The Journal of Finance

Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00037

Mark Carey, Mitch Post, Steven A. Sharpe

This paper establishes empirically the existence of specialization in private‐market corporate lending, adding a new dimension to the public versus private debt distinctions now common in the literature. Comparing corporate loans made by banks and by finance companies, we find that the two types of intermediaries are equally likely to finance information‐problematic firms. However, finance companies tend to serve observably riskier borrowers, particularly more leveraged borrowers. Evidence supports both regulatory and reputation‐based explanations for this specialization. In passing, we shed light on various theories of debt contracting and intermediation and present facts about finance companies.

Inferring Trade Direction from Intraday Data

Published: 06/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb02683.x

CHARLES M. C. LEE, MARK J. READY

This paper evaluates alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data. We document two potential problems with quote‐based methods of trade classification: quotes may be recorded ahead of trades that triggered them, and trades inside the spread are not readily classifiable. These problems are analyzed in the context of the interaction between exchange floor agents. We then propose and test relatively simple procedures for improving trade classifications.

Testing the CAPM with Time‐Varying Risks and Returns

Published: 09/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04627.x

JAMES N. BODURTHA, NELSON C. MARK

This paper draws on Engle's autoregressive conditionally heteroskedastic modeling strategy to formulate a conditional CAPM with time‐varying risk and expected returns. The model is estimated by generalized method of moments. A CAPM that allows mean excess returns to shift in January survives generalized method of moments specification tests for a number of omitted variables. However, a residual dividend yield component is found to remain in the excess returns of smaller firms. We find significant monthly and quarterly components in the risk premia and beta estimates.

Employee Stock Options, Corporate Taxes, and Debt Policy

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00673.x

John R. Graham, Mark H. Lang, Douglas A. Shackelford

We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31% to 5%. For S&P firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt.

Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect

Published: 08/06/2015   |   DOI: 10.1111/jofi.12311

TOM Y. CHANG, DAVID H. SOLOMON, MARK M. WESTERFIELD

We analyze brokerage data and an experiment to test a cognitive dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect—the propensity to realize past gains more than past losses—applies only to nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse‐disposition effect. In an experiment, we show that increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and a larger reverse‐disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse‐disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual fund management, and intermediation.

Which CEO Characteristics and Abilities Matter?

Published: 05/21/2012   |   DOI: 10.1111/j.1540-6261.2012.01739.x

STEVEN N. KAPLAN, MARK M. KLEBANOV, MORTEN SORENSEN

We exploit a unique data set to study individual characteristics of CEO candidates for companies involved in buyout and venture capital transactions and relate these characteristics to subsequent corporate performance. CEO candidates vary along two primary dimensions: one that captures general ability and another that contrasts communication and interpersonal skills with execution skills. We find that subsequent performance is positively related to general ability and execution skills. The findings expand our view of CEO characteristics and types relative to previous studies.

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.

Internal Monitoring Mechanisms and CEO Turnover: A Long‐Term Perspective

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00405

Mark R. Huson, Robert Parrino, Laura T. Starks

We report evidence on chief executive officer (CEO) turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance.

FOREIGN EXCHANGE HEDGING AND THE CAPITAL ASSET PRICING MODEL

Published: 06/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb02040.x

Michael Adler, Alexander A. Robichek, Mark R. Eaker

The Effect of Lender Identity on a Borrowing Firm's Equity Return

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04801.x

MATTHEW T. BILLETT, MARK J. FLANNERY, JON A. GARFINKEL

Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although we find no significant difference between the market's response to bank and nonbank loans, we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived “quality” signals valuable information about firm value to uninformed market investors.

Liquidity Premia and Transaction Costs

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01277.x

BONG‐GYU JANG, HYENG KEUN KOO, HONG LIU, MARK LOEWENSTEIN

Standard literature concludes that transaction costs only have a second‐order effect on liquidity premia. We show that this conclusion depends crucially on the assumption of a constant investment opportunity set. In a regime‐switching model in which the investment opportunity set varies over time, we explicitly characterize the optimal consumption and investment strategy. In contrast to the standard literature, we find that transaction costs can have a first‐order effect on liquidity premia. However, with reasonably calibrated parameters, the presence of transaction costs still cannot fully explain the equity premium puzzle.

Testing Volatility Restrictions on Intertemporal Marginal Rates of Substitution Implied by Euler Equations and Asset Returns

Published: 03/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04423.x

STEPHEN G. CECCHETTI, POK‐SANG LAM, NELSON C. MARK

The Euler equations derived from intertemporal asset pricing models, together with the unconditional moments of asset returns, imply a lower bound on the volatility of the intertemporal marginal rate of substitution. This paper develops and implements statistical tests of these lower bound restrictions. While the availability of short time series of consumption data often undermines the ability of these tests to discriminate among different utility functions, we find that the restrictions implied by a number of widely studied financial data sets continue to pose quite a challenge to the current generation of intertemporal asset pricing theories.

Volume, Volatility, and New York Stock Exchange Trading Halts

Published: 03/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04425.x

CHARLES M. C. LEE, MARK J. READY, PAUL J. SEGUIN

Trading halts increase, rather than reduce, both volume and volatility. Volume (volatility) in the first full trading day after a trading halt is 230 percent (50 to 115 percent) higher than following “pseudohalts”: nonhalt control periods matched on time of day, duration, and absolute net‐of‐market returns. These results are robust over different halt types and news categories. Higher posthalt volume is observed into the third day while higher posthalt volatility decays within hours. The extent of media coverage is a partial determinant of volume and volatility following both halts and pseudohalts, but a separate halt effect remains after controlling for the media effect.

The Price Impact and Survival of Irrational Traders

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00834.x

LEONID KOGAN, STEPHEN A. ROSS, JIANG WANG, MARK M. WESTERFIELD

Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long‐run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long‐run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long‐run limit.

Estimation of Implicit Bankruptcy Costs

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03651.x

ROBERT E. KALABA, TERENCE C. LANGETIEG, NIMA RASAKHOO, MARK I. WEINSTEIN

This paper presents a new methodology, quasilinear estimation, for efficiently estimating economic variables reflected in the prices of corporate securities. For example, ex ante bankruptcy costs are not directly observable, however, if these costs are sufficiently large, then current security prices are affected and bankruptcy costs can be indirectly measured. When bankruptcy costs and other relevant parameters are known, there are many numerical solution techniques that can be used to determine security prices. One technique, the method of lines, is compatible with quasilinear estimation, which has been employed extensively in the physical sciences for the estimation of coefficients in differential equation models. We demonstrate that quasilinear estimation is a potentially reliable and efficient technique for the estimation of corporate bankruptcy costs and the asset variance from security prices.

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.

Time Variation in Liquidity: The Role of Market‐Maker Inventories and Revenues

Published: 01/13/2010   |   DOI: 10.1111/j.1540-6261.2009.01530.x

CAROLE COMERTON‐FORDE, TERRENCE HENDERSHOTT, CHARLES M. JONES, PAMELA C. MOULTON, MARK S. SEASHOLES

We show that market‐maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity‐supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market‐level and specialist firm‐level spreads widen when specialists have large positions or lose money. The effects are nonlinear and most prominent when inventories are big or trading results have been particularly poor. These sensitivities are smaller after specialist firm mergers, consistent with deep pockets easing financing constraints. Finally, compared to low volatility stocks, the liquidity of high volatility stocks is more sensitive to inventories and losses.

A Direct Test of Roll's Conjecture on the Firm Size Effect

Published: 03/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb01093.x

MARC R. REINGANUM

Empirical research indicates that small firms earn higher average rates of return than large firms, even after accounting for beta risk. Roll conjectured that the small firm effect might be attributed to improper estimation of security betas. The evidence shows that while the direction of the bias in beta estimation is consistent with Roll's conjecture, the magnitude of the bias appears to be too small to explain the firm size effect.

DISCUSSION: WHAT THE ANOMALIES MEAN

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03677.x

MARC R. REINGANUM

The Arbitrage Pricing Theory: Some Empirical Results

Published: 05/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb00444.x

MARC R. REINGANUM