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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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.
REPLY
Published: 06/01/1973 | DOI: 10.1111/j.1540-6261.1973.tb01394.x
Pao L. Cheng, M. King Deets
Municipal Bond Pricing and the New York City Fiscal Crisis
Published: 12/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb03615.x
DAVID S. KIDWELL, CHARLES A. TRZCINKA
This paper's findings suggests that the New York City fiscal crisis by itself did not lead to a fundamental change in risk perceptions of investors, resulting in higher interest rates in the municipal bond market. The monthly prediction errors generated by time series tests were relatively small and none were statistically significant. Only the signs on the prediction errors for June, July, and August were consistent with a New York City effect. Thus, if the New York City default had an impact on aggregate interest rates, it was at most small and of short duration.
Corporate Risk Management and the Incentive Effects of Debt
Published: 12/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb03736.x
TIM S. CAMPBELL, WILLIAM A. KRACAW
This paper demonstrates how the incentive of manager‐equityholders to substitute toward riskier assets, commonly referred to as the “asset substitution problem,” is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager‐equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager‐equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level.
Stock Price Dynamics and Firm Size: An Empirical investigation
Published: 12/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb04693.x
YIN‐WONG CHEUNG, LILIAN K. NG
We show that after controlling for the effects of bid‐ask spreads and trading volume the conditional future volatility of equity returns is negatively related to the level of stock price. This “leverage effect” is stronger for small, as compared to large, firms. We also document that while the essential characteristics of the relations between stock price dynamics and firm size are stable, the strengths of the relationships appear to change over time.
A Multiple Lender Approach to Understanding Supply and Search in the Equity Lending Market
Published: 11/26/2012 | DOI: 10.1111/jofi.12007
ADAM C. KOLASINSKI, ADAM V. REED, MATTHEW C. RINGGENBERG
Using unique data from 12 lenders, we examine how equity lending fees respond to demand shocks. We find that, when demand is moderate, fees are largely insensitive to demand shocks. However, at high demand levels, further increases in demand lead to significantly higher fees and the extent to which demand shocks impact fees is also related to search frictions in the loan market. Moreover, consistent with search models, we find significant dispersion in loan fees, with this dispersion increasing in loan scarcity and search frictions. Our findings imply that search frictions significantly impact short selling costs.
Biased Auctioneers
Published: 01/18/2023 | DOI: 10.1111/jofi.13203
MATHIEU AUBRY, ROMAN KRÄUSSL, GUSTAVO MANSO, CHRISTOPHE SPAENJERS
We construct a neural network algorithm that generates price predictions for art at auction, relying on both visual and nonvisual object characteristics. We find that higher automated valuations relative to auction house presale estimates are associated with substantially higher price‐to‐estimate ratios and lower buy‐in rates, pointing to estimates' informational inefficiency. The relative contribution of machine learning is higher for artists with less dispersed and lower average prices. Furthermore, we show that auctioneers' prediction errors are persistent both at the artist and at the auction house level, and hence directly predictable themselves using information on past errors.
Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital*
Published: 03/01/1981 | DOI: 10.1111/j.1540-6261.1981.tb03534.x
STEPHEN A. BUSER, ANDREW H. CHEN, EDWARD J. KANE
This paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the FDIC. Essentially, the FDIC sells two products—insurance and regulation. To span the product space, it must and does set two prices. We argue that the need to establish regulatory disincentives to bank risk‐taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value (i.e., the value of their right to continue in business) stands at the center of these disincentives and in front of the FDIC's insurance reserves.
Does Money Explain Asset Returns? Theory and Empirical Analysis
Published: 03/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05212.x
K. C. CHAN, SILVERIO FORESI, LARRY H. P. LANG
A cash‐in‐advance model of a monetary economy is used to derive a money‐based CAPM (M‐CAPM), which allows us to implement tests of asset pricing restrictions without consumption data. A test as in Fama and MacBeth of the model suggests that the money betas have some explanatory power for the cross‐sectional variation of expected returns; however, the model is rejected using conditional information. Consistent with our predictions, estimates of the curvature parameter are lower than those of the consumption CAPM (C‐CAPM) and pricing errors of the M‐CAPM tend to be smaller than those of the C‐CAPM.
Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00438
Mark M. Carhart, Ron Kaniel, David K. Musto, Adam V. Reed
We present evidence that fund managers inflate quarter‐end portfolio prices with last‐minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large‐cap funds to well over 2 percent for small‐cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance.
Information, Trading, and Volatility: Evidence from Weather‐Sensitive Markets
Published: 01/11/2007 | DOI: 10.1111/j.1540-6261.2006.01007.x
JEFF FLEMING, CHRIS KIRBY, BARBARA OSTDIEK
We find that trading‐ versus nontrading‐period variance ratios in weather‐sensitive markets are lower than those in the equity market and higher than those in the currency market. The variance ratios are also substantially lower during periods of the year when prices are most sensitive to the weather. Moreover, the comovement of returns and volatilities for related commodities is stronger during the weather‐sensitive season, largely due to stronger comovement during nontrading periods. These results are consistent with a strong link between prices and public information flow and cannot be explained by pricing errors or changes in trading activity.
IPO Pricing and Share Allocation: The Importance of Being Ignorant
Published: 01/10/2008 | DOI: 10.1111/j.1540-6261.2008.01321.x
CÉLINE GONDAT‐LARRALDE, KEVIN R. JAMES
Since an underwriter sets an IPO's offer price without knowing its market value, investors can acquire information about its value and avoid overpriced deals (“lemon‐dodge”). To mitigate this well‐known risk, the bank enters into a repeat game with a coalition of investors who do not lemon‐dodge in exchange for on‐average underpriced shares. We (i) derive and test a quantitative IPO pricing rule (showing that tech IPOs were not excessively underpriced during the boom of the 1990s); and (ii) analyzing a unique multibank data set, find strong support for the conjecture that a bank preferentially allocates shares to its coalition.
Debt Specialization
Published: 04/09/2013 | DOI: 10.1111/jofi.12052
PAOLO COLLA, FILIPPO IPPOLITO, KAI LI
This paper examines debt structure using a new and comprehensive database on types of debt employed by public U.S. firms. We find that 85% of the sample firms borrow predominantly with one type of debt, and the degree of debt specialization varies widely across different subsamples—large rated firms tend to diversify across multiple debt types, while small unrated firms specialize in fewer types. We suggest several explanations for why debt specialization takes place, and show that firms employing few types of debt have higher bankruptcy costs, are more opaque, and lack access to some segments of the debt markets.