The Journal of Finance

The Investment Performance of Low‐grade Bond Funds

Published: 3/1991,  Volume: 46,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1991.tb03744.x  |  Cited by: 110

BRADFORD CORNELL, KEVIN GREEN

This study extends the literature on the pricing of low‐grade bonds by examining the performance of low‐grade bond funds. The findings reveal that over the long run low‐grade bond fund returns are approximately equal to the returns provided by an index of high‐grade bonds. The relative risks of high and low‐grade bonds are more difficult to assess. Because of their shorter durations, low‐grade bonds are less sensitive to movements in interest rates than high‐grade bonds. On the other hand, low‐grade bonds are much more sensitive to changes in stock prices than high‐grade bonds. When adjusted for risk using a simple two‐factor model, the returns on low‐grade bond funds are not statistically different from the returns on high‐grade bonds.

Report of the Editor of The Journal of Finance for the year 2000

Published: 8/2001,  Volume: 56,  Issue: 4  |  DOI: 10.1111/0022-1082.00382  |  Cited by: 0

Richard C. Green

Benchmark Portfolio Inefficiency and Deviations from the Security Market Line

Published: 6/1986,  Volume: 41,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1986.tb05037.x  |  Cited by: 23

RICHARD C. GREEN

This paper theoretically evaluates the robustness of the Security Market Line relationship when the market proxy employed is not mean‐variance efficient. The analysis focuses on the behavior of the “benchmark errors,” the deviations of assets and portfolios from the Security Market Line. First, we characterize how the location of an asset in mean‐variance space determines its benchmark error. Then the continuity properties of the benchmark errors are studied. The results indicate that the magnitudes of the errors exhibit continuous but not uniformly continuous behaviors. The relative rankings based on deviations from the Security Market Line, however, exhibit some severe discontinuities. In fact, these can be exactly reversed for two proxies arbitrarily close in mean‐variance space.

Positively Weighted Portfolios on the Minimum‐Variance Frontier

Published: 12/1986,  Volume: 41,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1986.tb02530.x  |  Cited by: 29

RICHARD C. GREEN

Duality theory is employed to provide necessary and sufficient conditions for portfolios on the minimum‐variance frontier to have positive investment proportions in all assets. These conditions involve the feasibility of portfolios that have non‐negative correlation with all assets and positive correlation with at least one. Using these results, several “qualitative” results concerning the signs of investment proportions in efficient portfolios are proved. It is argued that the conditions that ensure all‐positive weights in efficient portfolios are intuitively compelling and are not unique to the CAPM. With large numbers of assets, however, the signs of weights in minimum‐variance portfolios can be very sensitive to slight departures from these conditions due to, for example, sampling error.

Report of the Editor of The Journal of Finance for the Year 2001

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/1540-6261.00481  |  Cited by: 0

Richard C. Green

EVALUATING ADEQUACY OF BANK CAPITAL AN ANALYSIS OF THE PROBLEM*

Published: 9/1954,  Volume: 9,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1954.tb01239.x  |  Cited by: 0

Ralph Tillman Green

Report of the Editor of The Journal of Finance for the Year 2002

Published: 7/15/2003,  Volume: 58,  Issue: 4  |  DOI: 10.1111/1540-6261.00585  |  Cited by: 0

Presidential Address: Issuers, Underwriter Syndicates, and Aftermarket Transparency

Published: 8/2007,  Volume: 62,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2007.01250.x  |  Cited by: 52

RICHARD C. GREEN

I model strategic interaction among issuers, underwriters, retail investors, and institutional investors when the secondary market has limited price transparency. Search costs for retail investors lead to price dispersion in the secondary market, while the price for institutional investors is infinitely elastic. Because retail distribution capacity is assumed to be limited for each underwriter‐dealer, Bertrand competition breaks down in the primary market and new issues are underpriced in equilibrium. Syndicates emerge in which underwriters bid symmetrically, with quantities allocated internally to efficiently utilize retail distribution capacity.

Economic News and the Impact of Trading on Bond Prices

Published: 6/2004,  Volume: 59,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2004.00660.x  |  Cited by: 314

T. Clifton Green

This paper studies the impact of trading on government bond prices surrounding the release of macroeconomic news. The results show a significant increase in the informational role of trading following economic announcements, which suggests the release of public information increases the level of information asymmetry in the government bond market. The informational role of trading is greater after announcements with a larger initial price impact, and the relation is associated with the surprise component of the announcement and the precision of the public information. The results provide evidence that government bond order flow reveals fundamental information about riskless rates.

An Information‐Based Theory of Time‐Varying Liquidity

Published: 3/18/2016,  Volume: 71,  Issue: 2  |  DOI: 10.1111/jofi.12272  |  Cited by: 56

BRENDAN DALEY, BRETT GREEN

We propose an information‐based theory to explain time variation in liquidity and link it to a variety of patterns in asset markets. In “normal times,” the market is fully liquid and gains from trade are realized immediately. However, the equilibrium also involves periods during which liquidity “dries up,” which leads to endogenous liquidation costs. Traders correctly anticipate such costs, which reduces their willingness to pay. This foresight leads to a novel feedback effect between prices and market liquidity, which are jointly determined in equilibrium. The model also predicts that contagious sell‐offs can occur after sufficiently bad news.

INTEREST RATE EXPECTATIONS AND THE DEMAND FOR MONEY IN CANADA: COMMENT

Published: 3/1973,  Volume: 28,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1973.tb01364.x  |  Cited by: 0

Kevin Clinton

Market Risk and Model Risk for a Financial Institution Writing Options

Published: 8/1999,  Volume: 54,  Issue: 4  |  DOI: 10.1111/0022-1082.00152  |  Cited by: 177

T. Clifton Green, Stephen Figlewski

Derivatives valuation and risk management involve heavy use of quantitative models. To develop a quantitative assessment of model risk as it affects the basic option writing strategy that might be followed by a financial institution, we conduct an empirical simulation, with and without hedging, using data from 1976 to 1996. Results indicate that imperfect models and inaccurate volatility forecasts create sizable risk exposure for option writers. We consider to what extent the damage due to model risk can be limited by pricing options using a higher volatility than the best estimate from historical data.

The Structure and Incentive Effects of Corporate Tax Liabilities

Published: 9/1985,  Volume: 40,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1985.tb02365.x  |  Cited by: 43

RICHARD C. GREEN, ELI TALMOR

This paper describes situations in which tax liabilities assume the form of a negative position in a call option. This structure motivates an examination of the investment decisions of taxed corporations in the presence of risk. It is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger. These effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders, and under alternative assumptions about the tax code, and about the timing of investment and financing decisions.

Risk Aversion and Arbitrage

Published: 3/1985,  Volume: 40,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1985.tb04948.x  |  Cited by: 12

RICHARD C. GREEN, SANJAY SRIVASTAVA

This paper characterizes conditions under which asset returns and consumption are consistent with risk‐averse preferences. It is shown that risk aversion is equivalent to “zero arbitrage” on a transformation of the payoff space. The implicit state prices which are dual to this no‐arbitrage condition can be interpreted as prices of “pure consumption hedges.” This zero‐arbitrage restriction implies the usual restrictions associated with nonsatiation. The analysis holds in both complete and incomplete market settings.

When Will Mean‐Variance Efficient Portfolios Be Well Diversified?

Published: 12/1992,  Volume: 47,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1992.tb04683.x  |  Cited by: 200

RICHARD C. GREEN, BURTON HOLLIFIELD

We characterize the conditions under which efficient portfolios put small weights on individual assets. These conditions bound mean returns with measures of average absolute covariability between assets. The bounds clarify the relationship between linear asset pricing models and well‐diversified efficient portfolios. We argue that the extreme weightings in sample efficient portfolios are due to the dominance of a single factor in equity returns. This makes it easy to diversify on subsets to reduce residual risk, while weighting the subsets to reduce factor risk simultaneously. The latter involves taking extreme positions. This behavior seems unlikely to be attributable to sampling error.

The Allocation of Socially Responsible Capital

Published: 1/22/2025,  Volume: 80,  Issue: 2  |  DOI: 10.1111/jofi.13425  |  Cited by: 54

DANIEL GREEN, BENJAMIN N. ROTH

Portfolio allocation decisions increasingly incorporate social values. We develop a tractable framework to study how competition between investors to own socially valuable assets affects social welfare. Relative to the most common social‐investing strategies, we identify alternative strategies that result in higher impact and higher financial returns. We identify strategies for investors to have impact when impact is difficult to measure. From the firm's perspective, increasing profitability can have greater impact than directly increasing social value. We present new empirical evidence on the social preferences of investors that demonstrates the practical relevance of our theory.

Tax and Liquidity Effects in Pricing Government Bonds

Published: 10/1998,  Volume: 53,  Issue: 5  |  DOI: 10.1111/0022-1082.00064  |  Cited by: 124

Edwin J. Elton, T. Clifton Green

Daily data from interdealer government bond brokers are examined for tax and liquidity effects. We use two approaches to create cash flow matching portfolios of similar securities and look for pricing discrepancies associated with liquidity or tax effects. We also look for the presence of tax and liquidity effects by including a liquidity term when fitting a cubic spline to the after‐tax yield curve. We find evidence of tax timing options and liquidity effects. However, the effects are much smaller than previously reported and the effects of liquidity are primarily due to high volume bonds with long maturities.

Securitization, Ratings, and Credit Supply

Published: 12/20/2019,  Volume: 75,  Issue: 2  |  DOI: 10.1111/jofi.12866  |  Cited by: 52

BRENDAN DALEY, BRETT GREEN, VICTORIA VANASCO

We develop a framework to explore the effect of credit ratings on loan origination. We show that ratings endogenously shift the economy from asignalingequilibrium, in which banks inefficiently retain loans to signal quality, toward anoriginate‐to‐distributeequilibrium with zero retention and inefficiently low lending standards. Ratings increase overall efficiency, provided that the reduction in costly retention more than compensates for the origination of some negative net present value loans. We study how banks' ability to screen loans affects these predictions and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”

Are There Tax Effects in the Relative Pricing of U.S. Government Bonds?

Published: 6/1997,  Volume: 52,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1997.tb04815.x  |  Cited by: 55

RICHARD C. GREEN, BERNT A. ØDEGAARD

We investigate the impact of the Tax Reform Act of 1986 on the relative pricing of U.S. Treasury bonds. We obtain positive statistically and economically significant estimates for the implicit tax rates of a “representative” investor in the late 1970s and early 1980s. After the 1986 Tax Reform, the point estimates for the tax rate are close to zero. Tests for a regime shift associated with the 1986 Tax Reform support the hypothesis that this event largely eliminated tax effects from the term structure. We discuss both institutional and statutory explanations for this change.

Due Diligence

Published: 3/4/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13322  |  Cited by: 30

BRENDAN DALEY, THOMAS GEELEN, BRETT GREEN

We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the winning bidder (or “acquirer”) can gather information and chooses when to complete the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative results suggest that the magnitude of the distortion is economically significant. Nevertheless, allowing for due diligence can improve both total surplus and the seller's payoff compared to a setting without due diligence. We use our framework to explore the timing of due diligence, bidder heterogeneity, and breakup fees.

A Note on Unanticipated Money Growth and Interest Rate Surprises: Mishkin and Makin Revisited

Published: 9/1986,  Volume: 41,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1986.tb04561.x  |  Cited by: 2

KEVIN B. GRIER

Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets

Published: 12/1987,  Volume: 42,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1987.tb04358.x  |  Cited by: 45

ROBERT M. DAMMON, RICHARD C. GREEN

In models where both investors and securities are subject to differential taxation, there may be no set of prices that rule out infinite gains to trade, or “tax arbitrage.” This paper characterizes the joint restrictions on financial‐asset returns and investors' tax schedules that preclude tax arbitrage in the absence of short‐sale constraints. The authors show that, if there exists any configuration of marginal tax rates on investors' tax schedules that rule out infinite gains to trade, then “no‐tax‐arbitrage” prices will exist. They also show that the existence of “no‐tax‐arbitrage” prices ensures the existence of equilibrium prices.

Asset Pricing with Conditioning Information: A New Test

Published: 2/2003,  Volume: 58,  Issue: 1  |  DOI: 10.1111/1540-6261.00521  |  Cited by: 123

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.

Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?

Published: 9/21/2010,  Volume: 65,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2010.01590.x  |  Cited by: 127

RICHARD C. GREEN, DAN LI, NORMAN SCHÜRHOFF

We study price discovery in municipal bonds, an important OTC market. As in markets for consumer goods, prices “rise faster than they fall.” Round‐trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Further, effective half‐spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to Treasuries also adjust with asymmetric speed in rising and falling markets. Finally, intraday price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.

HOME MORTGAGE DELINQUENCIES: A COHORT ANALYSIS

Published: 12/1974,  Volume: 29,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1974.tb03135.x  |  Cited by: 17

George M. von Furstenberg, R. Jeffery Green

Financial Expertise as an Arms Race

Published: 9/12/2012,  Volume: 67,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2012.01771.x  |  Cited by: 108

VINCENT GLODE, RICHARD C. GREEN, RICHARD LOWERY

We show that firms intermediating trade have incentives to overinvest in financial expertise. In our model, expertise improves firms’ ability to estimate value when trading a security. Expertise creates asymmetric information, which, under normal circumstances, works to the advantage of the expert as it deters opportunistic bargaining by counterparties. This advantage is neutralized in equilibrium, however, by offsetting investments by competitors. Moreover, when volatility rises the adverse selection created by expertise triggers breakdowns in liquidity, destroying gains to trade and thus the benefits that firms hope to gain through high levels of expertise.

Joint Editorial

Published: 4/2002,  Volume: 57,  Issue: 2  |  DOI: 10.1111/1540-6261.00451  |  Cited by: 7

How Skilled Are Security Analysts?

Published: 2/20/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12890  |  Cited by: 57

ALAN CRANE, KEVIN CROTTY

The majority of security analysts are identified as skilled when the cross‐section of analyst performance is modeled as a mixture of multiple skill distributions. Analysts exhibit heterogeneous skill—some are high‐type, and some are low‐type. On average, the recommendation revisions of both types exhibit positive abnormal returns. The heterogeneity stems from differential ability to produce new information; all analysts can profitably process news. Top analysts outperform because more of their recommendations are influential (i.e., associated with statistically significant returns) and both their influential and noninfluential recommendations are more informative. A majority of research firms are also identified as skilled.

A REPLY

Published: 9/1970,  Volume: 25,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1970.tb00569.x  |  Cited by: 1

Roman L. Weil, Joel E. Segall, David Green

Optimal Investment, Growth Options, and Security Returns

Published: 10/1999,  Volume: 54,  Issue: 5  |  DOI: 10.1111/0022-1082.00161  |  Cited by: 1118

Jonathan B. Berk, Richard C. Green, Vasant Naik

As a consequence of optimal investment choices, a firm's assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm's systematic risk, and its expected return. Simulations show that the model simultaneously reproduces: (i) the time‐series relation between the book‐to‐market ratio and asset returns; (ii) the cross‐sectional relation between book‐to‐market, market value, and return; (iii) contrarian effects at short horizons; (iv) momentum effects at longer horizons; and (v) the inverse relation between interest rates and the market risk premium.

PREMIUMS ON CONVERTIBLE BONDS

Published: 6/1968,  Volume: 23,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1968.tb00819.x  |  Cited by: 10

Roman L. Weil, Joel E. Segall, David Green

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: 89

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.

Dividend Policy under Asymmetric Information

Published: 9/1985,  Volume: 40,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1985.tb02362.x  |  Cited by: 2119

MERTON H. MILLER, KEVIN ROCK

We extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the firm's managers to know more than outside investors about the true state of the firm's current earnings. The extension endogenizes the dividend (and financing) announcement effects amply documented in recent research. But once trading of shares is admitted to the model along with asymmetric information, the familiar Fisherian criterion for optimal investment becomes time inconsistent: the market's belief that the firm is following the Fisher rule creates incentives to violate the rule.We show that an informationally consistent signalling equilibrium exists under asymmetric information and the trading of shares that restores the time consistency of investment policy, but leads in general to lower levels of investment than the optimum achievable under full information and/or no trading. Contractual provisions that change the information asymmetry or the possibility of profiting from it could eliminate both the time inconsistency and the inefficiency in investment policies, but these contractual provisions too are likely to involve dead‐weight costs. Establishing which route or combination of routes serves in practice to maintain consistency remains for future research.

Real Options Models of the Firm, Capacity Overhang, and the Cross Section of Stock Returns

Published: 5/3/2018,  Volume: 73,  Issue: 3  |  DOI: 10.1111/jofi.12617  |  Cited by: 62

KEVIN ARETZ, PETER F. POPE

We use a stochastic frontier model to obtain a stock‐level estimate of the difference between a firm's installed production capacity and its optimal capacity. We show that this “capacity overhang” estimate relates significantly negatively to the cross section of stock returns, even when controlling for popular pricing factors. The negative relation persists among small and large stocks, stocks with more or less reversible investments, and in good and bad economic states. Capacity overhang helps explain momentum and profitability anomalies, but not value and investment anomalies. Our evidence supports real options models of the firm featuring valuable divestment options.

PREMIUMS ON CONVERTIBLE BONDS: REPLY

Published: 12/1972,  Volume: 27,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1972.tb03035.x  |  Cited by: 0

Roman L. Weil, Joel E. Segall, David O. Green

Attracting Early‐Stage Investors: Evidence from a Randomized Field Experiment

Published: 3/21/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12470  |  Cited by: 356

SHAI BERNSTEIN, ARTHUR KORTEWEG, KEVIN LAWS

This paper uses a randomized field experiment to identify which start‐up characteristics are most important to investors in early‐stage firms. The experiment randomizes investors’ information sets of fund‐raising start‐ups. The average investor responds strongly to information about the founding team, but not to firm traction or existing lead investors. We provide evidence that the team is not merely a signal of quality, and that investing based on team information is a rational strategy. Together, our results indicate that information about human assets is causally important for the funding of early‐stage firms and hence for entrepreneurial success.

IPO Pricing and Share Allocation: The Importance of Being Ignorant

Published: 1/10/2008,  Volume: 63,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01321.x  |  Cited by: 44

CÉLINE GONDAT‐LARRALDE, KEVIN R. JAMES

Since an underwriter sets an IPO's offer price without knowing its market value, investors can acquire information about its value and avoid overpriced deals (“lemon‐dodge”). To mitigate this well‐known risk, the bank enters into a repeat game with a coalition of investors who do not lemon‐dodge in exchange for on‐average underpriced shares. We (i) derive and test a quantitative IPO pricing rule (showing that tech IPOs were not excessively underpriced during the boom of the 1990s); and (ii) analyzing a unique multibank data set, find strong support for the conjecture that a bank preferentially allocates shares to its coalition.

The Effect of Money Shocks on Interest Rates in the Presence of Conditional Heteroskedasticity

Published: 9/1993,  Volume: 48,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1993.tb04761.x  |  Cited by: 19

KEVIN B. GRIER, MARK J. PERRY

Most current empirical work finds no evidence that money shocks lower interest rates. We show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates. Autoregressive conditional heteroskedasticity (ARCH) models find a significant liquidity effect where ordinary least squares (OLS) models do not. The existence of a liquidity effect is found using different models and sample periods when ARCH models are used in estimation, but never when OLS is employed.

Disclosing to Informed Traders

Published: 12/17/2023,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13296  |  Cited by: 16

SNEHAL BANERJEE, IVÁN MARINOVIC, KEVIN SMITH

We develop a model in which a firm's manager can voluntarily disclose to privately informed investors. In equilibrium, the manager only discloses sufficiently favorable news. If the manager is known to be informed but disclosure is costly, the probability of disclosure increases with market liquidity and the stock trades at a discount relative to expected cash flows. However, when investors are uncertain about whether the manager is informed, disclosure can decrease with market liquidity and the stock can trade at a premium relative to expected cash flows. Moreover, contrary to common intuition, public information can crowd in more voluntary disclosure.

Advance Refundings of Municipal Bonds

Published: 5/15/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12506  |  Cited by: 47

ANDREW ANG, RICHARD C. GREEN, FRANCIS A. LONGSTAFF, YUHANG XING

The advance refunding of debt is a widespread practice in municipal finance. In an advance refunding, municipalities retire callable bonds early and refund them with bonds with lower coupon rates. We find that 85% of all advance refundings occur at a net present value loss, and that the aggregate losses over the past 20 years exceed $15 billion. We explore why municipalities advance refund their debt at loss. Financially constrained municipalities may face pressure to advance refund since it allows them to reduce short‐term cash outflows. We find strong evidence that financial constraints are a major driver of advance refunding activity.

Testing the Expectations Hypothesis on the Term Structure of Volatilities in Foreign Exchange Options

Published: 6/1995,  Volume: 50,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1995.tb04794.x  |  Cited by: 61

JOSÉ MANUEL CAMPA, P. H. KEVIN CHANG

This article tests the expectations hypothesis in the term structure of volatilities in foreign exchange options. In particular, it addresses whether long‐dated volatility quotes are consistent with expected future short‐dated volatility quotes, assuming rational expectations. For options observed daily from December 1, 1989 to August 31, 1992 on dollar exchange rates against the pound, mark, yen, and Swiss franc, we are unable to reject the expectations hypothesis in the great majority of cases. The current spread between long‐ and short‐dated volatility rates proves to be a significant predictor of the direction of future short‐dated rates.

Feedback Effects and Systematic Risk Exposures

Published: 1/30/2025,  Volume: 80,  Issue: 2  |  DOI: 10.1111/jofi.13427  |  Cited by: 12

SNEHAL BANERJEE, BRADYN BREON‐DRISH, KEVIN SMITH

We model the “feedback effect” of a firm's stock price on investment in projects exposed to a systematic risk factor, like climate risk. The stock price reflects information about both the project's cash flows and its discount rate. A cash‐flow‐maximizing manager treats discount rate fluctuations as “noise,” but a price‐maximizing manager interprets such variation as information about the project's net present value. This difference qualitatively changes how investment behavior varies with the project's risk exposure. Moreover, traditional objectives (e.g., cash flow or price maximization) need not maximize welfare because they do not correctly account for hedging and risk‐sharing benefits of investment.

Access to Collateral and the Democratization of Credit: France's Reform of the Napoleonic Security Code

Published: 11/18/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12846  |  Cited by: 62

KEVIN ARETZ, MURILLO CAMPELLO, MARIA‐TERESA MARCHICA

France's Ordonnance 2006‐346 repudiated the notion of possessory ownership in the Napoleonic Code, easing the pledge of physical assets in a country where credit was highly concentrated. A differences‐test strategy shows that firms operating newly pledgeable assets significantly increased their borrowing following the reform. Small, young, and financially constrained businesses benefitted the most, observing improved credit access and real‐side outcomes. Start‐ups emerged with higher “at‐inception” leverage, located farther from large cities, with more assets‐in‐place than before. Their exit and bankruptcy rates declined. Spatial analyses show that the reform reached firms in rural areas, reducing credit access inequality across France's countryside.

Institutional Trading and Soft Dollars

Published: 2/2001,  Volume: 56,  Issue: 1  |  DOI: 10.1111/0022-1082.00331  |  Cited by: 119

Jennifer S. Conrad, Kevin M. Johnson, Sunil Wahal

Proprietary data allow us to distinguish between institutional investors' orders directed to soft‐dollar brokers and those directed to other types of brokers. We find that soft‐dollar brokers execute smaller orders in larger market value stocks. Allowing for differences in order characteristics, we estimate the incremental implicit cost of soft‐dollar execution at 29 (24) basis points for buyer‐ (seller‐) initiated orders. For large orders, incremental implicit costs are 41 (30) basis points for buys (sells). However, we document substantial variability in these estimates, and research services provided by soft‐dollar brokers may at least partially offset these costs.

The Effect of Risk on the Firm's Optimal Capital Stock: A Note

Published: 9/1983,  Volume: 38,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1983.tb02296.x  |  Cited by: 1

KEVIN J. MALONEY, WILLIAM J. MARSHALL, JESS B. YAWITZ

Compensation and Incentives: Practice vs. Theory

Published: 7/1988,  Volume: 43,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1988.tb04593.x  |  Cited by: 1316

GEORGE P. BAKER, MICHAEL C. JENSEN, KEVIN J. MURPHY

A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory—including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion‐based incentive systems, the absence of up‐front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic—focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.

Mandatory Portfolio Disclosure, Stock Liquidity, and Mutual Fund Performance

Published: 11/12/2015,  Volume: 70,  Issue: 6  |  DOI: 10.1111/jofi.12245  |  Cited by: 166

VIKAS AGARWAL, KEVIN A. MULLALLY, YUEHUA TANG, BAOZHONG YANG

We examine the impact of mandatory portfolio disclosure by mutual funds on stock liquidity and fund performance. We develop a model of informed trading with disclosure and test its predictions using the May 2004 SEC regulation requiring more frequent disclosure. Stocks with higher fund ownership, especially those held by more informed funds or subject to greater information asymmetry, experience larger increases in liquidity after the regulation change. More informed funds, especially those holding stocks with greater information asymmetry, experience greater performance deterioration after the regulation change. Overall, mandatory disclosure improves stock liquidity but imposes costs on informed investors.

Taxes, Default Risk, and Yield Spreads

Published: 9/1985,  Volume: 40,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1985.tb02367.x  |  Cited by: 35

JESS B. YAWITZ, KEVIN J. MALONEY, LOUIS H. EDERINGTON

This paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities. The tax loss consequences of default are recognized. Traditionally, tax‐free (municipal) bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk. While our model supports the linearity assumption, it implies that the slope and intercept are both functions of both the break‐even tax rate and the default probability(ies). Clientele effects among both municipal and taxable bonds are demonstrated. Finally, the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds.

Testing Disagreement Models

Published: 6/8/2022,  Volume: 77,  Issue: 4  |  DOI: 10.1111/jofi.13137  |  Cited by: 105

YEN‐CHENG CHANG, PEI‐JIE HSIAO, ALEXANDER LJUNGQVIST, KEVIN TSENG

We provide plausibly identified evidence for the role of investor disagreement in asset pricing. Our natural experiment exploits the staggered implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, which induces a reduction in investor disagreement. Consistent with models of investor disagreement, EDGAR inclusion helps resolve disagreement around information events, leading to stock price corrections. The reduction in disagreement following EDGAR inclusion also reduces stock price crash risk, especially among stocks with binding short‐sale constraints and high investor optimism.