AMUNDI SMITH BREEDEN PRIZES FOR 2016
Pages: 507-508 | Published: 3/2017 | DOI: 10.1111/jofi.12503 | Cited by: 0
Attracting Early‐Stage Investors: Evidence from a Randomized Field Experiment
Pages: 509-538 | Published: 3/2017 | DOI: 10.1111/jofi.12470 | Cited by: 215
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.
Politically Connected Private Equity and Employment
Pages: 539-574 | Published: 3/2017 | DOI: 10.1111/jofi.12483 | Cited by: 109
MARA FACCIO, HUNG‐CHIA HSU
We investigate the employment consequences of private equity buyouts. We find evidence of higher job creation, on average, at the establishments operated by targets of politically connected private equity firms than at those operated by targets of nonconnected private equity firms. Consistent with an exchange of favors story, establishments operated by targets of politically connected private equity firms increase employment more during election years and in states with high levels of corruption. In additional analyses, we provide evidence of specific benefits experienced by target firms from their political connections. Our results are robust to tests designed to mitigate selection concerns.
Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default
Pages: 575-612 | Published: 3/2017 | DOI: 10.1111/jofi.12482 | Cited by: 88
BRIAN T. MELZER
Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by investments in the property will go to the lender. This agency conflict affects housing investments. Homeowners at risk of default cut back substantially on home improvements and mortgage principal payments, even when they appear financially unconstrained. Meanwhile, they do not reduce spending on assets that they may retain in default, including home appliances, furniture, and vehicles. These findings highlight an important financial friction that has stifled housing investment since the Great Recession.
Bank Leverage and Monetary Policy's Risk‐Taking Channel: Evidence from the United States
Pages: 613-654 | Published: 3/2017 | DOI: 10.1111/jofi.12467 | Cited by: 274
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.
Linear‐Rational Term Structure Models
Pages: 655-704 | Published: 3/2017 | DOI: 10.1111/jofi.12488 | Cited by: 77
DAMIR FILIPOVIĆ, MARTIN LARSSON, ANDERS B. TROLLE
We introduce the class of linear‐rational term structure models in which the state price density is modeled such that bond prices become linear‐rational functions of the factors. This class is highly tractable with several distinct advantages: (i) ensures nonnegative interest rates, (ii) easily accommodates unspanned factors affecting volatility and risk premiums, and (iii) admits semi‐analytical solutions to swaptions. A parsimonious model specification within the linear‐rational class has a very good fit to both interest rate swaps and swaptions since 1997 and captures many features of term structure, volatility, and risk premium dynamics—including when interest rates are close to the zero lower bound.
Asset Market Participation and Portfolio Choice over the Life‐Cycle
Pages: 705-750 | Published: 3/2017 | DOI: 10.1111/jofi.12484 | Cited by: 183
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.
Before an Analyst Becomes an Analyst: Does Industry Experience Matter?
Pages: 751-792 | Published: 3/2017 | DOI: 10.1111/jofi.12466 | Cited by: 186
DANIEL BRADLEY, SINAN GOKKAYA, XI LIU
Using hand‐collected biographical information on financial analysts from 1983 to 2011, we find that analysts making forecasts on firms in industries related to their preanalyst experience have better forecast accuracy, evoke stronger market reactions to earning revisions, and are more likely to be named Institutional Investor all‐stars. Plausibly exogenous losses of analysts with related industry experience have real financial market implications—changes in firms’ information asymmetry and price reactions are significantly larger than those of other analysts. Overall, industry expertise acquired from preanalyst work experience is valuable to analysts, consistent with the emphasis placed on their industry knowledge by institutional investors.
Precautionary Savings with Risky Assets: When Cash Is Not Cash
Pages: 793-852 | Published: 3/2017 | DOI: 10.1111/jofi.12490 | Cited by: 182
RAN DUCHIN, THOMAS GILBERT, JARRAD HARFORD, CHRISTOPHER HRDLICKA
U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage‐backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.
On the Foundations of Corporate Social Responsibility
Pages: 853-910 | Published: 3/2017 | DOI: 10.1111/jofi.12487 | Cited by: 682
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.
Reverse Mortgage Loans: A Quantitative Analysis
Pages: 911-950 | Published: 3/2017 | DOI: 10.1111/jofi.12489 | Cited by: 86
MAKOTO NAKAJIMA, IRINA A. TELYUKOVA
Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. Despite rapid growth in this market, only 1.9% of eligible homeowners had RMLs in 2013. In this paper, we analyze reverse mortgages in a calibrated life‐cycle model of retirement. The average welfare gain from RMLs is $252 per homeowner, and $1,770 per RML borrower. Bequest motives, uncertainty about health and expenses, and loan costs account for low demand. According to the model, the Great Recession's impact differs across age, income, and wealth distributions, with a threefold increase in RML demand for lowest income and oldest households.