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: 1559

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.


On the Foundations of Corporate Social Responsibility

Published: 3/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12487  |  Cited by: 528

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.


Why Do Investors Hold Socially Responsible Mutual Funds?

Published: 9/2017,  Volume: 72,  Issue: 6  |  DOI: 10.1111/jofi.12547  |  Cited by: 516

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.


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: 503

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.


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: 437

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.


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

Published: 4/2017,  Volume: 72,  Issue: 3  |  DOI: 10.1111/jofi.12498  |  Cited by: 436

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.


Anticompetitive Effects of Common Ownership

Published: 8/2018,  Volume: 73,  Issue: 4  |  DOI: 10.1111/jofi.12698  |  Cited by: 355

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.


Presidential Address: The Scientific Outlook in Financial Economics

Published: 8/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12530  |  Cited by: 306

CAMPBELL R. HARVEY


Deviations from Covered Interest Rate Parity

Published: 5/2018,  Volume: 73,  Issue: 3  |  DOI: 10.1111/jofi.12620  |  Cited by: 295

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: 272

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.


Taming the Factor Zoo: A Test of New Factors

Published: 2/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12883  |  Cited by: 270

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.


Volatility-Managed Portfolios

Published: 5/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12513  |  Cited by: 267

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.


Diagnostic Expectations and Credit Cycles

Published: 1/2018,  Volume: 73,  Issue: 1  |  DOI: 10.1111/jofi.12586  |  Cited by: 251

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.


Comparing Asset Pricing Models

Published: 3/2018,  Volume: 73,  Issue: 2  |  DOI: 10.1111/jofi.12607  |  Cited by: 246

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.


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: 235

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.


Is Bitcoin Really Untethered?

Published: 6/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12903  |  Cited by: 230

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.


Interpreting Factor Models

Published: 3/2018,  Volume: 73,  Issue: 3  |  DOI: 10.1111/jofi.12612  |  Cited by: 201

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.


Bank Capital and Lending Relationships

Published: 2/2018,  Volume: 73,  Issue: 2  |  DOI: 10.1111/jofi.12604  |  Cited by: 195

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.


Housing Collateral and Entrepreneurship

Published: 1/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12468  |  Cited by: 195

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.


Tracking Retail Investor Activity

Published: 5/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13033  |  Cited by: 190

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.


Capital Commitment and Illiquidity in Corporate Bonds

Published: 7/2018,  Volume: 73,  Issue: 4  |  DOI: 10.1111/jofi.12694  |  Cited by: 188

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: 187

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.


The Geography of Financial Misconduct

Published: 10/2018,  Volume: 73,  Issue: 5  |  DOI: 10.1111/jofi.12704  |  Cited by: 186

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.


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

Published: 3/2017,  Volume: 72,  Issue: 2  |  DOI: 10.1111/jofi.12470  |  Cited by: 185

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.


Declining Labor and Capital Shares

Published: 5/2020,  Volume: 75,  Issue: 5  |  DOI: 10.1111/jofi.12909  |  Cited by: 183

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.