The Journal of Finance

On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05128.x

LAWRENCE R. GLOSTEN, RAVI JAGANNATHAN, DAVID E. RUNKLE

We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH‐M model modified by allowing (1) seasonal patterns in volatility, (2) positive and negative innovations to returns having different impacts on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH‐M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility.

Global Diversification, Industrial Diversification, and Firm Value

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00485

David J. Denis, Diane K. Denis, Keven Yost

Using a sample of 44,288 firm‐ears between 1984 and 1997, we document an increase in the extent of global diversification over time. This trend does not reflect a substitution of global for industrial diversification. We also find that global diversification results in average valuation discounts of approximately the same magnitude as those for industrial diversification. Analysis of the changes in excess value associated with changes in diversification reveals that increases in global diversification reduce excess value, while reductions in global diversification increase excess value. These findings support the view that the costs of global diversification outweigh the benefits.

The Trading Decision and Market Clearing under Transaction Price Uncertainty

Published: 03/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04935.x

THOMAS S. Y. HO, ROBERT A. SCHWARTZ, DAVID K. WHITCOMB

This paper models an individual's trading decision, given: (1) his/her demand function to hold shares of an asset, (2) his/her expectation on what the market clearing price will be, and (3) the design of the market which determines how orders will be translated into trades. The particular market design we consider is the batched trading (periodic call) regime. Assuming investors are distributed according to their propensities to hold shares, we model the aggregation of orders to obtain market clearing values of price and volume and to show the way in which, with trading friction, these solutions differ from Pareto efficient values. The importance of this analysis for various issues concerning market design is noted.

An Incentive Approach to Banking Regulation

Published: 09/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04766.x

RONALD M. GIAMMARINO, TRACY R. LEWIS, DAVID E. M. SAPPINGTON

We examine the optimal design of a risk‐adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank's assets (adverse selection), and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality (moral hazard). Under a socially optimal insurance scheme: (1) asset quality is below the first‐best level, (2) higher‐quality banks have larger asset bases and face lower capital adequacy requirements than lower‐quality banks, and (3) the probability of failure is equated across banks.

Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00628.x

Matthew T. Billett, Tao‐Hsien Dolly King, David C. Mauer

We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.

DISCUSSION

Published: 05/01/1968   |   DOI: 10.1111/j.1540-6261.1968.tb00807.x

Roger S. Barrett, David I. Fand, Robert C. Mayer

A REPLY

Published: 09/01/1970   |   DOI: 10.1111/j.1540-6261.1970.tb00569.x

Roman L. Weil, Joel E. Segall, David Green

Heteroscedasticity, R2 and Thin Trading on the Toronto Stock Exchange

Published: 12/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb00065.x

DAVID J. FOWLER, C. HARVEY RORKE, VIJAY M. JOG

PREMIUMS ON CONVERTIBLE BONDS: REPLY

Published: 12/01/1972   |   DOI: 10.1111/j.1540-6261.1972.tb03035.x

Roman L. Weil, Joel E. Segall, David O. Green

Who Borrows from the Lender of Last Resort?

Published: 05/23/2016   |   DOI: 10.1111/jofi.12421

ITAMAR DRECHSLER, THOMAS DRECHSEL, DAVID MARQUES‐IBANEZ, PHILIPP SCHNABL

We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.

The Effect of Taxes on the Relative Valuation of Dividends and Capital Gains: Evidence from Dual‐Class British Investment Trusts

Published: 03/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03756.x

JAMES S. ANG, DAVID W. BLACKWELL, WILLIAM L. MEGGINSON

We provide evidence that taxes affect equity valuation by studying British investment trusts having otherwise identical classes of cash‐ and stock‐dividend‐paying shares outstanding. We study 1969–1982, a period in which there were two dramatic changes in tax policy. We find that stock‐dividend shares, which are convertible into cash‐dividend shares, sell at premiums when the tax system favors capital gains and at discounts when the tax advantage of capital gains is reduced. After the 1975 elimination of the tax advantage to stock‐dividend shares, we observe that investors convert virtually all stock‐dividend shares into cash‐dividend shares.

Herd on the Street: Informational Inefficiencies in a Market with Short‐Term Speculation

Published: 09/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04665.x

KENNETH A. FROOT, DAVID S. SCHARFSTEIN, JEREMY C. STEIN

Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals.

Does Investor Misvaluation Drive the Takeover Market?

Published: 03/09/2006   |   DOI: 10.1111/j.1540-6261.2006.00853.x

MING DONG, DAVID HIRSHLEIFER, SCOTT RICHARDSON, SIEW HONG TEOH

This paper uses pre‐offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder and target valuations (price‐to‐book, or price‐to‐residual‐income‐model‐value) are related to means of payment, mode of acquisition, premia, target hostility, offer success, and bidder and target announcement‐period returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre‐1990 period than in the 1990–2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990–2000 period than in the pre‐1990 period.

Anomalies and the Expected Market Return

Published: 12/06/2021   |   DOI: 10.1111/jofi.13099

XI DONG, YAN LI, DAVID E. RAPACH, GUOFU ZHOU

We provide the first systematic evidence on the link between long‐short anomaly portfolio returns—a cornerstone of the cross‐sectional literature—and the time‐series predictability of the aggregate market excess return. Using 100 representative anomalies from the literature, we employ a variety of shrinkage techniques (including machine learning, forecast combination, and dimension reduction) to efficiently extract predictive signals in a high‐dimensional setting. We find that long‐short anomaly portfolio returns evince statistically and economically significant out‐of‐sample predictive ability for the market excess return. The predictive ability of anomaly portfolio returns appears to stem from asymmetric limits of arbitrage and overpricing correction persistence.

The Politics of Foreclosures

Published: 09/22/2018   |   DOI: 10.1111/jofi.12725

SUMIT AGARWAL, GENE AMROMIN, ITZHAK BEN‐DAVID, SERDAR DINC

The U.S. House of Representatives Financial Services Committee considered many important banking reforms in 2009 to 2010. We show that, during this period, foreclosure starts on delinquent mortgages were delayed in the districts of committee members although there was no difference in delinquency rates between committee and noncommittee districts. In these areas, banks delayed the foreclosure starts by 0.5 months (relative to the 12‐month average). The estimated cost of delay to lenders is an order of magnitude greater than the campaign contributions by the political action committees of the largest mortgage servicing banks to the committee members in that period.

DISCUSSION

Published: 05/01/1962   |   DOI: 10.1111/j.1540-6261.1962.tb04285.x

Donald R. Hodgman, David A. Alhadeff, Harry L. Barrett

Aversion to Student Debt? Evidence from Low‐Wage Workers

Published: 12/08/2023   |   DOI: 10.1111/jofi.13297

RADHAKRISHNAN GOPALAN, BARTON H. HAMILTON, JORGE SABAT, DAVID SOVICH

We combine state minimum wage changes with individual‐level income and credit data to estimate the effect of wage gains on the debt of low‐wage workers. In the three years following a $0.88 minimum wage increase, low‐wage workers experience a $2,712 income increase and a $856 decrease in debt. The entire decline in debt comes from less student loan borrowing among enrolled college students. Credit constraints, buffer‐stock behavior, and other rational channels cannot explain the reduction in student debt. Our results are consistent with students perceiving a utility cost of borrowing student debt arising from mental accounting.

Liquidity, Information, and Infrequently Traded Stocks

Published: 09/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb04074.x

DAVID EASLEY, NICHOLAS M. KIEFER, MAUREEN O'HARA, JOSEPH B. PAPERMAN

This article investigates whether differences in information‐based trading can explain observed differences in spreads for active and infrequently traded stocks. Using a new empirical technique, we estimate the risk of information‐based trading for a sample of New York Stock Exchange (NYSE) listed stocks. We use the information in trade data to determine how frequently new information occurs, the composition of trading when it does, and the depth of the market for different volume‐decile stocks. Our most important empirical result is that the probability of information‐based trading is lower for high volume stocks. Using regressions, we provide evidence of the economic importance of information‐based trading on spreads.

AN EVALUATION OF ALTERNATIVE EMPIRICAL MODELS OF THE TERM STRUCTURE OF INTEREST RATES*

Published: 09/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb01959.x

Steven W. Dobson, Richard C. Sutch, David E. Vanderford

LDC Debt: Forgiveness, Indexation, and Investment Incentives

Published: 12/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02656.x

KENNETH A. FROOT, DAVID S. SCHARFSTEIN, JEREMY C. STEIN

We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment. This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.