Top 25 Cited Recent Articles

A collection of the most cited articles published in the Journal of Finance over the last 5 years.

Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

Published: 8/2019,  Volume: 74,  Issue: 6  |  DOI: 10.1111/jofi.12841  |  Cited by: 647

SAMUEL M. HARTZMARK, ABIGAIL B. SUSSMAN

Examining a shock to the salience of the sustainability of the U.S. mutual fund market, we present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high‐sustainability funds outperform low‐sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and nonpecuniary motives influencing investment decisions.


Taming the Factor Zoo: A Test of New Factors

Published: 2/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12883  |  Cited by: 334

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.


Is Bitcoin Really Untethered?

Published: 6/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12903  |  Cited by: 278

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.


Tracking Retail Investor Activity

Published: 5/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13033  |  Cited by: 247

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.


Declining Labor and Capital Shares

Published: 5/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12909  |  Cited by: 226

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.


Local Crowding‐Out in China

Published: 8/2020,  Volume: 75,  Issue: 6  |  DOI: 10.1111/jofi.12966  |  Cited by: 198

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.


Diagnostic Expectations and Stock Returns

Published: 7/2019,  Volume: 74,  Issue: 6  |  DOI: 10.1111/jofi.12833  |  Cited by: 188

PEDRO BORDALO, NICOLA GENNAIOLI, RAFAEL LA PORTA, ANDREI SHLEIFER

We revisit La Porta's finding that returns on stocks with the most optimistic analyst long‐term earnings growth forecasts are lower than those on stocks with the most pessimistic forecasts. We document the joint dynamics of fundamentals, expectations, and returns of these portfolios, and explain the facts using a model of belief formation based on the representativeness heuristic. Analysts forecast fundamentals from observed earnings growth, but overreact to news by exaggerating the probability of states that have become more likely. We find support for the model's predictions. A quantitative estimation of the model accounts for the key patterns in the data.


Personal Experiences and Expectations about Aggregate Outcomes

Published: 7/2019,  Volume: 74,  Issue: 5  |  DOI: 10.1111/jofi.12819  |  Cited by: 184

THERESA KUCHLER, BASIT ZAFAR

Using novel survey data, we document that individuals extrapolate from recent personal experiences when forming expectations about aggregate economic outcomes. Recent locally experienced house price movements affect expectations about future U.S. house price changes and higher experienced house price volatility causes respondents to report a wider distribution over expected U.S. house price movements. When we exploit within‐individual variation in employment status, we find that individuals who personally experience unemployment become more pessimistic about future nationwide unemployment. The extent of extrapolation is unrelated to how informative personal experiences are, is inconsistent with risk adjustment, and is more pronounced for less sophisticated individuals.


Common Risk Factors in Cryptocurrency

Published: 2/2022,  Volume: 77,  Issue: 2  |  DOI: 10.1111/jofi.13119  |  Cited by: 181

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.


Lazy Prices

Published: 2/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12885  |  Cited by: 170

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.


Why Don't We Agree? Evidence from a Social Network of Investors

Published: 11/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12852  |  Cited by: 159

J. ANTHONY COOKSON, MARINA NIESSNER

We study sources of investor disagreement using sentiment of investors from a social media investing platform, combined with information on the users' investment approaches (e.g., technical, fundamental). We examine how much of overall disagreement is driven by different information sets versus differential interpretation of information by studying disagreement within and across investment approaches. Overall disagreement is evenly split between both sources of disagreement, but within‐group disagreement is more tightly related to trading volume than cross‐group disagreement. Although both sources of disagreement are important, our findings suggest that information differences are more important for trading than differences across market approaches.


Stock Returns over the FOMC Cycle

Published: 6/2019,  Volume: 74,  Issue: 5  |  DOI: 10.1111/jofi.12818  |  Cited by: 155

ANNA CIESLAK, ADAIR MORSE, ANNETTE VISSING‐JORGENSEN

We document that since 1994, the equity premium is earned entirely in weeks 0, 2, 4, and 6 in Federal Open Market Committee (FOMC) cycle time, that is, even weeks starting from the last FOMC meeting. We causally tie this fact to the Fed by studying intermeeting target changes, Fed funds futures, and internal Board of Governors meetings. The Fed has affected the stock market via unexpectedly accommodating policy, leading to large reductions in the equity premium. Evidence suggests systematic informal communication of Fed officials with the media and financial sector as a channel through which news about monetary policy has reached the market.


Price Discovery without Trading: Evidence from Limit Orders

Published: 4/2019,  Volume: 74,  Issue: 4  |  DOI: 10.1111/jofi.12769  |  Cited by: 142

JONATHAN BROGAARD, TERRENCE HENDERSHOTT, RYAN RIORDAN

We analyze the contribution to price discovery of market and limit orders by high‐frequency traders (HFTs) and non‐HFTs. While market orders have a larger individual price impact, limit orders are far more numerous. This results in price discovery occurring predominantly through limit orders. HFTs submit the bulk of limit orders and these limit orders provide most of the price discovery. Submissions of limit orders and their contribution to price discovery fall with volatility due to changes in HFTs’ behavior. Consistent with adverse selection arising from faster reactions to public information, HFTs’ informational advantage is partially explained by public information.


Firm‐Level Climate Change Exposure

Published: 3/2023,  Volume: 78,  Issue: 3  |  DOI: 10.1111/jofi.13219  |  Cited by: 139

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.


Banking on Deposits: Maturity Transformation without Interest Rate Risk

Published: 4/2021,  Volume: 76,  Issue: 3  |  DOI: 10.1111/jofi.13013  |  Cited by: 134

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.


What Is the Expected Return on a Stock?

Published: 5/2019,  Volume: 74,  Issue: 4  |  DOI: 10.1111/jofi.12778  |  Cited by: 131

IAN W. R. MARTIN, CHRISTIAN WAGNER

We derive a formula for the expected return on a stock in terms of the risk‐neutral variance of the market and the stock's excess risk‐neutral variance relative to that of the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.


High‐Frequency Trading around Large Institutional Orders

Published: 3/2019,  Volume: 74,  Issue: 3  |  DOI: 10.1111/jofi.12759  |  Cited by: 129

VINCENT VAN KERVEL, ALBERT J. MENKVELD

Liquidity suppliers lean against the wind. We analyze whether high‐frequency traders (HFTs) lean against large institutional orders that execute through a series of child orders. The alternative is HFTs trading with the wind, that is, in the same direction. We find that HFTs initially lean against these orders but eventually change direction and take positions in the same direction for the most informed institutional orders. Our empirical findings are consistent with investors trading strategically on their information. When deciding trade intensity, they seem to trade off higher speculative profits against higher risk of being detected and preyed on by HFTs.


Predictably Unequal? The Effects of Machine Learning on Credit Markets

Published: 12/2021,  Volume: 77,  Issue: 1  |  DOI: 10.1111/jofi.13090  |  Cited by: 126

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.


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: 122

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.


Attention‐Induced Trading and Returns: Evidence from Robinhood Users

Published: 10/2022,  Volume: 77,  Issue: 6  |  DOI: 10.1111/jofi.13183  |  Cited by: 119

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.


Presidential Address: Social Transmission Bias in Economics and Finance

Published: 5/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12906  |  Cited by: 117

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.


Do CEOs Matter? Evidence from Hospitalization Events

Published: 3/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12897  |  Cited by: 117

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 Limits of Limited Liability: Evidence from Industrial Pollution

Published: 10/2020,  Volume: 76,  Issue: 1  |  DOI: 10.1111/jofi.12978  |  Cited by: 113

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.


Sentiment Metrics and Investor Demand

Published: 3/2019,  Volume: 74,  Issue: 2  |  DOI: 10.1111/jofi.12754  |  Cited by: 113

LUKE DeVAULT, RICHARD SIAS, LAURA STARKS

Recent work suggests that sentiment traders shift from safer to more speculative stocks when sentiment increases. Exploiting these cross‐sectional patterns and changes in share ownership, we find that sentiment metrics capture institutional rather than individual investors’ demand shocks. We investigate the underlying economic mechanisms and find that common institutional investment styles (e.g., risk management, momentum trading) explain a significant portion of the relation between institutions and sentiment.


A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets

Published: 11/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12845  |  Cited by: 112

WENJIN KANG, K. GEERT ROUWENHORST, KE TANG

This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short‐term position changes are driven mainly by the liquidity demands of noncommercial traders, while long‐term variation is driven primarily by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance.