Pages: 1971-2001 | Published: 10/2018 | DOI: 10.1111/jofi.12718 | Cited by: 206
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.
Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?
Pages: 2003-2039 | Published: 7/2018 | DOI: 10.1111/jofi.12691 | Cited by: 175
JOHAN HOMBERT, ADRIEN MATRAY
We study whether R&D‐intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax‐induced changes to R&D costs. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained by R&D allowing firms to increase product differentiation. As a result, while firms in import‐competing industries cut capital expenditures and employment, R&D‐intensive firms downsize considerably less.
Pages: 2041-2086 | Published: 9/2018 | DOI: 10.1111/jofi.12706 | Cited by: 89
ALEKSANDAR ANDONOV, YAEL V. HOCHBERG, JOSHUA D. RAUH
Representation on pension fund boards by state officials—often determined by statute decades past—is negatively related to the performance of private equity investments made by the pension fund, despite state officials’ relatively strong financial education and experience. Their underperformance appears to be partly driven by poor investment decisions consistent with political expediency, and is also positively related to political contributions from the finance industry. Boards dominated by elected rank‐and‐file plan participants also underperform, but to a smaller extent and due to these trustees’ lesser financial experience.
The Geography of Financial Misconduct
Pages: 2087-2137 | Published: 10/2018 | DOI: 10.1111/jofi.12704 | Cited by: 236
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.
Expected Inflation and Other Determinants of Treasury Yields
Pages: 2139-2180 | Published: 7/2018 | DOI: 10.1111/jofi.12700 | Cited by: 63
GREGORY R. DUFFEE
Shocks to nominal bond yields consist of news about expected future inflation, expected future real short rates, and expected excess returns—all over the bond's life. I estimate the magnitude of the first component for short‐ and long‐maturity Treasury bonds. At a quarterly frequency, variances of news about expected inflation account for between 10% to 20% of variances of yield shocks. Standard dynamic models with long‐run risk imply variance ratios close to 1. Habit formation models fare somewhat better. The magnitudes of shocks to real rates and expected excess returns cannot be determined reliably.
Asset Management within Commercial Banking Groups: International Evidence
Pages: 2181-2227 | Published: 7/2018 | DOI: 10.1111/jofi.12702 | Cited by: 69
MIGUEL A. FERREIRA, PEDRO MATOS, PEDRO PIRES
We study the performance of equity mutual funds run by asset management divisions of commercial banking groups using a worldwide sample. We show that bank‐affiliated funds underperform unaffiliated funds by 92 basis points per year. Consistent with conflicts of interest, the underperformance is more pronounced among those affiliated funds that overweight the stock of the bank's lending clients to a great extent. Divestitures of asset management divisions by banking groups support a causal interpretation of the results. Our findings suggest that affiliated fund managers support their lending divisions’ operations to reduce career concerns at the expense of fund investors.
Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance
Pages: 2229-2269 | Published: 7/2018 | DOI: 10.1111/jofi.12699 | Cited by: 111
HAO JIANG, MICHELA VERARDO
We uncover a negative relation between herding behavior and skill in the mutual fund industry. Our new, dynamic measure of fund‐level herding captures the tendency of fund managers to follow the trades of the institutional crowd. We find that herding funds underperform their antiherding peers by over 2% per year. Differences in skill drive this performance gap: Antiherding funds make superior investment decisions even on stocks not heavily traded by institutions, and can anticipate the trades of the crowd; furthermore, the herding‐antiherding performance gap is persistent, wider when skill is more valuable, and larger among managers with stronger career concerns.
Rankings and Risk‐Taking in the Finance Industry
Pages: 2271-2302 | Published: 7/2018 | DOI: 10.1111/jofi.12701 | Cited by: 103
MICHAEL KIRCHLER, FLORIAN LINDNER, UTZ WEITZEL
Rankings are omnipresent in the finance industry, yet the literature is silent on how they impact financial professionals' behavior. Using lab‐in‐the‐field experiments with 657 professionals and lab experiments with 432 students, we investigate how rank incentives affect investment decisions. We find that both rank and tournament incentives increase risk‐taking among underperforming professionals, while only tournament incentives affect students. This rank effect is robust to the experimental frame (investment frame vs. abstract frame), to payoff consequences (own return vs. family return), to social identity priming (private identity vs. professional identity), and to professionals' gender (no gender differences among professionals).
Quid Pro Quo? What Factors Influence IPO Allocations to Investors?
Pages: 2303-2341 | Published: 10/2018 | DOI: 10.1111/jofi.12703 | Cited by: 62
TIM JENKINSON, HOWARD JONES, FELIX SUNTHEIM
Using data from all of the leading international investment banks on 220 initial public offerings (IPOs) raising $160 billion between January 2010 and May 2015, we test the determinants of IPO allocations. We compare investors’ IPO allocations with proxies for their information production during bookbuilding and the broking (and other) revenues they generate for bookrunners. We find evidence consistent with information revelation theories. We also find strong support for the existence of a quid pro quo whereby broking revenues are a significant determinant of investors’ IPO allocations and profits. The quid pro quo remains when we control for unobserved investor characteristics and investor‐bank relationships.
Do Rare Events Explain CDX Tranche Spreads?
Pages: 2343-2383 | Published: 10/2018 | DOI: 10.1111/jofi.12705 | Cited by: 68
SANG BYUNG SEO, JESSICA A. WACHTER
We investigate whether a model with time‐varying probability of economic disaster can explain prices of collateralized debt obligations. We focus on senior tranches of the CDX, an index of credit default swaps on investment grade firms. These assets do not incur losses until a large fraction of previously stable firms default, and thus are deep out‐of‐the money put options on the overall economy. When calibrated to consumption data and to the equity premium, the model explains the spreads on CDX tranches prior to and during the 2008 to 2009 crisis.
Creditor Control Rights and Board Independence
Pages: 2385-2423 | Published: 7/2018 | DOI: 10.1111/jofi.12692 | Cited by: 82
DANIEL FERREIRA, MIGUEL A. FERREIRA, BEATRIZ MARIANO
We find that the number of independent directors on corporate boards increases by approximately 24% following financial covenant violations in credit agreements. Most of these new directors have links to creditors. Firms that appoint new directors after violations are more likely to issue new equity, and to decrease payout, operational risk, and CEO cash compensation, than firms without such appointments. We conclude that a firm's board composition, governance, and policies are shaped by current and past credit agreements.
CMBS and Conflicts of Interest: Evidence from Ownership Changes for Servicers
Pages: 2425-2458 | Published: 7/2018 | DOI: 10.1111/jofi.12690 | Cited by: 13
MAISY WONG
Self‐dealing is potentially important but difficult to measure. In this paper, I study special servicers in commercial mortgage‐backed securities (CMBS), which sell distressed assets on behalf of bondholders. Around 2010, ownership changes of four major servicers raised concerns that they may direct benefits to new owners' affiliates (buyers and service providers). Loans liquidated after ownership changes have greater loss rates than before (8 percentage points (p.p.), $2.3 billion in losses), relative to other (placebo) servicers. Together with a case study that tracks self‐dealing purchases, the findings point to potential steering conflicts that could incentivize tunneling through fees to service providers.