Malcolm P. Baker
Robert G. Kirby Professor of Business Administration
Unit Head, Finance
Malcolm Baker is the Robert G. Kirby Professor of Business Administration at the Harvard Business School, where he is the Unit Head for finance, and the program director for corporate finance at the National Bureau of Economic Research.
His research is in the areas of behavioral finance, corporate finance, and capital markets, with a primary focus on the interactions among corporate finance, investor behavior, and inefficiency in capital markets. Professor Baker has made numerous presentations to academic and practitioner audiences. His research awards include the 2002 Brattle Prize, given annually by the American Finance Association to the best corporate finance paper in the Journal of Finance, second place for the 2012 Jensen Prize, given annually by the Journal of Financial Economics, the 2011 Sharpe Award, given annually by the Journal of Financial and Quantitative Analysis, and the 2011 and 2014 Graham and Dodd Scroll, given annually by the Financial Analysts Journal. He has served as associate editor for the Journal of Finance and the Review of Financial Studies.
Baker has taught in the first and second year of the MBA program at Harvard Business School and in several executive education programs. In 2006, he developed a new elective course in behavioral finance.
Baker received a Ph.D. in business economics from Harvard University, an M.Phil. in finance from Cambridge University, and a bachelor's degree in applied mathematics-economics from Brown University. Before beginning his doctoral studies, he was a senior associate at Charles River Associates and a member of the US Olympic rowing team.
Outside of Harvard, he serves as a director of research at Acadian Asset Management, an institutional asset management firm focusing in active global and international equity strategies, and as a board member at TAL International, a global leader in container leasing.
Bank Capital and the Low Risk Anomaly
Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks’ leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks’ low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a ten percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.
Understanding Why Low Risk Stocks Can Be Undervalued
Contrary to basic finance principles, high-beta and high-volatility stocks have long underperformed low-beta and low-volatility stocks. This anomaly may be partly explained by the fact that the typical institutional investor's mandate to beat a fixed benchmark discourages arbitrage activity in both high-alpha, low-beta stocks and low-alpha, high-beta stocks.
The Link Between Bonds and Individual Stocks
Government bonds comove more strongly with bond-like stocks: stocks of large, mature, low-volatility, profitable, dividend-paying firms that are neither high growth nor distressed. Variables derived from the yield curve that are already known to predict returns on bonds also predict returns on bond-like stocks; investor sentiment, a predictor of the cross section of stock returns, also predicts excess bond returns. These relationships remain in place even when bonds and stocks become "decoupled" at the index level. They are driven by a combination of effects including correlations between real cash flows on bonds and bond-like stocks, correlations between their risk-based return premia, and periodic flights to quality.
Behavioral Corporate Finance: A Survey
In this chapter, we survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers' biases and nonstandard preferences on their decisions. We review relevant psychology, economic theory and predictions, empirical challenges, empirical evidence, new directions such as behavioral signaling, and open questions.
Price Anchors and Mergers and Acquisitions
Prior stock price peaks of targets affect several aspects of merger and acquisition activity. Offer prices are biased toward recent peak prices although they are economically unremarkable. An offer's probability of acceptance jumps discontinuously when it exceeds a peak price. Conversely, bidder shareholders react more negatively as the offer price is influenced upward toward a peak. Merger waves occur when high returns on the market and likely targets make it easier for bidders to offer a peak price. Parties thus appear to use recent peaks as reference points or anchors to simplify the complex tasks of valuation and negotiation.