- 05 Jan 2017
- Cold Call Podcast
One third of the US population is obese, even as 50 million Americans often struggle to find enough to eat. And all that in a country where 40 percent of the food made and purchased each year is thrown away, and in which food needs are expected to more than double over the next few decades. Professor Jose Alvarez discusses how the former president of Trader Joe’s is boiling these difficult problems down into one elegant solution in a pilot store in Dorchester, Massachusetts, and blazing a trail toward sustainability in the process. Open for comment; 0 Comment(s) posted.
- 20 Jan 2016
- Working Paper Summaries
We examine whether patents help startups grow and succeed using detailed micro data on all patent applications filed by startups at the U.S. Patent and Trademark Office since 2001 and approved or rejected before 2014. We find that patent approvals help startups create jobs, grow their sales, innovate, and reward their investors.
- 12 May 2015
- Working Paper Summaries
This paper is the first to systematically study the extent to which industrial public firms in the US rely on the proceeds of security issues to fund payouts. By simultaneously raising and paying out capital, firms can accomplish a number of objectives, such as jointly managing their capital structure and cash holdings, monitoring managers' investment decisions, engaging in market timing, or increasing earnings-per-share. These results paint a very different picture from the commonly held view that payouts are first and foremost a vehicle to return free cash flow to investors. Key concepts include: A third of aggregate payouts is not funded by internally generated funds but rather is financed in the capital markets via net debt or equity issues. Conversely, a staggering 34 percent of the capital firms raise in the capital markets is paid out by the same firms during the same year. The pervasiveness, economic magnitude, and persistence of financed payouts suggest that the benefits associated with this behavior are more important than it has been recognized by prior work. At the same time, the external financing costs associated with financed payouts may be less important than it is assumed in the literature. Firms' payout and issuance decisions are intrinsically related. Much can be gained by studying them jointly as interdependent elements of the financial ecosystem. Closed for comment; 0 Comment(s) posted.
- 29 Apr 2014
- Working Paper Summaries
Industrial firms listed on stock markets in the United States held $1.5 trillion in cash at the end of 2011. Many commentators and policymakers observed that this so-called "dead money" might be one reason behind the sluggish performance of the United States and other developed economies since the Great Recession. But evidence on such cash-hoarding behavior is limited to listed (or 'public') firms, which account for a relatively small part of the US economy. Do private firms also hold large cash balances? Using a rich panel of over 200,000 non-SEC-filing private US firms, the author finds that the average public firm holds twice as much cash as the average large private firm over the 2002-2011 period. Results are most consistent with the hypothesis that differences in the extent to which public and private firms engage in market timing are a key driver of public firms' higher demand for cash, as the risk of misvaluation induces public firms to raise capital and accumulate precautionary cash reserves when they perceive their equity to be overvalued. Consistent with this hypothesis, the author finds that the cash difference between public and private firms is larger in industries with a higher prevalence of misvaluation shocks. In addition, public firms in these industries tend to save a larger fraction of their equity issuance proceeds than private firms, particularly in times when they have reasons to believe that their equity is overvalued. Key concepts include: Private firms are a large and underexplored part of the US economy. This paper underscores the limitations of extrapolating what we know about public firms to private firms. The much-debated cash-hoarding behavior of public firms has not been followed by their private counterparts. Public firms' greater access to capital explains about one-quarter of the cash difference between public and private firms. The remainder can be explained by differences in the extent to which public and private firms engage in market timing in response to misvaluation shocks. Unlike their public counterparts, private firms do not hold large precautionary cash reserves. This is surprising, particularly in light of the fact that, among public firms, those that are small and have worse access to capital (that is, those that look the most like private firms) hold the most precautionary cash. Closed for comment; 0 Comment(s) posted.
- 28 Apr 2014
- Working Paper Summaries
Payout policy is at the core of many key questions in corporate finance. In a world in which financial markets are not frictionless, how much firms pay out and which vehicle they choose to distribute cash to their shareholders may affect their valuation, has a potential impact on how much taxes investors pay, may affect management's investment decisions, and may inform the market about how good the firm is relative to its peers. In this paper the authors review the academic literature on payout policy, with a particular emphasis on developments in the past two decades. Scholarship on payout policy has made significant advancements in the last 20 years, and we now know much more about the importance of taxes, agency, and signaling motives for payout policy. Perhaps the most important change in corporate payout policy in the last two decades has been the secular increase of stock repurchases and the apparent triumph of buybacks over dividends as the dominant form of corporate payouts. Looking at the bigger picture, the authors observe that, until recently, most scholarship has analyzed payout policy in isolation. An important recent development in the payout literature has been to consider the interaction between payout and other corporate policies, such as compensation or investment. The fact that payouts are not simply residual free cash flows underlines the importance of taking seriously the interdependence of financing, investment, and payout decisions. Key concepts include: Studies centered on the 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second order impact on payout policy. Signaling theories have found only weak support, both empirically and in survey evidence, which likely explains why the notion of dividends as costly signals of firm quality to the market has become less popular. Agency has often prevailed as the alternative explanation in the horse race against signaling theories. A number of factors other than the level of free cash flow determine the level and form of payouts. More research is needed to understand even the basic elements of the corporate financial 'ecosystem', which includes financing, investment, and payout policies. Analyzing these interactions can play a key role in advancing the payout literature in the years to come. Closed for comment; 0 Comment(s) posted.
- 31 Oct 2013
- Working Paper Summaries
A core question in corporate finance is how financial constraints affect firm behavior. To answer this question we need a way to identify constrained firms with reasonable accuracy. Since the financial constraints that a firm faces are not directly observable, scholars have tended to rely on indirect proxies-such as having a credit rating or paying dividends-or on one of three popular indices based on linear combinations of observable firm characteristics such as size, age, or leverage (the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices). In this paper the authors ask: How well do these measures of financial constraints identify firms that are plausibly financially constrained? The short answer is: not well at all. The authors develop three different tests that show that public firms classified as constrained have no trouble raising debt when their demand for debt increases, are unaffected by changes in the supply of bank loans, and engage in paying out the proceeds of equity issues to their shareholders ("equity recycling"). Results imply that popular measures of financial constraints tend to identify as constrained subsets of firms that differ from the general firm population of public firms on a number of dimensions, but not in their ability to raise external funding. Importantly, the tests developed by the authors can be used to systematically test the extent to which any measure of financial constraints does capture constraints. Key concepts include: Popular measures of financial constraints do not do a good job of identifying firms that are plausibly financially constrained. None of the five measures the authors evaluate using three different tests is able to identify firms that behave as if they are in fact constrained. Previous studies' findings that have been attributed to financial constraints are more likely to be caused by some other difference in firm characteristics, such as size, age, growth rates, or preferred funding source. There are problems with the popular practice of using coefficients from the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices to extrapolate to other samples and time periods in an effort to identify potentially constrained firms. The authors' tests can be used to systematically test the extent to which any measure of financial constraints does capture constraints. Closed for comment; 0 Comment(s) posted.
- 13 Sep 2012
- Research & Ideas
Private companies are much more focused on the long term when making deals than their publicly owned counterparts. Which side has the right idea? New research from Assistant Professor Joan Farre-Mensa and colleagues. Open for comment; 3 Comment(s) posted.