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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The Economic Value of Volatility Timing
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00327
Jeff Fleming, Chris Kirby, Barbara Ostdiek
Numerous studies report that standard volatility models have low explanatory power, leading some researchers to question whether these models have economic value. We examine this question by using conditional meanm‐variance analysis to assess the value of volatility timing to short‐horizon investors. We find that the volatility timing strategies outperform the unconditionally efficient static portfolios that have the same target expected return and volatility. This finding is robust to estimation risk and transaction costs.
Learning about Mutual Fund Managers
Published: 02/29/2016 | DOI: 10.1111/jofi.12405
DARWIN CHOI, BIGE KAHRAMAN, ABHIROOP MUKHERJEE
We study capital allocations to managers with two mutual funds, and show that investors learn about managers from their performance records. Flows into a fund are predicted by the manager's performance in his other fund, especially when he outperforms and when signals from the other fund are more useful. In equilibrium, capital should be allocated such that there is no cross‐fund predictability. However, we find positive predictability, particularly among underperforming funds. Our results are consistent with incomplete learning: while investors move capital in the right direction, they do not withdraw enough capital when the manager underperforms in his other fund.
Noncognitive Abilities and Financial Delinquency: The Role of Self‐Efficacy in Avoiding Financial Distress
Published: 09/23/2018 | DOI: 10.1111/jofi.12724
CAMELIA M. KUHNEN, BRIAN T. MELZER
We investigate a novel determinant of financial distress, namely, individuals' self‐efficacy, or belief that their actions can influence the future. Individuals with high self‐efficacy are more likely to take precautions that mitigate adverse financial shocks. They are subsequently less likely to default on their debt and bill payments, especially after experiencing negative shocks such as job loss or illness. Thus, noncognitive abilities are an important determinant of financial fragility and subjective expectations are an important factor in household financial decisions.
Nonsynchronous Security Trading and Market Index Autocorrelation
Published: 03/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb02553.x
MICHAEL D. ATCHISON, KIRT C. BUTLER, RICHARD R. SIMONDS
The theoretical portfolio autocorrelation due solely to nonsynchronous trading is estimated from a derived model. This estimated level is found to be substantially less than that observed empirically. The theoretical and empirical relationship between portfolio size and autocorrelation also is investigated. The results of this study suggest that other price‐adjustment delay factors in addition to nonsynchronous trading cause the high autocorrelations present in daily returns on stock index portfolios.
Sensitivity of Multivariate Tests of the Capital Asset‐Pricing Model to the Return Measurement Interval
Published: 09/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04767.x
PUNEET HANDA, S. P. KOTHARI, CHARLES WASLEY
The capital asset‐pricing model's (CAPM) primary empirical implication is a positively sloped linear relation between a security's expected rate of return and its relative risk (beta). Recent research indicates that inferences about the risk‐return relation are sensitive to the choice of the return measurement interval. We perform multivariate tests of the Sharpe‐Lintner CAPM using monthly and annual returns on market‐value‐ranked portfolios. The CAPM is rejected using monthly returns, a result consistent with previous research. In contrast, we fail to reject the CAPM when annual holding period returns are used.
Takeover Defenses of IPO Firms
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00482
Laura Casares Field, Jonathan M. Karpoff
Many firms deploy takeover defenses when they go public. IPO managers tend to deploy defenses when their compensation is high, shareholdings are small, and oversight from nonmanagerial shareholders is weak. The presence of a defense is negatively related to subsequent acquisition likelihood, yet has no impact on takeover premiums for firms that are acquired. These results do not support arguments that takeover defenses facilitate the eventual sale of IPO firms at high takeover premiums. Rather, they suggest that managers shift the cost of takeover protection onto nonmanagerial shareholders. Thus, agency problems are important even for firms at the IPO stage.
Underwriter Reputation, Initial Returns, and the Long‐Run Performance of IPO Stocks
Published: 12/17/2002 | DOI: 10.1111/0022-1082.104624
Richard B. Carter, Frederick H. Dark, Ajai K. Singh
We find that the underperformance of IPO stocks relative to the market over a three‐year holding period is less severe for IPOs handled by more prestigious underwriters. Consistent with prior studies, we also find that IPOs managed by more reputable underwriters are associated with less short‐run underpricing. Among the various existing proxies for underwriter reputation, the Carter–Manaster measure is the most significant in the context of initial returns and also in the context of the three‐year performance of IPOs. The study also provides an updated list of the Carter–Manaster measure for various underwriters.
Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds
Published: 04/17/2019 | DOI: 10.1111/jofi.12776
TOBIAS ADRIAN, RICHARD K. CRUMP, ERIK VOGT
We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits variation in the cross‐section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight‐to‐safety: expected returns increase for stocks when volatility increases from moderate to high levels while they decline for Treasuries. These findings provide support for dynamic asset pricing theories in which the price of risk is a nonlinear function of market volatility.
Access to Collateral and the Democratization of Credit: France's Reform of the Napoleonic Security Code
Published: 10/09/2019 | DOI: 10.1111/jofi.12846
KEVIN ARETZ, MURILLO CAMPELLO, MARIA‐TERESA MARCHICA
France's Ordonnance 2006‐346 repudiated the notion of possessory ownership in the Napoleonic Code, easing the pledge of physical assets in a country where credit was highly concentrated. A differences‐test strategy shows that firms operating newly pledgeable assets significantly increased their borrowing following the reform. Small, young, and financially constrained businesses benefitted the most, observing improved credit access and real‐side outcomes. Start‐ups emerged with higher “at‐inception” leverage, located farther from large cities, with more assets‐in‐place than before. Their exit and bankruptcy rates declined. Spatial analyses show that the reform reached firms in rural areas, reducing credit access inequality across France's countryside.
Insider Investment Horizon
Published: 01/23/2020 | DOI: 10.1111/jofi.12878
FERHAT AKBAS, CHAO JIANG, PAUL D. KOCH
We examine the relation between insiders’ investment horizon and the information content of their trades with respect to future stock returns. We conjecture that an insider's investment horizon establishes a benchmark for expected patterns of continued trading behavior and thus helps identify unexpected insider trades, which should be more informative in efficient markets. Consistent with this conjecture, the trades of short‐horizon insiders are both more unexpected and more informed, on average, than those of long‐horizon insiders. Short‐horizon insiders and their firms also tend to display characteristics that are associated with a greater focus on short‐termism.
Ties That Bind: How Business Connections Affect Mutual Fund Activism
Published: 05/23/2016 | DOI: 10.1111/jofi.12425
DRAGANA CVIJANOVIĆ, AMIL DASGUPTA, KONSTANTINOS E. ZACHARIADIS
We investigate whether business ties with portfolio firms influence mutual funds' proxy voting using a comprehensive data set spanning 2003 to 2011. In contrast to prior literature, we find that business ties significantly influence promanagement voting at the level of individual pairs of fund families and firms after controlling for Institutional Shareholder Services (ISS) recommendations and holdings. The association is significant only for shareholder‐sponsored proposals and stronger for those that pass or fail by relatively narrow margins. Our findings are consistent with a demand‐driven model of biased voting in which company managers use existing business ties with funds to influence how they vote.
Measuring Liquidity Mismatch in the Banking Sector
Published: 10/10/2017 | DOI: 10.1111/jofi.12591
JENNIE BAI, ARVIND KRISHNAMURTHY, CHARLES‐HENRI WEYMULLER
This paper constructs a liquidity mismatch index (LMI) to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities, for 2,882 bank holding companies over 2002 to 2014. The aggregate LMI decreases from +$4 trillion precrisis to −$6 trillion in 2008. We conduct an LMI stress test revealing the fragility of the banking system in early 2007. Moreover, LMI predicts a bank's stock market crash probability and borrowing decisions from the government during the financial crisis. The LMI is therefore informative about both individual bank liquidity and the liquidity risk of the entire banking system.
Measuring “Dark Matter” in Asset Pricing Models
Published: 03/03/2024 | DOI: 10.1111/jofi.13317
HUI CHEN, WINSTON WEI DOU, LEONID KOGAN
We formalize the concept of “dark matter” in asset pricing models by quantifying the additional informativeness of cross‐equation restrictions about fundamental dynamics. The dark‐matter measure captures the degree of fragility for models that are potentially misspecified and unstable: a large dark‐matter measure indicates that the model lacks internal refutability (weak power of optimal specification tests) and external validity (high overfitting tendency and poor out‐of‐sample fit). The measure can be computed at low cost even for complex dynamic structural models. To illustrate its applications, we provide quantitative examples applying the measure to (time‐varying) rare‐disaster risk and long‐run risk models.
Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00628.x
Matthew T. Billett, Tao‐Hsien Dolly King, David C. Mauer
We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.