The Journal of Finance

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.

Risk Management: Coordinating Corporate Investment and Financing Policies

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05123.x

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

This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving “nonlinear” instruments like options.

Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01221.x

MATTHEW T. BILLETT, TAO‐HSIEN DOLLY KING, DAVID C. MAUER

We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.

Genetic Variation in Financial Decision‐Making

Published: 09/21/2010   |   DOI: 10.1111/j.1540-6261.2010.01592.x

DAVID CESARINI, MAGNUS JOHANNESSON, PAUL LICHTENSTEIN, ÖRJAN SANDEWALL, BJÖRN WALLACE

Individuals differ in how they construct their investment portfolios, yet empirical models of portfolio risk typically account only for a small portion of the cross‐sectional variance. This paper asks whether genetic variation can explain some of these individual differences. Following a major pension reform Swedish adults had to form a portfolio from a large menu of funds. We match data on these investment decisions with the Swedish Twin Registry and find that approximately 25% of individual variation in portfolio risk is due to genetic variation. We also find that these results extend to several other aspects of financial decision‐making.

Shelf Registrations and Shareholder Wealth: A Comparison of Shelf and Traditional Equity Offerings

Published: 06/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb05048.x

NORMAN H. MOORE, DAVID R. PETERSON, PAMELA P. PETERSON

This study examines the effect of issuing common stock on shareholder wealth under two alternative methods of registration, shelf registration under the Securities and Exchange Commission's Rule 415 and the traditional method of registering shares for immediate sale. The stock price reactions accompanying security registrations and offerings over the period from March 1982 through November 1983 are examined for over two hundred issues. A negative price reaction is observed for traditional and shelf registrations for both utility and non‐utility issuers. No statistically significant difference is observed between shelf and traditional registrations. Further negative price reactions precede the offerings of these securities.

Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls

Published: 09/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02631.x

PAUL ASQUITH, DAVID W. MULLINS, ERIC D. WOLFF

This paper presents an aging analysis of 741 high yield bonds and finds default, exchange, and call percentages substantially higher than reported in earlier studies. By December 31, 1988, cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979–1983 and from 3 to 9 percent for issue years 1984–1986. Exchanges are also a significant factor although they often are followed by default. Moreover, a significant percentage of high yield debt, 26–47 percent for 1977–1982, has been called. By December 31, 1988, approximately one third of the bonds issued in 1977–1982 has defaulted or been exchanged, and an additional one third had been called. On average, only 28 percent of these issues are still outstanding. There is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982.

The Shelf Registration of Debt and Self Selection Bias

Published: 03/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05093.x

DAVID S. ALLEN, ROBERT E. LAMY, G. RODNEY THOMPSON

Prior studies report lower issue costs for shelf registered debt and conclude that the benefits of increased underwriter competition can be realized by those firms using this registration procedure. This study re‐examines the purported superiority of issuing debt via shelf registration, and finds that the savings in issue costs displayed by earlier studies can be attributed to a self selection bias and not the method of registration.

Accounting for Forward Rates in Markets for Foreign Currency

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05132.x

DAVID K. BACKUS, ALLAN W. GREGORY, CHRIS I. TELMER

Forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure (the intertemporal marginal rate of substitution). Representative agent theory with time‐additive preferences cannot account for either of these properties. We show that the theory does considerably better along these dimensions when the representative agent's preferences exhibit habit persistence, but that the theory fails to reproduce some of the other properties of the data—in particular, the strong autocorrelation of forward premiums.

Hedge Funds: Performance, Risk, and Capital Formation

Published: 07/19/2008   |   DOI: 10.1111/j.1540-6261.2008.01374.x

WILLIAM FUNG, DAVID A. HSIEH, NARAYAN Y. NAIK, TARUN RAMADORAI

We use a comprehensive data set of funds‐of‐funds to investigate performance, risk, and capital formation in the hedge fund industry from 1995 to 2004. While the average fund‐of‐funds delivers alpha only in the period between October 1998 and March 2000, a subset of funds‐of‐funds consistently delivers alpha. The alpha‐producing funds are not as likely to liquidate as those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts. These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future.

An Empirical Study of the Consequences of U.S. Tax Rules for International Acquisitions by U.S. Firms

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04786.x

GIL B. MANZON, DAVID J. SHARP, NICKOLAOS G. TRAVLOS

This article examines the effect of tax factors on the equity values of U.S. multinational corporations making foreign acquisitions. Abnormal stock returns are found to be related to a tax variable that captures differences in the international tax status of acquiring firms but not related to a naive tax variable that captures differences between tax rates in target countries and the United States. Our evidence suggests that aggregate intercountry differentials in after‐tax returns are competed away, while firm‐specific, tax‐related advantages (or disadvantages) are reflected in abnormal returns around the announcement date of the acquisition.

PREMIUMS ON CONVERTIBLE BONDS

Published: 06/01/1968   |   DOI: 10.1111/j.1540-6261.1968.tb00819.x

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

Reinforcement Learning and Savings Behavior

Published: 11/25/2009   |   DOI: 10.1111/j.1540-6261.2009.01509.x

JAMES J. CHOI, DAVID LAIBSON, BRIGITTE C. MADRIAN, ANDREW METRICK

We show that individual investors over‐extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time‐series shocks, income effects, rational learning about investing skill, investor fixed effects, or time‐varying investor‐level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.

Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00438

Mark M. Carhart, Ron Kaniel, David K. Musto, Adam V. Reed

We present evidence that fund managers inflate quarter‐end portfolio prices with last‐minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large‐cap funds to well over 2 percent for small‐cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance.

Decentralized Investment Management: Evidence from the Pension Fund Industry

Published: 01/30/2013   |   DOI: 10.1111/jofi.12024

DAVID BLAKE, ALBERTO G. ROSSI, ALLAN TIMMERMANN, IAN TONKS, RUSS WERMERS

Using a unique data set, we document two secular trends in the shift from centralized to decentralized pension fund management over the past few decades. First, across asset classes, sponsors replace generalist balanced managers with better‐performing specialists. Second, within asset classes, funds replace single managers with multiple competing managers following diverse strategies to reduce scale diseconomies as funds grow larger relative to capital markets. Consistent with a model of decentralized management, sponsors implement risk controls that trade off higher anticipated alphas of multiple specialists against the increased difficulty in coordinating their risk‐taking and the greater uncertainty concerning their true skills.

Lender Automation and Racial Disparities in Credit Access

Published: 12/11/2023   |   DOI: 10.1111/jofi.13303

SABRINA T. HOWELL, THERESA KUCHLER, DAVID SNITKOF, JOHANNES STROEBEL, JUN WONG

Process automation reduces racial disparities in credit access by enabling smaller loans, broadening banks' geographic reach, and removing human biases from decision making. We document these findings in the context of the Paycheck Protection Program (PPP), where private lenders faced no credit risk but decided which firms to serve. Black‐owned firms obtained PPP loans primarily from automated fintech lenders, especially in areas with high racial animus. After traditional banks automated their loan processing procedures, their PPP lending to Black‐owned firms increased. Our findings cannot be fully explained by racial differences in loan application behaviors, preexisting banking relationships, firm performance, or fraud rates.

Uncertainty in the Monetary Aggregates: Sources, Measurement and Policy Effects*

Published: 05/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb00468.x

DAVID A. PIERCE, DARREL W. PARKE, WILLIAM P. CLEVELAND, AGUSTIN MARAVALL

An Empirical Analysis of the Role of the Medium of Exchange in Mergers

Published: 06/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02503.x

WILLARD T. CARLETON, DAVID K. GUILKEY, ROBERT S. HARRIS, JOHN F. STEWART

In empirical studies of differences between firms which are acquired and those which are not, researchers typically divide firms into two groups‐acquired and nonacquired. In this paper, we argue that cash takeovers may be sufficiently different from noncash acquisitionst hat failure to distinguish between them may lead to inappropriateg eneralizations. We provide evidence from the mid 1970s that three categories of firms can be distinguished:n onacquireda, cquiredi n a cash takeover, and acquired in an exchange of securities.

Subprime Mortgage Defaults and Credit Default Swaps

Published: 10/27/2014   |   DOI: 10.1111/jofi.12221

ERIC ARENTSEN, DAVID C. MAUER, BRIAN ROSENLUND, HAROLD H. ZHANG, FENG ZHAO

We offer the first empirical evidence on the adverse effect of credit default swap (CDS) coverage on subprime mortgage defaults. Using a large database of privately securitized mortgages, we find that higher defaults concentrate in mortgage pools with concurrent CDS coverage, and within these pools the loans originated after or shortly before the start of CDS coverage have an even higher delinquency rate. The results are robust across zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.

Political Connections and the Informativeness of Insider Trades

Published: 03/20/2020   |   DOI: 10.1111/jofi.12899

ALAN D. JAGOLINZER, DAVID F. LARCKER, GAIZKA ORMAZABAL, DANIEL J. TAYLOR

We analyze the trading of corporate insiders at leading financial institutions during the 2007 to 2009 financial crisis. We find strong evidence of a relation between political connections and informed trading during the period in which Troubled Asset Relief Program (TARP) funds were disbursed, and that the relation is most pronounced among corporate insiders with recent direct connections. Notably, we find evidence of abnormal trading by politically connected insiders 30 days in advance of TARP infusions, and that these trades anticipate the market reaction to the infusion. Our results suggest that political connections can facilitate opportunistic behavior by corporate insiders.