The Journal of Finance

Corporate Diversification: What Gets Discounted?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00492

Sattar A. Mansi, David M. Reeb

Prior literature finds that diversified firms sell at a discount relative to the sum of the imputed values of their business segments. We explore this documented discount and argue that it stems from risk‐reducing effects of corporate diversification. Consistent with this risk‐reduction hypothesis, we find that (a) shareholder losses in diversification are a function of firm leverage, (b) all equity firms do not exhibit a diversification discount, and (c) using book values of debt to compute excess value creates a downward bias for diversified firms. Overall, the results indicate that diversification is insignificantly related to excess firm value.

Book Reviews

Published: 03/31/2007   |   DOI: 10.1111/1540-6261.00091

David L. Ikenberry, Brad M. Barber

Zvi Bodie and Robert C. Merton, Finance.

A Microeconomic Model of Federal Home Loan Mortgage Corporation Activity

Published: 09/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb03513.x

KENNETH T. ROSEN, DAVID E. BLOOM

Municipal Bond Pricing and the New York City Fiscal Crisis

Published: 12/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03615.x

DAVID S. KIDWELL, CHARLES A. TRZCINKA

This paper's findings suggests that the New York City fiscal crisis by itself did not lead to a fundamental change in risk perceptions of investors, resulting in higher interest rates in the municipal bond market. The monthly prediction errors generated by time series tests were relatively small and none were statistically significant. Only the signs on the prediction errors for June, July, and August were consistent with a New York City effect. Thus, if the New York City default had an impact on aggregate interest rates, it was at most small and of short duration.

Implied Spot Rates as Predictors of Currency Returns: A Note

Published: 03/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02600.x

DAVID R. PETERSON, ALAN L. TUCKER

Currency call option transactions data and the Black‐Scholes option pricing model, as modified by Merton for continuous dividends and as adapted to currency options by Biger and Hull and by Garman and Kohlhagen, are used to imply spot foreign exchange rates. The proportional deviation between implied and simultaneously observed spot rates is found to be a direct and statistically significant determinant of subsequent returns on foreign currency holdings after controlling for interest rate differentials. Further, an ex ante trading rule reveals that the additional information contained in implied rates often is sufficient to generate significant economic profits.

The Long‐Run Negative Drift of Post‐Listing Stock Returns

Published: 12/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05188.x

BALA G. DHARAN, DAVID L. IKENBERRY

After firms move trading in their stock to the American or New York Stock Exchanges, stock returns are generally poor. Although many listing firms issue equity around the time of listing, post‐listing performance is not entirely explained by the equity issuance puzzle. Similar to the conclusions regarding other long‐run phenomena, poor post‐listing performance appears related to managers timing their application for listing. Managers of smaller firms, where initial listing requirements may be more binding, tend to apply for listing before a decline in performance. Poor post‐listing performance is not observed in larger firms.

Stimulating Housing Markets

Published: 10/15/2019   |   DOI: 10.1111/jofi.12847

DAVID BERGER, NICHOLAS TURNER, ERIC ZWICK

We study temporary fiscal stimulus designed to support distressed housing markets by inducing demand from buyers in the private market. Using difference‐in‐differences and regression kink research designs, we find that the First‐Time Homebuyer Credit increased home sales by 490,000 (9.8%), median home prices by $2,400 (1.1%) per standard deviation increase in program exposure, and the transition rate into homeownership by 53%. The policy response did not reverse immediately. Instead, demand comes from several years in the future: induced buyers were three years younger in 2009 than typical first‐time buyers. The program's market‐stabilizing benefits likely exceeded its direct stimulus effects.

Agency Problems, Equity Ownership, and Corporate Diversification

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03811.x

DAVID J. DENIS, DIANE K. DENIS, ATULYA SARIN

We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, we report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value‐reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces.

International Stock Return Predictability: What Is the Role of the United States?

Published: 03/19/2013   |   DOI: 10.1111/jofi.12041

DAVID E. RAPACH, JACK K. STRAUSS, GUOFU ZHOU

We investigate lead‐lag relationships among monthly country stock returns and identify a leading role for the United States: lagged U.S. returns significantly predict returns in numerous non‐U.S. industrialized countries, while lagged non‐U.S. returns display limited predictive ability with respect to U.S. returns. We estimate a news‐diffusion model, and the results indicate that return shocks arising in the United States are only fully reflected in equity prices outside of the United States with a lag, consistent with a gradual information diffusion explanation of the predictive power of lagged U.S. returns.

A New Approach to International Arbitrage Pricing

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05126.x

RAVI BANSAL, DAVID A. HSIEH, S. VISWANATHAN

This paper uses a nonlinear arbitrage‐pricing model, a conditional linear model, and an unconditional linear model to price international equities, bonds, and forward currency contracts. Unlike linear models, the nonlinear arbitrage‐pricing model requires no restrictions on the payoff space, allowing it to price payoffs of options, forward contracts, and other derivative securities. Only the nonlinear arbitrage‐pricing model does an adequate job of explaining the time series behavior of a cross section of international returns.

Debt Contracting on Management

Published: 02/19/2020   |   DOI: 10.1111/jofi.12893

BRIAN AKINS, DAVID DE ANGELIS, MACLEAN GAULIN

Change of management restrictions (CMRs) in loan contracts give lenders explicit ex ante control rights over managerial retention and selection. This paper shows that lenders use CMRs to mitigate risks arising from CEO turnover, especially those related to the loss of human capital and replacement uncertainty, thereby providing evidence that human capital risk affects debt contracting. With a CMR in place, the likelihood of CEO turnover decreases by more than half, and future firm performance improves when retention frictions are important, suggesting that lenders can influence managerial turnover, even outside of default states, and help the borrower retain talent.

Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500

Published: 05/06/2003   |   DOI: 10.1111/1540-6261.00567

Ronald C. Anderson, David M. Reeb

We investigate the relation between founding‐family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one‐third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure.

BUDGET BALANCE AND EQUILIBRIUM INCOME*

Published: 03/01/1965   |   DOI: 10.1111/j.1540-6261.1965.tb00185.x

David J. Ott, Attiat F. Ott

Death and Taxes: The Market for Flower Bonds

Published: 07/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04578.x

DAVID MAYERS, CLIFFORD W. SMITH

Certain U.S. Government securities, known as flower bonds, can be redeemed at par plus accrued interest for the purpose of paying estate taxes, if held at the time of death. Thus, a flower bond, selling at a discount, is like a straight bond plus a life insurance policy. An equilibrium derived from a rational flower bond pricing model implies the existence of clienteles: individuals with the highest death probabilities hold the deepest discount flower bonds. The empirical implication, that bonds with the deepest discount should be redeemed at the fastest rate, is tested and the results support the proposition.

The WACC Fallacy: The Real Effects of Using a Unique Discount Rate

Published: 02/06/2015   |   DOI: 10.1111/jofi.12250

PHILIPP KRÜGER, AUGUSTIN LANDIER, DAVID THESMAR

In this paper, we test whether firms properly adjust for risk in their capital budgeting decisions. If managers use a single discount rate within firms, we expect that conglomerates underinvest (overinvest) in relatively safe (risky) divisions. We measure division relative risk as the difference between the division's asset beta and a firm‐wide beta. We establish a robust and significant positive relationship between division‐level investment and division relative risk. Next, we measure the value loss due to this behavior in the context of acquisitions. When the bidder's beta is lower than that of the target, announcement returns are significantly lower.

Wholesale Funding Dry‐Ups

Published: 10/10/2017   |   DOI: 10.1111/jofi.12592

CHRISTOPHE PÉRIGNON, DAVID THESMAR, GUILLAUME VUILLEMEY

We empirically explore the fragility of wholesale funding of banks, using transaction‐level data on short‐term, unsecured certificates of deposit in the European market. We do not observe a market‐wide freeze during the 2008 to 2014 period. Yet, many banks suddenly experience funding dry‐ups. Dry‐ups predict, but do not cause, future deterioration in bank performance. Furthermore, during periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. We therefore fail to find evidence consistent with adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders.

The Narrow Channel of Quantitative Easing: Evidence from YCC Down Under

Published: 12/18/2023   |   DOI: 10.1111/jofi.13307

DAVID O. LUCCA, JONATHAN H. WRIGHT

We study the recent Australian experience with yield curve control (YCC) as perhaps the best evidence of how this policy might work in other developed economies. YCC seemingly worked well in 2020, when the market expected short rates to stay at zero for a long period of time. As the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, the Reserve Bank of Australia purchased most of the targeted government bond outstanding, and the target bond's yield dislocated from other financial market instruments. The evidence suggests that central bank bond purchase programs can operate more narrowly than previously considered.

TAX‐INDUCED BIAS IN REPORTED TREASURY YIELDS*

Published: 12/01/1970   |   DOI: 10.1111/j.1540-6261.1970.tb00869.x

Alexander A. Robichek, W. David Niebuhr

Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework

Published: 09/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb02453.x

DAVID C. MAUER, ALEXANDER J. TRIANTIS

This article analyzes the interaction between a firm's dynamic investment, operating, and financing decisions in a model with operating adjustment and recapitalization costs. Using numerical analysis, we solve the model for cases that highlight interaction effects. We find that higher production flexibility (due to lower costs of shutting down and reopening a production facility) enhances the firm's debt capacity, thereby increasing the net tax shield value of debt financing. While higher financial flexibility (resulting from lower recapitalization costs) has a similar effect, production flexibility and financial flexibility are, to some extent, substitutes. We find that the impact of debt financing on the firm's investment and operating decisions is economically insignificant.

Stock Returns following Large One‐Day Declines: Evidence on Short‐Term Reversals and Longer‐Term Performance

Published: 03/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04428.x

DON R. COX, DAVID R. PETERSON

We examine stock returns following large one‐day price declines and find that the bid‐ask bounce and the degree of market liquidity explain short‐term price reversals. Further, we do not find evidence consistent with the overreaction hypothesis. We observe that securities with large one‐day price declines perform poorly over an extended time horizon.