The Journal of Finance

Mortgage Redlining: Race, Risk, and Demand

Published: 03/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04421.x

ANDREW HOLMES, PAUL HORVITZ

Charges that geographical redlining is widely practiced by mortgage lenders and is associated with racial discrimination have received much attention. However, empirical research in this area has yet to document a convincing answer to the question of whether redlining even exists. Much of the previous research in this area has suffered from failure to account for variations in risk, and/or failure to adequately control for geographical differences in demand. This study addresses these problems in an effort to determine whether the disparity in the flow of mortgage credit can be explained by differences in risk and demand.

Stapled Finance

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01557.x

PAUL POVEL, RAJDEEP SINGH

“Stapled finance” is a loan commitment arranged by a seller in an M&A setting. Whoever wins the bidding contest has the option (not the obligation) to accept this loan commitment. We show that stapled finance increases bidding competition by subsidizing weak bidders, who raise their bids and thereby the price that strong bidders (who are more likely to win) must pay. The lender expects not to break even and must be compensated for offering the loan. This reduces but does not eliminate the seller's benefit. It also implies that stapled finance loans will show poorer performance than other buyout loans.

(Almost) Model‐Free Recovery

Published: 10/25/2018   |   DOI: 10.1111/jofi.12737

PAUL SCHNEIDER, FABIO TROJANI

Under mild assumptions, we recover the model‐free conditional minimum variance projection of the pricing kernel on various tradeable realized moments of market returns. Recovered conditional moments predict future realizations and give insight into the cyclicality of equity premia, variance risk premia, and the highest attainable Sharpe ratios under the minimum variance probability. The pricing kernel projections are often U‐shaped and give rise to optimal conditional portfolio strategies with plausible market timing properties, moderate countercyclical exposures to higher realized moments, and favorable out‐of‐sample Sharpe ratios.

The Impact of Merger Bids on the Participating Firms' Security Holders

Published: 12/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03613.x

PAUL ASQUITH, E. HAN KIM

This paper investigates whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. Monthly and daily bond and stock returns are calculated relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results show that while the stockholders of target firms gain from a merger bid, no other securityholders either gain or lose. To provide direct evidence on the existence of “diversification effects” and “incentive effects,” we test whether the bondholders' returns are dependent upon the correlation between the returns of the merging firms and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. The results are consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.

Robust Financial Contracting and the Role of Venture Capitalists

Published: 06/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb05146.x

ANAT R. ADMATI, PAUL PFLEIDERER

We derive a role for inside investors, such as venture capitalists, in resolving various agency problems that arise in a multistage financial contracting problem. Absent an inside investor, the choice of securities is unlikely to reveal all private information, and overinvestment may occur. An inside investor, however, always makes optimal investment decisions if and only if he holds a fixed‐fraction contract, where he always receives a fixed fraction of the project's payoff and finances that same fraction of future investments. This contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds.

The Really Long‐Run Performance of Initial Public Offerings: The Pre‐Nasdaq Evidence

Published: 07/15/2003   |   DOI: 10.1111/1540-6261.00570

Paul A. Gompers, Josh Lerner

Financial economists have intensely debated the performance of IPOs using data after the formation of Nasdaq. This paper sheds light on this controversy by undertaking a large, out‐of‐sample study: We examine the performance for five years after listing of 3,661 U.S. IPOs from 1935 to 1972. The sample displays some underperformance when event‐time buy‐and‐hold abnormal returns are used. The underperformance disappears, however, when cumulative abnormal returns are utilized. A calendar‐time analysis shows that over the entire period, IPOs return as much as the market. The intercepts in CAPM and Fama–French regressions are insignificantly different from zero, suggesting no abnormal performance.

Underwriter Compensation and Corporate Monitoring

Published: 09/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04669.x

ROBERT S. HANSEN, PAUL TORREGROSA

Studies suggest that underwriting syndicates provide marketing services and certify the fairness of offer prices. We argue that syndicate lead banks also monitor manager effort, increasing the value of capital‐raising companies. A given level of monitoring is associated with a given level of intrinsic value, so there is a “schedule” of certifiable offer prices, depending on the level of monitoring. Monitoring, marketing, and certification are, therefore, all legitimate syndicate functions. New evidence supporting the conclusion that syndicates provide corporate monitoring is presented.

The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition

Published: 07/20/2005   |   DOI: 10.1111/j.1540-6261.2005.00735.x

SHANE A. CORWIN, PAUL SCHULTZ

We examine syndicates for 1,638 IPOs from January 1997 through June 2002. We find strong evidence of information production by syndicate members. Offer prices are more likely to be revised in response to information when the syndicate has more underwriters and especially more co‐managers. More co‐managers also result in more analyst coverage and additional market makers following the IPO. Relationships between underwriters are critical in determining the composition of syndicates, perhaps because they mitigate free‐riding and moral hazard problems. While there appear to be benefits to larger syndicates, we discuss several factors that may limit syndicate size.

Convertible Debt: Corporate Call Policy and Voluntary Conversion

Published: 09/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04618.x

PAUL ASQUITH, DAVID W. MULLINS

This paper examines why, in contrast to the predictions of finance theory, firms do not call convertible debt when the conversion price exceeds the call price. The empirical results suggest that the principal reason is because some firms enjoy an advantage of paying less in after‐tax interest than they would pay in dividends were the bond converted. This cash flow incentive is the inverse of an investor's incentive to convert voluntarily if the converted dividends are greater than the bond's coupon. Because of taxation, however, the decisions by investors and firms are not symmetric, and there exist bonds which the firm may not call and an investor will not convert. The results also find that voluntary conversion is significantly related to both the conversion price and the differential between the coupon and the dividends on the converted stock.

Corporate Governance, Idiosyncratic Risk, and Information Flow

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01228.x

MIGUEL A. FERREIRA, PAUL A. LAUX

We study the relationship of corporate governance policy and idiosyncratic risk. Firms with fewer antitakeover provisions display higher levels of idiosyncratic risk, trading activity, private information flow, and information about future earnings in stock prices. Trading interest by institutions, especially those active in merger arbitrage, strengthens the relationship of governance to idiosyncratic risk. Our results indicate that openness to the market for corporate control leads to more informative stock prices by encouraging collection of and trading on private information. Consistent with an information‐flow interpretation, the component of volatility unrelated to governance is associated with the efficiency of corporate investment.

INVESTMENT PERFORMANCE: COMMON STOCKS VERSUS APARTMENT HOUSES*

Published: 12/01/1965   |   DOI: 10.1111/j.1540-6261.1965.tb02932.x

Paul F. Wendt, Sui N. Wong

Public Offerings of State‐Owned And Privately‐Owned Enterprises: An International Comparison

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb01125.x

KATHRYN L. DEWENTER, PAUL H. MALATESTA

We compare initial offer prices in privatizations to initial prices in public offerings of private companies. The evidence indicates that government officials in the United Kingdom underprice IPOs significantly more than their private company counterparts. In Canada and Malaysia, however, the opposite is true. There does not appear to be a general tendency for privatizations to be underpriced to a greater degree than private company IPOs. We provide additional evidence on the determinants of privatization initial returns. Our findings indicate that initial returns are significantly higher in relatively primitive capital markets and for privatized companies in regulated industries.

Executive Compensation and the Maturity Structure of Corporate Debt

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01563.x

PAUL BROCKMAN, XIUMIN MARTIN, EMRE UNLU

Executive compensation influences managerial risk preferences through executives' portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega). Large deltas discourage managerial risk‐taking, while large vegas encourage risk‐taking. Theory suggests that short‐maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short‐maturity debt. We also find that short‐maturity debt mitigates the influence of vega‐ and delta‐related incentives on bond yields. Overall, our empirical evidence shows that short‐term debt mitigates agency costs of debt arising from compensation risk.

Investor Protection and Firm Liquidity

Published: 03/21/2003   |   DOI: 10.1111/1540-6261.00551

Paul Brockman, Dennis Y. Chung

The purpose of this study is to investigate the relation between investor protection and firm liquidity. We posit that less protective environments lead to wider bid‐ask spreads and thinner depths because they fail to minimize information asymmetries. The Hong Kong equity market provides a unique opportunity to compare liquidity costs across distinct investor protection environments, but still within a common trading mechanism and currency. Our empirical findings verify that firm liquidity is significantly affected by investor protection. Regression and matched‐sample results show that Hong Kong‐based equities exhibit narrower spreads and thicker depths than their China‐based counterparts.

Biased Beliefs, Asset Prices, and Investment: A Structural Approach

Published: 08/12/2013   |   DOI: 10.1111/jofi.12089

AYDOĞAN ALTI, PAUL C. TETLOCK

We structurally estimate a model in which agents’ information processing biases can cause predictability in firms’ asset returns and investment inefficiencies. We generalize the neoclassical investment model by allowing for two biases—overconfidence and overextrapolation of trends—that distort agents’ expectations of firm productivity. Our model's predictions closely match empirical data on asset pricing and firm behavior. The estimated bias parameters are well identified and exhibit plausible magnitudes. Alternative models without either bias or with efficient investment fail to match observed return predictability and firm behavior. These results suggest that biases affect firm behavior, which in turn affects return anomalies.

DYNAMIC INTERDEPENDENCE IN DEMAND FOR SAVINGS DEPOSITS

Published: 05/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01798.x

Paul F. Wendt, Harish Batra

THE ROLE OF GOVERNMENT IN THE SAN FRANCISCO BAY AREA MORTGAGE MARKET*

Published: 12/01/1951   |   DOI: 10.1111/j.1540-6261.1951.tb04480.x

Paul F. Wendt, Daniel B. Rathbun

PREDICTION OF BANK FAILURES

Published: 09/01/1970   |   DOI: 10.1111/j.1540-6261.1970.tb00558.x

Paul A. Meyer, Howard W. Pifer

Common Stock Returns and Rating Changes: A Methodological Comparison

Published: 03/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb01098.x

PAUL A. GRIFFIN, ANTONIO Z. SANVICENTE

This paper examines the adjustments in a firm's common stock price during the eleven months before and during the month of announcement of a bond rating change. Based on several different measures of abnormal security return, the findings are consistent with the proposition that bond downgradings convey information to common stockholders. For bond upgradings, the price adjustments were statistically insignificant in the month of announcement, although in the eleven preceding months, upgraded firms exhibited positive abnormal returns. While the results do not fully support earlier research, we stress that the main contribution of this article lies in the scrutiny it gives to issues of methodology in assessing the possible price effects of bond reclassifications.

How Wise Are Crowds? Insights from Retail Orders and Stock Returns

Published: 02/07/2013   |   DOI: 10.1111/jofi.12028

ERIC K. KELLEY, PAUL C. TETLOCK

We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms’ monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.