The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Information Cascades and Threshold Implementation: Theory and an Application to Crowdfunding
Published: 11/05/2023 | DOI: 10.1111/jofi.13294
LIN WILLIAM CONG, YIZHOU XIAO
Economic interactions often involve sequential actions, observational learning, and contingent project implementation. We incorporate all‐or‐nothing thresholds in a canonical model of information cascades. Early supporters effectively delegate their decisions to a “gatekeeper,” resulting in unidirectional cascades without herding on rejections. Project proposers can consequently charge higher prices. Proposal feasibility, project selection, and information aggregation all improve, even when agents can wait. Equilibrium outcomes depend on crowd size, and project implementation and information aggregation achieve efficiency in the large‐crowd limit. Our key insights hold under thresholds in dollar amounts and alternative equilibrium selection, among other model extensions.
S&P 500 Index Additions and Earnings Expectations
Published: 09/11/2003 | DOI: 10.1111/1540-6261.00589
Diane K. Denis, John J. McConnell, Alexei V. Ovtchinnikov, Yun Yu
Stock price increases associated with addition to the S&P 500 Index have been interpreted as evidence that demand curves for stocks slope downward. A key premise underlying this interpretation is that Index inclusion provides no new information about companies' future prospects. We examine this premise by analyzing analysts' earnings per share (eps) forecasts around Index inclusion and by comparing postinclusion realized earnings to preinclusion forecasts. Relative to benchmark companies, companies newly added to the Index experience significant increases in eps forecasts and significant improvements in realized earnings. These results indicate that S&P Index inclusion is not an information‐free event.
Institutional Holdings and Payout Policy
Published: 05/03/2005 | DOI: 10.1111/j.1540-6261.2005.00765.x
YANIV GRINSTEIN, RONI MICHAELY
We examine the relation between institutional holdings and payout policy in U.S. public firms. We find that payout policy affects institutional holdings. Institutions avoid firms that do not pay dividends. However, among dividend‐paying firms they prefer firms that pay fewer dividends. Our evidence indicates that institutions prefer firms that repurchase shares, and regular repurchasers over nonregular repurchasers. Higher institutional holdings or a concentration of holdings do not cause firms to increase their dividends, their repurchases, or their total payout. Our results do not support models that predict that high dividends attract institutional clientele, or models that predict that institutions cause firms to increase payout.
OUTLOOK FOR U.S. TREASURY SECURITIES
Published: 05/01/1962 | DOI: 10.1111/j.1540-6261.1962.tb04273.x
C. Richard Youngdahl
Depositors' Welfare, Deposit Insurance, and Deregulation
Published: 07/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb05024.x
YUK‐SHEE CHAN, KING‐TIM MAK
We develop an analytical model to address the question of optimal deposit insurance policy and to examine the impact of deregulation on depositors' welfare and the soundness of the insurance system. We find that the optimal level of regulation depends critically on the functional relationship between risk and return. We show that in general deregulation of bank activities and/or of deposit rate ceilings will in volve tradeoff between depositors' welfare and the soundness of the insurance system. Our analysis also indicates that risk‐sensitive premium and capital requirement schedules may not be efficient in managing the risk of banks.
Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital
Published: 02/20/2019 | DOI: 10.1111/jofi.12761
PATRICK BOLTON, NENG WANG, JINQIANG YANG
A risk‐averse entrepreneur with access to a profitable venture needs to raise funds from investors. She cannot indefinitely commit her human capital to the venture, which limits the firm's debt capacity, distorts investment and compensation, and constrains the entrepreneur's risk sharing. This puts dynamic liquidity and state‐contingent risk allocation at the center of corporate financial management. The firm balances mean‐variance investment efficiency and the preservation of financial slack. We show that in general the entrepreneur's net worth is overexposed to idiosyncratic risk and underexposed to systematic risk. These distortions are greater the closer the firm is to exhausting its debt capacity.
Survival Bias and the Equity Premium Puzzle
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00486
Haitao Li, Yuewu Xu
Previous authors have raised the concern that there could be serious survival bias in the observed U.S. equity premium. Contrary to conventional wisdom, we argue that the survival bias in the U.S. data is unlikely to be significant. To reach this conclusion, we introduce a general framework for modeling survival and derive a mathematical relationship between the ex ante survival probability and the average survival bias. This relationship reveals the fundamental difficulty facing the survival argument: High survival bias requires an ex ante probability of market failure, which seems unrealistically high given the history of world financial markets.
A MODEL OF WARRANT PRICING IN A DYNAMIC MARKET
Published: 12/01/1970 | DOI: 10.1111/j.1540-6261.1970.tb00867.x
Andrew H. Y. Chen
THE ERRONEOUS MEC FUNCTION: COMMENT
Published: 03/01/1972 | DOI: 10.1111/j.1540-6261.1972.tb00631.x
Yutaka Imai, William Nelson
Trading Mechanisms and Stock Returns: An Empirical Investigation
Published: 07/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb04567.x
YAKOV AMIHUD, HAIM MENDELSON
This paper examines the effects of the mechanism by which securities are traded on their price behavior. We compare the behavior of open‐to‐open and close‐to‐close returns on NYSE stocks, given the differences in execution methods applied in the opening and closing transactions. Opening returns are found to exhibit greater dispersion, greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns. We study the effects of the bid‐ask spread and the price‐adjustment process on the estimated return variances and covariances and discuss the associated biases. We conclude that the trading mechanism has a significant effect on stock price behavior.
Feedback Effects and Asset Prices
Published: 07/19/2008 | DOI: 10.1111/j.1540-6261.2008.01378.x
EMRE OZDENOREN, KATHY YUAN
Feedback effects from asset prices to firm cash flows have been empirically documented. This finding raises a question for asset pricing: How are asset prices determined if price affects fundamental value, which in turn affects price? In this environment, by buying assets that others are buying, investors ensure high future cash flows for the firm and subsequent high returns for themselves. Hence, investors have an incentive to coordinate, which may generate self‐fulfilling beliefs and multiple equilibria. Using insights from global games, we pin down investors' beliefs, analyze equilibrium prices, and show that strong feedback leads to higher excess volatility.
CEO Compensation and Board Structure
Published: 01/23/2009 | DOI: 10.1111/j.1540-6261.2008.01433.x
VIDHI CHHAOCHHARIA, YANIV GRINSTEIN
In response to corporate scandals in 2001 and 2002, major U.S. stock exchanges issued new board requirements to enhance board oversight. We find a significant decrease in CEO compensation for firms that were more affected by these requirements, compared with firms that were less affected, taking into account unobservable firm effects, time‐varying industry effects, size, and performance. The decrease in compensation is particularly pronounced in the subset of affected firms with no outside blockholder on the board and in affected firms with low concentration of institutional investors. Our results suggest that the new board requirements affected CEO compensation decisions.
A Theory of Zombie Lending
Published: 04/06/2021 | DOI: 10.1111/jofi.13022
YUNZHI HU, FELIPE VARAS
An entrepreneur borrows from a relationship bank or the market. The bank has a higher cost of capital but produces private information over time. While the entrepreneur accumulates reputation as the lending relationship continues, asymmetric information is also developed between the bank/entrepreneur and the market. In this setting, zombie lending is inevitable: Once the entrepreneur becomes sufficiently reputable, the bank will roll over loans even after learning bad news, for the prospect of future market financing. Zombie lending is mitigated when the entrepreneur faces financial constraints. Finally, the bank stops producing information too early if information production is costly.