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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Governance Mechanisms and Equity Prices
Published: 11/10/2005 | DOI: 10.1111/j.1540-6261.2005.00819.x
K. J. MARTIJN CREMERS, VINAY B. NAIR
We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10% to 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to capture the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of “high” vulnerability to takeovers. The complementarity effect exists for firms with lower industry‐adjusted leverage and is stronger for smaller firms.
Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount
Published: 01/10/2008 | DOI: 10.1111/j.1540-6261.2008.01313.x
KALOK CHAN, ALBERT J. MENKVELD, ZHISHU YANG
We examine the effect of information asymmetry on equity prices in the local A‐ and foreign B‐share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross‐sectional variation in B‐share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid‐ask spread in the A‐ and B‐share markets explains 44% and 46% of the variation in B‐share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables.
Determinants of Contract Choice: The Use of Warrants to Compensate Underwriters of Seasoned Equity Issues
Published: 03/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05213.x
CHEE K. NG, RICHARD L. SMITH
The issuer's decision to include warrants as compensation to underwriters is studied for a sample of 1,991 negotiated firm commitment issues of seasoned equity. Using a two‐stage logit model to correct for self‐selection bias, we find direct evidence that warrant compensation functions as a bond, substituting for reputational capital and enabling the underwriter to certify the issue price. To a lesser degree, the decision also is affected by regulations on underwriter compensation and on the use of underwriter warrants. Issuers' decisions are consistent with an objective of minimizing total underwriting cost, including cash compensation, warrants, and underpricing.
Monitoring Managers: Does It Matter?
Published: 11/26/2012 | DOI: 10.1111/jofi.12004
FRANCESCA CORNELLI, ZBIGNIEW KOMINEK, ALEXANDER LJUNGQVIST
We study how well‐incentivized boards monitor CEOs and whether monitoring improves performance. Using unique, detailed data on boards' information sets and decisions for a large sample of private equity–backed firms, we find that gathering information helps boards learn about CEO ability. “Soft” information plays a much larger role than hard data, such as the performance metrics that prior literature focuses on, and helps avoid firing a CEO for bad luck or in response to adverse external shocks. We show that governance reforms increase the effectiveness of board monitoring and establish a causal link between forced CEO turnover and performance improvements.
Common Ownership Does Not Have Anticompetitive Effects in the Airline Industry
Published: 08/21/2022 | DOI: 10.1111/jofi.13176
PATRICK DENNIS, KRISTOPHER GERARDI, CAROLA SCHENONE
Institutions often own equity in multiple firms that compete in the same product market. Prior research has shown that these institutional “common owners” induce anticompetitive pricing behavior in the airline industry. This paper reevaluates this evidence and shows that the documented positive correlation between common ownership and airline ticket prices stems from the market share component of the common ownership measure, and not the ownership and control components. We further show that the results are sensitive to measures of investor control and to assumptions about equity holders' ownership and control during bankruptcy.
Regulation and the Determination of Bank Capital Changes: A Note
Published: 12/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb03848.x
J. KIMBALL DIETRICH, CHRISTOPHER JAMES
The effectiveness of bank capital adequacy requirements is examined in this paper. Using empirical tests similar to those employed by Peltzman and Mingo, no significant relationship is found between changes in bank capital and the capital standards imposed by regulators. The findings conflict with those of previous studies. The conflict in findings, it is argued, results from the failure of previous studies to account for the effect of binding deposit rate ceilings.
Collective Risk Management in a Flight to Quality Episode
Published: 09/10/2008 | DOI: 10.1111/j.1540-6261.2008.01394.x
RICARDO J. CABALLERO, ARVIND KRISHNAMURTHY
Severe flight to quality episodes involve uncertainty about the environment, not only risk about asset payoffs. The uncertainty is triggered by unusual events and untested financial innovations that lead agents to question their worldview. We present a model of crises and central bank policy that incorporates Knightian uncertainty. The model explains crisis regularities such as market‐wide capital immobility, agents' disengagement from risk, and liquidity hoarding. We identify a social cost of these behaviors, and a benefit of a lender of last resort facility. The benefit is particularly high because public and private insurance are complements during uncertainty‐driven crises.
Taxes and the Pricing of Stock Index Futures
Published: 06/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb02496.x
BRADFORD CORNELL, KENNETH R. FRENCH
Stock index futures prices are generally below the level predicted by simple arbitrage models. This paper suggests that the discrepancy between the actual and predicted prices is caused by taxes. Capital gains and losses are not taxed until they are realized. As Constantinides demonstrates in a recent paper, this gives stockholders a valuable timing option. If the stock price drops, the investor can pass part of the loss on to the government by selling the stock. On the other hand, if the stock price rises, the investor can postpone the tax by not realizing the gain. Since this option is not available to stock index futures traders, the futures prices will be lower than standard no‐tax models predict.
Oil and the Stock Markets
Published: 06/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb02691.x
CHARLES M. JONES, GAUTAM KAUL
We test whether the reaction of international stock markets to oil shocks can be justified by current and future changes in real cash flows and/or changes in expected returns. We find that in the postwar period, the reaction of United States and Canadian stock prices to oil shocks can be completely accounted for by the impact of these shocks on real cash flows alone. In contrast, in both the United Kingdom and Japan, innovations in oil prices appear to cause larger changes in stock prices than can be justified by subsequent changes in real cash flows or by changing expected returns.
Bank Deposit Rate Clustering: Theory and Empirical Evidence
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00185
Charles Kahn, George Pennacchi, Ben Sopranzetti
Like security prices, retail deposit interest rates cluster around integers and “even” fractions. However, explanations for security price clustering are incompatible with deposit rate clustering. A theory based on the limited recall of retail depositors is proposed. It predicts that banks tend to set rates at integers and that rates are “sticky” at these levels. The propensity for integer rates increases with the level of wholesale interest rates and deposit market concentration. When banks set noninteger rates, rates are more likely to be just above, rather than just below, integers. The paper finds substantial empirical support for the theory's implications.
The Determinants of Default on Insured Conventional Residential Mortgage Loans
Published: 12/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb03841.x
TIM S. CAMPBELL, J. KIMBALL DIETRICH
This paper presents empirical evidence on the determinants of default for insured residential mortgages. A multinomial logit model is specified and estimated for regional aggregates constructed from cross sectional and time series data. The results document the independent statistical significance of contemporaneous payment/income and loan/ value ratios and unemployment rates as well as more commonly studied determinants of default such as age and the original loan/value ratio.
Call Options, Points, and Dominance Restrictions on Debt Contracts
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00190
Kenneth B. Dunn, Chester S. Spatt
We analyze the impact of a contract's length, callability, amortization, and original discount by arbitrage methods. Among instruments that are callable without penalty, longer instruments command a higher interest rate because the borrower possesses the option of repaying relatively more slowly. However, the rate on longer self‐amortizing loans cannot be substantially larger than for shorter ones because the payments decrease with contract length. Bounds on the trade‐off between points and rate for callable debt are characterized using the trade‐off for noncallable debt and the property that the value of the prepayment option increases with the loan's interest rate.