The Journal of Finance

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: 354

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.

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

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

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.

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.

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.

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: 2115

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.

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.

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.

Compensation and Incentives: Practice vs. Theory

Published: 7/1988,  Volume: 43,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1988.tb04593.x  |  Cited by: 1308

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.

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

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.