The Journal of Finance

EASTERN FINANCE ASSOCIATION CALL FOR PAPERS

Published: 09/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb04904.x

Philip L. Cooley

Currency Hedging for International Portfolios

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05131.x

JACK GLEN, PHILIPPE JORION

This paper examines the benefits from currency hedging, both for speculative and risk minimization motives, in international bond and equity portfolios. The risk‐return performances of globally diversified portfolios are compared with and without forward contracts. Over the period 1974 to 1990, inclusion of forward contracts results in statistically significant improvements in the performance of unconditional portfolios containing bonds. Conditional strategies are also implemented, both in sample and out of sample, and are shown to both significantly improve the risk‐return tradeoff of global portfolios and to outperform unconditional hedging strategies.

The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00398

Vojislav Maksimovic, Gordon Phillips

We analyze the market for corporate assets. There is an active market for corporate assets, with close to seven percent of plants changing ownership annually through mergers, acquisitions, and asset sales in peak expansion years. The probability of asset sales and whole‐firm transactions is related to firm organization and ex ante efficiency of buyers and sellers. The timing of sales and the pattern of efficiency gains suggests that the transactions that occur, especially through asset sales of plants and divisions, tend to improve the allocation of resources and are consistent with a simple neoclassical model of profit maximizing by firms.

Yes, The APT Is Testable

Published: 09/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb02370.x

PHILIP H. DYBVIG, STEPHEN A. ROSS

The Arbitrage Pricing Theory (APT) has been proposed as an alternative to the mean‐variance Capital Asset Pricing Model (CAPM). This paper considers the testability of the APT and points out the irrelevance for testing of the approximation error. We refute Shanken's objections, including his assertion that Roll's critique of the CAPM is applicable to the APT. We also explain the testability of the APT on subsets, and we explore the relationship between the APT and the CAPM.

Merging Markets

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00137

Tom Arnold, Philip Hersch, J. Harold Mulherin, Jeffry Netter

We study the causes and effects of the competition for order flow by U.S. regional stock exchanges. We trace the origins of competition for order flow to a change in the role of regional exchanges from being venues for listing local securities to being more direct competitors for the order flow of NYSE listings. We study the way regionals competed for order flow, concentrating on a series of stock‐exchange mergers that occurred in the midst of this transition of the regional exchanges. The merging exchanges attracted market share and experienced narrower bid‐ask spreads.

The Time Variation of Risk and Return in the Foreign Exchange and Stock Markets

Published: 06/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb05059.x

ALBERTO GIOVANNINI, PHILIPPE JORION

This paper attempts to determine whether the fluctuations of conditional first and second moments—which are observed for many assets—are consistent with the Sharpe‐Lintner‐Mossin capital asset pricing model. We test the mean‐variance model under several different assumptions about the time variation of conditional second moments of returns, using weekly data from July 1974 to December 1986, that include returns on a portfolio composed of dollar, Deutsche mark, sterling, and Swiss franc assets, together with the U.S. stock market. The results indicate that estimated conditional variances cannot explain the observed time variation of risk premia.

Government Intervention and Information Aggregation by Prices

Published: 06/17/2015   |   DOI: 10.1111/jofi.12303

PHILIP BOND, ITAY GOLDSTEIN

Governments intervene in firms' lives in a variety of ways. To enhance the efficiency of government intervention, many researchers and policy makers call for governments to make use of information contained in stock market prices. However, price informativeness is endogenous to government policy. We analyze government policy in light of this endogeneity. In some cases, it is optimal for a government to commit to limit its reliance on market prices to avoid harming the aggregation of information into market prices. For similar reasons, it is optimal for a government to limit transparency in some dimensions.

The Analytics of Performance Measurement Using a Security Market Line

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04964.x

PHILIP H. DYBVIG, STEPHEN A. ROSS

Security market line (SML) analysis, while an important tool, has never been fully justified from a theoretical standpoint. Assuming symmetric information and an inefficient index, we show that SML analysis can be grossly misleading, since, in general, efficient and inefficient portfolios can plot above and below the SML. On a more positive note, if SML analysis uses the return on a marketed riskless asset for the zero‐beta rate, efficient portfolios must plot above the SML. Nonetheless, arbitrarily inefficient portfolios also plot above the SML.

Estimating Security Price Risk Using Duration and Price Elasticity

Published: 05/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03562.x

ALEX O. WILLIAMS, PHILLIP E. PFEIFER

Product Market Threats, Payouts, and Financial Flexibility

Published: 04/01/2013   |   DOI: 10.1111/jofi.12050

GERARD HOBERG, GORDON PHILLIPS, NAGPURNANAND PRABHALA

We examine how product market threats influence firm payout policy and cash holdings. Using firms' product text descriptions, we develop new measures of competitive threats. Our primary measure, product market fluidity, captures changes in rival firms' products relative to the firm's products. We show that fluidity decreases firm propensity to make payouts via dividends or repurchases and increases the cash held by firms, especially for firms with less access to financial markets. These results are consistent with the hypothesis that firms' financial policies are significantly shaped by product market threats and dynamics.

Testing the Predictive Power of Dividend Yields

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04732.x

WILLIAM N. GOETZMANN, PHILIPPE JORION

This paper reexamines the ability of dividend yields to predict long‐horizon stock returns. We use the bootstrap methodology, as well as simulations, to examine the distribution of test statistics under the null hypothesis of no forecasting ability. These experiments are constructed so as to maintain the dynamics of regressions with lagged dependent variables over long horizons. We find that the empirically observed statistics are well within the 95% bounds of their simulated distributions. Overall there is no strong statistical evidence indicating that dividend yields can be used to forecast stock returns.

Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations

Published: 03/13/2009   |   DOI: 10.1111/j.1540-6261.2009.01451.x

ELENA LOUTSKINA, PHILIP E. STRAHAN

Low‐cost deposits and increased balance sheet liquidity raise banks' supply of illiquid loans more than loans easily sold or securitized. We exploit the inability of Fannie Mae and Freddie Mac to purchase jumbo mortgages to identify an exogenous change in liquidity. The volume of jumbo mortgage originations relative to nonjumbo originations increases with bank holdings of liquid assets and decreases with bank deposit costs. This result suggests that the increasing depth of the mortgage secondary market fostered by securitization has reduced the effect of lender's financial condition on credit supply.

Differential Information and Performance Measurement Using a Security Market Line

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04963.x

PHILIP H. DYBVIG, STEPHEN A. ROSS

An uninformed observer using the tools of mean variance and security market line analysis to measure the performance of a portfolio manager who has superior information is unlikely to be able to make any reliable inferences. While some positive results of a very limited nature are possible, e.g., when there is a riskless asset or when information is restricted to be “security specific,” in general anything is possible. In particular, a manager with superior information can appear to the observer to be below or above the security market line and inside or outside of the mean‐variance efficient frontier, and any combination of these is possible.

Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00841.x

NICOLA CETORELLI, PHILIP E. STRAHAN

This paper tests how competition in local U.S. banking markets affects the market structure of nonfinancial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. The empirical evidence, however, strongly supports the idea that in markets with concentrated banking, potential entrants face greater difficulty gaining access to credit than in markets in which banking is more competitive.

How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01293.x

JUN QIAN, PHILIP E. STRAHAN

Legal and institutional differences shape the ownership and terms of bank loans across the world. We show that under strong creditor protection, loans have more concentrated ownership, longer maturities, and lower interest rates. Moreover, the impact of creditor rights on loans depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment, with their ownership declining relative to domestic banks as creditor protection falls. Our multidimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.

Exchange Rates and Monetary Policy Uncertainty

Published: 02/02/2017   |   DOI: 10.1111/jofi.12499

PHILIPPE MUELLER, ALIREZA TAHBAZ‐SALEHI, ANDREA VEDOLIN

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis‐à‐vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending

Published: 02/06/2015   |   DOI: 10.1111/jofi.12251

JUN (QJ) QIAN, PHILIP E. STRAHAN, ZHISHU YANG

In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank's internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information production and use.

Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt

Published: 07/06/2019   |   DOI: 10.1111/jofi.12832

FELIPE RESTREPO, LINA CARDONA‐SOSA, PHILIP E. STRAHAN

In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short‐term bank credit more than long‐term credit. Firms responded by cutting short‐term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit provides an alternative source of liquidity that can insulate some firms from bank liquidity shocks.

Regulatory Incentives and the Thrift Crisis: Dividends, Mutual‐to‐Stock Conversions, and Financial Distress

Published: 09/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb04070.x

RANDALL S. KROSZNER, PHILIP E. STRAHAN

During the 1980s, insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems. Lacking cash to close insolvent thrifts, regulators induced nearly $10 billion of private capital to flow into the industry through mutual‐to‐stock conversions. We test a theory of how regulators encouraged capital‐impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. We estimate the costs of this policy and interpret the 1991 Federal Deposit Insurance Corporation Improvement Act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress.

The Risk‐Adjusted Cost of Financial Distress

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01286.x

HEITOR ALMEIDA, THOMAS PHILIPPON

Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk‐adjusted default probabilities derived from corporate bond spreads. For a BBB‐rated firm, our benchmark calculations show that the NPV of distress is 4.5% of predistress value. In contrast, a valuation that ignores risk premia generates an NPV of 1.4%. We show that marginal distress costs can be as large as the marginal tax benefits of debt derived by Graham (2000). Thus, distress risk premia can help explain why firms appear to use debt conservatively.