The Journal of Finance

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.

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.

EVIDENCE ON THE ACQUISITION‐RELATED PERFORMANCE OF CONGLOMERATE FIRMS

Published: 03/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb00030.x

Ronald W. Melicher, David F. Rush

THE TIME‐VARIANCE RELATIONSHIP: EVIDENCE ON AUTOCORRELATION IN COMMON STOCK RETURNS

Published: 03/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03240.x

Robert A. Schwartz, David K. Whitcomb

A Capital Budgeting Analysis of Life Insurance Costs in the United States: 1950–1979

Published: 03/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb03632.x

DAVID F. BABBEL, KIM B. STAKING

A capital budgeting procedure is applied in developing a real price index for life insurance over three decades. Individual life policies of three types are analyzed. The analysis reveals that although the cost of whole life insurance, measured in nominal values, has decreased over the past thirty years, when properly measured in present value or constant dollar terms, the cost has risen substantially. Term life insurance has been characterized by decreasing costs in both nominal and real terms. The amounts of the cost variations attributable to improving survival rates, changing policy terms, varying discount rates and differing tax status are identified.

Debt Management under Corporate and Personal Taxation

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04366.x

DAVID C. MAUER, WILBUR G. LEWELLEN

The presence of long‐term debt in a corporation's capital structure is shown to give rise to a valuable tax‐timing option that can be exercised by the firm on behalf of its shareholders. This option, which is not available if the firm is fully equity financed, implies that leverage will have a positive tax effect on total firm value even if there is no such effect associated with the tax deductibility of the coupon interest payments on debt. The more volatile interest rates and bond prices are, the more valuable the tax‐timing option and the larger the favorable impact of debt on shareholder wealth.

Performance Changes Following Top Management Dismissals

Published: 09/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04049.x

DAVID J. DENIS, DIANE K. DENIS

We document that forced resignations of top managers are preceded by large and significant declines in operating performance and followed by large improvements in performance. However, forced resignations are rare and are due more often to external factors (e.g., blockholder pressure, takeover attempts, etc.) than to normal board monitoring. Following the management change, these firms significantly downsize their operations and are subject to a high rate of corporate control activity. Normal retirements are followed by small increases in operating income and are also subject to a slightly higher than normal incidence of postturnover corporate control activity.

Market Orders and Market Efficiency

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03816.x

DAVID P. BROWN, ZHI MING ZHANG

This work compares a dealer market and a limit‐order book. Dealers commonly observe order flow and collect information from multiple market orders. They may be better informed than other traders, although they do not earn rents from this information. Dealers earn rents as suppliers of liquidity, and their decisions to enter or exit the market are independent of the degree of adverse selection. Introduction of a limit‐order book lowers the execution‐price risk faced by speculators and leads them to trade more aggressively on their information. Introduction of the book also lowers dealer profits, but increases the informational efficiency of prices.

Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986 to 1999

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00740.x

PAUL GOMPERS, JOSH LERNER, DAVID SCHARFSTEIN

We examine two views of the creation of venture‐backed start‐ups, or “entrepreneurial spawning.” In one, young firms prepare employees for entrepreneurship, educating them about the process, and exposing them to relevant networks. In the other, individuals become entrepreneurs when large bureaucratic employers do not fund their ideas. Controlling for firm size, patents, and industry, the most prolific spawners are originally venture‐backed companies located in Silicon Valley and Massachusetts. Undiversified firms spawn more firms. Silicon Valley, Massachusetts, and originally venture‐backed firms typically spawn firms only peripherally related to their core businesses. Overall, entrepreneurial learning and networks appear important in creating venture‐backed firms.

On Time‐Variance Analysis: Reply

Published: 12/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb00074.x

ROBERT A. SCHWARTZ, DAVID K. WHITCOMB

The Stable Paretian Distribution, Subordinated Stochastic Processes, and Asymptotic Lognormality: An Empirical Investigation

Published: 09/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb03456.x

DAVID E. UPTON, DONALD S. SHANNON

Arbitrage, Continuous Trading, and Margin Requirements

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04357.x

DAVID C. HEATH, ROBERT A. JARROW

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options. In the context of the Black‐Scholes economy, margin restrictions are shown to exclude continuous‐trading arbitrage opportunities and, with two additional hypotheses, still to allow the Black‐Scholes call model to apply. The Black‐Scholes economy consists of a continuously traded stock with a price process that follows a geometric Brownian motion and a continuously traded bond with a price process that is deterministic.

Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Published: 08/14/2007   |   DOI: 10.1111/j.1540-6261.2007.01251.x

RANGARAJAN K. SUNDARAM, DAVID L. YERMACK

Though widely used in executive compensation, inside debt has been almost entirely overlooked by prior work. We initiate this research by studying CEO pension arrangements in 237 large capitalization firms. Among our findings are that CEO compensation exhibits a balance between debt and equity incentives; the balance shifts systematically away from equity and toward debt as CEOs grow older; annual increases in pension entitlements represent about 10% of overall CEO compensation, and about 13% for CEOs aged 61–65; CEOs with high debt incentives manage their firms conservatively; and pension compensation influences patterns of CEO turnover and cash compensation.

Disasters Implied by Equity Index Options

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01697.x

DAVID BACKUS, MIKHAIL CHERNOV, IAN MARTIN

We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk‐neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro‐finance and option‐pricing models. Second, we compare option prices derived from a macro‐finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro‐finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from macroeconomic data.

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.

Managerial Entrenchment and Capital Structure Decisions

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb01115.x

PHILIP G. BERGER, ELI OFEK, DAVID L. YERMACK

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross‐sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment‐reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth

Published: 01/17/2012   |   DOI: 10.1111/j.1540-6261.2011.01713.x

R. DAVID MCLEAN, TIANYU ZHANG, MENGXIN ZHAO

Investor protection is associated with greater investment sensitivity to q and lower investment sensitivity to cash flow. Finance plays a role in causing these effects; in countries with strong investor protection, external finance increases more strongly with q, and declines more strongly with cash flow. We further find that q and cash flow sensitivities are associated with ex post investment efficiency; investment predicts growth and profits more strongly in countries with greater q sensitivities and lower cash flow sensitivities. The paper's findings are broadly consistent with investor protection promoting accurate share prices, reducing financial constraints, and encouraging efficient investment.

Anomalies and News

Published: 08/09/2018   |   DOI: 10.1111/jofi.12718

JOSEPH ENGELBERG, R. DAVID MCLEAN, JEFFREY PONTIFF

Using a sample of 97 stock return anomalies, we find that anomaly returns are 50% higher on corporate news days and six times higher on earnings announcement days. These results could be explained by dynamic risk, mispricing due to biased expectations, or data mining. We develop and conduct several unique tests to differentiate between these three explanations. Our results are most consistent with the idea that anomaly returns are driven by biased expectations, which are at least partly corrected upon news arrival.