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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Near‐sighted Justice
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00712.x
DAN BERNHARDT, ED NOSAL
Chapter 11 structures complex negotiations between creditors and debtors that are overseen by a bankruptcy court. We identify conditions where the court should sometimes err in determining which firms should be liquidated. Such errors affect actions by both good and bad entrepreneurs. We first characterize the optimal error rate without renegotiation. When creditors and debtors can renegotiate to circumvent an error‐riven court, for one class of actions a blind court that ignores all information is optimal. For another class, the court should place the burden of proof on the entrepreneur. The robust feature is that the court should sometimes err.
Cross‐Asset Speculation in Stock Markets
Published: 09/10/2008 | DOI: 10.1111/j.1540-6261.2008.01400.x
DAN BERNHARDT, BART TAUB
In practice, heterogeneously informed speculators combine private information about multiple stocks with information in prices, taking into account how their trades influence the inferences of other speculators via prices. We show how this speculation causes prices to be more correlated than asset fundamentals, raising price volatility. The covariance structure of asset fundamentals drives that of prices, while the covariance structure of liquidity trade drives that of order flows. We characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators, and relate the cross‐asset factor structure of order flows to that of returns.
Information Effects on the Bid‐Ask Spread
Published: 12/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb03834.x
THOMAS E. COPELAND, DAN GALAI
An individual who chooses to serve as a market‐maker is assumed to optimize his position by setting a bid‐ask spread which maximizes the difference between expected revenues received from liquidity‐motivated traders and expected losses to information‐motivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information‐motivated trader, it is shown that the bid‐ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid‐ask spread proposed in this paper is consistent with the empirical literature.
Informed Trading When Information Becomes Stale
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00635.x
Dan Bernhardt, Jianjun Miao
This paper characterizes informed trade when speculators can acquire distinct signals of varying quality about an asset's value at different dates. The most reasonable characterization of private information about stocks is that while information is long‐lived, new information will arrive over time, information that may be acquired by others. Hence, while a speculator may know more than others at a moment, in the future, his information will become stale, but not valueless. In an environment that allows for arbitrary correlations among signals, we characterize equilibrium outcomes including trading, prices, and profits. We provide explicit numerical characterizations for different informational environments.
Dealer Networks
Published: 10/06/2018 | DOI: 10.1111/jofi.12728
DAN LI, NORMAN SCHÜRHOFF
Dealers in the over‐the‐counter municipal bond market form trading networks with other dealers to mitigate search frictions. Regulatory data show that this network has a core‐periphery structure with 10 to 30 hubs and over 2,000 peripheral broker‐dealers in which bonds flow from periphery to core and partially back. Central dealers charge investors up to double the round‐trip markups compared to peripheral dealers. In turn, central dealers provide immediacy by matching buyers with sellers more directly and prearranging fewer trades, especially during stress times. Investors thus face a trade‐off between execution cost and speed, consistent with network models of decentralized trade.
Relationship Trading in Over‐the‐Counter Markets
Published: 11/15/2019 | DOI: 10.1111/jofi.12864
TERRENCE HENDERSHOTT, DAN LI, DMITRY LIVDAN, NORMAN SCHÜRHOFF
We examine the network of trading relationships between insurers and dealers in the over‐the‐counter (OTC) corporate bond market. Regulatory data show that one‐third of insurers use a single dealer, whereas other insurers have large dealer networks. Execution prices are nonmonotone in network size, initially declining with more dealers but increasing once networks exceed 20 dealers. A model of decentralized trade in which insurers trade off the benefits of repeat business and faster execution quantitatively fits the distribution of insurers' network size and explains the price–network size relationship. Counterfactual analysis shows that regulations to unbundle trade and nontrade services can decrease welfare.
Fire‐Sale Spillovers in Debt Markets
Published: 09/14/2021 | DOI: 10.1111/jofi.13078
ANTONIO FALATO, ALI HORTAÇSU, DAN LI, CHAEHEE SHIN
Fire sales induced by investor redemptions have powerful spillover effects among funds that hold the same assets, hurting peer funds' performance and flows, and leading to further asset sales with negative bond price impact. A one‐standard‐deviation increase in our fire‐sale spillover measure leads to a 45 (90) bp decrease in peer fund returns (flows) and a two percentage point increase in the likelihood of a large bond price drop. The results hold in a regression‐discontinuity design addressing identification concerns. Timing, heterogeneity, instrumental‐variable, and placebo tests further support the price‐impact mechanism. Model‐based counterfactual and stress‐test analyses quantify the financial stability implications.
Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?
Published: 09/21/2010 | DOI: 10.1111/j.1540-6261.2010.01590.x
RICHARD C. GREEN, DAN LI, NORMAN SCHÜRHOFF
We study price discovery in municipal bonds, an important OTC market. As in markets for consumer goods, prices “rise faster than they fall.” Round‐trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Further, effective half‐spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to Treasuries also adjust with asymmetric speed in rising and falling markets. Finally, intraday price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.
The High‐Volume Return Premium
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00349
Simon Gervais, Ron Kaniel, Dan H. Mingelgrin
The idea that extreme trading activity contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a day or a week tend to appreciate (depreciate) over the course of the following month. We argue that this high‐volume return premium is consistent with the idea that shocks in the trading activity of a stock affect its visibility, and in turn the subsequent demand and price for that stock. Return autocorrelations, firm announcements, market risk, and liquidity do not seem to explain our results.
The Pricing of Best Efforts New Issues
Published: 06/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb04410.x
ANN GUENTHER SHERMAN
This paper offers an explanation for the underpricing of best efforts new issues and demonstrates that best efforts contracts allow issuers to use information from the market. If investors obtain information which indicates that a project will not be profitable, their demand will be low and the offering will be withdrawn. If this information is costly, investors will have to be compensated for its purchase through a lower offering price, which means that issuers will have to underprice. This result is consistent with the empirical observation that underpricing is considerably greater for best efforts than for firm commitment contracts.
Female Representation in the Academic Finance Profession
Published: 11/13/2021 | DOI: 10.1111/jofi.13094
MILA GETMANSKY SHERMAN, HEATHER E. TOOKES
We present new data on female representation in the academic finance profession. In our sample of finance faculty at top‐100 U.S. business schools during 2009 to 2017, only 16.0% are women. The gender imbalance manifests in several ways. First, after controlling for research productivity, women hold positions at lower ranked institutions and are less likely to be full professors. Results also suggest that they are paid less. Second, women publish fewer papers. This gender gap exists in research quantity, not quality. Third, women have more female coauthors, suggesting smaller publication networks. Time‐series data suggest shrinking gender gaps in recent years.
Preliminary Program
Published: 09/01/1972 | DOI: 10.1111/j.1540-6261.1972.tb01340.x
Irwin Friend, Sherman Maisel