Working Papers
Pyramidal Ownership and the Creation of New Firms
(joint with Hernan Ortiz-Molina), 2010We study the role of pyramidal ownership in the creation of new firms using a comprehensive panel of manufacturing firms in Europe. Pyramidal ownership structures are used to supply inside funds to new firms that are unable to raise enough external financing, namely, those with large investment requirements and low pledgeable cash flows. They are also used to finance more capital-intensive new firms, those that rely more on expensive labor, and those whose projects pay off late. New firms that need more inside funds are set up through pyramidal ownership links to parent companies with more resources. Our results suggest that pyramids arise because they provide a financing advantage in setting up new firms when the pledgeability of cash flows to outside financiers is limited. This financing advantage is pervasive in many countries, it exists regardless of whether new firms are set up by business groups or by smaller organizations, and is an important underpinning of entrepreneurial activity.
Technological Progress, Industry Rivalry, and Stock Returns
(joint with Lorenzo Garlappi), 2010In this paper we investigate the link between competition in technological innovation and asset prices. We develop a model of an innovation race in which firms are subject to technological as well as market-wide uncertainty and optimally exercise their options to innovate. The model predicts that the race leader has lower systematic risk than its lagging rival, that the follower-leader spread in systematic risk widens as the distance between the firms' technological efficiencies increases, and that the systematic risk of the portfolio of race participants increases with the number of competitors. We test these novel predictions using a comprehensive firm-level panel dataset on patenting activity in the U.S. from 1978 to 2003. Consistent with the model's predictions, we find that: (i) the beta of a portfolio of firms competing in innovation is monotonically increasing in the number of firms in the race, and (ii) within each innovation race, the beta of a firm is lower the closer it is to be the leader. These results have economy-wide implications for the cross-section of expected returns as firms engaged in innovation races account for 40%-50% of the total U.S. market capitalization in our sample period.
The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship
Using a dynamic model of a step-by-step innovation race between financially constrained firms, I study how financial constraints affect innovation activity. The novel theoretical results derive from an analysis of the interaction between the incentive effect of competition on innovation and the effect competition has on the degree of credit rationing. I find that the negative effect of financial constraints on firm- and aggregate-level R&D investment is most pronounced at both high and low levels of competition. These predictions are supported by empirical evidence: The competition-innovation relationship has an inverted-U shape in less financially developed systems relative to the benchmark pattern observed in countries with highly developed financial systems. Innovation-enhancing policies implemented through competition reforms ought to be complemented by promoting financial development.FinanceCompetition.pdf
FinanceCompetition_present.pdf
Publications
Financial Development and Corporate Growth in the EU Single Market
(joint with Štěpán Jurajda), 2009Forthcoming in ECONOMICA
The establishment of the EU-15 'single market' in 1993 brought about a high degree of similarity in firms' growth opportunities across countries, while substantial diversity existed in the development of national financial markets. We compare within-industry growth rates of similar 'single-market' firms facing financial systems of different depth and institutional quality as of 1993. Moving from the least to the most developed financial market within the EU-15 boosts firms' annual value-added growth by about three percentage points. Our results also suggest that the growth gap due to initially under-developed financial systems was closed by 2003.
FirmLevelComparisons.pdf
FirmLevelComparisons_present.ppt
Rent Extraction by Large Shareholders: Evidence Using Dividend Policy in the Czech Republic
(joint with Jan Hanousek), May 2008Czech Journal of Economics and Finance, Vol. 58, Issue 3-4, pp. 106-130
Using cross-sectional analysis of corporate dividend policy we show that large shareholders extract rents from firms and expropriate minority shareholders in the weak corporate governance environment of an emerging economy. By comparing dividends paid across varying corporate ownership structures – concentration, type, and domicile of ownership – we quantify these effects and reveal that they are substantial. We find that the target payout ratio for firms with majority ownership is low, but that the presence of a significant minority shareholder increases the target payout ratio and hence precludes a majority owner from extracting rent. In contrast to other studies from developed markets, our unique dataset from the Czech Republic for the period 1996–2003 permits us to take account of endogeneity of ownership.
CzechDividendPolicy.pdf
CzechDividendPolicy_present.ppt
Work in Progress
Which Firms Benefit More from Financial Development?
(joint with Štěpán Jurajda), Jul 2007CEPR Discussion Paper No. 6392
We test whether more developed financial systems are better at tackling asymmetric information proxied by firm age and size. Comparing the growth effect of financial development (FD) across firms of different type, we find that FD disproportionately fosters the growth of young companies, while there is little evidence of differences in this effect across medium-sized and large firms. The disproportionate gains from FD for youngest firms are concentrated among firms with lower shares of equity capital on total assets—the firms that rely on external finance availability. Entering firms in low-FD countries have high shares of equity capital; such selective entry process is consistent with limited access to external financing.
WhichFirmsBenefitMore.pdf
WhichFirmsBenefitMore_present.ppt
The Price of Information in Financial Intermediation
(joint with Tianxi Wang)We study how information about projects' risk-return characteristics is organized in the process of financial intermediation. The way in which the information is used gives rise to different organizations of financial market.
Intermediation_present.pdf
Choice of Corporate Risk Management Tools under Moral Hazard
May 2006FMG Discussion Paper No. 566
This paper examines the choice of tools for managing a firm’s operational risks: cash reserves, insurance contracts, and financial assets under an optimal financing contract that solves moral hazard between insiders and outside investors. Risk management is valuable as it reduces the costs of raising external financing, increases debt capacity, lessens underinvestment, and improves welfare. I show that insurance is superior as it facilitates the outside financing relationship but leads to inefficient excessive continuation if used without coverage limits. When insurance against an operational risk is not available, the firm uses financial assets instead or resorts to holding cash reserves.
RiskManagementTools.pdf
RiskManagementTools_presentation.pdf
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