Search results: 50.
A New Look at the Monday Effect
Published: 12/1997, Volume: 52, Issue: 5 | DOI: 10.1111/j.1540-6261.1997.tb02757.x | Cited by: 154
KO WANG, YUMING LI, JOHN ERICKSON
It is well documented that expected stock returns vary with the day‐of‐the‐week (the Monday or weekend effect). In this article we show that the well‐known Monday effect occurs primarily in the last two weeks (fourth and fifth weeks) of the month. In addition, the mean Monday return of the first three weeks of the month is not significantly different from zero. This result holds for most of the subperiods during the 1962–1993 sampling period and for various stock return indexes. The monthly effect reported by Ariel (1987) and Lakonishok and Smidt (1988) cannot fully explain this phenomenon.
Hedge Funds and Chapter 11
Published: 3/27/2012, Volume: 67, Issue: 2 | DOI: 10.1111/j.1540-6261.2012.01724.x | Cited by: 168
WEI JIANG, KAI LI, WEI WANG
This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter's loss of exclusive rights to file reorganization plans, CEO turnover, and adoptions of key employee retention plan, while their effect on secured creditors manifests in higher probabilities of emergence and payoffs to junior claims.
Reference‐Dependent Preferences and Sentiment‐Driven Asset Prices
Published: 8/22/2026, Volume: , Issue: | DOI: 10.1111/jofi.70079 | Cited by: 1
JESS BENHABIB, ZHAORUI LI, XUEWEN LIU, PENGFEI WANG
This paper studies asset pricing under expectations‐based reference‐dependent preferences in a general equilibrium framework. We show that reference‐dependent preferences can generate self‐fulfilling risk panics, producing sentiment‐driven asset price fluctuations through a feedback loop between current prices and perceived future downside risk—dynamics impossible under standard expected utility. The model helps explain empirical puzzles including (i) excess volatility, (ii) asymmetric volatility, (iii) asymmetric sentiment over the business cycle, (iv) excess asset price comovement, and (v) weak correlations between stock returns and economic fundamentals, alongside a sizable equity premium. Additional empirical evidence based on closed‐end fund discounts and quantitative analysis support the theory.
Attention Spillover in Asset Pricing
Published: 10/13/2023, Volume: 78, Issue: 6 | DOI: 10.1111/jofi.13281 | Cited by: 42
XIN CHEN, LI AN, ZHENGWEI WANG, JIANFENG YU
Exploiting a screen display feature whereby the order of stock display is determined by the stock's listing code, we lever a novel identification strategy and study how the interaction between overconfidence and limited attention affect asset pricing. We find that stocks displayed next to those with higher returns in the past two weeks are associated with higher returns in the future week, which are reverted in the long run. This is consistent with our conjectures that investors tend to trade more after positive investment experience and are more likely to pay attention to neighboring stocks, both confirmed using trading data.
Dynamic Banking and the Value of Deposits
Published: 4/23/2025, Volume: 80, Issue: 4 | DOI: 10.1111/jofi.13454 | Cited by: 18
PATRICK BOLTON, YE LI, NENG WANG, JINQIANG YANG
We propose a theory of banking in which banks cannot perfectly control deposit flows. Facing uninsurable loan and deposit shocks, banks dynamically manage lending, wholesale funding, deposits, and equity. Deposits create value by lowering funding costs. However, when the bank is undercapitalized and at risk of breaching leverage requirements, the marginal value of deposits can turn negative as deposit inflows, by raising leverage, increase the likelihood of costly equity issuance. Banks' inability to fully control leverage distinguishes them from nondepository intermediaries. Our model suggests a reevaluation of leverage regulations and offers new perspectives on banking in a low‐interest‐rate environment.
Retail Derivatives and Sentiment: A Sentiment Measure Constructed from Issuances of Retail Structured Equity Products
Published: 6/8/2023, Volume: 78, Issue: 4 | DOI: 10.1111/jofi.13253 | Cited by: 9
BRIAN J. HENDERSON, NEIL D. PEARSON, LI WANG
We use retail structured equity product (SEP) issuances to construct a new sentiment measure for large capitalization stocks. The SEP sentiment measure predicts negative abnormal returns on the SEP reference stocks based on a variety of factor models, and also predicts returns in Fama‐MacBeth regressions that include a wide range of covariates. Consistent with our interpretation that SEP issuances reflect investor sentiment, aggregate SEP issuances are highly correlated with the Baker‐Wurgler sentiment index. Tobit regressions reveal that proxies for attention and sentiment predict SEP issuance volumes, providing additional evidence consistent with the hypothesis that SEP issuances reflect sentiment.
Are Liquidity and Information Risks Priced in the Treasury Bond Market?
Published: 1/23/2009, Volume: 64, Issue: 1 | DOI: 10.1111/j.1540-6261.2008.01439.x | Cited by: 94
HAITAO LI, JUNBO WANG, CHUNCHI WU, YAN HE
We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure‐based measures of liquidity. Information risk is measured by the probability of information‐based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.
The Portfolio‐Driven Disposition Effect
Published: 8/21/2024, Volume: 79, Issue: 5 | DOI: 10.1111/jofi.13378 | Cited by: 39
LI AN, JOSEPH ENGELBERG, MATTHEW HENRIKSSON, BAOLIAN WANG, JARED WILLIAMS
The disposition effect for a stock significantly weakens if the portfolio is at a gain, but is large when it is at a loss. We find this portfolio‐driven disposition effect (PDDE) in four independent settings: U.S. and Chinese archival data, as well as U.S. and Chinese experiments. The PDDE is robust to a variety of controls in regression specifications and is not explained by extreme returns, portfolio rebalancing, tax considerations, or investor heterogeneity. Our evidence suggests that investors form mental frames at both the stock and the portfolio levels and that these frames combine to generate the PDDE.
A Theory of Corporate Scope and Financial Structure
Published: 6/1996, Volume: 51, Issue: 2 | DOI: 10.1111/j.1540-6261.1996.tb02699.x | Cited by: 45
DAVID D. LI, SHAN LI
We simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self‐interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. Our theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese Keiretsu.
Capital Gains Tax Overhang and Price Pressure
Published: 5/16/2006, Volume: 61, Issue: 3 | DOI: 10.1111/j.1540-6261.2006.00876.x | Cited by: 109
LI JIN
I study whether the capital gains tax is an impediment to selling by some investors and if so, to what degree associated delayed selling affects stock prices. I find that selling decisions by institutions serving tax‐sensitive clients are sensitive to cumulative capital gains, a pattern not observed for institutions with predominantly tax‐exempt clients. Moreover, tax‐related underselling impacts stock prices during large earnings surprises for stocks held primarily by tax‐sensitive investors. The corresponding price reactions are less negative (more positive) with higher cumulative capital gains. This price pressure pattern is more severe when arbitrage is more costly.
Information Aggregation via Contracting
Published: 2/2/2023, Volume: 78, Issue: 2 | DOI: 10.1111/jofi.13205 | Cited by: 5
JIASUN LI
When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project's profit? We show that a simple contract dividing profits in proportion to investors' risk tolerances may facilitate information aggregation by altering investors' risk‐taking incentives when they decide on how investment strategies respond to private information. Our results provide a contracting‐based approach for information aggregation, which is an alternative to learning from endogenous market variables (e.g., prices) via contingent schedules as seen in well‐known rational expectations equilibrium models.
Banks, Low Interest Rates, and Monetary Policy Transmission
Published: 3/9/2025, Volume: 80, Issue: 3 | DOI: 10.1111/jofi.13436 | Cited by: 30
OLIVIER WANG
I study how the secular decline in interest rates affects banks' intermediation spreads and credit supply. Following a permanent decrease in rates, bank lending may rise initially but contracts in the long run. As lower rates compress deposit spreads even well above the zero lower bound, banks' retained earnings, equity, and lending fall until loan spreads have risen enough to offset the reduction in deposit spreads. A higher inflation target can support bank lending at the cost of higher liquidity premia. I find support for the model's predictions in U.S. aggregate and bank‐level data.
Discussion
Published: 8/2001, Volume: 56, Issue: 4 | DOI: 10.1111/0022-1082.00366 | Cited by: 4
Zhenyu Wang
CO‐INSURANCE AND CONGLOMERATE MERGER
Published: 12/1977, Volume: 32, Issue: 5 | DOI: 10.1111/j.1540-6261.1977.tb03352.x | Cited by: 9
Li Way Lee
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.
Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs
Published: 3/20/2007, Volume: 62, Issue: 2 | DOI: 10.1111/j.1540-6261.2007.01227.x | Cited by: 464
JARRAD HARFORD, KAI LI
We explore how compensation policies following mergers affect a CEO's incentives to pursue a merger. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. Following a merger, a CEO's pay and overall wealth become insensitive to negative stock performance, but a CEO's wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs' compensation to poor performance following the merger. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures.
Investor Composition and the Liquidity Component in the U.S. Corporate Bond Market
Published: 1/21/2026, Volume: 81, Issue: 2 | DOI: 10.1111/jofi.70024 | Cited by: 5
JIAN LI, HAIYUE YU
The link between corporate bond credit spreads and secondary market illiquidity in the cross section has grown stronger since 2005, resulting in a higher liquidity component in credit spreads. Using U.S. investor holdings data, we show that short‐term investors (e.g., mutual funds/exchange‐traded funds [ETFs]) increase trading activities in the secondary market, amplifying the effect of secondary market frictions on prices. We provide a model featuring heterogeneous investors with different trading needs and heterogeneous bonds to investigate the impact of the rapid‐growing mutual fund/ETF sector on the corporate bond market. We find the change in investor composition can quantitatively explain the aggregate trend.
Corporate Innovations and Mergers and Acquisitions
Published: 9/12/2014, Volume: 69, Issue: 5 | DOI: 10.1111/jofi.12059 | Cited by: 798
JAN BENA, KAI LI
Using a large and unique patent‐merger data set over the period 1984 to 2006, we show that companies with large patent portfolios and low R&D expenses are acquirers, while companies with high R&D expenses and slow growth in patent output are targets. Further, technological overlap between firm pairs has a positive effect on transaction incidence, and this effect is reduced for firm pairs that overlap in product markets. We also show that acquirers with prior technological linkage to their target firms produce more patents afterwards. We conclude that synergies obtained from combining innovation capabilities are important drivers of acquisitions.
Survival Bias and the Equity Premium Puzzle
Published: 10/2002, Volume: 57, Issue: 5 | DOI: 10.1111/0022-1082.00486 | Cited by: 29
Haitao Li, Yuewu Xu
Previous authors have raised the concern that there could be serious survival bias in the observed U.S. equity premium. Contrary to conventional wisdom, we argue that the survival bias in the U.S. data is unlikely to be significant. To reach this conclusion, we introduce a general framework for modeling survival and derive a mathematical relationship between the ex ante survival probability and the average survival bias. This relationship reveals the fundamental difficulty facing the survival argument: High survival bias requires an ex ante probability of market failure, which seems unrealistically high given the history of world financial markets.
THE TAX SYSTEM OF TAIWAN*
Published: 3/1958, Volume: 13, Issue: 1 | DOI: 10.1111/j.1540-6261.1958.tb04179.x | Cited by: 0
Mabel K. W. Li
Capital Investment, Innovative Capacity, and Stock Returns
Published: 9/14/2016, Volume: 71, Issue: 5 | DOI: 10.1111/jofi.12419 | Cited by: 70
PRAVEEN KUMAR, DONGMEI LI
We study the dynamic implications of capital investment in innovative capacity (IC) on future stock returns, investment, and profitability by modeling the unique effects of IC investment on uncertain option generation/exercise and postexercise revenue. The model highlights the diverse effects of IC investment on expected returns in different postinvestment regimes and yields the novel prediction that, under the neoclassical assumption of nonincreasing revenue returns, IC investment is positively related to subsequent cumulative stock returns with a lag. The model also predicts a positive effect of IC investment on future investment and profitability. We find strong empirical support for these predictions.
Unspanned Stochastic Volatility: Evidence from Hedging Interest Rate Derivatives
Published: 1/20/2006, Volume: 61, Issue: 1 | DOI: 10.1111/j.1540-6261.2006.00838.x | Cited by: 133
HAITAO LI, FENG ZHAO
Most existing dynamic term structure models assume that interest rate derivatives are redundant securities and can be perfectly hedged using solely bonds. We find that the quadratic term structure models have serious difficulties in hedging caps and cap straddles, even though they capture bond yields well. Furthermore, at‐the‐money straddle hedging errors are highly correlated with cap‐implied volatilities and can explain a large fraction of hedging errors of all caps and straddles across moneyness and maturities. Our results strongly suggest the existence of systematic unspanned factors related to stochastic volatility in interest rate derivatives markets.
Dynamic Competition in Negotiated Price Markets
Published: 12/13/2024, Volume: 80, Issue: 1 | DOI: 10.1111/jofi.13408 | Cited by: 8
JASON ALLEN, SHAOTENG LI
Using contract‐level data for the Canadian mortgage market, this paper provides evidence of an “invest‐and‐harvest” pricing pattern. We build a dynamic model of price negotiation with search and switching frictions to capture key market features. We estimate the model and use it to investigate the effects of market frictions and the resulting dynamic competition on borrowers' and banks' payoffs. We show that dynamic pricing and the presence of search and switching costs have important implications for public policies.
Dealer Networks
Published: 11/5/2018, Volume: 74, Issue: 1 | DOI: 10.1111/jofi.12728 | Cited by: 229
DAN LI, NORMAN SCHÜRHOFF
Dealers in the over‐the‐counter municipal bond market form trading networks with other dealers to mitigate search frictions. Regulatory data show that this network has a core‐periphery structure with 10 to 30 hubs and over 2,000 peripheral broker‐dealers in which bonds flow from periphery to core and partially back. Central dealers charge investors up to double the round‐trip markups compared to peripheral dealers. In turn, central dealers provide immediacy by matching buyers with sellers more directly and prearranging fewer trades, especially during stress times. Investors thus face a trade‐off between execution cost and speed, consistent with network models of decentralized trade.
The Conditional CAPM and the Cross‐Section of Expected Returns
Published: 3/1996, Volume: 51, Issue: 1 | DOI: 10.1111/j.1540-6261.1996.tb05201.x | Cited by: 1151
RAVI JAGANNATHAN, ZHENYU WANG
Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the value‐weighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the cross‐section of average returns on stocks. We assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. We include the return on human capital when measuring the return on aggregate wealth. Our specification performs well in explaining the cross‐section of average returns.
Empirical Evaluation of Asset‐Pricing Models: A Comparison of the SDF and Beta Methods
Published: 10/2002, Volume: 57, Issue: 5 | DOI: 10.1111/1540-6261.00498 | Cited by: 92
Ravi Jagannathan, Zhenyu Wang
The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset‐pricing models. There have been concerns that, compared to the classical beta method, the generality of the SDF method comes at the cost of efficiency in parameter estimation and power in specification tests. We establish the correct framework for comparing the two methods and show that the SDF method is as efficient as the beta method for estimating risk premiums. Also, the specification test based on the SDF method is as powerful as the one based on the beta method.
Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions
Published: 5/13/2023, Volume: 78, Issue: 4 | DOI: 10.1111/jofi.13235 | Cited by: 14
YI CHEN, ZHE WANG
We study the dynamic profit‐maximizing selling mechanism in a merger and acquisitions (M&A) environment with costly bidder entry and without entry fees. Depending on the parameters, the optimal mechanism is implemented by a standard auction or by a two‐stage procedure with exclusive offers to one bidder followed by an auction potentially favoring that bidder. The optimal mechanism may involve common deal protections like termination fees, asset lockups, or stock option lockups. Our proposed procedures resemble sales of targets filing Chapter 11 bankruptcy or M&A involving public targets, and they shed light on how to use deal protections in practice.
Agency Conflicts, Investment, and Asset Pricing
Published: 1/10/2008, Volume: 63, Issue: 1 | DOI: 10.1111/j.1540-6261.2008.01309.x | Cited by: 196
RUI ALBUQUERUE, NENG WANG
The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's
q
, higher return volatility, larger risk premia, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.
The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment
Published: 11/17/2019, Volume: 75, Issue: 1 | DOI: 10.1111/jofi.12851 | Cited by: 211
CARY FRYDMAN, BAOLIAN WANG
We test whether the display of information causally affects investor behavior in a high‐stakes trading environment. Using investor‐level brokerage data from China and a natural experiment, we estimate the impact of a shock that increased the salience of a stock's purchase price but did not change the investor's information set. We employ a difference‐in‐differences approach and find that the salience shock causally increased the disposition effect by 17%. We use microdata to document substantial heterogeneity across investors in the treatment effect. A previously documented trading pattern, the “rank effect,” explains heterogeneity in the change in the disposition effect.
Optimal CEO Compensation with Search: Theory and Empirical Evidence
Published: 9/10/2013, Volume: 68, Issue: 5 | DOI: 10.1111/jofi.12069 | Cited by: 38
MELANIE CAO, RONG WANG
We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay‐to‐performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay‐to‐performance sensitivity depends positively on a firm's idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.
Did Structured Credit Fuel the LBO Boom?
Published: 7/19/2011, Volume: 66, Issue: 4 | DOI: 10.1111/j.1540-6261.2011.01667.x | Cited by: 163
ANIL SHIVDASANI, YIHUI WANG
The leveraged buyout (LBO) boom of 2004 to 2007 was fueled by growth in collateralized debt obligations (CDOs) and other forms of securitization. Banks active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through structured credit markets did not lead to worse LBOs, overpayment, or riskier deal structures. Securitization markets altered banks' access to capital, affected their lending policies, and fueled the recent LBO boom.
Trading and Returns under Periodic Market Closures
Published: 2/2000, Volume: 55, Issue: 1 | DOI: 10.1111/0022-1082.00207 | Cited by: 144
Harrison Hong, Jiang Wang
This paper studies how market closures affect investors' trading policies and the resulting return‐generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U‐shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open‐to‐open returns than close‐to‐close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs.
A Note on the Asymptotic Covariance in Fama‐MacBeth Regression
Published: 4/1998, Volume: 53, Issue: 2 | DOI: 10.1111/0022-1082.334095 | Cited by: 8
Ravi Jagannathan, Zhenyu Wang
Does Corporate Headquarters Location Matter for Stock Returns?
Published: 8/2006, Volume: 61, Issue: 4 | DOI: 10.1111/j.1540-6261.2006.00895.x | Cited by: 722
CHRISTO PIRINSKY, QINGHAI WANG
We document strong comovement in the stock returns of firms headquartered in the same geographic area. Moreover, stocks of companies that change their headquarters location experience a decrease in their comovement with stocks from the old location and an increase in their comovement with stocks from the new location. The local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents. We argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents.
Model Misspecification and Underdiversification
Published: 11/7/2003, Volume: 58, Issue: 6 | DOI: 10.1046/j.1540-6261.2003.00612.x | Cited by: 381
Raman Uppal, Tan Wang
AbstractIn this paper, we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification. We develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio, but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks. We find that when the overall ambiguity about the joint distribution of returns is high, then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean‐variance portfolio.
Agency Conflicts, Investment, and Asset Pricing: Erratum
Published: 9/3/2015, Volume: 70, Issue: 5 | DOI: 10.1111/jofi.12307 | Cited by: 2
RUI ALBUQUERUE, NENG WANG
Lazy Investors, Discretionary Consumption, and the Cross‐Section of Stock Returns
Published: 8/2007, Volume: 62, Issue: 4 | DOI: 10.1111/j.1540-6261.2007.01253.x | Cited by: 267
RAVI JAGANNATHAN, YONG WANG
When consumption betas of stocks are computed using year‐over‐year consumption growth based upon the fourth quarter, the consumption‐based asset pricing model (CCAPM) explains the cross‐section of stock returns as well as the Fama and French (1993) three‐factor model. The CCAPM's performance deteriorates substantially when consumption growth is measured based upon other quarters. For the CCAPM to hold at any given point in time, investors must make their consumption and investment decisions simultaneously at that point in time. We suspect that this is more likely to happen during the fourth quarter, given investors' tax year ends in December.
Corporate Financial Policy and the Value of Cash
Published: 8/2006, Volume: 61, Issue: 4 | DOI: 10.1111/j.1540-6261.2006.00894.x | Cited by: 1255
MICHAEL FAULKENDER, RONG WANG
We examine the cross‐sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi‐quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.
On the Design of Contingent Capital with a Market Trigger
Published: 3/12/2015, Volume: 70, Issue: 2 | DOI: 10.1111/jofi.12134 | Cited by: 152
SURESH SUNDARESAN, ZHENYU WANG
Contingent capital (CC), which aims to internalize the costs of too‐big‐to‐fail in the capital structure of large banks, has been under intense debate by policy makers and academics. We show that CC with a market trigger, in which direct stakeholders are unable to choose optimal conversion policies, does not lead to a unique competitive equilibrium unless value transfer at conversion is not expected ex ante. The “no value transfer” restriction precludes penalizing bank managers for taking excessive risk. Multiplicity or absence of equilibrium introduces the potential for price uncertainty, market manipulation, inefficient capital allocation, and frequent conversion errors.
Regulating Over‐the‐Counter Markets
Published: 5/30/2025, Volume: 80, Issue: 4 | DOI: 10.1111/jofi.13461 | Cited by: 6
TOMY LEE, CHAOJUN WANG
Over‐the‐counter (OTC) trading thrives despite competition from exchanges. We let OTC dealers cream skim from exchanges in an otherwise standard Glosten and Milgrom framework. Restricting the dealer's ability to cream skim induces “cheap substitution”: some traders exit while others with larger gains from trade enter. Cheap substitution implies trading costs, trade volumes, and market shares are poor policy indicators. In a benchmark case, restricting the dealer raises welfare only if trading cost increases, volume falls, and OTC market share is high. By contrast, the restriction improves welfare when adverse selection risk is low. A simple procedure implements the optimal Pigouvian tax.
An Asymptotic Theory for Estimating Beta‐Pricing Models Using Cross‐Sectional Regression
Published: 8/1998, Volume: 53, Issue: 4 | DOI: 10.1111/0022-1082.00053 | Cited by: 259
Ravi Jagannathan, Zhenyu Wang
Without the assumption of conditional homoskedasticity, a general asymptotic distribution theory for the two‐stage cross‐sectional regression method shows that the standard errors produced by the Fama–MacBeth procedure do not necessarily overstate the precision of the risk premium estimates. When factors are misspecified, estimators for risk premiums can be biased, and the
t
‐value of a premium may converge to infinity in probability even when the true premium is zero. However, when a beta‐pricing model is misspecified, the
t
‐values for firm characteristics generally converge to infinity in probability, which supports the use of firm characteristics in cross‐sectional regressions for detecting model misspecification.
Investor Tax Heterogeneity and Ex‐Dividend Day Trading Volume
Published: 1/20/2006, Volume: 61, Issue: 1 | DOI: 10.1111/j.1540-6261.2006.00842.x | Cited by: 73
DAN DHALIWAL, OLIVER ZHEN LI
We propose that ex‐dividend day excess volume is motivated by tax heterogeneity among investors, and thus is increasing in investor tax heterogeneity. Institutional ownership is our measure of heterogeneity. Since investor heterogeneity is a concave function of institutional ownership, we hypothesize that ex‐day volume is a concave function of institutional ownership. Cross‐sectional tests support the tax‐motivated trading hypothesis. Additional tests, using trade size and pension ownership as proxies for institutional trades, yield similar results. We contribute to the literature by considering the interaction between payout policy and ownership structure in explaining the cross‐sectional variation in ex‐day volume.
A Bayesian's Bubble
Published: 11/25/2009, Volume: 64, Issue: 6 | DOI: 10.1111/j.1540-6261.2009.01514.x | Cited by: 15
C. WEI LI, HUI XUE
The acceleration of the U.S. productivity growth in the late 1990s suggests a significant advance in technological innovation, making the perceived probability of entering a “new economy” ever increasing. Based on macroeconomic data, we identify a Bayesian investor's belief evolution when facing a possible structural break in the economy. We show that such belief evolution plays a significant role in explaining both the stock market boom and crash during 1998 to 2001. We conclude that a rational investor's uncertainty about the future of the U.S. economy provides an alternative explanation for the late 1990s stock market “bubble.”
Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model
Published: 12/2006, Volume: 61, Issue: 6 | DOI: 10.1111/j.1540-6261.2006.01005.x | Cited by: 88
ANDREW W. LO, JIANG WANG
We derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. We show that investors trade in only two portfolios: the market portfolio, and a hedging portfolio that is used to hedge the risk of changing market conditions. We empirically identify the hedging portfolio using weekly volume and returns data for U.S. stocks, and then test two of its properties implied by the theory: Its return should be an additional risk factor in explaining the cross section of asset returns, and should also be the best predictor of future market returns.
Corporate Scandals and Household Stock Market Participation
Published: 11/10/2016, Volume: 71, Issue: 6 | DOI: 10.1111/jofi.12399 | Cited by: 394
MARIASSUNTA GIANNETTI, TRACY YUE WANG
We show that, after the revelation of corporate fraud in a state, household stock market participation in that state decreases. Households decrease holdings in fraudulent as well as nonfraudulent firms, even if they do not hold stocks in fraudulent firms. Within a state, households with more lifetime experience of corporate fraud hold less equity. Following the exogenous increase in fraud revelation due to Arthur Andersen's demise, states with more Arthur Andersen clients experience a larger decrease in stock market participation. We provide evidence that the documented effect is likely to reflect a loss of trust in the stock market.
Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry
Published: 3/2024, Volume: 79, Issue: 3 | DOI: 10.1111/jofi.13321 | Cited by: 16
ALICE BONAIMÉ, YE (EMMA) WANG
Using novel data from the pharmaceutical industry, we study product prices and innovation around mergers. Exploiting within‐deal variation in product market consolidation, we show that prices increase more for drugs in consolidating markets than for matched control drugs. Estimates indicate a 2% average price effect that persists for about one year. Price increases expand with acquirer‐target product similarity and are more pronounced within less competitive product markets with fewer players and no generic competition. Examination of trade‐offs reveals these deals generate significant shareholder value. They also spur labeling and other manufacturing‐related innovation, but not the development of new drugs.
Implementing Option Pricing Models When Asset Returns Are Predictable
Published: 3/1995, Volume: 50, Issue: 1 | DOI: 10.1111/j.1540-6261.1995.tb05168.x | Cited by: 159
ANDREW W. LO, JIANG WANG
The predictability of an asset's returns will affect the prices of options on that asset, even though predictability is typically induced by the drift, which does not enter the option pricing formula. For discretely‐sampled data, predictability is linked to the parameters that do enter the option pricing formula. We construct an adjustment for predictability to the Black‐Scholes formula and show that this adjustment can be important even for small levels of predictability, especially for longer maturity options. We propose several continuous‐time linear diffusion processes that can capture broader forms of predictability, and provide numerical examples that illustrate their importance for pricing options.
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.
Continuous Trading or Call Auctions: Revealed Preferences of Investors at the Tel Aviv Stock Exchange
Published: 2/2002, Volume: 57, Issue: 1 | DOI: 10.1111/1540-6261.00431 | Cited by: 57
Avner Kalay, Li Wei, Avi Wohl
We use the move of Israeli stocks from call auction trading to continuous trading to show that investors have a preference for stocks that trade continuously. When large stocks move from call auction to continuous trading, the small stocks that still trade by call auction experience a significant loss in volume relative to the overall market volume. As small stocks move to continuous trading, they experience an increase in volume and positive abnormal returns because of the associated increase in liquidity. Overall, though, a move to continuous trading increases the volume of large stocks relative to small stocks.
Star Ratings and the Incentives of Mutual Funds
Published: 2/20/2020, Volume: 75, Issue: 3 | DOI: 10.1111/jofi.12888 | Cited by: 52
CHONG HUANG, FEI LI, XI WENG
We propose a theory of reputation to explain how investors rationally respond to mutual fund star ratings. A fund's performance is determined by its information advantage, which can be acquired but decays stochastically. Investors form beliefs about whether the fund is informed based on its past performance. We refer to such beliefs as fund reputation, which determines fund flows. As performance changes continuously, equilibrium fund reputation may take discrete values only and thus can be labeled with stars. Star upgrades thus imply reputation jumps, leading to discrete increases in flows and expected performance, although stars do not provide new information.