The Journal of Finance

Risk‐Sharing and the Term Structure of Interest Rates

Published: 05/11/2022   |   DOI: 10.1111/jofi.13139

ANDRÉS SCHNEIDER

I propose a general equilibrium model with heterogeneous investors to explain the key properties of the U.S. real and nominal term structure of interest rates. I find that differences in investors' elasticities of intertemporal substitution are critical in accounting for the dynamics of nominal and real yields. The nominal term structure is driven primarily by real shocks so that it can be upward sloping regardless of the correlation between nominal and real shocks.

Labor Mobility: Implications for Asset Pricing

Published: 01/16/2014   |   DOI: 10.1111/jofi.12141

ANDRÉS DONANGELO

Labor mobility is the flexibility of workers to walk away from an industry in response to better opportunities. I develop a model in which labor flows make bad times worse for shareholders who are left with capital that is less productive. The model shows that firms face greater operating leverage by providing flexibility to mobile workers. I construct an empirical measure of labor mobility consistent with the model and document an economically significant cross‐sectional relation between mobility, operating leverage, and stock returns. I find that firms in mobile industries earn returns over 5% higher than those in less mobile industries.

Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit

Published: 08/04/2016   |   DOI: 10.1111/jofi.12439

EMILY BREZA, ANDRES LIBERMAN

We present evidence that restrictions to the set of feasible financial contracts affect buyer‐supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within‐product difference‐in‐differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.

Entrenchment and Severance Pay in Optimal Governance Structures

Published: 03/21/2003   |   DOI: 10.1111/1540-6261.00536

Andres Almazan, Javier Suarez

This paper explores how motivating an incumbent CEO to undertake actions that improve the effectiveness of his management interacts with the firm's policy on CEO replacement. Such policy depends on the presence and the size of severance pay in the CEO's compensation package and on the CEO's influence on the board of directors regarding his own replacement (i.e., entrenchment). We explain when and why the combination of some degree of entrenchment and a sizeable severance package is desirable. The analysis offers predictions about the correlation between entrenchment, severance pay, and incentive compensation.

A Macrofinance View of U.S. Sovereign CDS Premiums

Published: 05/20/2020   |   DOI: 10.1111/jofi.12948

MIKHAIL CHERNOV, LUKAS SCHMID, ANDRES SCHNEIDER

Premiums on U.S. sovereign credit default swaps (CDS) have risen to persistently elevated levels since the financial crisis. We examine whether these premiums reflect the probability of a fiscal default—a state in which a balanced budget can no longer be restored by raising taxes or eroding the real value of debt by increasing inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stances jointly endogenously determine nominal debt, taxes, inflation, and growth. We show that the CDS premiums reflect the endogenous risk‐adjusted probabilities of fiscal default. The calibrated model is consistent with elevated levels of CDS premiums but leaves dynamic implications quantitatively unresolved.

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

Published: 06/01/2017   |   DOI: 10.1111/jofi.12526

ANDRES ALMAZAN, ZHAOHUI CHEN, SHERIDAN TITMAN

This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01361.x

ANDRES ALMAZAN, SANJAY BANERJI, ADOLFO DE MOTTA

We provide a theory of informal communication—cheap talk—between firms and capital markets that incorporates the role of agency conflicts between managers and shareholders. The analysis suggests that a policy of discretionary disclosure that encourages managers to attract the market's attention when the firm is substantially undervalued can create shareholder value. The theory also relates the credibility of managerial announcements to the use of stock‐based compensation, the presence of informed trading, and the liquidity of the stock. Our results are consistent with the existence of positive announcement effects produced by apparently innocuous corporate events (e.g., stock dividends, name changes).

Financial Structure, Acquisition Opportunities, and Firm Locations

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01543.x

ANDRES ALMAZAN, ADOLFO DE MOTTA, SHERIDAN TITMAN, VAHAP UYSAL

This paper investigates the relation between firms' locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high‐tech cities and growing cities maintain more financial slack. Overall, the evidence suggests that growth opportunities influence firms' financial decisions.

“You Can Enter but You Cannot Leave…”: U.S. Securities Markets and Foreign Firms

Published: 09/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01402.x

ANDRÁS MAROSI, NADIA MASSOUD

Although a number of prior papers have argued the benefits to foreign firms of cross‐listing their shares in the U.S., the number of foreign firms exiting U.S. capital markets has been increasing. This has occurred despite the difficulties foreign firms face in deregistering from the Securities and Exchange Commission (SEC). This paper examines the reasons underlying this trend. One of our main findings is that the passage of the Sarbanes‐Oxley Act has reduced the net benefits of a U.S. listing and registration, particularly for smaller foreign firms with lower trading volume and stronger insider control.

DISCUSSION

Published: 05/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb03070.x

Victor L. Andrews

DISCUSSION

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03685.x

ANDREW H. CHEN

Trade Generation, Reputation, and Sell‐Side Analysts

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00743.x

ANDREW R. JACKSON

This paper examines the trade‐generation and reputation‐building incentives facing sell‐side analysts. Using a unique data set I demonstrate that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. I also find that accurate analysts generate higher reputations. The analyst therefore faces a conflict between telling the truth to build her reputation versus misleading investors via optimistic forecasts to generate short‐term increases in trading commissions. In equilibrium I show forecast optimism can exist, even when investment‐banking affiliations are removed. The conclusions may have important policy implications given recent changes in the institutional structure of the brokerage industry.

THE FIRM'S OPTIMAL FINANCIAL DECISIONS: AN INTEGRATION OF CORPORATE FINANCIAL THEORY UNDER CERTAINTY*

Published: 12/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb03148.x

Andrew J. Senchack

Proxy Advisory Firms: The Economics of Selling Information to Voters

Published: 04/17/2019   |   DOI: 10.1111/jofi.12779

ANDREY MALENKO, NADYA MALENKO

We analyze how proxy advisors, which sell voting recommendations to shareholders, affect corporate decision‐making. If the quality of the advisor's information is low, there is overreliance on its recommendations and insufficient private information production. In contrast, if the advisor's information is precise, it may be underused because the advisor rations its recommendations to maximize profits. Overall, the advisor's presence leads to more informative voting only if its information is sufficiently precise. We evaluate several proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or decreasing litigation pressure, can have negative effects.

Strategic and Financial Bidders in Takeover Auctions

Published: 08/06/2014   |   DOI: 10.1111/jofi.12194

ALEXANDER  S. GORBENKO, ANDREY MALENKO

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature, poorly performing companies. We also find that (i) valuations of different strategic bidders are more dispersed and (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.

Theories of Corporate Debt Policy: A Synthesis

Published: 05/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb02098.x

ANDREW H. CHEN, E. HAN KIM

Institutional Trade Persistence and Long‐Term Equity Returns

Published: 03/21/2011   |   DOI: 10.1111/j.1540-6261.2010.01644.x

AMIL DASGUPTA, ANDREA PRAT, MICHELA VERARDO

Recent studies show that single‐quarter institutional herding positively predicts short‐term returns. Motivated by the theoretical herding literature, which emphasizes endogenous persistence in decisions over time, we estimate the effect of multiquarter institutional buying and selling on stock returns. Using both regression and portfolio tests, we find that persistent institutional trading negatively predicts long‐term returns: persistently sold stocks outperform persistently bought stocks at long horizons. The negative association between returns and institutional trade persistence is not subsumed by past returns or other stock characteristics, is concentrated among smaller stocks, and is stronger for stocks with higher institutional ownership.

Corporate Fraud and Business Conditions: Evidence from IPOs

Published: 11/09/2010   |   DOI: 10.1111/j.1540-6261.2010.01615.x

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.

Complex Asset Markets

Published: 07/20/2023   |   DOI: 10.1111/jofi.13264

ANDREA L. EISFELDT, HANNO LUSTIG, LEI ZHANG

Investors' individual arbitrage models introduce idiosyncratic risk into complex asset strategies, driving up average returns and Sharpe ratios. However, despite the attractive risk‐return trade‐off, participation is limited. This is because effective Sharpe ratios in complex asset markets vary with investors' expertise. Investors with higher expertise, better models, and lower resulting idiosyncratic risk exposures realize higher Sharpe ratios. Their demand deters entry by less sophisticated investors. As predicted by our model, market dislocations are characterized by an increase in idiosyncratic risk, investor exit, and persistently elevated alphas and Sharpe ratios. The selection effect from higher expertise agents' more favorable Sharpe ratios is unique to our model and key to our main results.

Ownership Structure, Speculation, and Shareholder Intervention

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.45483

Charles Kahn, Andrew Winton

An institution holding shares in a firm can use information about the firm both for trading (“speculation”) and for deciding whether to intervene to improve firm performance. Intervention increases the value of the institution's existing shareholdings, but intervention only increases the institution's trading profits if it enhances the precision of the institution's information relative to that of uninformed traders. Thus, the ability to speculate can increase or decrease institutional intervention. We examine key factors that affect the intervention decision, the usefulness of “short‐swing” provisions and restricted shares in encouraging institutional intervention, and implications for ownership structure across different firms.