David S. Scharfstein is the Edmund Cogswell Converse Professor of Finance and Banking at Harvard Business School. His research focuses on banking, financial distress, risk management, housing finance, venture capital and corporate investment. He teaches the introductory finance course in the MBA program and the Ph.D. corporate finance course. Previously, he has taught courses on private equity and venture capital.

Prior to joining the Harvard Business School faculty in 2003, Scharfstein was for 16 years on the finance faculty of MIT's Sloan School of Management, most recently as the Dai Ichi Kangyo Professor of Management. He has been Editor of the Rand Journal of Economics, Associate Editor of the Journal of Finance and Review of Financial Studies, and Director of the American Finance Association. He has received fellowships from the Sloan Foundation, Batterymarch Financial Management, and the Olin Foundation, as well as a Fulbright Scholarship at Oxford University.

Scharfstein is a Research Associate of the National Bureau of Economic Research. He is also a member of the Squam Lake Working Group on Financial Regulation, a nonpartisan, nonaffiliated group of fifteen leading economists which offers guidance on financial regulatory reform and recently published The Squam Lake Report: Fixing the Financial System (Princeton University Press). During 2009-10 Scharfstein served as Senior Advisor to the Secretary of the U.S. Treasury.

Scharfstein has a Ph.D in Economics from MIT (1986) and an A.B. summa cum laude from Princeton University (1982).

Featured Work

Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates

We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivites to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, increasing concentration by one standard deviation reduces the overall impact of a decline in MBS yields by approximately 50%. In the time series, a decrease in MBS yields today has a 40% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.
Dollar Funding and the Lending Behavior of Global Banks

A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.
The Growth of Modern Finance

The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly fees associated with residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or "shadow banking"). We offer a preliminary assessment of whether the growth of active asset management, household credit, and shadow banking – the main areas of growth in the financial sector – has been socially beneficial.
An Evaluation of Money Market Fund Reform Proposals

We analyze the leading reform proposals to address the structural vulnerabilities of money market mutual funds (MMFs). We take the main goal of MMF reform to be safeguarding financial stability. Specifically, MMF reforms should reduce the ex ante incentives for MMFs to take excessive risks and increase the ex post resilience of MMFs to system-wide runs. We argue that requiring MMFs to have capital buffers best accomplishes these goals. Capital provides MMFs with loss absorption capacity, lowering the probability that a MMF suffers losses large enough to trigger a run, and
reduces ex ante incentives to take excessive risks. Using a methodology that is standard in bank capital regulation, we estimate that a capital buffer of 3% to 4% would reduce the probability of breaking the buck to 0.1%, the threshold commonly used in bank capital models. The riskiness of this capital buffer would be comparable to the riskiness of the long-term debt of an A-rated or BBBrated financial firm. This implies that MMF capital would earn roughly 1.25% more than riskless short-term debt and MMF shareholders would earn 0.05% less in exchange for the protection provided by this capital. In summary, capital buffers would yield significant financial stability benefits, while maintaining the current fixed net asset value (NAV) structure of MMFs. Other leading reform alternatives such as converting MMFs to a floating NAV will be less effective in safeguarding financial stability. In practice, MMFs with a floating NAV would have all of the same vulnerabilities as MMFs have today. Introducing floating NAVs would not alter incentives for risk taking nor would it reduce incentives to run—investors would still attempt to exit early before illiquid assets have to be sold. Thus, we suggest that regulators adopt capital buffers for MMFs.

Publications

Recent Working Papers

Mimeo | 2013

Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates

David S. Scharfstein and Adi Sunderam

We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the effectiveness of housing as a monetary policy transmission channel varies in both the time series and the cross section. Increasing concentration by one standard deviation above the mean reduces the overall impact of a decline in MBS yields by approximately 50%.

Keywords: Mortgages; Banking Industry; United States;

Citation:
Scharfstein, David S., and Adi Sunderam. "Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates." April 2013. Mimeo.

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Mimeo | 2012

The Growth of Modern Finance

Robin Greenwood and David S. Scharfstein

The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly for residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or "shadow banking"). Whether the growth of the financial sector has been socially beneficial depends on one's view of active asset management, the increase in household credit, and the growth of shadow banking. While recognizing some of the benefits of professional asset management, we are skeptical about the marginal value of active asset management. We then raise concerns about whether the potential benefits of increased access to household credit—the main output of the shadow banking system—are outweighed by the risks inherent in this new approach to credit delivery.

Keywords: Finance; Asset Management; Credit; Mortgages; Risk and Uncertainty; Financial Markets; Growth and Development; Financial Services Industry;

Citation:
Greenwood, Robin, and David S. Scharfstein. "The Growth of Modern Finance." July 2012. Mimeo.

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Working Paper | HBS Working Paper Series | 2012

Dollar Funding and the Lending Behavior of Global Banks

Victoria Ivashina, David S. Scharfstein and Jeremy C. Stein

A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.

Keywords: banks; global banks; credit supply; dollar funding;

Citation:
Ivashina, Victoria, David S. Scharfstein, and Jeremy C. Stein. "Dollar Funding and the Lending Behavior of Global Banks." Harvard Business School Working Paper, No. 13–059, October 2012. (NBER Working Paper Series, No. 18528, October 2012.)

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Working Paper | 2013

An Evaluation of Money Market Fund Reform Proposals

Samuel G. Hanson, David S. Scharfstein and Adi Sunderam

We analyze the leading reform proposals to address the structural vulnerabilities of money market mutual funds (MMFs). We assume that the main goal of MMF reform is safeguarding financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that a MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. We estimate that a capital buffer in the range of 3 to 4% would significantly reduce the probability that ordinary MMF shareholders ever suffer losses. In exchange for having the safer investment product made possible by subordinated capital, the yield paid to ordinary MMFs shareholders would decline by only 0.05%. Other reform alternatives such as converting MMFs to a floating NAV would likely be less effective in protecting financial stability.

Citation:
Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "An Evaluation of Money Market Fund Reform Proposals." Working Paper.

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Books

Book | 2010

The Squam Lake Report: Fixing the Financial System

as part of the Squam Lake Working Group Scharfstein, David S.

In the fall of 2008, fifteen of the world's leading economists-representing the broadest spectrum of economic opinion-gathered at New Hampshire's Squam Lake. Their goal: the mapping of a long-term plan for financial regulation reform. The Squam Lake Report distills the wealth of insights from the ongoing collaboration that began at these meetings and provides a revelatory, unified, and coherent voice for fixing our troubled and damaged financial markets. As an alternative to the patchwork solutions and ideologically charged proposals that have dominated other discussions, the Squam Lake group sets forth a clear nonpartisan plan of action to transform the regulation of financial markets-not just for the current climate-but for generations to come.

Keywords: Financial Crisis; Financial Markets; Governing Rules, Regulations, and Reforms; Business and Government Relations;

Citation:
Scharfstein, David S., as part of the Squam Lake Working Group. The Squam Lake Report: Fixing the Financial System. Princeton, NJ: Princeton University Press, 2010.

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Journal Articles

Article | Harvard Business Review |

How to Make Finance Work

Robin Greenwood and David S. Scharfstein

Once a sleepy old boys' club, the U.S. financial sector is now a dynamic and growing business that attracts the best and the brightest. It is tempting to declare the industry a roaring success. But its purpose is to serve the needs of U.S. households and firms, and by this standard its performance has been mixed. The sector's growth has been beneficial for U.S. corporations, which enjoy ready access to the deepest capital markets in the world. Venture capital, for example, and the public equity markets that support it, has channeled money to innovative ideas that have transformed industries and generated new ones. The rest of the economy, however, has not been well served by the financial sector's boom. First, the shift from deposit-based banking to a market-based "shadow banking" system, without adequate regulatory adjustments, has left the financial system vulnerable to crisis. Second, trillions of dollars have been steered into residential real estate and away from more productive investments. Third, the cost of professional investment management is too high, which drains talent from other industries. The financial sector could promote the health and competitiveness of the U.S. economy by increasing capital and liquidity requirements, reorienting the discussion around housing finance reform from keeping mortgage credit cheap to ensuring financial stability, and instituting measures that compel asset managers to compete on the true value of the services they provide.

Keywords: Finance; Performance Evaluation; Business Ventures; Household Characteristics; Financial Crisis; Investment; Competitive Advantage; Value; Financial Services Industry; United States;

Citation:
Greenwood, Robin, and David S. Scharfstein. "How to Make Finance Work." Harvard Business Review 90, no. 3 (March 2012).

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Article | Journal of Financial Economics |

Bank Lending During the Financial Crisis of 2008

Victoria Ivashina and David S. Scharfstein

This paper documents that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to the peak of the credit boom (second quarter of 2007). New lending for real investment (such as working capital and capital expenditures) fell by only 14% in the last quarter of 2008 but contracted nearly as much as new lending for restructuring (LBOs, M&A, share repurchases) relative to the peak of the credit boom. After the failure of Lehman Brothers in September 2008 there was a run by short-term bank creditors, making it difficult for banks to roll over their short-term debt. We document that there was a simultaneous run by borrowers who drew down their credit lines, leading to a spike in commercial and industrial loans reported on bank balance sheets. We examine whether these two stresses on bank liquidity led them to cut lending. In particular, we show that banks cut their lending less if they had better access to deposit financing, and thus they were not as reliant on short-term debt. We also show that banks that were more vulnerable to credit line drawdowns because they co-syndicated more of their credit lines with Lehman Brothers reduced their lending to a greater extent.

Keywords: Financial Liquidity; Financing and Loans; Credit; Borrowing and Debt; Financial Crisis; Banking Industry;

Citation:
Ivashina, Victoria, and David S. Scharfstein. "Bank Lending During the Financial Crisis of 2008." Journal of Financial Economics 97, no. 3 (September 2010): 319–338.

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Article | American Economic Review: Papers and Proceedings |

Loan Syndication and Credit Cycles

Victoria Ivashina and David Scharfstein

Cyclicality in the supply of business credit has been the focus of a considerable amount of research. This cyclicality can stem from shocks to borrowers' collateral, which affect firms' ability to raise capital if agency and information problems are significant (Ben S. Bernanke and Mark Gertler, 1989). Or it can stem from shocks to bank capital, which affects the supply of bank loans if agency and information problems limit the ability of banks to raise additional capital (Bernanke, 1983). In this paper, we examine cyclicality in the supply of credit in the context of modern forms of banking, often referred to as the "originate-to-distribute" model. In particular, we focus on the role of syndicated lending.

Keywords: Business Cycles; Capital; Credit; Banks and Banking; Financing and Loans; System Shocks; Financial Services Industry;

Citation:
Ivashina, Victoria, and David Scharfstein. "Loan Syndication and Credit Cycles." American Economic Review: Papers and Proceedings 100, no. 2 (May 2010): 1–8.

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Article | Journal of Financial Economics |

Performance Persistence in Entrepreneurship and Venture Capital

Paul A. Gompers, Josh Lerner, David Scharfstein and Anna Kovner

This paper presents evidence of performance persistence in entrepreneurship. We show that entrepreneurs with a track record of success are much more likely to succeed than first-time entrepreneurs and those who have previously failed. In particular, they exhibit persistence in selecting the right industry and time to start new ventures. Entrepreneurs with demonstrated market-timing skill are also more likely to outperform industry peers in their subsequent ventures. This is consistent with the view that if suppliers and customers perceive the entrepreneur to have market-timing skill, and is therefore more likely to succeed, they will be more willing to commit resources to the firm. In this way, success breeds success and strengthens performance persistence.

Keywords: Performance; Entrepreneurship; Venture Capital; Market Timing; Competency and Skills; Customers; Resource Allocation; Success; Business Startups;

Citation:
Gompers, Paul A., Josh Lerner, David Scharfstein, and Anna Kovner. "Performance Persistence in Entrepreneurship and Venture Capital." Journal of Financial Economics 96, no. 1 (April 2010).

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Article | Review of Financial Studies |

Evidence on the Dark Side of Internal Capital Markets

David S. Scharfstein and Oguzhan Ozbas

Keywords: Capital; Markets;

Citation:
Scharfstein, David S., and Oguzhan Ozbas. "Evidence on the Dark Side of Internal Capital Markets." Review of Financial Studies 23 (February 2010): 581–599.

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Article | Yale Journal of Regulation |

Lowering the Cost of Bank Recapitalization

John C. Coates IV and David S. Scharfstein

Keywords: Banks and Banking; Capital; Cost;

Citation:
Coates, John C., IV, and David S. Scharfstein. "Lowering the Cost of Bank Recapitalization." Yale Journal of Regulation (July 2009).

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Article | Journal of Financial Economics |

Venture Capital Investment Cycles: The Impact of Public Markets

Paul Gompers, Anna Kovner, Josh Lerner and David Scharfstein

It is well documented that the venture capital industry is highly volatile and that much of this volatility is associated with shifting valuations and activity in public equity markets. This paper examines how changes in public market signals affected venture capital investing between 1975 and 1998. We find that venture capitalists with the most industry experience increase their investments the most when public market signals become more favorable. Their reaction to an increase is greater than the reaction of venture capital organizations with relatively little industry experience and those with considerable experience but in other industries. The increase in investment rates does not affect the success of these transactions adversely to a significant extent. These findings are consistent with the view that venture capitalists rationally respond to attractive investment opportunities signaled by public market shifts.

Keywords: History; Venture Capital; Investment; Experience and Expertise; Public Equity; Volatility; Financial Services Industry;

Citation:
Gompers, Paul, Anna Kovner, Josh Lerner, and David Scharfstein. "Venture Capital Investment Cycles: The Impact of Public Markets." Journal of Financial Economics 87, no. 1 (January 2008): 1–23. (Earlier versions distributed as National Bureau of Economic Research Working Paper No. 11385.)

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Article | Journal of Finance |

Entrepreneurial Spawning: Public Corporations and the Formation of New Ventures, 1986-1999

Paul A. Gompers, Josh Lerner and David S. Scharfstein

Keywords: Entrepreneurship; Business Ventures; Growth and Development; Business History;

Citation:
Gompers, Paul A., Josh Lerner, and David S. Scharfstein. "Entrepreneurial Spawning: Public Corporations and the Formation of New Ventures, 1986-1999." Journal of Finance 60, no. 2 (April 2005). (Earlier version distributed as National Bureau of Economic Research Working Paper No. 9816.)

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Article | Journal of Finance |

Learning about Internal Capital Markets from Corporate Spinoffs

David S. Scharfstein, Robert Gertner and Eric Powers

Keywords: Capital; Markets; Business Ventures;

Citation:
Scharfstein, David S., Robert Gertner, and Eric Powers. "Learning about Internal Capital Markets from Corporate Spinoffs." Journal of Finance 57, no. 6 (December 2002): 2479–2506.

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Journal Article | American Economic Review: Papers and Proceedings |

Do Firm Boundaries Matter?

David S. Scharfstein and Sendhil Mullainathan

Citation:
Scharfstein, David S., and Sendhil Mullainathan. "Do Firm Boundaries Matter?" American Economic Review: Papers and Proceedings (May 2001): 195–199.

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Article | Journal of Finance |

The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment

David S. Scharfstein and Jeremy Stein

Keywords: Global Range; Markets; Capital; Investment;

Citation:
Scharfstein, David S., and Jeremy Stein. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment." Journal of Finance 55, no. 6 (December 2000): 2537–2564.

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Article | Journal of Economic Perspectives |

Corporate Finance, the Theory of the Firm, and Organizations

David S. Scharfstein and Patrick Bolton

Keywords: Finance; Business Ventures; Theory; Organizations;

Citation:
Scharfstein, David S., and Patrick Bolton. "Corporate Finance, the Theory of the Firm, and Organizations." Journal of Economic Perspectives 12, no. 4 (fall 1998): 95–114.

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Article | American Economic Review |

Capital Market Imperfections and Countercyclical Markups: Theory and Evidence

Judith A. Chevalier and David S. Scharfstein

Keywords: Capital; Markets; Theory;

Citation:
Chevalier, Judith A., and David S. Scharfstein. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence." American Economic Review 86, no. 4 (September 1996): 703–725.

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Article | Journal of Political Economy |

Optimal Debt Structure and the Number of Creditors

David S. Scharfstein and Patrick Bolton

Keywords: Borrowing and Debt;

Citation:
Scharfstein, David S., and Patrick Bolton. "Optimal Debt Structure and the Number of Creditors." Journal of Political Economy 104, no. 1 (February 1996): 1–25.

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Article | American Economic Review: Papers and Proceedings |

Liquidity Constraints and the Cyclical Behavior of Markups

David S. Scharfstein and Judith A. Chevalier

Keywords: Behavior;

Citation:
Scharfstein, David S., and Judith A. Chevalier. "Liquidity Constraints and the Cyclical Behavior of Markups." American Economic Review: Papers and Proceedings (May 1995): 390–396.

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Article | Harvard Business Review |

A Framework for Risk Management

K. A. Froot, David S. Scharfstein and J. Stein

Keywords: Framework; Risk Management;

Citation:
Froot, K. A., David S. Scharfstein, and J. Stein. "A Framework for Risk Management." Harvard Business Review 72, no. 6 (November–December 1994): 59–71. (Revised from "Developing a Risk Management Strategy," Harvard Business School Working Paper No. 95-021. Reprinted in Bank of America Journal of Applied Corporate Finance 7, no. 3 (fall 1994): 22-33; Marsh & McLennan Companies' Viewpoint 24 (spring 1995): 21-37; and in Corporate Risk: Strategies and Management, edited by Greg Brown and Don Chew, London: Risk Books, December 1999.)

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Article | Quarterly Journal of Economics |

Internal versus External Capital Markets

David S. Scharfstein, Robert Gertner and Jeremy Stein

Keywords: Capital; Markets;

Citation:
Scharfstein, David S., Robert Gertner, and Jeremy Stein. "Internal versus External Capital Markets." Quarterly Journal of Economics 109, no. 4 (November 1994): 1211–1230.

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Article | Harvard Business Review |

A Framework for Risk Management

K. Froot, David S. Scharfstein and J. Stein

Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

Citation:
Froot, K., David S. Scharfstein, and J. Stein. "A Framework for Risk Management." Harvard Business Review 72, no. 6 (November–December 1994): 59–71. (Revised from "Developing a Risk Management Strategy," Harvard Business School Working Paper No. 95-021. Reprinted in Bank of America Journal of Applied Corporate Finance 7, no. 3 (fall 1994): 22-32; Marsh & McLennan Companies' Viewpoint 24 (spring 1995): 21-37; and in Corporate Risk: Strategies and Management, edited by Greg Brown and Don Chew, London: Risk Books, December 1999.)

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Article | Quarterly Journal of Economics |

Anatomy of Financial Distress: An Examination of Junk-Bond Issuers

David S. Scharfstein, Paul Asquith and Robert Gertner

Keywords: Bonds;

Citation:
Scharfstein, David S., Paul Asquith, and Robert Gertner. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers." Quarterly Journal of Economics 109, no. 3 (August 1994): 625–658.

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Article | Journal of Finance |

Risk Management: Coordinating Corporate Investment and Financing Policies

K. A. Froot, David S. Scharfstein and J. Stein

Keywords: Catastrophe Risk; corporate finance; Banking and Insurance; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Cost of Capital; Asset Pricing; Insurance Industry;

Citation:
Froot, K. A., David S. Scharfstein, and J. Stein. "Risk Management: Coordinating Corporate Investment and Financing Policies." Journal of Finance 48, no. 5 (December 1993): 1629–1658. (Revised from NBER Working Paper No. 4084, February 1993. Reprinted in RAE-Revista de Administração de Empresas, Management Journal of Fundação Getulio Vargas (FGV-EAESP), Business School for Administration in Sao Paulo, Brazil, volume no. 48, issue no. 1 (January-March 2008): 87-118. Reprinted in Insurance and Risk Management, Volume II, Corporate Risk Management, Part I: Theory on Why and How Firms Manage Risk, Chapter 3, edited by Gregory R. Niehaus, UK: Edward Elgar Publishing Ltd. (October 2008). Also in M.J. Brennan, The Theory of Corporate Finance from The International Library of Critical Writings in Financial Economics, edited by R. Roll, 1995; and in Merton Miller and Chris Culp, eds. Corporate Hedging in Theory and Practice: Lessons from Metallgesellschaft, Risk Books, 1999.)

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Article | Journal of Finance |

Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

Kenneth Froot, David S. Scharfstein and Jeremy Stein

Keywords: rational expectations; Asset Pricing; Behavioral Finance;

Citation:
Froot, Kenneth, David S. Scharfstein, and Jeremy Stein. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation." Journal of Finance 47, no. 4 (September 1992): 1461–1484. (Revised from NBER Working Paper No. 3250, February 1990.)

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Article | Journal of Finance |

A Theory of Workouts and the Effects of Reorganization Law

David S. Scharfstein and Robert Gertner

Keywords: Theory; Law;

Citation:
Scharfstein, David S., and Robert Gertner. "A Theory of Workouts and the Effects of Reorganization Law." Journal of Finance 46, no. 4 (September 1991): 1189–1222.

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Article | Quarterly Journal of Economics |

Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups

David S. Scharfstein, Takeo Hoshi and Anil Kashyap

Keywords: Financial Liquidity; Investment; Groups and Teams; Business Ventures; Japan;

Citation:
Scharfstein, David S., Takeo Hoshi, and Anil Kashyap. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups." Quarterly Journal of Economics 106, no. 1 (February 1991): 33–60.

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Article | Review of Financial Studies |

Shareholder Value Maximization and Product Market Competition

J. J. Rotemberg and David S. Scharfstein

Keywords: Product; Markets; Competition; Money; Value;

Citation:
Rotemberg, J. J., and David S. Scharfstein. "Shareholder Value Maximization and Product Market Competition." Review of Financial Studies 3, no. 3 (fall 1990): 367–392.

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Article | Journal of Financial Economics |

The Role of Banks in Reducing the Costs of Financial Distress in Japan

David S. Scharfstein, Takeo Hoshi and Anil Kashyap

Keywords: Banks and Banking; Cost; Global Range;

Citation:
Scharfstein, David S., Takeo Hoshi, and Anil Kashyap. "The Role of Banks in Reducing the Costs of Financial Distress in Japan." Journal of Financial Economics 27, no. 1 (September 1990): 67–88.

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Article | American Economic Review |

Herd Behavior and Investment

David S. Scharfstein and Jeremy Stein

Keywords: Investment; Behavior;

Citation:
Scharfstein, David S., and Jeremy Stein. "Herd Behavior and Investment." American Economic Review 80, no. 3 (June 1990): 465–479.

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Article | American Economic Review |

A Theory of Predation Based on Agency Problems in Financial Contracting

David S. Scharfstein and Patrick Bolton

Keywords: Theory; Problems and Challenges; Finance; Contracts;

Citation:
Scharfstein, David S., and Patrick Bolton. "A Theory of Predation Based on Agency Problems in Financial Contracting." American Economic Review (March 1990).

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Article | Journal of Finance |

LDC Debt: Forgiveness, Indexation, and Investment Incentives

K. A. Froot, D. Scharfstein and J. Stein

Keywords: Debt reduction; Chapter 7; Default; Debt restructuring; Borrowing and Debt;

Citation:
Froot, K. A., D. Scharfstein, and J. Stein. "LDC Debt: Forgiveness, Indexation, and Investment Incentives." Journal of Finance 44, no. 5 (December 1989): 1335–1350. (Revised from NBER Working Paper No. 2541, March 1988.)

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Article | RAND Journal of Economics |

Simultaneous Signaling to the Capital and Product Markets

David S. Scharfstein, Robert Gertner and Robert Gibbons

Keywords: Product; Capital; Markets;

Citation:
Scharfstein, David S., Robert Gertner, and Robert Gibbons. "Simultaneous Signaling to the Capital and Product Markets." RAND Journal of Economics 19, no. 2 (summer 1988): 173–190.

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Article | RAND Journal of Economics |

Product Market Competition and Managerial Slack

David S. Scharfstein

Keywords: Product; Markets; Competition; Management;

Citation:
Scharfstein, David S. "Product Market Competition and Managerial Slack." RAND Journal of Economics 19, no. 1 (spring 1988): 147–155.

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Journal Article | Review of Economic Studies |

The Disciplinary Role of Takeovers

David S. Scharfstein

Citation:
Scharfstein, David S. "The Disciplinary Role of Takeovers." Review of Economic Studies 55, no. 2 (April 1988): 185–200.

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Journal Article | Review of Economic Studies |

Testing in Models of Asymmetric Information

David S. Scharfstein and Barry Nalebuff

Citation:
Scharfstein, David S., and Barry Nalebuff. "Testing in Models of Asymmetric Information." Review of Economic Studies (April 1987): 265–277.

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Article | RAND Journal of Economics |

A Policy to Prevent Rational Test-Market Predation

David S. Scharfstein

Keywords: Policy; Markets; Behavior;

Citation:
Scharfstein, David S. "A Policy to Prevent Rational Test-Market Predation." RAND Journal of Economics (summer 1984): 229–243.

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Older Working Papers

Working Paper | 1990

Herd on the Street: Informational Inefficiencies in a Market with Short-term Speculation

Kenneth A. Froot, J. Stein and David S. Scharfstein

Citation:
Froot, Kenneth A., J. Stein, and David S. Scharfstein. "Herd on the Street: Informational Inefficiencies in a Market with Short-term Speculation." NBER Working Paper Series, No. 3250, February 1990. (Revised in Journal of Finance 47 (September 1992): 1461-1484.)

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Working Paper | 1993

The Choice Between Public and Private Debt: An Examination of Post-Deregulation Corporate Financing in Japan

David S. Scharfstein, Takeo Hoshi and Anil Kashyap

Citation:
Scharfstein, David S., Takeo Hoshi, and Anil Kashyap. "The Choice Between Public and Private Debt: An Examination of Post-Deregulation Corporate Financing in Japan." NBER Working Paper Series, No. 4421, August 1993.

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Working Paper | 1998

The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates

David S. Scharfstein

Citation:
Scharfstein, David S. "The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates." NBER Working Paper Series, No. 6352, January 1998. (under revision for Journal of Finance.)

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Working Paper | 2002

Entrepreneurship in Equilibrium

David S. Scharfstein and Denis Gromb

Citation:
Scharfstein, David S., and Denis Gromb. "Entrepreneurship in Equilibrium." NBER Working Paper Series, No. 9001, June 2002.

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Cases and Teaching Materials

Case | HBS Case Collection | 2012

Lin TV Corp

David Scharfstein, Erik Stafford and Joel Heilprin

This case considers the valuation of Lin TV, a publicly-traded company with 30 TV stations. The case highlights how a change in operating strategy can enhance the firm's value, and considers the effect of consolidation within the industry on firm value.

Keywords: valuation; Acquisitions; Synergy; broadcasting; Entertainment; Entertainment and Recreation Industry; North and Central America;

Citation:
Scharfstein, David, Erik Stafford, and Joel Heilprin. "Lin TV Corp." Harvard Business School Case 213-065, October 2012.

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Case | HBS Case Collection | 2012 (Revised from original 2010 version)

Momentive Performance Materials, Inc.

Victoria Ivashina and David S. Scharfstein

After getting close to violating its loan covenants in 2009, Momentive took a variety of actions over several months to restructure its debt. In particular, in May of 2009, Momentive had exchanged a fraction of its outstanding notes. In November of 2009, it proposed an amendment that sought to extend the maturity on the loan used to finance the Momentive buyout and allow issuance of senior secured notes. The case is set up from the perspective of a hedge fund that holds a fraction of Momentive's syndicated loan. The case serves as a vehicle for discussing contractual differences between public and private debt and challenges in its restructuring.

Keywords: Restructuring; Financial Crisis; Borrowing and Debt; Private Equity; Financing and Loans;

Citation:
Ivashina, Victoria, and David S. Scharfstein. "Momentive Performance Materials, Inc." Harvard Business School Case 210-081, February 2012. (Revised from original June 2010 version.)

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Teaching Note | HBS Case Collection | 2011

The Sale of Citigroup's Leveraged Loan Portfolio (TN)

Victoria Ivashina and David Scharfstein

Teaching Note for 209080.

Keywords: Financing and Loans; Investment Portfolio; Opportunities; Private Equity; Disruption; Credit; Markets; Negotiation Deal; Perspective; Performance Evaluation; Banking Industry; Financial Services Industry;

Citation:
Ivashina, Victoria, and David Scharfstein. "The Sale of Citigroup's Leveraged Loan Portfolio (TN)." Harvard Business School Teaching Note 212-024, September 2011.

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Case | HBS Case Collection | 2010

Restructuring CIT Group (A)

Victoria Ivashina and David S. Scharfstein

Keywords: Debt Securities; Restructuring; Financial Services Industry;

Citation:
Ivashina, Victoria, and David S. Scharfstein. "Restructuring CIT Group (A)." Harvard Business School Case 211-023, October 2010.

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Supplement | HBS Case Collection | 2010

Restructuring CIT Group (B)

Victoria Ivashina and David S. Scharfstein

Keywords: Financial Services Industry;

Citation:
Ivashina, Victoria, and David S. Scharfstein. "Restructuring CIT Group (B)." Harvard Business School Supplement 211-037, October 2010.

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Case | HBS Case Collection | 2010 (Revised from original 2008 version)

Paul Capital Partners: Secondary Limited Partnership Investing

David S. Scharfstein

This case examines the proposed purchase by Paul Capital Partners of a limited partnership (LP) interest in a private equity fund. Paul Capital has a fund dedicated to buying these "secondary" LP interests. The case is intended as a vehicle for discussing the secondary LP market as well as the valuation of LP interests.

Keywords: Capital; Investment; Private Equity; Valuation; Partners and Partnerships; Interests; Markets; Debates; Financial Services Industry;

Citation:
Scharfstein, David S. "Paul Capital Partners: Secondary Limited Partnership Investing." Harvard Business School Case 209-089, October 2010. (Revised from original December 2008 version.)

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Case | HBS Case Collection | 2010 (Revised from original 2008 version)

The Sale of Citigroup's Leveraged Loan Portfolio

Victoria Ivashina and David S. Scharfstein

This case describes the sale of Citigroup's leveraged loan portfolio in 2008 to a group of large private equity funds. The portfolio was sold at a discount given difficulties at the portfolio companies and disruptions in credit markets. The case takes the perspective of a private equity firm evaluating the deal to determine whether buying leveraged loans is a good investment opportunity.

Keywords: Restructuring; Private Equity; Insolvency and Bankruptcy; Credit Derivatives and Swaps; Financial Markets; Investment; Banking Industry; Financial Services Industry;

Citation:
Ivashina, Victoria, and David S. Scharfstein. "The Sale of Citigroup's Leveraged Loan Portfolio." Harvard Business School Case 209-080, March 2010. (Revised from original November 2008 version.)

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Background Note | HBS Case Collection | 2010 (Revised from original 2005 version)

Calculating Free Cash Flows

Robin Greenwood and David S. Scharfstein

Outlines the mechanics of calculating free cash flows from historical and proforma financial statements. Focuses on the mechanical process of transforming numbers from financial forecasts into cash flows.

Keywords: Financial Statements; Forecasting and Prediction; Cash Flow; Mathematical Methods;

Citation:
Greenwood, Robin, and David S. Scharfstein. "Calculating Free Cash Flows." Harvard Business School Background Note 206-028, February 2010. (Revised from original October 2005 version.)

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Case | HBS Case Collection | 2008 (Revised from original 2006 version)

The Howland Long-Term Opportunity Fund

Andre F. Perold and David S. Scharfstein

Melissa Howland, founder of an investment firm, must choose between two competing investments, which differ in size, maturity, and rate of return.

Keywords: Decision Choices and Conditions; Financial Instruments; Investment Return; Investment Funds; Value;

Citation:
Perold, Andre F., and David S. Scharfstein. "The Howland Long-Term Opportunity Fund." Harvard Business School Case 207-066, April 2008. (Revised from original September 2006 version.)

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Case | HBS Case Collection | 2008 (Revised from original 2006 version)

Ben Walter

Andre F. Perold and David S. Scharfstein

Ben Walter is thinking of purchasing Butler Lumber and needs to decide how he would run the business and how much to pay for it.

Keywords: Mergers and Acquisitions; Decision Choices and Conditions; Investment; Valuation;

Citation:
Perold, Andre F., and David S. Scharfstein. "Ben Walter." Harvard Business School Case 207-070, April 2008. (Revised from original October 2006 version.)

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Case | HBS Case Collection | 2007 (Revised from original 2005 version)

The Pilgrim Assurance Building

Robin Greenwood, David S. Scharfstein and Arthur I Segel

A local real estate developer has to decide how much to bid for a Boston office building in 2005.

Keywords: Buildings and Facilities; Decisions; Investment; Bids and Bidding; Real Estate Industry; Boston;

Citation:
Greenwood, Robin, David S. Scharfstein, and Arthur I Segel. "The Pilgrim Assurance Building." Harvard Business School Case 206-078, April 2007. (Revised from original December 2005 version.)

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Case | HBS Case Collection | 2006

Stedman Place: Buy or Rent?

Andre F. Perold and David S. Scharfstein

A couple has to decide whether to continue renting a townhouse or buy the one next door. Allows for a discussion of net present value, internal rate of return, and the costs and benefits of homeownership.

Keywords: Cost vs Benefits; Decisions; Asset Pricing; Investment Return; Housing; Family Ownership; Renting or Rental; Valuation;

Citation:
Perold, Andre F., and David S. Scharfstein. "Stedman Place: Buy or Rent?" Harvard Business School Case 207-063, September 2006.

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Case | HBS Case Collection | 2005 (Revised from original 2005 version)

Massachusetts General Hospital and the Enbrel Royalty

David S. Scharfstein and Darren R. Smart

Massachusetts General Hospital is considering selling its royalty interest in Enbrel, Amgen's blockbuster drug for the treatment of rheumatoid arthritis. In assessing whether to sell, and at what price, the hospital must determine its value to a potential buyer as well as its own value of the royalty income.

Keywords: Valuation; Price; Investment Return; Capital; Value; Revenue; Health Care and Treatment; Health Industry; Biotechnology Industry; Massachusetts;

Citation:
Scharfstein, David S., and Darren R. Smart. "Massachusetts General Hospital and the Enbrel Royalty." Harvard Business School Case 206-075, November 2005. (Revised from original November 2005 version.)

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Book Chapters

Chapter | The Future of Housing Finance | 2011

The Economics of Housing Finance Reform

David S. Scharfstein and Adi Sunderam

Keywords: Economics; Housing; Governing Rules, Regulations, and Reforms; Policy; Government and Politics;

Citation:
Scharfstein, David S., and Adi Sunderam. "The Economics of Housing Finance Reform." In The Future of Housing Finance, edited by Martin Neil Baily. Brookings Institution Press, 2011.

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Dictionary Entry | New Palgrave Dictionary in Money and Finance | 1992

Debt Renegotiation

David S. Scharfstein and Patrick Bolton

Keywords: Borrowing and Debt; Negotiation;

Citation:
Scharfstein, David S., and Patrick Bolton. "Debt Renegotiation." In New Palgrave Dictionary in Money and Finance. Palgrave Macmillan, 1992.

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Other Publications and Materials

Mimeo | 2013

Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates

David S. Scharfstein and Adi Sunderam

We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the effectiveness of housing as a monetary policy transmission channel varies in both the time series and the cross section. Increasing concentration by one standard deviation above the mean reduces the overall impact of a decline in MBS yields by approximately 50%.

Keywords: Mortgages; Banking Industry; United States;

Citation:
Scharfstein, David S., and Adi Sunderam. "Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates." April 2013. Mimeo.

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Government Testimony | 2012

Perspectives on Money Market Mutual Fund Reforms

David S. Scharfstein

Citation:
Scharfstein, David S. "Perspectives on Money Market Mutual Fund Reforms." Government Testimony, Washington, DC, June 2012.

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Other Unpublished Work | 2005

Venture Capital Investment Cycles: The Role of Experience and Specialization

P. Gompers, Anna R. Kovner, Josh Lerner and David S. Scharfstein

Keywords: Venture Capital;

Citation:
Gompers, P., Anna R. Kovner, Josh Lerner, and David S. Scharfstein. "Venture Capital Investment Cycles: The Role of Experience and Specialization." December 2005.

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Other Unpublished Work | 1991

Japanese Corporate Finance and Governance: Implications for the Privatization of Eastern European Economies

David S. Scharfstein

Keywords: Privatization; Corporate Governance; Developing Countries and Economies; Corporate Finance; Japan; Europe;

Citation:
Scharfstein, David S. "Japanese Corporate Finance and Governance: Implications for the Privatization of Eastern European Economies." December 1991.

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Other Unpublished Work | 1990

The High Price of Land and the Low Cost of Capital: Theory and Evidence from Japan

David S. Scharfstein, Anil Kashyap and David Weil

Keywords: Cost of Capital; Japan;

Citation:
Scharfstein, David S., Anil Kashyap, and David Weil. "The High Price of Land and the Low Cost of Capital: Theory and Evidence from Japan." August 1990.

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