Yuhai Xuan

Associate Professor of Business Administration, Marvin Bower Fellow

Yuhai Xuan is an Associate Professor in the Finance Unit and Marvin Bower Fellow at Harvard Business School, and an Associate Editor of the Journal of Financial and Quantitative Analysis.  He currently teaches Corporate Financial Management in the second year of the MBA program and Finance for Senior Executives in the Executive Education program.  He has previously taught the required finance course in the first-year MBA program. 

Professor Xuan's research focuses on empirical corporate finance, corporate governance, and behavioral finance.  His work has been published in the Journal of Financial Economics, the Review of Financial Studies, and the Journal of Accounting Research, and has been covered in media outlets such as Bloomberg, The Economist, the Financial Times, and The Wall Street Journal.  He has been awarded the 2011 Jensen Prize (First Place Winner) for the best corporate finance paper published in the Journal of Financial Economics.  

Professor Xuan holds an A.M. and a Ph.D. in Business Economics from Harvard University.  His employers prior to graduate school include HSBC and Microsoft Corporation.

Yuhai Xuan's Home Page

Journal Articles

  1. Acquirer-Target Social Ties and Merger Outcomes

    This paper investigates the effect of social ties between acquirers and targets on merger performance. Using data on educational background and past employment, we construct a measure of the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms. We find that between-firm social ties have a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm's CEO and a larger fraction of the target firm's pre-acquisition board of directors remain on the board of the combined firm after the merger. This also holds true at the level of individual target directors. An individual target director is more likely to be retained on the post-merger board if that target director has more social connections to the acquirer's directors and senior executives. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to occur between two firms that are well-connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision making and lower value creation for shareholders overall.

    Keywords: mergers; Acquisitions; social ties; social connections; Mergers and Acquisitions; Relationships; Outcome or Result;

    Citation:

    Ishii, Joy, and Yuhai Xuan. "Acquirer-Target Social Ties and Merger Outcomes." Journal of Financial Economics 112, no. 3 (June 2014): 344–363. View Details
  2. Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt

    This paper examines the relation between a borrowing firm's ownership structure and its choice of debt source using a novel, hand-collected data set on corporate ownership, control, and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the firm's choice between bank debt and public debt. A one-standard-deviation increase in the divergence reduces the borrowing firm's reliance on bank debt financing as measured by the ratio of bank debt to total debt by approximately 23% and increases its reliance on public debt financing as measured by the ratio of public debt to total debt by approximately 18%. The effect of the control-ownership divergence on borrowing firms' debt choice is more pronounced for firms with high financial distress risk, firms that are informationally opaque, and firms that are family controlled. Moreover, this effect is weakened by the presence of multiple large owners and in countries with strong shareholder rights. Overall, our results are consistent with the hypothesis that firms controlled by large shareholders with excess control rights choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.

    Keywords: Governance; Ownership; Borrowing and Debt; Corporate Finance;

    Citation:

    Lin, Chen, Yue Ma, Paul Malatesta, and Yuhai Xuan. "Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt." Journal of Financial Economics 109, no. 2 (August 2013): 517–534. View Details
  3. The Client Is King: Do Mutual Fund Relationships Bias Analyst Recommendations?

    This paper investigates whether the business relations between mutual funds and brokerage firms influence sell-side analyst recommendations. Using a unique data set that discloses brokerage firms' commission income derived from each mutual fund client as well as the share holdings of these mutual funds, we find that an analyst's recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst's brokerage firm. The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client's portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias towards a client's existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors. Abnormal stock returns are significantly greater both for the announcement period and in the long run for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business-related analysts. In addition, we find that subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds. Mutual funds increase their holdings in a stock that receives a favorable recommendation, but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure.

    Keywords: Prejudice and Bias; Decision Choices and Conditions; Investment Funds;

    Citation:

    Firth, Michael, Chen Lin, Ping Liu, and Yuhai Xuan. "The Client Is King: Do Mutual Fund Relationships Bias Analyst Recommendations?" Journal of Accounting Research 51, no. 1 (March 2013): 165–200. View Details
  4. Corporate Ownership Structure and Bank Loan Syndicate Structure

    Using a novel data set on corporate ownership and control, we show that the divergence between the control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the concentration and composition of the firm's loan syndicate. When the control-ownership divergence is large, lead arrangers form syndicates with structures that facilitate enhanced due diligence and monitoring efforts. These syndicates tend to be relatively concentrated and composed of domestic banks that are geographically close to the borrowing firms and that have lending expertise related to the industries of the borrowers. We also examine factors that influence the relation between ownership structure and syndicate structure, including lead arranger reputation, prior lending relationship, borrowing firm informational opacity, presence of multiple large owners, laws and institutions, and financial crises.

    Keywords: Ownership; Financing and Loans; Cash Flow; Borrowing and Debt; Accounting; Crisis Management; Relationships; Law; Contracts; Banking Industry;

    Citation:

    Lin, Chen, Yue Ma, Paul Malatesta, and Yuhai Xuan. "Corporate Ownership Structure and Bank Loan Syndicate Structure." Journal of Financial Economics 104, no. 1 (April 2012): 1–22. (Lead Article.) View Details
  5. Ownership Structure and Financial Constraints: Evidence from a Structural Estimation

    This article examines the impact of the divergence between corporate insiders' control rights and cash-flow rights on firms' external finance constraints via generalized method of moments estimation of an investment Euler equation.  Using a large sample of U.S. firms during the 1994-2002 period, we find that the shadow value of external funds is significantly higher for companies with a wider insider control-ownership divergence, suggesting that companies whose corporate insiders have larger excess control rights are more financially constrained. The effect of insider excess control rights on external finance constraints is more pronounced for firms with higher degrees of informational opacity and for firms with financial misreporting, and is moderated by institutional ownership. The results suggest that the agency problems associated with the control-ownership divergence can have a real impact on corporate financial and investment outcomes.

    Keywords: Ownership; Social Enterprise; Reputation; Cash Flow; Annuities; Investment; Investment Funds; Financial Reporting; Accounting Audits; Financial Services Industry; United States;

    Citation:

    Lin, Chen, Yue Ma, and Yuhai Xuan. "Ownership Structure and Financial Constraints: Evidence from a Structural Estimation." Journal of Financial Economics 102, no. 2 (November 2011): 416–431. View Details
  6. Ownership Structure and the Cost of Corporate Borrowing

    This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996-2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner's control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.

    Keywords: Borrowing and Debt; Cash Flow; Cost; Financing and Loans; Governance Controls; Ownership Stake; Business and Shareholder Relations;

    Citation:

    Lin, Chen, Yue Ma, Paul Malatesta, and Yuhai Xuan. "Ownership Structure and the Cost of Corporate Borrowing." Journal of Financial Economics 100, no. 1 (April 2011): 1–23. (Lead Article. First Place Winner of the 2011 Jensen Prize for the Best Paper in the Areas of Corporate Finance and Organizations published in the Journal of Financial Economics.) View Details
  7. Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions

    This article investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multi-divisional firms. I find that, after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. The pattern of reverse-favoritism in capital allocation is more pronounced if the new CEO has less authority or if the unaffiliated divisions have more bargaining power. I find evidence that having a specialist CEO negatively affects segment investment efficiency. The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful divisional managers in previously unaffiliated divisions.

    Keywords: Business Divisions; Decision Choices and Conditions; Capital Budgeting; Financial Management; Managerial Roles; Resource Allocation;

    Citation:

    Xuan, Yuhai. "Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions." Review of Financial Studies 22, no. 12 (December 2009): 4919–4948. (Online Appendix.) View Details

Book Chapters

  1. The Role of Venture Capitalists in the Acquisition of Private Companies

    Keywords: Venture Capital; Acquisition; Private Ownership;

    Citation:

    Gompers, Paul A., and Yuhai Xuan. "The Role of Venture Capitalists in the Acquisition of Private Companies." In Research Handbook on International Banking and Governance, edited by James Barth, Chen Lin, and Clas Wihlborg. Cheltenham, UK: Edward Elgar Publishing, 2012. View Details

Working Papers

  1. The Contract Year Phenomenon in the Corner Office: An Analysis of Firm Behavior During CEO Contract Renewals

    This paper investigates how executive employment contracts influence corporate financial policies during the final year of the contract term, using a new, hand-collected data set of CEO employment agreements. On the one hand, the impending expiration of fixed-term employment contracts creates incentives for CEOs to engage in strategic window-dressing activities. We find that, compared to normal periods, CEOs manage earnings more aggressively when they are in the process of contract renegotiations. Correspondingly, during CEO contract renewal times, firms are more likely to report earnings that meet or narrowly beat analyst consensus forecasts. Moreover, CEOs also reduce the amount of negative firm news released during their contract negotiation years. On the other hand, we find that merger and acquisition deals announced during the contract renegotiation year yield higher announcement returns than deals announced during other periods, suggesting that the upcoming contract expiration and renewal can also have disciplinary effects on potential value-destroying behaviors of CEOs. In addition, we show that firms whose CEOs are scheduled or expected to leave their posts upon contract expiration do not experience such corporate policy changes in the contract ending year and that CEOs who engage in manipulation during contract renewal obtain better employment terms in their new contracts, in terms of contract length, severance payment, and salary and bonus. Overall, our results indicate that job uncertainty created by expiring employment contracts induces changes in managerial behaviors that have significant impacts on firm financial activities and outcomes.

    Keywords: Management Style; Contracts; Behavior; Employment;

  2. The Cost of Friendship

    We investigate how personal characteristics affect people's desire to collaborate and whether this attraction enhances or detracts from performance in venture capital. We find that venture capitalists who share the same ethnic, educational, or career background are more likely to syndicate with each other. This homophily reduces the probability of investment success, and the detrimental effect is most prominent for early-stage investments. A variety of tests show that the cost of affinity is most likely attributable to poor decision making by high-affinity syndicates after the investment is made. These results suggest that "birds-of-a-feather-flock-together" effects in collaboration can be costly.

    Keywords: Venture Capital; Partners and Partnerships; Decision Making; Identity;

    Citation:

    Gompers, Paul A., Vladimir Mukharlyamov, and Yuhai Xuan. "The Cost of Friendship." Working Paper, 2014. View Details
  3. Bridge Building in Venture Capital-Backed Acquisitions

    We study the role of common venture capital investors in alleviating asymmetric information between public acquirers and private venture capital-backed targets. We find that acquisition announcement returns are more positive for acquisitions in which both the target and the acquirer are financed by the same venture capital firm. Similarly, having a common investor increases the likelihood that a transaction will be all equity-financed and the likelihood that an acquisition will take place. Our results suggest that common venture capital investors can form a bridge between acquiring and target firms that reduces asymmetric information associated with the transaction for both parties.

    Keywords: Mergers and Acquisitions; Venture Capital; Private Equity; Knowledge Sharing; Market Transactions;

    Citation:

    Gompers, Paul A., and Yuhai Xuan. "Bridge Building in Venture Capital-Backed Acquisitions." 2009. View Details
  4. Under New Management: Equity Issues and the Attribution of Past Returns

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

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

Cases and Teaching Materials

  1. Magna International, Inc. (A)

    Magna International, Inc., a Canadian-based automotive parts manufacturer, is considering whether and how to unwind its dual-class ownership structure. A family trust controlled by the founder owns a 0.65% economic interest in the company but has 66% of the votes via a super-voting class of shares. Officers of the company are considering how to fashion a transaction that will end the family's control and win the approval of both classes of shareholders. The Magna (A) case asks the students to weigh the costs and benefits of dual-class ownership and the best way to convert to single-class. The Magna (B) case describes the proposal that Magna's board put to a shareholder vote. Students are asked to evaluate it and decide whether they would approve it.

    Keywords: Family Business; Restructuring; Cost vs Benefits; Governance Controls; Ownership Stake; Family Ownership; Auto Industry; Canada;

    Citation:

    Luehrman, Timothy A., and Yuhai Xuan. "Magna International, Inc. (A)." Harvard Business School Case 211-044, November 2010. (Revised April 2011.) View Details
  2. Magna International, Inc. (A) (CW)

    Magna International, Inc., a Canadian-based automotive parts manufacturer, is considering whether and how to unwind its dual-class ownership structure. A family trust controlled by the founder owns a 0.65% economic interest in the company but has 66% of the votes via a super-voting class of shares. Officers of the company are considering how to fashion a transaction that will end the family's control and win the approval of both classes of shareholders. The Magna (A) case asks the students to weigh the costs and benefits of dual-class ownership and the best way to convert to single-class. The Magna (B) case describes the proposal that Magna's board put to a shareholder vote. Students are asked to evaluate it and decide whether they would approve it.

    Keywords: Cost vs Benefits; Voting; Governance Controls; Market Transactions; Production; Ownership; Business and Shareholder Relations; Value Creation; Auto Industry; Manufacturing Industry; Canada;

    Citation:

    Luehrman, Timothy A., and Yuhai Xuan. "Magna International, Inc. (A) (CW)." Harvard Business School Spreadsheet Supplement 211-707, November 2010. (Revised April 2011.) View Details
  3. Magna International, Inc. (B)

    Magna International, Inc., a Canadian-based automotive parts manufacturer, is considering whether and how to unwind its dual-class ownership structure. A family trust controlled by the founder owns a 0.65% economic interest in the company but has 66% of the votes via a super-voting class of shares. Officers of the company are considering how to fashion a transaction that will end the family's control and win the approval of both classes of shareholders. The Magna (A) case asks the students to weigh the costs and benefits of dual-class ownership and the best way to convert to single-class. The Magna (B) case describes the proposal that Magna's board put to a shareholder vote. Students are asked to evaluate it and decide whether they would approve it.

    Keywords: Business and Shareholder Relations; Value Creation; Voting; Family Ownership; Cost; Cost vs Benefits; Stock Shares; Governance Controls; Governing and Advisory Boards; Manufacturing Industry; Auto Industry; Canada;

    Citation:

    Luehrman, Timothy A., and Yuhai Xuan. "Magna International, Inc. (B)." Harvard Business School Supplement 211-045, November 2010. View Details
  4. Magna International, Inc. (TN) (A) and (B)

    Teaching Note for 211044.

    Keywords: Manufacturing Industry; Auto Industry; Canada;

    Citation:

    Luehrman, Timothy A., and Yuhai Xuan. "Magna International, Inc. (TN) (A) and (B)." Harvard Business School Teaching Note 211-077, April 2011. View Details
  5. Shenzhen Development Bank

    Weijian Shan, Managing Partner of Newbridge Capital, faces a tough call in regard to his firm's investment in Shenzhen Development Bank, China's fifteenth-largest commercial bank listed on the Shenzhen Stock Exchange. Due to the aggressive lobby of the existing management at the bank, the Shenzhen government didn't receive central government's support on Newbridge's investment and had to back out of the deal with Newbridge. Weijian Shan has to make a choice between two alternatives: 1) Give up pursuing the deal given huge political risk out of his control; 2) Work out an action plan and re-negotiate the deal.

    Keywords: Mergers and Acquisitions; Private Equity; Commercial Banking; Investment; Emerging Markets; Business and Government Relations; Banking Industry; China;

    Citation:

    Jin, Li, Yuhai Xuan, and Xiaobing Bai. "Shenzhen Development Bank." Harvard Business School Case 210-020, August 2009. (Revised March 2011.) View Details
  6. Shenzhen Development Bank (CW)

    Keywords: Mergers and Acquisitions; Private Equity; Commercial Banking; Investment; Emerging Markets; Business and Government Relations; Banking Industry; China;

    Citation:

    Xuan, Yuhai. "Shenzhen Development Bank (CW)." Harvard Business School Spreadsheet Supplement 213-703, November 2012. View Details
  7. Shenzhen Development Bank (TN)

    Teaching Note for 210020.

    Keywords: Partners and Partnerships; Decisions; Investment; Commercial Banking; Growth and Development; Negotiation Deal; Labor and Management Relations; Planning; Banking Industry; Financial Services Industry; China;

    Citation:

    Jin, Li, and Yuhai Xuan. "Shenzhen Development Bank (TN)." Harvard Business School Teaching Note 211-070, March 2011. View Details