A collection of the most cited articles published in the Journal of Finance over the last 5 years.
Firm‐Level Climate Change Exposure
Published: 3/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13219 | Cited by: 1119
ZACHARIAS SAUTNER, LAURENCE VAN LENT, GRIGORY VILKOV, RUISHEN ZHANG
We develop a method that identifies the attention paid by earnings call participants to firms' climate change exposures. The method adapts a machine learning keyword discovery algorithm and captures exposures related to opportunity, physical, and regulatory shocks associated with climate change. The measures are available for more than 10,000 firms from 34 countries between 2002 and 2020. We show that the measures are useful in predicting important real outcomes related to the net‐zero transition, in particular, job creation in disruptive green technologies and green patenting, and that they contain information that is priced in options and equity markets.
Global Pricing of Carbon‐Transition Risk
Published: 8/2023, Volume: 78, Issue: 6 | DOI: 10.1111/jofi.13272 | Cited by: 773
PATRICK BOLTON, MARCIN KACPERCZYK
The energy transition away from fossil fuels exposes companies to carbon‐transition risk. Estimating the market‐based premium associated with carbon‐transition risk in a cross section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.
Published: 4/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13217 | Cited by: 571
PO‐HSUAN HSU, KAI LI, CHI‐YANG TSOU
This paper studies the asset pricing implications of industrial pollution. A long‐short portfolio constructed from firms with high versus low toxic emission intensity within an industry generates an average annual return of 4.42%, which remains significant after controlling for risk factors. This pollution premium cannot be explained by existing systematic risks, investor preferences, market sentiment, political connections, or corporate governance. We propose and model a new systematic risk related to environmental policy uncertainty. We use the growth in environmental litigation penalties to measure regime change risk and find that it helps price the cross section of emission portfolios' returns.
Common Risk Factors in Cryptocurrency
Published: 2/2022, Volume: 77, Issue: 2 | DOI: 10.1111/jofi.13119 | Cited by: 506
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.
Is There a Replication Crisis in Finance?
Published: 6/2023, Volume: 78, Issue: 5 | DOI: 10.1111/jofi.13249 | Cited by: 456
THEIS INGERSLEV JENSEN, BRYAN KELLY, LASSE HEJE PEDERSEN
Several papers argue that financial economics faces a replication crisis because the majority of studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions. The majority of asset pricing factors (i) can be replicated; (ii) can be clustered into 13 themes, the majority of which are significant parts of the tangency portfolio; (iii) work out‐of‐sample in a new large data set covering 93 countries; and (iv) have evidence that is strengthened (not weakened) by the large number of observed factors.
Attention‐Induced Trading and Returns: Evidence from Robinhood Users
Published: 10/2022, Volume: 77, Issue: 6 | DOI: 10.1111/jofi.13183 | Cited by: 431
BRAD M. BARBER, XING HUANG, TERRANCE ODEAN, CHRISTOPHER SCHWARZ
We study the influence of financial innovation by fintech brokerages on individual investors’ trading and stock prices. Using data from Robinhood, we find that Robinhood investors engage in more attention‐induced trading than other retail investors. For example, Robinhood outages disproportionately reduce trading in high‐attention stocks. While this evidence is consistent with Robinhood attracting relatively inexperienced investors, we show that it is also driven in part by the app's unique features. Consistent with models of attention‐induced trading, intense buying by Robinhood users forecasts negative returns. Average 20‐day abnormal returns are −4.7% for the top stocks purchased each day.
Predictably Unequal? The Effects of Machine Learning on Credit Markets
Published: 12/2021, Volume: 77, Issue: 1 | DOI: 10.1111/jofi.13090 | Cited by: 409
ANDREAS FUSTER, PAUL GOLDSMITH‐PINKHAM, TARUN RAMADORAI, ANSGAR WALTHER
Innovations in statistical technology in functions including credit‐screening have raised concerns about distributional impacts across categories such as race. Theoretically, distributional effects of better statistical technology can come from greater flexibility to uncover structural relationships or from triangulation of otherwise excluded characteristics. Using data on U.S. mortgages, we predict default using traditional and machine learning models. We find that Black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning. In a simple equilibrium credit market model, machine learning increases disparity in rates between and within groups, with these changes attributable primarily to greater flexibility.
Presidential Address: Sustainable Finance and ESG Issues—ValueversusValues
Published: 6/2023, Volume: 78, Issue: 4 | DOI: 10.1111/jofi.13255 | Cited by: 403
LAURA T. STARKS
In this address, I discuss differences across investor and manager motivations for considering sustainable finance—
The Wisdom of the Robinhood Crowd
Published: 4/2022, Volume: 77, Issue: 3 | DOI: 10.1111/jofi.13128 | Cited by: 229
IVO WELCH
Robinhood investors increased their holdings in the March 2020 COVID bear market, indicating an absence of collective panic and margin calls. This steadfastness was rewarded in the subsequent bull market. Despite unusual interest in some “experience” stocks (e.g., cannabis stocks), they tilted primarily toward stocks with high past share volume and dollar‐trading volume (themselves mostly big stocks). From mid‐2018 to mid‐2020, an aggregated crowd consensus portfolio (a proxy for the household‐equal‐weighted portfolio) had both good timing and good alpha.
Institutional Investors and Corporate Governance: The Incentive to Be Engaged
Published: 10/2021, Volume: 77, Issue: 1 | DOI: 10.1111/jofi.13085 | Cited by: 222
JONATHAN LEWELLEN, KATHARINA LEWELLEN
This paper studies institutional investors’ incentives to be engaged shareholders. In 2017, the average institution gains an extra $129,000 in annual management fees if a stockholding increases 1% in value, considering both the direct effect on assets under management and the indirect effect on subsequent fund flows. The estimates range from $19,600 for investments in small firms to $307,600 for investments in large firms. Institutional shareholders in one firm often gain when the firm's competitors do well, by virtue of institutions’ holdings in those firms, but the impact of common ownership is modest in the most concentrated industries.
Anomalies and the Expected Market Return
Published: 12/2021, Volume: 77, Issue: 1 | DOI: 10.1111/jofi.13099 | Cited by: 201
XI DONG, YAN LI, DAVID E. RAPACH, GUOFU ZHOU
We provide the first systematic evidence on the link between long‐short anomaly portfolio returns—a cornerstone of the cross‐sectional literature—and the time‐series predictability of the aggregate market excess return. Using 100 representative anomalies from the literature, we employ a variety of shrinkage techniques (including machine learning, forecast combination, and dimension reduction) to efficiently extract predictive signals in a high‐dimensional setting. We find that long‐short anomaly portfolio returns evince statistically and economically significant out‐of‐sample predictive ability for the market excess return. The predictive ability of anomaly portfolio returns appears to stem from asymmetric limits of arbitrage and overpricing correction persistence.
Published: 2/2023, Volume: 78, Issue: 2 | DOI: 10.1111/jofi.13206 | Cited by: 196
BRUNO BIAIS, CHRISTOPHE BISIÈRE, MATTHIEU BOUVARD, CATHERINE CASAMATTA, ALBERT J. MENKVELD
We offer a general equilibrium analysis of cryptocurrency pricing. The fundamental value of the cryptocurrency is its stream of net transactional benefits, which depend on its future prices. This implies that, in addition to fundamentals, equilibrium prices reflect sunspots. This in turn implies multiple equilibria and extrinsic volatility, that is, cryptocurrency prices fluctuate even when fundamentals are constant. To match our model to the data, we construct indices measuring the net transactional benefits of Bitcoin. In our calibration, part of the variations in Bitcoin returns reflects changes in net transactional benefits, but a larger share reflects extrinsic volatility.
Factor Momentum and the Momentum Factor
Published: 4/2022, Volume: 77, Issue: 3 | DOI: 10.1111/jofi.13131 | Cited by: 193
SINA EHSANI, JUHANI T. LINNAINMAA
Momentum in individual stock returns relates to momentum in factor returns. Most factors are positively autocorrelated: the average factor earns a monthly return of six basis points following a year of losses and 51 basis points following a positive year. We find that factor momentum concentrates in factors that explain more of the cross section of returns and that it is not incidental to individual stock momentum: momentum‐neutral factors display more momentum. Momentum found in high‐eigenvalue principal component factors subsumes most forms of individual stock momentum. Our results suggest that momentum is not a distinct risk factor—it times other factors.
Partisan Professionals: Evidence from Credit Rating Analysts
Published: 10/2021, Volume: 76, Issue: 6 | DOI: 10.1111/jofi.13083 | Cited by: 190
ELISABETH KEMPF, MARGARITA TSOUTSOURA
Partisan perception affects the actions of professionals in the financial sector. Linking credit rating analysts to party affiliations from voter records, we show that analysts not affiliated with the U.S. president's party downward‐adjust corporate credit ratings more frequently. Since we compare analysts with different party affiliations covering the same firm in the same quarter, differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results show that analysts' partisan perception has price effects and may influence firms' investment policies.
Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation
Published: 6/2022, Volume: 77, Issue: 4 | DOI: 10.1111/jofi.13159 | Cited by: 189
YIFEI WANG, TONI M. WHITED, YUFENG WU, KAIRONG XIAO
We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks' funding costs. Banks optimize the pass‐through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy.
The Virtue of Complexity in Return Prediction
Published: 12/2023, Volume: 79, Issue: 1 | DOI: 10.1111/jofi.13298 | Cited by: 185
BRYAN KELLY, SEMYON MALAMUD, KANGYING ZHOU
Much of the extant literature predicts market returns with “simple” models that use only a few parameters. Contrary to conventional wisdom, we theoretically prove that simple models severely understate return predictability compared to “complex” models in which the number of parameters exceeds the number of observations. We empirically document the virtue of complexity in U.S. equity market return prediction. Our findings establish the rationale for modeling expected returns through machine learning.
Presidential Address: Corporate Finance and Reality
Published: 6/2022, Volume: 77, Issue: 4 | DOI: 10.1111/jofi.13161 | Cited by: 185
JOHN R. GRAHAM
This paper uses surveys to document CFO perspectives on corporate planning, investment, capital structure, payout, and shareholder versus stakeholder focus. Comparing policy decisions today to those 20 years ago, I find that companies employ decision rules that are conservative, sticky, and geared to time the market; rely on internal forecasts that are miscalibrated and considered reliable only two years ahead; and emphasize corporate objectives that focus increasingly on stakeholders and revenues. These practice of corporate finance themes can discipline academic models toward better explaining outcomes. Models of satisficing decision‐making or costly managerial biases align with many of the themes.
Rising Intangible Capital, Shrinking Debt Capacity, and the U.S. Corporate Savings Glut
Published: 8/2022, Volume: 77, Issue: 5 | DOI: 10.1111/jofi.13174 | Cited by: 181
ANTONIO FALATO, DALIDA KADYRZHANOVA, JAE SIM, ROBERTO STERI
This paper explores the connection between rising intangible capital and the secular upward trend in U.S. corporate cash holdings. We calibrate a dynamic model with two productive assets—tangible and intangible capital—in which only tangible capital can serve as collateral. We highlight the following points: (i) a shift toward intangible capital shrinks firms' debt capacity and leads them to hold more cash, (ii) the effect accounts for three‐quarters of the observed trend in average cash ratios, and (iii) it also accounts for the upward trend of cash ratios in the cross‐section of small and large firms and in the aggregate.
Prospect Theory and Stock Market Anomalies
Published: 6/2021, Volume: 76, Issue: 5 | DOI: 10.1111/jofi.13061 | Cited by: 169
NICHOLAS BARBERIS, LAWRENCE J. JIN, BAOLIAN WANG
We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 prominent stock market anomalies. The model incorporates all of the elements of prospect theory, accounts for investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of the asset's return volatility, return skewness, and past capital gain. We find that the model can help explain a majority of the 23 anomalies.
Carbon Returns across the Globe
Published: 10/2024, Volume: 80, Issue: 1 | DOI: 10.1111/jofi.13402 | Cited by: 158
SHAOJUN ZHANG
The pricing of carbon transition risk is central to the debate on climate‐aware investments. Emissions are tightly linked to sales and are available to investors only with significant lags. The positive carbon return, or brown‐minus‐green return differential, documented in previous studies arises from forward‐looking firm performance information contained in emissions rather than a risk premium in ex ante expected returns. After accounting for the data release lag, carbon returns turn negative in the United States and insignificant globally. Developed markets experience lower carbon returns due to intense climate concern shocks, while countries with stringent climate policies exhibit higher carbon returns.
Do Firms Respond to Gender Pay Gap Transparency?
Published: 6/2022, Volume: 77, Issue: 4 | DOI: 10.1111/jofi.13136 | Cited by: 158
MORTEN BENNEDSEN, ELENA SIMINTZI, MARGARITA TSOUTSOURA, DANIEL WOLFENZON
We examine the effect of pay transparency on the gender pay gap and firm outcomes. Using a 2006 legislation change in Denmark that requires firms to provide gender‐disaggregated wage statistics, detailed employee‐employer administrative data, and difference‐in‐differences and difference‐in‐discontinuities designs, we find that the law reduces the gender pay gap, primarily by slowing wage growth for male employees. The gender pay gap declines by 2 percentage points, or 13% relative to the prelegislation mean. Despite the reduction of the overall wage bill, the wage transparency mandate does not affect firm profitability, likely because of the offsetting effect of reduced firm productivity.
Belief Disagreement and Portfolio Choice
Published: 10/2022, Volume: 77, Issue: 6 | DOI: 10.1111/jofi.13179 | Cited by: 154
MAARTEN MEEUWIS, JONATHAN A. PARKER, ANTOINETTE SCHOAR, DUNCAN SIMESTER
Using proprietary financial data on millions of households, we show that likely‐Republicans increased the equity share and market beta of their portfolios following the 2016 presidential election, while likely‐Democrats rebalanced into safe assets. We provide evidence that this behavior was driven by investors interpreting public information based on different models of the world. We use detailed controls to rule out the main nonbelief‐based channels such as income hedging needs, preferences, and local economic exposures. These findings are driven by a small share of investors making big changes, and are stronger among investors who trade more ex ante.
Published: 3/2022, Volume: 77, Issue: 2 | DOI: 10.1111/jofi.13105 | Cited by: 146
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.
Sustainability or Greenwashing: Evidence from the Asset Market for Industrial Pollution
Published: 12/2024, Volume: 80, Issue: 2 | DOI: 10.1111/jofi.13412 | Cited by: 141
RAN DUCHIN, JANET GAO, QIPING XU
We study the asset market for pollutive plants. Firms divest pollutive plants in response to environmental pressures. Buyers are firms facing weaker environmental pressures that have supply chain relationships or joint ventures with the sellers. While pollution levels do not decline following divestitures, sellers highlight their sustainable policies in subsequent conference calls, earn higher returns as they sell more pollutive plants, and benefit from higher Environmental, Social, and Governance (ESG) ratings and lower compliance costs. Overall, the asset market allows firms to redraw their boundaries in a manner perceived as environmentally friendly without real consequences for pollution but with substantial gains from trade.
Retail Trading in Options and the Rise of the Big Three Wholesalers
Published: 10/2023, Volume: 78, Issue: 6 | DOI: 10.1111/jofi.13285 | Cited by: 137
SVETLANA BRYZGALOVA, ANNA PAVLOVA, TAISIYA SIKORSKAYA
We document a rapid increase in retail trading in options in the United States. Facilitated by payment for order flow (PFOF) from wholesalers executing retail orders, retail trading recently reached over 60% of total market volume. Nearly 90% of PFOF comes from three wholesalers. Exploiting new flags in transaction‐level data, we isolate wholesaler trades and build a novel measure of retail options trading. Our measure comoves with equity‐based retail activity proxies and drops significantly during U.S. brokerage platform outages and trading restrictions. Retail investors prefer cheaper, weekly options with average bid‐ask spread of 12.6%, and lose money on average.