The Journal of Finance

Networking as a Barrier to Entry and the Competitive Supply of Venture Capital

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01554.x

YAEL V. HOCHBERG, ALEXANDER LJUNGQVIST, YANG LU

We examine whether strong networks among incumbent venture capitalists (VCs) in local markets help restrict entry by outside VCs, thus improving incumbents' bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one‐standard deviation increase in network ties among incumbents reducing entry by approximately one‐third. Entrants with established ties to target‐market incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.

Telling from Discrete Data Whether the Underlying Continuous‐Time Model Is a Diffusion

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00489

Yacine Aït‐Sahalia

Can discretely sampled financial data help us decide which continuous‐time models are sensible? Diffusion processes are characterized by the continuity of their sample paths. This cannot be verified from the discrete sample path: Even if the underlying path were continuous, data sampled at discrete times will always appear as a succession of jumps. Instead, I rely on the transition density to determine whether the discontinuities observed are the result of the discreteness of sampling, or rather evidence of genuine jump dynamics for the underlying continuous‐time process. I then focus on the implications of this approach for option pricing models.

AN APPRAISAL OF CORPORATE WORKING FUND REQUIREMENTS*

Published: 12/01/1953   |   DOI: 10.1111/j.1540-6261.1953.tb01190.x

Eugene C. Yehle

Whom You Know Matters: Venture Capital Networks and Investment Performance

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2007.01207.x

YAEL V. HOCHBERG, ALEXANDER LJUNGQVIST, YANG LU

Many financial markets are characterized by strong relationships and networks, rather than arm's‐length, spot market transactions. We examine the performance consequences of this organizational structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better‐networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better‐networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.

Long‐Run Risk: Is It There?

Published: 03/29/2022   |   DOI: 10.1111/jofi.13126

YUKUN LIU, BEN MATTHIES

This paper documents the existence of a persistent component in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons—our measure explains between 23% and 38% of cumulative future consumption growth at the five‐year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross section and our one‐factor model outperforms many benchmark macro‐ and return‐based multifactor models.

FINANCIAL STRUCTURE AND THE THEORY OF PRODUCTION: COMMENT

Published: 12/01/1971   |   DOI: 10.1111/j.1540-6261.1971.tb01759.x

Yutaka Imai

Asymmetric Price Movements and Borrowing Constraints: A Rational Expectations Equilibrium Model of Crises, Contagion, and Confusion

Published: 07/20/2005   |   DOI: 10.1111/j.1540-6261.2005.00733.x

KATHY YUAN

This study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints. Consistent with empirical observations, the model finds: (1) Crises can be caused by small shocks to fundamentals; (2) market return distributions are asymmetric; and (3) correlations among asset returns tend to increase during crashes. The model also predicts: (1) Crises and contagion are likely to occur after small shocks in the intermediate price region; (2) the skewness of asset price distributions increases with information asymmetry and borrowing constraints; and (3) crises can spread through investor borrowing constraints.

What Drives the Cross‐Section of Credit Spreads?: A Variance Decomposition Approach

Published: 05/23/2017   |   DOI: 10.1111/jofi.12524

YOSHIO NOZAWA

I decompose the variation of credit spreads for corporate bonds into changing expected returns and changing expectation of credit losses. Using a log‐linearized pricing identity and a vector autoregression applied to microlevel data from 1973 to 2011, I find that expected returns contribute to the cross‐sectional variance of credit spreads nearly as much as expected credit loss does. However, most of the time‐series variation in credit spreads for the market portfolio corresponds to risk premiums.

Luxury Goods and the Equity Premium

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00721.x

YACINE AÏT‐SAHALIA, JONATHAN A. PARKER, MOTOHIRO YOGO

This paper evaluates the equity premium using novel data on the consumption of luxury goods. Specifying utility as a nonhomothetic function of both luxury and basic consumption goods, we derive pricing equations and evaluate the risk of holding equity. Household survey and national accounts data mostly reflect basic consumption, and therefore overstate the risk aversion necessary to match the observed equity premium. The risk aversion implied by the consumption of luxury goods is more than an order of magnitude less than that implied by national accounts data. For the very rich, the equity premium is much less of a puzzle.

The Optimal Size of Hedge Funds: Conflict between Investors and Fund Managers

Published: 04/15/2016   |   DOI: 10.1111/jofi.12413

CHENGDONG YIN

This study examines whether the standard compensation contract in the hedge fund industry aligns managers’ incentives with investors’ interests. I show empirically that managers’ compensation increases when fund assets grow, even when diseconomies of scale in fund performance exist. Thus, managers’ compensation is maximized at a much larger fund size than is optimal for fund performance. However, to avoid capital outflows, managers are also motivated to restrict fund growth to maintain style‐average performance. Similarly, fund management firms have incentives to collect more capital for all funds under management, including their flagship funds, even at the expense of fund performance.

Remuneration, Retention, and Reputation Incentives for Outside Directors

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00699.x

DAVID YERMACK

I study incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Previous research has only shown these relations to apply under limited circumstances such as financial distress. Together these incentive mechanisms provide directors with wealth increases of approximately 11 cents per $1,000 rise in firm value. Although smaller than the performance sensitivities of CEOs, outside directors' incentives imply a change in wealth of about $285,000 for a 1 standard deviation (SD) change in typical firm performance. Cross‐sectional patterns of director equity awards conform to agency and financial theories.

The Real Determinants of Asset Sales

Published: 09/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01396.x

LIU YANG

I develop a dynamic structural model in which a firm makes rational decisions to buy or sell assets in the presence of productivity shocks. By identifying equilibrium asset prices, the model also examines the aggregate asset sales activity over the business cycle. It shows that changes in productivity, rather than productivity levels, affect decisions: Firms with rising productivity buy assets and firms with falling productivity downsize (“rising buys falling”). As such, industries in which firms have less persistent and more volatile productivity experience greater asset reallocation. Using plant‐level data from Longitudinal Research Database (LRD), I find strong support for the model's predictions.

Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00318

John Y. Campbell, Martin Lettau, Burton G. Malkiel, Yexiao Xu

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period from 1962 to 1997 there has been a noticeable increase in firm‐level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, whereas the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.

Short‐Sales Constraints and Price Discovery: Evidence from the Hong Kong Market

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01270.x

ERIC C. CHANG, JOSEPH W. CHENG, YINGHUI YU

Short‐sales practices in the Hong Kong stock market are unique in that only stocks on a list of designated securities can be sold short. By analyzing the price effects following the addition of individual stocks to the list, we find that short‐sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists. These findings are consistent with Miller's (1977) intuition and other optimism models. We also document higher volatility and less positive skewness of individual stock returns when short sales are allowed.

Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide

Published: 11/26/2012   |   DOI: 10.1111/jofi.12012

VIKAS AGARWAL, WEI JIANG, YUEHUA TANG, BAOZHONG YANG

This paper studies the “confidential holdings” of institutional investors, especially hedge funds, where the quarter‐end equity holdings are disclosed with a delay through amendments to Form 13F and are usually excluded from the standard databases. Funds managing large risky portfolios with nonconventional strategies seek confidentiality more frequently. Stocks in these holdings are disproportionately associated with information‐sensitive events or share characteristics indicating greater information asymmetry. Confidential holdings exhibit superior performance up to 12 months, and tend to take longer to build. Together the evidence supports private information and the associated price impact as the dominant motives for confidentiality.

An Analysis of Bidding in the Japanese Government Bond Auctions

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.305342

Yasushi Hamao, Narasimhan Jegadeesh

We examine the bidding patterns and auction profits in the Japanese Government Bond (JGB) auctions and empirically test the predictions of auction theory. We find that the average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are insignificant in determining auction profits. The winning shares of the U.S. dealers are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese dealers tends to be correlated with the share of winnings of their compatriot dealers but a similar relation is not found for U.S. dealers.

Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers

Published: 03/09/2006   |   DOI: 10.1111/j.1540-6261.2006.00858.x

YANBO JIN, PHILIPPE JORION

This paper studies the hedging activities of 119 U.S. oil and gas producers from 1998 to 2001 and evaluates their effect on firm value. Theories of hedging based on market imperfections imply that hedging should increase the firm's market value (MV). To test this hypothesis, we collect detailed information on the extent of hedging and on the valuation of oil and gas reserves. We verify that hedging reduces the firm's stock price sensitivity to oil and gas prices. Contrary to previous studies, however, we find that hedging does not seem to affect MVs for this industry.

Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules

Published: 08/14/2007   |   DOI: 10.1111/j.1540-6261.2007.01257.x

VIDHI CHHAOCHHARIA, YANIV GRINSTEIN

The 2001 to 2002 corporate scandals led to the Sarbanes–Oxley Act and to various amendments to the U.S. stock exchanges' regulations. We find that the announcement of these rules has a significant effect on firm value. Firms that are less compliant with the provisions of the rules earn positive abnormal returns compared to firms that are more compliant. We also find variation in the response across firm size. Large firms that are less compliant earn positive abnormal returns but small firms that are less compliant earn negative abnormal returns, suggesting that some provisions are detrimental to small firms.

Did Structured Credit Fuel the LBO Boom?

Published: 07/19/2011   |   DOI: 10.1111/j.1540-6261.2011.01667.x

ANIL SHIVDASANI, YIHUI WANG

The leveraged buyout (LBO) boom of 2004 to 2007 was fueled by growth in collateralized debt obligations (CDOs) and other forms of securitization. Banks active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through structured credit markets did not lead to worse LBOs, overpayment, or riskier deal structures. Securitization markets altered banks' access to capital, affected their lending policies, and fueled the recent LBO boom.

The Interim Trading Skills of Institutional Investors

Published: 03/21/2011   |   DOI: 10.1111/j.1540-6261.2010.01643.x

ANDY PUCKETT, XUEMIN (STERLING) YAN

Using a large proprietary database of institutional trades, this paper examines the interim (intraquarter) trading skills of institutional investors. We find strong evidence that institutional investors earn significant abnormal returns on their trades within the trading quarter and that interim trading performance is persistent. After transactions costs, our estimates suggest that interim trading skills contribute between 20 and 26 basis points per year to the average fund's abnormal performance. Our findings also indicate that any trading skills documented by previous studies that use quarterly data are biased downwards because of their inability to account for interim trades.