2024,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13312  |  Cited by: 126

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: 61

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.