Vol 66 August 2011 No Editor Co-Editor CAMPBELL R HARVEY Duke University JOHN GRAHAM Duke University Associate Editors VIRAL ACHARYA New York University FRANCIS A LONGSTAFF University of California, Los Angeles ANAT R ADMATI Stanford University HANNO LUSTIG University of California, Los Angeles ANDREW ANG Columbia University ANDREW METRICK Yale University KERRY BACK Rice University TOBIAS J MOSKOWITZ University of Chicago MALCOLM BAKER Harvard University DAVID K MUSTO University of Pennsylvania NICHOLAS C BARBERIS Yale University STEFAN NAGEL Stanford University NITTAI K BERGMAN Massachusetts Institute of Technology TERRANCE ODEAN University of California, Berkeley HENDRIK BESSEMBINDER University of Utah CHRISTINE A PARLOUR University of California, Berkeley MICHAEL W BRANDT Duke University ALON BRAV Duke University MARKUS K BRUNNERMEIER Princeton University DAVID A CHAPMAN Boston College MIKHAIL CHERNOV London School of Economics JENNIFER S CONRAD University of North Carolina FRANCESCA CORNELLI London Business School BERNARD DUMAS INSEAD DAVID HIRSHLEIFER University of California, Irvine BURTON HOLLIFIELD Carnegie Mellon University HARRISON HONG Princeton University NARASIMHAN JEGADEESH Emory University WEI JIANG Columbia University STEVEN N KAPLAN University of Chicago JONATHAN M KARPOFF University of Washington ARVIND KRISHNAMURTHY Northwestern University MICHAEL LEMMON University of Utah ´ L˘ UBOS˘ PASTOR University of Chicago LASSE H PEDERSEN New York University MITCHELL A PETERSEN Northwestern University MANJU PURI Duke University RAGHURAM RAJAN University of Chicago JOSHUA RAUH Northwestern University MICHAEL R ROBERTS University of Pennsylvania ANTOINETTE SCHOAR Massachusetts Institute of Technology HENRI SERVAES London Business School ANIL SHIVDASANI University of North Carolina RICHARD STANTON University of California, Berkeley ANNETTE VISSING-JORGENSEN Northwestern University ANDREW WINTON University of Minnesota Business Manager DAVID H PYLE University of California, Berkeley Assistant Editor WENDY WASHBURN HELP DESK The Latest Information Our World Wide Web Site For the latest information about the journal, about our annual meeting, or about other announcements of interest to our membership, consult our web site at http://www.afajof.org Subscription Questions or Problems Address Changes Journal Customer Services: For ordering information, claims, and any enquiry concerning your journal subscription, please go to interscience.wiley.com/support or contact your nearest office Americas: Email: cs-journals@wiley.com; 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email: pyle@haas.berkeley.edu Volume 66 CONTENTS for AUGUST 2011 No ARTICLES Presidential Address: Discount Rates JOHN H COCHRANE Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis GARA AFONSO, ANNA KOVNER, and ANTOINETTE SCHOAR Systemic Liquidation Risk and the Diversity–Diversification Trade-Off WOLF WAGNER Rollover Risk and Market Freezes VIRAL V ACHARYA, DOUGLAS GALE, and TANJU YORULMAZER 1047 1109 1141 1177 Public Pension Promises: How Big Are They and What Are They Worth? ROBERT NOVY-MARX and JOSHUA RAUH 1211 Who Drove and Burst the Tech Bubble? JOHN M GRIFFIN, JEFFREY H HARRIS, TAO SHU, and SELIM TOPALOGLU 1251 Did Structured Credit Fuel the LBO Boom? ANIL SHIVDASANI and YIHUI WANG 1291 Explaining the Magnitude of Liquidity Premia: The Roles of Return Predictability, Wealth Shocks, and State-Dependent Transaction Costs ANTHONY W LYNCH and SINAN TAN 1329 Individual Investors and Volatility THIERRY FOUCAULT, DAVID SRAER, and DAVID J THESMAR 1369 Are Options on Index Futures Profitable for Risk-Averse Investors? Empirical Evidence GEORGE M CONSTANTINIDES, MICHAL CZERWONKO, JENS CARSTEN JACKWERTH, and STYLIANOS PERRAKIS 1407 REPORTS OF THE AMERICAN FINANCE ASSOCIATION Report of the Editor of The Journal of Finance for the Year 2010 CAMPBELL R HARVEY 1439 Minutes of the Annual Membership Meeting, January 8, 2011 DAVID H PYLE 1453 Report of the Executive Secretary and Treasurer for the Year Ending September 30, 2010 DAVID H PYLE 1455 MISCELLANEA 1457 The Journal of Finance John H Cochrane President of the American Finance Association 2010 THE JOURNAL OF FINANCE • VOL LXVI, NO • AUGUST 2011 Presidential Address: Discount Rates JOHN H COCHRANE∗ ABSTRACT Discount-rate variation is the central organizing question of current asset-pricing research I survey facts, theories, and applications Previously, we thought returns were unpredictable, with variation in price-dividend ratios due to variation in expected cashflows Now it seems all price-dividend variation corresponds to discount-rate variation We also thought that the cross-section of expected returns came from the CAPM Now we have a zoo of new factors I categorize discount-rate theories based on central ingredients and data sources Incorporating discount-rate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics ASSET PRICES SHOULD EQUAL expected discounted cashflows Forty years ago, Eugene Fama (1970) argued that the expected part, “testing market efficiency,” provided the framework for organizing asset-pricing research in that era I argue that the “discounted” part better organizes our research today I start with facts: how discount rates vary over time and across assets I turn to theory: why discount rates vary I attempt a categorization based on central assumptions and links to data, analogous to Fama’s “weak,” “semi-strong,” and “strong” forms of efficiency Finally, I point to some applications, which I think will be strongly influenced by our new understanding of discount rates In each case, I have more questions than answers This paper is more an agenda than a summary I Time-Series Facts A Simple Dividend Yield Regression Discount rates vary over time (“Discount rate,” “risk premium,” and “expected return” are all the same thing here.) Start with a very simple regression of returns on dividend yields,1 shown in Table I The 1-year regression forecast does not seem that important Yes, the t-statistic is “significant,” but there are lots of biases and fishing The 9% R2 is not impressive ∗ University of Chicago Booth School of Business, and NBER I thank John Campbell, George Constantnides, Doug Diamond, Gene Fama, Zhiguo He, Bryan Kelly, Juhani Linnanmaa, Toby Moskowitz, Lubos Pastor, Monika Piazzesi, Amit Seru, Luis Viceira, Lu Zhang, and Guofu Zhou for very helpful comments I gratefully acknowledge research support from CRSP and outstanding research assistance from Yoshio Nozawa Fama and French (1988) 1047 1048 The Journal of Finance R Table I Return-Forecasting Regressions e e The regression equation is Rt→t+k = a + b × Dt /Pt + ε t+k The dependent variable Rt→t+k is the CRSP value-weighted return less the 3-month Treasury bill return Data are annual, 1947–2009 The 5-year regression t-statistic uses the Hansen–Hodrick (1980) correction σ [Et (Re )] represents the standard deviation of the fitted value, σ (bˆ × Dt /Pt ) Horizon k year years b t(b) R2 σ [Et (Re )] σ [ Et (Re )] E(Re ) 3.8 20.6 (2.6) (3.4) 0.09 0.28 5.46 29.3 0.76 0.62 In fact, this regression has huge economic significance First, the coefficient estimate is large A one percentage point increase in dividend yield forecasts a nearly four percentage point higher return Prices rise by an additional three percentage points Second, five and a half percentage point variation in expected returns is a lot A 6% equity premium was already a “puzzle.”2 The regression implies that expected returns vary by at least as much as their puzzling level, as shown in the last two columns of Table I By contrast, R2 is a poor measure of economic significance in this context.3 The economic question is, “How much expected returns vary over time?” There will always be lots of unforecastable return movement, so the variance of ex post returns is not a very informative comparison for this question Third, the slope coefficients and R2 rise with horizon Figure plots each year’s dividend yield along with the subsequent years of returns, in order to illustrate this point Read the dividend yield as prices upside down: Prices were low in 1980 and high in 2000 The picture then captures the central fact: High prices, relative to dividends, have reliably preceded many years of poor returns Low prices have preceded high returns B Present Values, Volatility, Bubbles, and Long-Run Returns Long horizons are most interesting because they tie predictability to volatility, “bubbles,” and the nature of price movements I make this connection via the Campbell–Shiller (1988) approximate present value identity, k dpt ≈ k ρ j−1rt+ j − j=1 ρ j−1 dt+ j + ρ kdpt+k, (1) j=1 where dpt ≡ dt − pt = log(Dt /Pt ), rt+1 ≡ log R, and ρ ≈ 0.96 is a constant of approximation Mehra and Prescott (1985) Campbell (1991) makes this point, noting that a perpetuity would have very low shortrun R2 Discount Rates 1049 x D/P Return 25 20 15 10 1950 1960 1970 1980 1990 2000 2010 Figure Dividend yield and following 7-year return The dividend yield is multiplied by four Both series use the CRSP value-weighted market index Now, consider regressions of weighted long-run returns and dividend growth on dividend yields: k r ρ j−1rt+ j = ar + br(k) dpt + εt+k , (2) d ρ j−1 dt+ j = ad + bd(k) dpt + εt+k , (3) j=1 k j=1 dp (k) dpt+k = adp + bdp dpt + εt+k (4) The present value identity (1) implies that these long-run regression coefficients must add up to one, (k) ≈ br(k) − b(k)d + ρ kbdp (5) To derive this relation, regress both sides of the identity (1) on dpt Equations (1) and (5) have an important message If we lived in an i.i.d world, dividend yields would never vary in the first place Expected future 1050 The Journal of Finance R Table II Long-Run Regression Coefficients k ρ j−1 r (k) Table entries are long-run regression coefficients, for example, b(k) r in j=1 t+j = a + b r r See equations (2)–(4) Annual CRSP data, 1947–2009 “Direct” regression estimates dpt + εt+k are calculated using 15-year ex post returns, dividend growth, and dividend yields as left-hand variables The “VAR” estimates infer long-run coefficients from 1-year coefficients, using estimates in the right-hand panel of Table III See the Appendix for details Coefficient b(k) r Method and Horizon Direct regression , k = 15 Implied by VAR, k = 15 VAR, k = ∞ b(k) d −0.11 0.27 0.35 1.01 1.05 1.35 ρ k b(k)dp −0.11 0.22 0.00 returns and dividend growth would never change Since dividend yields vary, they must forecast long-run returns, long-run dividend growth, or a “rational bubble” of ever-higher prices The regression coefficients in (5) can be read as the fractions of dividend yield variation attributed to each source To see this interpretation more clearly, multiply both sides of (5) by var(dpt ), which gives ⎡ ⎤ ⎡ ⎤ var(dpt ) ≈ cov⎣dpt , k j=1 ρ j−1 rt+ j⎦ − cov⎣dpt , k ρ j−1 dt+ j⎦ + ρ kcov(dpt , dpt+k) j=1 (6) The empirical question is, how big is each source of variation? Table II presents long-run regression coefficients, each calculated three ways The long-run return coefficients, shown in the first column, are all a bit larger than 1.0 The dividend growth forecasts, in the second column, are small, statistically insignificant, and the positive point estimates go the “wrong” way—high prices relative to current dividends signal low future dividend growth The 15year dividend yield forecast coefficient is also essentially zero Thus, the estimates summarized in Table II say that all price-dividend ratio volatility corresponds to variation in expected returns None corresponds to variation in expected dividend growth, and none to “rational bubbles.” In the 1970s, we would have guessed exactly the opposite pattern Based on the idea that returns are not predictable, we would have supposed that high prices relative to current dividends reflect expectations that dividends will rise in the future, and so forecast higher dividend growth That pattern is completely absent Instead, high prices relative to current dividends entirely forecast low returns This is the true meaning of return forecastability.4 This is the real measure of “how big” the point estimates are—return forecastability is “just enough” Shiller (1981), Campbell and Shiller (1988), Campbell and Ammer (1993), Cochrane (1991a, 1992, 1994, 2005b) Discount Rates 1051 to account for price volatility This is the natural set of units with which to evaluate return forecastability What we expected to be zero is one; what we expected to be one is zero Table II also reminds us that the point of the return-forecasting project is to understand prices, the right-hand variable of the regression We put return on the left side because the forecast error is uncorrelated with the forecasting variable This choice does not reflect “cause” and “effect,” nor does it imply that the point of the exercise is to understand ex post return variation How you look at things matters The long-run and short-run regressions are equivalent, as each can be obtained from the other Yet looking at the long-run version of the regressions shows an unexpected economic significance We will see this lesson repeated many times Some quibbles: Table II does not include standard errors Sampling variation in long-run estimates is an important topic.5 My point is the economic importance of the estimates One might still argue that we cannot reject the alternative views But when point estimates are one and zero, arguing we should believe zero and one because zero and one cannot be rejected is a tough sell The variance of dividend yields or price-dividend ratios corresponds entirely to discount-rate variation, but as much as half of the variance of price changes pt+1 = −dpt+1 + dpt + dt+1 or returns rt+1 ≈ −ρdpt+1 + dpt + dt+1 corresponds to current dividends dt+1 This fact seems trivial but has caused a lot of confusion I divide by dividends for simplicity, to capture a huge literature in one example Many other variables work about as well, including earnings and book values C A Pervasive Phenomenon This pattern of predictability is pervasive across markets For stocks, bonds, credit spreads, foreign exchange, sovereign debt, and houses, a yield or valuation ratio translates one-for-one to expected excess returns, and does not forecast the cashflow or price change we may have expected In each case our view of the facts has changed completely since the 1970s • Stocks Dividend yields forecast returns, not dividend growth.6 • Treasuries A rising yield curve signals better 1-year returns for long-term bonds, not higher future interest rates Fed fund futures signal returns, not changes in the funds rate.7 • Bonds Much variation in credit spreads over time and across firms or categories signals returns, not default probabilities.8 • Foreign exchange International interest rate spreads signal returns, not exchange rate depreciation.9 Cochrane (2006) includes many references Fama and French (1988, 1989) Fama and Bliss (1987), Campbell and Shiller (1991), Piazzesi and Swanson (2008) Fama (1986), Duffie and Berndt (2011) Hansen and Hodrick (1980), Fama (1984) 1448 The Journal of Finance R Dinc, Serdar Dittmann, Ingolf Dittmar, Amy Doidge, Craig Dorn, Daniel Dow, James Drechsler, Itamar Driessen, Joost Duchin, Ran Duffee, Gregory Dyck, Alexander Eckbo, B Espen Eckner, Andreas Edelen, Roger Edgerton, Jesse Edmans, Alex Eisfeldt, Andrea Engelberg, Joseph Erel, Isil Evans, Richard Faccio, Mara Fahlenbrach, Ruediger Fang, Lily Farhi, Emmanuel Faulkender, Michael ¨ Feldhutter, Peter Ferreira, Miguel Ferson, Wayne Fich, Eliezer Field, Laura Fields, L Paige Figlewski, Stephen Fisher, Adlai Fishman, Michael Fisman, Raymond Flannery, Mark Fleming, Michael Fluck, Zsuzsanna Foley, C Fritz Foucault, Thierry Frame, W Scott Frank, Murray Franzoni, Francesco Frazzini, Andrea French, Ken Frey, Stefan Gabaix, Xavier Gale, Douglas Gallmeyer, Michael Galpin, Neal Gan, Jie Gande, Amar Gao, Pengjie Garcia, Ren´e Garicano, Luis Garlappi, Lorenzo Garleanu, Nicolae Garmaise, Mark Gatev, Evan George, Thomas Ghysels, Eric Giammarino, Ron Giannetti, Mariassunta Gillan, Stuart Glode, Vincent Goel, Anand Goetzmann, William Goldreich, David Goldstein, Itay Goldstein, Robert Gomes, Francisco Gomes, Joao Gompers, Paul Gopalan, Radhakrishnan Gordy, Michael Gormley, Todd Gorton, Gary Gourio, Franc¸ois Goyal, Amit Goyal, Vidhan Green, Brett Green, Richard Green, T Clifton Greenwood, Robin Griffin, John Grinblatt, Mark Grinstein, Yaniv Gromb, Denis Grullon, Gustavo Guadalupe, Maria Guidolin, Massimo Guiso, Luigi Gulen, Huseyin ¨ Gumbel, Alexander Gutierrez, Roberto Hackbarth, Dirk Hadlock, Charles Haliassos, Michael Hall, Bronwyn Han, Bing Han, Lu Hanlon, Michelle Hansen, Robert Harford, Jarrad Hartzell, Jay Hassan, Tarek Hau, Harald Haushalter, David He, Zhiguo Heaton, J.B Heaton, John Hedegaard, Esben Hege, Ulrich Helwege, Jean Hennessy, Christopher Hermalin, Benjamin Heron, Randall Hertzberg, Andrew Hilscher, Jens Hirshleifer, David Hjalmarsson, Erik Hoberg, Gerard Hochberg, Yael Hollifield, Burton Hortacsu, Ali Hotchkiss, Edith Huang, Jennifer Hughson, Eric Hvidkjaer, Soeren Hwang, Byoung-Hyoun Hwang, Lee-Seok Ilut, Cosmin Ivashina, Victoria Ivkovich, Zoran Jackwerth, Jens Jaffee, Dwight Jagannathan, Murali Report of the Editor Jagannathan, Ravi Jegadeesh, Narasimhan Jenter, Dirk Jermann, Urban Jiang, Danling Jiang, George Jiang, Wei Jin, Li Johannes, Michael Johnson, Timothy Jones, Christopher Jorion, Philippe Joslin, Scott Jurek, Jakub Kacperczyk, Marcin Kadlec, Gregory Kahl, Matthias Kaniel, Ron Kaplan, Steven Karceski, Jason Karolyi, Andrew Karpoff, Jonathan Kashyap, Anil Kasznik, Ron Kaustia, Markku Kedia, Simi Khwaja, Asim Kieschnick, Robert Kiku, Dana Kim, Woojin Kisgen, Darren Kisin, Roni Klein, April Kogan, Shimon Koijen, Ralph Kondor, Peter Korajczyk, Robert Korniotis, George Korteweg, Arthur Kovner, Anna Kremer, Ilan Krishnamurthy, Arvind Kristensen, Dennis Kubik, Jeffrey Kuhnen, Camelia Kumar, Alok Kumar, Praveen La Porta, Rafael Laeven, Luc Lando, David Larrain, Borja Lazrak, Ali Le, Anh Leary, Mark Lee, D Scott Lehn, Kenneth Lemmon, Michael Lerner, Josh Lesmond, David Lettau, Martin Leuz, Christian Levine, Ross Levy, Haim Lewellen, Jonathan Lewellen, Katharina Lewis, Craig Li, Feng Li, Haitao Li, Kai Liang, Bing Liang, Nellie Lie, Erik Lim, Sonya Lindsey, Laura Lipson, Marc Livdan, Dmitry Lo, Andrew Loewenstein, Mark Loh, Roger Longstaff, Francis Lou, Dong Lou, Xiaoxia Loughran, Tim Love, David Lowry, Michelle Lusardi, Annamaria Lustig, Hanno Lynch, Anthony Lynch, John MacKinlay, Craig Madrian, Brigitte Madureira, Leonardo 1449 Maenhout, Pascal Mahrt-Smith, Jan Malloy, Christopher Malmendier, Ulrike Manso, Gustavo Mariotti, Thomas Marquez, Robert Martin, Ian Martin, J Spencer Martin, Xiumin Massa, Massimo Masulis, Ronald Mathews, Richmond Matos, Pedro Matsa, David Matvos, Gregor Maug, Ernst Maxwell, William Mayhew, Stewart McDonald, Bill McDonald, Robert Meddahi, Nour Megginson, William Mehran, Hamid Mertens, Thomas Metrick, Andrew Mian, Atif Milbourn, Todd Milbradt, Konstantin Miller, Darius Minton, Bernadette Mitchell, Matthew Moinas, Sophie Molina, Carlos Morellec, Erwan Morgan, Donald Morrison, Alan Morse, Adair Moulton, Pamela Mueller, Holger Musto, David Nagel, Stefan Naik, Narayan Nanda, Ramana Naveen, Lalitha Ng, Lilian 1450 The Journal of Finance R Ni, Sophie Nini, Gregory Novy-Marx, Robert Nyborg, Kjell Odean, Terrance Oded, Jacob Oehmke, Martin Officer, Micah Ongena, Steven Opp, Christian Opp, Marcus Ostdiek, Barbara Ostrovsky, Michael Ouimet, Paige Ovtchinnikov, Alexei Oyer, Paul Ozbas, Oguzhan Ozdenoren, Emre Pagnotta, Emiliano Pan, Jun Panageas, Stavros Panunzi, Fausto Paravisini, Daniel Parlour, Christine Parrino, Robert Pasquariello, Paolo Patton, Andrew Pavlova, Anna Peng, Lin Pennacchi, George Peress, Joel Perez-Gonzalez, Francisco Petajisto, Antti Peters, Florian Petersen, Mitchell Peyer, Urs Philippon, Thomas Phillips, Gordon Piskorski, Tomasz Polk, Christopher Pollet, Joshua Pomorski, Lukasz Pontiff, Jeffrey Pouget, S´ebastien Povel, Paul Prabhala, Nagpurnanand Purnanandam, Amiyatosh Qi, Jianping Rajan, Uday Ramadorai, Tarun Ramcharan, Rodney Rampini, Adriano Rau, Raghavendra Rauh, Joshua Reed, Adam Renault, Eric Reuter, Jonathan Rey, Helene Rhodes-Kropf, Matthew Richardson, Matthew Rick, Scott Riddiough, Tim Ritter, Jay Roberts, Michael Robinson, David Rocholl, J¨org Ross, Stephen Rossi, Stefano Rosu, Ioanid Roussanov, Nikolai Rubio-Ramirez, Juan Ryan, Harley Saar, Gideon Sadka, Ronnie Sagi, Jacob ˚ Patrik Sandas, Sangiorgi, Francesco Sannikov, Yuliy Santa-Clara, Pedro ˜ Santos, Joao Sapienza, Paola Saretto, Alessio Sarkissian, Sergei Saunders, Anthony Savor, Pavel Scharfstein, David Schenone, Carola Scherbina, Anna Schlingemann, Frederik-Paul Schmalz, Martin Schmedders, Karl Schnabl, Philipp Schneider, Martin Schoar, Antoinette Schotman, Peter Schrand, Catherine Schroder, Mark Schultz, Paul ¨ Schurhoff, Norman Seasholes, Mark Sensoy, Berk Seru, Amit Servaes, Henri Sevilir, Merih Shackelford, Douglas Shanken, Jay Shanthikumar, Devin Shapiro, Joel Sheen, Albert Shevlin, Terry Shivdasani, Anil Shive, Sophie Sialm, Clemens Siegel, Stephan Sikes, Stephanie Simin, Timothy Singal, Vijay Singh, Rajdeep Skiadas, Costas Smith, David Sodini, Paolo Sohn, Bumjean Sorensen, Morten Stafford, Erik Stambaugh, Robert Strahan, Philip Strebulaev, Ilya Stulz, Ren´e Subrahmanyam, Marti Sufi, Amir Sundaresan, Suresh Tarhan, Vefa Tate, Geoffrey Report of the Editor Teo, Melvyn Teoh, Siew Hong Tetlock, Paul Thakor, Anjan Thesmar, David Tice, Sheri Timmermann, Allan Titman, Sheridan Tkac, Paula Tobacman, Jeremy Todorov, Viktor Tookes, Heather Topaloglu, Selim Torous, Walt Triantis, Alexander Tu, Jun Ueda, Masako Ulrich, Maxim Uppal, Raman Urosevic, Branko van Binsbergen, Jules van Dijk, Mathijs Van Hemert, Otto Van Nieuwerburgh, Stijn Vayanos, Dimitri Vega, Clara Venkatachalam, Mohan Venkataraman, Kumar Verardo, Michela Verdelhan, Adrien Vig, Vikrant Villalonga, Bel´en Vissing-Jorgensen, Annette Viswanathan, S Volpin, Paolo Von Thadden, Ernst-Ludwig Wachter, Jessica Wagner, Wolf Walden, Johan Walkling, Ralph Wang, Cong Wang, Jiang Wang, Tan Wang, Zhenyu Warnock, Francis Weber, Joseph Weill, Pierre-Olivier Weisbach, Michael Weisbenner, Scott Welch, Ivo Wermers, Russ Werner, Ingrid Westerfield, Mark Weston, James Whited, Toni Whitelaw, Robert Wilhelm, William Willen, Paul Williamson, Rohan Winton, Andrew Wohl, Avi Wolfenzon, Daniel Womack, Kent Wu, Xueping Wurgler, Jeffrey 1451 Xie, Fei Xing, Yuhang Xiong, Wei Xu, Danielle Xu, Jianguo Xuan, Yuhai Yan, Hong Yan, Hongjun Yan, Shu Yang, Jun Yang, Liu Yasuda, Ayako Yen, Jacqueline Yermack, David Yerramilli, Vijay Yogo, Motohiro Yorulmazer, Tanju Yu, Fan Yuan, Kathy Zawadowski, Adam Zha, Tao Zhang, Chu Zhang, Lu Zhang, Xiaoyan Zheng, Lu Zhou, Guofu Zhou, Hao Zhu, Ning Zigrand, Jean-Pierre Zingales, Luigi Zinman, Jonathan Zitzewitz, Eric Zwiebel, Jeffrey Appendix B: Smith Breeden Prizes for 2010 First Prize Paper Joao F Gomes and Lukas Schmid Levered Returns April 2010 Distinguished Papers Joel Peress Product Market Competition, Insider Trading, and Stock Market Efficiency February 2010 1452 The Journal of Finance R Lauren Cohen, Andrea Frazzini, and Christopher Malloy Sell-Side School Ties August 2010 ¨ Richard C Green, Dan Li, and Norman Schurhoff Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall? October 2010 Finalists Christopher J Malloy, Tobias J Moskowitz, and Annette Vissing-Jørgensen Long-Run Stockholder Consumption Risk and Asset Returns December 2009 Jules H van Binsbergen and Ralph S.J Koijen Predictive Regressions: A Present-Value Approach August 2010 Appendix C: Brattle Group Prizes for 2010 First Prize Paper Andrew Hertzberg, Jos´e M Liberti, and Daniel Paravisini Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation June 2010 Distinguished Papers Thorsten Beck, Ross Levine, and Alexey Levkov Big Bad Banks? The Winners and Losers from Bank Deregulation in the U.S October 2010 Jos´e M Liberti and Atif R Mian Collateral Spread and Financial Development February 2010 Finalists Jonathan B Berk, Richard Stanton, and Josef Zechner Human Capital, Bankruptcy, and Capital Structure June 2010 Tara Rice and Philip E Strahan Does Credit Competition Affect Small-Firm Finance? June 2010 Paul Povel and Rajdeep Singh Stapled Finance June 2010 THE JOURNAL OF FINANCE • VOL LXVI, NO • AUGUST 2011 AMERICAN FINANCE ASSOCIATION Minutes of the Annual Membership Meeting January 8, 2011 THE SEVENTY FIRST ANNUAL MEMBERSHIP Meeting was held at the Marriott City Center Hotel on January 8, 2011 at 5:45pm Executive Secretary and Treasurer David Pyle reported on the sound financial status of the organization and of the Fischer Black Prize Fund The Association’s business relations with Blackwell Publishing, Berkeley Electronic Press (supplier of the on line Journal submission system) and JSTOR remain good The 2011Annual Program Management was provided by SSRN He then turned the meeting over to President John Cochrane President Cochrane welcomed the members The results of the 2010 election for the year beginning at the end of this meeting were reported as: President: President Elect: Vice President: Director: Raghuram Rajan Sheridan Titman Robert Stambaugh Lasse Pedersen Paola Sapienza Raman Uppal On behalf of the Association, the President gave thanks to the 2010 Nominating Committee and all the candidates for election The 2011 Nominating Committee will begin work at this meeting Thanks were given to the Program Chair, Raghuram Rajan, and all participants for a strong meeting The 2012 meeting will be held in Chicago, IL January 6–8 The President thanked outgoing Directors Will Goetzmann, Toby Moskowitz, Jeremy Stein, and Annette Vissing-Jorgenson for their service to the Association and Steve Buser and Marty Gruber for their continuing service as Historian and NBER Representative, respectively At the 2011 Board Meeting, The Board approved the following membership for the 2012 Nominating Committee: Sheridan Titman (chair), Fritz Foley, Nicolae Garleanu, Joao Gomes, John Griffin, Wei Jiang, Leonid Kogan, Ulrike Malmendier, Tobias Moskowitz (carried over from 2011), Jonathan Parker, Francisco Perez-Gonzales, Thomas Philippon, and Amir Sufi The Board also approved the following membership for the 2012 Morgan-Stanley/AFA Award Committee: John Cochrane (chair), Marcus Brunnermeier, Xavier Gabaix, Monica Piazzesi, and Rene Stulz The Board approved having the Association join the Consortium of Social Science Associations (COSSA) as a non-governing member The podium was turned over to Raghuram Rajan, 2011 Program Chair, who thanked the Program Committee members for their service in assembling the 1453 1454 The Journal of Finance R program He reported that submission were up about 3% over last year to an all time high of 1402 He also reported on the special sessions implement this year, two panel sessions, a lecture and a timely papers session with solicited papers Vice President Sheridan Titman reported that 2011 travel grants were awarded to 97 students Journal Editor Campbell Harvey was introduced and gave his report on the state of the Journal (see his report in this issue for details) Then the 2010 Brattle Group prizes and the 2010 Smith Breedan Prizes were awarded to the honorees President Cochrane announced Milton Harris as the newly elected Fellow of the AFA President Cochrane called to the podium Xavier Gabaix this year’s winner of the Fischer Black award and Professor Gabaix said a few words of thanks Thanks were given to Smith Breeden and the Brattle Group for their continued support of research in finance There being no further business the business meeting was closed and President-Elect Rajan introduced John Cochrane for his Presidential Address DHP 1/24/2011 THE JOURNAL OF FINANCE • VOL LXVI, NO • AUGUST 2011 AMERICAN FINANCE ASSOCIATION Report of the Executive Secretary and Treasurer for the Year Ending September 30, 2010 OPERATING INCOME REPORTED in fiscal 2009–10 increased by 36.4% over the previous fiscal year due to a substantial increase in reported subscription income Operating expenses decreased by 3.8% Net operating income increased by 476.5% The year-to-year comparisons of total operating income and net operating income are distorted by the effects of a Wiley accounting change during the 2009 calendar year that shifted income from 2008–9 to 2009–10 Investment income increased by 129.5% largely due to an increase in capital gains Overall the Association’s net worth increased by 20.1% year over year Membership totals over the past five years are Active members Student members Life members and Sponsors Library and Corporate1 Total 2005 2006 2007 2008 2009 2010 5068 3680 165 8419 5270 4676 161 10035 5185 1176 157 10827 5642 1136 154 7406 5785 1802 134 7178 5068 2424 127 7786 17332 20142 17345 14338 14899 15706 The data for Library and Corporate has been changed to include all forms of circulation to these institutions This includes regular subscriptions, access through consortia, access through Ebsco and philanthropic subscriptions After 2007, the AFA withdrew the Journal of Finance from consortia arrangements The Annual Meeting for 2012 will be held in Chicago, IL on January 6–8, 2012 For the following two years the ASSA Meetings are scheduled as follows: 2013 2014 January 4–6 January 3–5 San Diego, CA Philadelphia, PA During the year, our business relationships with Wiley-Blackwell Publishing, BePress, On Line Video Service, SSRN and JSTOR continued to serve the Association well I thank all of the officers and directors for their assistance and support during the year Respectfully submitted, David H Pyle Executive Secretary and Treasurer January, 2011 1455 THE JOURNAL OF FINANCE r VOL LXVI, NO r AUGUST 2011 MISCELLANEA The following articles have been accepted for publication in The Journal of Finance and are scheduled to appear in the October 2011 issue You can read the full text of all upcoming articles on the AFA website at the following address: http://www.afajof.org/journal/forthcoming.asp ARTICLES Zhi Da, Joseph Engelberg, and Pengjie Gao, “In Search of Attention,” University of Notre Dame, University of North Carolina at Chapel Hill, and University of Notre Dame Jean-Paul De´camps, Thomas Mariotti, Jean-Charles Rochet, and Ste´phane Villeneuve, “Free Cash-Flow, Issuance Costs, and Stock Prices,” Toulouse School of Economics, Toulouse School of Economics, Universita¨t Zu¨rich, and Toulouse School of Economics Patrick Bolton, Hui Chen, and Neng Wang, “A Unified Theory of Tobin’s q, Corporate Investment, Financing, and Risk Management,” Columbia University, Massachusetts Institute of Technology, and Columbia University Doron Levit and Nadya Malenko, “Non-Binding Voting for Shareholder Proposals,” University of Pennsylvania and Stanford University Murillo Campello, Chen Lin, Yue Ma, and Hong Zou, “The Real and Financial Implications of Corporate Hedging,” Cornell University, Chinese University of Hong Kong, Lingnan University, and City University of Hong Kong Dalida Kadyrzhanova and Matthew Rhodes-Kropf, “Concentrating on Governance,” University of Maryland and Harvard Business School Ulrike Malmendier, Geoffrey Tate, and Jon Yan, “Overconfidence and EarlyLife Experiences: The Effect of Managerial Traits on Corporate Financial Policies,” University of California at Berkeley, University of California at Los Angeles, and no affiliation Simon Gervais, J.B Heaton, and Terrance Odean, “Overconfidence, Compensation Contracts, and Capital Budgeting,” Duke University, Bartlit Beck Herman Palenchar & Scott LLP, and University of California at Berkeley 1457 1458 The Journal of Finance R Adair Morse, Vikram Nanda, and Amit Seru, “Are Incentive Contracts Rigged by Powerful CEOs?” University of Chicago, Georgia Institute of Technology, University of Chicago Gustavo Manso, “Motivating Innovation,” Massachusetts Institute of Technology THE JOURNAL OF FINANCE • VOL LXVI, NO • AUGUST 2011 ANNOUNCEMENTS Annual Meeting: The Seventy Second Annual Meeting will be held in Chicago, Il, January 6–8, 2012 with Sheridan Titman as Program Chair The AFA sessions will be held in the Swissotel Submissions closed March 11, 2011 Worldwide Directory of Finance Faculty: The AFA and the Department of Finance at Ohio State University have entered into a joint venture to maintain and enhance the finance faculty directory held on the OSU web site At present, information on over 3,000 finance professors and professionals is available in the directory An effort is being made to include all AFA members on this list and members are encouraged to provide information to the directory manager A link to the directory is available on the homepage or you can go directly to http://www.cob.ohio-state.edu/fin/findir/ Other Announcements Please go to our web site, www.afajof.org, for announcements regarding meetings, conferences, and research support 1459 AMERICAN FINANCE ASSOCIATION Publisher of the Journal of Finance Prof David H Pyle Executive Secretary and Treasurer February 2011 To Those Seeking Permissions for Academic Classroom Use: Permission is granted to reproduce articles for classroom use by accredited, notfor-profit colleges and universities or their appointed agents without charge for: r classes of a faculty member who is a subscriber to The Journal of Finance r classes at a college or university with a library subscription to The Journal of Finance Articles also may be distributed for classroom use in electronic (pdf) form if they are stored on a password-protected web site at said institution or its agent Non-subscribers seeking to reproduce articles should contact Wiley-Blackwell Publishing Company (jrights@wiley.com) regarding permission This form is valid through February 1, 2012 University of California Berkeley Haas School of Business 545 Student Services Building Berkeley, CA 94720-1900 phone & fax: (510) 642-2397 STYLE INSTRUCTIONS (1)—-All submitted manuscripts must be original work that is not under submission at another journal or under consideration for publication in another form, such as a monograph or chapter of a book Authors of submitted papers are obligated not to submit their paper for publication elsewhere until an editorial decision is rendered on their submission Further, authors of accepted papers are prohibited from publishing the results in other publications that appear before the paper is published in the Journal, unless they receive approval for doing so from the managing editor (2)—-Authors must submit papers electronically Instructions for submission and manuscript preparation are available at the submission site, http://www.afajof.org/journal/submission.asp Manuscripts must be clearly typed with double spacing The pitch must not exceed 12 characters per inch, and the character height must be at least 10 points (3)—-The cover page shall contain the title of the paper and an abstract of not more than 100 words The title page should NOT include the names of the authors, their affiliations, or any other identifying information That information must be input separately as part of the on-line submission The abstract must also be entered or pasted into a separate text box as part of the on-line submission (4)—-An initial acknowledgement footnote should NOT be included Acknowledgements must be entered or pasted into a separate text box as part of the on-line submission (5)—-The introductory section must have no heading or number Subsequent headings should be given Roman numerals Subsection headings should be lettered A, B, C, etc (6)—-The article should end with a non-technical summary statement of the main conclusions Lengthy mathematical proofs and very extensive detailed tables should be placed in an appendix or omitted entirely The author should make every effort to explain the meaning of mathematical proofs Final versions of the manuscript should be prepared in accordance with the following additional guidelines: (7)—Footnotes Footnotes in the text must be numbered consecutively and typed on a separate page, double-spaced, following the reference section Footnotes to tables must also be double-spaced and typed on the bottom of the page with the table (8)—Tables Tables must be numbered with Roman numerals Please check that your text contains a reference to each table Indicate with a notation inserted in the text approximately where each table should be placed Type each table on a separate page at the end of the paper Tables must be self-contained, in the sense that the reader must be able to understand them without going back to the text of the paper Each table must have a title followed by a descriptive legend Authors must check tables to be sure that the title, column headings, captions, etc are clear and to the point (9)—Figures Figures must be numbered with Arabic numerals All figure captions must be typed in double space on a separate sheet following the footnotes A figure’s title should be part of the caption Figures must be self-contained Each figure must have a title followed by a descriptive legend Final figures for accepted papers must be submitted in native electronic form and uploaded as separate files on the submission site (10)—Equations All but very short mathematical expressions should be displayed on a separate line and centered Equations must be numbered consecutively on the right margin, using Arabic numerals in parentheses Use Greek letters only when necessary Do not use a dot over a variable to denote time derivative; only D operator notations are acceptable (11)—References References must be typed on a separate page, double-spaced, at the end of the paper References to publications in the text should appear as follows: “Jensen and Meckling (1976) report that ” At the end of the manuscript (before tables and figures), the complete list of references should be listed as follows: For monographs: Fama, Eugene F., and Merton H Miller, 1972, The Theory of Finance (Dryden Press, Hinsdale, III.) For contributions to collective works: Grossman, Sanford J., and Oliver D Hart, 1982, Corporate financial structure and managerial incentives, in John J McCall, ed.: The Economics of Information and Uncertainty (University of Chicago Press, Chicago, III.) For periodicals: Jensen, Michael C., and William H Meckling, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3, 305–360 [...]... (2009 ), Brunnermeier (2009 ), Gabaix, Krishnamurthy, and Vigneron (2007 ), Duffie and Strulovici (2011 ), Garleanu and Pedersen (2011 ), He and Krishnamurthy (2010 ), Krishnamurthy (20 08 ), Froot and O’Connell (20 08 ), Vayanos and Vila (2011) 40 For example, Gabaix, Krishnamurthy, and Vigneron (2007) 37 1070 The Journal of Finance R Figure 8 Segmented markets versus intermediated markets claims on the mangers... run on the shadow banking system and flight to quality, 48 which certainly qualifies as a 47 Cochrane (1991b, 199 6, 2007a ), Lamont (2000 ), Li, Livdan, and Zhang (20 08 ), Liu, Whited, and Zhang (2009 ), Belo (2010 ), Jermann (2010 ), Liu and Zhang (2011) 48 Cochrane (2011) Discount Rates 1075 “friction.” The first-order conditions are consistent with many other views of the fundamental determinants of both... “that’s nice, but I’m about to lose my job, and my business might go under I can’t take any more risks right now, especially in 24 See Cochrane (2007a) and Ludvigson (2011) for recent reviews Eichenbaum, Hansen, and Singleton (1 988 ); more recently, Yogo (2006) 26 For example, Campbell and Cochrane (1999) 27 Epstein and Zin (1 989 ), Bansal and Yaron (2004 ), Hansen, Heaton, and Li (20 08) 28 Rietz (1 988 ), Barro... similar mechanisms, especially models with leverage.46 In the habit model, the pricedividend ratio is a nearly log-linear function of the surplus-consumption ratio The fit is not perfect, but the general pattern is remarkably good, given the hue and cry about how the crisis invalidates all traditional finance B Investment The Q theory of investment is the off -the- shelf analogue to the simple powerutility... betas and the market premium, we would still have the equity premium puzzle—why is the market premium so large? (And why are betas what they are?) Conversely, even if we had the perfect utility function and a perfect consumption-based model, the fact 34 Fama (19 98) For example, which of Epstein and Zin (1 989 ), Barberis, Santos, and Huang (2001 ), Hansen and Sargent (2005 ), Laibson (1997 ), Hansen, Heaton... completely None of the cross-section of average stock returns corresponds to market betas All of it corresponds to hml and size betas Alas, the world is once again descending into chaos Expected return strategies have emerged that do not correspond to market, value, and size betas These include, among many others, momentum,17 accruals, equity issues and other accounting-related sorts, 18 beta arbitrage, credit... low prices, and then fade away, rewarding contrarians All the securities with low prices today must rise and fall together in the future Finally, Fama and French found that other sorting variables, such as firm sales growth, did not each require a new factor The three-factor model took the place of the CAPM for routine risk adjustment in empirical work Order to chaos, yes, but once again, the world... perfect versions of either of these first-order conditions, let alone a full macro model that captures value or the rest of the factor zoo These are very simple and rejectable models Each makes a 100% R2 prediction that is easy, though a bit silly, to formally reject: The habit model predicts that the price-dividend ratio is a function of the surplus-consumption ratio, with no error The Q theory predicts... function of Q, with no error, as in (10) The point is only that research and further elaboration of these kinds of models, as well as using their basic intuition as an important guide to events, is not a hopeless endeavor C Comparisons Conversely, I think the other kinds of models, though good for describing particular anomalies, will have greater difficulty accounting for big-picture asset-pricing events,... generate rewards “Macro,” “behavioral,” or other “deep” theories can then focus on why the factors are priced D Theories with Frictions Models that emphasize frictions are becoming more and more popular, especially since the financial crisis At heart, these models basically maintain the “rational” assumption Admittedly, there are often “irrational” agents in such models However, these agents are usually