The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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After‐Hours Stock Prices and Post‐Crash Hangovers
Published: 03/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb03748.x
DAVID NEUMARK, P. A. TINSLEY, SUZANNE TOSINI
After‐hours pricing in foreign equity markets of multiple‐listed U.S. securities appeared to be efficient in predicting New York prices in the weeks immediately following the October 1987 crash but relatively uninformative in succeeding months. By contrast, daily changes in New York prices appear to be efficiently incorporated in after‐hours trading on both the Tokyo and London exchanges throughout the sample period. This paper suggests that the asymmetry and temporal variations in cross‐market correlations are consistent with rational investor behavior in equity markets with nonzero transaction costs and time‐varying share price volatility.
The Impact of Bank Consolidation on Commercial Borrower Welfare
Published: 08/12/2005 | DOI: 10.1111/j.1540-6261.2005.00787.x
JASON KARCESKI, STEVEN ONGENA, DAVID C. SMITH
We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favoring acquiring borrowers. Bank mergers lead to higher relationship exit rates among borrowers of target banks. Larger merger‐induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that firms with low switching costs switch banks, while similar firms with high switching costs are locked into their current relationship.
Are Overconfident CEOs Better Innovators?
Published: 07/19/2012 | DOI: 10.1111/j.1540-6261.2012.01753.x
DAVID HIRSHLEIFER, ANGIE LOW, SIEW HONG TEOH
Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason: overconfidence can benefit shareholders by increasing investment in risky projects. Using options‐ and press‐based proxies for CEO overconfidence, we find that over the 1993–2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development expenditures. However, overconfident managers achieve greater innovation only in innovative industries. Our findings suggest that overconfidence helps CEOs exploit innovative growth opportunities.
Overconfidence, Arbitrage, and Equilibrium Asset Pricing
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00350
Kent D. Daniel, David Hirshleifer, Avanidhar Subrahmanyam
This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental/price ratios and market value to forecast returns, and the domination of beta by these variables in some studies.
Do Hedge Funds Manipulate Stock Prices?
Published: 05/13/2013 | DOI: 10.1111/jofi.12062
ITZHAK BEN‐DAVID, FRANCESCO FRANZONI, AUGUSTIN LANDIER, RABIH MOUSSAWI
We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers.
Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect
Published: 08/06/2015 | DOI: 10.1111/jofi.12311
TOM Y. CHANG, DAVID H. SOLOMON, MARK M. WESTERFIELD
We analyze brokerage data and an experiment to test a cognitive dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect—the propensity to realize past gains more than past losses—applies only to nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse‐disposition effect. In an experiment, we show that increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and a larger reverse‐disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse‐disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual fund management, and intermediation.
Sticky Expectations and the Profitability Anomaly
Published: 10/07/2018 | DOI: 10.1111/jofi.12734
JEAN‐PHILIPPE BOUCHAUD, PHILIPP KRÜGER, AUGUSTIN LANDIER, DAVID THESMAR
We propose a theory of the “profitability” anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional model predictions: (1) analysts are on average too pessimistic regarding the future profits of high‐profit firms, (2) the profitability anomaly is stronger for stocks that are followed by stickier analysts, and (3) the profitability anomaly is stronger for stocks with more persistent profits.
Resource Allocation in Bank Supervision: Trade‐Offs and Outcomes
Published: 03/29/2022 | DOI: 10.1111/jofi.13127
THOMAS M. EISENBACH, DAVID O. LUCCA, ROBERT M. TOWNSEND
We estimate a structural model of resource allocation on work hours of Federal Reserve bank supervisors to disentangle how supervisory technology, preferences, and resource constraints impact bank outcomes. We find a significant effect of supervision on bank risk and large technological scale economies with respect to bank size. Consistent with macroprudential objectives, revealed supervisory preferences disproportionately weight larger banks, especially post‐2008 when a resource reallocation to larger banks increased risk on average across all banks. Shadow cost estimates show tight resources around the financial crisis and counterfactuals indicate that binding constraints have large effects on the distribution of bank outcomes.
Market Maker Quotation Behavior and Pretrade Transparency
Published: 05/06/2003 | DOI: 10.1111/1540-6261.00565
Yusif Simaan, Daniel G. Weaver, David K. Whitcomb
We examine the impact of differing levels of pretrade transparency on the quotation behavior of Nasdaq market makers. We find that market makers are more likely to quote on odd ticks, and to actively narrow the spread, when they can do so anonymously by posting limit orders on Electronic Communication Networks (ECNs). From a public policy perspective, our findings suggest that making the level of pretrade transparency on Nasdaq more opaque by allowing anonymous quotes could improve price competition and narrow spreads further.
Can Taxes Shape an Industry? Evidence from the Implementation of the “Amazon Tax”
Published: 04/20/2018 | DOI: 10.1111/jofi.12687
BRIAN BAUGH, ITZHAK BEN‐DAVID, HOONSUK PARK
For years, online retailers have maintained a price advantage over brick‐and‐mortar retailers by not collecting sales tax at the time of sale. Recently, several states have required that online retailer Amazon collect sales tax during checkout. Using transaction‐level data, we document that households living in these states reduced their Amazon purchases by 9.4% following the implementation of the sales tax laws, implying elasticities of –1.2 to –1.4. The effect is stronger for large purchases, where purchases declined by 29.1%, corresponding to an elasticity of –3.9. Studying competitors in the electronics field, we find some evidence of substitution toward competing retailers.
Family‐Controlled Firms and Informed Trading: Evidence from Short Sales
Published: 01/17/2012 | DOI: 10.1111/j.1540-6261.2011.01714.x
RONALD C. ANDERSON, DAVID M. REEB, WANLI ZHAO
We investigate the relation between organization structure and the information content of short sales, focusing on founder‐ and heir‐controlled firms. Our analysis indicates that family‐controlled firms experience substantially higher abnormal short sales prior to negative earnings shocks than nonfamily firms. Supplementary testing indicates that family control characteristics intensify informed short selling. Further analysis suggests that daily short‐sale interest in family firms contains useful information in forecasting stock returns; however, we find no discernable effect for nonfamily firms. This analysis provides compelling evidence that informed trading via short sales occurs more readily in family firms than in nonfamily firms.
Do ETFs Increase Volatility?
Published: 09/22/2018 | DOI: 10.1111/jofi.12727
ITZHAK BEN‐DAVID, FRANCESCO FRANZONI, RABIH MOUSSAWI
Due to their low trading costs, exchange‐traded funds (ETFs) are a potential catalyst for short‐horizon liquidity traders. The liquidity shocks can propagate to the underlying securities through the arbitrage channel, and ETFs may increase the nonfundamental volatility of the securities in their baskets. We exploit exogenous changes in index membership and find that stocks with higher ETF ownership display significantly higher volatility. ETF ownership increases the negative autocorrelation in stock prices. The increase in volatility appears to introduce undiversifiable risk in prices because stocks with high ETF ownership earn a significant risk premium of up to 56 basis points monthly.
Affine Term Structure Models and the Forward Premium Anomaly
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00325
David K. Backus, Silverio Foresi, Chris I. Telmer
One of the most puzzling features of currency prices is the forward premium anomaly: the tendency for high interest rate currencies to appreciate. We characterize the anomaly in the context of affine models of the term structure of interest rates. In affine models, the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that nominal interest rates take on negative values with positive probability. We find the quantitative properties of either alternative to have important shortcomings.
Driven to Distraction: Extraneous Events and Underreaction to Earnings News
Published: 09/28/2009 | DOI: 10.1111/j.1540-6261.2009.01501.x
DAVID HIRSHLEIFER, SONYA SEONGYEON LIM, SIEW HONG TEOH
Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The investor distraction hypothesis holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post‐announcement drift much stronger, when a greater number of same‐day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry‐unrelated news and large earnings surprises have a stronger distracting effect.
An Unbiased Reexamination of Stock Market Volatility
Published: 07/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04990.x
N. GREGORY MANKIW, DAVID ROMER, MATTHEW D. SHAPIRO
Recent work demonstrates serious statistical problems with standard volatility tests. This paper proposes new tests that are unbiased in small samples and that do not require assumptions of stationarity. The new tests continue to find evidence against the model positing rational expectations and a constant required rate of return on equity.