The Journal of Finance

DISCUSSION

Published: 05/01/1972   |   DOI: 10.1111/j.1540-6261.1972.tb00981.x

Robert M. Coen, Martin David

DISCUSSION

Published: 05/01/1968   |   DOI: 10.1111/j.1540-6261.1968.tb00814.x

Richard T. Pratt, Preston Martin

Why Is Long‐Horizon Equity Less Risky? A Duration‐Based Explanation of the Value Premium

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2007.01201.x

MARTIN LETTAU, JESSICA A. WACHTER

We propose a dynamic risk‐based model that captures the value premium. Firms are modeled as long‐lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model implies that growth firms covary more with the discount rate than do value firms, which covary more with cash flows. When calibrated to explain aggregate stock market behavior, the model accounts for the observed value premium, the high Sharpe ratios on value firms, and the poor performance of the CAPM.

Pension Funding, Share Prices, and National Savings

Published: 09/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb04885.x

MARTIN FELDSTEIN, STEPHANIE SELIGMAN

This paper examines empirically the effect of unfunded pension obligations on corporate share prices and discusses the implications of these estimates for national saving, the decline of the stock market in recent years, and the rationality of corporate financial behavior. The analysis uses the information on inflation‐adjusted income and assets which large firms were required to provide for 1976 and subsequent years.

The Perception of Dependence, Investment Decisions, and Stock Prices

Published: 11/24/2020   |   DOI: 10.1111/jofi.12993

MICHAEL UNGEHEUER, MARTIN WEBER

How do investors perceive dependence between stock returns; and how does their perception of dependence affect investments and stock prices? We show experimentally that investors understand differences in dependence, but not in terms of correlation. Participants invest as if applying a simple counting heuristic for the frequency of comovement. They diversify more when the frequency of comovement is lower even if correlation is higher due to dependence in the tails. Building on our experimental findings, we empirically analyze U.S. stock returns. We identify a robust return premium for stocks with high frequencies of comovement with the market return.

Should Derivatives Be Privileged in Bankruptcy?

Published: 11/11/2014   |   DOI: 10.1111/jofi.12201

PATRICK BOLTON, MARTIN OEHMKE

Derivatives enjoy special status in bankruptcy: they are exempt from the automatic stay and effectively senior to virtually all other claims. We propose a corporate finance model to assess the effect of these exemptions on a firm's cost of borrowing and incentives to engage in derivative transactions. While derivatives are value‐enhancing risk management tools, seniority for derivatives can lead to inefficiencies: it transfers credit risk to debtholders, even though this risk is borne more efficiently in the derivative market. Seniority for derivatives is efficient only if it provides sufficient cross‐netting benefits to derivative counterparties that provide hedging services.

The Market for Conflicted Advice

Published: 10/10/2019   |   DOI: 10.1111/jofi.12848

BRIANA CHANG, MARTIN SZYDLOWSKI

We present a model of the market for advice in which advisers have conflicts of interest and compete for heterogeneous customers through information provision. The competitive equilibrium features information dispersion and partial disclosure. Although conflicted fees lead to distorted information, they are irrelevant for customers' welfare: banning conflicted fees improves only the information quality, not customers' welfare. Instead, financial literacy education for the least informed customers can improve all customers' welfare because of a spillover effect. Furthermore, customers who trade through advisers realize lower average returns, which rationalizes empirical findings.

THE CURRENT STATUS OF THE CAPITAL ASSET PRICING MODEL (CAPM)

Published: 06/01/1978   |   DOI: 10.1111/j.1540-6261.1978.tb02029.x

Martin J. Gruber, Stephen A. Ross

Report of the Managing Editors of the Journal of Finance for 1984

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05034.x

EDWIN J. ELTON, MARTIN J. GRUBER

Report of the Managing Editors of the Journal of Finance for 1985

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04544.x

EDWIN J. ELTON, MARTIN J. GRUBER

Incentivizing Calculated Risk‐Taking: Evidence from an Experiment with Commercial Bank Loan Officers

Published: 11/24/2014   |   DOI: 10.1111/jofi.12233

SHAWN COLE, MARTIN KANZ, LEORA KLAPPER

We conduct an experiment with commercial bank loan officers to test how performance compensation affects risk assessment and lending. High‐powered incentives lead to greater screening effort and more profitable lending decisions. This effect is muted, however, by deferred compensation and limited liability, two standard features of loan officer compensation contracts. We find that career concerns and personality traits affect loan officer behavior, but show that the response to incentives does not vary with traits such as risk‐aversion, optimism, or overconfidence. Finally, we present evidence that incentives distort the assessment of credit risk, even among professionals with many years of experience.

THE ADJUSTMENT OF BETA FORECASTS

Published: 09/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01027.x

Robert C. Klemkosky, John D. Martin

Sovereign Default, Domestic Banks, and Financial Institutions

Published: 11/19/2013   |   DOI: 10.1111/jofi.12124

NICOLA GENNAIOLI, ALBERTO MARTIN, STEFANO ROSSI

We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults. Our predictions: government defaults should lead to declines in private credit, and these declines should be larger in countries where financial institutions are more developed and banks hold more government bonds. In these same countries, government defaults should be less likely. Using a large panel of countries, we find evidence consistent with these predictions.

Thinking about Prices versus Thinking about Returns in Financial Markets

Published: 08/08/2019   |   DOI: 10.1111/jofi.12835

MARKUS GLASER, ZWETELINA ILIEWA, MARTIN WEBER

Prices and returns are alternative ways to present information and to elicit expectations in financial markets. But do investors think of prices and returns in the same way? We present three studies in which subjects differ in the level of expertise, amount of information, and type of incentive scheme. The results are consistent across all studies: asking subjects to forecast returns as opposed to prices results in higher expectations, whereas showing them return charts rather than price charts results in lower expectations. Experience is not a useful remedy but cognitive reflection mitigates the impact of format changes.

Report of the Managing Editors of the Journal of Finance for 1987

Published: 07/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb04612.x

EDWIN J. ELTON, MARTIN J. GRUBER

Executive Compensation and the Maturity Structure of Corporate Debt

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01563.x

PAUL BROCKMAN, XIUMIN MARTIN, EMRE UNLU

Executive compensation influences managerial risk preferences through executives' portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega). Large deltas discourage managerial risk‐taking, while large vegas encourage risk‐taking. Theory suggests that short‐maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short‐maturity debt. We also find that short‐maturity debt mitigates the influence of vega‐ and delta‐related incentives on bond yields. Overall, our empirical evidence shows that short‐term debt mitigates agency costs of debt arising from compensation risk.

Ambiguity, Information Quality, and Asset Pricing

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01314.x

LARRY G. EPSTEIN, MARTIN SCHNEIDER

When ambiguity‐averse investors process news of uncertain quality, they act as if they take a worst‐case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.

DISCUSSION

Published: 05/01/1963   |   DOI: 10.1111/j.1540-6261.1963.tb00728.x

Albert Ando, Martin J. Bailey

The Maturity Rat Race

Published: 11/26/2012   |   DOI: 10.1111/jofi.12005

MARKUS K. BRUNNERMEIER, MARTIN OEHMKE

Why do some firms, especially financial institutions, finance themselves so short‐term? We show that extreme reliance on short‐term financing may be the outcome of a maturity rat race: a borrower may have an incentive to shorten the maturity of an individual creditor's debt contract because this dilutes other creditors. In response, other creditors opt for shorter maturity contracts as well. This dynamic toward short maturities is present whenever interim information is mostly about the probability of default rather than the recovery in default. For borrowers that cannot commit to a maturity structure, equilibrium financing is inefficiently short‐term.

PORTFOLIO THEORY WHEN INVESTMENT RELATIVES ARE LOGNORMALLY DISTRIBUTED

Published: 09/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb03103.x

Edwin J. Elton, Martin J. Gruber