The Journal of Finance

The Real Determinants of Asset Sales

Published: 9/10/2008,  Volume: 63,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2008.01396.x  |  Cited by: 85

LIU YANG

I develop a dynamic structural model in which a firm makes rational decisions to buy or sell assets in the presence of productivity shocks. By identifying equilibrium asset prices, the model also examines the aggregate asset sales activity over the business cycle. It shows that changes in productivity, rather than productivity levels, affect decisions: Firms with rising productivity buy assets and firms with falling productivity downsize (“rising buys falling”). As such, industries in which firms have less persistent and more volatile productivity experience greater asset reallocation. Using plant‐level data from Longitudinal Research Database (LRD), I find strong support for the model's predictions.

Private and Public Merger Waves

Published: 9/10/2013,  Volume: 68,  Issue: 5  |  DOI: 10.1111/jofi.12055  |  Cited by: 222

VOJISLAV MAKSIMOVIC, GORDON PHILLIPS, LIU YANG

We document that public firms participate more than private firms as buyers and sellers of assets in merger waves and their participation is affected more by credit spreads and aggregate market valuation. Public firm acquisitions realize higher gains in productivity, particularly for on‐the‐wave acquisitions and when the acquirer's stock is liquid and highly valued. Our results are not driven solely by public firms' better access to capital. Using productivity data from early in the firm's life, we find that better private firms subsequently select to become public. Initial size and productivity predict asset purchases and sales 10 and more years later.

The Mismatch Between Mutual Fund Scale and Skill

Published: 6/4/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12950  |  Cited by: 101

YANG SONG

I demonstrate that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors confuse the effects of fund exposures to common systematic factors with managerial skill when allocating capital among funds. Active mutual funds with positive factor‐related past returns thus accumulate assets to the point that they significantly underperform. I also show that the negative aggregate benchmark‐adjusted performance of active equity mutual funds is driven mainly by these oversized funds.

A Model of Systemic Bank Runs

Published: 3/21/2023,  Volume: 78,  Issue: 2  |  DOI: 10.1111/jofi.13213  |  Cited by: 26

XUEWEN LIU

We develop a tractable model of systemic bank runs. The market‐based banking system features a two‐layer structure: banks with heterogeneous fundamentals face potential runs by their creditors while they trade short‐term funding in the asset (interbank) market in response to creditor withdrawals. The possibility of a run on a particular bank depends on its assets' interim liquidation value, and this value depends endogenously in turn on the status of other banks in the asset market. The within‐bank coordination problem among creditors and the cross‐bank price externality feed into each other. A small shock can be amplified into a systemic crisis.

Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets

Published: 2/2004,  Volume: 59,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2004.00634.x  |  Cited by: 249

Hong Liu

We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature.

The Price of Higher Order Catastrophe Insurance: The Case of VIX Options

Published: 10/18/2022,  Volume: 77,  Issue: 6  |  DOI: 10.1111/jofi.13182  |  Cited by: 16

BJØRN ERAKER, AOXIANG YANG

We develop a tractable equilibrium pricing model to explain observed characteristics in equity returns, VIX futures, S&P 500 options, and VIX options data based on affine jump‐diffusive state dynamics and representative agents endowed with Duffie‐Epstein recursive preferences. Our calibrated model replicates consumption, dividends, and asset market data, including VIX futures returns, the average implied volatilities in SPX and VIX options, and first‐ and higher‐order moments of VIX options returns. We document a time variation in the shape of VIX‐option‐implied volatility and a time‐varying hedging relationship between VIX and SPX options that our model both captures.

Nonfundamental Speculation Revisited

Published: 8/28/2017,  Volume: 72,  Issue: 6  |  DOI: 10.1111/jofi.12548  |  Cited by: 7

LIYAN YANG, HAOXIANG ZHU

We show that a linear pure strategy equilibrium may not exist in the model of Madrigal (1996), contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second‐order condition. If the nonfundamental speculator's information about noise trading is sufficiently precise, a linear pure strategy equilibrium fails to exist. In parameter regions where a pure strategy equilibrium does exist, we identify a few calculation errors in Madrigal (1996) that result in misleading implications.

Commodity Financialization and Information Transmission

Published: 7/2022,  Volume: 77,  Issue: 5  |  DOI: 10.1111/jofi.13165  |  Cited by: 109

ITAY GOLDSTEIN, LIYAN YANG

We provide a model to understand the effects of commodity futures financialization on various market variables. We distinguish between financial speculators and financial hedgers and study their separate and combined effects on the informativeness of futures prices, the futures price bias, the comovement of futures prices with other markets, and the predictiveness of financial trading. We capture the interactions between commodity futures financialization and the real economy through spot prices and production decisions. A dynamic extension illustrates how key variables change over time in a period of acute financialization in a way that is consistent with observed empirical patterns.

Information Diversity and Complementarities in Trading and Information Acquisition

Published: 7/23/2015,  Volume: 70,  Issue: 4  |  DOI: 10.1111/jofi.12226  |  Cited by: 268

ITAY GOLDSTEIN, LIYAN YANG

We analyze a model in which different traders are informed of different fundamentals that affect the security value. We identify a source for strategic complementarities in trading and information acquisition: aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental, encouraging more trading and information acquisition on that fundamental. This tends to amplify the effect of exogenous changes in the underlying information environment. Due to complementarities, greater diversity of information in the economy improves price informativeness. We discuss the relation between our model and recent financial phenomena and derive testable empirical implications.

Signalling and the Pricing of New Issues

Published: 6/1989,  Volume: 44,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1989.tb05063.x  |  Cited by: 801

MARK GRINBLATT, CHUAN YANG HWANG

This paper develops a signalling model with two signals, two attributes, and a continuum of signal levels and attribute types to explain new issue underpricing. Both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable “intrinsic” value of the firm and the variance of its cash flows. Many of the model's comparative statics results are novel, empirically testable, and consistent with the existing empirical evidence on new issues. In particular, the degree of underpricing, which can be inferred from observable variables, is positively related to the firm's post‐issue share price.

Rational Inattention and Portfolio Selection

Published: 8/2007,  Volume: 62,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2007.01263.x  |  Cited by: 130

LIXIN HUANG, HONG LIU

Costly information acquisition makes it rational for investors to obtain important economic news with only limited frequency or limited accuracy. We show that this rational inattention to important news may make investors over‐ or underinvest. In addition, the optimal trading strategy is “myopic” with respect to future news frequency and accuracy. We find that the optimal news frequency is nonmonotonic in news accuracy and investment horizon. Furthermore, when both news frequency and news accuracy are endogenized, an investor with a higher risk aversion or a longer investment horizon chooses less frequent but more accurate periodic news updates.

Mortgage Lock‐In, Mobility, and Labor Reallocation

Published: 10/20/2024,  Volume: 79,  Issue: 6  |  DOI: 10.1111/jofi.13398  |  Cited by: 28

JULIA FONSECA, LU LIU

We study the impact of rising mortgage rates on mobility and labor reallocation. Using individual‐level credit record data and variation in the timing of mortgage origination, we show that a 1 percentage point decline in the difference between mortgage rates locked in at origination and current rates reduces moving by 9% overall and 16% between 2022 and 2024, and this relationship is asymmetric. Mortgage lock‐in also dampens flows in and out of self‐employment and the responsiveness to shocks to nearby employment opportunities that require moving, measured as wage growth within a 50‐ to 150‐mile ring and instrumented with a shift‐share instrument.

Long‐Run Risk: Is It There?

Published: 4/14/2022,  Volume: 77,  Issue: 3  |  DOI: 10.1111/jofi.13126  |  Cited by: 46

YUKUN LIU, BEN MATTHIES

This paper documents the existence of a persistent component in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons—our measure explains between 23% and 38% of cumulative future consumption growth at the five‐year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross section and our one‐factor model outperforms many benchmark macro‐ and return‐based multifactor models.

How to Discount Cashflows with Time‐Varying Expected Returns

Published: 12/2004,  Volume: 59,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2004.00715.x  |  Cited by: 117

ANDREW ANG, JUN LIU

While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time‐varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk‐free rates, predictable risk premiums, and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analytic term structure of discount rates, with different discount rates applied to expected cashflows at different horizons. Using constant discount rates can produce large misvaluations, which, in portfolio data, are mostly driven at short horizons by market risk premiums and at long horizons by time variation in risk‐free rates and factor loadings.

Rent Extraction with Securities Plus Cash

Published: 4/6/2021,  Volume: 76,  Issue: 4  |  DOI: 10.1111/jofi.13018  |  Cited by: 26

TINGJUN LIU, DAN BERNHARDT

In our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.

Dividend Dynamics, Learning, and Expected Stock Index Returns

Published: 12/4/2018,  Volume: 74,  Issue: 1  |  DOI: 10.1111/jofi.12731  |  Cited by: 42

RAVI JAGANNATHAN, BINYING LIU

We present a latent variable model of dividends that predicts, out‐of‐sample, 39.5% to 41.3% of the variation in annual dividend growth rates between 1975 and 2016. Further, when learning about dividend dynamics is incorporated into a long‐run risks model, the model predicts, out‐of‐sample, 25.3% to 27.1% of the variation in annual stock index returns over the same time horizon, with learning contributing approximately half of the predictability in returns. These findings support the view that investors' aversion to long‐run risks and their learning about these risks are important in determining stock index prices and expected returns.

Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital

Published: 3/25/2019,  Volume: 74,  Issue: 3  |  DOI: 10.1111/jofi.12761  |  Cited by: 116

PATRICK BOLTON, NENG WANG, JINQIANG YANG

A risk‐averse entrepreneur with access to a profitable venture needs to raise funds from investors. She cannot indefinitely commit her human capital to the venture, which limits the firm's debt capacity, distorts investment and compensation, and constrains the entrepreneur's risk sharing. This puts dynamic liquidity and state‐contingent risk allocation at the center of corporate financial management. The firm balances mean‐variance investment efficiency and the preservation of financial slack. We show that in general the entrepreneur's net worth is overexposed to idiosyncratic risk and underexposed to systematic risk. These distortions are greater the closer the firm is to exhausting its debt capacity.

The 52‐Week High and Momentum Investing

Published: 10/2004,  Volume: 59,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2004.00695.x  |  Cited by: 686

THOMAS J. GEORGE, CHUAN‐YANG HWANG

When coupled with a stock's current price, a readily available piece of information—the 52‐week high price–explains a large portion of the profits from momentum investing. Nearness to the 52‐week high dominates and improves upon the forecasting power of past returns (both individual and industry returns) for future returns. Future returns forecast using the 52‐week high do not reverse in the long run. These results indicate that short‐term momentum and long‐term reversals are largely separate phenomena, which presents a challenge to current theory that models these aspects of security returns as integrated components of the market's response to news.

Funding Value Adjustments

Published: 12/30/2018,  Volume: 74,  Issue: 1  |  DOI: 10.1111/jofi.12739  |  Cited by: 169

LEIF ANDERSEN, DARRELL DUFFIE, YANG SONG

In this paper, we demonstrate that the funding value adjustments (FVAs) of major dealers are debt overhang costs to their shareholders. To maximize shareholder value, dealer quotations therefore adjust for FVAs. Our case studies include interest‐rate swap FVAs and violations of covered interest parity. Contrary to current valuation practice, FVAs are not themselves components of the market values of the positions being financed. Current dealer practice does, however, align incentives between trading desks and shareholders. We also establish a pecking order for preferred asset financing strategies and provide a new interpretation of the standard debit value adjustment.

Rare Disasters, Financial Development, and Sovereign Debt

Published: 8/25/2022,  Volume: 77,  Issue: 5  |  DOI: 10.1111/jofi.13175  |  Cited by: 33

SERGIO REBELO, NENG WANG, JINQIANG YANG

We propose a model of sovereign debt in which countries vary in their level of financial development, defined as the extent to which they can issue debt denominated in domestic currency in international capital markets. We show that low levels of financial development generate the “debt intolerance” phenomenon that plagues emerging markets: it reduces overall debt capacity, increases credit spreads, and limits the country's ability to smooth consumption.

Long‐Term Return Reversals: Overreaction or Taxes?

Published: 11/28/2007,  Volume: 62,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2007.01295.x  |  Cited by: 68

THOMAS J. GEORGE, CHUAN‐YANG HWANG

Long‐term reversals in U.S. stock returns are better explained as the rational reactions of investors to locked‐in capital gains than an irrational overreaction to news. Predictors of returns based on the overreaction hypothesis have no power, while those that measure locked‐in capital gains do, completely subsuming past returns measures that are traditionally used to predict long‐term returns. In data from Hong Kong, where investment income is not taxed, reversals are nonexistent, and returns are not forecastable either by traditional measures or by measures based on the capital gains lock‐in hypothesis that successfully predict U.S. returns.

Luck versus Skill in the Cross Section of Mutual Fund Returns: Reexamining the Evidence

Published: 4/17/2022,  Volume: 77,  Issue: 3  |  DOI: 10.1111/jofi.13123  |  Cited by: 39

CAMPBELL R. HARVEY, YAN LIU

While Kosowski et al. (2006, Journal of Finance 61, 2551–2595) and Fama and French (2010, Journal of Finance 65, 1915–1947) both evaluate whether mutual funds outperform, their conclusions are very different. We reconcile their findings. We show that the Fama‐French method suffers from an undersampling problem that leads to a failure to reject the null hypothesis of zero alpha, even when some funds generate economically large risk‐adjusted returns. In contrast, Kosowski et al. substantially overreject the null hypothesis, even when all funds have a zero alpha. We present a novel bootstrapping approach that should be useful to future researchers choosing between the two approaches.

A Variance‐Ratio Test of Random Walks in Foreign Exchange Rates

Published: 6/1991,  Volume: 46,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1991.tb02686.x  |  Cited by: 107

CHRISTINA Y. LIU, JIA HE

The separate variance‐ratio tests under homoscedasticity and heteroscedasticity both provide evidence rejecting the random walk hypothesis, using five pairs of weekly nominal exchange rate series over the period from August 7, 1974 to March 29, 1989. The rejections cast doubt on the random walk hypothesis in exchange rates, which has received support in the existing literature. Furthermore, since the rejections are robust to heteroscedasticity, they suggest autocorelations of weekly increments in the nominal exchange rate series, which may be consistent with the exchange rate overshooting or undershooting phenomenon.

False (and Missed) Discoveries in Financial Economics

Published: 6/16/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12951  |  Cited by: 106

CAMPBELL R. HARVEY, YAN LIU

Multiple testing plagues many important questions in finance such as fund and factor selection. We propose a new way to calibrate both Type I and Type II errors. Next, using a double‐bootstrap method, we establish a t ‐statistic hurdle that is associated with a specific false discovery rate (e.g., 5%). We also establish a hurdle that is associated with a certain acceptable ratio of misses to false discoveries (Type II error scaled by Type I error), which effectively allows for differential costs of the two types of mistakes. Evaluating current methods, we find that they lack power to detect outperforming managers.

Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds

Published: 6/26/2023,  Volume: 78,  Issue: 5  |  DOI: 10.1111/jofi.13258  |  Cited by: 60

JONATHAN A. PARKER, ANTOINETTE SCHOAR, YANG SUN

Target date funds (TDFs) are designed to provide unsophisticated or inattentive investors with age‐appropriate exposures to different asset classes like stocks and bonds. The rise of TDFs has moved a significant share of retirement investors into macrocontrarian strategies that sell stocks after relatively good stock market performance. This rebalancing drives contrarian flows across equity mutual funds held by TDFs, stabilizing their funding, and reduces stock returns for stocks disproportionately held by these funds when stock market returns are relatively high. Continued growth in TDFs and similar investment products may dampen stock market volatility and increase the transmission of shocks across asset classes.

Whom You Know Matters: Venture Capital Networks and Investment Performance

Published: 1/11/2007,  Volume: 62,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2007.01207.x  |  Cited by: 1572

YAEL V. HOCHBERG, ALEXANDER LJUNGQVIST, YANG LU

Many financial markets are characterized by strong relationships and networks, rather than arm's‐length, spot market transactions. We examine the performance consequences of this organizational structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better‐networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better‐networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.

Networking as a Barrier to Entry and the Competitive Supply of Venture Capital

Published: 5/7/2010,  Volume: 65,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2010.01554.x  |  Cited by: 261

YAEL V. HOCHBERG, ALEXANDER LJUNGQVIST, YANG LU

We examine whether strong networks among incumbent venture capitalists (VCs) in local markets help restrict entry by outside VCs, thus improving incumbents' bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one‐standard deviation increase in network ties among incumbents reducing entry by approximately one‐third. Entrants with established ties to target‐market incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.

Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount

Published: 1/10/2008,  Volume: 63,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01313.x  |  Cited by: 319

KALOK CHAN, ALBERT J. MENKVELD, ZHISHU YANG

We examine the effect of information asymmetry on equity prices in the local A‐ and foreign B‐share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross‐sectional variation in B‐share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid‐ask spread in the A‐ and B‐share markets explains 44% and 46% of the variation in B‐share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables.

Financial Markets, the Real Economy, and Self‐Fulfilling Uncertainties

Published: 3/27/2019,  Volume: 74,  Issue: 3  |  DOI: 10.1111/jofi.12764  |  Cited by: 65

JESS BENHABIB, XUEWEN LIU, PENGFEI WANG

We develop a model of informational interdependence between financial markets and the real economy, linking economic uncertainty to information production and aggregate economic activities in general equilibrium. The mutual learning between financial markets and the real economy creates a strategic complementarity in their information production, leading to self‐fulfilling surges in economic uncertainties. In a dynamic setting, our model characterizes self‐fulfilling uncertainty traps with two steady‐state equilibria and a two‐stage economic crisis in transitional dynamics.

Common Risk Factors in Cryptocurrency

Published: 2/24/2022,  Volume: 77,  Issue: 2  |  DOI: 10.1111/jofi.13119  |  Cited by: 574

YUKUN LIU, ALEH TSYVINSKI, XI WU

We find that three factors—cryptocurrency market, size, and momentum—capture the cross‐sectional expected cryptocurrency returns. We consider a comprehensive list of price‐ and market‐related return predictors in the stock market and construct their cryptocurrency counterparts. Ten cryptocurrency characteristics form successful long‐short strategies that generate sizable and statistically significant excess returns, and we show that all of these strategies are accounted for by the cryptocurrency three‐factor model. Lastly, we examine potential underlying mechanisms of the cryptocurrency size and momentum effects.

Institutional Investor Attention

Published: 1/16/2026,  Volume: 81,  Issue: 2  |  DOI: 10.1111/jofi.70009  |  Cited by: 6

ALAN KWAN, YUKUN LIU, BEN MATTHIES

Using data on Internet news reading, we measure fund‐level attention to both aggregate and firm‐specific news and relate it to fund portfolio allocation decisions. In the time series, we find that funds shift attention toward macroeconomic news during periods of high aggregate volatility. Those funds that exhibit stronger attention‐reallocation patterns earn higher future returns. In the cross‐section of fund portfolios, fund attention is positively related to stock holdings. Furthermore, fund attention to a stock increases the value‐add of that position to the fund's performance. This relationship is stronger using fund attention to more value‐relevant news articles.

Corrigendum for Dividend Dynamics, Learning, and Expected Stock Index Returns

Published: 5/30/2019,  Volume: 74,  Issue: 4  |  DOI: 10.1111/jofi.12786  |  Cited by: 0

RAVI JAGANNATHAN, BINYING LIU, JIAQI ZHANG

Before an Analyst Becomes an Analyst: Does Industry Experience Matter?

Published: 3/21/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12466  |  Cited by: 311

DANIEL BRADLEY, SINAN GOKKAYA, XI LIU

Using hand‐collected biographical information on financial analysts from 1983 to 2011, we find that analysts making forecasts on firms in industries related to their preanalyst experience have better forecast accuracy, evoke stronger market reactions to earning revisions, and are more likely to be named Institutional Investor all‐stars. Plausibly exogenous losses of analysts with related industry experience have real financial market implications—changes in firms’ information asymmetry and price reactions are significantly larger than those of other analysts. Overall, industry expertise acquired from preanalyst work experience is valuable to analysts, consistent with the emphasis placed on their industry knowledge by institutional investors.

On the Relative Pricing of Long‐Maturity Index Options and Collateralized Debt Obligations

Published: 11/19/2012,  Volume: 67,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2012.01779.x  |  Cited by: 74

PIERRE COLLIN‐DUFRESNE, ROBERT S. GOLDSTEIN, FAN YANG

We investigate a structural model of market and firm‐level dynamics in order to jointly price long‐dated S&P 500 index options and CDO tranches of corporate debt. We identify market dynamics from index option prices and idiosyncratic dynamics from the term structure of credit spreads. We find that all tranches can be well priced out‐of‐sample before the crisis. During the crisis, however, our model can capture senior tranche prices only if we allow for the possibility of a catastrophic jump. Thus, senior tranches are nonredundant assets that provide a unique window into the pricing of catastrophic risk.

Leverage Is a Double‐Edged Sword

Published: 2/15/2024,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13316  |  Cited by: 21

AVANIDHAR SUBRAHMANYAM, KE TANG, JINGYUAN WANG, XUEWEI YANG

We use proprietary data on intraday transactions at a futures brokerage to analyze how implied leverage influences trading performance. Across all investors, leverage is negatively related to performance, due partly to increased trading costs and partly to forced liquidations resulting from margin calls. Defining skill out‐of‐sample, we find that relative performance differentials across unskilled and skilled investors persist. Unskilled investors' leverage amplifies losses from lottery preferences and the disposition effect. Leverage stimulates liquidity provision by skilled investors, and enhances returns. Although regulatory increases in required margins decrease skilled investors' returns, they enhance overall returns, and attenuate return volatility.

Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide

Published: 3/7/2013,  Volume: 68,  Issue: 2  |  DOI: 10.1111/jofi.12012  |  Cited by: 279

VIKAS AGARWAL, WEI JIANG, YUEHUA TANG, BAOZHONG YANG

This paper studies the “confidential holdings” of institutional investors, especially hedge funds, where the quarter‐end equity holdings are disclosed with a delay through amendments to Form 13F and are usually excluded from the standard databases. Funds managing large risky portfolios with nonconventional strategies seek confidentiality more frequently. Stocks in these holdings are disproportionately associated with information‐sensitive events or share characteristics indicating greater information asymmetry. Confidential holdings exhibit superior performance up to 12 months, and tend to take longer to build. Together the evidence supports private information and the associated price impact as the dominant motives for confidentiality.

Bank Competition Amid Digital Disruption: Implications for Financial Inclusion

Published: 5/17/2026,  Volume: 81,  Issue: 4  |  DOI: 10.1111/jofi.70051  |  Cited by: 2

ERICA XUEWEI JIANG, GLORIA YANG YU, JINYUAN ZHANG

We examine how digital disruption affects bank competition using the staggered rollout of 3G mobile networks. 3G expansion increased mobile banking adoption among tech‐savvy households, reducing branch networks—especially in younger counties. Banks' strategies diverged: Less branch‐reliant banks closed branches and competed on price, while more branch‐reliant banks maintained branches but raised spreads. A structural model shows that perceived digital service improvements among younger consumers drove these shifts, reducing welfare for older savers. Counterfactuals demonstrate that subsidizing adoption for older savers can cost‐effectively reduce these disparities, facilitating a smoother digital transition.

The Pollution Premium

Published: 4/10/2023,  Volume: 78,  Issue: 3  |  DOI: 10.1111/jofi.13217  |  Cited by: 647

PO‐HSUAN HSU, KAI LI, CHI‐YANG TSOU

This paper studies the asset pricing implications of industrial pollution. A long‐short portfolio constructed from firms with high versus low toxic emission intensity within an industry generates an average annual return of 4.42%, which remains significant after controlling for risk factors. This pollution premium cannot be explained by existing systematic risks, investor preferences, market sentiment, political connections, or corporate governance. We propose and model a new systematic risk related to environmental policy uncertainty. We use the growth in environmental litigation penalties to measure regime change risk and find that it helps price the cross section of emission portfolios' returns.

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.

The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending

Published: 7/23/2015,  Volume: 70,  Issue: 4  |  DOI: 10.1111/jofi.12251  |  Cited by: 179

JUN (QJ) QIAN, PHILIP E. STRAHAN, ZHISHU YANG

In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank's internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information production and use.

Privacy and Team Incentives

Published: 10/15/2025,  Volume: 80,  Issue: 6  |  DOI: 10.1111/jofi.13496  |  Cited by: 0

ANDREA M. BUFFA, QING LIU, LUCY WHITE

Real‐world contracts are typically private, observed only by their direct signatories, so agents working together are vulnerable to the principal opportunistically reducing other agents' incentives. The principal can mitigate this commitment problem by giving the most skilled agent a budget and delegating authority to write other agents' contracts. This endogenous hierarchy, never optimal with public contracts, raises effort, output, and compensation but allows rent extraction. The principal prefers it when contracts are opaque enough, skill is sufficiently heterogeneous across agents, and joint output is sensitive enough to effort. Our model provides novel predictions for the structure of banking syndicates.

Underreaction to Dividend Reductions and Omissions?

Published: 4/2008,  Volume: 63,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2008.01337.x  |  Cited by: 40

YI LIU, SAMUEL H. SZEWCZYK, ZAHER ZANTOUT

Using a sample of 2,337 cash dividend reduction or omission announcements over the 1927 to 1999 period, this study reports significant negative post‐announcement long‐term abnormal returns, which last 1 year only. However, this long‐term abnormal performance is driven by the post‐earnings‐announcement drift. After controlling for the earnings performance and the skewness of buy‐and‐hold abnormal returns, there is no compelling evidence of a post‐dividend‐reduction or post‐dividend‐omission price drift.

Dynamic Asset Allocation with Event Risk

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

Jun Liu, Francis A. Longstaff, Jun Pan

Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event‐risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy‐and‐hold strategies. Jumps in prices and volatility both have important effects.

Detecting Informed Trading Risk from Undercutting Activity

Published: 6/1/2026,  Volume: 81,  Issue: 4  |  DOI: 10.1111/jofi.70047  |  Cited by: 0

YASHAR H. BARARDEHI, PETER DIXON, QIYU LIU

We introduce a simple measure of informed trading risk, , the residual to liquidity quote‐improvement‐to‐deterioration ratio times . When facing with increased informed trading risk, liquidity providers compete less to provide liquidity, reducing their undercutting activity. Reductions in undercutting leave footprints in trade and quote data that are captured by . Unlike prior measures, is easy to construct, can be computed intraday, and is orthogonal to liquidity. The measure outperforms prominent existing alternatives in reflecting the extent of information asymmetry before earnings announcements, predicting unscheduled press releases, and identifying informed trading spillovers around them.

The Cost of Debt

Published: 11/9/2010,  Volume: 65,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2010.01611.x  |  Cited by: 265

JULES H. Van BINSBERGEN, JOHN R. GRAHAM, JIE YANG

We use exogenous variation in tax benefit functions to estimate firm‐specific cost of debt functions that are conditional on company characteristics such as collateral, size, and book‐to‐market. By integrating the area between the benefit and cost functions, we estimate that the equilibrium net benefit of debt is 3.5% of asset value, resulting from an estimated gross benefit (cost) of debt equal to 10.4% (6.9%) of asset value. We find that the cost of being overlevered is asymmetrically higher than the cost of being underlevered and that expected default costs constitute only half of the total ex ante costs of debt.

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.

Individual Investor Trading and Return Patterns around Earnings Announcements

Published: 3/27/2012,  Volume: 67,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2012.01727.x  |  Cited by: 377

RON KANIEL, SHUMING LIU, GIDEON SAAR, SHERIDAN TITMAN

This paper provides evidence of informed trading by individual investors around earnings announcements using a unique data set of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose abnormal returns following the event into information and liquidity provision components, and show that about half of the returns can be attributed to private information. We also find that individuals trade in both return‐contrarian and news‐contrarian manners after earnings announcements. The latter behavior has the potential to slow the adjustment of prices to earnings news.

CEO Stress, Aging, and Death

Published: 10/7/2025,  Volume: 80,  Issue: 6  |  DOI: 10.1111/jofi.13497  |  Cited by: 4

MARK BORGSCHULTE, MARIUS GUENZEL, CANYAO LIU, ULRIKE MALMENDIER

We assess the long‐term effects of managerial stress on aging and mortality. Using a difference‐in‐differences design, we apply neural network–based machine‐learning techniques to CEOs' facial images and show that exposure to industry distress shocks during the Great Recession produces visible signs of aging. We estimate a one‐year increase in “apparent” age. Moreover, using data on CEOs since the mid‐1970s, we estimate a 1.1‐year decrease in life expectancy after an industry distress shock, but a two‐year increase when antitakeover laws insulate CEOs from market discipline. The estimated health costs are significant, both in absolute terms and relative to other health risks.

Marginal Q

Published: 8/19/2026,  Volume: ,  Issue:   |  DOI: 10.1111/jofi.70074  |  Cited by: 0

VITO D. GALA, JOAO F. GOMES, TONG LIU

We propose a new method to estimate the marginal value of capital under minimal assumptions. By combining asset prices with fundamentals, our method provides a quasi‐model‐free marginal q together with a simple correction for measurement error in (average) Tobin's Q using linear regressions. Marginal q yields plausible and robust estimates of adjustment costs and investment sensitivities to fundamentals. The widening gap between marginal q and Tobin's Q is driven primarily by market power and intangible capital. Our novel findings strongly support the neoclassical theory of investment and challenge the widespread use of Tobin's Q as proxy for investment opportunities.

Asset Pricing with Cohort‐Based Trading in MBS Markets

Published: 10/6/2022,  Volume: 77,  Issue: 6  |  DOI: 10.1111/jofi.13180  |  Cited by: 16

NICOLA FUSARI, WEI LI, HAOYANG LIU, ZHAOGANG SONG

Agency mortgage‐backed securities (MBSs) with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to‐be‐announced (TBA) contracts with delivery flexibility. This parallel trading environment generates distinctive effects on MBS pricing and trading: (i) Although cheapest‐to‐deliver (CTD) issues are present in TBA trading and absent from SP trading by design, MBS heterogeneity associated with CTD discounts affects SP yields positively, with the effect stronger for lower‐value SPs; (ii) high selling pressure amplifies the effects of MBS heterogeneity on SP yields; and (iii) greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.