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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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.
Household Finance
Published: 08/03/2006 | DOI: 10.1111/j.1540-6261.2006.00883.x
JOHN Y. CAMPBELL
The study of household finance is challenging because household behavior is difficult to measure, and households face constraints not captured by textbook models. Evidence on participation, diversification, and mortgage refinancing suggests that many households invest effectively, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations and avoid financial strategies for which they feel unqualified. Some financial products involve a cross‐subsidy from naive to sophisticated households, and this can inhibit welfare‐improving financial innovation.
CEO Involvement in the Selection of New Board Members: An Empirical Analysis
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00168
Anil Shivdasani, David Yermack
We study whether CEO involvement in the selection of new directors influences the nature of appointments to the board. When the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Stock price reactions to independent director appointments are significantly lower when the CEO is involved in director selection. Our evidence may illuminate a mechanism used by CEOs to reduce pressure from active monitoring, and we find a recent trend of companies removing CEOs from involvement in director selection.
The Effects of Beta, Bid‐Ask Spread, Residual Risk, and Size on Stock Returns
Published: 06/01/1989 | DOI: 10.1111/j.1540-6261.1989.tb05067.x
YAKOV AMIHUD, HAIM MENDELSON
Merton's [26] recent extension of the CAPM proposed that asset returns are an increasing function of their beta risk, residual risk, and size and a decreasing function of the public availability of information about them. Associating the latter with asset liquidity and following Amihud and Mendelson's [2] proposition that asset returns increase with their illiquidity (measured by the bid‐ask spread), we jointly estimate the effects of these four factors on stock returns.
Analyzing the Tax Benefits from Employee Stock Options
Published: 07/16/2009 | DOI: 10.1111/j.1540-6261.2009.01480.x
ILONA BABENKO, YURI TSERLUKEVICH
Employees tend to exercise stock options when corporate taxable income is high, shifting corporate tax deductions to years with higher tax rates. If firms paid employees the same dollar value in wages instead of stock options, the average annual tax bill for large U.S. companies would increase by $12.6 million, or 9.8%. These direct tax benefits of options increase in the convexity of the tax function. In addition, profitable firms can realize indirect tax benefits because stock options increase debt capacity. Although tax minimization is probably not the main motive for option grants, firms with larger potential tax benefits grant more options.
Commodity Financialization and Information Transmission
Published: 06/14/2022 | DOI: 10.1111/jofi.13165
ITAY GOLDSTEIN, LIYAN YANG
We provide a model to understand the effects of commodity futures financialization on various market variables. We distinguish between financial speculators and financial hedgers and study their separate and combined effects on the informativeness of futures prices, the futures price bias, the comovement of futures prices with other markets, and the predictiveness of financial trading. We capture the interactions between commodity futures financialization and the real economy through spot prices and production decisions. A dynamic extension illustrates how key variables change over time in a period of acute financialization in a way that is consistent with observed empirical patterns.
Tax‐Loss Selling and the January Effect: Evidence from Municipal Bond Closed‐End Funds
Published: 01/11/2007 | DOI: 10.1111/j.1540-6261.2006.01011.x
LAURA T. STARKS, LI YONG, LU ZHENG
This paper provides direct evidence supporting the tax‐loss selling hypothesis as an explanation of the January effect. Examining turn‐of‐the‐year return and volume patterns for municipal bond closed‐end funds, which are held mostly by tax‐sensitive individual investors, we document a January effect for these funds, but not for their underlying assets. We provide evidence that this effect can be largely explained by tax‐loss selling activities at the previous year‐end. Moreover, we find that funds associated with brokerage firms display more tax‐loss selling behavior, suggesting that tax counseling plays a role.
Intermediated Investment Management
Published: 05/23/2011 | DOI: 10.1111/j.1540-6261.2011.01656.x
NEAL M. STOUGHTON, YOUCHANG WU, JOSEF ZECHNER
Intermediaries such as financial advisers serve as an interface between portfolio managers and investors. A large fraction of their compensation is often provided through kickbacks from the portfolio manager. We provide an explanation for the widespread use of intermediaries and kickbacks. Depending on the degree of investor sophistication, kickbacks are used either for price discrimination or aggressive marketing. We explore the effects of these arrangements on fund size, flows, performance, and investor welfare. Kickbacks allow higher management fees to be charged, thereby lowering net returns. Competition among active portfolio managers reduces kickbacks and increases the independence of advisory services.
Optimal Sequential Investment When Capital is Not Readily Reversible
Published: 06/01/1982 | DOI: 10.1111/j.1540-6261.1982.tb02222.x
CARLISS Y. BALDWIN
When investment opportunities arrive one at a time and are reviewed sequentially, a corporation's optimal policy differs from a standard net present value rule if the corporation exercises control over an industry state variable and control is costly. The first condition presupposes a degree of market power for the firm; the second occurs if corporate investment decisions are imperfectly reversible.
A Defense of Traditional Hypotheses about the Term Structure of Interest Rates
Published: 03/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04498.x
JOHN Y. CAMPBELL
Expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. I present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity. Furthermore, I argue that differences among expectations theories are second‐order effects of bond yield variability. I develop an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes.
A Transactions Data Test of Stock Index Futures Market Efficiency and Index Arbitrage Profitability
Published: 12/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04644.x
Y. PETER CHUNG
This paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for The Chicago Board of Trade's Major Market Index contracts. The spot value of the index is computed with transactions prices for the component shares of the index obtained from the Fitch database. The tests account for transaction costs, execution lags, and the uptick rule for short sales of stocks. Results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time.
Buyer–Supplier Relationships and the Stakeholder Theory of Capital Structure
Published: 09/10/2008 | DOI: 10.1111/j.1540-6261.2008.01403.x
SHANTANU BANERJEE, SUDIPTO DASGUPTA, YUNGSAN KIM
Firms in bilateral relationships are likely to produce or procure unique products—especially when they are in durable goods industries. Consistent with the arguments of Titman and Titman and Wessels, such firms are likely to maintain lower leverage. We compile a database of firms' principal customers (those that account for at least 10% of sales or are otherwise considered important for business) from the Business Information File of Compustat and find results consistent with the predictions of this theory.
Why Do Firms Evade Taxes? The Role of Information Sharing and Financial Sector Outreach
Published: 11/18/2013 | DOI: 10.1111/jofi.12123
THORSTEN BECK, CHEN LIN, YUE MA
Tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis. We show that firms in countries with better credit information–sharing systems and higher branch penetration evade taxes to a lesser degree. This effect is stronger for smaller firms, firms in smaller cities and towns, firms in industries relying more on external financing, and firms in industries and countries with greater growth potential. This effect is robust to instrumental variable analysis, controlling for firm fixed effects in a smaller panel data set of countries, and many other robustness tests.
Sentiment Trading and Hedge Fund Returns
Published: 04/08/2021 | DOI: 10.1111/jofi.13025
YONG CHEN, BING HAN, JING PAN
In the presence of sentiment fluctuations, arbitrageurs may engage in different strategies leading to dispersed sentiment exposures. We find that hedge funds in the top decile ranked by sentiment beta outperform those in the bottom decile by 0.59% per month on a risk‐adjusted basis, with the spread being larger among skilled funds. We also find that about 10% of hedge funds have sentiment timing skill that positively correlates with fund sentiment beta and contributes to fund performance. Our findings show that skilled hedge funds can earn high returns by predicting and exploiting sentiment changes rather than betting against mispricing.
CAPITAL ADEQUACY AND RECOVERIES FROM FAILED BANKS
Published: 12/01/1975 | DOI: 10.1111/j.1540-6261.1975.tb01063.x
Yair E. Orgler