The Journal of Finance

Ex Ante Bond Returns and the Liquidity Preference Hypothesis

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00140

Jacob Boudoukh, Matthew Richardson, Tom Smith, Robert F. Whitelaw

We provide a formal test of the liquidity preference hypothesis (LPH), that is, the monotonicity of ex ante term premiums, using nonparametric estimates that do not require a structural model for conditional expected returns. Although the point estimates of the term premiums are consistent with previous conclusions in the literature regarding violations of the LPH, the test statistics are generally insignificant, even when powerful conditioning information is used. These results illustrate the importance of correctly accounting for correlations across maturities and of formally testing the inequality restrictions implied by the LPH.

The Impact of Merger Bids on the Participating Firms' Security Holders

Published: 12/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03613.x

PAUL ASQUITH, E. HAN KIM

This paper investigates whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. Monthly and daily bond and stock returns are calculated relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results show that while the stockholders of target firms gain from a merger bid, no other securityholders either gain or lose. To provide direct evidence on the existence of “diversification effects” and “incentive effects,” we test whether the bondholders' returns are dependent upon the correlation between the returns of the merging firms and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. The results are consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.

Rationality and Analysts' Forecast Bias

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00329

Terence Lim

This paper proposes and tests a quadratic‐loos utility function for modeling corporate earnings forecasting, where financial analysts trade off bias to improve management access and forecast accuracy. Optimal forecasts with minimum expected error are optimistically biased and exhibit predictable cross‐sectional variation related to analyst and company characteristics. Empirical evidence from individual analyst forecasts is consistent with the model's predictions. These results suggest that positive and predictable bias may be a rational property of optimal earnings forecasts. Prior studies using classical notions of unbiasedness may have prematurely dismissed analysts' forecasts as being irrational or inaccurate.

The Theoretical Relationship between Systematic Risk and Financial (Accounting) Variables: Comment

Published: 06/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb00660.x

KEE S. KIM

Credit Granting: A Comparative Analysis of Classification Procedures

Published: 07/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04576.x

VENKAT SRINIVASAN, YONG H. KIM

Financial classification issues, and particularly the financial distress problem, continue to be subject to vigorous investigation. The corporate credit granting process has not received as much attention in the literature. This paper examines the relative effectiveness of parametric, nonparametric and judgemental classification procedures on a sample of corporate credit data. The judgemental model is based on the Analytic Hierarchy Process. Evidence indicates that (nonparametric) recursive partitioning methods provide greater information than simultaneous partitioning procedures. The judgemental model is found to perform as well as statistical models. A complementary relationship is proposed between the statistical and the judgemental models as an effective paradigm for granting credit.

THE INTERNAL FINANCING OF CORPORATIONS IN THE UNITED STATES, 1946–54*

Published: 03/01/1960   |   DOI: 10.1111/j.1540-6261.1960.tb04849.x

Herbert E. Sim

DISCUSSION

Published: 05/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb00890.x

E. HAN KIM

Driven to Distraction: Extraneous Events and Underreaction to Earnings News

Published: 09/28/2009   |   DOI: 10.1111/j.1540-6261.2009.01501.x

DAVID HIRSHLEIFER, SONYA SEONGYEON LIM, SIEW HONG TEOH

Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The investor distraction hypothesis holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post‐announcement drift much stronger, when a greater number of same‐day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry‐unrelated news and large earnings surprises have a stronger distracting effect.

Financial Contracting and Leverage Induced Over‐ and Under‐Investment Incentives

Published: 07/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05105.x

ELAZAR BERKOVITCH, E. HAN KIM

This paper investigates the effects of seniority rules and restrictive dividend convenants on the over‐ and under‐investment incentives associated with risky debt. We show that increasing seniority of new debt decreases the incidence of under‐investment but increases over‐investment, and vice versa. Under symmetric information, the optimal seniority rule is to give new debtholders first claim on a new project without recourse to existing assets (i.e., project financing). Under asymmetric information, the optimal debt contract requires equating the expected return to new debtholders in the default state to the new project's cash flow in the same rate. If this is not possible, the optimal seniority rule calls for strict subordination of new debt if the expected cash flow in default is small and full seniority if it is large. With regard to dividend convenants, we show that their effect depends on whether or not dividend payments are conditioned on future investments. When they are unconditioned, allowing more dividends increases the under‐investment incentive. In contrast, conditional dividends decrease the underinvestment incentive and increase the over‐investment incentive.

Debt and Input Misallocation

Published: 07/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05106.x

MOSHE KIM, VOJISLAV MAKSIMOVIC

We investigate a class of agency costs of debt that arise because debt financing affects the firm's incentives to use inputs efficiently. A methodology for estimating this class of costs is presented and applied to a major industry, air transport. Our results are consistent with agency models that predict a decrease in efficiency as the debt increases. A part of the loss of efficiency that we identify is attributable to the greater use by levered firms of inputs that can be monitored and are collateralizable.

Indirect Incentives of Hedge Fund Managers

Published: 12/21/2015   |   DOI: 10.1111/jofi.12384

JONGHA LIM, BERK A. SENSOY, MICHAEL S. WEISBACH

Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow‐performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.

EVALUATING INVESTMENTS IN ACCOUNTS RECEIVABLE: A WEALTH MAXIMIZING FRAMEWORK

Published: 05/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb04857.x

Yong H. Kim, Joseph C. Atkins

Price Limit Performance: Evidence from the Tokyo Stock Exchange

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04827.x

KENNETH A. KIM, S. GHON RHEE

Price limit advocates claim that price limits decrease stock price volatility, counter overreaction, and do not interfere with trading activity. Conversely, price limit critics claim that price limits cause higher volatility levels on subsequent days (volatility spillover hypothesis), prevent prices from efficiently reaching their equilibrium level (delayed price discovery hypothesis), and interfere with trading due to limitations imposed by price limits (trading interference hypothesis). Empirical research does not provide conclusive support for either positions. We examine the Tokyo Stock Exchange price limit system to test these hypotheses. Our evidence supports all three hypotheses suggesting that price limits may be ineffective.

Employee Costs of Corporate Bankruptcy

Published: 05/27/2023   |   DOI: 10.1111/jofi.13251

JOHN R. GRAHAM, HYUNSEOB KIM, SI LI, JIAPING QIU

An employee's annual earnings fall by 13% in the first full calendar year after her firm's bankruptcy, and the present value of lost earnings from bankruptcy to six years following bankruptcy is 87% of pre‐bankruptcy annual earnings. More worker earnings are lost in thin labor markets and among small firms. Ex ante compensating wage differentials for this “bankruptcy risk” are up to 2% of firm value for a firm whose credit rating falls from AA to BBB, comparable in magnitude to debt tax benefits. Thus, wage premia for expected costs of bankruptcy are sufficiently large to be an important consideration in capital structure decisions.

Time‐Series Variation in Dividend Pricing

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04775.x

KENNETH M. EADES, PATRICK J. HESS, E. HAN KIM

Ex‐dividend day returns vary over time. The ex‐day returns of high‐yield stocks are persistently positive for some time periods and negative for others; in contrast, ex‐day returns of low‐yield stocks are always positive and less variable. We are unable to explain the variation with changes in the tax code, but we do find a strong effect for the introduction of negotiated commissions. We find evidence that corporate dividend capturing is affecting ex‐day returns and confirm the findings of Gordon and Bradford (1980) that the price of dividends is countercyclical.

Broad‐Based Employee Stock Ownership: Motives and Outcomes

Published: 02/20/2014   |   DOI: 10.1111/jofi.12150

E. HAN KIM, PAIGE OUIMET

Firms initiating broad‐based employee share ownership plans often claim employee stock ownership plans (ESOPs) increase productivity by improving employee incentives. Do they? Small ESOPs comprising less than 5% of shares, granted by firms with moderate employee size, increase the economic pie, benefiting both employees and shareholders. The effects are weaker when there are too many employees to mitigate free‐riding. Although some large ESOPs increase productivity and employee compensation, the average impacts are small because they are often implemented for nonincentive purposes such as conserving cash by substituting wages with employee shares or forming a worker‐management alliance to thwart takeover bids.

A Capital Budgeting Analysis of Life Insurance Costs in the United States: 1950–1979

Published: 03/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb03632.x

DAVID F. BABBEL, KIM B. STAKING

A capital budgeting procedure is applied in developing a real price index for life insurance over three decades. Individual life policies of three types are analyzed. The analysis reveals that although the cost of whole life insurance, measured in nominal values, has decreased over the past thirty years, when properly measured in present value or constant dollar terms, the cost has risen substantially. Term life insurance has been characterized by decreasing costs in both nominal and real terms. The amounts of the cost variations attributable to improving survival rates, changing policy terms, varying discount rates and differing tax status are identified.

Predictable Stock Returns: The Role of Small Sample Bias

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04731.x

CHARLES R. NELSON, MYUNG J. KIM

Predictive regressions are subject to two small sample biases: the coefficient estimate is biased if the predictor is endogenous, and asymptotic standard errors in the case of overlapping periods are biased downward. Both biases work in the direction of making t‐ratios too large so that standard inference may indicate predictability even if none is present. Using annual returns since 1872 and monthly returns since 1927 we estimate empirical distributions by randomizing residuals in the VAR representation of the variables. The estimated biases are large enough to affect inference in practice, and should be accounted for when studying predictability.

A Test of the Errors‐in‐Expectations Explanation of the Value/Glamour Stock Returns Performance: Evidence from Analysts' Forecasts

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00491

John A. Doukas, Chansog (Francis) Kim, Christos Pantzalis

Several empirical studies show that investment strategies that favor the purchase of stocks with low prices relative to conventional measures of value yield higher returns. Some of these studies imply that investors are too optimistic about (glamour) stocks that have had good performance in the recent past and too pessimistic about (value) stocks that have performed poorly. We examine whether investors systematically overestimate (underestimate) the future earnings performance of glamour (value) stocks over the 1976 to 1997 period. Our results fail to support the extrapolation hypothesis that posits that the superior performance of value stocks is because investors make systematic errors in predicting future growth in earnings of out‐of‐favor stocks.

The Geography of Block Acquisitions

Published: 11/11/2008   |   DOI: 10.1111/j.1540-6261.2008.01414.x

JUN‐KOO KANG, JIN‐MO KIM

Using a large sample of partial block acquisitions, we examine the importance of geographic proximity in corporate governance and target returns. We find that block acquirers have a strong preference for geographically proximate targets and acquirers that purchase shares in such targets are more likely to engage in post‐acquisition target governance activities than are remote block acquirers. Moreover, the targets of these acquirers realize higher announcement returns and better post‐acquisition operating performance than do targets of other types of acquirers, particularly when they face greater information asymmetries.