The Journal of Finance

The Effect of Bond Refunding on Shareholder Wealth: Reply

Published: 06/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb02147.x

JESS B. YAWITZ, JAMES A. ANDERSON

A Micro Model of the Federal Funds Market

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05026.x

THOMAS S. Y. HO, ANTHONY SAUNDERS

This paper demonstrates that valuable insights into the determination of Federal funds rates can be gained through modeling the micro‐decisions of market participants. Fed fund demand functions are derived for different bank valuation functions and several implications are discussed. Specifically, it is: (i) possible to rationalize the observation that large banks are net purchasers and small banks net sellers of Fed funds; (ii) to explain the positive spread of Fed funds rates over other short‐term money market rates; and (iii) to link the size of this spread to the Federal Reserve's underlying monetary policy strategy.

Taxes on Tax‐Exempt Bonds

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01545.x

ANDREW ANG, VINEER BHANSALI, YUHANG XING

Implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates, with implicit tax rates close to 100% using retail trades and above 70% for interdealer trades. These implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes. After valuing the tax payments, market discount bonds, which carry income tax liabilities, trade at yields around 25 basis points higher than comparable municipal bonds not subject to any taxes. The high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions.

The Effect of Government Regulations on Personal Loan Markets: A Tobit Estimation of a Microeconomic Model

Published: 09/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02293.x

JAMES R. BARTH, PADMA GOTUR, NEELA MANAGE, ANTHONY M. J. YEZER

The purpose of this paper is to analyze both theoretically and empirically the effect of selected government regulations on a high‐risk personal loan market. Unlike previous studies, which have generally relied on a loosely specified theory and then tested this theory with statewide aggregate data, our analysis is based on a more tightly specified model for individual loans which is then tested using statewide disaggregated data. The empirical results indicate that the regulatory effects are not only significant but consistent with our theoretical microeconomic model.

The People in Your Neighborhood: Social Interactions and Mutual Fund Portfolios

Published: 09/02/2014   |   DOI: 10.1111/jofi.12208

VERONIKA K. POOL, NOAH STOFFMAN, SCOTT E. YONKER

We find that socially connected fund managers have more similar holdings and trades. The overlap of funds whose managers reside in the same neighborhood is considerably higher than that of funds whose managers live in the same city but in different neighborhoods. These effects are larger when managers share a similar ethnic background, and are not explained by preferences. Valuable information is transmitted through these peer networks: a long‐short strategy composed of stocks purchased minus sold by neighboring managers delivers positive risk‐adjusted returns. Unlike prior empirical work, our tests disentangle the effects of social interactions from community effects.

Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Published: 03/18/2015   |   DOI: 10.1111/jofi.12273

RALPH S.J. KOIJEN, STIJN NIEUWERBURGH, MOTOHIRO YOGO

We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life‐cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long‐term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.

The Gains from Takeover Deregulation: Evidence from the End of Interstate Banking Restrictions

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00087

Yaron Brook, Robert Hendershott, Darrell Lee

This paper uses interstate banking deregulation to explore the benefits of takeover deregulation and how these benefits are distributed across different firms. We find large and significant abnormal returns around the Interstate Banking and Branching Efficiency Act of 1994 which imply it created $85 billion of value in the banking industry. Consistent with an active market for corporate control allowing beneficial consolidation and providing needed discipline, there is a strong negative relationship between banks' abnormal returns and their prior performance. Consistent with managerial entrenchment limiting takeover discipline, banks with higher insider ownership, lower outside block ownership, and/or less independent boards have lower abnormal returns.

The Resolution of Claims in Financial Distress the Case of Massey Ferguson

Published: 05/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02258.x

CARLISS Y. BALDWIN, SCOTT P. MASON

Stock Prices, Earnings, and Expected Dividends

Published: 07/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb04598.x

JOHN Y. CAMPBELL, ROBERT J. SHILLER

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871–1986), a vector‐autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving‐average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present‐value model of stock prices and for recent results that long‐horizon stock returns are highly forecastable.

Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Published: 08/14/2007   |   DOI: 10.1111/j.1540-6261.2007.01251.x

RANGARAJAN K. SUNDARAM, DAVID L. YERMACK

Though widely used in executive compensation, inside debt has been almost entirely overlooked by prior work. We initiate this research by studying CEO pension arrangements in 237 large capitalization firms. Among our findings are that CEO compensation exhibits a balance between debt and equity incentives; the balance shifts systematically away from equity and toward debt as CEOs grow older; annual increases in pension entitlements represent about 10% of overall CEO compensation, and about 13% for CEOs aged 61–65; CEOs with high debt incentives manage their firms conservatively; and pension compensation influences patterns of CEO turnover and cash compensation.

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

In Search of Distress Risk

Published: 11/11/2008   |   DOI: 10.1111/j.1540-6261.2008.01416.x

JOHN Y. CAMPBELL, JENS HILSCHER, JAN SZILAGYI

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small‐cap risk factors than stocks with low failure risk. These patterns are more pronounced for stocks with possible informational or arbitrage‐related frictions. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

The Trading Decision and Market Clearing under Transaction Price Uncertainty

Published: 03/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04935.x

THOMAS S. Y. HO, ROBERT A. SCHWARTZ, DAVID K. WHITCOMB

This paper models an individual's trading decision, given: (1) his/her demand function to hold shares of an asset, (2) his/her expectation on what the market clearing price will be, and (3) the design of the market which determines how orders will be translated into trades. The particular market design we consider is the batched trading (periodic call) regime. Assuming investors are distributed according to their propensities to hold shares, we model the aggregation of orders to obtain market clearing values of price and volume and to show the way in which, with trading friction, these solutions differ from Pareto efficient values. The importance of this analysis for various issues concerning market design is noted.

The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending

Published: 02/06/2015   |   DOI: 10.1111/jofi.12251

JUN (QJ) QIAN, PHILIP E. STRAHAN, ZHISHU YANG

In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank's internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information production and use.

Structuring Mortgages for Macroeconomic Stability

Published: 05/24/2021   |   DOI: 10.1111/jofi.13056

JOHN Y. CAMPBELL, NUNO CLARA, JOÃO F. COCCO

We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of borrowers and an infinitely lived risk‐averse representative lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable‐rate mortgage with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. The option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and enhances welfare. The cyclical properties of the contract are attractive to a risk‐averse lender so that the mortgage can be provided at a relatively low cost.

U.S. Banking Deregulation, Small Businesses, and Interstate Insurance of Personal Income

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01292.x

YULIYA DEMYANYK, CHARLOTTE OSTERGAARD, BENT E. SØRENSEN

We estimate the effects of deregulation of U.S. banking restrictions on interstate personal income insurance for the period 1970 to 2001. Interstate income insurance occurs when personal income reacts less than one‐to‐one to state‐specific output shocks. We find that insurance improved after banking deregulation, with a larger effect in states where small businesses are more important and on proprietors' income than on other components of personal income. Our explanation centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners.

Spending Less after (Seemingly) Bad News

Published: 04/29/2024   |   DOI: 10.1111/jofi.13325

MARK J. GARMAISE, YARON LEVI, HANNO LUSTIG

Using high‐frequency spending data, we show that household consumption displays excess sensitivity to salient macroeconomic news, even when the news is not real. When the announced local unemployment rate reaches a 12‐month maximum, local news coverage of unemployment increases and local consumers reduce their discretionary spending by 1.5% relative to consumers in areas with the same macroeconomic conditions. Low‐income households display greater excess sensitivity to salience. The decrease in spending is not later reversed. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.

Do Inventories Matter in Dealership Markets? Evidence from the London Stock Exchange

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00067

Oliver Hansch, Narayan Y. Naik, S. Viswanathan

Using London Stock Exchange data, we test the central implication of the canonical model of Ho and Stoll (1983) that relative inventory differences determine dealer behavior. We find that relative inventories explain which dealers obtain large trades and show that movements between best ask, best bid, and straddle are highly correlated with both standardized and relative inventory changes. We show that the mean reversion in inventories is highly nonlinear and increasing in inventory levels. We show that a key determinant of variations in interdealer trading is inventories and that interdealer trading plays an important role in managing large inventory positions.

Depositary Receipts, Country Funds, and the Peso Crash: The Intraday Evidence

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00303

Warren Bailey, Kalok Chan, Y. Peter Chung

We study the intraday impact of exchange rate news on emerging market American Depositary Receipts (ADRs) and closed‐end country funds during the 1994 Mexican peso crisis. Peso exchange‐rate changes affect prices and trading volumes of Latin American equities, and some closed‐end fund behavior is consistent with “noise trader” theories of small investors. However, there is no evidence that peso depreciation triggers a significant sell‐off of non‐Mexican securities or that other non‐Mexican trading patterns change at times of high peso news flow. Thus, the “Tequila Effect” is largely confined to price changes.

A Portfolio Approach to Estimating the Average Correlation Coefficient for the Constant Correlation Model

Published: 12/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02664.x

YASH P. ANEJA, RAMESH CHANDRA, ERDAL GUNAY

This paper presents a portfolio approach to estimating the average correlation coefficient of a group of stocks which are considered for portfolio analysis. The average correlation coefficient has been shown to produce a better estimate of the future correlation matrix than individual pairwise correlations. The advantage of the approach described here is that it does not require the estimation of pairwise correlations for estimating their average.