The Journal of Finance

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.

INTEREST RATE EXPECTATIONS AND THE DEMAND FOR MONEY IN CANADA: COMMENT

Published: 03/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01364.x

Kevin Clinton

EXPECTATIONS, PRICES, COUPONS AND YIELDS: COMMENT

Published: 09/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01030.x

Chulsoon Khang

Explaining the Cross‐Section of Stock Returns in Japan: Factors or Characteristics?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00344

Kent Daniel, Sheridan Titman, K.C. John Wei

Japanese stock returns are even more closely related to their book‐to‐market ratios than are their U.S. counterparts, and thus provide a good setting for testing whether the return premia associated with these characteristics arise because the characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests on a Japanese sample, reject the Fama and French (1993) three‐factor model, but fail to reject the characteristic model.

Excessive Dollar Debt: Financial Development and Underinsurance

Published: 03/21/2003   |   DOI: 10.1111/1540-6261.00549

Ricardo J. Caballero, Arvind Krishnamurthy

We propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar‐denominated external debt present in these markets. We show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets. The retarded entry reinforces the underinsurance problem.

A Test for the Number of Factors in an Approximate Factor Model

Published: 09/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04754.x

GREGORY CONNOR, ROBERT A. KORAJCZYK

An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test statistic to determine the number of factors in an approximate factor model of asset returns, which does not require that diversifiable components of returns be uncorrelated across assets. We find evidence for one to six pervasive factors in the cross‐section of New York Stock Exchange and American Stock Exchange stock returns.

Ownership Structure, Speculation, and Shareholder Intervention

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.45483

Charles Kahn, Andrew Winton

An institution holding shares in a firm can use information about the firm both for trading (“speculation”) and for deciding whether to intervene to improve firm performance. Intervention increases the value of the institution's existing shareholdings, but intervention only increases the institution's trading profits if it enhances the precision of the institution's information relative to that of uninformed traders. Thus, the ability to speculate can increase or decrease institutional intervention. We examine key factors that affect the intervention decision, the usefulness of “short‐swing” provisions and restricted shares in encouraging institutional intervention, and implications for ownership structure across different firms.

Moral Hazard and Optimal Subsidiary Structure for Financial Institutions

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00708.x

CHARLES KAHN, ANDREW WINTON

Banks and related financial institutions often have two separate subsidiaries that make loans of similar type but differing risk, for example, a bank and a finance company, or a “good bank/bad bank” structure. Such “bipartite” structures may prevent risk shifting, in which banks misuse their flexibility in choosing and monitoring loans to exploit their debt holders. By “insulating” safer loans from riskier loans, a bipartite structure reduces risk‐shifting incentives in the safer subsidiary. Bipartite structures are more likely to dominate unitary structures as the downside from riskier loans is higher or as expected profits from the efficient loan mix are lower.

Momentum Strategies

Published: 12/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05222.x

LOUIS K. C. CHAN, NARASIMHAN JEGADEESH, JOSEF LAKONISHOK

We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book–to–market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Retail Investor Sentiment and Return Comovements

Published: 09/19/2006   |   DOI: 10.1111/j.1540-6261.2006.01063.x

ALOK KUMAR, CHARLES M.C. LEE

Using a database of more than 1.85 million retail investor transactions over 1991–1996, we show that these trades are systematically correlated—that is, individuals buy (or sell) stocks in concert. Moreover, consistent with noise trader models, we find that systematic retail trading explains return comovements for stocks with high retail concentration (i.e., small‐cap, value, lower institutional ownership, and lower‐priced stocks), especially if these stocks are also costly to arbitrage. Macroeconomic news and analyst earnings forecast revisions do not explain these results. Collectively, our findings support a role for investor sentiment in the formation of returns.

The Behavior of Stock Prices Around Institutional Trades

Published: 09/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04053.x

LOUIS K. C. CHAN, JOSEF LAKONISHOK

All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence (“package”) of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact.

Institutional Equity Trading Costs: NYSE Versus Nasdaq

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04819.x

LOUIS K. C. CHAN, JOSEF LAKONISHOK

We compare execution costs (market impact plus commission) on the New York Stock Exchange (NYSE) and Nasdaq for institutional investors. The differences in cost generally conform to each market's area of specialization. Controlling for firm size, trade size, and the money management firm's identity, costs are lower on Nasdaq for trades in comparatively smaller firms, while costs for trading the larger stocks are lower on NYSE. The cost differences estimated from a regression model are, however, sensitive to the choice of time period.

DISCUSSION

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05009.x

KALMAN J. COHEN

Asymmetric Learning from Financial Information

Published: 10/27/2014   |   DOI: 10.1111/jofi.12223

CAMELIA M. KUHNEN

This study asks whether investors learn differently from gains versus losses. I find experimental evidence that indicates that being in the negative domain leads individuals to form overly pessimistic beliefs about available investment options. This pessimism bias is driven by people reacting more to low outcomes in the negative domain relative to the positive domain. Such asymmetric learning may help explain documented empirical patterns regarding the differential role of poor versus good economic conditions on investment behavior and household economic choices.

Analyzing the Analysts: When Do Recommendations Add Value?

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00657.x

Narasimhan Jegadeesh, Joonghyuk Kim, Susan D. Krische, Charles M. C. Lee

We show that analysts from sell‐side firms generally recommend “glamour” (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naïve adherence to these recommendations can be costly, because the level of the consensus recommendation adds value only among stocks with favorable quantitative characteristics (i.e., value stocks and positive momentum stocks). In fact, among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, we find that the quarterly change in consensus recommendations is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables.

Macroeconomic Influences and the Variability of the Commodity Futures Basis

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04727.x

WARREN BAILEY, K. C. CHAN

We provide evidence that the spread between commodity spot and futures prices (the basis) reflects the macroeconomic risks common to all asset markets. The basis of many commodities is correlated with the stock index dividend yield and corporate bond quality spread. Explanatory power is related to exposure to macroeconomic fluctuations: about 40 percent of the variation in the basis of a portfolio of commodities with high business cycle sensitivity is explained by the stock and bond yields. Further diagnostics indicate that these associations are largely due to the presence of risk premiums, rather than spot price forecasts, in the basis.

International Evidence on Institutional Trading Behavior and Price Impact

Published: 03/25/2004   |   DOI: 10.1111/j.1540-6261.2004.00651.x

Chiraphol N. Chiyachantana, Pankaj K. Jain, Christine Jiang, Robert A. Wood

This study characterizes institutional trading in international stocks from 37 countries during 1997 to 1998 and 2001. We find that the underlying market condition is a major determinant of the price impact and, more importantly, of the asymmetry between price impacts of institutional buy and sell orders. In bullish markets, institutional purchases have a bigger price impact than sells; however, in the bearish markets, sells have a higher price impact. This differs from previous findings on price impact asymmetry. Our study further suggests that price impact varies depending on order characteristics, firm‐specific factors, and cross‐country differences.

THE IMPACT AND EFFICIENCY OF INSTITUTIONAL NET TRADING IMBALANCES

Published: 03/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03243.x

Robert C. Klemkosky

MODELS OF EQUITY VALUATION: THE GREAT SERM BUBBLE

Published: 05/01/1970   |   DOI: 10.1111/j.1540-6261.1970.tb00505.x

Harry C. Sauvain, Michael Keenan

MEASURING ALLOCATIVE EFFICIENCY WITH TECHNOLOGICAL UNCERTAINTY

Published: 05/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb01914.x

Stewart Myers, Clement G. Krouse