The Journal of Finance

A Simple Econometric Approach for Utility‐Based Asset Pricing Models

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04962.x

DAVID P. BROWN, MICHAEL R. GIBBONS

Utility‐based models of asset pricing may be estimated with or without assuming a distribution for security returns; both approaches are developed and compared here. The chief strength of a parametric estimator lies in its computational simplicity and statistical efficiency when the added distributional assumption is true. In contrast, the nonparametric estimator is robust to departures from any particular distribution, and it is more consistent with the spirit underlying utility‐based asset pricing models since the distribution of asset returns remains unspecified even in the empirical work. The nonparametric approach turns out to be easy to implement with precision nearly indistinguishable from its parametric counterpart in this particular application. The application shows that log utility is consistent with the data over the period 1926–1981.

The Mode of Acquisition in Takeovers: Taxes and Asymmetric Information

Published: 06/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb02678.x

DAVID T. BROWN, MICHAEL D. RYNGAERT

We develop a model in which the mode of acquisition conveys information concerning the value of the bidder. The model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the U.S. tax code. We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers. The model yields a number of unique predictions about the construction of acquisition offers. We present evidence consistent with the model.

Finance and Growth at the Firm Level: Evidence from SBA Loans

Published: 01/24/2017   |   DOI: 10.1111/jofi.12492

J. DAVID BROWN, JOHN S. EARLE

We analyze linked databases on all SBA loans and lenders and on all U.S. employers to estimate the effects of financial access on employment growth. Estimation exploits the long panels and variation in local availability of SBA‐intensive lenders. The results imply an increase of 3–3.5 jobs for each million dollars of loans, suggesting real effects of credit constraints. Estimated impacts are stronger for younger and larger firms and when local credit conditions are weak, but we find no clear evidence of cyclical variation. We estimate taxpayer costs per job created in the range of $21,000–$25,000.

AN INTEGRATED MODEL FOR COMMERCIAL BANKS

Published: 03/01/1957   |   DOI: 10.1111/j.1540-6261.1957.tb04103.x

David A. Alhadeff, Charlotte P. Alhadeff

AN EMPIRICAL EXAMINATION OF FACTORS WHICH INFLUENCE WARRANT PRICES

Published: 12/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb03127.x

David F. Rush, Ronald W. Melicher

Comparative Costs of Competitive and Negotiated Underwritings in the State and Local Bond Market

Published: 06/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb02137.x

MICHAEL D. JOEHNK, DAVID S. KIDWELL

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.

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

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

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.

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.

Sources of Entropy in Representative Agent Models

Published: 08/12/2013   |   DOI: 10.1111/jofi.12090

DAVID BACKUS, MIKHAIL CHERNOV, STANLEY ZIN

We propose two data‐based performance measures for asset pricing models and apply them to models with recursive utility and habits. Excess returns on risky securities are reflected in the pricing kernel's dispersion and riskless bond yields are reflected in its dynamics. We measure dispersion with entropy and dynamics with horizon dependence, the difference between entropy over several periods and one. We compare their magnitudes to estimates derived from asset returns. This exercise reveals tension between a model's ability to generate one‐period entropy, which should be large, and horizon dependence, which should be small.

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.