Pub Date : 2024-05-20DOI: 10.1016/j.jfineco.2024.103856
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 to estimate the tightness of these constraints (i.e., the Relative Tightness Index) from cross-sectional returns of various asset classes. Our findings affirm that this measure significantly drives the dynamics of equity yield slope and convenience yields, both empirically and quantitatively.
{"title":"Intermediary-based equity term structure","authors":"Kai Li , Chenjie Xu","doi":"10.1016/j.jfineco.2024.103856","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103856","url":null,"abstract":"<div><p>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 to estimate the tightness of these constraints (i.e., the Relative Tightness Index) from cross-sectional returns of various asset classes. Our findings affirm that this measure significantly drives the dynamics of equity yield slope and convenience yields, both empirically and quantitatively.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"157 ","pages":"Article 103856"},"PeriodicalIF":8.9,"publicationDate":"2024-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141073245","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-05-17DOI: 10.1016/j.jfineco.2024.103855
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 transparency. Financially constrained firms optimally collect more cash at year-end when firms’ performance attracts more attention and information transparency is more valuable. Such behavior further results in greater exposure to aggregate productivity and financial shocks.
{"title":"Financial constraints, cash flow timing patterns, and asset prices","authors":"Weiping Hu , Kai Li , Xiao Zhang","doi":"10.1016/j.jfineco.2024.103855","DOIUrl":"10.1016/j.jfineco.2024.103855","url":null,"abstract":"<div><p>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 transparency. Financially constrained firms optimally collect more cash at year-end when firms’ performance attracts more attention and information transparency is more valuable. Such behavior further results in greater exposure to aggregate productivity and financial shocks.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"157 ","pages":"Article 103855"},"PeriodicalIF":8.9,"publicationDate":"2024-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140961528","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-05-13DOI: 10.1016/j.jfineco.2024.103850
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 about financial dynamics both around epidemic announcements and at daily/intra-daily frequencies. Analysis of contagion data and social media activity about COVID19 suggest that the market price of contagion risk is significant.
{"title":"When the markets get CO.V.I.D: COntagion, Viruses, and Information Diffusion","authors":"Maria Jose Arteaga-Garavito , Mariano M. Croce , Paolo Farroni , Isabella Wolfskeil","doi":"10.1016/j.jfineco.2024.103850","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103850","url":null,"abstract":"<div><p>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 about financial dynamics both around epidemic announcements and at daily/intra-daily frequencies. Analysis of contagion data and social media activity about COVID19 suggest that the market price of contagion risk is significant.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"157 ","pages":"Article 103850"},"PeriodicalIF":8.9,"publicationDate":"2024-05-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0304405X24000734/pdfft?md5=fe4131ebe2e1c1c3ed6988e99b91dd1f&pid=1-s2.0-S0304405X24000734-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140917962","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-05-10DOI: 10.1016/j.jfineco.2024.103857
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 by 43%, with greater bias for traditional vs. fintech lenders. Regulation using self-identified race would increase lending to Black borrowers, but also shift lending toward affluent areas because errors correlate with socioeconomics. Overall, using race proxies in policymaking and research presents challenges.
{"title":"Regulatory arbitrage or random errors? Implications of race prediction algorithms in fair lending analysis","authors":"Daniel L. Greenwald , Sabrina T. Howell , Cangyuan Li , Emmanuel Yimfor","doi":"10.1016/j.jfineco.2024.103857","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103857","url":null,"abstract":"<div><p>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 by 43%, with greater bias for traditional vs. fintech lenders. Regulation using self-identified race would increase lending to Black borrowers, but also shift lending toward affluent areas because errors correlate with socioeconomics. Overall, using race proxies in policymaking and research presents challenges.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"157 ","pages":"Article 103857"},"PeriodicalIF":8.9,"publicationDate":"2024-05-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140905962","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-05-10DOI: 10.1016/j.jfineco.2024.103851
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 manipulate income have a lower probability of default on their repayment plans, consistent with having access to hidden income. We estimate this strategic manipulation costs creditors 12% to 36% of their total payout per filing.
{"title":"Debtor income manipulation in consumer credit contracts","authors":"Vyacheslav Mikhed , Sahil Raina , Barry Scholnick , Man Zhang","doi":"10.1016/j.jfineco.2024.103851","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103851","url":null,"abstract":"<div><p>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 manipulate income have a lower probability of default on their repayment plans, consistent with having access to hidden income. We estimate this strategic manipulation costs creditors 12% to 36% of their total payout per filing.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"157 ","pages":"Article 103851"},"PeriodicalIF":8.9,"publicationDate":"2024-05-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140901564","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-05-07DOI: 10.1016/j.jfineco.2024.103853
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 fundamentals strongly overreact. In a betting market experiment, associative recall translates into overreaction in market prices, which makes realized prices too extreme. Our results highlight the importance of associative memory for beliefs and financial decisions.
{"title":"Associative memory, beliefs and market interactions","authors":"Benjamin Enke , Frederik Schwerter , Florian Zimmermann","doi":"10.1016/j.jfineco.2024.103853","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103853","url":null,"abstract":"<div><p>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 fundamentals strongly overreact. In a betting market experiment, associative recall translates into overreaction in market prices, which makes realized prices too extreme. Our results highlight the importance of associative memory for beliefs and financial decisions.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"157 ","pages":"Article 103853"},"PeriodicalIF":8.9,"publicationDate":"2024-05-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0304405X2400076X/pdfft?md5=dea2b1f241e6082556b240607e9324da&pid=1-s2.0-S0304405X2400076X-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140878554","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-05-02DOI: 10.1016/j.jfineco.2024.103854
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 with workers’ education, implying a substantial increase in wage inequality. The changes in inequality are concentrated in cities where the initial supply of skilled workers is low, indicating that talent scarcity can drive how financial development affects inequality.
{"title":"Financial inclusion, economic development, and inequality: Evidence from Brazil","authors":"Julia Fonseca , Adrien Matray","doi":"10.1016/j.jfineco.2024.103854","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103854","url":null,"abstract":"<div><p>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 with workers’ education, implying a substantial increase in wage inequality. The changes in inequality are concentrated in cities where the initial supply of skilled workers is low, indicating that talent scarcity can drive how financial development affects inequality.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"156 ","pages":"Article 103854"},"PeriodicalIF":8.9,"publicationDate":"2024-05-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0304405X24000771/pdfft?md5=19c52b392050c60b30d5b01a13c15b47&pid=1-s2.0-S0304405X24000771-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140818600","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-04-29DOI: 10.1016/j.jfineco.2024.103849
Steffen Meyer , Charline Uhr
We investigate individual investors' decisions under time-varying ambiguity (VVIX) using plausibly exogenous forced mutual fund liquidations at a German brokerage. Investors reinvest 87% of forced liquidations when the refund occurs on a day of low ambiguity and 0% when it occurs on a day of high ambiguity. Instead of reinvesting, investors become inert and keep the refund in their cash holdings. The effect reverses approximately six months after the liquidation. If investors reinvest, they decrease their risk-taking under ambiguity. Our results are not driven by risk, rebalancing decisions, experiencing losses, or attention and are robust to alternative measures of ambiguity.
{"title":"Ambiguity and private investors’ behavior after forced fund liquidations","authors":"Steffen Meyer , Charline Uhr","doi":"10.1016/j.jfineco.2024.103849","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103849","url":null,"abstract":"<div><p>We investigate individual investors' decisions under time-varying ambiguity (VVIX) using plausibly exogenous forced mutual fund liquidations at a German brokerage. Investors reinvest 87% of forced liquidations when the refund occurs on a day of low ambiguity and 0% when it occurs on a day of high ambiguity. Instead of reinvesting, investors become inert and keep the refund in their cash holdings. The effect reverses approximately six months after the liquidation. If investors reinvest, they decrease their risk-taking under ambiguity. Our results are not driven by risk, rebalancing decisions, experiencing losses, or attention and are robust to alternative measures of ambiguity.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"156 ","pages":"Article 103849"},"PeriodicalIF":8.9,"publicationDate":"2024-04-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0304405X24000722/pdfft?md5=f77d5289553925bd2ba54071c173f406&pid=1-s2.0-S0304405X24000722-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140807727","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-04-26DOI: 10.1016/j.jfineco.2024.103852
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, leading to a CIO-based peer momentum strategy that outperforms Ali and Hirshleifer's (2020) shared-analyst momentum strategy. This anomaly stems primarily from institutional investors with fewer stock holdings, who employ passive asset management characterized by lower portfolio turnover and more delegated investment.
{"title":"Gradual information diffusion across commonly owned firms","authors":"Jie Ying","doi":"10.1016/j.jfineco.2024.103852","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103852","url":null,"abstract":"<div><p>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, leading to a CIO-based peer momentum strategy that outperforms <span>Ali and Hirshleifer</span>'s (<span>2020</span>) shared-analyst momentum strategy. This anomaly stems primarily from institutional investors with fewer stock holdings, who employ passive asset management characterized by lower portfolio turnover and more delegated investment.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"156 ","pages":"Article 103852"},"PeriodicalIF":8.9,"publicationDate":"2024-04-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140645812","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-04-15DOI: 10.1016/j.jfineco.2024.103839
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 strong reversals at the quarter end. Moreover, despite a minor underperformance stemming from portfolio misallocation, non-star fund managers pumping for star funds receive abnormally high subsequent flows, suggesting a pattern of family subsidization.
{"title":"Portfolio pumping in mutual fund families","authors":"Pingle Wang","doi":"10.1016/j.jfineco.2024.103839","DOIUrl":"https://doi.org/10.1016/j.jfineco.2024.103839","url":null,"abstract":"<div><p>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 strong reversals at the quarter end. Moreover, despite a minor underperformance stemming from portfolio misallocation, non-star fund managers pumping for star funds receive abnormally high subsequent flows, suggesting a pattern of family subsidization.</p></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"156 ","pages":"Article 103839"},"PeriodicalIF":8.9,"publicationDate":"2024-04-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140554028","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}