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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Do Initial Public Offering Firms Purchase Analyst Coverage with Underpricing?
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00719.x
MICHAEL T. CLIFF, DAVID J. DENIS
We report that initial public offering (IPO) underpricing is positively related to analyst coverage by the lead underwriter and to the presence of an all‐star analyst on the research staff of the lead underwriter. These findings are robust to controls for other determinants of underpricing and to controls for the endogeneity of underpricing and analyst coverage. In addition, we find that the probability of switching underwriters between IPO and seasoned equity offering is negatively related to the unexpected amount of post‐IPO analyst coverage. These findings are consistent with the hypothesis that underpricing is, in part, compensation for expected post‐IPO analyst coverage from highly ranked analysts.
The Market for Mergers and the Boundaries of the Firm
Published: 05/09/2008 | DOI: 10.1111/j.1540-6261.2008.01355.x
MATTHEW RHODES‐KROPF, DAVID T. ROBINSON
We relate the property rights theory of the firm to empirical regularities in the market for mergers and acquisitions. We first show that high market‐to‐book acquirers typically do not purchase low market‐to‐book targets. Instead, mergers pair together firms with similar ratios. We then build a continuous‐time model of investment and merger activity combining search, scarcity, and asset complementarity to explain this like buys like result. We test the model by relating like‐buys‐like to search frictions. Search frictions and assortative matching vary inversely, supporting the model over standard explanations.
Firm Age, Investment Opportunities, and Job Creation
Published: 02/18/2017 | DOI: 10.1111/jofi.12495
MANUEL ADELINO, SONG MA, DAVID ROBINSON
New firms are an important source of job creation, but the underlying economic mechanisms for why this is so are not well understood. Using an identification strategy that links shocks to local income to job creation in the nontradable sector, we ask whether job creation arises more through new firm creation or through the expansion of existing firms. We find that new firms account for the bulk of net employment creation in response to local investment opportunities. We also find significant gross job creation and destruction by existing firms, suggesting that positive local shocks accelerate churn.
The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies
Published: 05/21/2020 | DOI: 10.1111/jofi.12947
YONGQIANG CHU, DAVID HIRSHLEIFER, LIANG MA
We examine the causal effect of limits to arbitrage on 11 well‐known asset pricing anomalies using the pilot program of Regulation SHO, which relaxed short‐sale constraints for a quasi‐random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. The pilot program reduced the combined anomaly long–short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.
Aggregate Jump and Volatility Risk in the Cross‐Section of Stock Returns
Published: 10/27/2014 | DOI: 10.1111/jofi.12220
MARTIJN CREMERS, MICHAEL HALLING, DAVID WEINBAUM
We examine the pricing of both aggregate jump and volatility risk in the cross‐section of stock returns by constructing investable option trading strategies that load on one factor but are orthogonal to the other. Both aggregate jump and volatility risk help explain variation in expected returns. Consistent with theory, stocks with high sensitivities to jump and volatility risk have low expected returns. Both can be measured separately and are important economically, with a two‐standard‐deviation increase in jump (volatility) factor loadings associated with a 3.5% to 5.1% (2.7% to 2.9%) drop in expected annual stock returns.
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.
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.
The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00299
David S. Scharfstein, Jeremy C. Stein
We develop a two‐tiered agency model that shows how rent‐seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent‐seeking, division managers can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra compensation may take the form not of cash wages, but rather of preferential capital budgeting allocations. One interesting feature of our model is that it implies a kind of “socialism” in internal capital allocation, whereby weaker divisions get subsidized by stronger ones.
How Investors Interpret Past Fund Returns
Published: 09/11/2003 | DOI: 10.1111/1540-6261.00596
Anthony W. Lynch, David K. Musto
The literature documents a convex relation between past returns and fund flows of mutual funds. We show this to be consistent with fund incentives, because funds discard exactly those strategies which underperform. Past returns tell less about the future performance of funds which discard, so flows are less sensitive to them when they are poor. Our model predicts that strategy changes only occur after bad performance, and that bad performers who change strategy have dollar flow and future performance that are less sensitive to current performance than those that do not. Empirical tests support both predictions.
The Behavior of the Interest Rate Differential Between Tax‐exempt Revenue and General Obligation Bonds: A Test of Risk Preferences and Market Segmentation
Published: 03/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb01096.x
DAVID S. KIDWELL, TIMOTHY W. KOCH*
This paper presents evidence that the yield differential between revenue bonds and similar general obligation bonds varies contracyclically with the level of economic activity. The evidence also indicates that significant investor‐borrower induced market segmentation exists in the municipal bond market. An increase in the relative demand by commercial banks for tax‐exempt securities and/or an increase in the supply of revenue bonds relative to the supply of general obligation bonds increase the yield spread between the two classes of debt. These findings were the result of a series of empirical tests with both macroeconomic and microeconomic data.
Marginal Tax Rates: Evidence from Nontaxable Corporate Bonds: A Note
Published: 03/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04953.x
JAMES ANG, DAVID PETERSON, PAMELA PETERSON
This study offers an alternative method of calculating marginal personal tax rates through the pairing of nontaxable (industrial development and pollution control) and taxable corporate bonds. This procedure is shown to produce matched bond pairs that are comparable. Two hundred pairs of bonds are examined from the second quarter of 1973 through the second quarter of 1983. Testing of the marginal tax rate relationships indicates that the marginal personal tax rate is less than the corporate statutory tax rate.