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.

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.

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.

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.

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.

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.

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.

GOVERNMENT FINANCIAL AID TO SMALL BUSINESS: FISCAL POLICY

Published: 06/01/1951   |   DOI: 10.1111/j.1540-6261.1951.tb04453.x

Dan Throop Smith

THE DEBT‐EQUITY RATIO*

Published: 03/01/1961   |   DOI: 10.1111/j.1540-6261.1961.tb02802.x

Dan Usher

PRICING OF WARRANTS AND THE VALUE OF THE FIRM

Published: 12/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb03423.x

Dan Galai, Meir I. Schneller

A Proposal for Indexes for Traded Call Options

Published: 12/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb00062.x

DAN GALAI

Liquidity or Credit Risk? The Determinants of Very Short‐Term Corporate Yield Spreads

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01276.x

DAN COVITZ, CHRIS DOWNING

Employing a comprehensive database on transactions of commercial paper issued by domestic U.S. nonfinancial corporations, we study the determinants of very short‐term corporate yield spreads. We find that liquidity plays a role in the determination of spreads but, somewhat surprisingly, credit quality is the more important determinant of spreads, even at horizons of less than 1 month. These results are robust across a variety of proxies for liquidity and credit risk, and have important implications for the literature on the modeling of corporate bond prices.

Financial Speculators' Underperformance: Learning, Self‐Selection, and Endogenous Liquidity

Published: 05/08/2007   |   DOI: 10.1111/j.1540-6261.2007.01237.x

REZA MAHANI, DAN BERNHARDT

We develop an equilibrium model of learning by rational traders to reconcile several empirical regularities: Cross sectionally, most individual speculators lose money; large speculators outperform small speculators; past performance positively affects subsequent trade intensity; most new traders lose money and cease speculation; and performance shows persistence. Learning from trading generates substantial endogenous liquidity, reducing bid–ask spreads and the impact of exogenous liquidity shocks on asset prices, but amplifying the effects of real shocks. Introducing slightly overconfident traders increases bid–ask spreads, hurting all traders. Finally, behavioral theories cannot reconcile all of these empirical regularities.

Rent Extraction with Securities Plus Cash

Published: 03/16/2021   |   DOI: 10.1111/jofi.13018

TINGJUN LIU, DAN BERNHARDT

In our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.

Year‐End Tax‐Induced Sales and Stock Market Seasonality

Published: 03/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb03633.x

DAN GIVOLY, ARIE OVADIA

The paper relates two phenomena in the stock market: the high return during the month of January and the apparent existence of widespread sales of stocks for tax purposes towards the end of the fiscal year. The findings suggest that, due to the tax‐induced sales, the price of many stocks over the last 35 years was temporarily depressed in December but recovered in the following January. This price recovery is a major contributor to the high returns observed in January. The tax effect is present in firms of all sizes but much more pronounced for small firms. The analysis also indicates that a more precise identification of the tax‐switch candidates may prove that the tax‐induced sales are, in fact, the sole contributor to the high January's returns.

LEVERAGE, DIVIDEND POLICY AND THE COST OF CAPITAL: COMMENT

Published: 12/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01468.x

Dan B. Hemmings

A PORTFOLIO APPROACH TO FOSSIL FUEL PROCUREMENT IN THE ELECTRIC UTILITY INDUSTRY

Published: 06/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb01935.x

Dan Bar‐Lev, Steven Katz