The Journal of Finance

Empirical Tests of Boundary Conditions for Toronto Stock Exchange Options

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04968.x

PAUL J. HALPERN, STUART M. TURNBULL

Using option and stock transaction data for the period 1978–1979, three issues were investigated: first, the conformance of observed prices to various boundary conditions; second, the evolution of the market over time, as the volume of trading and the number of listed options increased; and third, to test the efficiency of the market. It was found that violations did occur. Using a trading rule based on the signal of observed violations, the results suggest that even after transaction costs the market was inefficient over the sample period.

DISCUSSION

Published: 05/01/1961   |   DOI: 10.1111/j.1540-6261.1961.tb02832.x

Paul P. Harbrect, Roger F. Murray

Animal Spirits, Margin Requirements, and Stock Price Volatility

Published: 06/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb02682.x

PAUL H. KUPIEC, STEVEN A. SHARPE

A simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices. Investors are assumed to exhibit heterogeneous preferences for risk‐bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economy‐wide average risk‐bearing propensity. The ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs.

Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986 to 1999

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00740.x

PAUL GOMPERS, JOSH LERNER, DAVID SCHARFSTEIN

We examine two views of the creation of venture‐backed start‐ups, or “entrepreneurial spawning.” In one, young firms prepare employees for entrepreneurship, educating them about the process, and exposing them to relevant networks. In the other, individuals become entrepreneurs when large bureaucratic employers do not fund their ideas. Controlling for firm size, patents, and industry, the most prolific spawners are originally venture‐backed companies located in Silicon Valley and Massachusetts. Undiversified firms spawn more firms. Silicon Valley, Massachusetts, and originally venture‐backed firms typically spawn firms only peripherally related to their core businesses. Overall, entrepreneurial learning and networks appear important in creating venture‐backed firms.

What Drives Anomaly Returns?

Published: 01/17/2020   |   DOI: 10.1111/jofi.12876

LARS A. LOCHSTOER, PAUL C. TETLOCK

We decompose the returns of five well‐known anomalies into cash flow and discount rate news. Common patterns emerge across the five factor portfolios and their mean‐variance efficient (MVE) combination. Whereas discount rate news predominates in market returns, systematic cash flow news drives the returns of anomaly portfolios and their MVE combination with the market portfolio. Anomaly cash flow and discount rate shocks are largely uncorrelated with market cash flow and discount rate shocks and with business cycle fluctuations. These rich empirical patterns restrict the joint dynamics of firm cash flows and the pricing kernel, thereby informing models of stocks' expected returns.

GENERALIZED MEAN‐VARIANCE TRADEOFFS FOR BEST PERTURBATION CORRECTIONS TO APPROXIMATE PORTFOLIO DECISIONS*

Published: 03/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb00022.x

Paul A. Samuelson, Robert C. Merton

Boom and Gloom

Published: 02/03/2016   |   DOI: 10.1111/jofi.12391

PAUL POVEL, GIORGO SERTSIOS, RENÁTA KOSOVÁ, PRAVEEN KUMAR

We study the performance of investments made at different points of an investment cycle. We use a large data set covering hotels in the United States, with rich details on their location, characteristics, and performance. We find that hotels built during hotel construction booms underperform their peers. For hotels built during local hotel construction booms, this underperformance persists for several decades. We examine possible explanations for this long‐lasting underperformance. The evidence is consistent with information‐based herding explanations.

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.

Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts

Published: 09/28/2009   |   DOI: 10.1111/j.1540-6261.2009.01503.x

SANJEEV BHOJRAJ, PAUL HRIBAR, MARC PICCONI, JOHN McINNIS

This paper examines the performance consequences of cutting discretionary expenditures and managing accruals to exceed analyst forecasts. We show that firms that just beat analyst forecasts with low quality earnings exhibit a short‐term stock price benefit relative to firms that miss forecasts with high quality earnings. This trend, however, reverses over a 3‐year horizon. Additionally, firms reducing discretionary expenditures to beat forecasts have significantly greater equity issuances and insider selling in the following year, consistent with managers understanding the myopic nature of their actions. Our results confirm survey evidence suggesting managers engage in myopic behavior to beat benchmarks.

Informed Trading through the Accounts of Children

Published: 03/19/2013   |   DOI: 10.1111/jofi.12043

HENK BERKMAN, PAUL D. KOCH, P. JOAKIM WESTERHOLM

This study shows that the guardians behind underaged accounts are successful at picking stocks. Moreover, they tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these results, we argue that the proportion of total trading activity through underaged accounts (labeled BABYPIN) should serve as an effective proxy for the probability of information trading in a stock. Consistent with this claim, we show that investors demand a higher return for holding stocks with a greater likelihood of private information, proxied by BABYPIN.

More Than Words: Quantifying Language to Measure Firms' Fundamentals

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01362.x

PAUL C. TETLOCK, MAYTAL SAAR‐TSECHANSKY, SOFUS MACSKASSY

We examine whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns. Our three main findings are: (1) the fraction of negative words in firm‐specific news stories forecasts low firm earnings; (2) firms' stock prices briefly underreact to the information embedded in negative words; and (3) the earnings and return predictability from negative words is largest for the stories that focus on fundamentals. Together these findings suggest that linguistic media content captures otherwise hard‐to‐quantify aspects of firms' fundamentals, which investors quickly incorporate into stock prices.

Discussion

Published: 05/01/1966   |   DOI: 10.1111/j.1540-6261.1966.tb00239.x

Leo Grebler, Harlow D. Osborne, Paul F. Smith

How Debit Cards Enable the Poor to Save More

Published: 03/29/2021   |   DOI: 10.1111/jofi.13021

PIERRE BACHAS, PAUL GERTLER, SEAN HIGGINS, ENRIQUE SEIRA

We study an at‐scale natural experiment in which debit cards were given to cash transfer recipients who already had a bank account. Using administrative account data and household surveys, we find that beneficiaries accumulated a savings stock equal to 2% of annual income after two years with the card. The increase in formal savings represents an increase in overall savings, financed by a reduction in current consumption. There are two mechanisms. First, debit cards reduce transaction costs of accessing money. Second, they reduce monitoring costs, which led beneficiaries to check their account balances frequently and build trust in the bank.

Tax‐Induced Trading: The Effect of the 1986 Tax Reform Act on Stock Market Activity

Published: 06/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb05060.x

PAUL J. BOLSTER, LAWRENCE B. LINDSEY, ANDREW MITRUSI

The end of favorable tax treatment for long‐term capital gains caused investors to reassess traditional tax‐induced trading strategies. This study compares trading behavior in December 1986 and January 1987 with previous years. Our results indicate that these tax code changes had a powerful effect on trading behavior. Relative trading volume was considerably higher in December 1986 for long‐term winners but not significantly lower for long‐term losers. Results also indicate altered trading patterns based on short‐term gains in December 1986 and for long‐term winners in January 1987.

Neighbors Matter: Causal Community Effects and Stock Market Participation

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01364.x

JEFFREY R. BROWN, ZORAN IVKOVIĆ, PAUL A. SMITH, SCOTT WEISBENNER

This paper establishes a causal relation between an individual's decision whether to own stocks and average stock market participation of the individual's community. We instrument for the average ownership of an individual's community with lagged average ownership of the states in which one's nonnative neighbors were born. Combining this instrumental variables approach with controls for individual and community fixed effects, a broad set of time‐varying individual and community controls, and state‐year effects rules out alternative explanations. To further establish that word‐of‐mouth communication drives this causal effect, we show that the results are stronger in more sociable communities.

Why Did NASDAQ Market Makers Stop Avoiding Odd‐Eighth Quotes?

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04783.x

WILLIAM G. CHRISTIE, JEFFREY H. HARRIS, PAUL H. SCHULTZ

On May 26 and 27, 1994 several national newspapers reported the findings of Christie and Schultz (1994) who cannot reject the hypothesis that market makers of active NASDAQ stocks implicitly colluded to maintain spreads of at least $0.25 by avoiding odd‐eighth quotes. On May 27, dealers in Amgen, Cisco Systems, and Microsoft sharply increased their use of odd‐eighth quotes, and mean inside and effective spreads fell nearly 50 percent. This pattern was repeated for Apple Computer the following trading day. Using individual dealer quotes for Apple and Microsoft, we find that virtually all dealers moved in unison to adopt odd‐eighth quotes.

Predictably Unequal? The Effects of Machine Learning on Credit Markets

Published: 10/28/2021   |   DOI: 10.1111/jofi.13090

ANDREAS FUSTER, PAUL GOLDSMITH‐PINKHAM, TARUN RAMADORAI, ANSGAR WALTHER

Innovations in statistical technology in functions including credit‐screening have raised concerns about distributional impacts across categories such as race. Theoretically, distributional effects of better statistical technology can come from greater flexibility to uncover structural relationships or from triangulation of otherwise excluded characteristics. Using data on U.S. mortgages, we predict default using traditional and machine learning models. We find that Black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning. In a simple equilibrium credit market model, machine learning increases disparity in rates between and within groups, with these changes attributable primarily to greater flexibility.

CAPITAL STRUCTURE REARRANGEMENTS AND ME‐FIRST RULES IN AN EFFICIENT CAPITAL MARKET

Published: 06/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb01989.x

E. Han Kim, John J. McConnell, Paul R. Greenwood

The Temporal Price Relationship between S&P 500 Futures and the S&P 500 Index

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04368.x

IRA G. KAWALLER, PAUL D. KOCH, TIMOTHY W. KOCH

This paper empirically examines the intraday price relationship between S&P 500 futures and the S&P 500 index using minute‐to‐minute data. Three‐stage least‐squares regression is used to estimate lead and lag relationships with estimates for expiration days of the S&P 500 futures compared with estimates for days prior to expiration. The results suggest that futures price movements consistently lead index movements by twenty to forty‐five minutes while movements in the index rarely affect futures beyond one minute.

Wanna Dance? How Firms and Underwriters Choose Each Other

Published: 09/16/2005   |   DOI: 10.1111/j.1540-6261.2005.00804.x

CHITRU S. FERNANDO, VLADIMIR A. GATCHEV, PAUL A. SPINDT

We develop and test a theory explaining the equilibrium matching of issuers and underwriters. We assume that issuers and underwriters associate by mutual choice, and that underwriter ability and issuer quality are complementary. Our model implies that matching is positive assortative, and that matches are based on firms' and underwriters' relative characteristics at the time of issuance. The model predicts that the market share of top underwriters and their average issue quality varies inversely with issuance volume. Various cross‐sectional patterns in underwriting spreads are consistent with equilibrium matching. We find strong empirical confirmation of our theory.