Top 25 Cited Recent Articles

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

Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis

Published: 5/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12505  |  Cited by: 608

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.


The Flash Crash: High-Frequency Trading in an Electronic Market

Published: 4/2017,  Volume: 72,  Issue: 3  |  DOI: 10.1111/jofi.12498  |  Cited by: 293

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.


On the Foundations of Corporate Social Responsibility

Published: 3/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12487  |  Cited by: 211

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.


Anticompetitive Effects of Common Ownership

Published: 8/2018,  Volume: 73,  Issue: 4  |  DOI: 10.1111/jofi.12698  |  Cited by: 180

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.


Why Do Investors Hold Socially Responsible Mutual Funds?

Published: 9/2017,  Volume: 72,  Issue: 6  |  DOI: 10.1111/jofi.12547  |  Cited by: 178

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.


Presidential Address: The Scientific Outlook in Financial Economics

Published: 8/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12530  |  Cited by: 171

CAMPBELL R. HARVEY


What Doesn't Kill You Will Only Make You More Risk‐Loving: Early‐Life Disasters and CEO Behavior

Published: 1/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12432  |  Cited by: 169

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.


Volatility-Managed Portfolios

Published: 5/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12513  |  Cited by: 154

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.


Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States

Published: 3/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12467  |  Cited by: 145

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.


Comparing Asset Pricing Models

Published: 3/2018,  Volume: 73,  Issue: 2  |  DOI: 10.1111/jofi.12607  |  Cited by: 145

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.


Deviations from Covered Interest Rate Parity

Published: 5/2018,  Volume: 73,  Issue: 3  |  DOI: 10.1111/jofi.12620  |  Cited by: 139

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.


Do ETFs Increase Volatility?

Published: 11/2018,  Volume: 73,  Issue: 6  |  DOI: 10.1111/jofi.12727  |  Cited by: 118

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.


Attracting Early-Stage Investors: Evidence from a Randomized Field Experiment

Published: 3/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12470  |  Cited by: 118

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.


Capital Commitment and Illiquidity in Corporate Bonds

Published: 7/2018,  Volume: 73,  Issue: 4  |  DOI: 10.1111/jofi.12694  |  Cited by: 117

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.


The Real Effects of Credit Ratings: The Sovereign Ceiling Channel

Published: 1/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12434  |  Cited by: 112

HEITOR ALMEIDA, IGOR CUNHA, MIGUEL A. FERREIRA, FELIPE RESTREPO

We show that sovereign debt impairments can have a significant effect on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation in corporate ratings due to rating agencies' sovereign ceiling policies, which require that firms' ratings remain at or below the sovereign rating of their country of domicile.


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: 112

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.


Housing Collateral and Entrepreneurship

Published: 1/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12468  |  Cited by: 108

MARTIN C. SCHMALZ, DAVID A. SRAER, DAVID THESMAR

We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross‐sectional variation in local house‐price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.


Diagnostic Expectations and Credit Cycles

Published: 1/2018,  Volume: 73,  Issue: 1  |  DOI: 10.1111/jofi.12586  |  Cited by: 107

PEDRO BORDALO, NICOLA GENNAIOLI, ANDREI SHLEIFER

We present a model of credit cycles arising from diagnostic expectations—a belief formation mechanism based on Kahneman and Tversky's representativeness heuristic. Diagnostic expectations overweight future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, and thus is immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified framework. In our model, credit spreads are excessively volatile, overreact to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.


The Leverage Ratchet Effect

Published: 12/2017,  Volume: 73,  Issue: 1  |  DOI: 10.1111/jofi.12588  |  Cited by: 104

ANAT R. ADMATI, PETER M. DEMARZO, MARTIN F. HELLWIG, PAUL PFLEIDERER

Firms’ inability to commit to future funding choices has profound consequences for capital structure dynamics. With debt in place, shareholders pervasively resist leverage reductions no matter how much such reductions may enhance firm value. Shareholders would instead choose to increase leverage even if the new debt is junior and would reduce firm value. These asymmetric forces in leverage adjustments, which we call the leverage ratchet effect, cause equilibrium leverage outcomes to be history‐dependent. If forced to reduce leverage, shareholders are biased toward selling assets relative to potentially more efficient alternatives such as pure recapitalizations.


The Geography of Financial Misconduct

Published: 10/2018,  Volume: 73,  Issue: 5  |  DOI: 10.1111/jofi.12704  |  Cited by: 96

CHRISTOPHER A. PARSONS, JOHAN SULAEMAN, SHERIDAN TITMAN

Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of 3. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city‐level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city.


Interpreting Factor Models

Published: 3/2018,  Volume: 73,  Issue: 3  |  DOI: 10.1111/jofi.12612  |  Cited by: 94

SERHIY KOZAK, STEFAN NAGEL, SHRIHARI SANTOSH

We argue that tests of reduced‐form factor models and horse races between “characteristics” and “covariances” cannot discriminate between alternative models of investor beliefs. Since asset returns have substantial commonality, absence of near‐arbitrage opportunities implies that the stochastic discount factor can be represented as a function of a few dominant sources of return variation. As long as some arbitrageurs are present, this conclusion applies even in an economy in which all cross‐sectional variation in expected returns is caused by sentiment. Sentiment‐investor demand results in substantial mispricing only if arbitrageurs are exposed to factor risk when taking the other side of these trades.


Asset Market Participation and Portfolio Choice over the Life-Cycle

Published: 3/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12484  |  Cited by: 91

ANDREAS FAGERENG, CHARLES GOTTLIEB, LUIGI GUISO

Using error‐free data on life‐cycle portfolio allocations of a large sample of Norwegian households, we document a double adjustment as households age: a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement. When structurally estimating an extended life‐cycle model, the parameter combination that best fits the data is one with a relatively large risk aversion, a small per‐period participation cost, and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in Norway.


Bank Capital and Lending Relationships

Published: 2/2018,  Volume: 73,  Issue: 2  |  DOI: 10.1111/jofi.12604  |  Cited by: 91

MICHAEL SCHWERT

This paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for lending relationships, bank capital, and credit provision. I find that bank‐dependent firms borrow from well‐capitalized banks, while firms with access to the bond market borrow from banks with less capital. This matching of bank‐dependent firms with stable banks smooths cyclicality in aggregate credit provision and mitigates the effects of bank shocks on the real economy.


Anomalies and News

Published: 10/2018,  Volume: 73,  Issue: 5  |  DOI: 10.1111/jofi.12718  |  Cited by: 88

JOSEPH ENGELBERG, R. DAVID MCLEAN, JEFFREY PONTIFF

Using a sample of 97 stock return anomalies, we find that anomaly returns are 50% higher on corporate news days and six times higher on earnings announcement days. These results could be explained by dynamic risk, mispricing due to biased expectations, or data mining. We develop and conduct several unique tests to differentiate between these three explanations. Our results are most consistent with the idea that anomaly returns are driven by biased expectations, which are at least partly corrected upon news arrival.


The Macroeconomics of Shadow Banking

Published: 8/2017,  Volume: 72,  Issue: 6  |  DOI: 10.1111/jofi.12540  |  Cited by: 80

ALAN MOREIRA, ALEXI SAVOV

We build a macrofinance model of shadow banking—the transformation of risky assets into securities that are money‐like in quiet times but become illiquid when uncertainty spikes. Shadow banking economizes on scarce collateral, expanding liquidity provision, boosting asset prices and growth, but also building up fragility. A rise in uncertainty raises shadow banking spreads, forcing financial institutions to switch to collateral‐intensive funding. Shadow banking collapses, liquidity provision shrinks, liquidity premia and discount rates rise, asset prices and investment fall. The model generates slow recoveries, collateral runs, and flight‐to‐quality effects, and it sheds light on Large‐Scale Asset Purchases, Operation Twist, and other interventions.