The Journal of Finance

Presidential Address: Sustainable Finance and ESG Issues—Value versus Values

Published: 06/19/2023   |   DOI: 10.1111/jofi.13255

LAURA T. STARKS

In this address, I discuss differences across investor and manager motivations for considering sustainable finance—value versus values motivations—and how these differences contribute to misunderstandings about environmental, social, and governance investment approaches. The finance research community has the ability and responsibility to help clear up these misunderstandings through additional research, which I suggest.

Investment Management and Risk Sharing with Multiple Managers

Published: 06/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb02321.x

CHRISTOPHER B. BARRY, LAURA T. STARKS

This paper addresses the investor's decision to employ multiple managers for the management of investment funds. Under conditions such that specialization of managers and diversification among managers are not motives for the use of multiple managers, the paper shows that risk sharing considerations may be sufficient. A model is developed in which the decision to use multiple managers is explicitly treated, and conditions are studied such that an increase or decrease in the number of managers would be desirable. Under some conditions, a multiple manager solution is preferred over a single manager solution.

Institutions and Individuals at the Turn‐of‐the‐Year

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb01120.x

RICHARD W. SIAS, LAURA T. STARKS

This article evaluates the tax‐loss‐selling hypothesis against the window‐dressing hypothesis as explanations for turn‐of‐the‐year anomalies. We examine differences between securities dominated by individual investors versus those dominated by institutional investors and find that the effect is more pervasive in the former. Controlling for capitalization, we find that in early January (late December), stocks with greater individual investor interest outperform (underperform) stocks with greater institutional investor interest. These results hold for both stocks that previously appreciated in value and stocks that previously depreciated in value. The results are most consistent with the tax‐loss‐selling hypothesis as an explanation for the turn‐of‐the‐year effect.

Institutional Investors and Executive Compensation

Published: 11/07/2003   |   DOI: 10.1046/j.1540-6261.2003.00608.x

Jay C. Hartzell, Laura T. Starks

We find that institutional ownership concentration is positively related to the pay‐for‐performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences.

Tax‐Loss Selling and the January Effect: Evidence from Municipal Bond Closed‐End Funds

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2006.01011.x

LAURA T. STARKS, LI YONG, LU ZHENG

This paper provides direct evidence supporting the tax‐loss selling hypothesis as an explanation of the January effect. Examining turn‐of‐the‐year return and volume patterns for municipal bond closed‐end funds, which are held mostly by tax‐sensitive individual investors, we document a January effect for these funds, but not for their underlying assets. We provide evidence that this effect can be largely explained by tax‐loss selling activities at the previous year‐end. Moreover, we find that funds associated with brokerage firms display more tax‐loss selling behavior, suggesting that tax counseling plays a role.

Defined Contribution Pension Plans: Sticky or Discerning Money?

Published: 11/24/2014   |   DOI: 10.1111/jofi.12232

CLEMENS SIALM, LAURA T. STARKS, HANJIANG ZHANG

Participants in defined contribution (DC) retirement plans rarely adjust their portfolio allocations, suggesting that their investment choices and consequent money flows are sticky and not discerning. However, participants’ inertia could be offset by DC plan sponsors, who adjust the plan's investment options. We examine these countervailing influences on flows into U.S. mutual funds. We find that flows into funds from DC assets are more volatile and exhibit more performance sensitivity than non‐DC flows, primarily due to adjustments to the investment options by the plan sponsors. Thus, DC retirement money is less sticky and more discerning than non‐DC money.

Internal Monitoring Mechanisms and CEO Turnover: A Long‐Term Perspective

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00405

Mark R. Huson, Robert Parrino, Laura T. Starks

We report evidence on chief executive officer (CEO) turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance.

Behind the Scenes: The Corporate Governance Preferences of Institutional Investors

Published: 02/03/2016   |   DOI: 10.1111/jofi.12393

JOSEPH A. McCAHERY, ZACHARIAS SAUTNER, LAURA T. STARKS

We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories, we document widespread behind‐the‐scenes intervention as well as governance‐motivated exit. These governance mechanisms are viewed as complementary devices, with intervention typically occurring prior to a potential exit. We further find that long‐term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.

An Equilibrium Model of Asset Trading with Sequential Information Arrival

Published: 03/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb03540.x

ROBERT H. JENNINGS, LAURA T. STARKS, JOHN C. FELLINGHAM

In an effort to better understand the dynamic market price adjustment process, this paper develops a model which describes the impact of new information on a financial market. The primary emphasis is on the price change‐volume relationship in the presence of a margin requirement. We find that the margin requirement significantly affects the relation of price change to volume. Furthermore, this relationship is shown to be affected by the number of investors in the market, the degree of information dissemination, differences in interpretation of information and the implicit cost of the margin requirement.

Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry

Published: 03/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05203.x

KEITH C. BROWN, W. V. HARLOW, LAURA T. STARKS

We test the hypothesis that when their compensation is linked to relative performance, managers of investment portfolios likely to end up as “losers” will manipulate fund risk differently than those managing portfolios likely to be “winners.” An empirical investigation of the performance of 334 growth‐oriented mutual funds during 1976 to 1991 demonstrates that mid‐year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid‐year winners. Furthermore, we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time.