The Journal of Finance

Discussion

Published: 8/2001,  Volume: 56,  Issue: 4  |  DOI: 10.1111/0022-1082.00366  |  Cited by: 4

Zhenyu Wang

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.

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: 258

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.

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.

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

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: 1149

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.

Banks, Low Interest Rates, and Monetary Policy Transmission

Published: 3/9/2025,  Volume: 80,  Issue: 3  |  DOI: 10.1111/jofi.13436  |  Cited by: 24

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.

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.

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: 164

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.

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: 192

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.

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.

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: 714

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.

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: 212

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.

Trading and Returns under Periodic Market Closures

Published: 2/2000,  Volume: 55,  Issue: 1  |  DOI: 10.1111/0022-1082.00207  |  Cited by: 143

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.

Regulating Over‐the‐Counter Markets

Published: 5/30/2025,  Volume: 80,  Issue: 4  |  DOI: 10.1111/jofi.13461  |  Cited by: 4

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.

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: 265

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.

Model Misspecification and Underdiversification

Published: 11/7/2003,  Volume: 58,  Issue: 6  |  DOI: 10.1046/j.1540-6261.2003.00612.x  |  Cited by: 379

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.

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: 1244

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.

Corporate Scandals and Household Stock Market Participation

Published: 11/10/2016,  Volume: 71,  Issue: 6  |  DOI: 10.1111/jofi.12399  |  Cited by: 390

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.

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.

Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry

Published: 3/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13321  |  Cited by: 15

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.

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.

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.

Short‐Term Debt as Bridge Financing: Evidence from the Commercial Paper Market

Published: 1/19/2015,  Volume: 70,  Issue: 1  |  DOI: 10.1111/jofi.12216  |  Cited by: 140

MATTHIAS KAHL, ANIL SHIVDASANI, YIHUI WANG

We analyze why firms use nonintermediated short‐term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start‐up financing for capital investment. Firms’ CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long‐term bond issuance to reduce rollover risk.

Electricity Forward Prices: A High‐Frequency Empirical Analysis

Published: 8/2004,  Volume: 59,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2004.00682.x  |  Cited by: 279

Francis A. Longstaff, Ashley W. Wang

We conduct an empirical analysis of forward prices in the PJM electricity market using a high‐frequency data set of hourly spot and day‐ahead forward prices. We find that there are significant risk premia in electricity forward prices. These premia vary systematically throughout the day and are directly related to economic risk factors, such as the volatility of unexpected changes in demand, spot prices, and total revenues. These results support the hypothesis that electricity forward prices in the Pennsylvania, New Jersey, and Maryland market are determined rationally by risk‐averse economic agents.

Hedge Funds and Chapter 11

Published: 3/27/2012,  Volume: 67,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2012.01724.x  |  Cited by: 167

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.

A Unified Theory of Tobin's  q , Corporate Investment, Financing, and Risk Management

Published: 9/21/2011,  Volume: 66,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2011.01681.x  |  Cited by: 651

PATRICK BOLTON, HUI CHEN, NENG WANG

We propose a model of dynamic investment, financing, and risk management for financially constrained firms. The model highlights the central importance of the endogenous marginal value of liquidity (cash and credit line) for corporate decisions. Our three main results are: (1) investment depends on the ratio of marginal  q  to the marginal value of liquidity, and the relation between investment and marginal  q  changes with the marginal source of funding; (2) optimal external financing and payout are characterized by an endogenous double‐barrier policy for the firm's cash‐capital ratio; and (3) liquidity management and derivatives hedging are complementary risk management tools.

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.

Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?

Published: 12/1997,  Volume: 52,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1997.tb02751.x  |  Cited by: 425

ALBERT S. KYLE, F. ALBERT WANG

In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a two‐fund game is a Prisoner's Dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run.

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: 117

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.

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.

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.

Dynamic Trading with Realization Utility

Published: 2/2026,  Volume: 81,  Issue: 1  |  DOI: 10.1111/jofi.13472  |  Cited by: 0

MIN DAI, CONG QIN, NENG WANG

An investor receives utility bursts from realizing gains and losses at the individual stock level and dynamically allocates his mental budget between risky and risk‐free assets at the trading account level. Using savings, he reduces his stockholdings and is more willing to realize losses. Using leverage, he increases his stockholdings beyond his mental budget and is more reluctant to realize losses. While leverage strengthens the disposition effect, introducing leverage constraints mitigates it. Our model predicts that investors with stocks in deep losses sell them either immediately or after stocks rebound a little.

The Illiquidity of Corporate Bonds

Published: 5/23/2011,  Volume: 66,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2011.01655.x  |  Cited by: 899

JACK BAO, JUN PAN, JIANG WANG

This paper examines the illiquidity of corporate bonds and its asset‐pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid–ask spreads. We establish a strong link between bond illiquidity and bond prices. In aggregate, changes in market‐level illiquidity explain a substantial part of the time variation in yield spreads of high‐rated (AAA through A) bonds, overshadowing the credit risk component. In the cross‐section, the bond‐level illiquidity measure explains individual bond yield spreads with large economic significance.

Corporate Governance and Acquirer Returns

Published: 8/2007,  Volume: 62,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2007.01259.x  |  Cited by: 1465

RONALD W. MASULIS, CONG WANG, FEI XIE

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement‐period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire‐building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.

Noise as Information for Illiquidity

Published: 11/12/2013,  Volume: 68,  Issue: 6  |  DOI: 10.1111/jofi.12083  |  Cited by: 407

GRACE XING HU, JUN PAN, JIANG WANG

We propose a market‐wide liquidity measure by exploiting the connection between the amount of arbitrage capital in the market and observed “noise” in U.S. Treasury bonds—the shortage of arbitrage capital allows yields to deviate more freely from the curve, resulting in more noise in prices. Our noise measure captures episodes of liquidity crises of different origins across the financial market, providing information beyond existing liquidity proxies. Moreover, as a priced risk factor, it helps to explain cross‐sectional returns on hedge funds and currency carry trades, both known to be sensitive to the general liquidity conditions of the market.

Corporate Fraud and Business Conditions: Evidence from IPOs

Published: 11/9/2010,  Volume: 65,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2010.01615.x  |  Cited by: 306

TRACY YUE WANG, ANDREW WINTON, XIAOYUN YU

We examine how a firm's incentive to commit fraud when going public varies with investor beliefs about industry business conditions. Fraud propensity increases with the level of investor beliefs about industry prospects but decreases when beliefs are extremely high. We find that two mechanisms are at work: monitoring by investors and short‐term executive compensation, both of which vary with investor beliefs about industry prospects. We also find that monitoring incentives of investors and underwriters differ. Our results are consistent with models of investor beliefs and corporate fraud, and suggest that regulators and auditors should be vigilant for fraud during booms.

Currency Mispricing and Dealer Balance Sheets

Published: 10/4/2021,  Volume: 76,  Issue: 6  |  DOI: 10.1111/jofi.13079  |  Cited by: 95

GINO CENEDESE, PASQUALE DELLA CORTE, TIANYU WANG

We find dealer‐level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity. Our analysis uses a unique data set of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the U.K. leverage ratio framework. Dealers who are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients' demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a preexisting relationship.

Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation

Published: 8/2000,  Volume: 55,  Issue: 4  |  DOI: 10.1111/0022-1082.00265  |  Cited by: 822

Andrew W. Lo, Harry Mamaysky, Jiang Wang

Technical analysis, also known as “charting,” has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis—the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and we apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution—conditioned on specific technical indicators such as head‐and‐shoulders or double bottoms—we find that over the 31‐year sample period, several technical indicators do provide incremental information and may have some practical value.

Prospect Theory and Stock Market Anomalies

Published: 6/18/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13061  |  Cited by: 183

NICHOLAS BARBERIS, LAWRENCE J. JIN, BAOLIAN WANG

We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 prominent stock market anomalies. The model incorporates all of the elements of prospect theory, accounts for investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of the asset's return volatility, return skewness, and past capital gain. We find that the model can help explain a majority of the 23 anomalies.

Agency Problems at Dual‐Class Companies

Published: 7/16/2009,  Volume: 64,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2009.01477.x  |  Cited by: 517

RONALD W. MASULIS, CONG WANG, FEI XIE

Using a sample of U.S. dual‐class companies, we examine how divergence between insider voting and cash flow rights affects managerial extraction of private benefits of control. We find that as this divergence widens, corporate cash holdings are worth less to outside shareholders, CEOs receive higher compensation, managers make shareholder value‐destroying acquisitions more often, and capital expenditures contribute less to shareholder value. These findings support the agency hypothesis that managers with greater excess control rights over cash flow rights are more prone to pursue private benefits at shareholders’ expense, and help explain why firm value is decreasing in insider excess control rights.

Deposit Franchise Runs

Published: 4/7/2026,  Volume: 81,  Issue: 3  |  DOI: 10.1111/jofi.70034  |  Cited by: 8

ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL, OLIVIER WANG

The deposit franchise is valuable because banks pay below‐market deposit rates. However, if depositors leave, its value vanishes. This can trigger runs by uninsured depositors, even if banks hold fully liquid assets. Because the franchise value increases with interest rates, runs are more harmful, and hence likelier, when rates are high. Banks can deter runs by shortening asset duration, but this risks insolvency if rates fall. Avoiding both runs and insolvency requires capital covering the potential loss of the uninsured deposit franchise. We estimate deposit franchise values and use them to identify vulnerable banks during the 2023 regional bank crisis.

A q$q$ Theory of Internal Capital Markets

Published: 2/24/2024,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13318  |  Cited by: 21

MIN DAI, XAVIER GIROUD, WEI JIANG, NENG WANG

We propose a tractable model of dynamic investment, spinoffs, financing, and risk management for a multidivision firm facing costly external finance. Our analysis formalizes the following insights: (i) Within‐firm resource allocation is based not only on divisions' productivity, as in winner‐picking models, but also their risk; (ii) firms may voluntarily spin off productive divisions to increase liquidity; (iii) diversification can reduce firm value in low‐liquidity states, as it increases the spinoff cost and hampers liquidity management; (iv) corporate socialism makes liquidity less valuable; and (v) division investment is determined by the ratio between marginal and marginal value of cash.

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.

Estimation and Test of a Simple Model of Intertemporal Capital Asset Pricing

Published: 8/2004,  Volume: 59,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2004.00678.x  |  Cited by: 265

Michael J. Brennan, Ashley W. Wang, Yihong Xia

A simple valuation model with time‐varying investment opportunities is developed and estimated. The model assumes that the investment opportunity set is completely described by the real interest rate and the maximum Sharpe ratio, which follow correlated Ornstein–Uhlenbeck processes. The model parameters and time series of the state variables are estimated using U.S. Treasury bond yields and expected inflation from January 1952 to December 2000, and as predicted, the estimated maximum Sharpe ratio is related to the equity premium. In cross‐sectional asset‐pricing tests, both state variables have significant risk premia, which is consistent with Merton's ICAPM.

Dynamic Banking and the Value of Deposits

Published: 4/23/2025,  Volume: 80,  Issue: 4  |  DOI: 10.1111/jofi.13454  |  Cited by: 17

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.

Beliefs Aggregation and Return Predictability

Published: 12/27/2022,  Volume: 78,  Issue: 1  |  DOI: 10.1111/jofi.13195  |  Cited by: 8

ALBERT S. KYLE, ANNA A. OBIZHAEVA, YAJUN WANG

We study return predictability using a model of speculative trading among competitive traders who agree to disagree about the precision of private information. Although traders apply Bayes' Law consistently, returns are predictable. In addition to trading on long‐term fundamental value, traders also trade on perceived short‐term opportunities arising from foreseen future disagreement, as in a Keynesian beauty contest. Contradicting conventional wisdom, this short‐term speculation dampens price fluctuations and generates time‐series momentum. Model calibration shows quantitatively realistic patterns of return dynamics. Consistent with empirical evidence, our model predicts more pronounced momentum for stocks with higher trading volume.

The Evolution of Security Designs

Published: 9/19/2006,  Volume: 61,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2006.01052.x  |  Cited by: 12

THOMAS H. NOE, MICHAEL J. REBELLO, JUN WANG

We consider a competitive and perfect financial market in which agents have heterogeneous cash flow valuations. Instead of assuming that agents are endowed with rational expectations, we model their behavior as the product of adaptive learning. Our results demonstrate that adaptive learning affects security design profoundly, with securities mispriced even in the long run and optimal designs trading off underpricing against intrinsic value maximization. The evolutionary dominant security design calls for issuing securities that engender large losses with a small but positive probability, but that otherwise produce stable payoffs, almost the exact opposite of the pure state claims that are optimal in the rational expectations framework.