The Journal of Finance

Asset Pricing without Garbage

Published: 08/04/2016   |   DOI: 10.1111/jofi.12438

TIM A. KROENCKE

This paper provides an explanation for why garbage implies a much lower relative risk aversion in the consumption‐based asset pricing model than National Income and Product Accounts (NIPA) consumption expenditure: Unlike garbage, NIPA consumption is filtered to mitigate measurement error. I apply a simple model of the filtering process that allows one to undo the filtering inherent in NIPA consumption. “Unfiltered NIPA consumption” well explains the equity premium and is priced in the cross‐section of stock returns. I discuss the likely properties of true consumption (i.e., without measurement error and filtering) and quantify implications for habit and long‐run risk models.

A MODEL OF THE MARKET FOR LINES OF CREDIT

Published: 03/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb03401.x

Tim S. Campbell

THE IMPACT OF COMPENSATING BALANCE REQUIREMENTS ON THE CASH BALANCES OF MANUFACTURING CORPORATIONS: AN EMPIRICAL STUDY*

Published: 03/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03239.x

Tim Campbell, Leland Brendsel

Trading Patterns and Prices in the Interbank Foreign Exchange Market

Published: 09/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04760.x

TIM BOLLERSLEV, IAN DOMOWITZ

The behavior of quote arrivals and bid‐ask spreads is examined for continuously recorded deutsche mark‐dollar exchange rate data over time, across locations, and by market participants. A pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns. Models for the conditional mean and variance of returns and bid‐ask spreads indicate volatility clustering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds for spread volatility. Conditional returns volatility is increasing in the size of the spread.

The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05138.x

TIM OPLER, SHERIDAN TITMAN

This paper investigates the determinants of leveraged buyout (LBO) activity by comparing firms that have implemented LBOs to those that have not. Consistent with the free cash flow theory, we find that firms that initiate LBOs can be characterized as having a combination of unfavorable investment opportunities (low Tobin's q) and relatively high cash flow. LBO firms also tend to be more diversified than firms which do not undertake LBOs. In addition, firms with high expected costs of financial distress (e.g., those with high research and development expenditures) are less likely to do LBOs.

Bids and Allocations in European IPO Bookbuilding

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00700.x

TIM JENKINSON, HOWARD JONES

This paper uses evidence from a data set of 27 European IPOs to analyze how investors bid and the factors that influence their allocations. We also make use of a unique ranking of investor quality, associated with the likelihood of flipping the IPO. We find that investors perceived to be long‐term holders of the stock are consistently favored in allocation and in out‐turn profits. In contrast to Cornelli and Goldreich (2001), we find little evidence that more informative bids receive larger allocations or higher profits. Our results cast doubt upon the extent of information production during the bookbuilding period.

Measuring Readability in Financial Disclosures

Published: 03/26/2014   |   DOI: 10.1111/jofi.12162

TIM LOUGHRAN, BILL MCDONALD

Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the Securities and Exchange Commission's plain English initiative. We propose defining readability as the effective communication of valuation‐relevant information. The Fog Index—the most commonly applied readability measure—is shown to be poorly specified in financial applications. Of Fog's two components, one is misspecified and the other is difficult to measure. We report that 10‐K document file size provides a simple readability proxy that outperforms the Fog Index, does not require document parsing, facilitates replication, and is correlated with alternative readability constructs.

Tails, Fears, and Risk Premia

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01695.x

TIM BOLLERSLEV, VIKTOR TODOROV

We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof, we identify and estimate a new Investor Fears index. The index reveals large time‐varying compensation for fears of disasters. Our empirical investigations involve new extreme value theory approximations and high‐frequency intraday data for estimating the expected jump tails under the statistical probability measure, and short maturity out‐of‐the‐money options and new model‐free implied variation measures for estimating the corresponding risk‐neutral expectations.

New Evidence of the Impact of Dividend Taxation and on the Identity of the Marginal Investor

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00462

Leonie Bell, Tim Jenkinson

This paper examines the impact of a major change in dividend taxation introduced in the United Kingdom in July 1997. The reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the United Kingdom, namely pension funds. We find significant changes in the valuation of dividend income after the reform, in particular for high‐yielding companies. These results provide strong support for the hypothesis that taxation affects the valuation of companies, and that pension funds were the effective marginal investors for high‐yielding companies.

When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks

Published: 01/06/2011   |   DOI: 10.1111/j.1540-6261.2010.01625.x

TIM LOUGHRAN, BILL MCDONALD

Previous research uses negative word counts to measure the tone of a text. We show that word lists developed for other disciplines misclassify common words in financial text. In a large sample of 10‐Ks during 1994 to 2008, almost three‐fourths of the words identified as negative by the widely used Harvard Dictionary are words typically not considered negative in financial contexts. We develop an alternative negative word list, along with five other word lists, that better reflect tone in financial text. We link the word lists to 10‐K filing returns, trading volume, return volatility, fraud, material weakness, and unexpected earnings.

The Determinants of the Maturity of Corporate Debt Issues

Published: 12/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05227.x

JOSE GUEDES, TIM OPLER

We document the determinants of the term to maturity of 7,369 bonds and notes issued between 1982 and 1993. Our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum, while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum. This pattern is consistent with the theory that risky firms do not issue short‐term debt in order to avoid inefficient liquidation, but are screened out of the long‐term debt market because of the prospect of risky asset substitution.

Deposit Insurance in a Deregulated Environment

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03669.x

TIM S. CAMPBELL, DAVID GLENN

The Operating Performance of Firms Conducting Seasoned Equity Offerings

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02743.x

TIM LOUGHRAN, JAY R. RITTER

Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run‐up in the year prior to the offering. This article documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then deteriorates. The multiples at the time of the offering, however, do not reflect an expectation of deteriorating performance. Issuing firms are disproportionately high‐growth firms, but issuers have much lower subsequent stock returns than nonissuers with the same growth rate.

The New Issues Puzzle

Published: 03/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05166.x

TIM LOUGHRAN, JAY R. RITTER

Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long‐run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book‐to‐market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date.

Common Stochastic Trends in a System of Exchange Rates

Published: 03/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02410.x

RICHARD T. BAILLIE, TIM BOLLERSLEV

Univariate tests reveal strong evidence for the presence of a unit root in the univariate time‐series representation for seven daily spot and forward exchange rate series. Furthermore, all seven spot and forward rates appear to be cointegrated; that is, the forward premiums are stationary, and one common unit root, or stochastic trend, is detectable in the multivariate time‐series models for the seven spot and forward rates, respectively. This is consistent with the hypothesis that the seven exchange rates possess one long‐run relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates.

Heterogeneous Information Arrivals and Return Volatility Dynamics: Uncovering the Long‐Run in High Frequency Returns

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02722.x

TORBEN G. ANDERSEN, TIM BOLLERSLEV

Recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean‐reverting fractionally integrated process. Meanwhile, much shorter lived volatility dynamics are typically observed with high frequency intradaily returns. The present article demonstrates, that by interpreting the volatility as a mixture of numerous heterogeneous short‐run information arrivals, the observed volatility process may exhibit long‐run dependence. As such, the long‐memory characteristics constitute an intrinsic feature of the return generating process, rather than the manifestation of occasional structural shifts. These ideas are confirmed by our analysis of a one‐year time series of five‐minute Deutschemark‐U.S. Dollar exchange rates.

Financial Distress and Corporate Performance

Published: 07/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb00086.x

TIM C. OPLER, SHERIDAN TITMAN

This study finds that highly leveraged firms lose substantial market share to their more conservatively financed competitors in industry downturns. Specifically, firms in the top leverage decile in industries that experience output contractions see their sales decline by 26 percent more than do firms in the bottom leverage decile. A similar decline takes place in the market value of equity. These findings are consistent with the view that the indirect costs of financial distress are significant and positive. Consistent with the theory that firms with specialized products are especially vulnerable to financial distress, we find that highly leveraged firms that engage in research and development suffer the most in economically distressed periods. We also find that the adverse consequences of leverage are more pronounced in concentrated industries.

Cointegration, Fractional Cointegration, and Exchange Rate Dynamics

Published: 06/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb05161.x

RICHARD T. BAILLIE, TIM BOLLERSLEV

Multivariate tests due to Johansen (1988, 1991) as implemented by Baillie and Bollerslev (1989a) and Diebold, Gardeazabal, and Yilmaz (1994) reveal mixed evidence on whether a group of exchange rates are cointegrated. Further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process. Hence, the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons.

Do Long‐Term Shareholders Benefit From Corporate Acquisitions?

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02741.x

TIM LOUGHRAN, ANAND M. VIJH

Using 947 acquisitions during 1970–1989, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five‐year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of −25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns.

Deutsche Mark–Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.85732

Torben G. Andersen, Tim Bollerslev

This paper provides a detailed characterization of the volatility in the deutsche mark–dollar foreign exchange market using an annual sample of five‐minute returns. The approach captures the intraday activity patterns, the macroeconomic announcements, and the volatility persistence (ARCH) known from daily returns. The different features are separately quantified and shown to account for a substantial fraction of return variability, both at the intraday and daily level. The implications of the results for the interpretation of the fundamental “driving forces” behind the volatility process is also discussed.