The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Macroeconomic Seasonality and the January Effect
Published: 12/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb04785.x
CHAELES KEAMER
Many financial markets researchers have sought an explanation for the role of January in stock returns. Any explanation of this phenomenon that is consistent with rational pricing must specify a source of seasonality in expected returns. The pervasive seasonality in the macroeconomy is an appealing possibility. A multifactor model that links macroeconomic risk to expected return is found to show substantial seasonality in expected returns. This model accounts for the seasonality in average returns, while the capital asset pricing model cannot.
Incentivizing Calculated Risk‐Taking: Evidence from an Experiment with Commercial Bank Loan Officers
Published: 11/24/2014 | DOI: 10.1111/jofi.12233
SHAWN COLE, MARTIN KANZ, LEORA KLAPPER
We conduct an experiment with commercial bank loan officers to test how performance compensation affects risk assessment and lending. High‐powered incentives lead to greater screening effort and more profitable lending decisions. This effect is muted, however, by deferred compensation and limited liability, two standard features of loan officer compensation contracts. We find that career concerns and personality traits affect loan officer behavior, but show that the response to incentives does not vary with traits such as risk‐aversion, optimism, or overconfidence. Finally, we present evidence that incentives distort the assessment of credit risk, even among professionals with many years of experience.
Can Tax‐Loss Selling Explain the January Seasonal in Stock Returns?
Published: 12/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb02534.x
K. C. CHAN
This paper analyzes the tax‐loss selling hypothesis as an explanation of the January seasonal in stock returns and argues that rational tax‐loss selling implies little relation between the January seasonal and the long‐term loss. Empirical results show that the January seasonal is as strongly related to the long‐term loss as it is to the short‐term loss. The evidence is inconsistent with a model that explains the January seasonal by optimal tax trading.
Forward and Futures Prices: Evidence from the Foreign Exchange Markets
Published: 09/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb02442.x
CAROLYN W. CHANG, JACK S. K. CHANG
Cornell and Reinganum (1981), hereafter CR, report that price differentials for future contracts and forward contracts are statistically insignificant in foreign exchange markets. Based on this finding, CR conclude that marking‐to‐market is insignificant in the formulation of currency futures prices. This note identifies two potential concerns with the CR tests. One problem relates to the timing of delivery dates for “matched” contracts. A second problem relates to the time period for the CR study. We show that correcting for these problems does not affect the overall conclusions of the CR study; marking‐to‐market does not appear to have a significant effect on currency futures prices.
Patterns of Productivity in the Finance Literature: A Study of the Bibliometric Distributions
Published: 03/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb05095.x
KEE H. CHUNG, RAYMOND A. K. COX
This study finds a bibliometric regularity in the finance literature that the number of authors publishing n papers is about 1/nc of those publishing one paper. We find that the finance literature conforms very well to the inverse square law (c=2) if data are taken from a large collection of journals. When applied to individual finance journals, we find that values of c range from 1.95 to 3.26. We also find that top‐rated journals have higher concentrations among their contributors. This implies that the phenomenon “success breeds success” is more common in higher quality publications.
How Wise Are Crowds? Insights from Retail Orders and Stock Returns
Published: 02/07/2013 | DOI: 10.1111/jofi.12028
ERIC K. KELLEY, PAUL C. TETLOCK
We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms’ monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.
Value versus Glamour
Published: 09/11/2003 | DOI: 10.1111/1540-6261.00594
Jennifer Conrad, Michael Cooper, Gautam Kaul
The fragility of the CAPM has led to a resurgence of research that frequently uses trading strategies based on sorting procedures to uncover relations between firm characteristics (such as “value” or “glamour”) and equity returns. We examine the propensity of these strategies to generate statistically and economically significant profits due to our familiarity with the data. Under plausible assumptions, data snooping can account for up to 50 percent of the in‐sample relations between firm characteristics and returns uncovered using single (one‐way) sorts. The biases can be much larger if we simultaneously condition returns on two (or more) characteristics.
The Level and Persistence of Growth Rates
Published: 03/21/2003 | DOI: 10.1111/1540-6261.00540
Louis K. C. Chan, Jason Karceski, Josef Lakonishok
Expectations about long‐term earnings growth are crucial to valuation models and cost of capital estimates. We analyze historical long‐term growth rates across a broad cross section of stocks using several indicators of operating performance. We test for persistence and predictability in growth. While some firms have grown at high rates historically, they are relatively rare instances. There is no persistence in long‐term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. Specifically, IBES growth forecasts are overly optimistic and add little predictive power. Valuation ratios also have limited ability to predict future growth.
An Unconditional Asset‐Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk
Published: 06/01/1988 | DOI: 10.1111/j.1540-6261.1988.tb03941.x
K. C. CHAN, NAI‐FU CHEN
In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size‐portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm‐size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size‐ranked portfolios.
New Evidence on the Market for Directors: Board Membership and Pennsylvania Senate Bill 1310
Published: 02/12/2003 | DOI: 10.1111/1540-6261.00522
Jeffrey L. Coles, Chun‐Keung Hoi
We examine the relation between a board' decision to reject antitakeover provisions of Pennsylvania Senate Bill 1310 and subsequent labor market opportunities of those same board members. Compared to directors retaining all provisions, directors rejecting all protective provisions of SB1310 are three times as likely to gain additional external directorships and are 30 percent more likely to retain their internal slot on the board of that same Pennsylvania company. For external board seats, the results are driven by nonexecutive directors who are not members of the management team; for internal board seats, the results are driven by executive directors.
Imperfect Information and Cross‐Autocorrelation among Stock Prices
Published: 09/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04752.x
KALOK CHAN
I develop a model to explain why stock returns are positively cross‐autocorrelated. When market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As market makers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively cross‐autocorrelated. If the signal quality differs among stocks, the cross‐autocorrelation pattern is asymmetric. I show that both own‐ and cross‐autocorrelations are higher when market movements are larger.
How Skilled Are Security Analysts?
Published: 02/03/2020 | DOI: 10.1111/jofi.12890
ALAN CRANE, KEVIN CROTTY
The majority of security analysts are identified as skilled when the cross‐section of analyst performance is modeled as a mixture of multiple skill distributions. Analysts exhibit heterogeneous skill—some are high‐type, and some are low‐type. On average, the recommendation revisions of both types exhibit positive abnormal returns. The heterogeneity stems from differential ability to produce new information; all analysts can profitably process news. Top analysts outperform because more of their recommendations are influential (i.e., associated with statistically significant returns) and both their influential and noninfluential recommendations are more informative. A majority of research firms are also identified as skilled.
Portfolio Analysis Using Single Index, Multi‐Index, and Constant Correlation Models: A Unified Treatment
Published: 12/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb04918.x
CLARENCE C. Y. KWAN
In this study a simple common algorithm which is applicable to seven models is proposed for optimal portfolio selection disallowing short sales of risky securities. The models considered in the analysis consist of a single index model, four multi‐index models, and two constant correlation models. Unlike the previous approach, the proposed algorithm does not require explicit ranking of securities. Therefore, it is particularly useful for two multi‐index models with orthogonal indices which do not provide any ranking criterion. Also, because of its algorithmic efficiency as demonstrated in a simulation study on models with multiple groups, the approach here can enhance their usefulness in portfolio analysis.
Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis
Published: 08/06/2015 | DOI: 10.1111/jofi.12309
HEITOR ALMEIDA, CHANG‐SOO KIM, HWANKI BRIAN KIM
This paper examines capital reallocation among firms in Korean business groups (chaebol) in the aftermath of the 1997 Asian financial crisis, and the consequences of this capital reallocation for the investment and performance of chaebol firms. We show that chaebol transferred cash from low‐growth to high‐growth member firms, using cross‐firm equity investments. This capital reallocation allowed chaebol firms with greater investment opportunities to invest more than control firms after the crisis. These firms also showed higher profitability and lower declines in valuation than control firms following the crisis. Our results suggest that chaebol internal capital markets helped them mitigate the negative effects of the Asian crisis on investment and performance.
Structural and Return Characteristics of Small and Large Firms
Published: 09/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04626.x
K. C. CHAN, NAI‐FU CHEN
We examine differences in structural characteristics that lead firms of different sizes to react differently to the same economic news. We find that a small firm portfolio contains a large proportion of marginal firms‐firms with low production efficiency and high financial leverage. We construct two size‐matched return indices designed to mimic the return behavior of marginal firms and find that these return indices are important in explaining the time‐series return difference between small and large firms. Furthermore, risk exposures to these indices are as powerful as log(size) in explaining average returns of size‐ranked portfolios.
Vote Trading and Information Aggregation
Published: 11/28/2007 | DOI: 10.1111/j.1540-6261.2007.01296.x
SUSAN E.K. CHRISTOFFERSEN, CHRISTOPHER C. GECZY, DAVID K. MUSTO, ADAM V. REED
The standard analysis of corporate governance assumes that shareholders vote in ratios that firms choose, such as one share‐one vote. However, if the cost of unbundling and trading votes is sufficiently low, then shareholders choose the ratios. We document an active market for votes within the U.S. equity loan market, where the average vote sells for zero. We hypothesize that asymmetric information motivates the vote trade and find support in the cross section. More trading occurs for higher‐spread and worse‐performing firms, especially when voting is close. Vote trading corresponds to support for shareholder proposals and opposition to management proposals.