US Securities and Exchange Commission (SEC) enforcement actions are intended to protect investors and limit expropriation by firm insiders, but these SEC actions could affect insiders' incentives to contribute to value‐enhancing activities. Therefore, we explore how corporate innovation and performance respond to insider trading restrictions imposed by regulators and firms. Using manually collected data on SEC indictments against corporate insiders, we document more innovative activity following external insider trading restrictions. External restrictions are also followed by higher corporate investment, capital access, and operating performance. Similarly, internal blackout restrictions to insider trading are linked to more innovation as well. We use SEC and congressional rule changes as quasi‐natural experiments resulting in shocks in enforcement and indictments for identification and inference. Our results suggest insider trading restrictions and enforcement actions affect subsequent firm activities and managerial decisions by protecting outside investment, resulting in more investment in innovation.
{"title":"Insider trading restriction enforcement, investor protection, and innovation","authors":"D. Brian Blank, Jiawei Chen, Valeriya Posylnaya","doi":"10.1111/jfir.12426","DOIUrl":"https://doi.org/10.1111/jfir.12426","url":null,"abstract":"US Securities and Exchange Commission (SEC) enforcement actions are intended to protect investors and limit expropriation by firm insiders, but these SEC actions could affect insiders' incentives to contribute to value‐enhancing activities. Therefore, we explore how corporate innovation and performance respond to insider trading restrictions imposed by regulators and firms. Using manually collected data on SEC indictments against corporate insiders, we document more innovative activity following external insider trading restrictions. External restrictions are also followed by higher corporate investment, capital access, and operating performance. Similarly, internal blackout restrictions to insider trading are linked to more innovation as well. We use SEC and congressional rule changes as quasi‐natural experiments resulting in shocks in enforcement and indictments for identification and inference. Our results suggest insider trading restrictions and enforcement actions affect subsequent firm activities and managerial decisions by protecting outside investment, resulting in more investment in innovation.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"12 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141880662","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the determinants of mutual fund partial liquidation and the effect of a negative shock to fund size on performance. We find that older funds from a smaller family with a large number of share classes are more likely to conduct partial liquidation. As fund size decreases after partial liquidation, its performance improves. This effect is more pronounced for funds with stronger pre‐event liquidity constraint and funds that subsequently experience a larger decrease in liquidity, suggesting that liquidity constraint is a contributing factor of fund performance. These findings are consistent with mutual funds having decreasing returns to scale.
{"title":"Mutual fund partial liquidation and future performance","authors":"George Jiang, Ping McLemore, Ao Wang","doi":"10.1111/jfir.12425","DOIUrl":"https://doi.org/10.1111/jfir.12425","url":null,"abstract":"We examine the determinants of mutual fund partial liquidation and the effect of a negative shock to fund size on performance. We find that older funds from a smaller family with a large number of share classes are more likely to conduct partial liquidation. As fund size decreases after partial liquidation, its performance improves. This effect is more pronounced for funds with stronger pre‐event liquidity constraint and funds that subsequently experience a larger decrease in liquidity, suggesting that liquidity constraint is a contributing factor of fund performance. These findings are consistent with mutual funds having decreasing returns to scale.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"62 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141770613","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Junru Zhang, Chen Cui, Chen Zheng, Grantley Taylor
This study examines the association between artificial intelligence innovation (AII) and stock price crash risk (SPCR). AII serves as a governance mechanism that can bolster strength in internal controls, leading to increased financial transparency and thereby reducing the likelihood of future SPCR. The results hold after accounting for possible endogeneity issues Further, we find that monitoring through corporate governance mechanisms, level of following by equity analysts, and the reduced information asymmetry constitute important channels that mediate the association between AII and SPCR. Additionally, the relationship between AII and SPCR varies across corporate life cycle stages and workplace culture.
{"title":"Artificial intelligence innovation and stock price crash risk","authors":"Junru Zhang, Chen Cui, Chen Zheng, Grantley Taylor","doi":"10.1111/jfir.12424","DOIUrl":"https://doi.org/10.1111/jfir.12424","url":null,"abstract":"This study examines the association between artificial intelligence innovation (AII) and stock price crash risk (SPCR). AII serves as a governance mechanism that can bolster strength in internal controls, leading to increased financial transparency and thereby reducing the likelihood of future SPCR. The results hold after accounting for possible endogeneity issues Further, we find that monitoring through corporate governance mechanisms, level of following by equity analysts, and the reduced information asymmetry constitute important channels that mediate the association between AII and SPCR. Additionally, the relationship between AII and SPCR varies across corporate life cycle stages and workplace culture.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"47 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141742383","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use tail events at different levels of severity to define an asset's tail risk and to decompose the latter into a systematic and an idiosyncratic component. The systematic component captures an asset's tendency to experience joint tail losses with the market and generalizes a classic tail dependence coefficient. However, the idiosyncratic component consists of two parts: idiosyncratic tail risk that leads to asset‐specific tail losses and tail risk cushioning that dampens the tail losses emanating from the market. Tail risk cushioning is a novel concept that arises naturally in our framework, is consistent with the previous two and completes the taxonomy of tail risk. We examine the performance of our tail risk decomposition on a large dataset, confirming some previous results on tail risk and uncovering new theoretical and empirical findings.
{"title":"The taxonomy of tail risk","authors":"Evarist Stoja, Arnold Polanski, Linh H. Nguyen","doi":"10.1111/jfir.12423","DOIUrl":"https://doi.org/10.1111/jfir.12423","url":null,"abstract":"We use tail events at different levels of severity to define an asset's tail risk and to decompose the latter into a systematic and an idiosyncratic component. The systematic component captures an asset's tendency to experience joint tail losses with the market and generalizes a classic tail dependence coefficient. However, the idiosyncratic component consists of two parts: idiosyncratic tail risk that leads to asset‐specific tail losses and tail risk cushioning that dampens the tail losses emanating from the market. Tail risk cushioning is a novel concept that arises naturally in our framework, is consistent with the previous two and completes the taxonomy of tail risk. We examine the performance of our tail risk decomposition on a large dataset, confirming some previous results on tail risk and uncovering new theoretical and empirical findings.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"16 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-07-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141586998","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Personal connections (based on prior employment, educational, or social club membership overlaps) between top executives and board members of the bidding firm and those of the bidder financial advisor affect Mergers and Acquisition (M&A) outcomes. M&A deals where bidder top managers share past personal work‐related connections with their advisors are associated with 1.7% lower bidder announcement returns compared to the returns for deals without such connections. We also show M&A deals advised by personally connected financial advisors are more likely to be completed but take longer to get finalized. Last, when connections exist, the bidder CEO receives a higher cash bonus upon completion of the deal, and the financial advisors are rewarded by higher advisor fees. Overall, our findings suggest that personal connections between bidders and their financial advisors could be detrimental.
{"title":"Personal connections, financial advisors and M&A outcomes","authors":"Dobrina Jandik, Tomas Jandik, Weineng Xu","doi":"10.1111/jfir.12422","DOIUrl":"https://doi.org/10.1111/jfir.12422","url":null,"abstract":"Personal connections (based on prior employment, educational, or social club membership overlaps) between top executives and board members of the bidding firm and those of the bidder financial advisor affect Mergers and Acquisition (M&A) outcomes. M&A deals where bidder top managers share past personal work‐related connections with their advisors are associated with 1.7% lower bidder announcement returns compared to the returns for deals without such connections. We also show M&A deals advised by personally connected financial advisors are more likely to be completed but take longer to get finalized. Last, when connections exist, the bidder CEO receives a higher cash bonus upon completion of the deal, and the financial advisors are rewarded by higher advisor fees. Overall, our findings suggest that personal connections between bidders and their financial advisors could be detrimental.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"31 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-06-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141503764","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Anup Basnet, Kuntara Pukthuanthong, Harry Turtle, Thomas Walker
We examine the evolution of lead venture capital firm (VC) ownership after their portfolio companies (PCs) are publicly listed. We find that, on average, lead VCs retain their shares for three years post‐IPO. Higher liquidity pressure and better stock market performance lead to faster VC exits, while higher VC reputation, better VC monitoring, and higher quality PCs lead to slower exits. VCs mostly use sales in the open market, share distributions, and mergers and acquisitions to divest their shares. Higher liquidity pressure incentivizes VCs to use majority share distributions, while better stock market performance increases their preference for continuous sales.
{"title":"VC ownership post‐IPO: When, why, and how do VCs exit?","authors":"Anup Basnet, Kuntara Pukthuanthong, Harry Turtle, Thomas Walker","doi":"10.1111/jfir.12412","DOIUrl":"https://doi.org/10.1111/jfir.12412","url":null,"abstract":"We examine the evolution of lead venture capital firm (VC) ownership after their portfolio companies (PCs) are publicly listed. We find that, on average, lead VCs retain their shares for three years post‐IPO. Higher liquidity pressure and better stock market performance lead to faster VC exits, while higher VC reputation, better VC monitoring, and higher quality PCs lead to slower exits. VCs mostly use sales in the open market, share distributions, and mergers and acquisitions to divest their shares. Higher liquidity pressure incentivizes VCs to use majority share distributions, while better stock market performance increases their preference for continuous sales.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"42 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-05-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141196716","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Qingxi Meng, Shenwei Mo, Xiaofeng Quan, Joseph H. Zhang
In this article, we examine whether and how small investors’ social media activity is associated with subsequent bond credit spreads. We use extensive data from posts/comments on social media 30 days before the bond issuance announcement date to identify their implied power and find that the more posts/comments, the smaller the bond issuance spreads. We further find that information quality improvement of posts increases this negative relation between social media activity and bond cost, and that posts directly related to issuers’ fundamentals and/or debt financing drive our main results. Additional tests show that the effect is more salient when there is a greater demand for information quality or when macroeconomic conditions worsen.
{"title":"Social media and cost of debt financing: Evidence from stock forum text analysis","authors":"Qingxi Meng, Shenwei Mo, Xiaofeng Quan, Joseph H. Zhang","doi":"10.1111/jfir.12413","DOIUrl":"https://doi.org/10.1111/jfir.12413","url":null,"abstract":"In this article, we examine whether and how small investors’ social media activity is associated with subsequent bond credit spreads. We use extensive data from posts/comments on social media 30 days before the bond issuance announcement date to identify their implied power and find that the more posts/comments, the smaller the bond issuance spreads. We further find that information quality improvement of posts increases this negative relation between social media activity and bond cost, and that posts directly related to issuers’ fundamentals and/or debt financing drive our main results. Additional tests show that the effect is more salient when there is a greater demand for information quality or when macroeconomic conditions worsen.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"121 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-05-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141196721","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we investigate the role a monitored credit line plays in managing a firm's liquidity needs and influencing the firm's project risk. We develop a theoretical model where a firm finances a risky project that is subject to a liquidity shock. External lenders are imperfectly informed about both project risk and the firm's liquidity, which leads to moral hazard. We identify conditions under which it is optimal for the firm to fund the project using a term loan from a less informed lender and manage liquidity using a line of credit from an informed lender.
{"title":"Project risk and the bank monitored credit line","authors":"Eric Van Tassel","doi":"10.1111/jfir.12411","DOIUrl":"https://doi.org/10.1111/jfir.12411","url":null,"abstract":"In this paper we investigate the role a monitored credit line plays in managing a firm's liquidity needs and influencing the firm's project risk. We develop a theoretical model where a firm finances a risky project that is subject to a liquidity shock. External lenders are imperfectly informed about both project risk and the firm's liquidity, which leads to moral hazard. We identify conditions under which it is optimal for the firm to fund the project using a term loan from a less informed lender and manage liquidity using a line of credit from an informed lender.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"31 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-05-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141196656","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We theoretically and empirically identify synthetic long stock as an alternative driver of option trading. Our model proves that the use of synthetic long stocks by capital‐constrained traders contributes to at‐the‐money (ATM) option trading. Using an event study based on stock splits, we document empirical evidence consistent with the model's predictions. ATM option trading declines after stock splits, and these declines are more pronounced for stock splits with higher stock split factors and for more illiquid stocks but are less pronounced for more illiquid options. Our study implies that option trading can occur even without information or opinion dispersion.
{"title":"Synthetic long stock and option trading: Evidence from stock splits","authors":"Yifan Liu, Louis R. Piccotti","doi":"10.1111/jfir.12404","DOIUrl":"https://doi.org/10.1111/jfir.12404","url":null,"abstract":"We theoretically and empirically identify synthetic long stock as an alternative driver of option trading. Our model proves that the use of synthetic long stocks by capital‐constrained traders contributes to at‐the‐money (ATM) option trading. Using an event study based on stock splits, we document empirical evidence consistent with the model's predictions. ATM option trading declines after stock splits, and these declines are more pronounced for stock splits with higher stock split factors and for more illiquid stocks but are less pronounced for more illiquid options. Our study implies that option trading can occur even without information or opinion dispersion.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"27 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140838335","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine dividend growth predictability and the excess volatility puzzle across a large sample of international equity markets using a mixed‐frequency data sampling (MIDAS) regression approach. We find that accounting for dividend seasonality under the MIDAS framework significantly improves dividend growth predictability compared to simple regressions with annually aggregated data. Moreover, variance bounds tests that allow for nonstationary dividends consistently fail to reject the market efficiency hypothesis across all countries. Our findings suggest that the common rejection of market efficiency in the literature is most likely driven by the annual aggregation of dividend data as well as by the assumption of stationary dividends.
{"title":"MIDAS and dividend growth predictability: Revisiting the excess volatility puzzle","authors":"Enoch Quaye, Radu Tunaru, Nikolaos Voukelatos","doi":"10.1111/jfir.12403","DOIUrl":"https://doi.org/10.1111/jfir.12403","url":null,"abstract":"We examine dividend growth predictability and the excess volatility puzzle across a large sample of international equity markets using a mixed‐frequency data sampling (MIDAS) regression approach. We find that accounting for dividend seasonality under the MIDAS framework significantly improves dividend growth predictability compared to simple regressions with annually aggregated data. Moreover, variance bounds tests that allow for nonstationary dividends consistently fail to reject the market efficiency hypothesis across all countries. Our findings suggest that the common rejection of market efficiency in the literature is most likely driven by the annual aggregation of dividend data as well as by the assumption of stationary dividends.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":"11 1","pages":""},"PeriodicalIF":3.5,"publicationDate":"2024-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140838660","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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