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.

Working Papers

· Barbarians at the Store? Private Equity, Products, and Consumers [2018], with Alessandro Previtero, and Albert Sheen.

We investigate the effects of private equity on product markets, using detailed price and sales data for an extensive number of consumer products. In the years following a buyout, target firms increase sales by 53% compared to 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 lose shelf space and marginally raise prices themselves. These growth results hold in particular for private firms, while public targets in fact contract. Private equity thus appears to ease financial constraints, provide expertise to manage growth, and reduce investment where needed. Our findings question the common view that private equity substantially increases prices, harming consumers.

· What's in a Debt? Rating Agency Methodologies and Firms' Financing and Investment Decisions [2018], with Gregory Weitzner.

In July 2013, Moody's unexpectedly changed its credit risk methodology, increasing 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 fundamentals did not change. We find that these firms responded by issuing more debt, expanding their balance sheet, and targeting an adjusted leverage ratio as defined by Moody's. Furthermore, firms rated speculative-grade by Moody's increased their preferred stock issuance relative to firms rated speculative by S&P, suggesting rating agencies affect the type of fixed-income securities firms issue. These findings suggest that the methodologies used by rating agencies to assess credit risk have a significant causal impact on firms' financing and investment decisions.

Works in Progress

· Agency problems in rating agencies [2018], with S. Petry, and G. Tate.

· Fintech and Access to Credit [2018], with M. Jansen.

Teaching

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

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

· Valuation – MBA FIN 286 – 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