Cesare Fracassi

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 [2015] with Kenneth R. Ahern and Daniele Daminelli – Journal of Financial Economics, 117 (1), 165-189.

- Winner of the Jensen Prize for Corporate Finance and Organizations – 2015 JFE Best Paper (second prize)

- Winner of the CEG Research Prize in Corporate Finance at the 2011 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

· Shopping for Information? Diversification and the Network of Industries [2015] with Fernando Anjos – Management Science, 61 (1), 161-183

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

· Business Microloans for U.S. Subprime Borrowers [2016] with Mark J. Garmaise, Shimon Kogan, and Gabriel Natividad –Journal of Financial and Quantitative Analysis, 51 (1), 55-83

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.

· Does Rating Analyst Subjectivity Affect Corporate Debt Pricing? [2016] with Stefan Petry and Geoffrey Tate. - Journal of Financial Economics, 120 (3), 514-538.

We find evidence of systematic optimism and pessimism among credit analysts, comparing contemporaneous ratings of the same firm across rating agencies. These differences in perspectives carry through to debt prices and negatively predict future changes in credit spreads, consistent with mispricing. Moreover, the pricing effects are the largest among firms that are the most opaque, likely exacerbating financing constraints. We find that MBAs provide higher quality ratings; however, optimism increases and accuracy decreases with tenure covering the firm. Our analysis demonstrates the role analysts play in shaping investor expectations and its effect on corporate debt markets.

Online Appendix

· Corporate Finance Policies and Social Networks [2017] - Management Science, 63 (8), 2420-2438.

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

Online Appendix

· Technological Specialization and the Decline of Diversified Firms [2018] with Fernando Anjos. Journal of Financial and Quantitative Analysis, 53 (4), 1581-1614

We document a strong decline in corporate-diversification activity since the late 1970's, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.

· Data Autonomy [2020], with William J. Magnuson. Vanderbilt Law Review. Forthcoming

In recent years, “data privacy” has vaulted to the forefront of public attention. Scholars, policymakers and the media have, nearly in unison, decried the lack of data privacy in the modern world. In response, they have put forth various proposals to remedy the situation, from the imposition of fiduciary obligations on technology platforms to the creation of rights to be forgotten for individuals. All of these proposals, however, share one essential assumption: we must raise greater protective barriers around data. As a scholar of corporate finance and a scholar of corporate law, respectively, we find this assumption problematic. Data, after all, is simply information, and information can be used for beneficial purposes as well as harmful ones. Just as it can be used to discriminate and to embarrass, information can be used to empower and to improve. And while data privacy is often pitched at ending unauthorized data sharing, it all too often leads simply to the end of data sharing, period. This comes at a cost. Data silos can inhibit consumer choice, protect the positions of powerful incumbents, and reduce the efficiency of markets. The best example of these costs comes from the financial industry. For more than a century, banks and other financial institutions have built their information technology systems to keep financial records as private and non-shareable as possible. While security concerns can be a primary reason for such closed systems, banks also understand that financial data is an advantage that can protect them from market entry and competition. Banks can hold up consumers with unfavorable rates and inferior products as a result, and a set of market failures make it difficult for consumers to opt out. First, information asymmetries between consumers and financial institutions are large and difficult to resolve. Second, search and switch costs — the difficulty of finding out more information about the risks and benefits of financial products and of switching to a better financial service — are high in the financial industry. Finally, individuals struggle to take advantage of even simple financial strategies as they struggle to save, borrow, and invest. Data sharing can help resolve these problems. The emergence of a new regulatory and technological framework called “open banking” raises the possibility of consumers being able to task trusted intermediaries with automatically analyzing their financial data, nudging them to achieve their goals, and switching them to better products, all in order to reduce the substantial inefficiencies in their financial lives. There is one problem, however. A combination of market failure and regulatory ambiguity has led to a situation in which data is limited, siloed, and inaccessible, thereby preventing individuals from using their data in efficient ways. Ultimately, this Article contends, resolving these problems will require us to replace the clarion call of “data privacy” with a new, more comprehensive concept, that of “data autonomy,” the ability of individuals to have control over their data. Data autonomy would balance the need for data to be protected and secure with the need for it to be accessible and shareable. In this Article, we lay out a set of key principles that would grant individuals a legal right to data autonomy, including a right of ownership over data as well as obligations on institutions to safely share standardized and inter-operable data with third parties that consumers so choose. Perhaps counter-intuitively, the only way of expanding consumer welfare and protection today is by breaking down the barriers of data privacy.

· Barbarians at the Store? Private Equity, Products, and Consumers [2021], with Alessandro Previtero, and Albert Sheen. Journal of Finance. Forthcoming.

We investigate the effects of private equity firms on product markets using price and sales data for an extensive number of consumer products. Following a private equity deal, target firms increase retail sales of their products 50% more than matched control firms. Price increases---roughly 1% on existing products---do not drive this growth. The launch of new products and geographic expansion do. Competitors reduce their product offerings and marginally raise prices. Cross-sectional results on target firms, PE firms, the economic environment, and product categories suggest that private equity generates growth by easing financial constraints and providing managerial expertise.

Working Papers

· What's in a Debt? Rating Agency Methodologies and Firms' Financing and Investment Decisions [2020], with Gregory Weitzner.

In July 2013, Moody's unexpectedly increased the amount of equity credit that speculative-grade firms receive for preferred stock from 50% to 100%. Firms affected by the rule change were suddenly considered less levered by Moody's even though their balance sheets did not change. These firms responded by issuing debt, targeting a leverage ratio as defined by Moody's, and growing their assets. The rule change transferred value from bond to equity holders, and led to an increase in preferred stock issuance. How rating agencies assess risk thus has a significant causal impact on firms' financing, investment, and security design decisions.

· Bank Loan Markups and Adverse Selection [2020], with Mehdi Beyhaghi and Gregory Weitzner.

How does adverse selection affect the interest rates on bank loans? Using corporate bank loan data, we create a measure of markup using the internal measures of risk banks report to the Federal Reserve. Our risk-adjusted measure of markup does not predict the subsequent performance of loans, while a measure excluding banks’ private risk assessments strongly predicts performance. Consistent with theories of asymmetric information in which lower concentration increases the information rents banks extract, we find that markups are higher in less concentrated regions, among firms that are more subject to asymmetric information and when firms stay with their existing banks. Finally, higher local markups are associated with lower loan volume and higher levels of collateralization. Our findings suggest that adverse selection drives markups, loan volume and lending standards.

· Equity Crowdfunding in the US [2021] with I. Dolatabadi and L. Yi.

We assess the impact of the 2012 JOBS Act equity crowdfunding legislation that allows U.S.non-accredited investors to invest in private small businesses through online portals. The goals of new regulation were to spur small business growth and democratize investment in private startups by increasing access to capital. We find that the evidence is mixed:on the one hand, crowdfunding seems to expand access to finance to small business by targeting firms that are not usually served by institutional investors like angel and venture capital. Furthermore, having a successful crowdfunding campaign has a causal positive effect on future firm performance relative to a failed campaign. On the other hand, the equity crowdfunding market faces severe adverse selection that limit the expansion of this new form of business financing. Moreover, relative to angel-backed firms, successfully crowdfunded firms are less likely to progress through the financing funnel and thus provide exit to investors.

Works in Progress

· Alternative Credit Data, Lending, and Consumer Welfare. [2021] with M. Jansen.

· Private Firm Governance [2021] with J. Dammann and J. Serrano.

Teaching

· Financial Technology – MBA and MSF/MSBA FIN 294 –Spring 2021/Spring 2020/Spring 2019/Spring 2018/

· Empirical Corporate Finance – PhD FIN 395 – Spring 2020/Spring 2019/Spring 2018/Spring 2017/Spring 2016/Spring 2015

· Valuation – MBA FIN 286 – Spring 2020/Spring 2019/Spring 2018/Spring 2017/Spring 2016/Spring 2015/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