The Journal of Finance

Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01218.x

MARIANNE BERTRAND, ANTOINETTE SCHOAR, DAVID THESMAR

We investigate how the deregulation of the French banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets. Following deregulation, banks are less willing to bail out poorly performing firms and firms in the more bank‐dependent sectors are more likely to undertake restructuring activities. At the industry level, we observe an increase in asset and job reallocation, an improvement in allocative efficiency across firms, and a decline in concentration. Overall, these findings support the view that a more efficient banking sector helps foster a Schumpeterian process of “creative destruction.”

What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance

Published: 02/16/2018   |   DOI: 10.1111/jofi.12619

BRICE CORGNET, MARK DESANTIS, DAVID PORTER

Using laboratory experiments, we provide evidence on three factors influencing trader performance: fluid intelligence, cognitive reflection, and theory of mind (ToM). Fluid intelligence provides traders with computational skills necessary to draw a statistical inference. Cognitive reflection helps traders avoid behavioral biases and thereby extract signals from market orders and update their prior beliefs accordingly. ToM describes the degree to which traders correctly assess the informational content of orders. We show that cognitive reflection and ToM are complementary because traders benefit from understanding signals’ quality only if they are capable of processing these signals.

The Dividend Disconnect

Published: 05/13/2019   |   DOI: 10.1111/jofi.12785

SAMUEL M. HARTZMARK, DAVID H. SOLOMON

Many individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g., the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if dividends are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend‐paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend‐paying stocks.

Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable Economy

Published: 06/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb05042.x

MICHAEL U. DOTHAN, DAVID FELDMAN

This paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk. The paper demonstrates that, for a large class of diffusion outputs and preferences, optimizing consumers first estimate the realizations of the unobservable factor and then use these estimates to determine portfolio and consumption rules. Moreover, the explicit consideration of this unobservable productivity factor affects equilibrium demands and prices. The equilibrium spot rate of interest emerges as the “best estimate” of the unobservable factor, and multiperiod default‐free bonds arise as the optimal hedge for the unobservable changes of the stochastic investment opportunity set.

First‐Order Risk Aversion, Heterogeneity, and Asset Market Outcomes

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01482.x

DAVID A. CHAPMAN, VALERY POLKOVNICHENKO

We examine a wide range of two‐date economies populated by heterogeneous agents with the most common forms of nonexpected utility preferences used in finance and macroeconomics. We demonstrate that the risk premium and the risk‐free rate in these models are sensitive to ignoring heterogeneity. This follows because of endogenous withdrawal by nonexpected utility agents from the market for the risky asset. This finding is important precisely because these alternative preferences have frequently been proposed as possible resolutions to various asset pricing puzzles, and they have all been examined exclusively in a representative agent framework.

The Pre‐FOMC Announcement Drift

Published: 08/06/2014   |   DOI: 10.1111/jofi.12196

DAVID O. LUCCA, EMANUEL MOENCH

We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. These pre‐FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns. While other major international equity indices experienced similar pre‐FOMC returns, we find no such effect in U.S. Treasury securities and money market futures. Other major U.S. macroeconomic news announcements also do not give rise to preannouncement excess equity returns. We discuss challenges in explaining these returns with standard asset pricing theory.

Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms

Published: 10/13/2015   |   DOI: 10.1111/jofi.12367

JENNIFER BROWN, DAVID A. MATSA

We use novel data from a leading online job search platform to examine the impact of corporate distress on firms’ ability to attract job applicants. Survey responses suggest that job seekers accurately perceive firms’ financial condition, as measured by companies’ credit default swap prices and accounting data. Analyzing responses to job postings by major financial firms during the Great Recession, we find that an increase in an employer's distress results in fewer and lower quality applicants. These effects are particularly evident when the social safety net provides workers with weak protection against unemployment and for positions requiring a college education.

Speculative Betas

Published: 05/27/2016   |   DOI: 10.1111/jofi.12431

HARRISON HONG, DAVID A. SRAER

The risk and return trade‐off, the cornerstone of modern asset pricing theory, is often of the wrong sign. Our explanation is that high‐beta assets are prone to speculative overpricing. When investors disagree about the stock market's prospects, high‐beta assets are more sensitive to this aggregate disagreement, experience greater divergence of opinion about their payoffs, and are overpriced due to short‐sales constraints. When aggregate disagreement is low, the Security Market Line is upward‐sloping due to risk‐sharing. When it is high, expected returns can actually decrease with beta. We confirm our theory using a measure of disagreement about stock market earnings.

The Conditional Performance of Insider Trades

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.205263

B. Espen Eckbo, David C. Smith

This paper estimates the performance of insider trades on the closely held Oslo Stock Exchange (OSE) during a period of lax enforcement of insider trading regulations. Our data permit construction of a portfolio that tracks all movements of insiders in and out of the OSE firms. Using three alternative performance estimators in a time‐varying expected return setting, we document zero or negative abnormal performance by insiders. The results are robust to a variety of trade characteristics. Applying the performance measures to mutual funds on the OSE, we also document some evidence that the average mutual fund outperforms the insider portfolio.

Learning about Internal Capital Markets from Corporate Spin‐offs

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00503

Robert Gertner, Eric Powers, David Scharfstein

We examine the investment behavior of firms before and after being spun off from their parent companies. Their investment after the spin‐off is significantly more sensitive to measures of investment opportunities (e.g., industry Tobin's Q or industry investment) than it is before the spin‐off. Spin‐offs tend to cut investment in low Q industries and increase investment in high Q industries. These changes are observed primarily in spin‐offs of firms in industries unrelated to the parents' industries and in spin‐offs where the stock market reacts favorably to the spin‐off announcement. Our findings suggest that spin‐offs may improve the allocation of capital.

DISCUSSION

Published: 05/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03283.x

David K. Whitcomb, Enrique R. Arzac

Return, Risk, and Yield: Evidence from Ex Ante Data

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04971.x

JAMES S. ANG, DAVID R. PETERSON

The purpose of this study is to investigate the relationship between return and yield in the context of ex ante data from The Value Line Investment Survey and by examining the role of dividends as a proxy for risk. The use of ex ante data should substantially reduce the confounding of tax and information effects that has affected earlier studies. Heteroscedasticity is detected in the after‐tax CAPM and found to be negatively related to yield and positively related to beta. Maximum likelihood methods are used to correct for heteroscedasticity and generate efficient coefficient estimates. Using data for each of the years 1973 through 1983, there is an overall positive relationship between expected return and yield. However, coefficient estimates of yield are highly variable from year to year.

Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons

Published: 06/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb02566.x

BRUCE N. LEHMANN, DAVID M. MODEST

The authors' main goal in this paper is to ascertain whether conventional measures of abnormal mutual fund performance are sensitive to the benchmark chosen to measure normal performance. They employ the standard CAPM benchmarks and a variety of APT benchmarks to investigate this question. They find little similarity between the absolute and relative mutual fund rankings obtained from these alternative benchmarks, which suggests the importance of knowing the appropriate model for risk and return in this context. In addition, the rankings are not insensitive to the method used to construct the APT benchmark. Finally, they find statistically significant measured abnormal performance using all the benchmarks. The economic explanation for this phenomenon appears to be an open question.

Security Analysis and Trading Patterns When Some Investors Receive Information Before Others

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04777.x

DAVID HIRSHLEIFER, AVANIDHAR SUBRAHMANYAM, SHERIDAN TITMAN

In existing models of information acquisition, all informed investors receive their information at the same time. This article analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others. The model implies that, under some conditions, investors will focus only on a subset of securities (“herding”), while neglecting other securities with identical exogenous characteristics. In addition, the model is consistent with empirical correlations that are suggestive of oft‐cited trading strategies such as profit taking (short‐term position reversal) and following the leader (mimicking earlier trades).

Corporate Events, Trading Activity, and the Estimation of Systematic Risk: Evidence From Equity Offerings and Share Repurchases

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04781.x

DAVID J. DENIS, GREGORY B. KADLEC

We investigate the relation between trading activity, the measurement of security returns, and the evolution of security prices by examining estimates of systematic risk surrounding equity offerings and share repurchases. In contrast to prior studies, we find no evidence of changes in systematic risk following either equity offerings or share repurchases after correcting for biases caused by infrequent trading and price adjustment delays. Moreover, changes in ordinary least squares beta estimates are significantly related to contemporaneous changes in trading activity. Our results have implications for studies interested in the properties of security returns, particularly those examining periods in which trading activity changes.

Investor Sentiment and Pre‐IPO Markets

Published: 05/16/2006   |   DOI: 10.1111/j.1540-6261.2006.00870.x

FRANCESCA CORNELLI, DAVID GOLDREICH, ALEXANDER LJUNGQVIST

We examine whether irrational behavior among small (retail) investors drives post‐IPO prices. We use prices from the grey market (the when‐issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating overoptimism) are a very good predictor of first‐day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long‐run price reversal only following high grey market prices. This asymmetry occurs because larger (institutional) investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic.

Outsourcing in the International Mutual Fund Industry: An Equilibrium View

Published: 03/05/2015   |   DOI: 10.1111/jofi.12259

OLEG CHUPRININ, MASSIMO MASSA, DAVID SCHUMACHER

We study outsourcing relationships among international asset management firms. We find that, in companies that manage both outsourced and in‐house funds, in‐house funds outperform outsourced funds by 0.85% annually (57% of the expense ratio). We attribute this result to preferential treatment of in‐house funds via the preferential allocation of IPOs, trading opportunities, and cross‐trades, especially at times when in‐house funds face steep outflows and require liquidity. We explain preferential treatment with agency problems: it increases with the subcontractor's market power and the difficulty of monitoring the subcontractor, and decreases with the subcontractor's amount of parallel in‐house activity.

Women's Liberation as a Financial Innovation

Published: 06/29/2019   |   DOI: 10.1111/jofi.12829

MOSHE HAZAN, DAVID WEISS, HOSNY ZOABI

In one of the greatest extensions of property rights in human history, common law countries began giving rights to married women in the 1850s. Before this “women's liberation,” the doctrine of coverture strongly incentivized parents of daughters to hold real estate, rather than financial assets such as money, stocks, or bonds. We exploit the staggered nature of coverture's demise across U.S. states to show that women's rights led to shifts in household portfolios, a positive shock to the supply of credit, and a reallocation of labor toward nonagriculture and capital‐intensive industries. Investor protection thus deepened financial markets, aiding industrialization.

THE EX‐DIVIDEND BEHAVIOR OF AMERICAN TELEPHONE AND TELEGRAPH STOCK*

Published: 03/01/1960   |   DOI: 10.1111/j.1540-6261.1960.tb04833.x

David Durand, Alan M. May

A Note on Ambiguity in Portfolio Performance Measures

Published: 12/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb02208.x

DAVID PETERSON, MICHAEL L. RICE