Associate Professor of Finance
& Marvin Bower Fellow
Harvard Business School
Baker Library 347
10 Soldiers Field Road
Boston, MA 02163
Phone: (617) 495-6538
|Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions|
|Review of Financial Studies, Vol. 22, No. 12, December 2009, pp. 4919-4948.
This article investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multi-divisional firms. I find that, after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. The pattern of reverse-favoritism in capital allocation is more pronounced if the new CEO has less authority or if the unaffiliated divisions have more bargaining power. I find evidence that having a specialist CEO negatively affects segment investment efficiency. The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful divisional managers in previously unaffiliated divisions.
|Ownership Structure and the Cost of Corporate Borrowing|
with Chen Lin, Yue Ma, and Paul MalatestaAbstract
Journal of Financial Economics, Vol. 100, Issue 1, April 2011, pp. 1-23 (Lead Article; First Place Winner of the 2011 Jensen Prize for the Best Paper in the Areas of Corporate Finance and Organizations published in the Journal of Financial Economics).
This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996-2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner's control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.
|Ownership Structure and Financial Constraints: Evidence from a Structural Estimation|
|with Chen Lin and Yue Ma
Journal of Financial Economics, Vol. 102, Issue 2, November 2011, pp. 416-431.
This article examines the impact of the divergence between corporate insiders' control rights and cash-flow rights on firms' external finance constraints via generalized method of moments estimation of an investment Euler equation. Using a large sample of U.S. firms during the 1994-2002 period, we find that the shadow value of external funds is significantly higher for companies with a wider insider control-ownership divergence, suggesting that companies whose corporate insiders have larger excess control rights are more financially constrained. The effect of insider excess control rights on external finance constraints is more pronounced for firms with higher degrees of informational opacity and for firms with financial misreporting, and is moderated by institutional ownership. The results suggest that the agency problems associated with the control-ownership divergence can have a real impact on corporate financial and investment outcomes.
|The Role of Venture Capitalists in the Acquisition of Private Companies|
with Paul Gompers
in Research Handbook on International Banking and Governance, edited by James Barth, Chen Lin, and Clas Wihlborg, Cheltenham, UK: Edward Elgar Publishing, 2012.
|Corporate Ownership Structure and Bank Loan Syndicate Structure|
|with Chen Lin, Yue Ma, and Paul Malatesta
Journal of Financial Economics, Vol. 104, Issue 1, April 2012, pp. 1-22 (Lead Article).
Using a novel data set on corporate ownership and control, we show that the divergence between the control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the concentration and composition of the firmís loan syndicate. When the control-ownership divergence is large, lead arrangers form syndicates with structures that facilitate enhanced due diligence and monitoring efforts. These syndicates tend to be relatively concentrated and composed of domestic banks that are geographically close to the borrowing firms and that have lending expertise related to the industries of the borrowers. We also examine factors that influence the relation between ownership structure and syndicate structure, including lead arranger reputation, prior lending relationship, borrowing firm informational opacity, presence of multiple large owners, laws and institutions, and financial crises.
|The Client is King: Do Mutual Fund Relationships Bias Analyst Recommendations?|
|with Michael Firth, Chen Lin, and Ping Liu
Journal of Accounting Research, Vol. 51, Issue 1, March 2013, pp. 165-200.
This paper investigates whether the business relations between mutual funds and brokerage firms influence sell-side analyst recommendations. Using a unique data set that discloses brokerage firms' commission income derived from each mutual fund client as well as the share holdings of these mutual funds, we find that an analyst's recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst's brokerage firm. The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client's portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias towards a client's existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors. Abnormal stock returns are significantly greater both for the announcement period and in the long run for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business-related analysts. In addition, we find that subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds. Mutual funds increase their holdings in a stock that receives a favorable recommendation but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure.
|Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt|
|with Chen Lin, Yue Ma, and Paul Malatesta
Journal of Financial Economics, Vol. 109, Issue 2, August 2013, pp. 517-534.
We examine the relation between a borrowing firm's ownership structure and its choice of debt source using a novel, hand-collected data set on corporate ownership, control and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the firm's choice between bank debt and public debt. A one-standard-deviation increase in the divergence reduces the borrowing firm's reliance on bank debt financing (measured by the ratio of bank debt to total debt) by approximately 23%. The effect of the control-ownership divergence on borrowing firms' debt choice is more pronounced for firms with high financial distress risk, firms that are informationally opaque, and firms that are family-controlled. Moreover, this effect is weakened by the presence of multiple large owners and in countries with strong shareholder rights. In addition, we find that the control-ownership divergence affects other aspects of debt structure such as debt maturity and security. Overall, our results are consistent with the hypothesis that firms controlled by large shareholders with excess control rights choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.
|Acquirer-Target Social Ties and Merger Outcomes|
|with Joy Ishii
Journal of Financial Economics, Vol. 112, Issue 3, June 2014, pp. 344-363.
This paper investigates the effect of social ties between acquirers and targets on merger performance. Using data on educational background and past employment, we construct a measure of the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms. We find that between-firm social ties have a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm's CEO and a larger fraction of the target firm's pre-acquisition board of directors remain on the board of the combined firm after the merger. This also holds true at the level of individual target directors. An individual target director is more likely to be retained on the post-merger board if that target director has more social connections to the acquirer's directors and senior executives. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to occur between two firms that are well-connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision-making and lower value creation for shareholders overall.
|The Cost of Friendship|
|with Paul Gompers and Vladimir Mukharlyamov
Journal of Financial Economics, forthcoming
We investigate how personal characteristics affect people's desire to collaborate and whether this attraction enhances or detracts from performance in venture capital. We find that venture capitalists who share the same ethnic, educational, or career background are more likely to syndicate with each other. This homophily reduces the probability of investment success, and the detrimental effect is most prominent for early-stage investments. A variety of tests show that the cost of affinity is most likely attributable to poor decision making by high-affinity syndicates after the investment is made. These results suggest that "birds-of-a-feather-flock-together" effects in collaboration can be costly.
|The Contract Year Phenomenon in the Corner Office: An Analysis of Firm Behavior During CEO Contract Renewals|
|with Ping Liu
Draft date: October 2014
This paper investigates how executive employment contracts influence corporate financial policies during the final year of the contract term, using a new, hand-collected data set of CEO employment agreements. On the one hand, the impending expiration of fixed-term employment contracts creates incentives for CEOs to engage in strategic window-dressing activities. We find that, compared to normal periods, CEOs manage earnings more aggressively when they are in the process of contract renegotiations. Correspondingly, during CEO contract renewal times, firms are more likely to report earnings that meet or narrowly beat analyst consensus forecasts. Moreover, CEOs also reduce the amount of negative firm news released during their contract negotiation years. On the other hand, we find that merger and acquisition deals announced during the contract renegotiation year yield higher announcement returns than deals announced during other periods, suggesting that the upcoming contract expiration and renewal can also have disciplinary effects on potential value-destroying behaviors of CEOs. In addition, we show that firms whose CEOs are not subject to contract renewal pressure do not experience such corporate policy changes and that CEOs who engage in manipulation during contract renewal obtain better employment terms in their new contracts, in terms of contract length, severance payment, and salary and bonus. Overall, our results indicate that job uncertainty created by expiring employment contracts induces changes in managerial behaviors that have significant impacts on firm financial activities and outcomes.
|Gender Effects in Venture Capital|
|with Paul Gompers, Vladimir Mukharlyamov, and Emily Weisburst
Draft date: May 2014
We explore gender differences in performance in a comprehensive sample of venture capital investments in the United States. We find that female venture capitalists significantly underperform their male colleagues controlling for personal characteristics including employment and educational history as well as the characteristics of the portfolio companies in which they invest. When we examine their performance differences, we find that the difference results from a lack of contribution by the male colleagues within their firms. We explore the mechanism for this lack of contribution from male colleagues in a large sample survey of female venture capitalists and in detailed one-on-one interviews. We find support for the notion that formal feedback mechanisms and hierarchies are useful in ameliorating the female performance gap. Female venture capitalists find gender bias in informal mentoring systems as well as in the attitude of entrepreneurs.
|Under New Management: Equity Issues and the Attribution of Past Returns|
|with Malcolm Baker
Draft date: January 2014
There is a strong link between measures of stock market performance and equity issues. Typically, this performance is considered a characteristic of the firm, not the CEO who happens to run the firm. In contrast, we find that equity issues depend on changes in Q and returns to a greater extent if the current CEO was at the helm when those past returns were realized. Moreover, there is a discontinuity in the distribution of equity issues around the specific share price that the CEO inherited, while there is no discontinuity around salient share prices prior to turnover. The evidence suggests that capital allocation involves an attribution of past returns not only to the firm but also to its CEO. A corollary is that a firm with poor stock market performance may be better able to raise new capital if its current CEO is replaced.
|Bridge Building in Venture Capital-Backed Acquisitions|
|with Paul Gompers
Draft date: December 2009
This paper studies the role of common venture capital investors in alleviating asymmetric information between public acquirers and private venture capital-backed targets. We find that acquisition announcement returns are more positive for acquisitions in which both the target and the acquirer are financed by the same venture capital firm. Similarly, having a common investor increases both the likelihood that a transaction will be all equity-financed as well as the fraction of stock in the overall acquisition payment. In addition, an acquisition is more likely to take place when there is a common venture capital investor linking the acquirer and the target. Our results suggest that common venture capital investors can form a bridge between acquiring and target firms that reduces asymmetric information associated with the transaction for both parties.
|"Shenzhen Development Bank" (with Li Jin and Xiaobing Bai), Harvard Business School Case 210-020.|
"Shenzhen Development Bank" (with Li Jin), Harvard Business School Teaching Note 211-070.
"Shenzhen Development Bank", Harvard Business School Spreadsheet Supplement 213-703.
Weijian Shan, Managing Partner of Newbridge Capital, faces a tough decision in regard to his firm's investment in Shenzhen Development Bank, China's fifteenth largest commercial bank. After signing a binding agreement to sell an effective controlling stake in SDB to Newbridge, the government-owned sellers and SDB reneged on the deal and dissolved the transitional management committee appointed by Newbridge. Weijian Shan and his deal team must work out an action plan to revive and renegotiate the transaction or decide to give up pursuing the deal altogether. The case provides students an opportunity to evaluate a private equity investment in a highly regulated industry in an emerging market setting. Specifically, the case asks the students to assess the investment thesis and the risk factors for Newbridge's investment in SDB, analyze the valuation of SDB, propose a short-term plan for dealing with the public falling-out, and devise a long-term turnaround plan post-investment. In addition to the financial analysis, the case highlights the importance of control rights in turnaround private equity deals, and the importance of managing relationships for private equity investing, especially in emerging markets where relationships with relevant local and central government entities play a crucial part in determining deal success.
|"Magna International, Inc. (A)" (with Timothy Luehrman), Harvard Business School Case 211-044.
"Magna International, Inc. (B)" (with Timothy Luehrman), Harvard Business School Supplement 211-045.
"Magna International, Inc. (A) and (B)" (with Timothy Luehrman), Harvard Business School Teaching Note 211-077.
"Magna International, Inc. (A)" (with Timothy Luehrman), Harvard Business School Spreadsheet Supplement 211-707.
Magna International, Inc., a Canadian-based automotive parts manufacturer, is considering whether and how to unwind its dual-class ownership structure. A family trust controlled by the founder owns a 0.65% economic interest in the company but has 66% of the votes via a super-voting class of shares. Officers of the company are considering how to fashion a transaction that will end the family's control and win the approval of both classes of shareholders. The Magna (A) case asks the students to weigh the costs and benefits of dual-class ownership and the best way to convert to single-class. The Magna (B) case describes the proposal that Magna's board put to a shareholder vote. Students are asked to evaluate it and decide whether they would approve it. The Magna (A) and (B) cases are intended to support a general discussion of the costs and benefits of dual-class ownership structures, which are common in many countries. In the specific case of Magna, students are asked to quantify the potential benefits of unwinding a dual-class structure that has been in place for more than 30 years, and to consider how the value created should be divided between two classes of shareholders.
|2012-||Associate Professor, Finance Unit, Harvard Business School|
|2012-||Marvin Bower Fellow, Harvard Business School|
|2006-2012||Assistant Professor, Finance Unit, Harvard Business School|
|2004-2006||Head Teaching Fellow, Harvard University|
|2009-||Corporate Financial Management, MBA Elective Curriculum|
|2010-||Finance for Senior Executives, Executive Education|
Global Immersion, Field Immersion Experiences for Leadership Development (FIELD), MBA Required Curriculum
|2006-2008||First-Year Finance, MBA Required Curriculum|
|2004-2006||Corporate Finance; Introductory Econometrics; MBA Analytics Program (Finance)|
|Awarded Harvard University Certificate of Distinction in Teaching, 2004, 2005|
|2006||Ph.D., Business Economics (Finance), Harvard University (Cambridge, MA)|
|2002||A.M., Business Economics (Finance), Harvard University (Cambridge, MA)|
INVITED PRESENTATIONS AND DISCUSSIONS
University of Amsterdam (Business School), Bentley University (Department of Finance), University of Bristol (School of Economics, Finance and Management), Case Western Reserve University (Weatherhead), University of Chicago (Booth), Chinese University of Hong Kong (Faculty of Business Administration), City University of Hong Kong (College of Business, 2009, 2010), Cornell University (Johnson), Dartmouth College (Tuck), University of Delaware (Lerner), Duke University (Fuqua), Erasmus University (Rotterdam), University of Exeter (Business School), University of Florida (Warrington), George Mason University (School of Management), Harvard Business School, Hong Kong University of Science and Technology (Business School), University of Illinois at Urbana-Champaign (College of Business, 2006, 2014), University of Iowa (Tippie), Lingnan University (Department of Economics, 2010, 2011), Massachusetts Institute of Technology (Sloan), University of Michigan (Ross, 2006, 2011), Michigan State University (Broad), National University of Singapore (Business School), New York University (Stern), University of North Carolina at Chapel Hill (Kenan-Flagler), University of Notre Dame (Mendoza), Ohio State University (Fisher), University of Rochester (Simon), Singapore Management University (Business School), University of Texas at Austin (McCombs), Tilburg University (School of Economics and Management), Tsinghua University (School of Economics and Management), University of Utah (Eccles), University of Washington (Foster), Washington University in St. Louis (Olin), American Economic Association Meetings (2007), American Finance Association Meetings (2007, 2008, 2009, 2010, 2011, 2012), Drexel University Annual Academic Conference on Corporate Governance (2011), Minnesota Corporate Finance Conference (2014), National Bureau of Economic Research Summer Institute Law and Economics Workshop (2010), Singapore International Conference on Finance (2010), Texas Finance Festival (2009), Yale-European Corporate Governance Institute-Oxford Conference on Corporate Governance (2010)
Associate Editor, Journal of Financial and Quantitative Analysis, 2012-
Referee for Emerging Markets Finance and Trade, Journal of Business Finance and Accounting, Journal of Comparative Economics, Journal of Corporate Finance, Journal of Economics and Business, Journal of Finance, Journal of Financial and Quantitative Analysis, Journal of Financial Economics, Management Science, Quarterly Journal of Economics, Review of Corporate Finance Studies, Review of Financial Studies, Research Grants Council of Hong Kong, Swiss National Science Foundation
Program committee: European Finance Association Annual Meetings (2013-), European Financial Management Association Annual Meeting (2015-), Midwest Finance Association Annual Meeting (2015-), Utah Winter Finance Conference (2013-), Western Finance Association Annual Meetings (2010-)