The Journal of Finance

Individual Investors and Volatility

Published: 07/19/2011   |   DOI: 10.1111/j.1540-6261.2011.01668.x

THIERRY FOUCAULT, DAVID SRAER, DAVID J. THESMAR

We show that retail trading activity has a positive effect on the volatility of stock returns, which suggests that retail investors behave as noise traders. To identify this effect, we use a reform of the French stock market that raises the relative cost of speculative trading for retail investors. The daily return volatility of the stocks affected by the reform falls by 20 basis points (a quarter of the sample standard deviation of the return volatility) relative to other stocks. For affected stocks, we also find a significant decrease in the magnitude of return reversals and the price impact of trades.

Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France

Published: 01/22/2020   |   DOI: 10.1111/jofi.12880

JOHAN HOMBERT, ANTOINETTE SCHOAR, DAVID SRAER, DAVID THESMAR

We evaluate the effect of downside insurance on self‐employment. We exploit a large‐scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one‐for‐one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.

Investor Psychology and Asset Pricing

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00379

David Hirshleifer

The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.

INCREASED TAXATION WITH INCREASED ACCEPTABILITY—A DISCUSSION OF NET WORTH TAXATION AS A FEDERAL REVENUE ALTERNATIVE

Published: 05/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01793.x

Martin David

Presidential Address: Social Transmission Bias in Economics and Finance

Published: 05/27/2020   |   DOI: 10.1111/jofi.12906

DAVID HIRSHLEIFER

I discuss a new intellectual paradigm, social economics and finance—the study of the social processes that shape economic thinking and behavior. This emerging field recognizes that people observe and talk to each other. A key, underexploited building block of social economics and finance is social transmission bias: systematic directional shift in signals or ideas induced by social transactions. I use five “fables” (models) to illustrate the novelty and scope of the transmission bias approach, and offer several emergent themes. For example, social transmission bias compounds recursively, which can help explain booms, bubbles, return anomalies, and swings in economic sentiment.

Housing Collateral and Entrepreneurship

Published: 09/21/2016   |   DOI: 10.1111/jofi.12468

MARTIN C. SCHMALZ, DAVID A. SRAER, DAVID THESMAR

We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross‐sectional variation in local house‐price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.

DISCUSSION

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04539.x

DAVID FELDMAN

Good Timing: CEO Stock Option Awards and Company News Announcements

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04809.x

DAVID YERMACK

This article analyzes the timing of CEO stock option awards, as a method of investigating corporate managers' influence over the terms of their own compensation. In a sample of 620 stock option awards to CEOs of Fortune 500 companies between 1992 and 1994, I find that the timing of awards coincides with favorable movements in company stock prices. Patterns of companies' quarterly earnings announcements are consistent with an interpretation that CEOs receive stock option awards shortly before favorable corporate news. I evaluate and reject several alternative explanations of the results, including insider trading and the manipulation of news announcement dates.

Minutes of the Annual Membership Meeting

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00380

David H. Pyle

INTERDEPENDENCE OF UTILITY RATE‐BASE TYPE, PERMITTED RATE OF RETURN, AND UTILITY EARNINGS*

Published: 03/01/1962   |   DOI: 10.1111/j.1540-6261.1962.tb04247.x

David K. Eiteman

THE EFFECTS OF POPULATION GROWTH UPON THE FISCAL STRENGTH OF RESIDENTIAL SUBURBS*

Published: 06/01/1968   |   DOI: 10.1111/j.1540-6261.1968.tb00832.x

David Forrest Gates

Transactions Costs and the Theory of Portfolio Selection

Published: 09/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb01964.x

David Goldsmith

The Term Structure of Interest Rates in a Partially Observable Economy

Published: 07/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb04391.x

DAVID FELDMAN

This paper investigates the term structure of interest rates in a multiperiod production and exchange economy with incomplete information. Unable to observe their stochastic investment opportunities, investors engage in dynamic Bayesian inference. This results in the endogenous identification of a more complex production function which generates a richer term structure, resembling the one that actual market prices imply. In addition, this paper introduces a characteristic function of the term structure and demonstrates that, in contrast with a fully observable economy, the widely investigated expectations hypothesis holds true only if interest rates are nonstochastic.

Quantifying Reduced‐Form Evidence on Collateral Constraints

Published: 05/25/2022   |   DOI: 10.1111/jofi.13158

SYLVAIN CATHERINE, THOMAS CHANEY, ZONGBO HUANG, DAVID SRAER, DAVID THESMAR

This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic investment model with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced‐form coefficient from the recent corporate finance literature that connects exogenous debt capacity shocks to corporate investment. Relative to a frictionless benchmark, collateral constraints induce losses of 7.1% for output and 1.4% for total factor productivity (TFP) (misallocation). We show these estimated losses tend to be more robust to misspecification than estimates obtained by targeting leverage.

Naïve Buying Diversification and Narrow Framing by Individual Investors

Published: 03/20/2023   |   DOI: 10.1111/jofi.13222

JOHN GATHERGOOD, DAVID HIRSHLEIFER, DAVID LEAKE, HIROAKI SAKAGUCHI, NEIL STEWART

We provide the first tests to distinguish whether individual investors equally balance their overall portfolios (naïve portfolio diversification, NPD) or, in contrast, equally balance the values of same‐day purchases of multiple assets (naïve buying diversification, NBD). We find NBD in purchases of multiple stocks, and in mixed purchases of individual stocks and funds. In contrast, there is little evidence of NPD. Evidence suggests that NBD arises due to stock picking behavior and neglect of diversification. These findings suggest that behavioral finance theory should incorporate transaction, as well as portfolio, framing.

Remuneration, Retention, and Reputation Incentives for Outside Directors

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00699.x

DAVID YERMACK

I study incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Previous research has only shown these relations to apply under limited circumstances such as financial distress. Together these incentive mechanisms provide directors with wealth increases of approximately 11 cents per $1,000 rise in firm value. Although smaller than the performance sensitivities of CEOs, outside directors' incentives imply a change in wealth of about $285,000 for a 1 standard deviation (SD) change in typical firm performance. Cross‐sectional patterns of director equity awards conform to agency and financial theories.

STATE OF THE FINANCE FIELD: FURTHER COMMENT

Published: 12/01/1968   |   DOI: 10.1111/j.1540-6261.1968.tb00322.x

David Durand

DISCUSSION

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03648.x

DAVID EMANUEL

Heterogeneous Beliefs, Speculation, and the Equity Premium

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01310.x

ALEXANDER DAVID

Agents with heterogeneous beliefs about fundamental growth do not share risks perfectly but instead speculate with each other on the relative accuracy of their models' predictions. They face the risk that market prices move more in line with the trading models of competing agents than with their own. Less risk‐averse agents speculate more aggressively and demand higher risk premiums. My calibrated model generates countercyclical consumption volatility, earnings forecast dispersion, and cross‐sectional consumption dispersion. With a risk aversion coefficient less than one, agents' speculation causes half the observed equity premium and lowers the riskless rate by about 1%.

GROWTH STOCKS AND THE PETERSBURG PARADOX*

Published: 09/01/1957   |   DOI: 10.1111/j.1540-6261.1957.tb04143.x

David Durand