Cesare Fracassi
Associate Professor of Finance
Director of the Blockchain Initiative at Texas McCombs
The University of Texas at Austin
2110 Speedway Stop B6600
Austin, TX, 78712
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 [2012] with Geoffrey Tate. The Journal of Finance, 67 (1), 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.
· 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.
· 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.
· 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.
· 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.
· 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.
Works in Progress
·
Alternative
Credit Data, Lending, and Consumer Welfare. [2019] with M. Jansen.
·
Equity
Crowdfunding in the US [2020] with M. Dolatabadi and L. Yang.
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