The Journal of Finance

Limitation of Liability and the Ownership Structure of the Firm

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04724.x

ANDREW WINTON

This paper models the optimal choice of shareholder liability. If investors want managers to be monitored, the monitors should be residual claimants (shareholders), and monitoring and firm value will increase as shareholders commit more of their wealth to the firm. When liquidating wealth is costly, contingent liability dominates direct investment as a wealth commitment device; however, if wealth is unobservable, under this regime only relatively poor investors will hold shares in equilibrium. This may be prevented at a cost by verifying shareholder wealth and restricting stock transfers. Comparative statics on various liability regimes are used to motivate actual contractual arrangements.

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 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.

Why Do Markets Move Together? An Investigation of U.S.‐Japan Stock Return Comovements

Published: 07/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02713.x

G. ANDREW KAROLYI, RENÉ M. STULZ

This article explores the fundamental factors that affect cross‐country stock return correlations. Using transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE‐traded American Depository Receipts (ADRs) and a matched‐sample portfolio of U. S. stocks. We find that U. S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad‐based market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations.

Predictable Financial Crises

Published: 01/27/2022   |   DOI: 10.1111/jofi.13105

ROBIN GREENWOOD, SAMUEL G. HANSON, ANDREI SHLEIFER, JAKOB AHM SØRENSEN

Using historical data on postwar financial crises around the world, we show that the combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth is elevated. Our evidence challenges the view that financial crises are unpredictable “bolts from the sky” and supports the Kindleberger‐Minsky view that crises are the byproduct of predictable, boom‐bust credit cycles. This predictability favors policies that lean against incipient credit‐market booms.

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.

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.

Family Firms

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00601

Mike Burkart, Fausto Panunzi, Andrei Shleifer

We present a model of succession in a firm owned and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on what fraction of the company to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder's decision is shaped by the legal environment. This theory of separation of ownership from management includes the Anglo‐Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross‐country evidence.

WEALTH ACCUMULATION OF BLACK AND WHITE FAMILIES: THE EMPIRICAL EVIDENCE

Published: 05/01/1971   |   DOI: 10.1111/j.1540-6261.1971.tb00904.x

Andrew F. Brimmer, Henry S. Terrell

An Analysis of Divestiture Effects Resulting from Deregulation

Published: 12/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb02527.x

ANDREW H. CHEN, LARRY J. MERVILLE

Capital market data were used to examine the divestiture effects pertaining to deregulation, the dropping of antitrust charges, and the reversing of the co‐insurance effect associated with the recent breakup of AT&T. The empirical results of the study indicate that significant economic events took place during the breakup process, which led to transfers of wealth from various parties to the securityholders of AT&T. The results also indicate that the buffering effect of regulation was reduced as AT&T went through the total deregulation process. This is in accordance with Peltzman's prediction.

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

Rational Expectations and the Measurement of a Stock's Elasticity of Demand

Published: 09/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03896.x

FRANKLIN ALLEN, ANDREW POSTLEWAITE

Scholes [1] considered the effect of secondary sales of large blocks of stock on the price of the stock. However, he only looked at price changes occurring just before and just after the sale took place. It is argued here, using a simple model, that if traders have rational expectations they may anticipate the sale, and prices could reflect this possibility long before it actually occurs. To determine the full effect, it may therefore be necessary to consider the price path many months, or even years, before the sale.

Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit

Published: 08/04/2016   |   DOI: 10.1111/jofi.12439

EMILY BREZA, ANDRES LIBERMAN

We present evidence that restrictions to the set of feasible financial contracts affect buyer‐supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within‐product difference‐in‐differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.

THE EFFECTS OF TAX POLICY ON CAPITAL FORMATION, CORPORATE LIQUIDITY AND THE AVAILABILITY OF INVESTIBLE FUNDS: A SIMULATION STUDY

Published: 05/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb01887.x

Andrew F. Brimmer, Allen Sinai

The Size and Incidence of the Losses from Noise Trading

Published: 07/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb04385.x

J. BRADFORD DE LONG, ANDREI SHLEIFER, LAWRENCE H. SUMMERS, ROBERT J. WALDMANN

Recent empirical research has identified a significant amount of volatility in stock prices that cannot easily be explained by changes in fundamentals; one interpretation is that asset prices respond not only to news but also to irrational “noise trading.” We assess the welfare effects and incidence of such noice trading using an overlapping‐generations model that gives investors short horizons. We find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and we show that part of that cost may be borne by rational investors. We conclude that the welfare costs of noise trading may be large if the magnitude of noise in aggregate stock prices is as large as suggested by some of the recent empirical litrature on the excess volatility of the market.