The Journal of Finance

Role of Managerial Incentives and Discretion in Hedge Fund Performance

Published: 9/28/2009,  Volume: 64,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2009.01499.x  |  Cited by: 475

VIKAS AGARWAL, NAVEEN D. DANIEL, NARAYAN Y. NAIK

Using a comprehensive hedge fund database, we examine the role of managerial incentives and discretion in hedge fund performance. Hedge funds with greater managerial incentives, proxied by the delta of the option‐like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high‐water mark provisions in the incentive contracts, are associated with superior performance. The incentive fee percentage rate by itself does not explain performance. We also find that funds with a higher degree of managerial discretion, proxied by longer lockup, notice, and redemption periods, deliver superior performance. These results are robust to using alternative performance measures and controlling for different data‐related biases.

The Bright Side of Internal Capital Markets

Published: 8/2001,  Volume: 56,  Issue: 4  |  DOI: 10.1111/0022-1082.00377  |  Cited by: 207

Naveen Khanna, Sheri Tice

We examine capital expenditure decisions of discount firms in response to WalMart's entry into their markets. Before WalMart's entry, focused incumbents and discount divisions of diversified incumbents are similar in size, geographic dispersion, and firm debt levels. However, discount divisions of diversified firms are significantly more productive. After WalMart's entry, diversified firms are quicker to either exit the discount business or stay and fight. Also, their capital expenditures are more sensitive to the productivity of their discount business. Internal capital markets function well, as transfers are away from the worsening discount divisions. It appears diversified firms make better investment decisions.

How Target Shareholders Benefit from Value‐Reducing Defensive Strategies in Takeovers

Published: 3/1990,  Volume: 45,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1990.tb05084.x  |  Cited by: 50

ELAZAR BERKOVITCH, NAVEEN KHANNA

This paper shows that target shareholders can be made better off through the use of certain types of defensive strategies that reduce the value of the target by different amounts for different bidders. In many cases, simply the threat of such strategies can make target shareholders better off. Therefore, empirical tests based on stock price reactions at the adoption of defensive strategies may be underestimating the effect of such strategies. The paper also identifies the necessary characteristics that make these strategies effective and shows that many observed defenses possess similar properties.

Insider Trading in Financial Signaling Models

Published: 12/1992,  Volume: 47,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1992.tb04688.x  |  Cited by: 26

MARK BAGNOLI, NAVEEN KHANNA

We study the impact of voluntary trade by the manager. We find that, in contrast to standard signaling models, an action is good news for some firms and bad news for others, depending on observable characteristics of the firm, its managers, and their compensation plans. Further, voluntary trade eliminates separating equilibria and thus the possibility of exactly inferring the manager's private information. This may cause the manager to take inefficient actions so as to earn trading profits. Such undesirable behavior can be more effectively constrained by compensation contracts based on phantom shares or nontradeable options instead of large stockholdings.

Managers of Financially Distressed Firms: Villains or Scapegoats?

Published: 7/1995,  Volume: 50,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1995.tb04042.x  |  Cited by: 104

NAVEEN KHANNA, ANNETTE B. POULSEN

In this article, we provide evidence concerning the extent to which managers are to blame when their firms become bankrupt. We study a sample of firms that file for Chapter 11 and determine the actions taken by the firms' managers during the three‐year period before the filing. We compare the sample with a control sample of firms that performed better. We suggest that the comparison provides evidence on the way managers act as their firms sink into financial trouble and whether financial distress is the result of incompetence or excessively self‐serving managerial decisions or due to factors outside of management's control. We find that managers of the Chapter 11 firms and the control firms make very similar decisions and that, on average, neither set of managers is perceived to be taking value‐reducing actions. These results do not change when we control for managerial turnover or managerial ownership. We also find that when managers are replaced in firms that eventually file for Chapter 11 protection, the market does not respond positively, regardless of whether the new managers are from inside or outside the firm. Our findings suggest that when managers are blamed for financial distress, they are serving as scapegoats.

Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets

Published: 2/18/2024,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13311  |  Cited by: 28

SNEHAL BANERJEE, JESSE DAVIS, NAVEEN GONDHI

The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.

The Real Effects of Government‐Owned Banks: Evidence from an Emerging Market

Published: 3/17/2014,  Volume: 69,  Issue: 2  |  DOI: 10.1111/jofi.12130  |  Cited by: 311

DANIEL CARVALHO

Using plant‐level data for Brazilian manufacturing firms, this paper provides evidence that government control over banks leads to significant political influence over the real decisions of firms. I find that firms eligible for government bank lending expand employment in politically attractive regions near elections. These expansions are associated with additional (favorable) borrowing from government banks. Further, these persistent expansions take place just before competitive elections, and are associated with lower future employment growth by firms in other regions. The analysis suggests that politicians in Brazil use bank lending to shift employment towards politically attractive regions and away from unattractive regions.

A NOTE ON THE USELESSNESS OF TRANSACTION DEMAND MODELS*

Published: 12/1974,  Volume: 29,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1974.tb03137.x  |  Cited by: 1

Daniel Orr

EFFECTS OF GENERAL CREDIT CONTROLS ON NON‐FARM RESIDENTIAL CONSTRUCTION*

Published: 3/1960,  Volume: 15,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1960.tb04842.x  |  Cited by: 0

Coldwell Daniel

Makin's MARP A Comment

Published: 6/1981,  Volume: 36,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1981.tb00658.x  |  Cited by: 0

DANIEL FRIEDMAN

Local Bank Financial Constraints and Firm Access to External Finance

Published: 9/10/2008,  Volume: 63,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2008.01393.x  |  Cited by: 292

DANIEL PARAVISINI

I exploit the exogenous component of a formula‐based allocation of government funds across banks in Argentina to test for financial constraints and underinvestment by local banks. Banks are found to expand lending by $0.66 in response to an additional dollar of external financing. Using novel data to measure risk and return on marginal lending, I show that the profitability of lending does not decline and total borrower debt increases during lending expansions, holding investment opportunities constant. Overall, financial shocks to constrained banks are found to have a quick, persistent, and amplified effect on the aggregate supply of credit.

How Do Financing Constraints Affect Firms’ Equity Volatility?

Published: 3/9/2018,  Volume: 73,  Issue: 3  |  DOI: 10.1111/jofi.12610  |  Cited by: 31

DANIEL CARVALHO

Theory suggests that financing frictions can have significant implications for equity volatility by shaping firms’ exposure to economic risks. This paper provides evidence that an important determinant of higher equity volatility among research and development (R&D)‐intensive firms is fewer financing constraints on firms’ ability to access growth options. I provide evidence for this effect by studying how persistent shocks to the value of firms’ tangible assets (real estate) affect their subsequent equity volatility. The analysis addresses concerns about the identification of these balance sheet effects and shows that these effects are consistent with broader patterns on the equity volatility of R&D‐intensive firms.

Discussion

Published: 8/2000,  Volume: 55,  Issue: 4  |  DOI: 10.1111/0022-1082.00268  |  Cited by: 0

Daniel G. Weaver

DIVIDEND UNDERREPORTING ON TAX RETURNS

Published: 5/1958,  Volume: 13,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1958.tb04192.x  |  Cited by: 1

Daniel M. Holland

PROCESS OF ECONOMIC ADAPTATION IN A WORLD WAR II NEUTRAL: A CASE STUDY OF SWEDEN*

Published: 9/1961,  Volume: 16,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1961.tb02841.x  |  Cited by: 0

Daniel James Edwards

RESERVE MEASURES AS OPERATING VARIABLES OF MONETARY POLICY: AN EMPIRICAL ANALYSIS

Published: 6/1976,  Volume: 31,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1976.tb01928.x  |  Cited by: 1

Daniel E. Laufenberg

ASPECTS OF FEDERAL RESERVE POLICY, 1951–59 FACTS AND CONTROVERSIES*

Published: 9/1962,  Volume: 17,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1962.tb04329.x  |  Cited by: 0

Daniel S. Ahearn

BUSINESS TAX PROVISIONS OF THE 1962 AND 1964 ACTS

Published: 5/1965,  Volume: 20,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1965.tb00209.x  |  Cited by: 0

Daniel M. Holland

SOME OBSERVATIONS ON RECENT STUDIES OF INVESTMENT RISK*

Published: 5/1953,  Volume: 8,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1953.tb01147.x  |  Cited by: 0

Eleanor Bagley Daniel

LIQUID ASSETS: A NEGLECTED FACTOR IN THE FORMULATION OF HOUSING FINANCE POLICIES¹

Published: 12/1952,  Volume: 7,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1952.tb02482.x  |  Cited by: 0

Daniel B. Rathbun

THE ECONOMIC IMPACT OF LIFE INSURANCE INVESTMENTS ON THE AMERICAN ECONOMY*

Published: 3/1959,  Volume: 14,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1959.tb00491.x  |  Cited by: 1

Daniel E. Diamond

Mutual Fund Advisory Contracts: An Empirical Investigation

Published: 2/2002,  Volume: 57,  Issue: 1  |  DOI: 10.1111/1540-6261.00417  |  Cited by: 118

Daniel N. Deli

We investigate marginal compensation rates in mutual fund advisory contracts and find the following. Equity and foreign fund advisors receive higher marginal compensation than debt and domestic fund advisors. Advisors of funds with greater turnover receive higher marginal compensation. Also, closedend fund advisors receive higher marginal compensation than open‐end fund advisors. Finally, we find that marginal compensation is lower for advisors of large funds and members of large fund families. We argue that these differences in marginal compensation reflect differences in advisor marginal product, differences in the difficulty of monitoring performance, differences in control environments, and scale economies.

An Analysis of the Impact of Interest Rate Ceilings

Published: 9/1982,  Volume: 37,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1982.tb03590.x  |  Cited by: 13

DANIEL J. VILLEGAS

The first aim of this study is to estimate the interest rates paid for motor vehicle loans. The second aim is to identify those potential borrowers most likely to be rationed out of the market by the imposition of rate ceilings. Rate ceilings constrain the rates paid by successful loan applicants to be no greater than the applicable ceiling level. These constraints are dealt with by treating the interest rate paid as a variable truncated at the ceiling level. Assuming the dependent variable is truncated normal, consistent estimates are obtained by employing the maximum likelihood method of Hausman and Wise.

Inside and Outside Information

Published: 6/10/2024,  Volume: 79,  Issue: 4  |  DOI: 10.1111/jofi.13360  |  Cited by: 10

DANIEL QUIGLEY, ANSGAR WALTHER

We study an economy with financial frictions in which a regulator designs a test that reveals outside information about a firm's quality to investors. The firm can also disclose verifiable inside information about its quality. We show that the regulator optimally aims for “public speech and private silence,” which is achieved with tests that give insiders an incentive to stay quiet. We fully characterize optimal tests by developing tools for Bayesian persuasion with incentive constraints, and use these results to derive novel guidance for the design of bank stress tests, as well as benchmarks for socially optimal corporate credit ratings.

Underpricing of Newly Issued Bonds: Evidence from the Swiss Capital Market

Published: 12/1988,  Volume: 43,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1988.tb03963.x  |  Cited by: 18

WALTER WASSERFALLEN, DANIEL WYDLER

The pricing of newly issued bonds on the Swiss capital market is investigated over the years 1980–1982. The results reveal a slight underpricing of new bonds at the issue date that is roughly equal to the difference in transactions costs between the markets for new and seasoned bonds. Underpricing is no longer observed when the new bonds start to be traded on the stock exchange, that is, after about two days. Tests of several hypotheses show that unexpected changes in interest rates over the offering period explain part of the underpricing.

Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Published: 3/1997,  Volume: 52,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1997.tb03806.x  |  Cited by: 1189

KENT DANIEL, SHERIDAN TITMAN

Firm sizes and book‐to‐market ratios are both highly correlated with the average returns of common stocks. Fama and French (1993) argue that the association between these characteristics and returns arise because the characteristics are proxies for nondiversifiable factor risk. In contrast, the evidence in this article indicates that the return premia on small capitalization and high book‐to‐market stocks does not arise because of the comovements of these stocks with pervasive factors. It is the characteristics rather than the covariance structure of returns that appear to explain the cross‐sectional variation in stock returns.

Market Reactions to Tangible and Intangible Information

Published: 8/2006,  Volume: 61,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2006.00884.x  |  Cited by: 812

KENT DANIEL, SHERIDAN TITMAN

The book‐to‐market effect is often interpreted as evidence of high expected returns on stocks of “distressed” firms with poor past performance. We dispute this interpretation. We find that while a stock's future return is unrelated to the firm's past accounting‐based performance, it is strongly negatively related to the “intangible” return, the component of its past return that is orthogonal to the firm's past performance. Indeed, the book‐to‐market ratio forecasts returns because it is a good proxy for the intangible return. Also, a composite equity issuance measure, which is related to intangible returns, independently forecasts returns.

Can Markets Discipline Government Agencies? Evidence from the Weather Derivatives Market

Published: 1/14/2016,  Volume: 71,  Issue: 1  |  DOI: 10.1111/jofi.12366  |  Cited by: 23

AMIYATOSH PURNANANDAM, DANIEL WEAGLEY

We analyze the role of financial markets in shaping the incentives of government agencies using a unique empirical setting: the weather derivatives market. We show that the introduction of weather derivative contracts on the Chicago Mercantile Exchange (CME) improves the accuracy of temperature measurement by 13% to 20% at the underlying weather stations. We argue that temperature‐based financial markets generate additional scrutiny of the temperature data measured by the National Weather Service, which motivates the agency to minimize measurement errors. Our results have broader implications: the visibility and scrutiny generated by financial markets can potentially improve the efficiency of government agencies.

Prestige, Promotion, and Pay

Published: 12/21/2023,  Volume: 79,  Issue: 1  |  DOI: 10.1111/jofi.13301  |  Cited by: 12

DANIEL FERREIRA, RADOSLAWA NIKOLOWA

We develop a theory in which financial (and other professional services) firms design career structures to “sell” prestigious jobs to qualified candidates. Firms create less prestigious entry‐level jobs, which serve as currency for employees to pay for the right to compete for the more prestigious jobs. In optimal career structures, entry‐level employees (“associates”) compete for better‐paid and more prestigious positions (“managing directors” or “partners”). The model provides new implications relating job prestige to compensation, employment, competition, and the size of the financial sector.

Option Pricing When the Underlying Asset Earns a Below‐Equilibrium Rate of Return: A Note

Published: 3/1984,  Volume: 39,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1984.tb03874.x  |  Cited by: 85

ROBERT MCDONALD, DANIEL SIEGEL

Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

Published: 2/12/2020,  Volume: 75,  Issue: 2  |  DOI: 10.1111/jofi.12863  |  Cited by: 224

JOEL PERESS, DANIEL SCHMIDT

In this paper, we study the impact of noise traders’ limited attention on financial markets. Specifically, we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes.

A Theory of Friendly Boards

Published: 1/11/2007,  Volume: 62,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2007.01206.x  |  Cited by: 1927

RENÉE B. ADAMS, DANIEL FERREIRA

We analyze the consequences of the board's dual role as advisor as well as monitor of management. Given this dual role, the CEO faces a trade‐off in disclosing information to the board: If he reveals his information, he receives better advice; however, an informed board will also monitor him more intensively. Since an independent board is a tougher monitor, the CEO may be reluctant to share information with it. Thus, management‐friendly boards can be optimal. Using the insights from the model, we analyze the differences between sole and dual board systems. We highlight several policy implications of our analysis.

Partial Revelation of Information in Experimental Asset Markets

Published: 3/1991,  Volume: 46,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1991.tb03752.x  |  Cited by: 45

THOMAS E. COPELAND, DANIEL FRIEDMAN

We develop a model of market efficiency assuming private information is partially revealed to uninformed traders via the behavior of those who are informed. This partial revelation of information (PRE) model is tested in fourteen computerized double auction laboratory markets. It explains the market value and allocation of purchased information, and asset allocations, better than either a fully revealing information model (FRE strong‐form efficiency) or a nonrevealing expectations model; but it takes second place to FRE in explaining asset prices. We conjecture that refined versions of PRE may provide insight into “technical analysis” and minibubbles in securities markets.

The Allocation of Socially Responsible Capital

Published: 1/22/2025,  Volume: 80,  Issue: 2  |  DOI: 10.1111/jofi.13425  |  Cited by: 56

DANIEL GREEN, BENJAMIN N. ROTH

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

Subtle Discrimination

Published: 10/6/2025,  Volume: 81,  Issue: 1  |  DOI: 10.1111/jofi.13506  |  Cited by: 5

ELENA S. PIKULINA, DANIEL FERREIRA

We introduce the concept of subtle discrimination —biased acts that cannot be objectively ascertained as discriminatory. When candidates compete for promotions by investing in skills, firms' subtle biases induce discriminated candidates to overinvest when promotions are low‐stakes (to distinguish themselves from favored candidates) but underinvest in high‐stakes settings (anticipating low promotion probabilities). This asymmetry implies that subtle discrimination raises profits in low‐productivity firms but lowers them in high‐productivity firms. Although subtle biases are small, they generate large gaps in skills and promotion outcomes. We derive further predictions in contexts such as equity analysis, lending, fund flows, banking careers, and entrepreneurial finance.

The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study

Published: 7/1987,  Volume: 42,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1987.tb04585.x  |  Cited by: 72

THOMAS E. COPELAND, DANIEL FRIEDMAN

A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (ie., asset allocation), and bid‐ask spreads. In this paper, these variables are observed in a controlled setting—a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival—whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong‐form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi‐strong form efficiency); and private information, where traders use no market information. We conclude 1) that stronger‐form market models predict equilibrium prices better than weaker‐form models, 2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, 3) that trading volume was significantly higher in SIM environments, 4) and that bid‐ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity.

THE DEMAND FOR MONEY BY FIRMS: EXTENSIONS OF ANALYTIC RESULTS

Published: 12/1968,  Volume: 23,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1968.tb00314.x  |  Cited by: 46

Merton H. Miller, Daniel Orr

A Theory of Pyramidal Ownership and Family Business Groups

Published: 12/2006,  Volume: 61,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2006.01001.x  |  Cited by: 650

HEITOR V. ALMEIDA, DANIEL WOLFENZON

We provide a new rationale for pyramidal ownership in family business groups. A pyramid allows a family to access all retained earnings of a firm it already controls to set up a new firm, and to share the new firm's nondiverted payoff with shareholders of the original firm. Our model is consistent with recent evidence of a small separation between ownership and control in some pyramids, and can differentiate between pyramids and dual‐class shares, even when either method can achieve the same deviation from one share–one vote. Other predictions of the model are consistent with both systematic and anecdotal evidence.

Household Liquidity Constraints and Labor Market Outcomes: Evidence from a Danish Mortgage Reform

Published: 9/23/2023,  Volume: 78,  Issue: 6  |  DOI: 10.1111/jofi.13277  |  Cited by: 17

ALEX XI HE, DANIEL LE MAIRE

We study the causal effect of liquidity constraints on individual labor market outcomes by exploiting the 1992 mortgage reform in Denmark, which for the first time allowed homeowners to borrow against housing equity for nonhousing purposes. Following the reform, liquidity‐constrained homeowners increased debt levels and had higher earnings growth and lower employment rates. The option to borrow against housing equity enabled liquidity‐constrained individuals to move to high‐wage jobs and invest in valuable human and physical capital. The results imply that relaxing household liquidity constraints during recessions can create better job matches, potentially increasing earnings and output in the longer run.

Monetary Policy and Reaching for Income

Published: 2/24/2021,  Volume: 76,  Issue: 3  |  DOI: 10.1111/jofi.13004  |  Cited by: 75

KENT DANIEL, LORENZO GARLAPPI, KAIRONG XIAO

Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to significantly higher demand for income‐generating assets such as high‐dividend stocks and high‐yield bonds. We argue that this “reaching‐for‐income” phenomenon is driven by investors who follow the “living off income” rule‐of‐thumb. Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income‐generating assets. In addition, we explore the implications of reaching for income for capital allocation and the effectiveness of monetary policy.

Investor Psychology and Security Market Under‐ and Overreactions

Published: 12/1998,  Volume: 53,  Issue: 6  |  DOI: 10.1111/0022-1082.00077  |  Cited by: 4256

Kent Daniel, David Hirshleifer, Avanidhar Subrahmanyam

We propose a theory of securities market under‐ and overreactions based on two well‐known psychological biases: investor overconfidence about the precision of private information; and biased self‐attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long‐lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public‐event‐based return predictability. Biased self‐attribution adds positive short‐lag autocorrelations (“momentum”), short‐run earnings “drift,” but negative correlation between future returns and long‐term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy.

Do Firms Hedge in Response to Tax Incentives?

Published: 4/2002,  Volume: 57,  Issue: 2  |  DOI: 10.1111/1540-6261.00443  |  Cited by: 680

John R. Graham, Daniel A. Rogers

There are two tax incentives for corporations to hedge: to increase debt capacity and interest tax deductions, and to reduce expected tax liability if the tax function is convex. We test whether these incentives affect the extent of corporate hedging with derivatives. Using an explicit measure of tax function convexity, we find no evidence that firms hedge in response to tax convexity. Our analysis does, however, indicate that firms hedge to increase debt capacity, with increased tax benefits averaging 1.1 percent of firm value. Our results also indicate that firms hedge because of expected financial distress costs and firm size.

The Impact of the Financial Education of Executives on the Financial Practices of Medium and Large Enterprises

Published: 8/18/2025,  Volume: 80,  Issue: 5  |  DOI: 10.1111/jofi.13476  |  Cited by: 4

CLÁUDIA CUSTÓDIO, DIOGO MENDES, DANIEL METZGER

We study the impact of an MBA‐style executive education course in finance on corporate policies and firm performance targeting top managers of medium and large Mozambican enterprises. Using a randomized controlled trial, we find that the educational treatment induces changes in financial policies that improve firm performance. Specifically, a reduction in working capital (0.4 to 0.5 standard deviations) increases cash flow, and in turn long‐term investments. This effect operates primarily through a reduction in accounts receivable (0.4 to 1 standard deviations). Our findings show that targeted educational interventions can build managerial capital and enhance corporate performance by improving financial decision making among executives.

DISCUSSION

Published: 5/1963,  Volume: 18,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1963.tb00713.x  |  Cited by: 0

James R. Schlesinger, Daniel M. Holland

The Working Capital Credit Multiplier

Published: 8/27/2024,  Volume: 79,  Issue: 6  |  DOI: 10.1111/jofi.13385  |  Cited by: 20

HEITOR ALMEIDA, DANIEL CARVALHO, TAEHYUN KIM

We provide novel evidence that funding frictions can limit firms’ short‐term investments in receivables and inventories, reducing their production capacity. We propose a credit multiplier driven by these considerations and empirically isolate its importance by comparing how a similar firm responds to shocks differently when these shocks are initiated in their most profitable quarter (“main quarter”). We implement this test using recurring and unpredictable shocks (e.g., oil shocks) and provide extensive evidence supporting our identification strategy. Our results suggest that funding constraints and credit multiplier effects are significant for smaller firms that heavily rely on financing from suppliers.

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: 313

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.

Liquidity Provision and the Organizational Form of NYSE Specialist Firms

Published: 4/2002,  Volume: 57,  Issue: 2  |  DOI: 10.1111/1540-6261.00444  |  Cited by: 34

Jay F. Coughenour, Daniel N. Deli

We examine the influence of NYSE specialist firm organizational form on the nature of liquidity provision. We compare closely held firms whose specialists provide liquidity with their own capital to widely held firms whose specialists provide liquidity with diffusely owned capital. We argue that specialists using their own capital have a greater incentive and ability to reduce adverse selection costs, but face a greater cost of capital. Differences in the proportion of spreads due to adverse selection costs, large trade frequency, the sensitivity between depth and spreads, and price stabilization support this argument.

Non‐Deal Roadshows, Informed Trading, and Analyst Conflicts of Interest

Published: 11/21/2021,  Volume: 77,  Issue: 1  |  DOI: 10.1111/jofi.13089  |  Cited by: 73

DANIEL BRADLEY, RUSSELL JAME, JARED WILLIAMS

Non‐deal roadshows (NDRs) are private meetings between management and institutional investors, typically organized by sell‐side analysts. We find that around NDRs, local institutional investors trade heavily and profitably, while retail trading is significantly less informed. Analysts who sponsor NDRs issue significantly more optimistic recommendations and target prices, together with more “beatable” earnings forecasts, consistent with analysts issuing strategically biased forecasts to win NDR business. Our results suggest that NDRs result in a substantial information advantage for institutional investors and create significant conflicts of interests for the analysts who organize them.

Corporate Financial Policy, Information, and Market Expectations: An Empirical Investigation of Dividends

Published: 9/1987,  Volume: 42,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1987.tb03918.x  |  Cited by: 116

AHARON R. OFER, DANIEL R. SIEGEL

This paper documents a relationship between announcements of unexpected changes in financial policy and unexpected changes in performance of the firm. Using a new methodology that combines analysis of stock price movements and earnings forecast data, the authors provide evidence that analysts revise their earnings forecasts following the announcement of an unexpected dividend change by an amount positively related to the size of the unexpected dividend change. They also provide evidence that these revisions are positively related to the change in equity value surrounding the announcement. Further, they find that these revisions are consistent with rationality. Their results therefore provide direct evidence consistent with the hypothesis that unexpected dividend changes signal information about firm performance to market participants.

Correlated Trading and Returns

Published: 4/2008,  Volume: 63,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2008.01334.x  |  Cited by: 196

DANIEL DORN, GUR HUBERMAN, PAUL SENGMUELLER

A German broker's clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, consistent with executed limit orders being compensated for accommodating liquidity demands.