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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Cash Holdings and Corporate Diversification
Published: 05/07/2010 | DOI: 10.1111/j.1540-6261.2010.01558.x
RAN DUCHIN
This paper studies the relation between corporate liquidity and diversification. The key finding is that multidivision firms hold significantly less cash than stand‐alone firms because they are diversified in their investment opportunities. Lower cross‐divisional correlations in investment opportunity and higher correlations between investment opportunity and cash flow correspond to lower cash holdings, even after controlling for cash flow volatility. The effects are strongest in financially constrained firms and in well‐governed firms, and correspond to efficient fund transfers from low‐ to high‐productivity divisions. Taken together, these results bring forth an efficient link between diversification and corporate liquidity.
Default Risk and the Duration of Zero Coupon Bonds
Published: 03/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb05092.x
DON M. CHANCE
This paper applies a contingent claims approach to examine the duration of a zero coupon bond subject to default risk. One replicating portfolio for a default‐prone zero coupon bond contains a long position in the default‐free asset plus a short position in a put option on the underlying assets. The duration of the bond is shown to be a weighted combination of the duration of the default‐free bond and the put option. The duration is less than maturity and is not an immunizing duration. The technique is then extended to subordinated debt.
COMMERCIAL BANKING IN ARIZONA—PAST AND PRESENT*
Published: 12/01/1959 | DOI: 10.1111/j.1540-6261.1959.tb00146.x
Don C. Bridenstine
FORWARD EXCHANGE AND CURRENCY POSITION
Published: 12/01/1969 | DOI: 10.1111/j.1540-6261.1969.tb01699.x
Don Schilling
Models of Stock Returns—A Comparison
Published: 03/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb03865.x
STANLEY J. KON
In this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis (fat tails) and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes. Stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis. An alternative explanation for the observed fat tails is the symmetric student model. The result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model.
Do Managerial Motives Influence Firm Risk Reduction Strategies?
Published: 09/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb04059.x
DON O. MAY
This article finds evidence consistent with the hypothesis that managers consider personal risk when making decisions that affect firm risk. I find that Chief Executive Officers (CEOs) with more personal wealth vested in firm equity tend to diversify. CEOs who are specialists at the existing technology tend to buy similar technologies. When specialists have many years vested, they tend to diversify, however. Poor performance in the existing lines of business is associated with movements into new lines of business.
Pricing Options under Generalized GARCH and Stochastic Volatility Processes
Published: 05/06/2003 | DOI: 10.1111/0022-1082.00109
Peter Ritchken, Rob Trevor
In this paper, we develop an efficient lattice algorithm to price European and American options under discrete time GARCH processes. We show that this algorithm is easily extended to price options under generalized GARCH processes, with many of the existing stochastic volatility bivariate diffusion models appearing as limiting cases. We establish one unifying algorithm that can price options under almost all existing GARCH specifications as well as under a large family of bivariate diffusions in which volatility follows its own, perhaps correlated, process.
Divisional Managers and Internal Capital Markets
Published: 11/26/2012 | DOI: 10.1111/jofi.12003
RAN DUCHIN, DENIS SOSYURA
Using hand‐collected data on divisional managers at S&P 500 firms, we study their role in internal capital budgeting. Divisional managers with social connections to the CEO receive more capital. Connections to the CEO outweigh measures of managers' formal influence, such as seniority and board membership, and affect both managerial appointments and capital allocations. The effect of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. Under weak governance, connections reduce investment efficiency and firm value via favoritism. Under high information asymmetry, connections increase investment efficiency and firm value via information transfer.
Precautionary Savings with Risky Assets: When Cash Is Not Cash
Published: 12/19/2016 | DOI: 10.1111/jofi.12490
RAN DUCHIN, THOMAS GILBERT, JARRAD HARFORD, CHRISTOPHER HRDLICKA
U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage‐backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.
Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies
Published: 09/21/2011 | DOI: 10.1111/j.1540-6261.2011.01685.x
ULRIKE MALMENDIER, GEOFFREY TATE, JON YAN
We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity financing. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.
Stock Returns following Large One‐Day Declines: Evidence on Short‐Term Reversals and Longer‐Term Performance
Published: 03/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb04428.x
DON R. COX, DAVID R. PETERSON
We examine stock returns following large one‐day price declines and find that the bid‐ask bounce and the degree of market liquidity explain short‐term price reversals. Further, we do not find evidence consistent with the overreaction hypothesis. We observe that securities with large one‐day price declines perform poorly over an extended time horizon.
Dissecting Conglomerate Valuations
Published: 02/19/2022 | DOI: 10.1111/jofi.13117
OLIVER BOGUTH, RAN DUCHIN, MIKHAIL SIMUTIN
We develop a new method to estimate Tobin's Qs of conglomerate divisions without relying on standalone firms. Divisional Qs differ considerably from those of standalone firms across industries, over time, and in their sensitivity to economic shocks. The differences are explained by intraconglomerate covariance structures and access to internal capital markets that mitigate external financing frictions. Consequently, the Qs capture variation in the allocation of assets in the economy: within firms through internal capital markets and across focused and diversified firms through diversifying acquisitions. Overall, our method provides opportunities to study the economic mechanisms that explain corporate diversification.
The Effect of Lender Identity on a Borrowing Firm's Equity Return
Published: 06/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb04801.x
MATTHEW T. BILLETT, MARK J. FLANNERY, JON A. GARFINKEL
Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although we find no significant difference between the market's response to bank and nonbank loans, we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived “quality” signals valuable information about firm value to uninformed market investors.
A Horizon‐Based Decomposition of Mutual Fund Value Added Using Transactions
Published: 04/04/2024 | DOI: 10.1111/jofi.13331
JULES VAN BINSBERGEN, JUNGSUK HAN, HONGXUN RUAN, RAN XING
We decompose mutual fund value added by the length of funds' holdings using transaction‐level data. We motivate our decomposition with a model featuring horizon‐specific investment ideas, where short‐term ideas are less scalable because the associated trades cannot be spread over time. Fund turnover correlates negatively with the horizon over which value is added and positively with price impact costs. As predicted, holdings of high‐turnover funds add a substantial amount of value in the first two weeks, of which more than 80% is earned on Federal Open Market Committee (FOMC) and earnings announcement days. Holdings of low‐turnover funds add value only over longer horizons.