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Are cryptos different? Evidence from retail trading J. Financ. Econ. (IF 10.4) Pub Date : 2024-07-06 Shimon Kogan, Igor Makarov, Marina Niessner, Antoinette Schoar
Trading in cryptocurrencies grew rapidly over the last decade, dominated by retail investors. Using data from eToro, we show that retail traders are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. The differences are not explained by individual characteristics, investor composition, inattention, differences in fees, or preference for lottery-like
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Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs? J. Financ. Econ. (IF 10.4) Pub Date : 2024-07-04 Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorski, Amit Seru
We develop a conceptual framework and an empirical methodology to analyze the effect of rising interest rates on the value of U.S. bank assets and bank stability. We mark-to-market the value of banks’ assets due to interest rate increases from Q1 2022 to Q1 2023, revealing an average decline of 10 %, totaling about $2 trillion in aggregate. We present a model illustrating how asset value declines due
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High-frequency trading in the stock market and the costs of options market making J. Financ. Econ. (IF 10.4) Pub Date : 2024-07-03 Mahendrarajah Nimalendran, Khaladdin Rzayev, Satchit Sagade
We investigate how high-frequency trading (HFT) in equity markets affects options market liquidity. We find that increased aggressive HFT activity in the stock market leads to wider bid–ask spreads in the options market through two main channels. First, options market makers’ quotes are exposed to sniping risk from HFTs exploiting put–call parity violations. Second, informed trading in the options
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Borrow now, pay even later: A quantitative analysis of student debt payment plans J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-25 Michael Boutros, Nuno Clara, Francisco Gomes
In the U.S., student debt is currently the second largest component of consumer debt. Households are required to repay these loans early in their lifecycle, when marginal utility is particularly high. We study alternative contracts that offer partial or full payment deferral until later in life. We calibrate an economy with the current contracts, and then solve for counterfactual equilibria. The alternative
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The reserve supply channel of unconventional monetary policy J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-21 William Diamond, Zhengyang Jiang, Yiming Ma
We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 7.4 basis points, and each dollar of reserves reduces
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Importance of transaction costs for asset allocation in foreign exchange markets J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-19 Ilias Filippou, Thomas A. Maurer, Luca Pezzo, Mark P. Taylor
Transaction costs have a first-order effect on the performance of currency portfolios. Proportional costs based on quoted bid–ask spread are relatively small, but when a fund is large, costs due to the trading volume price impact are sizable and quickly erode returns, leaving many popular strategies unprofitable. A mean–variance-transaction-cost optimized approach (MVTC) that accounts for costs in
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The effects of policy interventions to limit illegal money lending J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-15 Kaiwen Leong, Huailu Li, Nicola Pavanini, Christoph Walsh
We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the effects of interventions aimed at limiting this market. We find that an enforcement crackdown that occurred during our sample period increased lenders’ unit cost of harassment and interest
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The short-termism trap: Catering to informed investors with limited horizons J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-14 James Dow, Jungsuk Han, Francesco Sangiorgi
Does the stock market exert short-term pressure on listed firms, do they respond, and is this response value reducing? We show that limited investor horizons indeed have those consequences, as follows. First, informative stock prices increase firm value; in our model, they reduce the agency cost of incentivizing managers. Second, short project maturity improves stock price informativeness by catering
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Financial market concentration and misallocation J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-14 Daniel Neuhann, Michael Sockin
How does financial market concentration affect capital allocation? We propose a complete-markets model in which real investment and financial price impact are jointly determined in general equilibrium. We identify a two-way feedback mechanism whereby price impact induces misallocation and misallocation raises price impact. The mechanism is stronger if productivity is low or productivity dispersion
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Concealed carry J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-08 Spencer Andrews, Riccardo Colacito, Mariano M. Croce, Federico Gavazzoni
The slope carry takes a long (short) position in the long-term bonds of countries with steeper (flatter) yield curves. The traditional carry takes a long (short) position in countries with high (low) short-term rates. We document that: (i) the slope carry return is slightly negative (strongly positive) in the pre (post) 2008 period, whereas it is concealed over longer samples; (ii) the traditional
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How do Treasury dealers manage their positions? J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-07 Michael Fleming, Giang Nguyen, Joshua Rosenberg
Using 31 years of data (1990–2020) on U.S. Treasury dealer positions, we find that Treasury issuance is the main driver of dealers’ weekly inventory changes. Such inventory fluctuations are only partially offset in adjacent weeks and not significantly hedged with futures. Dealers are compensated for inventory risk by means of subsequent price appreciation of their holdings. Amid increased balance sheet
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Intermediation frictions in debt relief: Evidence from CARES Act forbearance J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-07 You Suk Kim, Donghoon Lee, Tess Scharlemann, James Vickery
We study how intermediaries – mortgage servicers – shaped the implementation of mortgage forbearance during the COVID-19 pandemic and use servicer-level variation to trace out the causal effects of forbearance on borrowers. Forbearance provision varied widely across servicers. Small servicers, nonbanks, and especially nonbanks with small liquidity buffers, facilitated fewer forbearances and saw a higher
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The death of a regulator: Strict supervision, bank lending, and business activity J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-07 João Granja, Christian Leuz
We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized
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Refinancing cross-subsidies in the mortgage market J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-04 Jack Fisher, Alessandro Gavazza, Lu Liu, Tarun Ramadorai, Jagdish Tripathy
In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a structural model of household mortgage refinancing and estimate it on rich administrative data covering the stock of outstanding mortgages in the UK. We
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Discrimination in the payments chain J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-04 Anna M. Costello, Michael Minnis, Irina Rabinovich
We examine whether discrimination affects customers’ willingness to pay their suppliers. Using a dataset of detailed trade credit networks, we find that when facing a macroeconomic shock, customers delay payments to their suppliers with female or black trade credit officers at a 10%–20% higher rate relative to their payments to non-minorities. These results hold after controlling for a host of economic
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The social signal J. Financ. Econ. (IF 10.4) Pub Date : 2024-06-03 J. Anthony Cookson, Runjing Lu, William Mullins, Marina Niessner
We examine social media attention and sentiment from three major platforms: Twitter, StockTwits, and Seeking Alpha. We find that, even after controlling for firm disclosures and news, attention is highly correlated across platforms, but sentiment is not: its first principal component explains little more variation than purely idiosyncratic sentiment. Using market events, we attribute differences across
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Tiny trades, big questions: Fractional shares J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-28 Robert P. Bartlett, Justin McCrary, Maureen O'Hara
This paper investigates fractional share trading. We develop a latency-based method for identifying a large sample of fractional share trades. We find that high-priced stocks, meme stocks, IPOs, SPACs, and popular retail stocks exhibit considerable numbers of these tiny trades. We surmise that this reflects dollar-based order entry, with many tiny trades being fractional components of larger orders
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The diversification and welfare effects of robo-advising J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-25 Alberto G. Rossi, Stephen Utkus
We study the diversification and welfare effects of a large US robo-advisor on the portfolios of previously self-directed investors and document five facts. First, robo-advice reshapes portfolios by increasing indexing and reducing home bias, number of assets held, and fees. Second, these portfolio changes contribute to higher Sharpe ratios. Third, those who benefit most from robo-advice are investors
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Crowdsourcing peer information to change spending behavior J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-22 Francesco D’Acunto, Alberto G. Rossi, Michael Weber
We isolate the information channel of peer effects in consumption in a setting that excludes a role for common shocks or social pressure—a spending panel paired with crowdsourced information about anonymous “peers” elicited at different times. Consumers converge to peers’ spending, and more so when peer signals are more informative. Convergence is asymmetric: within 12 months of information provision
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Real effects of supplying safe private money J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-21 Chenzi Xu, He Yang
Privately issued money often bears default risk, which creates transaction frictions when used as a medium of exchange. The late 19th century US provides a unique context to evaluate the real effects of supplying a new type of money that is safe from default. We measure the local change in “monetary” transaction frictions with a market access approach derived from general equilibrium trade theory.
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The passive ownership share is double what you think it is J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-21 Alex Chinco, Marco Sammon
Each time a stock gets added to or dropped from an index, we ask: “How much money would have to be tracking that index to explain the huge spike in rebalancing volume we observe on reconstitution day?” While index funds held of the US stock market in 2021, we put the overall passive ownership share at . Our headline number is twice as large because it reflects index funds as well as other kinds of
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When failure is an option: Fragile liquidity in over-the-counter markets J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-21 Terrence Hendershott, Dan Li, Dmitry Livdan, Norman Schürhoff
Markets can give false impressions of liquidity and stability if failed attempts to trade are ignored. For collateralized loan obligations, we quantify this bias by estimating the total cost of immediacy (TCI) which incorporates failure rates and failure costs. TCI is substantially higher than the observed cost, 0.3–3.8% versus 0.04–0.12% across credit-quality tranches because trade failures are frequent
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Intermediary-based equity term structure J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-20 Kai Li, Chenjie Xu
We demonstrate that a financial intermediary-based asset pricing model offers a compelling explanation for a new set of conditional moments of equity term structure and convenience yields. The model’s key mechanism is that the time-varying tightness of intermediaries’ leverage constraints drives significant mean reversion in the price of risk. This model guides us in devising a novel empirical methodology
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Financial constraints, cash flow timing patterns, and asset prices J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-17 Weiping Hu, Kai Li, Xiao Zhang
We show that firms collect almost 70% of their cash flows in the second half of the fiscal year, and that firms that collect more cash by year-end earn a 6.8% higher per annum risk premium and save more cash. We rationalize these facts in a quantitative investment-based asset pricing model. Immediate cash payments negatively affect profitability, but reduce equity financing costs by increasing information
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When the markets get CO.V.I.D: COntagion, Viruses, and Information Diffusion J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-13 Maria Jose Arteaga-Garavito, Mariano M. Croce, Paolo Farroni, Isabella Wolfskeil
We quantify the exposure of major financial markets to news shocks about global contagion risk while accounting for local epidemic conditions. For a wide cross section of countries, we construct a novel dataset comprising (i) announcements related to COVID19 and (ii) high-frequency data on epidemic news diffused through Twitter (Hassan et al., 2019’s methodology). We provide novel empirical evidence
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Regulatory arbitrage or random errors? Implications of race prediction algorithms in fair lending analysis J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-10 Daniel L. Greenwald, Sabrina T. Howell, Cangyuan Li, Emmanuel Yimfor
When race is not directly observed, regulators and analysts commonly predict it using algorithms based on last name and address. In small business lending—where regulators assess fair lending law compliance using the Bayesian Improved Surname Geocoding (BISG) algorithm—we document large prediction errors among Black Americans. The errors bias measured racial disparities in loan approval rates downward
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Debtor income manipulation in consumer credit contracts J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-10 Vyacheslav Mikhed, Sahil Raina, Barry Scholnick, Man Zhang
We show that forcing insolvent consumer debtors to repay a larger fraction of debt causes them to strategically manipulate the data they report to creditors. Exploiting a policy change that required insolvent debtors to increase debt repayments at an arbitrary income cutoff, we document that some debtors reduce reported income to just below this cutoff to avoid the higher repayment. Those debtors who
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Associative memory, beliefs and market interactions J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-07 Benjamin Enke, Frederik Schwerter, Florian Zimmermann
Recent theories and narratives highlight the potential role of associative recall in driving overreaction in expectations and market behavior. Based on a simple model, we test this idea through a series of experiments in which news are communicated with memorable contexts. Because the experimental participants predominantly remember those past news that get cued by new information, their beliefs about
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Financial inclusion, economic development, and inequality: Evidence from Brazil J. Financ. Econ. (IF 10.4) Pub Date : 2024-05-02 Julia Fonseca, Adrien Matray
We study a financial inclusion policy targeting Brazilian cities with low bank branch coverage using data on the universe of employees from 2000–2014. The policy leads to bank entry and to similar increases in both deposits and lending. It also fosters entrepreneurship, employment, and wage growth, especially for cities initially in banking deserts. These gains are not shared equally and instead increase
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Ambiguity and private investors’ behavior after forced fund liquidations J. Financ. Econ. (IF 10.4) Pub Date : 2024-04-29 Steffen Meyer, Charline Uhr
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Gradual information diffusion across commonly owned firms J. Financ. Econ. (IF 10.4) Pub Date : 2024-04-26 Jie Ying
This paper studies how common institutional ownership (CIO) affects information diffusion in the stock market. My findings suggest that CIO can exacerbate the slow spread of information across firms. With over 50% of institutional investors holding concentrated stock portfolios, I infer a fundamental connection among firms with CIO. These firms exhibit cross-predictability in monthly stock returns
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Portfolio pumping in mutual fund families J. Financ. Econ. (IF 10.4) Pub Date : 2024-04-15 Pingle Wang
This paper investigates portfolio pumping at the fund family level, where non-star fund managers strategically purchase stocks held by star funds in the family to inflate their quarter-end performance. Star funds that engage in such activities show inflated performance after 2002 when the Securities and Exchange Commission increased regulation on portfolio pumping. Stocks pumped by the strategy show
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Measuring macroeconomic tail risk J. Financ. Econ. (IF 10.4) Pub Date : 2024-04-12 Roberto Marfè, Julien Pénasse
This paper estimates consumption and GDP tail risk dynamics over the long run (1900–2020). Our predictive approach circumvents the scarcity of large macroeconomic crises by exploiting a rich information set covering 42 countries. This flexible approach does not require asset price information and can thus serve as a benchmark to evaluate the empirical validity of rare disaster models. Our estimates
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Shattered housing J. Financ. Econ. (IF 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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 10.4) 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