Dec 30, 2021

Readings for 254-01, 2022

When reading the paper, always ask yourself the following questions:

  1. Can I summarize and walk my colleagues through this paper’s exhibits?

  2. What is good about the paper?

    • (Given that the paper has been assigned, there probably is a reason. The assigned papers are not average run-of-the-mill. Don’t expect to be able to write a similarly good paper on the first try.)
  3. Is this paper important? Why?

  4. What is wrong with the paper?

  5. What is the source of exogenous variation?

  6. What would you do differently today?

  7. What could make for an interesting extended study?

Note that I know many but not all of the papers myself. This class is also an opportunity for me to plug my own knowledge holes.

I adhere to the University of Chicago Freedom of Expression statement. From time to time, I will make intentionally incorrect or provocative statements. You are not only allowed but encourage to disagree and argue with me.

Anand has been kind enough to make Google folders for all the readings:

I. (More) Subject-Matter Based Coverage

Corporate Governance

The board is legally the principal of the firm, the executives are the agents.

Functioning of Governance

The role of managers and their preferences is explored in

Diversity has become a more important issue. Search SSRN for “Gender Board Diversity” and there are over 600 matches.

Espen Eckbo and others have written many other nice papers on corporate agency related issues that we sadly need to skip over.

Executive Compensation

From the perspective of the executives (but not necessarily from the perspective of the firm), executive compensation is the most important agency problem. Managers will move mountains to get more for themselves, and mountain-moving may cost the firm even more than just the executive compensation.

Dirk Jenter and others have written many other nice papers on executive compensation related issues that we sadly need to skip over.

Liquidity, Financial Constraints, Collateral

A central question in finance is to what extent the need for cash makes firms decide on economically suboptimal choices.

Some broader but closely related topics/papers are:

Diversification Discount and Inefficient Cross Subsidization

Financial Distress

The distinction between financial and economic distress is central here. Is a firm in trouble because of a temporary cash shortfall (and does this destroy value) or is it in trouble because the business is in trouble and this has caused the cash shortfall? If it is the former, we should rescue the firm and tie it over. If it is the latter,

After years of boom, the Great Recession brought financial distress back into the public eye. The best empirical paper on the subject may well be:

Shohini Kundu now works in this area.

Note: at this point, my other half-course ends, which will allow me to focus more on this course.

IPOs, Entrepreneurship, Innovation

For a long time, especially before data was easy to purchase over the internet, Jay Ritter helped many young researchers (e.g., with, which amplified the interest in the IPO area. Ritter has also written a great number of interesting papers on the subject, see here. Beatty-Ritter is a classic, too. My IPO survey paper with Jay was not greatly novel, but it was influential.

Beyond IPOs, more entrepreneurship related is

We won’t have time for Haltiwanger et al., AER 2014, Private Equity, Jobs, and Productivity, but it lays out what buyouts do to the firm.

Capital Structure

Capital structure used to be a prime focus of corporate finance. This literature would examine what the most important violations of M&M were. Logically, the exploration should be separated into the question of (1) what capital structures do CEOs choose and why?; and (2) what value consequences do these have?

Over the last two decades, the profession has largely converged on the view that capital structure is economically fairly unimportant to the value of the firm, except when leverage becomes potentially strangling, i.e., when debt ratios go above, say, 80%. This applies to (1) financial institutions; and (2) firms in financial distress. Thus, for most firms, the first question of what drives it is only of secondary importance. It’s more like vanilla vs. chocolate.

Due to the waning interest, even though there are now many articles on the subject, we will only spend one session on the subject. My advice to PhD students would be not to work in this literature for a thesis. However, anyone with an interest in corporate finance needs to be aware of this literature, which is why we are still covering it:

  • [Sx] Chevalier, AER 1985, Capital Structure and Product Market Competition

  • [-] Baker-Wurgler, JF 2000, Equity Share in New Issues

  • [Sx] Baker-Wurgler, JF 2002, Market-Timing and Capital Structure

  • [-] Murray-Goyal, JFE 2003, “Testing the Pecking Order Theory of Capital Structure”

  • [Sx] Welch, JPE 2004, Capital Structure and Stock Returns

  • [-] Leary-Roberts 2005, Do Firms Rebalance Their Capital Structures?

  • [-] Chava-Roberts, JF 2008, How Does Financing Impact Investment? The Role of Debt Covenants

  • [-] Parsons-Titman, FTF 3-1, 2009, Empirical Capital Structure: A Review

  • [-] Matsa, JF 2010, Capital Structure as a Strategic Variable: Evidence from Collective Bargaining.

  • [-] Fama-French, CFR 2012, Capital Structure Choices

  • [Sx] Heider-Ljunqvist, JFE 2015, As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes

Also, Basic Definitions:

Feb 18 is going to be text analysis with Gerard Hoberg.


Dividends are paid only by the largest publicly-traded firms, not by smaller ones. (They are also paid in private firms, but their meaning is quite different.) They used to be far more important when dividend yields were large, but these yields had shrunk to about 2%/year in the 2010s and interest predictably waned.

A number of papers have been written about Fama-French 2001. If you are interested in dividends, you will have to read up on it by yourself. The most plausible explanation is that the number of dividend-paying companies remained about the same, but financial markets expand and contract to include more or fewer smaller firms.

To fit Gerard Hoberg into a class, we are diverting to text-analysis for the 2nd session of week 8.


Banking is so big an area that it has its own course in many larger departments.

Mark Garmaise has been actively working in the area:

Real Estate

Stuart Gabriel, Mark Garmaise, Barney Hartman-Glaeser, and Gregor Schubert have worked actively in real estate. I hope some will be joining us.

Notes and recommendations from Gregor:

  • Sinai, Todd, and Nicholas S. Souleles. “Owner-occupied housing as a hedge against rent risk.” The Quarterly Journal of Economics 120.2 (2005): 763-789.

    • This paper conveys the intuition that a lot of residential real estate is about “corporate finance but for households” with leverage, risk, capital investments, equity vs. debt etc. all having analogues at the household level. It also conveys the importance of taking into account future moving decisions and spatial variation in risk, which distinguish real estate from other areas of finance. (I would not emphasize the derivation and exact formulas but mostly focus on the theoretical intuition and the key takeaways from the empirics.)
  • Identification Instrument:

  • Himmelberg, Charles, Christopher Mayer, and Todd Sinai. “Assessing high house prices: Bubbles, fundamentals and misperceptions.” Journal of Economic Perspectives 19.4 (2005): 67-92

    • Rather than cover this in detail, I would use the formulas from this to convey the “user cost” approach to house prices, incorporating financing costs, taxes, risk premia etc., which allows us to decompose variations in house prices over time. Importantly, this relates the importance of thinking about the arbitrage at the margin of the tenure decision: if HHs decide on renting vs. homeownership, the price-to-rent ratio tells us about expected rent growth or housing returns, and discussions of “bubbles” often hinge on where prices are relatively to current or future rents, unrealistic expected growth in rents etc. They were wrong about the sustainability of house prices — but is that because their approach is wrong or because one of the factors in the user cost formula changed in unexpected ways during the run-up to the Great Recession?
  • Mian, Atif, and Amir Sufi. “The consequences of mortgage credit expansion: Evidence from the US mortgage default crisis.” The Quarterly journal of economics 124.4 (2009): 1449-1496. AND Adelino, Manuel, Antoinette Schoar, and Felipe Severino. “Loan originations and defaults in the mortgage crisis: The role of the middle class.” The Review of Financial Studies 29.7 (2016): 1635-1670.

    Also, as appropriate, Amir and Antoinette are friends and run the NBER CF group together. This is not incompatible with having an intellectual argument.

Etc: Taxes

We won’t have time for taxes, even though I think tax-related changes are among the most interesting phenomena and they are unusuall well identified.

I do want to cover some behavioral finance, too, so the last session will probably pull from the topic below.

II. (More) Method or Approach Based

Due to lack of time, most of this will have to be covered in spring quarter if students are interested.

Text Analysis

Gerard Hoberg has been a leading figure in this area and agreed to visit our class. We will have to work him into the schedule — probably February 18.

  • Das, SR, FTF 8-3 Text and Context: Language Analytics in Finance

  • Hoberg-Philips, RFS 2010, Product market synergies and competition in mergers and acquisitions: A text-based analysis

  • Hoberg-Maks, RFS 2014, Redefining Financial Constraints

Note that text analysis is also used beyond corporate finance, e.g., prominently in Baker-Bloom-Davis QJE 2016, Measuring economic policy uncertainty.

Behavioral corporate finance and overconfidence (1 Session)

Growth Finance and Cross-Country Approaches

PS: There is very little development work in financial economics. The two intrinsic problems are external validity and replicability.

Structural and Quasi-Experimental Methods (2-3)

I had an older interesting disagreement with some of the leaders in the field:


Econometrics (1 Session)

There is also a literature on how to conduct event studies if your study requires one. Event studies got a bad name because they are very easy to conduct and for a while everybody did it. They are quite powerful, though, in that it is usually clear what is exogenous and what is endogenous (the stock price).

Crossover to Economics, Including Macro

If we do this, I will probably ask Andrea to join us.

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