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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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.
Myth or Reality? The Long‐Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital‐Backed Companies
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb02742.x
ALON BRAV, PAUL A. GOMPERS
We investigate the long‐run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture‐backed IPOs from 1972–1992 and 3,407 nonventure‐backed IPOs from 1975–1992. We find that venture‐backed IPOs outperform non‐venture‐backed IPOs using equal weighted returns. Value weighting significantly reduces performance differences and substantially reduces underperformance for nonventure‐backed IPOs. In tests using several comparable benchmarks and the Fama‐French (1993) three factor asset pricing model, venture‐backed companies do not significantly underperform, while the smallest nonventure‐backed firms do. Underperformance, however, is not an IPO effect. Similar size and book‐to‐market firms that have not issued equity perform as poorly as IPOs.
Procyclical Capital Regulation and Lending
Published: 10/13/2015 | DOI: 10.1111/jofi.12368
MARKUS BEHN, RAINER HASELMANN, PAUL WACHTEL
We use a quasi‐experimental research design to examine the effect of model‐based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model‐based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects.
Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market
Published: 01/25/2017 | DOI: 10.1111/jofi.12496
PENGJIE GAO, PAUL SCHULTZ, ZHAOGANG SONG
Agency mortgage‐backed securities (MBS) trade simultaneously in a market for specified pools (SPs) and in the to‐be‐announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA‐eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge.
Low‐Risk Anomalies?
Published: 04/26/2020 | DOI: 10.1111/jofi.12910
PAUL SCHNEIDER, CHRISTIAN WAGNER, JOSEF ZECHNER
This paper shows that low‐risk anomalies in the capital asset pricing model and in traditional factor models arise when investors require compensation for coskewness risk. Empirically, we find that option‐implied ex ante skewness is strongly related to ex post residual coskewness, which allows us to construct coskewness factor‐mimicking portfolios. Controlling for skewness renders the alphas of betting‐against‐beta and betting‐against‐volatility insignificant. We also show that the returns of beta‐ and volatility‐sorted portfolios are driven largely by a single principal component, which in turn is explained largely by skewness.
The Irrelevance of Margin: Evidence from the Crash of '87
Published: 09/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04762.x
PAUL J. SEGUIN, GREGG A. JARRELL
Following the crash of 1987, one contentious regulatory issue has been whether margin activity exacerbated the decline in equity values. We contrast the crash behavior of NASDAQ securities eligible for margin trading with the behavior of ineligible ones. Consistent with the hypothesis that margin‐eligible securities were more frequently subjected to margin calls and forced sales, we find that abnormal volumes were uniformly larger for eligible securities. However, there is no evidence that this activity provoked additional price depreciation. Margin‐eligible securities actually fell by one percent less than the ineligible securities over the period.
Bayesian Alphas and Mutual Fund Persistence
Published: 09/19/2006 | DOI: 10.1111/j.1540-6261.2006.01057.x
JEFFREY A. BUSSE, PAUL J. IRVINE
We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measure that predicts future performance better than standard measures do. Bayesian alphas based on the Capital Asset Pricing Model (CAPM) are particularly useful for predicting future standard CAPM alphas. Over our sample period, priors consistent with moderate to diffuse beliefs in managerial skill dominate more skeptical prior beliefs, a result that is consistent with investor cash flows.
Foreign Exchange Fixings and Returns around the Clock
Published: 12/18/2023 | DOI: 10.1111/jofi.13306
INGOMAR KROHN, PHILIPPE MUELLER, PAUL WHELAN
The U.S. dollar appreciates in the run‐up to foreign exchange (FX) fixes and depreciates thereafter, tracing a W‐shaped return pattern around the clock. Return reversals for the top nine traded currencies over a 21‐year period are pervasive and highly statistically significant, and they imply daily swings of more than one billion U.S. dollars based on spot volumes. Using natural experiments, we document the existence of a published reference rate determines the timing of intraday return reversals. We present evidence consistent with an inventory risk explanation whereby FX dealers intermediate unconditional demand for U.S. dollars at the fixes.
Managerial Incentives in a Stock Market Economy
Published: 12/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb03609.x
PAUL J. BECK, THOMAS S. ZORN
This study presents an analysis of the managerial incentive problem in a stock market economy in which incentive contracts are structured in terms of security ownership. In our model, the manager's ownership share signals effort and is determined endogenously as the solution to a special portfolio decision problem. Managerial investment in the firm is evaluated under various security pricing arrangements. Our analysis indicates that, in general, stockholders should sell shares to a manager at a discount to ensure a Pareto efficient ownership (incentive) structure. However, efficient pricing (discount) schedules generally are nonlinear and, in many respects, isomorphic to discriminating price functions which have been considered in neoclassical models of monopoly.
Heteroskedasticity in Stock Returns
Published: 09/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb02430.x
G. WILLIAM SCHWERT, PAUL J. SEGUIN
We use predictions of aggregate stock return variances from daily data to estimate time‐varying monthly variances for size‐ranked portfolios. We propose and estimate a single factor model of heteroskedasticity for portfolio returns. This model implies time‐varying betas. Implications of heteroskedasticity and time‐varying betas for tests of the capital asset pricing model (CAPM) are then documented. Accounting for heteroskedasticity increases the evidence that risk‐adjusted returns are related to firm size. We also estimate a constant correlation model. Portfolio volatilities predicted by this model are similar to those predicted by more complex multivariate generalized‐autoregressive‐conditional‐heteroskedasticity (GARCH) procedures.
Correlated Trading and Returns
Published: 04/01/2008 | DOI: 10.1111/j.1540-6261.2008.01334.x
DANIEL DORN, GUR HUBERMAN, PAUL SENGMUELLER
A German broker's clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, consistent with executed limit orders being compensated for accommodating liquidity demands.
Why do NASDAQ Market Makers Avoid Odd‐Eighth Quotes?
Published: 12/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb04782.x
WILLIAM G. CHRISTIE, PAUL H. SCHULTZ
The NASDAQ multiple dealer market is designed to produce narrow bid‐ask spreads through the competition for order flow among individual dealers. However, we find that odd‐eighth quotes are virtually nonexistent for 70 of 100 actively traded NASDAQ securities, including Apple Computer and Lotus Development. The lack of odd‐eighth quotes cannot be explained by the negotiation hypothesis of Harris (1991), trading activity, or other variables thought to impact spreads. This result implies that the inside spread for a large number of NASDAQ stocks is at least $0.25 and raises the question of whether NASDAQ dealers implicitly collude to maintain wide spreads.