The Journal of Finance

DISCUSSION

Published: 05/01/1952   |   DOI: 10.1111/j.1540-6261.1952.tb00252.x

Reavis Cox, Avram Kisselgoff, Wallace P. Mors, Thomas W. Rogers

Global Currency Hedging

Published: 01/13/2010   |   DOI: 10.1111/j.1540-6261.2009.01524.x

JOHN Y. CAMPBELL, KARINE SERFATY‐DE MEDEIROS, LUIS M. VICEIRA

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar), the euro, and the Swiss franc (particularly in the second half of the period) moved against world equity markets. Thus, these currencies should be attractive to risk‐minimizing global equity investors despite their low average returns. The risk‐minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk‐minimizing investors should adjust their currency positions in response to movements in interest differentials.

A Rejoinder

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04743.x

Nai‐Fu Chen, Raymond Kan, Merton H. Miller

Were the Good Old Days That Good? Changes in Managerial Stock Ownership Since the Great Depression

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00114

Clifford G. Holderness, Randall S. Kroszner, Dennis P. Sheehan

We document that ownership by officers and directors of publicly traded firms is on average higher today than earlier in the century. Managerial ownership has risen from 13 percent for the universe of exchange‐listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.

A Test of the Relative Pricing Effects of Dividends and Earnings: Evidence from Simultaneous Announcements in Japan

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00245

Robert M. Conroy, Kenneth M. Eades, Robert S. Harris

We study the pricing effects of dividend and earnings announcements by taking advantage of the unique setting in Japan where managers simultaneously announce the current year's dividends and earnings as well as forecasts of next year's dividends and earnings. Defining surprises as deviations from analysts' forecasts, we find that share price reactions are significantly affected by earnings surprises, especially management forecasts of next year's earnings. The information content of dividends is marginal and is restricted to announcements of next year's dividends. Consistent with Modigliani and Miller's dividend irrelevance proposition, current dividend surprises have no material impact on stock prices in Japan.

MONEY AND STOCK PRICES: THE CHANNELS OF INFLUENCE

Published: 05/01/1972   |   DOI: 10.1111/j.1540-6261.1972.tb00957.x

Charles H. Brunie, Michael J. Hamburger, Levis A. Kochin

Outsourcing Mutual Fund Management: Firm Boundaries, Incentives, and Performance

Published: 11/26/2012   |   DOI: 10.1111/jofi.12006

JOSEPH CHEN, HARRISON HONG, WENXI JIANG, JEFFREY D. KUBIK

We investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms. These funds underperform those run internally by about 52 basis points per year. After instrumenting for a fund's outsourcing status, the estimated underperformance is three times larger. We hypothesize that contractual externalities due to firm boundaries make it difficult to extract performance from an outsourced relationship. Consistent with this view, outsourced funds face higher powered incentives; they are more likely to be closed after poor performance and excessive risk‐taking.

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.

The Resiliency of the High‐Yield Bond Market: The LTV Default

Published: 09/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02641.x

CHRISTOPHER K. MA, RAMESH P. RAO, RICHARD L. PETERSON

This paper investigates the resiliency of the new‐issue high‐yield bond market by examining the changes in implied default rates of such bonds before and after the largest high‐yield bond default, i.e., the LTV bankruptcy. Specifically, the paper compares implied default probabilities of high‐yield bonds during the post‐LTV period calculated from actual new‐issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred. A comparison of these probabilities reveals that the market's perception of default on the high risk segment of the bond market increased significantly after the LTV bankruptcy. However, the effect was transitory, lasting only six months. Thus, the market was resilient to a major default.

THE DETERMINANTS OF COMMON STOCK RETURNS VOLATILITY: AN INTERNATIONAL COMPARISON

Published: 05/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb01917.x

Kalman J. Cohen, Walter L. Ness, Hitoshi Okuda, Robert A. Schwartz, David K. Whitcomb

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.

Option Momentum

Published: 09/17/2023   |   DOI: 10.1111/jofi.13279

STEVEN L. HESTON, CHRISTOPHER S. JONES, MEHDI KHORRAM, SHUAIQI LI, HAITAO MO

This paper investigates the performance of option investments across different stocks by computing monthly returns on at‐the‐money straddles on individual equities. We find that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from 6 to 36 months. This phenomenon is robust to including out‐of‐the‐money options or delta‐hedging the returns. Unlike stock momentum, option return continuation is not followed by long‐run reversal. Significant returns remain after factor risk adjustment and after controlling for implied volatility and other characteristics. Across stocks, trading costs are unrelated to the magnitude of momentum profits.

AN EMPIRICAL ANALYSIS OF THE FLOTATION COST OF CORPORATE SECURITIES, 1971–1972

Published: 09/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01028.x

Keith B. Johnson, T. Gregory Morton, M. Chapman Findlay

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.

Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry

Published: 03/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05203.x

KEITH C. BROWN, W. V. HARLOW, LAURA T. STARKS

We test the hypothesis that when their compensation is linked to relative performance, managers of investment portfolios likely to end up as “losers” will manipulate fund risk differently than those managing portfolios likely to be “winners.” An empirical investigation of the performance of 334 growth‐oriented mutual funds during 1976 to 1991 demonstrates that mid‐year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid‐year winners. Furthermore, we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time.

Estimation of Implicit Bankruptcy Costs

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03651.x

ROBERT E. KALABA, TERENCE C. LANGETIEG, NIMA RASAKHOO, MARK I. WEINSTEIN

This paper presents a new methodology, quasilinear estimation, for efficiently estimating economic variables reflected in the prices of corporate securities. For example, ex ante bankruptcy costs are not directly observable, however, if these costs are sufficiently large, then current security prices are affected and bankruptcy costs can be indirectly measured. When bankruptcy costs and other relevant parameters are known, there are many numerical solution techniques that can be used to determine security prices. One technique, the method of lines, is compatible with quasilinear estimation, which has been employed extensively in the physical sciences for the estimation of coefficients in differential equation models. We demonstrate that quasilinear estimation is a potentially reliable and efficient technique for the estimation of corporate bankruptcy costs and the asset variance from security prices.

SOME DIRECT EVIDENCE ON THE DIVIDEND CLIENTELE PHENOMENON

Published: 12/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb03427.x

Wilbur G. Lewellen, Kenneth L. Stanley, Ronald C. Lease, Gary G. Schlarbaum

The Anatomy of the Transmission of Macroprudential Policies

Published: 08/10/2022   |   DOI: 10.1111/jofi.13170

VIRAL V. ACHARYA, KATHARINA BERGANT, MATTEO CROSIGNANI, TIM EISERT, FERGAL MCCANN

We analyze how regulatory constraints on household leverage—in the form of loan‐to‐income and loan‐to‐value limits—affect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Loan‐level data suggest that mortgage credit is reallocated from low‐ to high‐income borrowers and from urban to rural counties. This reallocation weakens the feedback between credit and house prices and slows house price growth in “hot” housing markets. Banks whose lending to households is more affected by the regulatory constraint drive this reallocation, but also substitute their risk‐taking into holdings of securities and corporate credit.

On the Perils of Financial Intermediaries Setting Security Prices: The Mutual Fund Wild Card Option

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00403

John M. R. Chalmers, Roger M. Edelen, Gregory B. Kadlec

Economic distortions can arise when financial claims trade at prices set by an intermediary rather than direct negotiation between principals. We demonstrate the problem in a specific context, the exchange of open‐end mutual fund shares. Mutual funds typically set fund share price (NAV) using an algorithm that fails to account for nonsynchronous trading in the fund's underlying securities. This results in predictable changes in NAV, which lead to exploitable trading opportunities. A modification to the pricing algorithm that corrects for nonsynchronous trading eliminates much of the predictability. However, there are many other potential sources of distortion when intermediaries set prices.