A collection of the most cited articles published in the Journal of Finance over the last 5 years.
Taming the Factor Zoo: A Test of New Factors
Published: 2/2020, Volume: 75, Issue: 3 | DOI: 10.1111/jofi.12883 | Cited by: 430
GUANHAO FENG, STEFANO GIGLIO, DACHENG XIU
We propose a model selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high‐dimensional set of existing factors explains. Our methodology accounts for model selection mistakes that produce a bias due to omitted variables, unlike standard approaches that assume perfect variable selection. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are shown to be redundant relative to the existing factors, a few have statistically significant explanatory power beyond the hundreds of factors proposed in the past.
Tracking Retail Investor Activity
Published: 5/2021, Volume: 76, Issue: 5 | DOI: 10.1111/jofi.13033 | Cited by: 359
EKKEHART BOEHMER, CHARLES M. JONES, XIAOYAN ZHANG, XINRAN ZHANG
We provide an easy method to identify marketable retail purchases and sales using recent, publicly available U.S. equity transactions data. Individual stocks with net buying by retail investors outperform stocks with negative imbalances by approximately 10 bps over the following week. Less than half of the predictive power of marketable retail order imbalance is attributable to order flow persistence, while the rest cannot be explained by contrarian trading (proxy for liquidity provision) or public news sentiment. There is suggestive, but only suggestive, evidence that retail marketable orders might contain firm‐level information that is not yet incorporated into prices.
Firm‐Level Climate Change Exposure
Published: 3/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13219 | Cited by: 352
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.
Published: 6/2020, Volume: 75, Issue: 4 | DOI: 10.1111/jofi.12903 | Cited by: 338
JOHN M. GRIFFIN, AMIN SHAMS
This paper investigates whether Tether, a digital currency pegged to the U.S. dollar, influenced Bitcoin and other cryptocurrency prices during the 2017 boom. Using algorithms to analyze blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month‐ends. Rather than demand from cash investors, these patterns are most consistent with the supply‐based hypothesis of unbacked digital money inflating cryptocurrency prices.
Declining Labor and Capital Shares
Published: 5/2020, Volume: 75, Issue: 5 | DOI: 10.1111/jofi.12909 | Cited by: 298
SIMCHA BARKAI
This paper presents direct measures of capital costs, equal to the product of the required rate of return on capital and the value of the capital stock. The capital share, equal to the ratio of capital costs and gross value added, does not offset the decline in the labor share. Instead, a large increase in the share of pure profits offsets declines in the shares of both labor and capital. Industry data show that increases in concentration are associated with declines in the labor share.
Published: 8/2020, Volume: 75, Issue: 6 | DOI: 10.1111/jofi.12966 | Cited by: 281
YI HUANG, MARCO PAGANO, UGO PANIZZA
In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints while leaving state‐owned firms' investment unaffected. We establish this result using a purpose‐built data set for Chinese local public debt. Private firms invest less in cities with more public debt, with the reduction in investment larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow.
Common Risk Factors in Cryptocurrency
Published: 2/2022, Volume: 77, Issue: 2 | DOI: 10.1111/jofi.13119 | Cited by: 279
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.
Published: 4/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13217 | Cited by: 215
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.
Attention‐Induced Trading and Returns: Evidence from Robinhood Users
Published: 10/2022, Volume: 77, Issue: 6 | DOI: 10.1111/jofi.13183 | Cited by: 210
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.
Published: 2/2020, Volume: 75, Issue: 3 | DOI: 10.1111/jofi.12885 | Cited by: 206
LAUREN COHEN, CHRISTOPHER MALLOY, QUOC NGUYEN
Using the complete history of regular quarterly and annual filings by U.S. corporations, we show that changes to the language and construction of financial reports have strong implications for firms’ future returns and operations. A portfolio that shorts “changers” and buys “nonchangers” earns up to 188 basis points per month in alpha (over 22% per year) in the future. Moreover, changes to 10‐Ks predict future earnings, profitability, future news announcements, and even future firm‐level bankruptcies. Unlike typical underreaction patterns, we find no announcement effect, suggesting that investors are inattentive to these simple changes across the universe of public firms.
Banking on Deposits: Maturity Transformation without Interest Rate Risk
Published: 4/2021, Volume: 76, Issue: 3 | DOI: 10.1111/jofi.13013 | Cited by: 194
ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL
We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.
Predictably Unequal? The Effects of Machine Learning on Credit Markets
Published: 12/2021, Volume: 77, Issue: 1 | DOI: 10.1111/jofi.13090 | Cited by: 187
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.
Global Pricing of Carbon‐Transition Risk
Published: 8/2023, Volume: 78, Issue: 6 | DOI: 10.1111/jofi.13272 | Cited by: 178
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.
Presidential Address: Social Transmission Bias in Economics and Finance
Published: 5/2020, Volume: 75, Issue: 4 | DOI: 10.1111/jofi.12906 | Cited by: 168
DAVID HIRSHLEIFER
I discuss a new intellectual paradigm, social economics and finance—the study of the social processes that shape economic thinking and behavior. This emerging field recognizes that people observe and talk to each other. A key, underexploited building block of social economics and finance is social transmission bias: systematic directional shift in signals or ideas induced by social transactions. I use five “fables” (models) to illustrate the novelty and scope of the transmission bias approach, and offer several emergent themes. For example, social transmission bias compounds recursively, which can help explain booms, bubbles, return anomalies, and swings in economic sentiment.
Is There a Replication Crisis in Finance?
Published: 6/2023, Volume: 78, Issue: 5 | DOI: 10.1111/jofi.13249 | Cited by: 156
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.
What Is a Patent Worth? Evidence from the U.S. Patent “Lottery”
Published: 12/2019, Volume: 75, Issue: 2 | DOI: 10.1111/jofi.12867 | Cited by: 154
JOAN FARRE‐MENSA, DEEPAK HEGDE, ALEXANDER LJUNGQVIST
We provide evidence on the value of patents to startups by leveraging the quasi‐random assignment of applications to examiners with different propensities to grant patents. Using unique data on all first‐time applications filed at the U.S. Patent Office since 2001, we find that startups that win the patent “lottery” by drawing lenient examiners have, on average, 55% higher employment growth and 80% higher sales growth five years later. Patent winners also pursue more, and higher quality, follow‐on innovation. Winning a first patent boosts a startup’s subsequent growth and innovation by facilitating access to funding from venture capitalists, banks, and public investors.
Foreign Safe Asset Demand and the Dollar Exchange Rate
Published: 3/2021, Volume: 76, Issue: 3 | DOI: 10.1111/jofi.13003 | Cited by: 153
ZHENGYANG JIANG, ARVIND KRISHNAMURTHY, HANNO LUSTIG
We develop a theory that links the U.S. dollar's valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis, the yield gap between U.S. government and currency‐hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models that impute a special role to the United States as the world's provider of safe assets and the dollar as the world's reserve currency.
Published: 5/2021, Volume: 76, Issue: 4 | DOI: 10.1111/jofi.13024 | Cited by: 151
JAMES R. BROWN, MATTHEW T. GUSTAFSON, IVAN T. IVANOV
Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank‐borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower‐friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the nonfundamental component of cash flow volatility, especially for solvent, small bank borrowers.
Glued to the TV: Distracted Noise Traders and Stock Market Liquidity
Published: 2/2020, Volume: 75, Issue: 2 | DOI: 10.1111/jofi.12863 | Cited by: 144
JOEL PERESS, DANIEL SCHMIDT
In this paper, we study the impact of noise traders’ limited attention on financial markets. Specifically, we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes.
Do CEOs Matter? Evidence from Hospitalization Events
Published: 3/2020, Volume: 75, Issue: 4 | DOI: 10.1111/jofi.12897 | Cited by: 143
MORTEN BENNEDSEN, FRANCISCO PÉREZ‐GONZÁLEZ, DANIEL WOLFENZON
Using variation in firms’ exposure to their CEOs resulting from hospitalization, we estimate the effect of chief executive officers (CEOs) on firm policies, holding firm‐CEO matches constant. We document three main findings. First, CEOs have a significant effect on profitability and investment. Second, CEO effects are larger for younger CEOs, in growing and family‐controlled firms, and in human‐capital‐intensive industries. Third, CEOs are unique: the hospitalization of other senior executives does not have similar effects on the performance. Overall, our findings demonstrate that CEOs are a key driver of firm performance, which suggests that CEO contingency plans are valuable.
The Wisdom of the Robinhood Crowd
Published: 4/2022, Volume: 77, Issue: 3 | DOI: 10.1111/jofi.13128 | Cited by: 141
IVO WELCH
The Limits of Limited Liability: Evidence from Industrial Pollution
Published: 10/2020, Volume: 76, Issue: 1 | DOI: 10.1111/jofi.12978 | Cited by: 141
PAT AKEY, IAN APPEL
We study how parent liability for subsidiaries' environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference‐in‐differences framework, we find that stronger liability protection for parents leads to a 5% to 9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than increased production. Cross‐sectional tests suggest convexities associated with insolvency and executive compensation drive heterogeneous effects. Overall, our findings highlight the moral hazard problem associated with limited liability.
The Impact of Supervision on Bank Performance
Published: 7/2020, Volume: 75, Issue: 5 | DOI: 10.1111/jofi.12964 | Cited by: 128
BEVERLY HIRTLE, ANNA KOVNER, MATTHEW PLOSSER
We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors' time use, we demonstrate that the top‐ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top‐ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability. Our results underscore the distinct role of supervision in mitigating banking sector risk.
Partisan Professionals: Evidence from Credit Rating Analysts
Published: 10/2021, Volume: 76, Issue: 6 | DOI: 10.1111/jofi.13083 | Cited by: 118
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.
Factor Momentum and the Momentum Factor
Published: 4/2022, Volume: 77, Issue: 3 | DOI: 10.1111/jofi.13131 | Cited by: 117
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.