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Shattered housing J. Financ. Econ. (IF 8.238) Pub Date : 2024-04-09 Jonas Happel, Yigitcan Karabulut, Larissa Schäfer, Şelale Tüzel
Do negative housing shocks lead to persistent changes in household attitudes toward housing and homeownership? We use the residential destruction of Germany during World War II (WWII) as a quasi-experiment and exploit the reasonably exogenous region-by-cohort variation in destruction exposure. We find that WWII-experiencing cohorts from high destruction regions are significantly less likely to be homeowners
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Consumption smoothing or consumption binging? The effects of government-led consumer credit expansion in Brazil J. Financ. Econ. (IF 8.238) Pub Date : 2024-04-05 Gabriel Garber, Atif Mian, Jacopo Ponticelli, Amir Sufi
Brazil initiated a major credit expansion program through government banks in 2011. The program primarily targeted public sector workers with offers of payroll-backed loans. Using individual-level administrative data we find that the program led to a 15 percentage point rise in debt to initial income for public sector workers. We develop a new method for estimating workers' expected income growth,
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In-sample and out-of-sample Sharpe ratios of multi-factor asset pricing models J. Financ. Econ. (IF 8.238) Pub Date : 2024-04-04 Raymond Kan, Xiaolu Wang, Xinghua Zheng
Using available return data, many multi-factor asset pricing models present impressive in-sample Sharpe ratios, significantly surpassing that of the market portfolio. Such a performance, however, contradicts the conventional wisdom in finance. Investors cannot realistically attain the in-sample Sharpe ratios. They obtain the out-of-sample Sharpe ratios, which are significantly lower. Estimation risk
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The timing of voluntary delisting J. Financ. Econ. (IF 8.238) Pub Date : 2024-04-03 Alcino Azevedo, Gonul Colak, Izidin El Kalak, Radu Tunaru
For many firms, voluntarily delisting from a stock exchange can be optimal. We model an entrepreneur's incentives to voluntarily delist the firm as a trade-off between consumption of private benefits when listed and expected improvements in the firm's performance after delisting. Our model allows for heterogeneity across firms and countries, and various micro and macro shocks affect the delisting decision
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Price ceilings, market structure, and payout policies J. Financ. Econ. (IF 8.238) Pub Date : 2024-04-01 Xiongshi Li, Mao Ye, Miles Zheng
To prevent issuers from inflating their share prices, SEC Rule 10b-18 sets price ceilings on share repurchases through open markets. We find that market-structure reforms in the 1990s and 2000s dramatically increased share repurchases because they relaxed constraints on issuers competing with other buyers under price ceilings. The Tick Size Pilot Program, a controlled experiment that partially reversed
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The pricing of U.S. Treasury floating rate notes J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-27 Jonathan S. Hartley, Urban J. Jermann
Since January 2014, the U.S. Treasury has been issuing floating rate notes (FRNs). These notes pay quarterly interest based on an average of the constant maturity rates of newly issued three-month T-bills during the quarter. We show how to price such FRNs. We estimate that they have been paying excess interest between 3 and 42 basis points above the implied interest of other Treasury securities. We
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Sustainability or performance? Ratings and fund managers’ incentives J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-27 Nickolay Gantchev, Mariassunta Giannetti, Rachel Li
We explore how mutual fund managers and investors react when the tradeoff between a fund's sustainability and performance becomes salient. Following the introduction of Morningstar's sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks to attract flows. Such sustainability-driven trades, however, underperformed, impairing the funds’ overall performance
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Robo advisors and access to wealth management J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-22 Michael Reher, Stanislav Sokolinski
We investigate how access to robo-advisors impacts the financial investment and welfare of less-wealthy investors. We leverage a quasi-experiment where a major U.S. robo-advisor significantly expands access by reducing its account minimum, increasing participation by middle-class investors but not the poor. A benchmark model calibrated to portfolio-level data rationalizes this increase: middle-class
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Trade credit and the stability of supply chains J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-21 Nuri Ersahin, Mariassunta Giannetti, Ruidi Huang
We show that trade credit flows increase when a firm in a production network becomes a less reliable supplier due to an operating shock. Affected firms extend more trade credit when their customers have lower switching costs or expect more disruption. Suppliers that are more dependent on the affected firms facilitate the trade credit extension. However, when financial constraints at the affected firms
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The governance of director compensation J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-20 Lily Fang, Sterling Huang
The average total compensation of directors in U.S.-listed companies was $342,030 in 2020, 5.06 times the median household income. Directors set their own pay, giving rise to potential self-dealing. We argue and document that in the presence of self-dealing, external mechanisms such as legal standards act as effective means of governance. Following a landmark Delaware court ruling that subjected director
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Aggregate lapsation risk J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-18 Ralph S.J. Koijen, Hae Kang Lee, Stijn Van Nieuwerburgh
We study aggregate lapsation risk in the life insurance sector. We construct two lapsation risk factors that explain a large fraction of the common variation in lapse rates of the 30 largest life insurance companies. The first is a cyclical factor that is positively correlated with credit spreads and unemployment, while the second factor is a trend factor that correlates with the level of interest
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Political polarization in financial news J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-12 Eitan Goldman, Nandini Gupta, Ryan Israelsen
Comparing coverage of the same corporate financial news by the conservative and the liberal , we find strong evidence of political polarization in their reporting on both the intensive and extensive margins of coverage. We show that this politics-induced disagreement in corporate financial news leads to an increase in abnormal trading volume for the most politically extreme firms. Our results highlight
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Production complementarity and information transmission across industries J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-10 Charles M.C. Lee, Terrence Tianshuo Shi, Stephen Teng Sun, Ran Zhang
Economic theory suggests that production complementarity is an important driver of sectoral co-movements and business cycle fluctuations. We operationalize this concept using a measure of production complementarity proximity () between any two companies. We show firms from different industries but are closely aligned in exhibit strong co-movement in their operating, investing, and financing activities
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Missing values handling for machine learning portfolios J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-08 Andrew Y. Chen, Jack McCoy
We characterize the structure and origins of missingness for 159 cross-sectional return predictors and study missing value handling for portfolios constructed using machine learning. Simply imputing with cross-sectional means performs well compared to rigorous expectation-maximization methods. This stems from three facts about predictor data: (1) missingness occurs in large blocks organized by time
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The effect of female leadership on contracting from Capitol Hill to Main Street J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-05 Jonathan Brogaard, Nataliya Gerasimova, Maximilian Rohrer
This paper provides novel evidence that female politicians increase the proportion of US government procurement contracts allocated to women-owned firms. For identification, we use a regression discontinuity design on a sample of mixed-gender elections in the US House of Representatives. The effect grows over a female representative's tenure and concentrates in female representatives who are on powerful
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Limited attention to detail in financial markets: Evidence from reduced-form and structural estimation J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-04 Henrik Cronqvist, Tomislav Ladika, Elisa Pazaj, Zacharias Sautner
We show that firm valuations fell after a key expense became more visible in financial statements. FAS 123-R required firms to deduct option compensation costs from earnings, instead of disclosing them in footnotes. Firms that granted high option pay experienced earnings reductions, while fundamentals remained unchanged. These firms were more likely to miss earnings forecasts, and they experienced
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Demand-and-supply imbalance risk and long-term swap spreads J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-01 Samuel G. Hanson, Aytek Malkhozov, Gyuri Venter
We develop and test a model in which swap spreads are determined by end users' demand for and constrained intermediaries' supply of long-term interest rate swaps. Swap spreads reflect compensation both for using scarce intermediary capital and for bearing convergence risk—i.e., the risk spreads will widen due to a future demand-and-supply imbalance. We show that a proxy for the intermediated quantity
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J'Accuse! Antisemitism and financial markets in the time of the Dreyfus Affair J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-01 Quoc-Anh Do, Roberto Galbiati, Benjamin Marx, Miguel A. Ortiz Serrano
We study the stock market performance of firms with Jewish board members during the “Dreyfus Affair” in 19th century France. In a context of widespread latent antisemitism, initial accusations made against the Jewish officer Alfred Dreyfus led to short-lived abnormal negative returns for Jewish-connected firms. However, investors betting on these firms earned higher returns during the period corresponding
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Persistent and transitory components of firm characteristics: Implications for asset pricing J. Financ. Econ. (IF 8.238) Pub Date : 2024-03-01 Fahiz Baba-Yara, Martijn Boons, Andrea Tamoni
We study the horizon dimension of cross-sectional return predictability using a model where characteristics contain both persistent and transitory components. We test the implications of this model for the average returns of popular characteristic-based trading strategies at short versus long horizons after portfolio formation. Our evidence supports the claim that the relative compensation for persistent
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The proxy advisory industry: Influencing and being influenced J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-27 Chong Shu
This paper develops two new methods to infer a mutual fund's proxy advisors from SEC filings. It then applies these methods to characterize features of the proxy advice industry from 2007 to 2021: (i) As of 2021, ISS and Glass Lewis collectively control approximately 90 percent of the market. During this period, the market share of ISS remains stable, while that of Glass Lewis has increased. (ii) When
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Siphoned apart: A portfolio perspective on order flow segmentation J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-21 Markus Baldauf, Joshua Mollner, Bart Zhou Yueshen
We study liquidity supply in fragmented markets. Market makers intermediate heterogeneous order flows, trading off spread revenue against inventory costs. Applying our model to payment for order flow (PFOF), we demonstrate that portfolio-based considerations of inventory management incentivize market makers to segment retail orders by siphoning them off-exchange. Banning order flow segmentation reduces
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Investment when new capital is hard to find J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-16 Olivier Darmouni, Andrew Sutherland
We examine how a fixed capital supply shortage affects firm investment. Using equipment transaction–level data, we find pandemic-driven production disruptions significantly altered capital reallocation patterns across firms. A surge in used capital trading activity softened the investment decline, as firms acquired used capital from distant and dissimilar counterparts. Younger firms were disproportionately
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Motivating collusion J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-14 Sangeun Ha, Fangyuan Ma, Alminas Žaldokas
We examine how executive compensation can be designed to facilitate product market collusion. We look at the 2013 decision to close several regional offices of the U.S. Department of Justice, which lowered antitrust enforcement for firms located near these closed offices. We argue this made collusion more appealing to shareholders, and find that these firms increased the sensitivity of executive pay
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RegTech: Technology-driven compliance and its effects on profitability, operations, and market structure J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-13 Ben Charoenwong, Zachary T. Kowaleski, Alan Kwan, Andrew G. Sutherland
Compliance-driven investments in technology—or “RegTech”—are growing rapidly. To understand the effects on the financial sector, we study firms’ responses to new internal control requirements. Affected firms make significant investments in ERP and hardware. These expenditures then enable complementary investments that are leveraged for noncompliance purposes, leading to modest savings from avoided
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Human capital risk and portfolio choices: Evidence from university admission discontinuities J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-13 Philippe d'Astous, Stephen H. Shore
Theory suggests that increasing idiosyncratic, uninsurable labor income risk may cause individuals to reduce the risk in their financial assets. This relationship is confounded empirically by the tendency of risk tolerant people to choose riskier careers and hold riskier portfolios, leading to an upward-biased estimate of the effect of earnings risk on risky assets holdings. We overcome this identification
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Is it alpha or beta? Decomposing hedge fund returns when models are misspecified J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-13 David Ardia, Laurent Barras, Patrick Gagliardini, Olivier Scaillet
We develop a novel approach to separate alpha and beta under model misspecification. It comes with formal tests to identify less misspecified models and sharpen the return decomposition of individual funds. Our hedge fund analysis reveals that: (i) prominent models are as misspecified as the CAPM, (ii) several factors (time-series momentum, variance, carry) capture alternative strategies and lower
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Asset life, leverage, and debt maturity matching J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-09 Thomas Geelen, Jakub Hajda, Erwan Morellec, Adam Winegar
Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital
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Causal effects of closing businesses in a pandemic J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-09 Jean-Noël Barrot, Maxime Bonelli, Basile Grassi, Julien Sauvagnat
We study whether state-level mandatory business closures implemented in response to the outbreak of the Covid-19 causally affect economic and health outcomes. Using plausibly exogenous variations in exposure to these restrictions, we find that they impose substantial losses to firms and workers, the former bearing approximately two thirds of the cost, consistent with firms partially insuring their
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How does competition affect retail banking? Quasi-experimental evidence from bank mergers J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-07 Jack Liebersohn
This paper studies bank antitrust rules which discontinuously shift bank mergers' competitive impact. The likelihood of mandatory divestiture rises sharply for mergers in markets above a threshold level of concentration, leading to an increase in the number of banks in these markets. Consistent with greater competition, intervention leads to higher deposit rates. Mortgage originations rise by 11%,
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Corporate responses to stock price fragility J. Financ. Econ. (IF 8.238) Pub Date : 2024-02-05 Richard Friberg, Itay Goldstein, Kristine W. Hankins
This study shows that firms regard stock price fragility - exposure to non-fundamental demand shocks stemming from the composition of equity ownership - as a salient corporate risk. We model ex ante corporate responses to higher potential for stock market misvaluation and then empirically document that within firm variation in equity fragility has effects in line with the model: higher fragility raises
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Evergreening J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-25 Miguel Faria-e-Castro, Pascal Paul, Juan M. Sánchez
We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical
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Charting by machines J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-24 Scott Murray, Yusen Xia, Houping Xiao
We test the efficient market hypothesis by using machine learning to forecast stock returns from historical performance. These forecasts strongly predict the cross-section of future stock returns. The predictive power holds in most subperiods and is strong among the largest 500 stocks. The forecasting function has important nonlinearities and interactions, is remarkably stable through time, and captures
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Fearing the Fed: How wall street reads main street J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-22 Vadim Elenev, Tzuo-Hann Law, Dongho Song, Amir Yaron
We provide strong evidence of a countercyclical sensitivity of the stock market to major macroeconomic announcements. The most notable cyclical variation takes place within expansions: sensitivity is largest early in an expansion and essentially zero late in an expansion. By exploiting the comovement pattern between stocks and bonds around announcements, we show that the stock market sensitivity is
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Disagreement, information quality and asset prices J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-22 Costas Xiouros, Fernando Zapatero
We present an analytical solution for a pure exchange economy featuring a continuum of agents with disagreement, time-varying information quality, and reference-dependent preferences. Our general equilibrium model exhibits stationary dynamics. By examining the implications of the model, we find that the commonly studied asset pricing channels of disagreement have limited quantitative significance.
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Delayed creative destruction: How uncertainty shapes corporate assets J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-21 Murillo Campello, Gaurav Kankanhalli, Hyunseob Kim
We show how uncertainty shapes corporate asset allocation, composition, and productivity using data from the shipping industry. Firms curtail both ship acquisitions and disposals when uncertainty increases, primarily through cuts in new ship orders and ship demolitions — decisions that are costlier to reverse vis-à-vis secondary market transactions. Uncertainty also prompts firms to concentrate their
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Personality differences and investment decision-making J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-18 Zhengyang Jiang, Cameron Peng, Hongjun Yan
We survey thousands of affluent American investors to examine the relationship between personalities and investment decisions. The Big Five personality traits correlate with investors' beliefs about the stock market and economy, risk preferences, and social interaction tendencies. Two personality traits, Neuroticism and Openness, stand out in their explanatory power for equity investments. Investors
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Harnessing the overconfidence of the crowd: A theory of SPACs J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-16 Snehal Banerjee, Martin Szydlowski
In a SPAC transaction, a sponsor raises financing from investors using redeemable shares and rights. When investors are sophisticated, these features dilute the sponsor's stake and can lead to underinvestment in profitable targets. However, when investors are overconfident about their ability to respond to interim news, the optionality in such features is overpriced, and SPACs can lead to over-investment
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Capital budgeting, uncertainty, and misallocation J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-16 Ben Charoenwong, Yosuke Kimura, Alan Kwan, Eugene Tan
In canonical models of investment dynamics under uncertainty, “time-to-build” in investment decisions implies that uncertainty negatively impacts firm values and aggregate capital productivity. However, capital budgeting, which involves ex-ante information acquisition and state-contingent investment decisions, can potentially ameliorate time-to-build frictions. Reduced-form evidence using firm-level
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Regulatory costs of being public: Evidence from bunching estimation J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-12 Michael Ewens, Kairong Xiao, Ting Xu
We quantify the costs of major disclosure and governance regulations by exploiting a regulatory quirk: many rules trigger when a firm's public float exceeds a threshold. Consistent with firms avoiding costly regulation, we document significant bunching around three major regulatory thresholds. Estimations reveal that the three examined rules' compliance costs range from 1.2% to 1.8% of market capitalization
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Collateral eligibility of corporate debt in the Eurosystem J. Financ. Econ. (IF 8.238) Pub Date : 2024-01-09 Loriana Pelizzon, Max Riedel, Zorka Simon, Marti G. Subrahmanyam
We study the many implications of the Eurosystem collateral framework for corporate bonds. Using data on the evolving collateral eligibility list, we identify the first inclusion dates of bonds and issuers and use these events to find that the increased supply and demand for pledgeable collateral following eligibility (a) increases activity in the corporate securities lending market, (b) lowers eligible
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Quantifying the impact of red tape on investment: A survey data approach J. Financ. Econ. (IF 8.238) Pub Date : 2023-12-29 Bruno Pellegrino, Geoffery Zheng
An important strand of research in macro-finance investigates which factors impede enterprise investment, and what is their aggregate economic cost. In this paper, we make two contributions to this literature. The first contribution is methodological: we introduce a novel framework to calibrate macroeconomic models with firm-level distortions using enterprise survey micro-data. The core of our innovation
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Independent regulators and financial stability evidence from gubernatorial election campaigns in the Progressive Era J. Financ. Econ. (IF 8.238) Pub Date : 2023-12-22 Marco Del Angel, Gary Richardson
Regulatory independence forms a foundation for modern financial systems. The institutions’ value is illuminated by a Progressive Era policy experiment when independent state-bank regulators came under governors’ supervision. Afterwards, bank resolution rates declined during gubernatorial election campaigns for banks supervised by state but not national authorities. This gubernatorial-campaign effect
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Stress tests and model monoculture J. Financ. Econ. (IF 8.238) Pub Date : 2023-12-06 Keeyoung Rhee, Keshav Dogra
We study whether regulators should reveal stress test results that contain imperfect information about banks' financial health. Although disclosure restores market confidence in banks, it misclassifies some healthy banks as risky. This encourages banks to choose portfolios deemed safe by regulators, leading to model monoculture and making the financial system less diversified. Under the ex-ante optimal
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Why did shareholder liability disappear? J. Financ. Econ. (IF 8.238) Pub Date : 2023-12-05 David A. Bogle, Gareth Campbell, Christopher Coyle, John D. Turner
Why did shareholder liability disappear? We address this question by looking at its use by British insurance companies until its complete disappearance. We explore three possible explanations for its demise: (1) regulation and government-provided policyholder protection meant that it was no longer required; (2) it had become de facto limited; and (3) shareholders saw an opportunity to expunge something
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Disagreement about public information quality and informational price efficiency J. Financ. Econ. (IF 8.238) Pub Date : 2023-12-02 Chong Huang, Radhika Lunawat, Qiguang Wang
Investors often hold differing opinions on public information quality. This paper shows that such investor disagreement provides a novel explanation for financial market dynamics around earnings announcements. We propose a rational expectations equilibrium model where investors disagree about the precision of a public signal, which separates a pre-news trading period from a post-news trading period
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Learning about the consumption risk exposure of firms J. Financ. Econ. (IF 8.238) Pub Date : 2023-11-27 Yongjin Kim, Lars-Alexander Kuehn, Kai Li
We structurally estimate an investment-based asset pricing model, in which firms' exposure to macroeconomic risk is unknown. Bayesian beliefs about this parameter are updated from firms' and industry peers' comovement between their productivity and consumption growth. The model implies that discount rates rise endogenously with the perceived risk exposure of firms, thereby depressing investment and
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Delayed crises and slow recoveries J. Financ. Econ. (IF 8.238) Pub Date : 2023-11-27 Xuewen Liu, Pengfei Wang, Zhongchao Yang
We present a rational expectations model of credit-driven crises, providing a new perspective to explain why credit booms can lead to severe financial crises and aftermath slow economic recoveries. In our model economy, banks can operate in two types of business. They are sequentially aware of the deterioration of fundamentals of the speculative business and decide whether to continue credit extension
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Financial returns to household inventory management J. Financ. Econ. (IF 8.238) Pub Date : 2023-11-24 Scott R. Baker, Stephanie Johnson, Lorenz Kueng
Households tend to hold substantial amounts of non-financial assets in the form of consumer goods inventories that are unobserved by traditional measures of wealth, about $725 on average for products covered by our sample. Such holdings can eclipse total financial assets among households in the lowest income quintile. Households can obtain significant financial returns from strategically shopping and
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Artificial intelligence, firm growth, and product innovation J. Financ. Econ. (IF 8.238) Pub Date : 2023-11-23 Tania Babina, Anastassia Fedyk, Alex He, James Hodson
We study the use and economic impact of AI technologies. We propose a new measure of firm-level AI investments using employee resumes. Our measure reveals a stark increase in AI investments across sectors. AI-investing firms experience higher growth in sales, employment, and market valuations. This growth comes primarily through increased product innovation. Our results are robust to instrumenting
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Monetary policy transmission in segmented markets J. Financ. Econ. (IF 8.238) Pub Date : 2023-11-16 Jens Eisenschmidt, Yiming Ma, Anthony Lee Zhang
Repo markets are an important first stage of monetary policy transmission. In the European repo market, the majority of participants, including non-dealer banks and non-banks, do not have access to centralized trading platforms. Rather, they rely on OTC intermediation by a small number of dealers that exert significant market power. Dealer market power causes the passthrough of the ECB's policy rate
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The use of asset growth in empirical asset pricing models J. Financ. Econ. (IF 8.238) Pub Date : 2023-11-15 Michael Cooper, Huseyin Gulen, Mihai Ion
We show that the performance of the new factor models of and depends crucially on how their investment factor is constructed. Both models use growth in total assets to measure investment. Their ability to price the cross-section of returns decreases significantly when the investment factor is constructed using traditional investment measures, or measures that also account for investment in intangibles
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Liquidity regulation and banks: Theory and evidence J. Financ. Econ. (IF 8.238) Pub Date : 2023-11-10 Suresh Sundaresan, Kairong Xiao
This paper theoretically and empirically investigates the effects of liquidity regulation on the banking system. We document that the current quantity-based liquidity rule has reduced banks' liquidity risks. However, the mandated liquidity buffer appears to crowd out bank lending and lead to a migration of liquidity risks to banks that are not subject to liquidity regulation. These findings motivate
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Machine learning and fund characteristics help to select mutual funds with positive alpha J. Financ. Econ. (IF 8.238) Pub Date : 2023-10-26 Victor DeMiguel, Javier Gil-Bazo, Francisco J. Nogales, André A.P. Santos
Machine-learning methods exploit fund characteristics to select tradable long-only portfolios of mutual funds that earn significant out-of-sample annual alphas of 2.4% net of all costs. The methods unveil interactions in the relation between fund characteristics and future performance. For instance, past performance is a particularly strong predictor of future performance for more active funds. Machine
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Return predictability with endogenous growth J. Financ. Econ. (IF 8.238) Pub Date : 2023-10-23 Federico M. Bandi, Lorenzo Bretscher, Andrea Tamoni
The component of the volatility of total factor productivity (TFP) that is orthogonal to the dividend price ratio is shown to have long-run predictive ability for excess market returns. This finding implies that TFP volatility should also predict real cash flows and/or real interest rates: it is found to mainly predict real cash flows through inflation. A model with endogenous growth, Epstein-Zin preferences
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CEO compensation: Evidence from the field J. Financ. Econ. (IF 8.238) Pub Date : 2023-10-20 Alex Edmans, Tom Gosling, Dirk Jenter
We survey directors and investors on the objectives, constraints, and determinants of CEO pay. We find that directors face constraints beyond participation and incentives, and that pay matters not to finance consumption but to address CEOs’ fairness concerns. 67% of directors would sacrifice shareholder value to avoid controversy, leading to lower levels and one-size-fits-all structures. Shareholders
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Sorting out the effect of credit supply J. Financ. Econ. (IF 8.238) Pub Date : 2023-10-14 Briana Chang, Matthieu Gomez, Harrison Hong
We document that banks that cut lending more during the Great Recession were lending to riskier firms ex-ante. To understand the aggregate implications of this sorting pattern, we build an assignment model in which banks have heterogeneous costs to take on risky loans and firms have different credit risks. In the model, aggregate loan volume depends on the entire distribution of bank holding costs
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Treasury option returns and models with unspanned risks J. Financ. Econ. (IF 8.238) Pub Date : 2023-10-13 Gurdip Bakshi, John Crosby, Xiaohui Gao, Jorge W. Hansen
We document the phenomenon that average excess returns of out-of-the-money puts and calls on bond futures are negative, both unconditionally and conditionally on economic states. To explain these findings, we develop economically motivated restrictions in the context of a theory in which the pricing kernel is a general diffusion process with spanned and unspanned components. Our reconciliation is a