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: 797
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: 391
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: 325
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: 316
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: 274
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.
Firm‐Level Climate Change Exposure
Published: 3/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13219 | Cited by: 256
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: 8/2020, Volume: 75, Issue: 6 | DOI: 10.1111/jofi.12966 | Cited by: 246
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: 243
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.
Diagnostic Expectations and Stock Returns
Published: 7/2019, Volume: 74, Issue: 6 | DOI: 10.1111/jofi.12833 | Cited by: 209
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.
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: 200
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.
Published: 2/2020, Volume: 75, Issue: 3 | DOI: 10.1111/jofi.12885 | Cited by: 199
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.
Attention‐Induced Trading and Returns: Evidence from Robinhood Users
Published: 10/2022, Volume: 77, Issue: 6 | DOI: 10.1111/jofi.13183 | Cited by: 187
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.
Banking on Deposits: Maturity Transformation without Interest Rate Risk
Published: 4/2021, Volume: 76, Issue: 3 | DOI: 10.1111/jofi.13013 | Cited by: 168
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.
Published: 4/2023, Volume: 78, Issue: 3 | DOI: 10.1111/jofi.13217 | Cited by: 168
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.
Predictably Unequal? The Effects of Machine Learning on Credit Markets
Published: 12/2021, Volume: 77, Issue: 1 | DOI: 10.1111/jofi.13090 | Cited by: 167
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: Social Transmission Bias in Economics and Finance
Published: 5/2020, Volume: 75, Issue: 4 | DOI: 10.1111/jofi.12906 | Cited by: 152
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.
Foreign Safe Asset Demand and the Dollar Exchange Rate
Published: 3/2021, Volume: 76, Issue: 3 | DOI: 10.1111/jofi.13003 | Cited by: 146
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.
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: 144
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.
The Limits of Limited Liability: Evidence from Industrial Pollution
Published: 10/2020, Volume: 76, Issue: 1 | DOI: 10.1111/jofi.12978 | Cited by: 139
PAT AKEY, IAN APPEL
The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment
Published: 11/2019, Volume: 75, Issue: 1 | DOI: 10.1111/jofi.12851 | Cited by: 134
CARY FRYDMAN, BAOLIAN WANG
We test whether the display of information causally affects investor behavior in a high‐stakes trading environment. Using investor‐level brokerage data from China and a natural experiment, we estimate the impact of a shock that increased the salience of a stock's purchase price but did not change the investor's information set. We employ a difference‐in‐differences approach and find that the salience shock causally increased the disposition effect by 17%. We use microdata to document substantial heterogeneity across investors in the treatment effect. A previously documented trading pattern, the “rank effect,” explains heterogeneity in the change in the disposition effect.
Published: 5/2021, Volume: 76, Issue: 4 | DOI: 10.1111/jofi.13024 | Cited by: 130
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: 129
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: 129
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: 127
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.
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: 126
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.