The Journal of Finance

False (and Missed) Discoveries in Financial Economics

Published: 05/19/2020   |   DOI: 10.1111/jofi.12951

CAMPBELL R. HARVEY, YAN LIU

Multiple testing plagues many important questions in finance such as fund and factor selection. We propose a new way to calibrate both Type I and Type II errors. Next, using a double‐bootstrap method, we establish a t‐statistic hurdle that is associated with a specific false discovery rate (e.g., 5%). We also establish a hurdle that is associated with a certain acceptable ratio of misses to false discoveries (Type II error scaled by Type I error), which effectively allows for differential costs of the two types of mistakes. Evaluating current methods, we find that they lack power to detect outperforming managers.

Number of Shareholders and Stock Prices: Evidence from Japan

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00141

Yakov Amihud, Haim Mendelson, Jun Uno

Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit—the number of shares in a “round lot”—which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders.

THE RELATIONSHIP BETWEEN TAKE‐OVER ACTIVITY AND SHARE VALUATION

Published: 12/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01052.x

A. R. Appleyard, G. K. Yarrow

THE COST OF CAPITAL AND VALUATION OF A TWO‐COUNTRY FIRM: COMMENT

Published: 09/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03334.x

Michael A. Goldberg, Wayne Y. Lee

Prologue to a Unified Portfolio Theory

Published: 05/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03585.x

HERBERT F. AYRES, JOHN Y. BARRY

Dividend Surprises Inferred from Option and Stock Prices

Published: 09/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04675.x

SASSON BAE‐YOSEF, ODED H. SARIG

This paper introduces a new method to measure the unexpected component of dividend announcements. While measures used previously were based on various arbitrary models of dividend expectations, our suggested method compares the reaction of stock and option prices to dividend announcements. Our measure is compared to commonly used model‐based measures, to a Box‐Jenkins time‐series‐based measure, and to a Value‐Line Investor Survey‐based measure of dividend surprises. The new measure is more highly correlated with the market's reaction to the announcements than are alternative measures of dividend surprises. The new measure is also shown to be insensitive to the extent to which the options used to identify unexpected dividend announcements are in‐ or out‐of‐the‐money.

Value‐Enhancing Capital Budgeting and Firm‐specific Stock Return Variation

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00627.x

Art Durnev, Randall Morck, Bernard Yeung

We document a robust cross‐sectional positive association across industries between a measure of the economic efficiency of corporate investment and the magnitude of firm‐specific variation in stock returns. This finding is interesting for two reasons, neither of which is a priori obvious. First, it adds further support to the view that firm‐specific return variation gauges the extent to which information about the firm is quickly and accurately reflected in share prices. Second, it can be interpreted as evidence that more informative stock prices facilitate more efficient corporate investment.

Common Risk Factors in Cryptocurrency

Published: 02/11/2022   |   DOI: 10.1111/jofi.13119

YUKUN LIU, ALEH TSYVINSKI, XI WU

We find that three factors—cryptocurrency market, size, and momentum—capture the cross‐sectional expected cryptocurrency returns. We consider a comprehensive list of price‐ and market‐related return predictors in the stock market and construct their cryptocurrency counterparts. Ten cryptocurrency characteristics form successful long‐short strategies that generate sizable and statistically significant excess returns, and we show that all of these strategies are accounted for by the cryptocurrency three‐factor model. Lastly, we examine potential underlying mechanisms of the cryptocurrency size and momentum effects.

Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden

Published: 04/08/2024   |   DOI: 10.1111/jofi.13341

SYLVAIN CATHERINE, PAOLO SODINI, YAPEI ZHANG

Using Swedish administrative panel data, we document that workers facing higher left‐tail income risk when equity markets perform poorly have lower portfolio equity share. In line with theory, the relationship between cyclical skewness and stock holdings increases with the share of human capital in a worker's total wealth and vanishes as workers get closer to retirement. Cyclical skewness also predicts portfolio differences within pairs of identical twins. Our findings show that households hedge against correlated tail risks, an important mechanism in asset pricing and portfolio choice models.

Explaining the Poor Performance of Consumption‐based Asset Pricing Models

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00310

John Y. Campbell, John H. Cochrane

We show that the external habit‐formation model economy of Campbell and Cochrane (1999) can explain why the Capital Asset Pricing Model (CAPM) and its extensions are betterapproximate asset pricing models than is the standard onsumption‐based model. The model economy produces time‐varying expected eturns, tracked by the dividend–price ratio. Portfolio‐based models capture some of this variation in state variables, which a state‐independent function of consumption cannot capture. Therefore, though the consumption‐based model and CAPM are both perfect conditional asset pricing models, the portfolio‐based models are better approximate unconditional asset pricing models.

THE STABILITY OF THE DEMAND FOR MONEY FUNCTION, 1900–1974

Published: 06/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb01998.x

G. S. Laumas, Y. P. Mehra

THE INTEREST‐INDUCED WEALTH EFFECT AND THE BEHAVIOR OF REAL AND NOMINAL INTEREST RATES: A COMMENT

Published: 06/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb02005.x

Laurence H. Meyer, Jess B. Yawitz

Debt, Taxes and Leasing A Note

Published: 12/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb02207.x

R. A. BREALEY, C. M. YOUNG

This paper discusses the implications of Miller's paper “Debt and Taxes” for the valuation of leases. It shows that if Miller's equilibrium holds, leasing is only likely to dominate debt and equity for companies in temporary nontaxpaying positions.

Stock Price Dynamics and Firm Size: An Empirical investigation

Published: 12/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04693.x

YIN‐WONG CHEUNG, LILIAN K. NG

We show that after controlling for the effects of bid‐ask spreads and trading volume the conditional future volatility of equity returns is negatively related to the level of stock price. This “leverage effect” is stronger for small, as compared to large, firms. We also document that while the essential characteristics of the relations between stock price dynamics and firm size are stable, the strengths of the relationships appear to change over time.

Signalling and the Pricing of New Issues

Published: 06/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb05063.x

MARK GRINBLATT, CHUAN YANG HWANG

This paper develops a signalling model with two signals, two attributes, and a continuum of signal levels and attribute types to explain new issue underpricing. Both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable “intrinsic” value of the firm and the variance of its cash flows. Many of the model's comparative statics results are novel, empirically testable, and consistent with the existing empirical evidence on new issues. In particular, the degree of underpricing, which can be inferred from observable variables, is positively related to the firm's post‐issue share price.

Risk Management and Firm Value: Evidence from Weather Derivatives

Published: 05/13/2013   |   DOI: 10.1111/jofi.12061

FRANCISCO PÉREZ‐GONZÁLEZ, HAYONG YUN

This paper shows that active risk management policies lead to an increase in firm value. To identify the effect of hedging and to overcome endogeneity concerns, we exploit the introduction of weather derivatives as an exogenous shock to firms’ ability to hedge weather risks. This innovation disproportionately benefits weather‐sensitive firms, irrespective of their future investment opportunities. Using this natural experiment and data from energy firms, we find that derivatives lead to higher valuations, investments, and leverage. Overall, our results demonstrate that risk management has real consequences on firm outcomes.

Market Maker Quotation Behavior and Pretrade Transparency

Published: 05/06/2003   |   DOI: 10.1111/1540-6261.00565

Yusif Simaan, Daniel G. Weaver, David K. Whitcomb

We examine the impact of differing levels of pretrade transparency on the quotation behavior of Nasdaq market makers. We find that market makers are more likely to quote on odd ticks, and to actively narrow the spread, when they can do so anonymously by posting limit orders on Electronic Communication Networks (ECNs). From a public policy perspective, our findings suggest that making the level of pretrade transparency on Nasdaq more opaque by allowing anonymous quotes could improve price competition and narrow spreads further.

Role of Managerial Incentives and Discretion in Hedge Fund Performance

Published: 09/28/2009   |   DOI: 10.1111/j.1540-6261.2009.01499.x

VIKAS AGARWAL, NAVEEN D. DANIEL, NARAYAN Y. NAIK

Using a comprehensive hedge fund database, we examine the role of managerial incentives and discretion in hedge fund performance. Hedge funds with greater managerial incentives, proxied by the delta of the option‐like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high‐water mark provisions in the incentive contracts, are associated with superior performance. The incentive fee percentage rate by itself does not explain performance. We also find that funds with a higher degree of managerial discretion, proxied by longer lockup, notice, and redemption periods, deliver superior performance. These results are robust to using alternative performance measures and controlling for different data‐related biases.

Luck versus Skill in the Cross Section of Mutual Fund Returns: Reexamining the Evidence

Published: 03/27/2022   |   DOI: 10.1111/jofi.13123

CAMPBELL R. HARVEY, YAN LIU

While Kosowski et al. (2006, Journal of Finance 61, 2551–2595) and Fama and French (2010, Journal of Finance 65, 1915–1947) both evaluate whether mutual funds outperform, their conclusions are very different. We reconcile their findings. We show that the Fama‐French method suffers from an undersampling problem that leads to a failure to reject the null hypothesis of zero alpha, even when some funds generate economically large risk‐adjusted returns. In contrast, Kosowski et al. substantially overreject the null hypothesis, even when all funds have a zero alpha. We present a novel bootstrapping approach that should be useful to future researchers choosing between the two approaches.

ANALYSIS OF THE LEASE‐OR‐BUY DECISION: COMMENT

Published: 09/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01427.x

Baruch Lev, Yair E. Orgler