Cesare Fracassi

Assistant Professor of Finance

 

McCombs School of Business

The University of Texas at Austin

Finance Department

2110 Speedway Stop B6600

Austin, TX, 78712

(map it)

 

E-mail: cesare.fracassi@mccombs.utexas.edu

Office: GSB 5.165

Work phone: 512-232-6843

Fax: 512-471-5073

 

Curriculum Vitae (pdf)

 

 

Research

 

Published Papers

 

·         External Networking and Internal Firm Governance  with Geoffrey Tate. The Journal of Finance, 67 Issue 1 (February) 2012 pp 153-194

 We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO-director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. We also find that firms with more CEO-director ties engage in more value-destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.

Online Appendix

 

·         Lost In Translation? The Effect of Cultural Values on Mergers Around the World with Kenneth R. Ahern and Daniele Daminelli – Forthcoming on the Journal of Financial Economics, 2012 and Winner of the CEG Research Prize in Corporate Finance at the Finance Down Under Conference

We find strong evidence that three key dimensions of national culture (trust, hierarchy, and individualism) affect merger volume and synergy gains.  The volume of cross-border mergers is lower when countries are more culturally distant. In addition, greater cultural distance in trust and individualism leads to lower combined announcement returns. These findings are robust to year and country-level fixed effects, time-varying country-pair and deal-level variables, as well as instrumental variables for cultural differences based on genetic and somatic differences. The results are the first large-scale evidence that cultural differences have substantial impacts on multiple aspects of cross-border mergers.

Online Appendix

 

·         Business Microloans for U.S. Subprime Borrowers   [May 2014] with Mark J. Garmaise, Shimon Kogan, and Gabriel Natividad – Forthcoming on the Journal of Financial and Quantitative Analysis

We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data on startup loan applicants from a lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues and create more jobs. Loans are more consequential for survival among subprime business owners with more education and less managerial experience. 

 

·         Shopping for Information? Diversification and the Network of Industries  [June 2014] with Fernando Anjos – Forthcoming on Management Science

We propose and test a view of corporate diversification as a strategy that exploits internal information markets, by bringing together information that is scattered across the economy. First, we construct an inter-industry network using input-output data, to proxy for the economy's information structure. Second, we introduce a new measure of conglomerate informational advantage, named "excess centrality", which captures how much more central conglomerates are relative to specialized firms operating in the same industries. We find that high-excess-centrality conglomerates have greater value, and produce more and better patents. Consistent with the internal-information-markets view, we also show that excess centrality has a greater effect in industries covered by fewer analysts and in industries where soft information is important.. Online Appendix

 

Working Papers

  

·         Technological Specialization and Corporate Diversification [June 2014] with Fernando Anjos

We document a trend towards fewer and more-focused conglomerates, and develop a model that explains these patterns based on increasing technological specialization. In the model, diversification adds value by allowing efficient within-firm resource reallocation. However, synergies decrease with technological specialization, leading to fewer diversified firms over time. Also, the optimal level of technological diversity across conglomerate divisions decreases with technological specialization, leading to more-focused conglomerates. The calibrated model matches the evolution of conglomerate pervasiveness and focus, and other empirical magnitudes: growing output, level and trend of the diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.

 

·         Do Credit Analysts Matter? The Effect of Analysts on Ratings, Prices, and Corporate Decisions  [Aug 2014] with Stefan Petry and Geoffrey Tate.  - Revise and Resubmit at the Journal of Financial Economics. 

How do market prices become distorted? We find evidence of systematic optimism and pessimism among credit analysts, comparing credit ratings for the same firm at the same time across rating agencies. These biases carry through to spreads on firms’ outstanding debt and yields on new public debt issues. They also negatively predict future changes in credit spreads, consistent with mispricing. These inefficiencies in turn affect corporate policies: firms covered by more pessimistic analysts issue less debt, lean more on equity financing, and experience slower revenue growth. We also identify specific analyst traits that predict rating quality. MBAs provide less optimistic and more accurate ratings; however, optimism increases and accuracy decreases with tenure covering the firm, particularly among information-sensitive firms. Our analysis uncovers a novel mechanism through which debt prices become distorted and demonstrates its effect on real corporate decisions.

 

·         Corporate Finance Policies and Social Networks [Apr 2014] – Revise and Resubmit at the Journal of Financial and Quantitative Analysis 

This paper shows that managers are influenced by their social peers when making corporate policy decisions. Using a matrix of social ties from current and past employment, education, and other activities for US executives and directors, we find that more social connections two companies share with each other, more similar their capital investments are. To address endogeneity concerns, we find that two companies invest less similarly when an individual connecting them dies. The results extend to other corporate finance policies. Furthermore, companies positioned centrally in the social network invest in a less idiosyncratic way, and exhibit better economic performance.

Online Appendix

 

·         Stock Price Sensitivity to Dividend Changes [July 2008]

This paper examines the sensitivity of stock prices to dividend changes. The Dividend Signaling, Free-Cash-Flow, Maturity and Catering Hypotheses all predict an average positive (negative) reaction to announcement of a dividend increase (decrease). However, these hypotheses have different cross-sectional predictions. This paper documents that the positive stock price response to dividend increases is due primarily to the signaling of higher future earnings, to the managers catering to the time-varying premium assigned by the market to dividend paying stocks, and partially to the reduction of agency problems. By contrast, the negative price response to dividend decreases is mainly due to the transition from a mature life-cycle stage to a decline stage with higher systematic risk, as maintained by the Maturity Hypothesis.

 

 

Teaching

 

·         Valuation – MBA FIN 286 – Fall 2013/Spring 2012/Fall 2010/Spring 2010

·         Valuation – MBA FNCE 728 (Wharton) – Fall 2012

·         Financial Planning for Large Corporations – Undergraduate FIN 374C - Fall 2010