The Journal of Finance

The Limits of p‐Hacking: Some Thought Experiments

Published: 04/30/2021   |   DOI: 10.1111/jofi.13036

ANDREW Y. CHEN

Suppose that the 300+ published asset pricing factors are all spurious. How much p‐hacking is required to produce these factors? If 10,000 researchers generate eight factors every day, it takes hundreds of years. This is because dozens of published t‐statistics exceed 6.0, while the corresponding p‐value is infinitesimal, implying an astronomical amount of p‐hacking in a general model. More structure implies that p‐hacking cannot address ≈100 published t‐statistics that exceed 4.0, as they require an implausibly nonlinear preference for t‐statistics or even more p‐hacking. These results imply that mispricing, risk, and/or frictions have a key role in stock returns.

Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00323

Yihong Xia

This paper examines the effects of uncertainty about the stock return predictability on optimal dynamic portfolio choice in a continuous time setting for a longhorizon investor. Uncertainty about the predictive relation affects the optimal portfolio choice through dynamic learning, and leads to a state‐dependent relation between the optimal portfolio choice and the investment horizon. There is substantial market timing in the optimal hedge demands, which is caused by stochastic covariance between stock return and dynamic learning. The opportunity cost of ignoring predictability or learning is found to be quite substantial.

A Comparison of Centralized and Fragmented Markets with Costly Search

Published: 05/03/2005   |   DOI: 10.1111/j.1540-6261.2005.00770.x

XIANGKANG YIN

How does quotation transparency affect financial market performance? Biais's irrelevance proposition in 1993 shows that centralized markets yield the same expected bid–ask spreads as fragmented markets, other things equal. However, de Frutos and Manzano demonstrated in 2002 that expected spreads in fragmented markets are smaller and market participants prefer to trade in fragmented markets. This paper introduces liquidity traders' costs of searching for a better quote into the Biais model and derives opposite conclusions to these previous studies: expected spreads in centralized markets are smaller and liquidity traders prefer centralized markets, while market makers prefer fragmented markets.

Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions

Published: 08/12/2005   |   DOI: 10.1111/j.1540-6261.2005.00784.x

YUANZHI LUO

I find that the market reaction to a merger and acquisition (M&A) announcement predicts whether the companies later consummate the deal. The relation cannot be explained by the market's anticipation of the closing decision or its perception of the deal quality at the announcement. Merging companies appear to extract information from the market reaction and later consider it in closing the deal. Furthermore, the relation varies with deal characteristics, suggesting that companies seem to have a higher incentive to learn from the market when canceling the announced deal is easier or when the market has more information that the companies do not know.

Nonfinancial Firms as Cross‐Market Arbitrageurs

Published: 08/09/2019   |   DOI: 10.1111/jofi.12837

YUERAN MA

I demonstrate that nonfinancial corporations act as cross‐market arbitrageurs in their own securities. Firms use one type of security to replace another in response to shifts in relative valuations, inducing negatively correlated financing flows in different markets. Net equity repurchases and net debt issuance both increase when expected excess returns on debt are particularly low, or when expected excess returns on equity are relatively high. Credit valuations affect equity financing as much as equity valuations do, and vice versa. Cross‐market corporate arbitrage is most prevalent among large, unconstrained firms, and helps account for aggregate financing patterns.

A PORTFOLIO—BALANCE MODEL OF CORPORATE WORKING CAPITAL

Published: 05/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb04866.x

Edward E. Yardeni

On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information

Published: 12/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb03840.x

YUK‐SHEE CHAN

This paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information. We consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions, about which the investors are imperfectly informed. It is shown that when all investors have positive search costs, the entrepreneurs are induced to offer the unacceptable inferior projects (“lemons” only), and the investors will not enter the venture capital market, but put their funds in other low return investments–an undesirable allocation of resources.

BOOTSTRAP INFLATION

Published: 03/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb03200.x

Leland Yeager

Do Bank Relationships Affect the Firm's Underwriter Choice in the Corporate‐Bond Underwriting Market?

Published: 05/03/2005   |   DOI: 10.1111/j.1540-6261.2005.00761.x

AYAKO YASUDA

This paper studies the effect of bank relationships on underwriter choice in the U.S. corporate‐bond underwriting market following the 1989 commercial‐bank entry. I find that bank relationships have positive and significant effects on a firm's underwriter choice, over and above their effects on fees. This result is sharply stronger for junk‐bond issuers and first‐time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect.

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.

Corporate Scandals and Household Stock Market Participation

Published: 02/19/2016   |   DOI: 10.1111/jofi.12399

MARIASSUNTA GIANNETTI, TRACY YUE WANG

We show that, after the revelation of corporate fraud in a state, household stock market participation in that state decreases. Households decrease holdings in fraudulent as well as nonfraudulent firms, even if they do not hold stocks in fraudulent firms. Within a state, households with more lifetime experience of corporate fraud hold less equity. Following the exogenous increase in fraud revelation due to Arthur Andersen's demise, states with more Arthur Andersen clients experience a larger decrease in stock market participation. We provide evidence that the documented effect is likely to reflect a loss of trust in the stock market.

ECONOMIC ADJUSTMENTS AMONG NATIONS*

Published: 03/01/1961   |   DOI: 10.1111/j.1540-6261.1961.tb02788.x

Theodore O. Yntema

EXTERNALITIES AND RISKY INVESTMENTS

Published: 09/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03316.x

Jess B. Yawitz

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.

AN INTEGRATION OF NEOCLASSICAL THEORY OF OPTIMAL CAPITAL ACCUMULATION AND CORPORATE FINANCIAL THEORIES*

Published: 06/01/1972   |   DOI: 10.1111/j.1540-6261.1972.tb01004.x

Yutaka Imai

Stochastic Choice in Insurance and Risk Sharing: A Comment

Published: 06/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02519.x

YORAM KROLL

Counterparty Risk and the Pricing of Defaultable Securities

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00389

Robert A. Jarrow, Fan Yu

Motivated by recent financial crises in East Asia and the United States where the downfall of a small number of firms had an economy‐wide impact, this paper generalizes existing reduced‐form models to include default intensities dependent on the default of a counterparty. In this model, firms have correlated defaults due not only to an exposure to common risk factors, but also to firm‐specific risks that are termed “counterparty risks.” Numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps.