Malcolm P. Baker

Robert G. Kirby Professor of Business Administration
Unit Head, Finance

Unit: Finance

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Malcolm Baker is the Robert G. Kirby Professor of Business Adminstration at the Harvard Business School and the program director for corporate finance at the National Bureau of Economic Research. 

His research is in the areas of behavioral finance, corporate finance, and capital markets, with a primary focus on the interactions among corporate finance, investor behavior, and inefficiency in capital markets. Professor Baker has made numerous presentations to academic and practitioner audiences. His research awards include the 2002 Brattle Prize, given annually by the American Finance Association to the best corporate finance paper in the Journal of Finance, second place for the 2012 Jensen Prize, given annually by the Journal of Financial Economics, the 2011 Sharpe Award, given annually by the Journal of Financial and Quantitative Analysis, and the 2012 Graham and Dodd Scroll, given annually by the Financial Analysts Journal. He has served as associate editor for the Journal of Finance and the Review of Financial Studies

Baker has taught in the first and second year of the MBA program at Harvard Business School and in several executive education programs. In 2006, he developed a new elective course in behavioral finance. 

Baker received a Ph.D. in business economics from Harvard University, an M.Phil. in finance from Cambridge University, and a bachelor's degree in applied mathematics-economics from Brown University. Before beginning his doctoral studies, he was a senior associate at Charles River Associates and a member of the US Olympic rowing team.

Outside of Harvard, he serves as a director of research at Acadian Asset Management, an institutional asset management firm focusing in active global and international equity strategies, and as a board member at TAL International, a global leader in container leasing.

Featured Work

Publications

Journal Articles

  1. The Low-Risk Anomaly: A Decomposition into Micro and Macro Effects

    Low beta stocks have offered a combination of low risk and high returns. We decompose the anomaly into micro and macro components. The micro component comes from the selection of low beta stocks. The macro component comes from the selection of low beta countries or industries. The two parts both contribute to the low beta anomaly, with important implications for the construction of managed volatility portfolios.

    Keywords: Low volatility; beta; portfolio construction; market efficiency; capital asset pricing model; Asset Management;

    Citation:

    Baker, Malcolm, Brendan Bradley, and Ryan Taliaferro. "The Low-Risk Anomaly: A Decomposition into Micro and Macro Effects." Financial Analysts Journal 70, no. 2 (March–April 2014): 43–58. View Details
  2. Comovement and Predictability Relationships Between Bonds and the Cross-Section of Stocks

    Government bonds comove more strongly with bond-like stocks: stocks of large, mature, low-volatility, profitable, dividend-paying firms that are neither high growth nor distressed. Variables derived from the yield curve that are already known to predict returns on bonds also predict returns on bond-like stocks; investor sentiment, a predictor of the cross section of stock returns, also predicts excess bond returns. These relationships remain in place even when bonds and stocks become "decoupled" at the index level. They are driven by a combination of effects including correlations between real cash flows on bonds and bond-like stocks, correlations between their risk-based return premia, and periodic flights to quality.

    Keywords: Relationships; Bonds; Stocks; Investment Return; Cash Flow; Quality; Risk and Uncertainty; Forecasting and Prediction; Profit;

  3. The Effect of Reference Point Prices on Mergers and Acquisitions

    Prior stock price peaks of targets affect several aspects of merger and acquisition activity. Offer prices are biased toward recent peak prices although they are economically unremarkable. An offer's probability of acceptance jumps discontinuously when it exceeds a peak price. Conversely, bidder shareholders react more negatively as the offer price is influenced upward toward a peak. Merger waves occur when high returns on the market and likely targets make it easier for bidders to offer a peak price. Parties thus appear to use recent peaks as reference points or anchors to simplify the complex tasks of valuation and negotiation.

    Keywords: Mergers and Acquisitions; Stocks; Price; Valuation; Negotiation;

    Citation:

    Baker, Malcolm, Xin Pan, and Jeffrey Wurgler. "The Effect of Reference Point Prices on Mergers and Acquisitions." Journal of Financial Economics 106, no. 1 (October 2012): 49–71. View Details
  4. Global, Local, and Contagious Investor Sentiment

    We construct investor sentiment indices for six major stock markets and decompose them into one global and six local indices. In a validation test, we find that relative sentiment is correlated with the relative prices of dual-listed companies. Global sentiment is a contrarian predictor of country-level returns. Both global and local sentiment are contrarian predictors of the time-series of cross-sectional returns within markets: When sentiment is high, future returns are low on relatively difficult to arbitrage and difficult to value stocks. Private capital flows appear to be one mechanism by which sentiment spreads across markets and forms global sentiment.

    Keywords: Business and Shareholder Relations; Globalization; Stocks; Markets; Capital; Financial Services Industry;

    Citation:

    Baker, Malcolm, Jeffrey Wurgler, and Yu Yuan. "Global, Local, and Contagious Investor Sentiment." Journal of Financial Economics 104, no. 2 (May 2012): 272–287. View Details
  5. Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly

    Contrary to basic finance principles, high-beta and high-volatility stocks have long underperformed low-beta and low-volatility stocks. This anomaly may be partly explained by the fact that the typical institutional investor's mandate to beat a fixed benchmark discourages arbitrage activity in both high-alpha, low-beta stocks and low-alpha, high-beta stocks.

    Keywords: Volatility; Stocks; Investment Return; Investment Portfolio; Risk Management; Performance Expectations;

    Citation:

    Baker, Malcolm, Brendan Bradley, and Jeffrey Wurgler. "Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly." Financial Analysts Journal 67, no. 1 (January–February 2011). View Details
  6. Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements

    We consider measures of stock-picking skill of mutual fund managers based on the earnings announcement returns of the stocks that they hold and trade. Relative to standard approaches, this approach focuses on an especially informative subset of the returns data, potentially increasing power to detect skilled trading, and also sheds light on the sources of skilled trading. We find that the average fund's recent buys significantly outperform its recent sells around subsequent earnings announcements. We find that mutual fund trades also forecast EPS surprises. The point estimates suggest that skilled trading around earnings announcements, deriving from an ability to forecast economic fundamentals, represents a disproportionate fraction of the total abnormal returns to skilled trading by mutual funds estimated in prior work.

    Keywords: Competency and Skills; Stocks; Investment Return; Investment Funds; Power and Influence; Earnings Management;

    Citation:

    Baker, Malcolm, Lubomir Litov, Jessica Wachter, and Jeffrey Wurgler. "Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements." Journal of Financial and Quantitative Analysis 45, no. 5 (2010): 1111 –1131. View Details
  7. Catering Through Nominal Share Prices

    We propose and test a catering theory of nominal stock prices. The theory predicts that when investors place higher valuation on low-price firms, managers will maintain share prices at lower levels, and vice-versa. Using measures of time-varying catering incentives based on valuation ratios, split announcement effects, and future returns, we find empirical support for the predictions in both time-series and firm-level data. Given the strong cross-sectional relationship between capitalization and nominal share price, an interpretation of the results is that managers may be trying to categorize their firms as small firms when investors favor small firms.

    Keywords: Stocks; Stock Shares; Investment; Investment Return; Price; Theory; Valuation;

    Citation:

    Baker, Malcolm, Robin Greenwood, and Jeffrey Wurgler. "Catering Through Nominal Share Prices." Journal of Finance 64, no. 6 (December 2009): 2559–2590. (Internet Appendix.) View Details
  8. Capital Market-Driven Corporate Finance

    Much of empirical corporate finance focuses on sources of the demand for various forms of capital, not the supply. Recently, this has changed. Supply effects of equity and credit markets can arise from a combination of three ingredients: investor tastes, limited intermediation, and corporate opportunism. Investor tastes, when combined with imperfectly competitive intermediaries, lead prices and interest rates to deviate from fundamental values. Opportunistic firms respond by issuing securities with high prices and investing the proceeds. A link between capital market prices and corporate finance can, in principle, come from either supply or demand. This framework helps to organize empirical approaches that more precisely identify and quantify supply effects through variation in one of these three ingredients. Taken as a whole, the evidence shows that shifting equity and credit market conditions play an important role in dictating corporate finance and investment.

    Keywords: Venture Capital; Cost of Capital; Values and Beliefs; Resource Allocation; Supply Chain; Investment; Price; Markets; Capital Markets; Interest Rates; Equity; Corporate Finance; Financial Services Industry;

    Citation:

    Baker, Malcolm. "Capital Market-Driven Corporate Finance." Annual Review of Financial Economics 1, no. 1 (December 2009): 181–205. View Details
  9. Multinationals as Arbitrageurs? The Effect of Stock Market Valuations on Foreign Direct Investment

    Empirical evidence of imperfect integration across world capital markets suggests a role for cross-border arbitrage by multinationals. Consistent with multinational arbitrage as a determinant of foreign direct investment (FDI) patterns, we find that FDI flows increase sharply with source-country stock market valuations—particularly the component of valuations that is predicted to revert the next year, and particularly in the presence of capital account restrictions that limit other mechanisms of cross-country arbitrage. The results suggest the existence of a cheap financial capital channel in which FDI flows reflect, in part, the use of relatively low-cost capital available to overvalued parents in the source country.

    Keywords: Multinational Firms and Management; Financial Markets; Foreign Direct Investment; Valuation; Capital Markets; Cross-Cultural and Cross-Border Issues; Cost; Forecasting and Prediction; Capital; Stocks; Integration;

    Citation:

    Baker, Malcolm, C. Fritz Foley, and Jeffrey Wurgler. "Multinationals as Arbitrageurs? The Effect of Stock Market Valuations on Foreign Direct Investment." Review of Financial Studies 22, no. 1 (January 2009): 337–369. View Details
  10. Review of The Battle for the Soul of Capitalism, by John Bogle

    Keywords: Information; Economic Systems;

    Citation:

    Baker, Malcolm. "Review of The Battle for the Soul of Capitalism, by John Bogle." Journal of Economic Literature 46, no. 3 (September 2008): 731–735. View Details
  11. How Does Investor Sentiment Affect the Cross-Section of Returns

    Broad waves of investor sentiment should have larger impacts on securities that are more difficult to value and to arbitrage. Consistent with this intuition, we find that when an index of investor sentiment takes low values, small, young, high volatility, unprofitable, non-dividend-paying, extreme growth, and distressed stocks earn relatively higher subsequent returns. When sentiment is high, the aforementioned categories of stocks earn relatively lower subsequent returns.

    Keywords: Volatility; Behavioral Finance; Stocks; Investment; Investment Return; Attitudes;

    Citation:

    Baker, Malcolm, Johnathan Wang, and Jeffrey Wurgler. "How Does Investor Sentiment Affect the Cross-Section of Returns." Journal of Investment Management 6, no. 2 (Second Quarter 2008): 57–72. View Details
  12. Corporate Financing Decisions When Investors Take the Path of Least Resistance

    We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed with an SEO. With a merger, acquirer stock is placed in the hands of investors, who, because of inertia, do not resell it all on the open market. If there is downward-sloping demand for acquirer shares, this leads to less price pressure than an SEO, and cheaper equity financing as a result. We develop a simple model to illustrate this idea, and present supporting empirical evidence. Both individual and institutional investors tend to hang on to shares granted them in mergers, with this tendency being much stronger for individuals. Consistent with the model and with this cross-sectional pattern in inertia, acquirers targeting firms with high institutional ownership experience more negative announcement effects and greater announcement volume. Moreover, the results are strongest when the overlap in target and acquirer institutional ownership is low and when the demand curve for the acquirer's shares appears to be steep.

    Keywords: Behavior; Investment; Policy; Corporate Finance;

    Citation:

    Baker, Malcolm, Joshua Coval, and Jeremy Stein. "Corporate Financing Decisions When Investors Take the Path of Least Resistance." Journal of Financial Economics 84, no. 2 (May 2007): 266–298. View Details
  13. Investor Sentiment in the Stock Market

    We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

    Keywords: Financial Markets; Stocks; Investment Return; Valuation; Forecasting and Prediction; Volatility; Price; Risk and Uncertainty; Behavioral Finance;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "Investor Sentiment in the Stock Market." Journal of Economic Perspectives 21, no. 2 (spring 2007): 129–151. View Details
  14. The Effect of Dividends on Consumption

    Classical models predict that the division of stock returns into dividends and capital appreciation does not affect investor consumption patterns, while mental accounting and other economic frictions predict that investors have a higher propensity to consume from stock returns in the form of dividends. Using two micro data sets, we show that investors are indeed far more likely to consume from dividends than capital gains. In the Consumer Expenditure Survey, household consumption increases with dividend income, controlling for total wealth, total portfolio returns, and other sources of income. In a sample of household investment accounts data from a brokerage, net withdrawals from the accounts increase one-for-one with ordinary dividends of moderate size, controlling for total portfolio returns, and also increase with mutual fund and special dividends. We comment on several potential explanations for the results.

    Keywords: Investment; Investment Return; Economics; Stocks; Capital; Business Earnings; Investment Portfolio; Investment Funds; Cost; Saving; Consumer Products Industry;

    Citation:

    Baker, Malcolm, Stefan Nagel, and Jeffrey Wurgler. "The Effect of Dividends on Consumption." Brookings Papers on Economic Activity (2007): 277–291. View Details
  15. Investor Sentiment and the Cross Section of Stock Returns

    We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

    Keywords: Behavioral Finance; Stocks; Investment Return; Forecasting and Prediction; Motivation and Incentives; Risk and Uncertainty; Volatility;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "Investor Sentiment and the Cross Section of Stock Returns." Journal of Finance 61, no. 4 (August 2006): 1645–1680. View Details
  16. Predicting Returns with Managerial Decision Variables: Is There a Small-Sample Bias?

    Many studies find that aggregate managerial decision variables, such as aggregate equity issuance, predict stock or bond market returns. Recent research argues that these findings may be driven by an aggregate time-series version of Schultz's (2003, Journal of Finance 58, 483-517) pseudo market-timing bias. Using standard simulation techniques, we find that the bias is much too small to account for the observed predictive power of the equity share in new issues, corporate investment plans, insider trading, dividend initiations, or the maturity of corporate debt issues.

    Keywords: Prejudice and Bias; Fairness; Managerial Roles; Management Analysis, Tools, and Techniques; Equity; Bonds; Financial Markets; Investment; Capital Markets; Borrowing and Debt; Investment Return;

    Citation:

    Baker, Malcolm, Ryan Taliaferro, and Jeffrey Wurgler. "Predicting Returns with Managerial Decision Variables: Is There a Small-Sample Bias?" Journal of Finance 61, no. 4 (August 2006): 1711–1730. (Section V of "Pseudo Market Timing and Predictive Regressions,” NBER Working Paper Series, No. 10823, contains additional analyses.) View Details
  17. Appearing and Disappearing Dividends: The Link to Catering Incentives

    We document a close link between fluctuations in the propensity to pay dividends and catering incentives. First, we use the methodology of Fama and French (J. Finan. Econ. (2001)) to identify a total of four distinct trends in the propensity to pay dividends between 1963 and 2000. Second, we show that each of these trends lines up with a corresponding fluctuation in catering incentives: The propensity to pay increases when a proxy for the stock market dividend premium is positive and decreases when it is negative. The lone disconnect is attributable to Nixon-era controls.

    Keywords: Investment Return; Motivation and Incentives; Trends; Stocks; Financial Services Industry;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "Appearing and Disappearing Dividends: The Link to Catering Incentives." Journal of Financial Economics 73, no. 2 (August 2004): 271–288. View Details
  18. A Catering Theory of Dividends

    We propose that the decision to pay dividends is driven by prevailing investor demand for dividend payers. Managers cater to investors by paying dividends when investors put a stock price premium on payers, and by not paying when investors prefer nonpayers. To test this prediction, we construct four stock price-based measures of investor demand for dividend payers. By each measure, nonpayers tend to initiate dividends when demand is high. By some measures, payers tend to omit dividends when demand is low. Further analysis confirms that these results are better explained by catering than other theories of dividends.

    Keywords: Financial Instruments; Investment Return; Business and Shareholder Relations;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "A Catering Theory of Dividends." Journal of Finance 59, no. 3 (June 2004): 1125–1165. View Details
  19. Market Liquidity as a Sentiment Indicator

    We build a model that helps to explain why increases in liquidity-such as lower bid-ask spreads, a lower price impact of trade, or higher turnover-predict lower subsequent returns in both firm-level and aggregate data. The model features a class of irrational investors, who underreact to the information contained in order flow, thereby boosting liquidity. In the presence of short-sales constraints, high liquidity is a symptom of the fact that the market is dominated by these irrational investors, and hence is overvalued. This theory can also explain how managers might successfully time the market for seasoned equity offerings, by simply following a rule of thumb that involves issuing when the SEO market is particularly liquid. Empirically, we find that: (i) aggregate measures of equity issuance and share turnover are highly correlated; yet (ii) in a multiple regression, both have incremental predictive power for future equal-weighted market returns.

    Keywords: Markets; Financial Liquidity; Price; Trade; Sales; Equity; Information; Management Analysis, Tools, and Techniques; Accounting Industry;

    Citation:

    Baker, Malcolm, and Jeremy Stein. "Market Liquidity as a Sentiment Indicator." Journal of Financial Markets 7, no. 3 (June 2004): 271–299. View Details
  20. The Maturity of Debt Issues and Predictable Variation in Bond Returns

    The maturity of new debt issues predicts excess bond returns. When the share of long-term debt issues in total debt issues is high, future excess bond returns are low. This predictive power comes in two parts. First, inflation, the real short-term rate, and the term spread predict excess bond returns. Second, these same variables explain the long-term share, and together account for much of its own ability to predict excess bond returns. The results are consistent with survey evidence that firms use debt market conditions in an effort to determine the lowest-cost maturity at which to borrow.

    Keywords: Borrowing and Debt; Bonds; Investment Return; Financial Markets; Forecasting and Prediction;

    Citation:

    Baker, Malcolm, Robin Greenwood, and Jeffrey Wurgler. "The Maturity of Debt Issues and Predictable Variation in Bond Returns." Journal of Financial Economics 70, no. 2 (November 2003): 261–291. View Details
  21. The Determinants of Board Structure at the Initial Public Offering

    This paper describes board size and composition and investigates the role of venture capital in a sample of 1,116 firms' initial public offerings. First, firms backed by venture capital have fewer insider and instrumental directors and more independent outsiders. Second, we consider board composition as the outcome of a bargain between the CEO and outside shareholders. Representation of independent outsiders on the board decreases with the power of the CEO--tenure and voting control--and increases with the power of outside investors--venture capital backing and venture firm reputation. Third, within the sample of firms financed by venture capital and also consistent with a bargaining model, the probability that a founder remains as CEO is decreasing in venture firm reputation. Finally, we examine the influence of venture capital backing and board structure on firm outcomes in the 10 years after the initial public offering.

    Keywords: Governing and Advisory Boards; Venture Capital; Initial Public Offering; Managerial Roles; Power and Influence;

    Citation:

    Baker, Malcolm, and Paul Gompers. "The Determinants of Board Structure at the Initial Public Offering." Journal of Law & Economics 46, no. 2 (October 2003): 569–598. View Details
  22. When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms

    We use a simple model of corporate investment to determine when investment will be sensitive to non-fundamental movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are 'equity dependent' - firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model.

    Keywords: Stocks; Price; Investment; Equity; Business Model; Forecasting and Prediction; Rank and Position; Markets;

    Citation:

    Baker, Malcolm, Jeremy Stein, and Jeffrey Wurgler. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms." Quarterly Journal of Economics 118, no. 3 (August 2003): 969–1006. View Details
  23. Limited Arbitrage in Mergers and Acquisitions

    A diversified portfolio of risk arbitrage positions produces an abnormal return of 0.6-0.9% per month over the period from 1981 to 1996. We trace these profits to practical limits on risk arbitrage. In our model of risk arbitrage, arbitrageurs' risk-bearing capacity is constrained by deal completion risk and the size of the position they hold. Consistent with this model, we document that the returns to risk arbitrage increase in an ex ante measure of completion risk and target size. We also examine the influence of the general supply of arbitrage capital, measured by the total equity holdings of arbitrageurs, on arbitrage profits.

    Keywords: Acquisition; Mergers and Acquisitions; Investment Banking; Profit; Risk and Uncertainty; Risk Management; Corporate Strategy; Capital; Supply Chain; Industry Growth; Banking Industry;

    Citation:

    Baker, Malcolm, and Serkan Savasoglu. "Limited Arbitrage in Mergers and Acquisitions." Journal of Financial Economics 64, no. 1 (April 2002): 91–116. View Details
  24. Market Timing and Capital Structure

    It is well known that firms tend to raise equity when their market values are high relative to book and past market values. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to past market valuations. The results are difficult to explain within traditional theories of capital structure and suggest that capital structure is the cumulative outcome of past attempts to time the equity market.

    Keywords: Valuation; Outcome or Result; Equity; Capital Structure; Theory; Market Timing; Financial Markets;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "Market Timing and Capital Structure." Journal of Finance 57, no. 1 (February 2002): 1–32. (Winner of Brattle Prize. First Prize Paper For outstanding papers on corporate finance published in the Journal of Finance presented by Brattle Group, Inc. Reprinted in Recent Developments in Corporate Finance, edited by Jay Ritter. Edward Elgar Publishing: UK, 2005.) View Details
  25. The Equity Share in New Issues and Aggregate Stock Returns

    The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.

    Keywords: Equity; Borrowing and Debt; Stocks; Markets; Capital Markets; Mergers and Acquisitions; Debt Securities; Forecasting and Prediction; Accounting Industry; United States;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "The Equity Share in New Issues and Aggregate Stock Returns." Journal of Finance 55, no. 5 (October 2000): 2219–57. View Details
  26. Alternative Models of Uncertain Commodity Prices for Use with Modern Asset Pricing Methods

    This paper provides an introduction to alternative models of uncertain commodity prices. A model of commodity price movements is the engine around which any valuation methodology for commodity production projects is built, whether discounted cash flow (DCF) models or the recently developed modern asset pricing (MAP) methods. The accuracy of the valuation is in part dependent on the quality of the engine employed. This paper provides an overview of several basic commodity price models and explains the essential differences among them. We also show how futures prices can be used to discriminate among the models and to estimate better key parameters of the model chosen.

    Keywords: Asset Pricing; Goods and Commodities; Price; Risk and Uncertainty; Valuation; Production; Projects; Cash Flow;

    Citation:

    Baker, Malcolm, E. S. Mayfield, and John Parsons. "Alternative Models of Uncertain Commodity Prices for Use with Modern Asset Pricing Methods." Energy Journal 19, no. 1 (1998): 115–148. View Details

Book Chapters

  1. Behavioral Corporate Finance: A Current Survey

    We survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers' biases and nonstandard preferences on their decisions. We review relevant psychology, economic theory and predictions, empirical challenges, empirical evidence, new directions such as behavioral signaling, and open questions.

    Keywords: Managerial Roles; Theory; Corporate Finance; Financial Management; Investment; Market Timing; Behavioral Finance; Prejudice and Bias; Economics; Forecasting and Prediction;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "Behavioral Corporate Finance: A Current Survey." In Handbook of the Economics of Finance. Vol. 2, edited by George M. Constantinides, Milton Harris, and Rene M. Stulz. Handbooks in Economics. New York, NY: Elsevier, 2012. View Details
  2. Behavioral Corporate Finance: A Survey

    Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

    Keywords: Decisions; Prejudice and Bias; Debt Securities; Financial Management; Price; Theory; Investment; Problems and Challenges; Behavioral Finance; Corporate Finance;

    Citation:

    Baker, Malcolm, Richard Ruback, and Jeffrey Wurgler. "Behavioral Corporate Finance: A Survey." In The Handbook of Corporate Finance: Empirical Corporate Finance, edited by Espen Eckbo. New York: Elsevier/North-Holland, 2002. View Details

Working Papers

  1. Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly

    Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks' leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks' low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a ten percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.

    Keywords: Risk and Uncertainty; Cost of Capital; Capital Markets; Banks and Banking; Banking Industry; United States;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly." NBER Working Paper Series, No. 19018, May 2013. View Details
  2. Dividends as Reference Points: A Behavioral Signaling Approach

    We outline a dividend signaling approach in which rational managers signal firm strength to investors who are loss averse to reductions in dividends relative to the reference point set by prior dividends. Managers with strong but unobservable cash earnings separate themselves by paying high dividends but retain enough earnings to be likely not to fall short of the same level next period. The model is consistent with several features of the data, including equilibrium dividend policies similar to a Lintner partial-adjustment model; modal dividend changes of zero, stronger market reactions to dividend cuts than increases, relative infrequency and irregularity of repurchases versus dividends, and a core mechanism that does not center on public destruction of value, a notion that managers reject in surveys. Supportive new tests involve nominal levels and changes of dividends per share, announcement effects, and reference point currencies of ADR dividends.

    Keywords: Risk Management; Investment; Standards;

    Citation:

    Baker, Malcolm, and Jeffrey Wurgler. "Dividends as Reference Points: A Behavioral Signaling Approach." NBER Working Paper Series, No. 18242, July 2012. View Details

Cases and Teaching Materials

  1. Restructuring at Nova Chemical Corporation (Abridged), Spreadsheet Supplement

    Citation:

    Baker, Malcolm. "Restructuring at Nova Chemical Corporation (Abridged), Spreadsheet Supplement." Harvard Business School Spreadsheet Supplement 214-703, November 2013. View Details
  2. Restructuring JAL

    Hideo Seto, the recently appointed chairman of the investment committee of the Enterprise Turnaround Initiative Corporation, must decide whether to push JAL group, Japan's largest airline, into bankruptcy or to act as a sponsor in an out-of-court restructuring. The bankruptcy of JAL would be the largest ever for an industrial firm in Japan's history. The case introduces the mechanics of bankruptcy, the tradeoff between out-of-court restructuring and bankruptcy, and the costs of financial distress. At the level of public policy, the case also serves as a useful backdrop to discuss the role of bankruptcy in the efficient functioning of the economy, and the related comparison between Japan and the U.S. in terms of both the bankruptcy code and the cultural attitudes toward corporate restructuring. This case can fit into an introductory course in a module on capital structure and the tradeoff between the costs and benefits of debt or in an advanced corporate restructuring course in a module on the effect of different legal and cultural environments on bankruptcy proceedings.

    Keywords: bankruptcy; costs of financial distress; capital structure; restructuring; Japan; United States; Asia;

    Citation:

    Baker, Malcolm, Adi Sunderam, Nobuo Sato, and Akiko Kanno. "Restructuring JAL." Harvard Business School Case 214-055, November 2013. View Details
  3. Berkshire Partners: Bidding for Carter's, Spreadsheet Supplement

    Keywords: Auctions; Valuation; Leveraged Buyouts; Mergers and Acquisitions; Apparel and Accessories Industry; Retail Industry; Massachusetts;

    Citation:

    Baker, Malcolm, and James Quinn. "Berkshire Partners: Bidding for Carter's, Spreadsheet Supplement." Harvard Business Publishing Supplement, 2010. Electronic. (Spreadsheet supplement for case number 205058.) View Details
  4. The MCI Takeover Battle: Verizon versus Qwest

    MCI's board of directors is considering competing bids from Verizon and Qwest. Qwest, a smaller company with a weaker balance sheet, is offering almost a billion dollars more. But Verizon, one of the largest telecommunications companies in the world, has a history of successful mergers and acquisitions.

    Keywords: Mergers and Acquisitions; Decision Choices and Conditions; Capital Markets; Financial Strategy; Governing and Advisory Boards; Valuation; Telecommunications Industry; United States;

    Citation:

    Baker, Malcolm P., and James Quinn. "The MCI Takeover Battle: Verizon versus Qwest." Harvard Business School Case 206-045, November 2005. (Revised October 2012.) View Details
  5. Berkshire Partners: Bidding for Carter's (CW)

    Supplemental data on comparable companies to Burger King including both public companies and similar transactions.

    Keywords: Leveraged Buyouts; Data and Data Sets; Bids and Bidding; Financial Services Industry;

    Citation:

    Baker, Malcolm P., and David Lane. "Berkshire Partners: Bidding for Carter's (CW)." Harvard Business School Spreadsheet Supplement 211-709, February 2011. (Revised November 2011.) View Details
  6. Matrix Capital Management (A)

    Ben Balbale, a partner at hedge fund Matrix Capital, must decide whether to exit their investment in Rovi Corporation, a company with a diverse portfolio of patents used primarily for digital interactive guides. Rovi's shares are up over 50% from the time Balbale initiated a position in the middle of 2009.

    Keywords: Forecasting and Prediction; Asset Management; Cash Flow; Stock Shares; Financial Markets; Investment Funds; Measurement and Metrics; Mathematical Methods; Strategy; Valuation; Financial Services Industry;

    Citation:

    Baker, Malcolm P., and David Lane. "Matrix Capital Management (A)." Harvard Business School Case 211-017, January 2011. (Revised October 2011.) View Details
  7. Berkshire Partners: Bidding for Carter's

    A five-member team from Berkshire Partners must recommend a final bid and financial structure for a leveraged buyout of William Carter Co., a leading producer of children's apparel. Investorcorp, a global investment group, has put the company up for auction. Goldman Sachs, in addition to running the auction, was offering "staple-on" financing. Under this arrangement, the winning bidder would have the option to finance the deal through a prepackaged capital structure.

    Keywords: Leveraged Buyouts; Capital Structure; Private Equity; Financing and Loans; Auctions; Bids and Bidding; Valuation; Apparel and Accessories Industry;

    Citation:

    Baker, Malcolm P., and James Quinn. "Berkshire Partners: Bidding for Carter's." Harvard Business School Case 205-058, April 2005. (Revised August 2011.) View Details
  8. The Auction for Burger King (A) (CW)

    The courseware contains information on comparable firms and transactions as well as a forecasting model using the case data.

    Keywords: Forecasting and Prediction; Auctions; Market Transactions; Valuation; Service Industry;

    Citation:

    Baker, Malcolm P., and David Lane. "The Auction for Burger King (A) (CW)." Harvard Business School Spreadsheet Supplement 211-712, February 2011. (Revised February 2011.) View Details
  9. Matrix Capital Management (A) (CW)

    Spreadsheet supplement to Matrix Capital Management (A) allowing students to value the company.

    Keywords: Investment Funds; Valuation; Financial Services Industry;

    Citation:

    Baker, Malcolm P., and David Lane. "Matrix Capital Management (A) (CW)." Harvard Business School Spreadsheet Supplement 211-713, February 2011. View Details
  10. Matrix Capital Management (B)

    Ben Balbale, a partner at hedge fund Matrix Capital, must decide whether to exit their investment in Rovi Corporation, a company with a diverse portfolio of patents used primarily for digital interactive guides. Rovi's shares are up over 50% from the time Balbale initiated a position in the middle of 2009.

    Keywords: Public Ownership; Cash Flow; Management Analysis, Tools, and Techniques; Investment Funds; Financial Strategy; Valuation; Partners and Partnerships; Markets; Performance Efficiency; Patents; Stock Shares; Decisions; Financial Services Industry;

    Citation:

    Baker, Malcolm P., and David Lane. "Matrix Capital Management (B)." Harvard Business School Supplement 211-048, January 2011. View Details
  11. Matrix Capital Management (C)

    Ben Balbale, a partner at hedge fund Matrix Capital, must decide whether to exit their investment in Rovi Corporation, a company with a diverse portfolio of patents used primarily for digital interactive guides. Rovi's shares are up over 50% from the time Balbale initiated a position in the middle of 2009.

    Keywords: Public Ownership; Cash Flow; Management Analysis, Tools, and Techniques; Investment Funds; Financial Strategy; Valuation; Partners and Partnerships; Markets; Performance Efficiency; Patents; Stock Shares; Decisions; Financial Services Industry;

    Citation:

    Baker, Malcolm P., and David Lane. "Matrix Capital Management (C)." Harvard Business School Supplement 211-060, January 2011. View Details
  12. Fortress Investment Group

    CEO Wesley Edens and the five Fortress principals are contemplating a move unprecedented in the industry: becoming the first hedge fund and private equity firm to complete an IPO on the New York Stock Exchange (NYSE). This case examines potential reasons for a leading alternative investment firm to go public, including the firm's own rationale relating to "people, permanence, currency, and capital," while also providing analyst expectations regarding target valuation and initial stock performance.

    Keywords: Private Equity; Public Equity; Initial Public Offering; Investment Funds; Going Public; Valuation; Financial Services Industry;

    Citation:

    Baker, Malcolm, Carlos M. Galvez, and James Quinn. "Fortress Investment Group." Harvard Business School Case 208-080, January 2008. (Revised March 2009.) View Details
  13. Opportunity Partners (courseware)

    Keywords: Opportunities; Education; Information;

    Citation:

    Baker, Malcolm, and James Quinn. "Opportunity Partners (courseware)." Harvard Business School Spreadsheet Supplement 208-711, January 2008. View Details
  14. Multifactor Models (CW)

    Keywords: Asset Pricing; Cost of Capital; Forecasting and Prediction; Investment Funds; Investment Return; Mathematical Methods; Performance Evaluation;

    Citation:

    Baker, Malcolm P. "Multifactor Models (CW)." Harvard Business School Spreadsheet Supplement 207-710, February 2007. (Revised January 2008.) View Details
  15. Market Making Exercise

    Students make a market in a new security, posting bid and offer prices and quantities for a new derivative security.

    Keywords: Financial Instruments; Financial Markets; Price;

    Citation:

    Baker, Malcolm P. "Market Making Exercise." Harvard Business School Exercise 207-033, September 2006. (Revised November 2007.) View Details
  16. Wells Fargo Convertible Bonds (CW)

    Keywords: Bonds; Financial Services Industry;

    Citation:

    Baker, Malcolm P., and Elizabeth Kind. "Wells Fargo Convertible Bonds (CW)." Harvard Business School Spreadsheet Supplement 208-704, September 2007. View Details
  17. The MCI Takeover Battle: Verizon versus Qwest (CW)

    Keywords: Integration; Communications Industry;

    Citation:

    Baker, Malcolm P., and James Quinn. "The MCI Takeover Battle: Verizon versus Qwest (CW)." Harvard Business School Spreadsheet Supplement 208-705, September 2007. View Details
  18. Corning: Convertible Preferred Stock (CW)

    Keywords: Stocks; Consumer Products Industry;

    Citation:

    Baker, Malcolm P., and James Quinn. "Corning: Convertible Preferred Stock (CW)." Harvard Business School Spreadsheet Supplement 208-706, September 2007. View Details
  19. Behavioral Finance at JP Morgan

    Following a successful model in Europe, JP Morgan has introduced a set of five U.S. retail mutual funds with an investment philosophy and marketing strategy grounded in behavioral finance. The asset management group believes that understanding investor biases like overconfidence, anchoring, and loss aversion is key to generating returns on the investment side and educating clients on the advisory side.

    Keywords: Banks and Banking; Investment Funds; Behavioral Finance; Competitive Advantage; Asset Management; Marketing Strategy; Product Marketing; Customer Focus and Relationships; Banking Industry; Financial Services Industry; United States; Europe;

    Citation:

    Baker, Malcolm P., and Aldo Sesia. "Behavioral Finance at JP Morgan." Harvard Business School Case 207-084, February 2007. View Details
  20. Multifactor Models

    Students evaluate the performance of four mutual funds and compute the cost of capital for two companies using fixed benchmarks, the CAPM, and a multifactor model of returns.

    Keywords: Cost of Capital; Performance Evaluation; Business Model; Investment Funds; Investment Return; Motivation and Incentives; Markets;

    Citation:

    Baker, Malcolm P. "Multifactor Models." Harvard Business School Exercise 207-056, January 2007. View Details
  21. Corning: Convertible Preferred Stock

    Corning, with large investments in fiber optic technology, was hit particularly hard by the collapse of the telecommunications industry in 2001. With over $4 billion in debt, the firm's survival appears to rest on raising additional equity capital. James Flaws, the chief financial officer, is considering raising $500 million with an issue of mandatory convertible preferred stock.

    Keywords: Financial Strategy; Financial Condition; Financial Instruments; Valuation; Capital; Public Equity; Stock Shares; Business or Company Management; Strategy; Manufacturing Industry; Industrial Products Industry;

    Citation:

    Baker, Malcolm P., and James Quinn. "Corning: Convertible Preferred Stock." Harvard Business School Case 206-018, December 2005. (Revised November 2006.) View Details
  22. Selling Biovail Short

    Hedge fund SAC Capital and analysts from Gradient Analytics and Banc of America face charges of stock price manipulation from Biovail, a Canadian pharmaceutical company. Gradient and BofA produced negative reports on Biovail's earnings quality. At the same time, SAC built a large short position in the stock. The defendants must consider specific and general strategic responses to these allegations.

    Keywords: Stock Shares; Investment Banking; Asset Pricing; Financial Strategy; Crime and Corruption; Pharmaceutical Industry; Financial Services Industry; Canada;

    Citation:

    Baker, Malcolm P., Chris Lombardi, and Aldo Sesia. "Selling Biovail Short." Harvard Business School Case 207-071, November 2006. View Details
  23. Berkshire Partners: Bidding for Carter's (TN)

    Keywords: Financial Services Industry;

    Citation:

    Baker, Malcolm P. "Berkshire Partners: Bidding for Carter's (TN)." Harvard Business School Teaching Note 207-029, September 2006. View Details
  24. Earnings Management Exercise

    Students act as managers or investors. Managers have the ability to manipulate reported earnings, and investors must bid for shares taking this into account.

    Keywords: Earnings Management; Value; Stock Shares; Opportunities; Bids and Bidding; Reports;

    Citation:

    Baker, Malcolm P. "Earnings Management Exercise." Harvard Business School Exercise 207-034, September 2006. View Details
  25. Corning: Convertible Preferred Stock (TN)

    Keywords: Stocks;

    Citation:

    Baker, Malcolm P. "Corning: Convertible Preferred Stock (TN)." Harvard Business School Teaching Note 207-030, September 2006. View Details
  26. The MCI Takeover Battle: Verizon versus Qwest (TN)

    Keywords: Mergers and Acquisitions; Telecommunications Industry;

    Citation:

    Baker, Malcolm P. "The MCI Takeover Battle: Verizon versus Qwest (TN)." Harvard Business School Teaching Note 207-031, September 2006. View Details
  27. Investment Banking at Thomas Weisel Partners

    Thomas Weisel Partners (TWP), a San Francisco-based bank focusing on emerging growth companies, is considering its strategy in the context of regulatory, competitive, and legal changes. Blake Jorgensen, the chief operating officer and co-director of investment banking, must decide how best to serve TWP's clients given the Global Research Analyst Settlement, Regulation Fair Disclosure, changes in "soft dollar" commissions, decimalization, and Sarbanes-Oxley.

    Keywords: Strategy; Business or Company Management; Conflict of Interests; Change Management; Investment Banking; Financing and Loans; Laws and Statutes; Financial Strategy; Corporate Finance; Banking Industry; San Francisco;

    Citation:

    Baker, Malcolm P., and Lauren Barley. "Investment Banking at Thomas Weisel Partners." Harvard Business School Case 206-091, February 2006. (Revised August 2006.) View Details
  28. Auctioning Morningstar

    Morningstar, a publisher of data and ratings for mutual fund investors, is considering an auction-based approach to the company's upcoming IPO, with management weighing the risks and benefits of the auction approach vs. a traditional underwritten offering.

    Keywords: Financial Strategy; Initial Public Offering; Stock Shares; Cost vs Benefits; Strategy; Auctions; Business or Company Management; Conflict of Interests; Publishing Industry;

    Citation:

    Baker, Malcolm P., and James Quinn. "Auctioning Morningstar." Harvard Business School Case 206-023, February 2006. (Revised August 2006.) View Details
  29. Siebel Systems: The Role of the CFO

    Mike Lawrie, the newly appointed CEO of Siebel Systems, considers a combination of growth and spending cuts to turn around the struggling software company. Focuses on the role of the chief financial officer, Ken Goldman, in corporate governance and compliance under Sarbanes-Oxley; in establishing a financial model for the firm; in operations and leadership; and in investor relations under Regulation FD. Goldman, who had presided over rapid growth at several other technology firms before joining Siebel three years earlier, must adapt to Siebel's new leadership and operating environment.

    Keywords: Financial Management; Leading Change; Entrepreneurship; Job Design and Levels; Corporate Governance; Financial Strategy; Management Teams; Corporate Finance; Business and Shareholder Relations; Information Technology Industry;

    Citation:

    Baker, Malcolm P., and Lauren Barley. "Siebel Systems: The Role of the CFO." Harvard Business School Case 205-068, March 2005. (Revised August 2006.) View Details
  30. Wells Fargo Convertible Bonds

    Howard Atkins, the chief financial officer of Wells Fargo, is considering issuing $3 billion in convertible debt. With an investment-grade credit rating, Wells Fargo is not the typical issuer of convertible securities, but the market conditions in 2003 are unusual. Strong demand from both convertible arbitrage hedge funds and income mutual funds appears to create an opportunity for Wells Fargo to raise capital at a low cost.

    Keywords: Capital Structure; Financial Institutions; Banks and Banking; Debt Securities; Financial Management; Financial Strategy; Strategy; Banking Industry;

    Citation:

    Baker, Malcolm P., and Elizabeth Kind. "Wells Fargo Convertible Bonds." Harvard Business School Case 206-022, March 2006. View Details
  31. Dividend Policy at Linear Technology

    Spreadsheet to (9-204-066). Download only.

    Keywords: Stocks; Technology Industry;

    Citation:

    Baker, Malcolm P. "Dividend Policy at Linear Technology." Harvard Business School Spreadsheet Supplement 204-702, February 2004. (Revised February 2004.) View Details
  32. Dividend Policy at Linear Technology

    In 1992, Linear Technology, a designer and manufacturer of analog semiconductors, initiated a dividend. The firm increased its dividend by approximately $0.01 per share each year thereafter. In fiscal year 2002, Linear experienced its first significant drop in sales since its 1986 initial public offering. Sales dropped by 47%, and profits fell by 54%. In the spring of 2003, CFO Paul Coghlan is deciding whether to recommend yet another increase in dividends to lift Linear's payout ratio to 33.1%, high by the standards of technology firms.

    Keywords: Financial Strategy; Investment Return; Financial Condition; Taxation; Initial Public Offering; Financial Management; Semiconductor Industry;

    Citation:

    Baker, Malcolm P., and Alison Berkley Wagonfeld. "Dividend Policy at Linear Technology." Harvard Business School Case 204-066, October 2003. (Revised February 2004.) View Details
  33. Giant Cinema

    The owner of Giant Cinema must decide whether to invest in a digital projector, a new technology for screening films, or purchase a traditional projector. The impact of the new technology is uncertain, and the case describes probabilities for different outcomes that students can incorporate in the financial analysis of the proposed project.

    Keywords: Entrepreneurship; Film Entertainment; Technology Adoption; Financial Strategy; Investment; Outcome or Result; Risk and Uncertainty; Technology; Entertainment and Recreation Industry;

    Citation:

    Baker, Malcolm P., Richard S. Ruback, Erik Stafford, and Kathleen Luchs. "Giant Cinema." Harvard Business School Case 204-052, September 2003. (Revised January 2004.) View Details
  34. Dividend Policy at Linear Technology (TN)

    Teaching Note to (9-204-066).

    Keywords: Semiconductor Industry;

    Citation:

    Baker, Malcolm P. "Dividend Policy at Linear Technology (TN)." Harvard Business School Teaching Note 204-084, October 2003. View Details
  35. Pharmacyclics: Financing Research and Development (TN)

    Teaching Note for (9-201-056).

    Keywords: Pharmaceutical Industry; Medical Devices and Supplies Industry;

    Citation:

    Baker, Malcolm P., and Richard S. Ruback. "Pharmacyclics: Financing Research and Development (TN)." Harvard Business School Teaching Note 204-012, August 2003. View Details
  36. Pharmacyclics: Financing Research & Development

    Pharmacyclics (NASDAQ: PCYC), a pharmaceutical company that manufactures products that will improve existing therapeutic treatments for cancer, arteriosclerosis, and retinal disease, was considering a $60 million private placement in February 2000. The company had more cash than ever before, but projections of R&D and marketing expenses were also unprecedented. PCYC's most promising oncology drug, a radiation enhancer called Xcytrin, was in Phase III clinical trials--the rigorous final phase before FDA approval for commercialization. Analysts gave the drug a slightly better than 50% chance of success. This case focuses on stage financing and a simple decision-tree evaluation. Students have the opportunity to consider the impact of past staged financing decisions on the ownership structure of the firm and to evaluate the current stock market price in light of analyst forecasts of the cash flow and the probability of success for each drug. These two analyses help inform the private placement decision.

    Keywords: Valuation; Cash Flow; Financing and Loans; Business Startups; Financial Strategy; Medical Devices and Supplies Industry; Pharmaceutical Industry; Health Industry;

    Citation:

    Baker, Malcolm P., Richard S. Ruback, and Aldo Sesia. "Pharmacyclics: Financing Research & Development." Harvard Business School Case 201-056, January 2001. (Revised July 2003.) View Details

Other Publications and Materials

  1. Under New Management: Equity Issues and the Attribution of Past Returns

    There is a strong link between measures of stock market performance, such as changes in Tobin's Q or past stock returns, and equity issues. Typically, this performance is thought to be a characteristic of the firm, not the CEO who happens to run the firm. In contrast to this conventional wisdom, we find that equity issues depend on changes in Q and returns to a greater extent if the current CEO was at the helm when those past returns were realized. What we label the CEO-specific Q and past return explains equity issuance, but it does not explain debt issuance, investment, or profitability. Two discontinuity analyses show that the specific share price that the current CEO inherited is an important reference point, while salient share prices prior to turnover are not. A corollary is that a firm with poor stock market performance cannot, or will not, raise new capital unless the current CEO is replaced.

    Keywords: Equity; Stocks; Investment Return; Price; Retention; Managerial Roles; Performance;

  2. Career Concerns and Staged Investment: Evidence from the Venture Capital Industry

    I develop a model in which career concerns lead to inefficient reinvestment decisions. Managers have incentives to inflate interim returns by continuing bad projects and delaying write-offs. In the venture capital industry, the syndication of follow-on investments can help to solve this problem by providing an intermediate, arm's-length valuation. The evidence suggests that young venture firms do use syndication to certify investment quality. Moreover, the gap in quality between syndicated and non-syndicated investments -- measured by ex post outcomes -- is especially high for young venture firms, consistent with the hypothesis that career concerns reduce the efficiency of staged investment.

    Keywords: Performance Efficiency; Valuation; Venture Capital; Investment; Decisions; Motivation and Incentives; Quality; Personal Development and Career;

  3. Executive Ownership and Control in Newly Public Firms: The Role of Venture Capitalists

    We study the implications of CEO equity ownership for incentives and control in a sample of 1,011 newly public firms. Before an initial public offering, equity investments by venture capitalists reduce CEO ownership by about half, from an average of 35 percent to 19 percent. Venture capitalists narrow this difference by granting options, reducing secondary sales, and lowering the dilution by primary shares, but a gap in post-IPO CEO equity ownership remains. The effect of this lower ownership on incentives depends upon the measure employed - the dollar sensitivity of CEO pay to firm value is lower in venture firms, but the elasticity is about the same. In addition, we present evidence that lower ownership, combined with concentrated outside holdings, leads to a reduction in the agency costs of managerial control. We conclude that the patterns of ownership in part represent a tradeoff by venture capitalists between the benefits of incentives and the agency costs of control.

    Keywords: Equity; Ownership; Motivation and Incentives; Initial Public Offering; Investment; Venture Capital; Managerial Roles; Cost Management; Governance Controls; Executive Compensation;

    Citation:

    Baker, Malcolm, and Paul Gompers. "Executive Ownership and Control in Newly Public Firms: The Role of Venture Capitalists." November 1999. (First draft in 1998.) View Details
  4. Estimating Industry Multiples

    We analyze industry multiples for the S&P 500 in 1995. We use Gibbs sampling to estimate simultaneously the error specification and small sample minimum variance multiples for 22 industries. In addition, we consider the performance of four common multiples: the simple mean, the harmonic mean, the value-weighted mean, and the median. The harmonic mean is a close approximation to the Gibbs minimum variance estimates. Finally, we show that EBITDA is a better single basis of substitutability than EBIT or revenue in the industries that we examine.

    Keywords: Management Analysis, Tools, and Techniques; Performance; Mathematical Methods;

    Citation:

    Baker, Malcolm, and R. S. Ruback. "Estimating Industry Multiples." 1999. View Details

      Teaching

    1. Overview

      My current teaching includes the second half of the required finance curriculum - Finance 2 - and a second year investments course in Behavioral Finance and Value Investing, which I am co-teaching with Robin Greenwood. In the past, I have taught in the first half of the required curriculum - Finance 1 - and in executive courses, including Finance for Senior Executives and the Investment Management Workshop.
    2. MBA Elective Curriculum: Behavioral and Value Investing

      Capital markets are not efficient in the way that textbook theory suggests. Through their trading behavior, biased individual investors and rule-bound institutions can cause prices to deviate significantly from fundamental value. These deviations create opportunities and risks for sophisticated investors. The first part of the course develops a framework for understanding what drives deviations from market efficiency. This covers the two building blocks of behavioral finance: investor psychology and so-called limits-to-arbitrage. The second part of the course - value investing - is focused on identifying and measuring these deviations in practice. The course takes a broad view of value investing. This means that we will cover many of the traditional ideas emphasized in early treatments of value investing - such as the concept of franchise value - while also covering situations in which the broader themes of behavioral finance can help us make better investments. The applications studied in the course appear in markets in the U.S. and abroad.

    3. MBA Required Curriculum: Finance 2

      This course builds on the foundation developed in FIN1, adding a focus on financing and deal structure. FIN2 extends the valuation frameworks of FIN1 to include the impact of financing decisions on firm value. The course is divided into four parts.

      §  Financing and financial policy. Choosing the right mix of debt, equity, and other securities.

      §  Integrated financing and valuation. Taking into account the impact of financing decisions and deal structure on valuation.

      §  Options and risk management. Using options in employee incentive contracts, in the design of securities, and in risk management.

      §  Mergers and acquisitions. Combining firms to create value, and using deal structure in merger negotiations.

    4. Executive Education: Finance for Senior Executives

      Finance for Senior Executives provides the frameworks to strategically use financial resources and position your company for future success. By examining corporate finance from both internal and external perspectives, this HBS Executive Education leadership development offering enables you to establish the best financial systems for management and control—and utilize capital markets for the most profitable outcomes. You will leave with the strategies and tools to improve your company's bottom line and to take on new responsibilities over time.

      Specifically, you will be better able to:

      §  Position your company to compete in today's volatile global marketplace and to seize opportunities when the market expands

      §  Establish successful and realistic performance plans, incentives, and financial controls at the corporate and divisional levels

      §  Employ proven forecasting methods that enable you to predict and monitor outcomes with greater confidence

      §  Recognize and address biases within financial systems and structures

      §  Master the workings of capital structure and capital markets to ensure better strategic decision making in an economic downturn

      §  Balance profit, growth, and control in highly dynamic environments

      §  Understand and implement optimal restructuring strategies

      §  Work more effectively with a diverse range of colleagues in financial roles inside and outside your organization

      Awards & Honors

    1. Journal of Financial Economics. Jensen Prize. Second Place: Second Place Winner of the 2012 Jensen Prize for the Best Corporate Finance Paper Published in the Journal of Financial Economics for "The Effect of Reference Point Prices on Mergers and Acquisitions" (with Xin Pan and Jeffrey Wurgler, October 2012).

    2. Graham and Dodd Scroll Award: Received a 2011 Graham and Dodd Scroll Award from the Financial Analysts Journal with Brendan Bradley and Jeffrey Wurgler for "Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly" (January–February 2011).

    3. Emerald Management Reviews. Citation of Excellence: Received a 2011 Emerald Management Review Citation of Excellence Award for his paper with Jeffrey Wurgler, “Investor Sentiment in the Stock Market” (The Journal of Economic Perspectives, Spring 2007).

    4. William F. Sharpe Award for Scholarship in Financial Research: Won the William F. Sharpe Award for Best Paper in 2011 for his paper with Lubomir Litov, Jessica A. Wachter, and Jeffrey Wurgler, “Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements” (Journal of Financial and Quantitative Analysis, October 2010).

    5. Smith Breeden Prize. Best Paper: Nominated for the 2006 Smith Breeden Prize for the Best Finance Research Paper Published in the Journal of Finance for his paper with Jeffrey Wurgler, "Investor Sentiment and the Cross Section of Stock Returns" (August 2006).

    6. Glucksman Institute for Research in Security Markets Prize: Winner of the 2005 Glucksman Prize from the Glucksman Institute for Research in Security Markets Prize at New York University. Also won Second Place in 2003 and 2010.

    7. Brattle Prize. First Prize Paper: Nominated for the 2004 Brattle Prize for Outstanding Paper in Corporate Finance in the Journal of Finance for his paper with Jeffrey Wurgler. "A Catering Theory of Dividends." (June 2004).

    8. Robert F. Greenhill Award: Received the 2004 Robert F. Greenhill Award.

    9. Brattle Prize. First Prize Paper: Winner of the 2002 Brattle Prize for Outstanding Paper in Corporate Finance in the Journal of Finance for "Market Timing and Capital Structure" (with Jeffrey Wurgler, February 2002).

    10. George S. Dively Award: Winner of the 1998 George S. Dively Award for outstanding dissertation research for "Essays in Financial Economics" (Harvard University, PhD, 2000).