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: 542
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.
Tracking Retail Investor Activity
Published: 5/2021, Volume: 76, Issue: 5 | DOI: 10.1111/jofi.13033 | Cited by: 407
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.
Published: 6/2020, Volume: 75, Issue: 4 | DOI: 10.1111/jofi.12903 | Cited by: 382
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.
Global Pricing of Carbon‐Transition Risk
Published: 8/2023, Volume: 78, Issue: 6 | DOI: 10.1111/jofi.13272 | Cited by: 353
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.
Common Risk Factors in Cryptocurrency
Published: 2/2022, Volume: 77, Issue: 2 | DOI: 10.1111/jofi.13119 | Cited by: 350
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.
Declining Labor and Capital Shares
Published: 5/2020, Volume: 75, Issue: 5 | DOI: 10.1111/jofi.12909 | Cited by: 346
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: 330
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.
Published: 4/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13217 | Cited by: 315
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: 272
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: 246
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.
Banking on Deposits: Maturity Transformation without Interest Rate Risk
Published: 4/2021, Volume: 76, Issue: 3 | DOI: 10.1111/jofi.13013 | Cited by: 234
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.
Is There a Replication Crisis in Finance?
Published: 6/2023, Volume: 78, Issue: 5 | DOI: 10.1111/jofi.13249 | Cited by: 222
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.
Presidential Address: Social Transmission Bias in Economics and Finance
Published: 5/2020, Volume: 75, Issue: 4 | DOI: 10.1111/jofi.12906 | Cited by: 201
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.
The Limits of Limited Liability: Evidence from Industrial Pollution
Published: 10/2020, Volume: 76, Issue: 1 | DOI: 10.1111/jofi.12978 | Cited by: 183
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.
Published: 5/2021, Volume: 76, Issue: 4 | DOI: 10.1111/jofi.13024 | Cited by: 183
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.
Presidential Address: Sustainable Finance and ESG Issues—ValueversusValues
Published: 6/2023, Volume: 78, Issue: 4 | DOI: 10.1111/jofi.13255 | Cited by: 183
LAURA T. STARKS
In this address, I discuss differences across investor and manager motivations for considering sustainable finance—value versus values motivations—and how these differences contribute to misunderstandings about environmental, social, and governance investment approaches. The finance research community has the ability and responsibility to help clear up these misunderstandings through additional research, which I suggest.
Foreign Safe Asset Demand and the Dollar Exchange Rate
Published: 3/2021, Volume: 76, Issue: 3 | DOI: 10.1111/jofi.13003 | Cited by: 172
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.
The Wisdom of the Robinhood Crowd
Published: 4/2022, Volume: 77, Issue: 3 | DOI: 10.1111/jofi.13128 | Cited by: 166
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: 142
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.
The Impact of Supervision on Bank Performance
Published: 7/2020, Volume: 75, Issue: 5 | DOI: 10.1111/jofi.12964 | Cited by: 142
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.
Factor Momentum and the Momentum Factor
Published: 4/2022, Volume: 77, Issue: 3 | DOI: 10.1111/jofi.13131 | Cited by: 142
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: 140
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.
Anomalies and the Expected Market Return
Published: 12/2021, Volume: 77, Issue: 1 | DOI: 10.1111/jofi.13099 | Cited by: 139
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: 132
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.
Subjective Cash Flow and Discount Rate Expectations
Published: 3/2021, Volume: 76, Issue: 3 | DOI: 10.1111/jofi.13016 | Cited by: 129
RICARDO DELAO, SEAN MYERS
Why do stock prices vary? Using survey forecasts, we find that cash flow growth expectations explain most movements in the S&P 500 price‐dividend and price‐earnings ratios, accounting for at least 93% and 63% of their variation. These expectations comove strongly with price ratios, even when price ratios do not predict future cash flow growth. In comparison, return expectations have low volatility and small comovement with price ratios. Short‐term, rather than long‐term, expectations account for most price ratio variation. We propose an asset pricing model with beliefs about earnings growth reversal that accurately replicates these cash flow growth expectations and dynamics.