The Journal of Finance

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.

The Impact of Deregulation and Financial Innovation on Consumers: The Case of the Mortgage Market

Published: 01/13/2010   |   DOI: 10.1111/j.1540-6261.2009.01531.x

KRISTOPHER S. GERARDI, HARVEY S. ROSEN, PAUL S. WILLEN

We develop a technique to assess the impact of changes in mortgage markets on households, exploiting an implication of the permanent income hypothesis: The higher a household's expected future income, the higher its desired consumption, ceteris paribus. With perfect credit markets, desired consumption matches actual consumption and current spending forecasts future income. Because credit market imperfections mute this effect, the extent to which house spending predicts future income measures the “imperfectness” of mortgage markets. Using micro‐data, we find that since the early 1980s, mortgage markets have become less imperfect in this sense, and securitization has played an important role.

Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports

Published: 06/01/2020   |   DOI: 10.1111/jofi.12954

WILL DOBBIE, PAUL GOLDSMITH‐PINKHAM, NEALE MAHONEY, JAE SONG

We study the financial and labor market impacts of bad credit reports. Using difference‐in‐differences variation from the staggered removal of bankruptcy flags, we show that bankruptcy flag removal leads to economically large increases in credit limits and borrowing. Using administrative tax records linked to personal bankruptcy records, we estimate economically small effects of flag removal on employment and earnings outcomes. We rationalize these contrasting results by showing that, conditional on basic observables, “hidden” bankruptcy flags are strongly correlated with adverse credit market outcomes but have no predictive power for measures of job performance.

Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls

Published: 09/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02631.x

PAUL ASQUITH, DAVID W. MULLINS, ERIC D. WOLFF

This paper presents an aging analysis of 741 high yield bonds and finds default, exchange, and call percentages substantially higher than reported in earlier studies. By December 31, 1988, cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979–1983 and from 3 to 9 percent for issue years 1984–1986. Exchanges are also a significant factor although they often are followed by default. Moreover, a significant percentage of high yield debt, 26–47 percent for 1977–1982, has been called. By December 31, 1988, approximately one third of the bonds issued in 1977–1982 has defaulted or been exchanged, and an additional one third had been called. On average, only 28 percent of these issues are still outstanding. There is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982.

The Leverage Ratchet Effect

Published: 10/10/2017   |   DOI: 10.1111/jofi.12588

ANAT R. ADMATI, PETER M. DEMARZO, MARTIN F. HELLWIG, PAUL PFLEIDERER

Firms’ inability to commit to future funding choices has profound consequences for capital structure dynamics. With debt in place, shareholders pervasively resist leverage reductions no matter how much such reductions may enhance firm value. Shareholders would instead choose to increase leverage even if the new debt is junior and would reduce firm value. These asymmetric forces in leverage adjustments, which we call the leverage ratchet effect, cause equilibrium leverage outcomes to be history‐dependent. If forced to reduce leverage, shareholders are biased toward selling assets relative to potentially more efficient alternatives such as pure recapitalizations.

Genetic Variation in Financial Decision‐Making

Published: 09/21/2010   |   DOI: 10.1111/j.1540-6261.2010.01592.x

DAVID CESARINI, MAGNUS JOHANNESSON, PAUL LICHTENSTEIN, ÖRJAN SANDEWALL, BJÖRN WALLACE

Individuals differ in how they construct their investment portfolios, yet empirical models of portfolio risk typically account only for a small portion of the cross‐sectional variance. This paper asks whether genetic variation can explain some of these individual differences. Following a major pension reform Swedish adults had to form a portfolio from a large menu of funds. We match data on these investment decisions with the Swedish Twin Registry and find that approximately 25% of individual variation in portfolio risk is due to genetic variation. We also find that these results extend to several other aspects of financial decision‐making.

Free Cash Flow, Issuance Costs, and Stock Prices

Published: 09/21/2011   |   DOI: 10.1111/j.1540-6261.2011.01680.x

JEAN‐PAUL DÉCAMPS, THOMAS MARIOTTI, JEAN‐CHARLES ROCHET, STÉPHANE VILLENEUVE

We develop a dynamic model of a firm facing agency costs of free cash flow and external financing costs, and derive an explicit solution for the firm's optimal balance sheet dynamics. Financial frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns.

DISCUSSION

Published: 05/01/1955   |   DOI: 10.1111/j.1540-6261.1955.tb01261.x

Paul M. Van Arsdell, Bion B. Howard, Charles M. Williams

On Timing and Selectivity

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04536.x

ANAT R. ADMATI, SUDIPTO BHATTACHARYA, PAUL PFLEIDERER, STEPHEN A. ROSS

The dichotomy between timing ability and the ability to select individual assets has been widely used in discussing investment performance measurement. This paper discusses the conceptual and econometric problems associated with defining and measuring timing and selectivity. In defining these notions we attempt to capture their intuitive interpretation. We offer two basic modeling approaches, which we term the portfolio approach and the factor approach. We show how the quality of timing and selectivity information can be identified statistically in a number of simple models, and discuss some of the econometric issues associated with these models. In particular, a simple quadratic regression is shown to be valid in measuring timing information.

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.

Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure

Published: 03/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05178.x

HENDRIK BESSEMBINDER, JAY F. COUGHENOUR, PAUL J. SEGUIN, MARGARET MONROE SMOLLER

We use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices. The empirical results indicate mean reversion in each market we examine. For agricultural commodities and crude oil the magnitude of the estimated mean reversion is large; for example, point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months. For metals, the degree of mean reversion is substantially less, but still statistically significant. We detect only weak evidence of mean reversion in financial asset prices.

How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

Published: 11/26/2012   |   DOI: 10.1111/jofi.12011

BURCU DUYGAN‐BUMP, PATRICK PARKINSON, ERIC ROSENGREN, GUSTAVO A. SUAREZ, PAUL WILLEN

The events following Lehman's failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short‐term credit markets and the role of central banks as back‐stop liquidity providers. The Federal Reserve's response to financial disruptions in the United States importantly included the creation of liquidity facilities. Using a differences‐in‐differences approach, we evaluate one of the most unusual of these interventions—the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. We find that this facility helped stabilize asset outflows from money market funds and reduced asset‐backed commercial paper yields significantly.

Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks

Published: 05/06/2003   |   DOI: 10.1111/0022-1082.00097

Michael J. Barclay, William G. Christie, Jeffrey H. Harris, Eugene Kandel, Paul H. Schultz

The relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate. On January 20, 1997, the Securities and Exchange Commission began implementing reforms that would permit the public to compete directly with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes placed by Nasdaq dealers in private trading venues began to be displayed in the Nasdaq market. We measure the impact of these new rules on various measures of performance, including trading costs and depths. Our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality.

Is Long‐Run Risk Really Priced? Revisiting Liu and Matthies (2022)

Published: 04/22/2024   |   DOI: 10.1111/jofi.13340

PAULO MAIO

The claim by Liu and Matthies (LM) that their macro news risk factor (NI) prices 51 portfolios (associated with four different portfolio groups) is not appropriate. In fact, their single‐factor model is successful only in explaining the momentum deciles, while producing strongly negative performance for the remaining groups. The pricing performance is more doubtful in the case of the alternative news factor (HNI), as the respective risk price is not identified. LM's conclusions stem from a combination of questionable empirical choices and misinterpretation of their results. Moreover, the NI model cannot explain prominent capital asset pricing model anomalies not considered in their study.

Relative Price Variability, Real Shocks, and the Stock Market

Published: 06/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03699.x

GAUTAM KAUL, H. NEJAT SEYHUN

In this paper, we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return‐inflation regressions. The evidence shows that the negative stock return‐inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the seventies, when the U.S. experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of Fama (1981) and the supply shocks reflected in relative price variability.

Value versus Glamour

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00594

Jennifer Conrad, Michael Cooper, Gautam Kaul

The fragility of the CAPM has led to a resurgence of research that frequently uses trading strategies based on sorting procedures to uncover relations between firm characteristics (such as “value” or “glamour”) and equity returns. We examine the propensity of these strategies to generate statistically and economically significant profits due to our familiarity with the data. Under plausible assumptions, data snooping can account for up to 50 percent of the in‐sample relations between firm characteristics and returns uncovered using single (one‐way) sorts. The biases can be much larger if we simultaneously condition returns on two (or more) characteristics.

THE MORTGAGE MARKET

Published: 05/01/1961   |   DOI: 10.1111/j.1540-6261.1961.tb02822.x

Saul B. Klaman

THE CHANGING ROLE OF INTERNATIONAL CAPITAL FLOWS*

Published: 05/01/1963   |   DOI: 10.1111/j.1540-6261.1963.tb00716.x

Poul Høt‐Madsen

Long‐Term Market Overreaction or Biases in Computed Returns?

Published: 03/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04701.x

JENNIFER CONRAD, GAUTAM KAUL

We show that the returns to the typical long‐term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single‐period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single‐period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.

MORTGAGE MARKET PROSPECTS*

Published: 05/01/1963   |   DOI: 10.1111/j.1540-6261.1963.tb00732.x

Saul B. Klaman