The Journal of Finance

Efficient Recapitalization

Published: 12/27/2012   |   DOI: 10.1111/j.1540-6261.2012.01793.x

THOMAS PHILIPPON, PHILIPP SCHNABL

We analyze government interventions to recapitalize a banking sector that restricts lending to firms because of debt overhang. We find that the efficient recapitalization program injects capital against preferred stock plus warrants and conditions implementation on sufficient bank participation. Preferred stock plus warrants reduces opportunistic participation by banks that do not require recapitalization, although conditional implementation limits free riding by banks that benefit from lower credit risk because of other banks’ participation. Efficient recapitalization is profitable if the benefits of lower aggregate credit risk exceed the cost of implicit transfers to bank debt holders.

The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market

Published: 05/21/2012   |   DOI: 10.1111/j.1540-6261.2012.01737.x

PHILIPP SCHNABL

I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its transmission to Peru. I find that after the shock international banks reduce bank‐to‐bank lending to Peruvian banks and Peruvian banks reduce lending to Peruvian firms. The effect is strongest for domestically owned banks that borrow internationally, intermediate for foreign‐owned banks, and weakest for locally funded banks. I control for credit demand by examining firms that borrow from several banks. These results suggest that international banks transmit liquidity shocks across countries and that negative liquidity shocks reduce bank lending in affected countries.

Ambiguous Information, Portfolio Inertia, and Excess Volatility

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01693.x

PHILIPP KARL ILLEDITSCH

I study the effects of risk and ambiguity (Knightian uncertainty) on optimal portfolios and equilibrium asset prices when investors receive information that is difficult to link to fundamentals. I show that the desire of investors to hedge ambiguity leads to portfolio inertia and excess volatility. Specifically, when news is surprising, investors may not react to price changes even if there are no transaction costs or other market frictions. Moreover, I show that small shocks to cash flow news, asset betas, or market risk premia may lead to drastic changes in the stock price and hence to excess volatility.

Sticky Expectations and the Profitability Anomaly

Published: 10/07/2018   |   DOI: 10.1111/jofi.12734

JEAN‐PHILIPPE BOUCHAUD, PHILIPP KRÜGER, AUGUSTIN LANDIER, DAVID THESMAR

We propose a theory of the “profitability” anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional model predictions: (1) analysts are on average too pessimistic regarding the future profits of high‐profit firms, (2) the profitability anomaly is stronger for stocks that are followed by stickier analysts, and (3) the profitability anomaly is stronger for stocks with more persistent profits.

Banking on Deposits: Maturity Transformation without Interest Rate Risk

Published: 02/15/2021   |   DOI: 10.1111/jofi.13013

ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL

We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.

A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk

Published: 08/11/2014   |   DOI: 10.1111/jofi.12206

VIRAL ACHARYA, ITAMAR DRECHSLER, PHILIPP SCHNABL

We model a loop between sovereign and bank credit risk. A distressed financial sector induces government bailouts, whose cost increases sovereign credit risk. Increased sovereign credit risk in turn weakens the financial sector by eroding the value of its government guarantees and bond holdings. Using credit default swap (CDS) rates on European sovereigns and banks, we show that bailouts triggered the rise of sovereign credit risk in 2008. We document that post‐bailout changes in sovereign CDS explain changes in bank CDS even after controlling for aggregate and bank‐level determinants of credit spreads, confirming the sovereign‐bank loop.

Specialization in Bank Lending: Evidence from Exporting Firms

Published: 06/20/2023   |   DOI: 10.1111/jofi.13254

DANIEL PARAVISINI, VERONICA RAPPOPORT, PHILIPP SCHNABL

We develop a novel approach for measuring bank specialization using granular data on borrower activities and apply it to Peruvian exporters and their banks. We find that borrowers seek credit from banks that specialize in their export destinations, both when expanding exports and when exporting to new countries. Firms experiencing country‐specific export demand shocks adjust borrowing disproportionately from specialized banks. Specialized bank credit supply shocks affect exports disproportionately to countries of specialization. Our results demonstrate that firm credit demand is bank‐ and activity‐specific, which reduces banking competition and affects the transmission and amplification of shocks through the banking sector.

The WACC Fallacy: The Real Effects of Using a Unique Discount Rate

Published: 02/06/2015   |   DOI: 10.1111/jofi.12250

PHILIPP KRÜGER, AUGUSTIN LANDIER, DAVID THESMAR

In this paper, we test whether firms properly adjust for risk in their capital budgeting decisions. If managers use a single discount rate within firms, we expect that conglomerates underinvest (overinvest) in relatively safe (risky) divisions. We measure division relative risk as the difference between the division's asset beta and a firm‐wide beta. We establish a robust and significant positive relationship between division‐level investment and division relative risk. Next, we measure the value loss due to this behavior in the context of acquisitions. When the bidder's beta is lower than that of the target, announcement returns are significantly lower.

A Model of Monetary Policy and Risk Premia

Published: 06/22/2017   |   DOI: 10.1111/jofi.12539

ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL

We develop a dynamic asset pricing model in which monetary policy affects the risk premium component of the cost of capital. Risk‐tolerant agents (banks) borrow from risk‐averse agents (i.e., take deposits) to fund levered investments. Leverage exposes banks to funding risk, which they insure by holding liquidity buffers. By changing the nominal rate the central bank influences the liquidity premium, and hence the cost of taking leverage. Lower nominal rates make liquidity cheaper and raise leverage, resulting in lower risk premia and higher asset prices, volatility, investment, and growth. We analyze forward guidance, a “Greenspan put,” and the yield curve.

Information Inertia

Published: 10/04/2020   |   DOI: 10.1111/jofi.12979

PHILIPP K. ILLEDITSCH, JAYANT V. GANGULI, SCOTT CONDIE

We show that aversion to risk and ambiguity leads to information inertia when investors process public news about assets. Optimal portfolios do not always depend on news that is worse than expected; hence, the equilibrium stock price does not reflect this bad news. This informational inefficiency is more severe when there is more risk and ambiguity but disappears when investors are risk‐neutral or the news is about idiosyncratic risk. Information inertia leads to news momentum (e.g., after earnings announcements) and is consistent with low household trading activity. An ambiguity premium helps explain the macro and earnings announcement premium.

Who Borrows from the Lender of Last Resort?

Published: 05/23/2016   |   DOI: 10.1111/jofi.12421

ITAMAR DRECHSLER, THOMAS DRECHSEL, DAVID MARQUES‐IBANEZ, PHILIPP SCHNABL

We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.

Growth versus Margins: Destabilizing Consequences of Giving the Stock Market What It Wants

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01351.x

PHILIPPE AGHION, JEREMY C. STEIN

We develop a model in which a firm can devote effort either to increasing sales growth, or to improving per‐unit profit margins. If the firm's manager cares about the current stock price, she will favor the growth strategy when the market pays more attention to growth numbers. Conversely, it can be rational for the market to weight growth measures more heavily when it is known that the firm is following a growth strategy. This two‐way feedback between firms' strategies and the market's pricing rule can lead to excess volatility in real variables, even absent any external shocks.

The Time‐Variance Relationship of Security Returns: Implications for the Return‐Generating Stochastic Process

Published: 06/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb02228.x

PHILIP R. PERRY

Using a test statistic which specifically allows for parameter shifts over time, we investigate the time‐variance relationship of security returns. The null hypothesis of stationary and independent increments is rejected, and the existence of a complex short‐term reversal phenomenon is reported.

Entrepreneurship and Bank Credit Availability

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00513

Sandra E. Black, Philip E. Strahan

The literature is divided on the expected effects of increased competition and consolidation in the financial sector on the supply of credit to relationship borrowers. This paper tests whether policy changes fostering competition and consolidation in U.S. banking helped or harmed entrepreneurs. We find that the rate of new incorporations increases following deregulation of branching restrictions, and that deregulation reduces the negative effect of concentration on new incorporations. We also find the formation of new incorporations increases as the share of small banks decreases, suggesting that diversification benefits of size outweigh the possible comparative advantage small banks may have in forging relationships.

On The Direction of Preference for Moments of Higher Order Than The Variance

Published: 09/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb03509.x

ROBERT C. SCOTT, PHILIP A. HORVATH

Integration vs. Segmentation in the Canadian Stock Market

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04521.x

PHILIPPE JORION, EDUARDO SCHWARTZ

This paper examines the issue of integration versus segmentation of the Canadian equity market relative to a global North American market. We compare the international and domestic versions of the CAPM, and find that integration, or the mean‐variance efficiency of the global market index, is rejected by the data. Segmentation is the preferred model, based on a maximum likelihood procedure correcting for thin trading. We further divide the sample into securities that are interlisted in Canada and the U.S., and those that are not. Integration is rejected for both groups, which indicates that the source of segmentation can be traced to legal barriers based on the nationality of issuing firms.

One Way Arbitrage, Foreign Exchange and Securities Markets: A Note

Published: 12/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb01084.x

PHILIPPE CALLIER

Global Stock Markets in the Twentieth Century

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00133

Philippe Jorion, William N. Goetzmann

Long‐term estimates of expected return on equities are typically derived from U.S. data only. There are reasons to suspect that these estimates are subject to survivorship, as the United States is arguably the most successful capitalist system in the world. We collect a database of capital appreciation indexes for 39 markets going back to the 1920s. For 1921 to 1996, U.S. equities had the highest real return of all countries, at 4.3 percent, versus a median of 0.8 percent for other countries. The high equity premium obtained for U.S. equities appears to be the exception rather than the rule.

FACTORS DETERMINING ADEQUACY OF CAPITAL IN COMMERCIAL BANKS*

Published: 03/01/1966   |   DOI: 10.1111/j.1540-6261.1966.tb02969.x

Philip J. Hahn

A MULTIDIMENSIONAL ANALYSIS OF INSTITUTIONAL INVESTOR PERCEPTION OF RISK*

Published: 03/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03242.x

Philip L. Cooley