The Journal of Finance

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

Published: 06/01/2017   |   DOI: 10.1111/jofi.12526

ANDRES ALMAZAN, ZHAOHUI CHEN, SHERIDAN TITMAN

This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

Financial Constraints, Competition, and Hedging in Industry Equilibrium

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01280.x

TIM ADAM, SUDIPTO DASGUPTA, SHERIDAN TITMAN

We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fraction of firms that hedge depends on industry characteristics, such as the number of firms in the industry, the elasticity of demand, and the convexity of production costs. Consistent with prior empirical findings, the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries.

Individual Investor Trading and Stock Returns

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01316.x

RON KANIEL, GIDEON SAAR, SHERIDAN TITMAN

This paper investigates the dynamic relation between net individual investor trading and short‐horizon returns for a large cross‐section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk‐averse individuals provide liquidity to meet institutional demand for immediacy.

Explaining the Cross‐Section of Stock Returns in Japan: Factors or Characteristics?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00344

Kent Daniel, Sheridan Titman, K.C. John Wei

Japanese stock returns are even more closely related to their book‐to‐market ratios than are their U.S. counterparts, and thus provide a good setting for testing whether the return premia associated with these characteristics arise because the characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests on a Japanese sample, reject the Fama and French (1993) three‐factor model, but fail to reject the characteristic model.

Individual Investor Trading and Return Patterns around Earnings Announcements

Published: 03/27/2012   |   DOI: 10.1111/j.1540-6261.2012.01727.x

RON KANIEL, SHUMING LIU, GIDEON SAAR, SHERIDAN TITMAN

This paper provides evidence of informed trading by individual investors around earnings announcements using a unique data set of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose abnormal returns following the event into information and liquidity provision components, and show that about half of the returns can be attributed to private information. We also find that individuals trade in both return‐contrarian and news‐contrarian manners after earnings announcements. The latter behavior has the potential to slow the adjustment of prices to earnings news.

Urban Vibrancy and Corporate Growth

Published: 09/17/2014   |   DOI: 10.1111/jofi.12215

CASEY DOUGAL, CHRISTOPHER A. PARSONS, SHERIDAN TITMAN

We find that a firm's investment is highly sensitive to the investments of other firms headquartered nearby, even those in very different industries. A firm's investment also responds to fluctuations in the cash flows and stock prices (q) of local firms outside its sector. These patterns do not appear to reflect exogenous area shocks such as local shocks to labor or real estate values, but rather suggest that local agglomeration economies are important determinants of firm investment and growth.

The Geography of Financial Misconduct

Published: 06/19/2018   |   DOI: 10.1111/jofi.12704

CHRISTOPHER A. PARSONS, JOHAN SULAEMAN, SHERIDAN TITMAN

Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of 3. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city‐level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city.

Financial Structure, Acquisition Opportunities, and Firm Locations

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01543.x

ANDRES ALMAZAN, ADOLFO DE MOTTA, SHERIDAN TITMAN, VAHAP UYSAL

This paper investigates the relation between firms' locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high‐tech cities and growing cities maintain more financial slack. Overall, the evidence suggests that growth opportunities influence firms' financial decisions.

Measuring Mutual Fund Performance with Characteristic‐Based Benchmarks

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02724.x

KENT DANIEL, MARK GRINBLATT, SHERIDAN TITMAN, RUSS WERMERS

This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book‐to‐market, and prior‐year return characteristics of those stocks. Based on these benchmarks, “Characteristic Timing” and “Characteristic Selectivity” measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive‐growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability.

Individualism and Momentum around the World

Published: 01/13/2010   |   DOI: 10.1111/j.1540-6261.2009.01532.x

ANDY C.W. CHUI, SHERIDAN TITMAN, K.C. JOHN WEI

This paper examines how cultural differences influence the returns of momentum strategies. Cross‐country cultural differences are measured with an individualism index developed by Hofstede (2001), which is related to overconfidence and self‐attribution bias. We find that individualism is positively associated with trading volume and volatility, as well as to the magnitude of momentum profits. Momentum profits are also positively related to analyst forecast dispersion, transaction costs, and the familiarity of the market to foreigners, and negatively related to firm size and volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits.