The Journal of Finance

THE STABILITY OF FINANCIAL PATTERNS IN INDUSTRIAL ORGANIZATIONS

Published: 05/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01782.x

George E. Pinches, Kent A. Mingo, J. Kent Caruthers

Do Brokerage Analysts' Recommendations Have Investment Value?

Published: 03/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05205.x

KENT L. WOMACK

An analysis of new buy and sell recommendations of stocks by security analysts at major U.S. brokerage firms shows significant, systematic discrepancies between prerecommendation prices and eventual values. The initial return at the time of the recommendations is large, even though few recommendations coincide with new public news or provide previously unavailable facts. However, these initial price reactions are incomplete. For buy recommendations, the mean postevent drift is modest (+2.4%) and short‐lived, but for sell recommendations, the drift is larger (−9.1%) and extends for six months. Analysts appear to have market timing and stock picking abilities.

An Analysis of Countercyclical Policies of The FHLBB

Published: 03/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb03535.x

RICHARD J. KENT

Three policies of the Federal Home Loan Bank Board, the Specially Priced Advances Program in 1970–1, a program of advances at a reduced interest rate in 1974, and changes in the minimum liquidity ratio, are analyzed. A model of portfolio allocation is developed and estimated for savings and loan associations. Most of the net increase in advances borrowed under the first two programs have not been lent in the mortgage market. Reductions in the minimum liquidity requirement have resulted in an increase in mortgage lending, but substantial effects are not felt until a year after the liquidity requirement is reduced.

Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03806.x

KENT DANIEL, SHERIDAN TITMAN

Firm sizes and book‐to‐market ratios are both highly correlated with the average returns of common stocks. Fama and French (1993) argue that the association between these characteristics and returns arise because the characteristics are proxies for nondiversifiable factor risk. In contrast, the evidence in this article indicates that the return premia on small capitalization and high book‐to‐market stocks does not arise because of the comovements of these stocks with pervasive factors. It is the characteristics rather than the covariance structure of returns that appear to explain the cross‐sectional variation in stock returns.

Market Reactions to Tangible and Intangible Information

Published: 08/03/2006   |   DOI: 10.1111/j.1540-6261.2006.00884.x

KENT DANIEL, SHERIDAN TITMAN

The book‐to‐market effect is often interpreted as evidence of high expected returns on stocks of “distressed” firms with poor past performance. We dispute this interpretation. We find that while a stock's future return is unrelated to the firm's past accounting‐based performance, it is strongly negatively related to the “intangible” return, the component of its past return that is orthogonal to the firm's past performance. Indeed, the book‐to‐market ratio forecasts returns because it is a good proxy for the intangible return. Also, a composite equity issuance measure, which is related to intangible returns, independently forecasts returns.

A MULTIVARIATE ANALYSIS OF INDUSTRIAL BOND RATINGS

Published: 03/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01341.x

George E. Pinches, Kent A. Mingo

Investor Psychology and Security Market Under‐ and Overreactions

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00077

Kent Daniel, David Hirshleifer, Avanidhar Subrahmanyam

We propose a theory of securities market under‐ and overreactions based on two well‐known psychological biases: investor overconfidence about the precision of private information; and biased self‐attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long‐lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public‐event‐based return predictability. Biased self‐attribution adds positive short‐lag autocorrelations (“momentum”), short‐run earnings “drift,” but negative correlation between future returns and long‐term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy.

TOWARD THE DEVELOPMENT OF CLIENT‐SPECIFIED VALUATION MODELS

Published: 09/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb03102.x

H. Kent Baker, John A. Haslem

Monetary Policy and Reaching for Income

Published: 02/01/2021   |   DOI: 10.1111/jofi.13004

KENT DANIEL, LORENZO GARLAPPI, KAIRONG XIAO

Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to significantly higher demand for income‐generating assets such as high‐dividend stocks and high‐yield bonds. We argue that this “reaching‐for‐income” phenomenon is driven by investors who follow the “living off income” rule‐of‐thumb. Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income‐generating assets. In addition, we explore the implications of reaching for income for capital allocation and the effectiveness of monetary policy.

THE ROLE OF SUBORDINATION AND INDUSTRIAL BOND RATINGS

Published: 03/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb03171.x

George E. Pinches, Kent A. Mingo

Overconfidence, Arbitrage, and Equilibrium Asset Pricing

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00350

Kent D. Daniel, David Hirshleifer, Avanidhar Subrahmanyam

This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental/price ratios and market value to forecast returns, and the domination of beta by these variables in some studies.

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.

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04796.x

RONI MICHAELY, RICHARD H. THALER, KENT L. WOMACK

This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature we find that the magnitude of short‐run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift following omissions is stronger and more robust. This post‐dividend initiation/omission price drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples earns positive returns in 22 out of 25 years. We find little evidence for clientele shifts in either sample.

Caveat Compounder: A Warning about Using the Daily CRSP Equal‐Weighted Index to Compute Long‐Run Excess Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.165353

Linda Canina, Roni Michaely, Richard Thaler, Kent Womack

This paper issues a warning that compounding daily returns of the Center for Research in Security Prices (CRSP) equal‐weighted index can lead to surprisingly large biases. The differences between the monthly returns compounded from the daily tapes and the monthly CRSP equal‐weighted indices is almost 0.43 percent per month, or 6 percent per year. This difference amounts to one‐third of the average monthly return, and is large enough to reverse the conclusions of a paper using the daily tape to compute the return on the benchmark portfolio. We also investigate the sources of these biases and suggest several alternative strategies to avoid them.

The Persistence of IPO Mispricing and the Predictive Power of Flipping

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00135

Laurie Krigman, Wayne H. Shaw, Kent L. Womack

This paper examines underwriters' pricing errors and the information content of first‐day trading activity in IPOs. We show that first‐day winners continue to be winners over the first year, and first‐day dogs continue to be relative dogs. Exceptions are “extra‐hot” IPOs, which provide the worst future performance. We also demonstrate that large, supposedly informed, traders “flip” IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the first six months beginning on the third day. We show that flipping is predictable and conclude that underwriters' pricing errors are intentional.

The Intertemporal Relation Between the U.S. and Japanese Stock Markets

Published: 09/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb02438.x

KENT G. BECKER, JOSEPH E. FINNERTY, MANOJ GUPTA

This paper finds a high correlation between the open to close returns for U.S. stocks in the previous trading day and the Japanese equity market performance in the current period. In contrast, the Japanese market has only a small impact on the U.S. return in the current period. High correlations among open to close returns are a violation of the efficient market hypothesis; however, in trading simulations, the excess profits in Japan vanish when transactions costs and transfer taxes are included.

Measuring Mutual Fund Performance with Characteristic‐Based Benchmarks

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02724.x

KENT DANIEL, MARK GRINBLATT, SHERIDAN TITMAN, RUSS WERMERS

This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book‐to‐market, and prior‐year return characteristics of those stocks. Based on these benchmarks, “Characteristic Timing” and “Characteristic Selectivity” measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive‐growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability.

MAJOR TRENDS IN THE MARKET FOR TAX‐EXEMPT SECURITIES*, 1

Published: 05/01/1954   |   DOI: 10.1111/j.1540-6261.1954.tb01222.x

George E. Lent

Financial and Legal Constraints to Growth: Does Firm Size Matter?

Published: 07/20/2005   |   DOI: 10.1111/j.1540-6261.2005.00727.x

THORSTEN BECK, ASLI DEMIRGÜÇ‐KUNT, VOJISLAV MAKSIMOVIC

Using a unique firm‐level survey database covering 54 countries, we investigate the effect of financial, legal, and corruption problems on firms' growth rates. Whether these factors constrain growth depends on firm size. It is consistently the smallest firms that are most constrained. Financial and institutional development weakens the constraining effects of financial, legal, and corruption obstacles and it is again the small firms that benefit the most. There is only a weak relation between firms' perception of the quality of the courts in their country and firm growth. We also provide evidence that the corruption of bank officials constrains firm growth.

The Global Impact of Brexit Uncertainty

Published: 11/02/2023   |   DOI: 10.1111/jofi.13293

TAREK A. HASSAN, STEPHAN HOLLANDER, LAURENCE VAN LENT, AHMED TAHOUN

We propose a text‐based method for measuring the cross‐border propagation of large shocks at the firm level. We apply this method to estimate the expected costs, benefits, and risks of Brexit and find widespread reverberations in listed firms in 81 countries. International (i.e., non‐U.K.) firms most exposed to Brexit uncertainty (the second moment) lost significant market value and reduced hiring and investment. International firms also overwhelmingly expected negative first‐moment impacts from the U.K.'s decision to leave the European Union (EU), particularly related to regulation, asset prices, and labor market impacts of Brexit.