A collection of the most cited articles published in the Journal of Finance over the last 5 years.
Published: 5/2017, Volume: 72, Issue: 4 | DOI: 10.1111/jofi.12505 | Cited by: 563
KARL V. LINS, HENRI SERVAES, ANE TAMAYO
During the 2008–2009 financial crisis, firms with high social capital, as measured by corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High‐CSR firms also experienced higher profitability, growth, and sales per employee relative to low‐CSR firms, and they raised more debt. This evidence suggests that the trust between a firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock.
Published: 1/2016, Volume: 71, Issue: 1 | DOI: 10.1111/jofi.12365 | Cited by: 491
R. DAVID MCLEAN, JEFFREY PONTIFF
We study the out‐of‐sample and post‐publication return predictability of 97 variables shown to predict cross‐sectional stock returns. Portfolio returns are 26% lower out‐of‐sample and 58% lower post‐publication. The out‐of‐sample decline is an upper bound estimate of data mining effects. We estimate a 32% (58%–26%) lower return from publication‐informed trading. Post‐publication declines are greater for predictors with higher in‐sample returns, and returns are higher for portfolios concentrated in stocks with high idiosyncratic risk and low liquidity. Predictor portfolios exhibit post‐publication increases in correlations with other published‐predictor portfolios. Our findings suggest that investors learn about mispricing from academic publications.
Published: 11/2016, Volume: 71, Issue: 6 | DOI: 10.1111/jofi.12393 | Cited by: 365
JOSEPH A. McCAHERY, ZACHARIAS SAUTNER, LAURA T. STARKS
We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories, we document widespread behind‐the‐scenes intervention as well as governance‐motivated exit. These governance mechanisms are viewed as complementary devices, with intervention typically occurring prior to a potential exit. We further find that long‐term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.
Published: 4/2017, Volume: 72, Issue: 3 | DOI: 10.1111/jofi.12498 | Cited by: 286
ANDREI KIRILENKO, ALBERT S. KYLE, MEHRDAD SAMADI, TUGKAN TUZUN
We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event—the Flash Crash—where a large automated selling program was rapidly executed in the E‐mini S&P 500 stock index futures market. Using audit trail transaction‐level data for the E‐mini on May 6 and the previous three days, we find that the trading pattern of the most active nondesignated intraday intermediaries (classified as High‐Frequency Traders) did not change when prices fell during the Flash Crash.
Published: 7/2016, Volume: 71, Issue: 4 | DOI: 10.1111/jofi.12408 | Cited by: 214
SULEYMAN BASAK, ANNA PAVLOVA
We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect commodity prices. Institutional investors care about their performance relative to a commodity index. We find that all commodity futures prices, volatilities, and correlations go up with financialization, but more so for index futures than for nonindex futures. The equity‐commodity correlations also increase. We demonstrate how financial markets transmit shocks not only to futures prices but also to commodity spot prices and inventories. Spot prices go up with financialization, and shocks to any index commodity spill over to all storable commodity prices.
Published: 9/2016, Volume: 71, Issue: 5 | DOI: 10.1111/jofi.12406 | Cited by: 212
BRYAN KELLY, ĽUBOŠ PÁSTOR, PIETRO VERONESI
We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. To isolate political uncertainty, we exploit its variation around national elections and global summits. We find that political uncertainty is priced in the equity option market as predicted by theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the price, variance, and tail risks associated with political events. This protection is more valuable in a weaker economy and amid higher political uncertainty. The effects of political uncertainty spill over across countries.
Published: 3/2017, Volume: 72, Issue: 2 | DOI: 10.1111/jofi.12487 | Cited by: 191
HAO LIANG, LUC RENNEBOOG
Using corporate social responsibility (CSR) ratings for 23,000 companies from 114 countries, we find that a firm's CSR rating and its country's legal origin are strongly correlated. Legal origin is a stronger explanation than “doing good by doing well” factors or firm and country characteristics (ownership concentration, political institutions, and globalization): firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings. Evidence from quasi‐natural experiments such as scandals and natural disasters suggests that civil law firms are more responsive to CSR shocks than common law firms.
Published: 7/2016, Volume: 71, Issue: 4 | DOI: 10.1111/jofi.12370 | Cited by: 187
SHAI BERNSTEIN, XAVIER GIROUD, RICHARD R. TOWNSEND
We show that venture capitalists' (VCs) on‐site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit. We rule out selection effects by exploiting an exogenous source of variation in VC involvement: the introduction of new airline routes that reduce VCs' travel times to their existing portfolio companies. We confirm the importance of this channel by conducting a large‐scale survey of VCs, of whom almost 90% indicate that direct flights increase their interaction with their portfolio companies and management, and help them better understand companies' activities.
Published: 8/2018, Volume: 73, Issue: 4 | DOI: 10.1111/jofi.12698 | Cited by: 169
JOSÉ AZAR, MARTIN C. SCHMALZ, ISABEL TECU
Many natural competitors are jointly held by a small set of large institutional investors. In the U.S. airline industry, taking common ownership into account implies increases in market concentration that are 10 times larger than what is “presumed likely to enhance market power” by antitrust authorities. Within‐route changes in common ownership concentration robustly correlate with route‐level changes in ticket prices, even when we only use variation in ownership due to the combination of two large asset managers. We conclude that a hidden social cost—reduced product market competition—accompanies the private benefits of diversification and good governance.
Published: 8/2017, Volume: 72, Issue: 4 | DOI: 10.1111/jofi.12530 | Cited by: 168
CAMPBELL R. HARVEY
Published: 9/2017, Volume: 72, Issue: 6 | DOI: 10.1111/jofi.12547 | Cited by: 161
ARNO RIEDL, PAUL SMEETS
To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play less of a role. Socially responsible investors in our sample expect to earn lower returns on SRI funds than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.
Published: 1/2016, Volume: 71, Issue: 1 | DOI: 10.1111/jofi.12302 | Cited by: 156
THIERRY FOUCAULT, JOHAN HOMBERT, IOANID ROŞU
We compare the optimal trading strategy of an informed speculator when he can trade ahead of incoming news (is “fast”), versus when he cannot (is “slow”). We find that speed matters: the fast speculator's trades account for a larger fraction of trading volume, and are more correlated with short‐run price changes. Nevertheless, he realizes a large fraction of his profits from trading on long‐term price changes. The fast speculator's behavior matches evidence about high‐frequency traders. We predict that stocks with more informative news are more liquid even though they attract more activity from informed high‐frequency traders.
Published: 1/2017, Volume: 72, Issue: 1 | DOI: 10.1111/jofi.12432 | Cited by: 155
GENNARO BERNILE, VINEET BHAGWAT, P. RAGHAVENDRA RAU
The literature on managerial style posits a linear relation between a chief executive officer's (CEOs) past experiences and firm risk. We show that there is a nonmonotonic relation between the intensity of CEOs’ early‐life exposure to fatal disasters and corporate risk‐taking. CEOs who experience fatal disasters without extremely negative consequences lead firms that behave more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively. These patterns manifest across various corporate policies including leverage, cash holdings, and acquisition activity. Ultimately, the link between CEOs’ disaster experience and corporate policies has real economic consequences on firm riskiness and cost of capital.
Published: 5/2016, Volume: 71, Issue: 3 | DOI: 10.1111/jofi.12369 | Cited by: 152
VIVIAN W. FANG, ALLEN H. HUANG, JONATHAN M. KARPOFF
During 2005 to 2007, the SEC ordered a pilot program in which one‐third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short‐sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre‐experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.
Published: 9/2016, Volume: 71, Issue: 5 | DOI: 10.1111/jofi.12403 | Cited by: 151
I exploit the adoption of state‐level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws, with this result stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm's degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.
Published: 5/2017, Volume: 72, Issue: 4 | DOI: 10.1111/jofi.12513 | Cited by: 143
ALAN MOREIRA, TYLER MUIR
Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean‐variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting‐against‐beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk‐based explanations and is a challenge to structural models of time‐varying expected returns.
Published: 3/2017, Volume: 72, Issue: 2 | DOI: 10.1111/jofi.12467 | Cited by: 139
GIOVANNI DELL'ARICCIA, LUC LAEVEN, GUSTAVO A. SUAREZ
We present evidence of a risk‐taking channel of monetary policy for the U.S. banking system. We use confidential data on banks’ internal ratings on loans to businesses over the period 1997 to 2011 from the Federal Reserve's Survey of Terms of Business Lending. We find that ex ante risk‐taking by banks (measured by the risk rating of new loans) is negatively associated with increases in short‐term interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods of financial distress.
Published: 3/2018, Volume: 73, Issue: 2 | DOI: 10.1111/jofi.12607 | Cited by: 138
FRANCISCO BARILLAS, JAY SHANKEN
A Bayesian asset pricing test is derived that is easily computed in closed form from the standard F‐statistic. Given a set of candidate traded factors, we develop a related test procedure that permits the computation of model probabilities for the collection of all possible pricing models that are based on subsets of the given factors. We find that the recent models of Hou, Xue, and Zhang (2015a, 2015b) and Fama and French (2015, 2016) are dominated by a variety of models that include a momentum factor, along with value and profitability factors that are updated monthly.
Published: 5/2018, Volume: 73, Issue: 3 | DOI: 10.1111/jofi.12620 | Cited by: 131
WENXIN DU, ALEXANDER TEPPER, ADRIEN VERDELHAN
We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed income spreads and with nominal interest rates.
Published: 5/2016, Volume: 71, Issue: 3 | DOI: 10.1111/jofi.12281 | Cited by: 126
TOBIAS BERG, ANTHONY SAUNDERS, SASCHA STEFFEN
More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total‐cost‐of‐borrowing measure that includes various fees charged by lenders.
Published: 11/2018, Volume: 73, Issue: 6 | DOI: 10.1111/jofi.12727 | Cited by: 115
ITZHAK BEN-DAVID, FRANCESCO FRANZONI, RABIH MOUSSAWI
Due to their low trading costs, exchange‐traded funds (ETFs) are a potential catalyst for short‐horizon liquidity traders. The liquidity shocks can propagate to the underlying securities through the arbitrage channel, and ETFs may increase the nonfundamental volatility of the securities in their baskets. We exploit exogenous changes in index membership and find that stocks with higher ETF ownership display significantly higher volatility. ETF ownership increases the negative autocorrelation in stock prices. The increase in volatility appears to introduce undiversifiable risk in prices because stocks with high ETF ownership earn a significant risk premium of up to 56 basis points monthly.
Published: 3/2017, Volume: 72, Issue: 2 | DOI: 10.1111/jofi.12470 | Cited by: 114
SHAI BERNSTEIN, ARTHUR KORTEWEG, KEVIN LAWS
This paper uses a randomized field experiment to identify which start‐up characteristics are most important to investors in early‐stage firms. The experiment randomizes investors’ information sets of fund‐raising start‐ups. The average investor responds strongly to information about the founding team, but not to firm traction or existing lead investors. We provide evidence that the team is not merely a signal of quality, and that investing based on team information is a rational strategy. Together, our results indicate that information about human assets is causally important for the funding of early‐stage firms and hence for entrepreneurial success.
Published: 1/2016, Volume: 71, Issue: 1 | DOI: 10.1111/jofi.12364 | Cited by: 114
KLAUS ADAM, ALBERT MARCET, JUAN PABLO NICOLINI
We show that consumption‐based asset pricing models with time‐separable preferences generate realistic amounts of stock price volatility if one allows for small deviations from rational expectations. Rational investors with subjective beliefs about price behavior optimally learn from past price observations. This imparts momentum and mean reversion into stock prices. The model quantitatively accounts for the volatility of returns, the volatility and persistence of the price‐dividend ratio, and the predictability of long‐horizon returns. It passes a formal statistical test for the overall fit of a set of moments provided one excludes the equity premium.
Published: 7/2018, Volume: 73, Issue: 4 | DOI: 10.1111/jofi.12694 | Cited by: 113
HENDRIK BESSEMBINDER, STACEY JACOBSEN, WILLIAM MAXWELL, KUMAR VENKATARAMAN
We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, dealer capital commitment, turnover, block trade frequency, and average trade size decreased during the financial crisis and thereafter. These declines are attributable to bank‐affiliated dealers, as nonbank dealers have increased their market commitment. Our evidence indicates that liquidity provision in the corporate bond markets is evolving away from the commitment of bank‐affiliated dealer capital to absorb customer imbalances, and that postcrisis banking regulations likely contribute.
Published: 9/2016, Volume: 71, Issue: 5 | DOI: 10.1111/jofi.12421 | Cited by: 110
ITAMAR DRECHSLER, THOMAS DRECHSEL, DAVID MARQUES-IBANEZ, PHILIPP SCHNABL
We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.