David S. Scharfstein

Edmund Cogswell Converse Professor of Finance and Banking

Unit: Finance

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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

  1. The Growth of 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 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.
  2. 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.
  3. 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.

  4. 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

  1. 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, 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." June 2013. Mimeo.
  2. 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.

    Keywords: banks; global banks; credit supply; dollar funding; Currency; System Shocks; Financing and Loans; Credit; Globalized Markets and Industries; Banks and Banking; Banking Industry; Europe;

    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, November 2012.)
  3. An Evaluation of Money Market Fund Reform Proposals

    U.S. money market mutual funds (MMFs) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the U.S. MMFs proved to be a source of considerable instability during the financial crisis of 2007-2009, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which we analyze in this paper. We assume that the main goal of MMF reform is safeguarding global 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 an MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating NAV, may be less effective in protecting financial stability. Our analysis sheds light on the fundamental tensions inherent in regulating the global shadow banking system.

    Keywords: Risk Management; Balance and Stability; Investment Funds;

    Citation:

    Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "An Evaluation of Money Market Fund Reform Proposals." Working Paper, March 2014.

Books

  1. The Squam Lake Report: Fixing the Financial System

    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.

Journal Articles

  1. The Growth of 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 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: Asset Management; Research; Finance; Mortgages; Financial Services Industry;

    Citation:

    Greenwood, Robin, and David S. Scharfstein. "The Growth of Finance." Journal of Economic Perspectives 27, no. 2 (Spring 2013): 3–28.
  2. How to Make Finance Work

    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: Business Ventures; Value; Competitive Advantage; Investment; Performance Evaluation; Household Characteristics; Financial Crisis; Finance; 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).
  3. Bank Lending During the Financial Crisis of 2008

    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.
  4. Loan Syndication and Credit Cycles

    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.
  5. Performance Persistence in Entrepreneurship and Venture Capital

    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).
  6. Evidence on the Dark Side of Internal Capital Markets

    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.
  7. Lowering the Cost of Bank Recapitalization

    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).
  8. Venture Capital Investment Cycles: The Impact of Public Markets

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

    Keywords: Entrepreneurship; Business Startups; Public Ownership;

    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.)
  10. Learning about Internal Capital Markets from Corporate Spinoffs

    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.
  11. Do Firm Boundaries Matter?

    Citation:

    Scharfstein, David S., and Sendhil Mullainathan. "Do Firm Boundaries Matter?" American Economic Review: Papers and Proceedings (May 2001): 195–199.
  12. The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment

    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.
  13. Corporate Finance, the Theory of the Firm, and Organizations

    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.
  14. Capital Market Imperfections and Countercyclical Markups: Theory and Evidence

    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.
  15. Optimal Debt Structure and the Number of Creditors

    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.
  16. Liquidity Constraints and the Cyclical Behavior of Markups

    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.
  17. A Framework for Risk Management

    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.)
  18. Internal versus External Capital Markets

    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.
  19. A Framework for Risk Management

    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.)
  20. Anatomy of Financial Distress: An Examination of Junk-Bond Issuers

    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.
  21. Risk Management: Coordinating Corporate Investment and Financing Policies

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

    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.)
  23. A Theory of Workouts and the Effects of Reorganization Law

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

    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.
  25. Shareholder Value Maximization and Product Market Competition

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

    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.
  27. Herd Behavior and Investment

    Keywords: Investment; Behavior;

    Citation:

    Scharfstein, David S., and Jeremy Stein. "Herd Behavior and Investment." American Economic Review 80, no. 3 (June 1990): 465–479.
  28. A Theory of Predation Based on Agency Problems in Financial Contracting

    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).
  29. LDC Debt: Forgiveness, Indexation, and Investment Incentives

    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.)
  30. Simultaneous Signaling to the Capital and Product Markets

    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.
  31. Product Market Competition and Managerial Slack

    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.
  32. The Disciplinary Role of Takeovers

    Citation:

    Scharfstein, David S. "The Disciplinary Role of Takeovers." Review of Economic Studies 55, no. 2 (April 1988): 185–200.
  33. Testing in Models of Asymmetric Information

    Citation:

    Scharfstein, David S., and Barry Nalebuff. "Testing in Models of Asymmetric Information." Review of Economic Studies (April 1987): 265–277.
  34. A Policy to Prevent Rational Test-Market Predation

    Keywords: Policy; Markets; Behavior;

    Citation:

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

Older Working Papers

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

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

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

    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.)
  4. Entrepreneurship in Equilibrium

    Citation:

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

Cases and Teaching Materials

  1. Leader Bank, N.A.

    Keywords: Banking Industry; North and Central America;

    Citation:

    Scharfstein, David, Adi Sunderam, and Hafiz Chagani. "Leader Bank, N.A." Harvard Business School Case 214-076, January 2014.
  2. The Case of the Unidentified Financial Firms

    Keywords: financial firms; bank holding companies; Banking Industry;

    Citation:

    Scharfstein, David. "The Case of the Unidentified Financial Firms." Harvard Business School Case 214-072, January 2014.
  3. Lending Club: Time to Join?

    Keywords: North and Central America;

    Citation:

    Scharfstein, David, Adi Sunderam, John Ference, and Philip Roane. "Lending Club: Time to Join?" Harvard Business School Case 214-046, January 2014.
  4. Oaktree and the Restructuring of CIT Group (A) and (B)

    Citation:

    Ivashina, Victoria, and David S. Scharfstein. "Oaktree and the Restructuring of CIT Group (A) and (B)." Harvard Business School Teaching Note 214-058, November 2013.
  5. Momentive Performance Materials, Inc.

    Citation:

    Ivashina, Victoria, and David Scharfstein. "Momentive Performance Materials, Inc." Harvard Business School Teaching Note 214-057, November 2013.
  6. Blackstone and the Sale of Citigroup's Loan Portfolio Teaching Note

    Keywords: private equity; restructuring; derivatives; bankruptcy; Credit Derivatives and Swaps; Private Equity; Restructuring; Insolvency and Bankruptcy; Banks and Banking; Banking Industry; Financial Services Industry;

    Citation:

    Ivashina, Victoria, and David Scharfstein. "Blackstone and the Sale of Citigroup's Loan Portfolio Teaching Note." Harvard Business School Teaching Note 214-040, October 2013. (Revised December 2013.)
  7. Blackstone and the Sale of Citigroup's Loan Portfolio

    The credit boom that preceded the 2007-2009 financial crisis led to several lending practices that exposed banks to large risks. In particular, when the financial crisis unraveled, there were several billion dollars' worth of leveraged buyout (LBO) loans that were meant to be syndicated but—due to full underwriting—had to be funded by the originating banks. The case protagonist is Bennett J. Goodman, a Senior Managing Director at Blackstone. Goodman evaluates the opportunity to buy a fraction of the leveraged loan portfolio being offered for sale by Citigroup. This case can be used as a vehicle for discussing details of leveraged financing. In particular, it illustrates the close connection between syndicated-lending-backed leveraged transactions and loan securitization, and provides a context for discussion of factors that led to the leveraged credit boom that ended in 2007. The case also provides in-depth details of the structure of the transaction and its underlying assets, and serves as a means for understanding and valuing alternative investment strategies pursued by private equity firms during the credit-market crisis. As a byproduct, students learn how to use credit default swaps (CDS), a market-based indicator, for valuation.

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

    Citation:

    Ivashina, Victoria, and David Scharfstein. "Blackstone and the Sale of Citigroup's Loan Portfolio." Harvard Business School Case 214-037, October 2013. (Revised November 2013.)
  8. Oaktree and the Restructuring of CIT Group (B)

    This supplement presents the actual terms of the rescue financing provided by a group of private investors to CIT. It is intended to be distributed at the end of the discussion of "Oaktree and the Restructuring of CIT Group (A)" (HBS No. 214-035) and can be used as background to reflect on the students' proposal of financing terms for the $3 billion rescue financing of CIT.

    Keywords: Private Equity; Restructuring; Financial Services Industry;

    Citation:

    Ivashina, Victoria, and David Scharfstein. "Oaktree and the Restructuring of CIT Group (B)." Harvard Business School Supplement 214-036, October 2013.
  9. Oaktree and the Restructuring of CIT Group (A)

    CIT's prepackaged bankruptcy marked the first time a major financial institution was able to successfully restructure and emerge from Chapter 11 bankruptcy, challenging conventional views that a financial firm could not survive bankruptcy proceedings as a going concern. A diverse group of private investors that had accumulated a large position in CIT in the period leading up to the restructuring played a central role in the success of this restructuring. The case protagonist is Rajath Shourie, Managing Director at Oaktree Capital Management. Shourie evaluates the opportunity to extend a $3 billion rescue credit facility to CIT, together with five other large creditors of the struggling bank. The decision takes place just one day after CIT was denied access to the Temporary Liquidity Guarantee Program (TLGP). This case provides a platform for discussing what constitutes a good attractive distressed target. (In parallel, students can gain in-depth insight into alternative financing models of corporate lenders, including banks and finance companies.) The second major component of the case concerns distressed debt investment strategies, and provides an illustration of turning an investment in public debt into a position of control over CIT's management and the restructuring process.

    Keywords: Debt Securities; Restructuring; Financial Services Industry;

    Citation:

    Ivashina, Victoria, and David Scharfstein. "Oaktree and the Restructuring of CIT Group (A)." Harvard Business School Case 214-035, October 2013.
  10. Lin TV Corp

    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.
  11. Momentive Performance Materials, Inc.

    After nearly violating its loan covenants in 2009, Momentive Performance Materials, backed by its financial sponsor Apollo Global Management, took a variety of actions to restructure its debt. The restructuring steps included an open market repurchase of publicly held notes; a notes exchange; a loan-covenant waiver; and, finally, an attempted loan amendment that sought to extend the maturity of the loan used to finance the Momentive buyout. This case allows students to see different debt-restructuring options in one setting. The case protagonist is a fund investment manager at a large hedge fund that holds 3 percent of Momentive's syndicated loan. The decision point in the case is whether the investor should vote to amend the loan. The perspective of the investor allows students to understand tensions underlying the restructuring process. The case serves as a vehicle for discussing contractual and institutional differences between public debt and syndicated loans, and challenges in the restructuring of such debt.

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

    Citation:

    Ivashina, Victoria, and David Scharfstein. "Momentive Performance Materials, Inc." Harvard Business School Case 210-081, June 2010. (Revised November 2013.)
  12. Paul Capital Partners: Secondary Limited Partnership Investing

    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, December 2008. (Revised October 2010.)
  13. Calculating Free Cash Flows

    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, October 2005. (Revised February 2010.)
  14. The Howland Long-Term Opportunity Fund

    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, September 2006. (Revised April 2008.)
  15. Ben Walter

    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, October 2006. (Revised April 2008.)
  16. The Pilgrim Assurance Building

    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, December 2005. (Revised April 2007.)
  17. Stedman Place: Buy or Rent?

    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.
  18. Massachusetts General Hospital and the Enbrel Royalty

    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 November 2005.)

Book Chapters

  1. The Economics of Housing Finance Reform

    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.
  2. Debt Renegotiation

    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.

Other Publications and Materials

  1. 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, 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." June 2013. Mimeo.
  2. Perspectives on Money Market Mutual Fund Reforms

    Citation:

    Scharfstein, David S. "Perspectives on Money Market Mutual Fund Reforms." Government Testimony, Washington, DC, June 2012.
  3. Venture Capital Investment Cycles: The Role of Experience and Specialization

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

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

    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.

    Research Summary

  1. Research

    Banking, financial distress, risk management, corporate investment, private equity.

      Contact Information

      Office: Baker Library|Bloomberg Center 239

      Email:dscharfstein@hbs.edu

      Assistant: Peggy Moreland

      Email: pmoreland@hbs.edu

      Tel: 617-495-6882