The Journal of Finance

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

Labor Mobility: Implications for Asset Pricing

Published: 01/16/2014   |   DOI: 10.1111/jofi.12141

ANDRÉS DONANGELO

Labor mobility is the flexibility of workers to walk away from an industry in response to better opportunities. I develop a model in which labor flows make bad times worse for shareholders who are left with capital that is less productive. The model shows that firms face greater operating leverage by providing flexibility to mobile workers. I construct an empirical measure of labor mobility consistent with the model and document an economically significant cross‐sectional relation between mobility, operating leverage, and stock returns. I find that firms in mobile industries earn returns over 5% higher than those in less mobile industries.

Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01361.x

ANDRES ALMAZAN, SANJAY BANERJI, ADOLFO DE MOTTA

We provide a theory of informal communication—cheap talk—between firms and capital markets that incorporates the role of agency conflicts between managers and shareholders. The analysis suggests that a policy of discretionary disclosure that encourages managers to attract the market's attention when the firm is substantially undervalued can create shareholder value. The theory also relates the credibility of managerial announcements to the use of stock‐based compensation, the presence of informed trading, and the liquidity of the stock. Our results are consistent with the existence of positive announcement effects produced by apparently innocuous corporate events (e.g., stock dividends, name changes).

Model Comparison with Transaction Costs

Published: 03/20/2023   |   DOI: 10.1111/jofi.13225

ANDREW DETZEL, ROBERT NOVY‐MARX, MIHAIL VELIKOV

Failing to account for transaction costs materially impacts inferences drawn when evaluating asset pricing models, biasing tests in favor of those employing high‐cost factors. Ignoring transaction costs, Hou, Xue, and Zhang (2015, Review of Financial Studies, 28, 650–705) q‐factor model and Barillas and Shanken (2018, TheJournal of Finance, 73, 715–754) six‐factor models have high maximum squared Sharpe ratios and small alphas across 205 anomalies. They do not, however, come close to spanning the achievable mean‐variance efficient frontier. Accounting for transaction costs, the Fama and French (2015, Journal of Financial Economics, 116, 1–22; 2018, Journal of Financial Economics, 128, 234–252) five‐factor model has a significantly higher squared Sharpe ratio than either of these alternative models, while variations employing cash profitability perform better still.

Which Investors Fear Expropriation? Evidence from Investors' Portfolio Choices

Published: 05/16/2006   |   DOI: 10.1111/j.1540-6261.2006.00879.x

MARIASSUNTA GIANNETTI, ANDREI SIMONOV

Using a data set that provides unprecedented detail on investors' stockholdings, we analyze whether investors take the quality of corporate governance into account when selecting stocks. We find that all categories of investors (domestic and foreign, institutional and small individual) who generally enjoy only security benefits are reluctant to invest in companies with weak corporate governance. In contrast, individuals connected with company insiders are more likely to invest in weak corporate governance companies. These findings suggest that it is important to distinguish between investors who enjoy private benefits or access private information, and investors who enjoy only security benefits.

The Limits of Arbitrage

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03807.x

Andrei Shleifer, Robert W. Vishny

Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.

Financial Protectionism? First Evidence

Published: 06/20/2014   |   DOI: 10.1111/jofi.12184

ANDREW K. ROSE, TOMASZ WIELADEK

We examine large public interventions in the financial sector, such as bank nationalizations and search for “financial protectionism,” a decrease in the quantity and/or an increase in the price of loans that banks from one country make to borrowers resident in another. We use a bank‐level panel data set spanning all U.K.‐resident banks between 1997Q3 and 2010Q1. After nationalization, foreign banks reduced their fraction of British loans by about 11% and increased their effective interest rates by about 70 basis points. In contrast, nationalized British banks did not significantly change either their loan mix or effective interest rates.

Time‐Consistent Individuals, Time‐Inconsistent Households

Published: 10/16/2024   |   DOI: 10.1111/jofi.13392

ANDREW HERTZBERG

I present a model of consumption and savings for a multiperson household in which members are imperfectly altruistic, derive utility from both private and shared public goods, and share wealth. I show that, despite having standard exponential time preferences, the household is time‐inconsistent: Members save too little and overspend on private consumption goods. The household remains time‐inconsistent even when members save separately, because the possibility of voluntary transfers or joint contribution to the public good preserves the dynamic commons problem. The household will choose to share wealth when the risk‐sharing benefits outweigh the utility cost of overconsumption.

Corporate Ownership Around the World

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00115

Rafael Porta, Florencio Lopez‐De‐Silanes, Andrei Shleifer

We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means's image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.

A Nonparametric Approach to Pricing and Hedging Derivative Securities Via Learning Networks

Published: 07/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb00081.x

JAMES M. HUTCHINSON, ANDREW W. LO, TOMASO POGGIO

We propose a nonparametric method for estimating the pricing formula of a derivative asset using learning networks. Although not a substitute for the more traditional arbitrage‐based pricing formulas, network‐pricing formulas may be more accurate and computationally more efficient alternatives when the underlying asset's price dynamics are unknown, or when the pricing equation associated with the no‐arbitrage condition cannot be solved analytically. To assess the potential value of network pricing formulas, we simulate Black‐Scholes option prices and show that learning networks can recover the Black‐Scholes formula from a two‐year training set of daily options prices, and that the resulting network formula can be used successfully to both price and delta‐hedge options out‐of‐sample. For comparison, we estimate models using four popular methods: ordinary least squares, radial basis function networks, multilayer perceptron networks, and projection pursuit. To illustrate the practical relevance of our network pricing approach, we apply it to the pricing and delta‐hedging of S&P 500 futures options from 1987 to 1991.

MULTI‐NATIONAL BANKS AND THE MANAGEMENT OF MONETARY POLICY IN THE UNITED STATES

Published: 05/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01788.x

Andrew F. Brimmer

Money Market Funds and Shareholder Dilution

Published: 09/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03889.x

ANDREW B. LYON

This paper analyzes the effects of a share valuation technique, amortized cost valuation, on institutional money market funds (MMFs) and their investors. The possibility of arbitrage between securities priced at market value and amortized MMFs is investigated. It is found that significant dilution has taken place as a result of this valuation technique. Losses per share have been about 10 basis points per year. Evidence that arbitrageurs will take advantage of a misvaluation of the MMF and cause losses to other shareholders may suggest that some investors should reconsider the desirability of amortized MMFs for their investments.

On the High‐Frequency Dynamics of Hedge Fund Risk Exposures

Published: 11/26/2012   |   DOI: 10.1111/jofi.12008

ANDREW J. PATTON, TARUN RAMADORAI

We propose a new method to model hedge fund risk exposures using relatively high‐frequency conditioning variables. In a large sample of funds, we find substantial evidence that hedge fund risk exposures vary across and within months, and that capturing within‐month variation is more important for hedge funds than for mutual funds. We consider different within‐month functional forms, and uncover patterns such as day‐of‐the‐month variation in risk exposures. We also find that changes in portfolio allocations, rather than in the risk exposures of the underlying assets, are the main drivers of hedge funds' risk exposure variation.

Auctions with Endogenous Initiation

Published: 11/02/2023   |   DOI: 10.1111/jofi.13288

ALEXANDER S. GORBENKO, ANDREY MALENKO

We study initiation of takeover auctions by potential buyers and the seller. A bidder's indication of interest reveals that she is optimistic about the target. If bidders' values have a substantial common component, as in takeover battles between financial bidders, this effect disincentivizes bidders from indicating interest, and auctions are seller‐initiated. Conversely, in private‐value auctions, such as battles between strategic bidders, equilibria can feature both seller‐ and bidder‐initiated auctions, with the likelihood of the latter decreasing in commonality of values and the probability of a forced sale by the seller. We also relate initiation to bids and auction outcomes.

THE BLACK BANKS: AN ASSESSMENT OF PERFORMANCE AND PROSPECTS

Published: 05/01/1971   |   DOI: 10.1111/j.1540-6261.1971.tb00905.x

Andrew F. Brimmer

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.

Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital*

Published: 03/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb03534.x

STEPHEN A. BUSER, ANDREW H. CHEN, EDWARD J. KANE

This paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the FDIC. Essentially, the FDIC sells two products—insurance and regulation. To span the product space, it must and does set two prices. We argue that the need to establish regulatory disincentives to bank risk‐taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value (i.e., the value of their right to continue in business) stands at the center of these disincentives and in front of the FDIC's insurance reserves.

Financial Structure, Acquisition Opportunities, and Firm Locations

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01543.x

ANDRES ALMAZAN, ADOLFO DE MOTTA, SHERIDAN TITMAN, VAHAP UYSAL

This paper investigates the relation between firms' locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high‐tech cities and growing cities maintain more financial slack. Overall, the evidence suggests that growth opportunities influence firms' financial decisions.

Asset Market Participation and Portfolio Choice over the Life‐Cycle

Published: 01/20/2017   |   DOI: 10.1111/jofi.12484

ANDREAS FAGERENG, CHARLES GOTTLIEB, LUIGI GUISO

Using error‐free data on life‐cycle portfolio allocations of a large sample of Norwegian households, we document a double adjustment as households age: a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement. When structurally estimating an extended life‐cycle model, the parameter combination that best fits the data is one with a relatively large risk aversion, a small per‐period participation cost, and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in Norway.

Investor Sentiment and the Closed‐End Fund Puzzle

Published: 03/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03746.x

CHARLES M. C. LEE, ANDREI SHLEIFER, RICHARD H. THALER

This paper examines the proposition that fluctuations in discounts of closed‐end funds are driven by changes in individual investor sentiment. The theory implies that discounts on various funds move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts are correlated with prices of other securities affected by the same investor sentiment. The evidence supports these predictions. In particular, we find that both closed‐end funds and small stocks tend to be held by individual investors, and that the discounts on closed‐end funds narrow when small stocks do well.