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Volume 66: Issue 6 (December 2011)


Front Matter

Pages: i-iii  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01719.x  |  Cited by: 0


Information Disclosure, Cognitive Biases, and Payday Borrowing

Pages: 1865-1893  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01698.x  |  Cited by: 112

MARIANNE BERTRAND, ADAIR MORSE

Can psychology‐guided information disclosure induce borrowers to lower their use of high‐cost debt? In a field experiment at payday stores, we find that information that makes people think less narrowly (over time) about finance costs results in less borrowing. In particular, reinforcing the adding‐up dollar fees incurred when rolling over loans reduces the take‐up of future payday loans by 11% in the subsequent 4 months. Although we remain agnostic as to the overall sufficiency of better disclosure policy to “remedy” payday borrowing, we cast the 11% reduction in borrowing in light of the relative low cost of this policy.


Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th Century

Pages: 1895-1931  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01694.x  |  Cited by: 29

RAGHURAM G. RAJAN, RODNEY RAMCHARAN

We find that, in the early 20th century, counties in the United States where the agricultural elite had disproportionately large land holdings had significantly fewer banks per capita, even correcting for state‐level effects. Moreover, credit appears to have been costlier, and access to it more limited, in these counties. The evidence suggests that elites may restrict financial development in order to limit access to finance, and they may be able to do so even in countries with well‐developed political institutions.


Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?

Pages: 1933-1967  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01696.x  |  Cited by: 91

SHAWN COLE, THOMAS SAMPSON, BILAL ZIA

Financial development is critical for growth, but its microdeterminants are not well understood. We test leading theories of low demand for financial services in emerging markets, combining novel survey evidence from Indonesia and India with a field experiment. We find a strong correlation between financial literacy and behavior. However, a financial education program has modest effects, increasing demand for bank accounts only for those with limited education or financial literacy. In contrast, small subsidies greatly increase demand. A follow‐up survey confirms these findings, demonstrating that newly opened accounts remain open and in use 2 years after the intervention.


Disasters Implied by Equity Index Options

Pages: 1969-2012  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01697.x  |  Cited by: 55

DAVID BACKUS, MIKHAIL CHERNOV, IAN MARTIN

We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk‐neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro‐finance and option‐pricing models. Second, we compare option prices derived from a macro‐finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro‐finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from macroeconomic data.


Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets

Pages: 2013-2053  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01700.x  |  Cited by: 82

ROBERT BATTALIO, PAUL SCHULTZ

We examine how the September 2008 short sale restrictions and the accompanying confusion and regulatory uncertainty impacted equity option markets. We find that the short sale ban is associated with dramatically increased bid‐ask spreads for options on banned stocks. In addition, synthetic share prices for banned stocks become significantly lower than actual share prices during the ban. We find similar results for synthetic share prices of hard‐to‐borrow stocks, suggesting that the dislocation in actual and synthetic share prices is attributable to the increased hedging costs for options on banned stocks during the short sale ban.


Why Don't U.S. Issuers Demand European Fees for IPOs?

Pages: 2055-2082  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01699.x  |  Cited by: 31

MARK ABRAHAMSON, TIM JENKINSON, HOWARD JONES

We compare fees charged by investment banks for conducting IPOs in the United States and Europe. In recent years, the “7% solution,” as documented by Chen and Ritter (2000), has become even more prevalent in the United States, and is now the norm for IPOs raising up to $250 million. The same banks dominate both markets, but European IPO fees are roughly three percentage points lower, are much more variable, and have been falling. We review explanations for the gap in spreads and find the evidence consistent with strategic pricing. U.S. issuers could have saved over $1 billion a year by paying European fees.


Does Poor Performance Damage the Reputation of Financial Intermediaries? Evidence from the Loan Syndication Market

Pages: 2083-2120  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01692.x  |  Cited by: 36

RADHAKRISHNAN GOPALAN, VIKRAM NANDA, VIJAY YERRAMILLI

We investigate the effect of poor performance on financial intermediary reputation by estimating the effect of large‐scale bankruptcies among a lead arranger's borrowers on its subsequent syndication activity. Consistent with reputation damage, such lead arrangers retain larger fractions of the loans they syndicate, are less likely to syndicate loans, and are less likely to attract participant lenders. The consequences are more severe when borrower bankruptcies suggest inadequate screening or monitoring by the lead arranger. However, the effect of borrower bankruptcies on syndication activity is not present among dominant lead arrangers, and is weak in years in which many lead arrangers experience borrower bankruptcies.


IQ and Stock Market Participation

Pages: 2121-2164  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01701.x  |  Cited by: 101

MARK GRINBLATT, MATTI KELOHARJU, JUHANI LINNAINMAA

Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ and participation exists even among the affluent. Supplemental data from siblings, studied with an instrumental variables approach and regressions that control for family effects, demonstrate that IQ's influence on participation extends to females and does not arise from omitted familial and nonfamilial variables. High‐IQ investors are more likely to hold mutual funds and larger numbers of stocks, experience lower risk, and earn higher Sharpe ratios. We discuss implications for policy and finance research.


Tails, Fears, and Risk Premia

Pages: 2165-2211  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01695.x  |  Cited by: 135

TIM BOLLERSLEV, VIKTOR TODOROV

We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof, we identify and estimate a new Investor Fears index. The index reveals large time‐varying compensation for fears of disasters. Our empirical investigations involve new extreme value theory approximations and high‐frequency intraday data for estimating the expected jump tails under the statistical probability measure, and short maturity out‐of‐the‐money options and new model‐free implied variation measures for estimating the corresponding risk‐neutral expectations.


Ambiguous Information, Portfolio Inertia, and Excess Volatility

Pages: 2213-2247  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01693.x  |  Cited by: 25

PHILIPP KARL ILLEDITSCH

I study the effects of risk and ambiguity (Knightian uncertainty) on optimal portfolios and equilibrium asset prices when investors receive information that is difficult to link to fundamentals. I show that the desire of investors to hedge ambiguity leads to portfolio inertia and excess volatility. Specifically, when news is surprising, investors may not react to price changes even if there are no transaction costs or other market frictions. Moreover, I show that small shocks to cash flow news, asset betas, or market risk premia may lead to drastic changes in the stock price and hence to excess volatility.


MISCELLANEA

Pages: 2249-2250  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01702.x  |  Cited by: 0


Back Matter

Pages: 2251-2252  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01720.x  |  Cited by: 0


INDEX TO VOLUME LXVI

Pages: 2253-2259  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01718_1.x  |  Cited by: 0


SEVENTY SECOND ANNUAL MEETING AMERICAN FINANCE ASSOCIATION

Pages: 2260-2327  |  Published: 11/2011  |  DOI: 10.1111/j.1540-6261.2011.01718_2.x  |  Cited by: 0