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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Rational Momentum Effects
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00435
Timothy C. Johnson
Momentum effects in stock returns need not imply investor irrationality, heterogeneous information, or market frictions. A simple, single‐firm model with a standard pricing kernel can produce such effects when expected dividend growth rates vary over time. An enhanced model, under which persistent growth rate shocks occur episodically, can match many of the features documented by the empirical research. The same basic mechanism could potentially account for underreaction anomalies in general.
Forecast Dispersion and the Cross Section of Expected Returns
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00688.x
TIMOTHY C. JOHNSON
Recent work by Diether, Malloy, and Scherbina (2002) has established a negative relationship between stock returns and the dispersion of analysts' earnings forecasts. I offer a simple explanation for this phenomenon based on the interpretation of dispersion as a proxy for unpriced information risk arising when asset values are unobservable. The relationship then follows from a general options‐pricing result: For a levered firm, expected returns should always decrease with the level of idiosyncratic asset risk. This story is formalized with a straightforward model. Reasonable parameter values produce large effects, and the theory's main empirical prediction is supported in cross‐sectional tests.
Corporate Combinations and Common Stock Returns: The Case of Joint Ventures
Published: 06/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04970.x
JOHN J. McCONNELL, TIMOTHY J. NANTELL
The gain to stockholders from mergers is well documented. However, there is little evidence as to whether the source of the gain is due to synergy or management displacement. Merger is just one of an almost limitless variety of ways in which firms combine resources to accomplish some objective. A joint venture is another. In addition to being of interest as an independent phenomenon, because the original managements of the parent firms remain intact under a joint venture, investigation of wealth gains from joint ventures provides an opportunity to isolate the management displacement hypothesis from the synergy hypothesis as the source of gains in corporate combinations. Our results are 1) there are significant wealth gains from joint ventures, 2) the smaller partner earns a larger excess rate of return while the dollar gains are more equally divided, and 3) the gains, scaled by resources committed, yield “premiums” similar to those in mergers. We are inclined to interpret our results as supportive of the synergy hypothesis as the source of gain from corporate combinations.
Variance and Lower Partial Moment Measures of Systematic Risk: Some Analytical and Empirical Results
Published: 06/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb02227.x
KELLY PRICE, BARBARA PRICE, TIMOTHY J. NANTELL
As a measure of systematic risk, the lower partial moment measure requires fewer restrictive assumptions than does the variance measure. However, the latter enjoys far wider usage than the former, perhaps because of its familiarity and the fact that two measures of systematic risk are equivalent when return distributions are normal. This paper shows analytically that there are systematic differences in the two risk measures when return distributions are lognormal. Results of empirical tests show that there are indeed systematic differences in measured values of the two risk measures for securities with above average and with below average systematic risk.
Spurious Regressions in Financial Economics?
Published: 07/15/2003 | DOI: 10.1111/1540-6261.00571
Wayne E. Ferson, Sergei Sarkissian, Timothy T. Simin
Even though stock returns are not highly autocorrelated, there is a spurious regression bias in predictive regressions for stock returns related to the classic studies of Yule (1926) and Granger and Newbold (1974). Data mining for predictor variables interacts with spurious regression bias. The two effects reinforce each other, because more highly persistent series are more likely to be found significant in the search for predictor variables. Our simulations suggest that many of the regressions in the literature, based on individual predictor variables, may be spurious.
Robust Structure Without Predictability: The “Compass Rose” Pattern of the Stock Market
Published: 06/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb02702.x
TIMOTHY FALCON CRACK, OLIVIER LEDOIT
Plotting daily stock returns against themselves with one day's lag reveals a striking pattern. Evenly spaced lines radiate from the origin; the thickest lines point in the major directions of the compass. This “compass rose” pattern appears in every stock. It is caused by discreteness. However, counter‐examples demonstrate that the existence of exchange‐imposed tick sizes (e.g. eighths) is neither necessary nor sufficient for the compass rose. The compass rose cannot be used to make abnormal profits: it is structure without predictability. Among other consequences, the compass rose may bias estimation of ARCH models, and tests for chaos.
The Behavior of the Interest Rate Differential Between Tax‐exempt Revenue and General Obligation Bonds: A Test of Risk Preferences and Market Segmentation
Published: 03/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb01096.x
DAVID S. KIDWELL, TIMOTHY W. KOCH*
This paper presents evidence that the yield differential between revenue bonds and similar general obligation bonds varies contracyclically with the level of economic activity. The evidence also indicates that significant investor‐borrower induced market segmentation exists in the municipal bond market. An increase in the relative demand by commercial banks for tax‐exempt securities and/or an increase in the supply of revenue bonds relative to the supply of general obligation bonds increase the yield spread between the two classes of debt. These findings were the result of a series of empirical tests with both macroeconomic and microeconomic data.
Competition among Trading Venues: Information and Trading on Electronic Communications Networks
Published: 11/07/2003 | DOI: 10.1046/j.1540-6261.2003.00618.x
Michael J. Barclay, Terrence Hendershott, D. Timothy McCormick
This paper explores the competition between two trading venues, Electronic Communication Networks (ECNs) and Nasdaq market makers. ECNs offer the advantages of anonymity and speed of execution, which attract informed traders. Thus, trades are more likely to occur on ECNs when information asymmetry is greater and when trading volume and stock‐return volatility are high. ECN trades have greater permanent price impacts and more private information is revealed through ECN trades than though market‐maker trades. However, ECN trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and offer them better executions.
Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession
Published: 09/24/2020 | DOI: 10.1111/jofi.12976
SHAI BERNSTEIN, TIMOTHY MCQUADE, RICHARD R. TOWNSEND
We investigate how the deterioration of household balance sheets affects worker productivity, and in turn economic downturns. Specifically, we compare the output of innovative workers who experienced differential declines in housing wealth during the financial crisis but were employed at the same firm and lived in the same metropolitan area. We find that, following a negative wealth shock, innovative workers become less productive and generate lower economic value for their firms. The reduction in innovative output is not driven by workers switching to less innovative firms or positions. These effects are more pronounced among workers at greater risk of financial distress.
Mortgage Design in an Equilibrium Model of the Housing Market
Published: 07/14/2020 | DOI: 10.1111/jofi.12963
ADAM M. GUREN, ARVIND KRISHNAMURTHY, TIMOTHY J. MCQUADE
How can mortgages be redesigned to reduce macrovolatility and default? We address this question using a quantitative equilibrium life‐cycle model. Designs with countercyclical payments outperform fixed payments. Among those, designs that front‐load payment reductions in recessions outperform those that spread relief over the full term. Front‐loading alleviates liquidity constraints when they bind most, reducing default and stimulating housing demand. To illustrate, a fixed‐rate mortgage (FRM) with an option to convert to adjustable‐rate mortgage, which front‐loads payment reductions relative to an FRM with an option to refinance underwater, reduces price and consumption declines six times as much and default three times as much.
Measuring Distress Risk: The Effect of R&D Intensity
Published: 11/28/2007 | DOI: 10.1111/j.1540-6261.2007.01297.x
LAUREL A. FRANZEN, KIMBERLY J. RODGERS, TIMOTHY T. SIMIN
Because of upward trends in research and development activity, accounting measures of financial distress have become less accurate. We document that (1) higher research and development spending increases the likelihood of misclassifying solvent firms, (2) adjusting for conservative accounting of research and development increases the number of correctly identified distressed firms, and (3) adjusted measures of distress alleviate previously documented anomalously low returns of large, high distress risk, low book‐to‐market firms. The results hold after updating stale parameters and under various tax assumptions. Our evidence raises concerns about interpretation of extant literature that relies on accounting measures of distress.
The Temporal Price Relationship between S&P 500 Futures and the S&P 500 Index
Published: 12/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb04368.x
IRA G. KAWALLER, PAUL D. KOCH, TIMOTHY W. KOCH
This paper empirically examines the intraday price relationship between S&P 500 futures and the S&P 500 index using minute‐to‐minute data. Three‐stage least‐squares regression is used to estimate lead and lag relationships with estimates for expiration days of the S&P 500 futures compared with estimates for days prior to expiration. The results suggest that futures price movements consistently lead index movements by twenty to forty‐five minutes while movements in the index rarely affect futures beyond one minute.
Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis
Published: 08/06/2015 | DOI: 10.1111/jofi.12309
HEITOR ALMEIDA, CHANG‐SOO KIM, HWANKI BRIAN KIM
This paper examines capital reallocation among firms in Korean business groups (chaebol) in the aftermath of the 1997 Asian financial crisis, and the consequences of this capital reallocation for the investment and performance of chaebol firms. We show that chaebol transferred cash from low‐growth to high‐growth member firms, using cross‐firm equity investments. This capital reallocation allowed chaebol firms with greater investment opportunities to invest more than control firms after the crisis. These firms also showed higher profitability and lower declines in valuation than control firms following the crisis. Our results suggest that chaebol internal capital markets helped them mitigate the negative effects of the Asian crisis on investment and performance.