The Journal of Finance

Is Fairly Priced Deposit Insurance Possible?

Published: 03/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03984.x

YUK‐SHEE CHAN, STUART I. GREENBAUM, ANJAN V. THAKOR

We analyze risk‐sensitive, incentive‐compatible deposit insurance in the presence of private information and moral hazard. Without deposit‐linked subsidies it is impossible to implement risk‐sensitive, incentive‐compatible deposit insurance pricing in a competitive, deregulated environment, except when the deposit insurer is the least risk averse agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk‐sensitive deposit insurance.

A REPLY

Published: 09/01/1971   |   DOI: 10.1111/j.1540-6261.1971.tb00937.x

Henry A. Latané, Willam E. Young

Financial Analyst Characteristics and Herding Behavior in Forecasting

Published: 07/20/2005   |   DOI: 10.1111/j.1540-6261.2005.00731.x

MICHAEL B. CLEMENT, SENYO Y. TSE

This study classifies analysts' earnings forecasts as herding or bold and finds that (1) boldness likelihood increases with the analyst's prior accuracy, brokerage size, and experience and declines with the number of industries the analyst follows, consistent with theory linking boldness with career concerns and ability; (2) bold forecasts are more accurate than herding forecasts; and (3) herding forecast revisions are more strongly associated with analysts' earnings forecast errors (actual earnings—forecast) than are bold forecast revisions. Thus, bold forecasts incorporate analysts' private information more completely and provide more relevant information to investors than herding forecasts.

Long‐Term Return Reversals: Overreaction or Taxes?

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01295.x

THOMAS J. GEORGE, CHUAN‐YANG HWANG

Long‐term reversals in U.S. stock returns are better explained as the rational reactions of investors to locked‐in capital gains than an irrational overreaction to news. Predictors of returns based on the overreaction hypothesis have no power, while those that measure locked‐in capital gains do, completely subsuming past returns measures that are traditionally used to predict long‐term returns. In data from Hong Kong, where investment income is not taxed, reversals are nonexistent, and returns are not forecastable either by traditional measures or by measures based on the capital gains lock‐in hypothesis that successfully predict U.S. returns.

Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies

Published: 09/21/2011   |   DOI: 10.1111/j.1540-6261.2011.01685.x

ULRIKE MALMENDIER, GEOFFREY TATE, JON YAN

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity financing. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.

Does Poor Performance Damage the Reputation of Financial Intermediaries? Evidence from the Loan Syndication Market

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01692.x

RADHAKRISHNAN GOPALAN, VIKRAM NANDA, VIJAY YERRAMILLI

We investigate the effect of poor performance on financial intermediary reputation by estimating the effect of large‐scale bankruptcies among a lead arranger's borrowers on its subsequent syndication activity. Consistent with reputation damage, such lead arrangers retain larger fractions of the loans they syndicate, are less likely to syndicate loans, and are less likely to attract participant lenders. The consequences are more severe when borrower bankruptcies suggest inadequate screening or monitoring by the lead arranger. However, the effect of borrower bankruptcies on syndication activity is not present among dominant lead arrangers, and is weak in years in which many lead arrangers experience borrower bankruptcies.

Technological Growth and Asset Pricing

Published: 07/19/2012   |   DOI: 10.1111/j.1540-6261.2012.01747.x

NICOLAE GÂRLEANU, STAVROS PANAGEAS, JIANFENG YU

We study the asset‐pricing implications of technological growth in a model with “small,” disembodied productivity shocks and “large,” infrequent technological innovations, which are embodied into new capital vintages. The technological‐adoption process leads to endogenous cycles in output and asset valuations. This process can help explain stylized asset‐valuation patterns around major technological innovations. More importantly, it can help provide a unified, investment‐based theory for numerous well‐documented facts related to excess‐return predictability. To illustrate the distinguishing features of our theory, we highlight novel implications pertaining to the joint time‐series properties of consumption and excess returns.

A Model of Mortgage Default

Published: 02/06/2015   |   DOI: 10.1111/jofi.12252

JOHN Y. CAMPBELL, JOÃO F. COCCO

In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero‐profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan‐to‐value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable‐rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.

Do Acquisitions Relieve Target Firms’ Financial Constraints?

Published: 03/27/2014   |   DOI: 10.1111/jofi.12155

ISIL EREL, YEEJIN JANG, MICHAEL S. WEISBACH

Managers often claim that target firms are financially constrained prior to being acquired and that these constraints are eased following the acquisition. Using a large sample of European acquisitions, we document that the level of cash that target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline, while investment increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. Our findings suggest that acquisitions relieve financial frictions in target firms, especially when the target firm is relatively small.

Learning about Consumption Dynamics

Published: 01/27/2015   |   DOI: 10.1111/jofi.12246

MICHAEL JOHANNES, LARS A. LOCHSTOER, YIQUN MOU

This paper characterizes U.S. consumption dynamics from the perspective of a Bayesian agent who does not know the underlying model structure but learns over time from macroeconomic data. Realistic, high‐dimensional macroeconomic learning problems, which entail parameter, model, and state learning, generate substantially different subjective beliefs about consumption dynamics compared to the standard, full‐information rational expectations benchmark. Beliefs about long‐run dynamics are volatile, with counter‐cyclical conditional volatility, and drift over time. Embedding these beliefs in a standard asset pricing model significantly improves the model's ability to match the stylized facts, as well as the sample path of the market price‐dividend ratio.

Variable Selection for Portfolio Choice

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00369

Yacine AÏT‐SAHALI, Michael W. Brandt

We study asset allocation when the conditional moments of returns are partly predictable. Rather than first model the return distribution and subsequently characterize the portfolio choice, we determine directly the dependence of the optimal portfolio weights on the predictive variables. We combine the predictors into a single index that best captures time variations in investment opportunities. This index helps investors determine which economic variables they should track and, more importantly, in what combination. We consider investors with both expected utility (mean variance and CRRA) and nonexpected utility (ambiguity aversion and prospect theory) objectives and characterize their market timing, horizon effects, and hedging demands.

COST OF CAPITAL FOR A DIVISION OF A FIRM: COMMENT

Published: 12/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03373.x

J. Fred Weston, Wayne Y. Lee

An Analysis of the Impact of Deposit Rate Ceilings on the Market Values of Thrift Institutions

Published: 12/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03617.x

LARRY Y. DANN, CHRISTOPHER M. JAMES

This paper examines the impact of changes in deposit interest rate regulations on the common stock values of savings and loan institutions. The analysis indicates that stockholder‐owned savings and loans (S & L's) have experienced statistically significant declines in equity market values at the announcement of the removal of ceilings on certain consumer (small saver) certificate accounts and the introduction of short term variable rate money market certificates. We find the evidence to be consistent with the hypothesis that S & L's have earned economic rents from restrictions on interest rates paid to small saver accounts, and that relaxation of interest rate ceilings has reduced these rents.

Lifting the Veil: An Analysis of Pre‐trade Transparency at the NYSE

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00746.x

EKKEHART BOEHMER, GIDEON SAAR, LEI YU

We study pre‐trade transparency by looking at the introduction of NYSE's OpenBook service that provides limit‐order book information to traders off the exchange floor. We find that traders attempt to manage limit‐order exposure: They submit smaller orders and cancel orders faster. Specialists' participation rate and the depth they add to the quote decline. Liquidity increases in that the price impact of orders declines, and we find some improvement in the informational efficiency of prices. These results suggest that an increase in pre‐trade transparency affects investors' trading strategies and can improve certain dimensions of market quality.

Oil Futures Prices in a Production Economy with Investment Constraints

Published: 05/20/2009   |   DOI: 10.1111/j.1540-6261.2009.01466.x

LEONID KOGAN, DMITRY LIVDAN, AMIR YARON

We document a new stylized fact, that the relationship between the volatility of oil futures prices and the slope of the forward curve is nonmonotone and has a V‐shape. This pattern cannot be generated by standard models that emphasize storage. We develop an equilibrium model of oil production in which investment is irreversible and capacity constrained. Investment constraints affect firms' investment decisions and imply that the supply elasticity changes over time. Since demand shocks must be absorbed by changes in prices or changes in supply, time‐varying supply elasticity results in time‐varying volatility of futures prices. Estimating this model, we show it is quantitatively consistent with the V‐shape relationship between the volatility of futures prices and the slope of the forward curve.

Local Crowding‐Out in China

Published: 07/26/2020   |   DOI: 10.1111/jofi.12966

YI HUANG, MARCO PAGANO, UGO PANIZZA

In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints while leaving state‐owned firms' investment unaffected. We establish this result using a purpose‐built data set for Chinese local public debt. Private firms invest less in cities with more public debt, with the reduction in investment larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow.

Preferencing, Internalization, Best Execution, and Dealer Profits

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00167

Oliver Hansch, Narayan Y. Naik, S. Viswanathan

The practices of preferencing and internalization have been alleged to support collusion, cause worse execution, and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization and spreads across stocks. These results do not lend support to the “collusion” hypothesis but are consistent with a “costly search and trading relationships” hypothesis.

Mean‐Variance Versus Direct Utility Maximization

Published: 03/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03859.x

YORAM KROLL, HAIM LEVY, HARRY M. MARKOWITZ

Levy and Markowitz showed, for various utility functions and empirical returns distributions, that the expected utility maximizer could typically do very well if he acted knowing only the mean and variance of each distribution. Levy and Markowitz considered only situations in which the expected utility maximizer chose among a finite number of alternate probability distributions. The present paper examines the same questions for a case with an infinite number of alternate distributions, namely those available from the standard portfolio constraint set.

Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions

Published: 06/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03706.x

YAKOV AMIHUD, BARUCH LEV, NICKOLAOS G. TRAVLOS

We test the proposition that corporate control considerations motivate the means of investment financing—cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership.

A Note on Simple Criteria for Optimal Portfolio Selection

Published: 03/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02599.x

C. SHERMAN CHEUNG, CLARENCE C. Y. KWAN