The Journal of Finance

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.

Private Equity Performance and Liquidity Risk

Published: 11/19/2012   |   DOI: 10.1111/j.1540-6261.2012.01788.x

FRANCESCO FRANZONI, ERIC NOWAK, LUDOVIC PHALIPPOU

Private equity has traditionally been thought to provide diversification benefits. However, these benefits may be lower than anticipated as we find that private equity suffers from significant exposure to the same liquidity risk factor as public equity and other alternative asset classes. The unconditional liquidity risk premium is about 3% annually and, in a four‐factor model, the inclusion of this liquidity risk premium reduces alpha to zero. In addition, we provide evidence that the link between private equity returns and overall market liquidity occurs via a funding liquidity channel.

Optimal Hedging under Intertemporally Dependent Preferences

Published: 09/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb02440.x

ERIC BRIYS, MICHEL CROUHY, HARRIS SCHLESINGER

This paper examines optimal hedging behavior in a market where preferences for current consumption are partly determined by the consumer's past consumption history. The model considers an individual exposed to price risk, who allocates wealth between consumption and futures contracts over a (continuous‐time) finite planning horizon. The speculative component of the hedge ratio is shown to be smaller and the consumption path smoother than in models where preferences are separable over time. Some comparative‐static properties of the hedge ratio are also examined.

A Fundamental Study of the Seasonal Risk‐Return Relationship: A Note

Published: 09/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02621.x

ERIC C. CHANG, J. MICHAEL PINEGAR

Stimulating Housing Markets

Published: 10/15/2019   |   DOI: 10.1111/jofi.12847

DAVID BERGER, NICHOLAS TURNER, ERIC ZWICK

We study temporary fiscal stimulus designed to support distressed housing markets by inducing demand from buyers in the private market. Using difference‐in‐differences and regression kink research designs, we find that the First‐Time Homebuyer Credit increased home sales by 490,000 (9.8%), median home prices by $2,400 (1.1%) per standard deviation increase in program exposure, and the transition rate into homeownership by 53%. The policy response did not reverse immediately. Instead, demand comes from several years in the future: induced buyers were three years younger in 2009 than typical first‐time buyers. The program's market‐stabilizing benefits likely exceeded its direct stimulus effects.

The Pricing of Default‐free Interest Rate Cap, Floor, and Collar Agreements

Published: 12/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04647.x

ERIC BRIYS, MICHEL CROUHY, RAINER SCHÖBEL

The paper focuses on the valuation of caps, floors, and collars in a contingent claim framework under continuous time. These instruments are interpreted as options on traded zero coupon bonds. The bond prices themselves are used as the underlying stochastic variables. This has the advantage that we end up with closed form solutions which are easy to compute. Special attention is devoted to the choice of the stochastic process appropriate for the price dynamics of the underlying zero coupon bonds.

Stochastic Processes for Interest Rates and Equilibrium Bond Prices

Published: 05/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02275.x

TERRY A. MARSH, ERIC R. ROSENFELD

Investment Policy and Exit‐Exchange Offers Within Financially Distressed Firms

Published: 07/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02710.x

ANTONIO E. BERNARDO, ERIC L. TALLEY

This article examines the conflict of interest between shareholders and bondholders in a setting in which firms can renegotiate the terms of existing debt with public debtholders. In particular, we consider one of the most common types of debt restructuring: the exit‐exchange offer. Our analysis explores the relation between exit‐exchange offers and investment choice by the manager, and it concludes that managers, acting strategically on behalf of shareholders, may select inefficient investment projects in order to enhance their bargaining position vis‐a‐vis creditors. Holding the upside potential of an investment project fixed, managers/shareholders prefer projects with lower payoffs in states of bankruptcy because it induces individual bondholders to accept poorer terms in a debt‐for‐debt exit‐exchange offer, thus generating a greater residual for shareholders in states of solvency. Additionally, we show how the investment inefficiencies in our analysis depend on (i) the inability of bondholders to coordinate their actions; (ii) the ability of managers to commit to suboptimal investment projects; and (iii) the coupling of an individual bondholder's decision to tender and her decision to consent to allow the firm to strip fiduciary covenants. We suggest conditions under which a ban on coupled exit‐exchange offers—or alternatively, constraints on “debt‐for‐debt” exchanges—would be efficiency‐enhancing.

The Demand for Preferred Stock with Sinking Funds and Without: A Note

Published: 03/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb01107.x

ERIC H. SORENSEN, CLARK A. HAWKINS

The Valuation Effects of Private Placements of Convertible Debt

Published: 12/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04650.x

L. PAIGE FIELDS, ERIC L. MAIS

Share price reactions to announcements of 61 private placements of convertible debt securities are investigated and a significant positive average abnormal return of 1.80% is documented. This unique result contrasts with the negative average abnormal return associated with public sales of convertible debt securities. The positive effect on common shareholders' wealth appears to be related to the relative size of the private issue and unrelated to the degree to which the convertible bond is “out‐of‐the‐money” at issuance.

Ex Ante Skewness and Expected Stock Returns

Published: 12/27/2012   |   DOI: 10.1111/j.1540-6261.2012.01795.x

JENNIFER CONRAD, ROBERT F. DITTMAR, ERIC GHYSELS

We use option prices to estimate ex ante higher moments of the underlying individual securities’ risk‐neutral returns distribution. We find that individual securities’ risk‐neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross‐section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co‐moments, individual securities’ skewness matters.

Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market

Published: 09/16/2005   |   DOI: 10.1111/j.1540-6261.2005.00797.x

FRANCIS A. LONGSTAFF, SANJAY MITHAL, ERIC NEIS

We use the information in credit default swaps to obtain direct measures of the size of the default and nondefault components in corporate spreads. We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the definition of the riskless curve. We also find that the nondefault component is time varying and strongly related to measures of bond‐specific illiquidity as well as to macroeconomic measures of bond market liquidity.

The Long‐Lasting Momentum in Weekly Returns

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01320.x

ROBERTO C. GUTIERREZ, ERIC K. KELLEY

Reversal is the current stylized fact of weekly returns. However, we find that an opposing and long‐lasting continuation in returns follows the well‐documented brief reversal. These subsequent momentum profits are strong enough to offset the initial reversal and to produce a significant momentum effect over the full year following portfolio formation. Thus, ex post, extreme weekly returns are not too extreme. Our findings extend to weekly price movements with and without public news. In addition, there is no relation between news uncertainty and the momentum in 1‐week returns.

Contingent Claims Analysis of Corporate Capital Structures: an Empirical Investigation

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03649.x

E. PHILIP JONES, SCOTT P. MASON, ERIC ROSENFELD

Short‐Sales Constraints and Price Discovery: Evidence from the Hong Kong Market

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01270.x

ERIC C. CHANG, JOSEPH W. CHENG, YINGHUI YU

Short‐sales practices in the Hong Kong stock market are unique in that only stocks on a list of designated securities can be sold short. By analyzing the price effects following the addition of individual stocks to the list, we find that short‐sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists. These findings are consistent with Miller's (1977) intuition and other optimism models. We also document higher volatility and less positive skewness of individual stock returns when short sales are allowed.

A Re‐Examination of Shareholder Wealth Effects of Calls of Convertible Preferred Stock

Published: 12/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02661.x

ERIC L. MAIS, WILLIAM T. MOORE, RONALD C. ROGERS

Common stock price reactions to announcements of 67 calls of in‐the‐money convertible preferred stocks are examined, and a significant average abnormal return of −1.6 percent is documented. The finding is robust to the choice of estimation period and the assumed return‐generating process. Annual dividend obligations for the called preferred issues in the sample typically are greater than the dividends for the common shares into which they are converted, and announcement‐period abnormal returns are negatively correlated with changes in dividends. Moreover, calls that result in dilution of voting rights appear to have greater adverse valuation effects than calls that do not alter voting rights concentration.

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.

How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

Published: 11/26/2012   |   DOI: 10.1111/jofi.12011

BURCU DUYGAN‐BUMP, PATRICK PARKINSON, ERIC ROSENGREN, GUSTAVO A. SUAREZ, PAUL WILLEN

The events following Lehman's failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short‐term credit markets and the role of central banks as back‐stop liquidity providers. The Federal Reserve's response to financial disruptions in the United States importantly included the creation of liquidity facilities. Using a differences‐in‐differences approach, we evaluate one of the most unusual of these interventions—the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. We find that this facility helped stabilize asset outflows from money market funds and reduced asset‐backed commercial paper yields significantly.

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.

Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors

Published: 08/11/2023   |   DOI: 10.1111/jofi.13271

KLAKOW AKEPANIDTAWORN, RICK DI MASCIO, ALEX IMAS, LAWRENCE D.W. SCHMIDT

Are market experts prone to heuristics, and do these heuristics transfer across buying and selling domains? We investigate this question using a unique data set of institutional investors with portfolios averaging $573 million. A striking finding emerges: While there is evidence of skill in buying, selling decisions underperform substantially, even relative to random‐selling strategies. This holds despite the similarity between the two decisions in frequency, substance, and consequences for performance. Evidence suggests an asymmetric allocation of cognitive resources such as attention can explain the discrepancy: We document a systematic, costly heuristic process for selling but not for buying.