The Journal of Finance

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.

Family Firms

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00601

Mike Burkart, Fausto Panunzi, Andrei Shleifer

We present a model of succession in a firm owned and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on what fraction of the company to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder's decision is shaped by the legal environment. This theory of separation of ownership from management includes the Anglo‐Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross‐country evidence.

WEALTH ACCUMULATION OF BLACK AND WHITE FAMILIES: THE EMPIRICAL EVIDENCE

Published: 05/01/1971   |   DOI: 10.1111/j.1540-6261.1971.tb00904.x

Andrew F. Brimmer, Henry S. Terrell

An Analysis of Divestiture Effects Resulting from Deregulation

Published: 12/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb02527.x

ANDREW H. CHEN, LARRY J. MERVILLE

Capital market data were used to examine the divestiture effects pertaining to deregulation, the dropping of antitrust charges, and the reversing of the co‐insurance effect associated with the recent breakup of AT&T. The empirical results of the study indicate that significant economic events took place during the breakup process, which led to transfers of wealth from various parties to the securityholders of AT&T. The results also indicate that the buffering effect of regulation was reduced as AT&T went through the total deregulation process. This is in accordance with Peltzman's prediction.

Liquidation Values and Debt Capacity: A Market Equilibrium Approach

Published: 09/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04661.x

ANDREI SHLEIFER, ROBERT W. VISHNY

We explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets. When a firm in financial distress needs to sell assets, its industry peers are likely to be experiencing problems themselves, leading to asset sales at prices below value in best use. Such illiquidity makes assets cheap in bad times, and so ex ante is a significant private cost of leverage. We use this focus on asset buyers to explain variation in debt capacity across industries and over the business cycle, as well as the rise in U.S. corporate leverage in the 1980s.

Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2006.01005.x

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.

Do Demand Curves for Stocks Slope Down?

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04518.x

ANDREI SHLEIFER

Since September, 1976, stocks newly included into the Standard and Poor's 500 Index have earned a significant positive abnormal return at the announcement of the inclusion. This return does not disappear for at least ten days after the inclusion. The returns are positively related to measures of buying by index funds, consistent with the hypothesis that demand curves for stocks slope down. The returns are not related to S & P's bond ratings, which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock.

Performance Evaluation with Transactions Data: The Stock Selection of Investment Newsletters

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00165

Andrew Metrick

This paper analyzes the equity‐portfolio recommendations made by investment newsletters. Overall, there is no significant evidence of superior stock‐picking ability for this sample of 153 newsletters. Moreover, there is no evidence of abnormal short‐run performance persistence (“hot hands”). The comprehensive and bias‐free transactions database also allows for insights into the precision of performance evaluation. Using a measure of precision defined in the paper, a transactions‐based approach yields a median improvement of 10 percent over a corresponding factor model. This compares favorably with the precision gained by adding factors to the CAPM.

Limitation of Liability and the Ownership Structure of the Firm

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04724.x

ANDREW WINTON

This paper models the optimal choice of shareholder liability. If investors want managers to be monitored, the monitors should be residual claimants (shareholders), and monitoring and firm value will increase as shareholders commit more of their wealth to the firm. When liquidating wealth is costly, contingent liability dominates direct investment as a wealth commitment device; however, if wealth is unobservable, under this regime only relatively poor investors will hold shares in equilibrium. This may be prevented at a cost by verifying shareholder wealth and restricting stock transfers. Comparative statics on various liability regimes are used to motivate actual contractual arrangements.

Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital*

Published: 03/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb03534.x

STEPHEN A. BUSER, ANDREW H. CHEN, EDWARD J. KANE

This paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the FDIC. Essentially, the FDIC sells two products—insurance and regulation. To span the product space, it must and does set two prices. We argue that the need to establish regulatory disincentives to bank risk‐taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value (i.e., the value of their right to continue in business) stands at the center of these disincentives and in front of the FDIC's insurance reserves.

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.

THE BLACK BANKS: AN ASSESSMENT OF PERFORMANCE AND PROSPECTS

Published: 05/01/1971   |   DOI: 10.1111/j.1540-6261.1971.tb00905.x

Andrew F. Brimmer

The Limits of p‐Hacking: Some Thought Experiments

Published: 04/30/2021   |   DOI: 10.1111/jofi.13036

ANDREW Y. CHEN

Suppose that the 300+ published asset pricing factors are all spurious. How much p‐hacking is required to produce these factors? If 10,000 researchers generate eight factors every day, it takes hundreds of years. This is because dozens of published t‐statistics exceed 6.0, while the corresponding p‐value is infinitesimal, implying an astronomical amount of p‐hacking in a general model. More structure implies that p‐hacking cannot address ≈100 published t‐statistics that exceed 4.0, as they require an implausibly nonlinear preference for t‐statistics or even more p‐hacking. These results imply that mispricing, risk, and/or frictions have a key role in stock returns.

When Uncertainty Blows in the Orchard: Comovement and Equilibrium Volatility Risk Premia

Published: 09/17/2013   |   DOI: 10.1111/jofi.12095

ANDREA BURASCHI, FABIO TROJANI, ANDREA VEDOLIN

We provide novel evidence for an equilibrium link between investors' disagreement, the market price of volatility and correlation, and the differential pricing of index and individual equity options. We show that belief disagreement is positively related to (i) the wedge between index and individual volatility risk premia, (ii) the different slope of the smile of index and individual options, and (iii) the correlation risk premium. Priced disagreement risk also explains returns of option volatility and correlation trading strategies in a way that is robust to the inclusion of other risk factors and different market conditions.

Public Information and Coordination: Evidence from a Credit Registry Expansion

Published: 03/21/2011   |   DOI: 10.1111/j.1540-6261.2010.01637.x

ANDREW HERTZBERG, JOSÉ MARÍA LIBERTI, DANIEL PARAVISINI

This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that forced lenders to share negative private assessments about their borrowers. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of other lenders' reaction to the negative news about the firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.

A Model of Shadow Banking

Published: 01/30/2013   |   DOI: 10.1111/jofi.12031

NICOLA GENNAIOLI, ANDREI SHLEIFER, ROBERT W. VISHNY

We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry‐ups when investors neglect tail risks.

Change You Can Believe In? Hedge Fund Data Revisions

Published: 01/27/2015   |   DOI: 10.1111/jofi.12240

ANDREW J. PATTON, TARUN RAMADORAI, MICHAEL STREATFIELD

We analyze the reliability of voluntary disclosures of financial information, focusing on widely‐employed publicly‐available hedge fund databases. Tracking changes to statements of historical performance recorded between 2007 and 2011, we find that historical returns are routinely revised. These revisions are not merely random or corrections of earlier mistakes; they are partly forecastable by fund characteristics. Funds that revise their performance histories significantly and predictably underperform those that have never revised, suggesting that unreliable disclosures constitute a valuable source of information for investors. These results speak to current debates about mandatory disclosures by financial institutions to market regulators.

Why Do Markets Move Together? An Investigation of U.S.‐Japan Stock Return Comovements

Published: 07/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02713.x

G. ANDREW KAROLYI, RENÉ M. STULZ

This article explores the fundamental factors that affect cross‐country stock return correlations. Using transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE‐traded American Depository Receipts (ADRs) and a matched‐sample portfolio of U. S. stocks. We find that U. S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad‐based market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations.

Predictable Financial Crises

Published: 01/27/2022   |   DOI: 10.1111/jofi.13105

ROBIN GREENWOOD, SAMUEL G. HANSON, ANDREI SHLEIFER, JAKOB AHM SØRENSEN

Using historical data on postwar financial crises around the world, we show that the combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth is elevated. Our evidence challenges the view that financial crises are unpredictable “bolts from the sky” and supports the Kindleberger‐Minsky view that crises are the byproduct of predictable, boom‐bust credit cycles. This predictability favors policies that lean against incipient credit‐market booms.

Multimarket Trading and Liquidity: Theory and Evidence

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01272.x

SHMUEL BARUCH, G. ANDREW KAROLYI, MICHAEL L. LEMMON

We develop a new model of multimarket trading to explain the differences in the foreign share of trading volume of internationally cross‐listed stocks. The model predicts that the trading volume of a cross‐listed stock is proportionally higher on the exchange in which the cross‐listed asset returns have greater correlation with returns of other assets traded on that market. We find robust empirical support for this prediction using stock return and volume data on 251 non‐U.S. stocks cross‐listed on major U.S. exchanges.