David S. Scharfstein

Edmund Cogswell Converse Professor of Finance and Banking

Harvard Business School

Contact Information:
Baker Library 239
Soldiers Field
Boston, MA 02163
Telephone: (617) 496-5067
Fax: (617) 496-5305
E-mail: dscharfstein@hbs.edu

Assistant: Peggy Moreland
Telephone: (617) 495-6882
E-mail: pmoreland@hbs.edu

 







List of Publications and Working Papers

Current Research

At the broadest level, my research centers on the role that financial markets and organizational structure play in corporate strategy and performance.  I have two current areas of interest.

Biopharmaceutical Drug Development.  In this research project, we are seeking to understand the role that financial and organizational factors play in the complex and costly process of drug development.  Our work has already established important differences in the strategies and performance of early stage drug development companies and large pharmaceutical firms.  We want to extend this analysis to explore many other important questions including:

  • The role of strategic alliances including the determinants of success

  • The allocation of R&D effort in large pharmaceutical firms

  • The role of stock market  mispricing on drug development

  • The process by which biopharmaceutical firms are founded and the effect of founder backgrounds on their strategies and success

Venture Capital.  In this project, which is joint with several colleagues at Harvard Business School, we investigate a number of different topics:

  • The determinants of venture capital performance

  • The process by which new venture capital backed firms are started

  • The valuation of venture capital deal terms

 

Recent Working Papers

Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs
This paper argues that a large component of success in entrepreneurship and venture capital can be attributed to skill.  We show that entrepreneurs with a track record of success are more likely to succeed than first time entrepreneurs and those who have previously failed.  Funding by more experienced venture capital firms enhances the change of success, but only for entrepreneurs without a successful track record.  Similarly, more experienced venture capitalists are able to identify and invest in first time entrepreneurs who are more likely to become serial entrepreneurs.  Investments by venture capitalists in successful serial entrepreneurs generate higher returns for their venture capital investors.  This finding provides further support for the role of skill in both entrepreneurship and venture capital..

Venture Capital Investment Cycles: The Impact of Public Markets
It is well documented that the venture capital industry is highly volatile and that much of this volatility is associated with shifting valuations and activity in public equity markets. This paper examines how changes in public market signals affected venture capital investing between 1975 and 1998. We find that venture capitalists with the most industry experience increase their investments the most when public market signals become more favorable. Their reaction to an increase is greater than the reaction of venture capital organizations with relatively little industry experience and those with considerable experience but in other industries. The increase in investment rates does not affect the success of these transactions adversely to a significant extent. These findings are consistent with the view that venture capitalists rationally respond to attractive investment opportunities signaled by public market shifts.
   .

Organizational Scope and Investment: Evidence from the Drug Development Strategies and Performance of Biopharmaceutical Firms
This paper compares the clinical trial strategies and performance of large, established (“mature”) biopharmaceutical firms to those of smaller (“early stage”) firms that have not yet successfully developed a drug. We study a sample of 235 cancer drug candidates that entered clinical trials during the period 1990-2002 and were sponsored by public firms.  Early stage firms are more likely than mature firms to advance drug candidates from Phase I to Phase II clinical trials.  However, early stage firms have much less promising clinical results in their Phase II trials and their Phase II drug candidates are also less likely to advance to Phase III and to receive Food and Drug Administration approval.  This pattern is more pronounced for early stage firms with large cash reserves.  The evidence points to an agency problem between shareholders and managers of single-product early stage firms who are reluctant to abandon development of their only viable drug candidates. By contrast, the managers of mature firms with multiple products in development are more willing to drop unpromising drug candidates.  The findings appear to be consistent with the benefits of internal capital markets identified by Stein (1997).

Entrepreneurship in Equilibrium
This paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external) labor markets are thus particularly valuable, which favors intrapreneurship (entrepreneurship). We also show that there can be too little or too much entrepreneurial activity. There can be too much because entrepreneurs do not take into account their positive effect on the quality of the labor market. There can be too little because a high quality labor market is bad for entrepreneurial incentives.


Publications

Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999, with Paul Gompers and Josh Lerner, Journal of Finance, April 2005  

Learning About Internal Capital Markets from Corporate Spinoffs, with Robert Gertner and Eric Powers, Journal of Finance, December 2002  

Do Firm Boundaries Matter?, with Sendhil Mullainathan, American Economic Review, May 2002  

The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment, with Jeremy Stein, Journal of Finance, December 2000  

Corporate Finance, the Theory of the Firm, and Organizations, with Patrick Bolton, The Journal of Economic Perspectives, Autumn, 1998  

Optimal Debt Structure and the Number of Creditors, with Patrick Bolton, The Journal of Political Economy, February, 1996  

Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence , with Judith Chevalier, The American Economic Review, September, 1996  

Liquidity Constraints and the Cyclical Behavior of Markups, with Judith A. Chevalier, The American Economic Review, May, 1995  

Anatomy of Financial Distress: An Examination of Junk-Bond Issuers, with Paul Asquith & Robert Gertner, The Quarterly Journal of Economics, August, 1994  

Internal Versus External Capital Markets, with Robert H. Gertner & Jeremy C. Stein, The Quarterly Journal of Economics, November, 1994  

Risk Management: Coordinating Corporate Investment and Financing Policies, with Kenneth A. Froot & Jeremy C. Stein, The Journal of Finance, December, 1993  

Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation, with Kenneth A. Froot & Jeremy C. Stein, The Journal of Finance, September, 1992  

Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups, with Takeo Hoshi & Anil Kashyap, The Quarterly Journal of Economics, February, 1991  

A Theory of Workouts and the Effects of Reorganization Law, with Robert Gertner, The Journal of Finance, September, 1991  

Shareholder-Value Maximization and Product-Market Competition, with Julio J. Rotemberg, The Review of Financial Studies, 1990  

A Theory of Predation Based on Agency Problems in Financial Contracting, with Patrick Bolton, The American Economic Review, March, 1990  

Herd Behavior and Investment, with Jeremy C. Stein, The American Economic Review, June 1990  

LDC Debt: Forgiveness, Indexation, and Investment Incentives, with Kenneth A. Froot & Jeremy C. Stein, The Journal of Finance, December, 1989  

The Disciplinary Role of Takeovers, The Review of Economic Studies, April, 1988  

Simultaneous Signalling to the Capital and Product Markets, with Robert Gernter & Robert Gibbons, The RAND Journal of Economics, Summer, 1988  

Product-Market Competition and Managerial Slack, The RAND Journal of Economics, Spring, 1988  

Testing in Models of Asymmetric Information, with Barry Nalebuff, The Review of Economic Studies, April, 1987  

A Policy to Prevent Rational Test-Market Predation, The RAND Journal of Economics, Summer, 1984