Assistant Professor of Business Administration
Joan Farre-Mensa is an assistant professor of business administration in the Entrepreneurial Management Unit, where he teaches the Entrepreneurial Manager course in the MBA required curriculum.
Professor Farre-Mensa’s research interests center on entrepreneurial finance, corporate finance, and corporate governance. His most recent research analyzes the costs and benefits associated with the listing of a firm on a stock market. In particular, he has studied how the differences in disclosure requirements between public and private firms affect their optimal cash policies and the effects of short-termism on the investment decisions of public firms.
Professor Farre-Mensa earned his Ph.D. in economics at New York University. His earlier education was in his native Spain: he holds an M.Phil. in economics from Universitat Autònoma de Barcelona and a bachelor’s degree in mathematics from Universitat de Barcelona.
Comparing the Cash Policies of Public and Private Firms
I document that public U.S. firms hold twice as much cash as large privately held firms, a
surprising finding that is robust to three alternative identification strategies: matching, within-firm variation, and IV. Public firms’ greater access to capital accounts for about one-quarter of the difference. The remainder can be explained by differences in the extent to which public and private firms engage in market timing in response to misvaluation shocks. I show that the risk of misvaluation induces public firms to raise capital and accumulate cashreserves when they perceive their equity to be overvalued, resulting in greater demand for recautionary cash holdings.
Corporate cash hoarding;
We survey the literature on payout policy, with a particular emphasis on developments in the last two decades. Of the traditional motives of why firms pay out (agency, signaling, and taxes), the cross-sectional empirical evidence is most persuasive in favor of agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts are made over the last 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motives such as changes in compensation practices and management incentives are better able to explain the observed variation in payout patterns over time than the traditional motives. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm’s larger financial ecosystem, with important implications for financing, investment, and risk management.
Farre-Mensa, Joan, Roni Michaely, and Martin Schmalz. "Payout Policy."
Harvard Business School Working Paper, No. 14-096, April 2014.
Corporate Investment and Stock Market Listing: A Puzzle?
We evaluate differences in investment behavior between stock market listed and privately held firms in the U.S. using a rich new data source on private firms. Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar, matched private firms, especially in industries in which stock prices are particularly sensitive to current earnings. These differences do not appear to be due to unobserved differences between public and private firms, how we measure investment opportunities, lifecycle differences, or our matching criteria. We suggest that the patterns we document are most consistent with theoretical models emphasizing the role of managerial myopia.
Keywords: Private Ownership;
Do Measures of Financial Constraints Measure Financial Constraints?
Financial constraints are not directly observable, so empirical research relies on indirect measures. We evaluate how well five popular measures (paying dividends, having a credit rating, and the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices) identify firms that are financially constrained, using three novel tests: an exogenous increase in a firm's demand for credit, exogenous variation in the supply of bank loans, and the tendency for firms to pay out the proceeds of equity issues to their shareholders ("equity recycling"). We find that none of the five measures identifies firms that behave as if they were constrained: public firms classified as constrained have no trouble raising debt when their demand for debt increases, are unaffected by changes in the supply of bank loans, and engage in equity recycling. The point estimates are little different for supposedly constrained and unconstrained firms, even though we find important differences in their characteristics and sources of financing. On the other hand, privately held firms (particularly small ones) and public firms with below investment-grade ratings appear to be financially constrained.
Financial Services Industry;
Why Takeover Vulnerability Matters to Debtholders
Recent work documents that firms that are more vulnerable to takeover have higher borrowing costs. This paper investigates the reasons behind this stylized fact. My results show that firms with few antitakeover defenses face a higher cost of debt because lenders are concerned that takeovers may result in leverage increases. Specifically, I find that takeover vulnerability does not increase loan spreads when the loan deal contains covenants restricting leverage. In order to identify the effect of covenants on spreads, I use two instruments to control for the endogeneity of covenants, which arises from the fact that lenders are more likely to include covenants when lending to riskier firms. My first instrument exploits exogenous supply-side variation in the contracting strictness of the lead-arranger lender, induced by lender-specific factors such as the rate of past defaults suffered by the bank in unrelated loans. My second instrument makes use of the relation between syndicate size and the likelihood that a given loan includes covenants. This instrument exploits exogenous variation in the contribution of the deal to the idiosyncratic risk of the lead bank's loan portfolio. The identifying assumption is that lead banks tend to include covenants in those loans whose risk has a higher correlation with the risk of their existing portfolio, so that they can syndicate a larger share of such loans. Overall, my findings show how debt covenants can successfully resolve agency conflicts between shareholders and debtholders. In the absence of covenants, takeover defenses have opposite effects on the cost of equity and debt capital. Yet this difference disappears when debt deals contain leverage-limiting covenants.
Borrowing and Debt;
Banks and Banking;
Agreements and Arrangements;
Business and Shareholder Relations;
Conflict and Resolution;
Entrepreneurial Finance Lab: Scaling an Innovative Start-up Financing Venture
EFL provides credit-scoring services in developing countries using psychometric assessment, but the potential loss of a large customer makes them reconsider their scaling narrative.
Developing Countries and Economies;
Growth and Development Strategy;
Financial Services Industry;
Farre-Mensa, Joan, William R. Kerr, and Alexis Brownell. "Entrepreneurial Finance Lab: Scaling an Innovative Start-up Financing Venture." Harvard Business School Case 814-073, January 2014.
Non-Equity Financing for Entrepreneurial Ventures
Young, and particularly high-growth ventures often need to raise significant external finance, since their internal cash flow is usually insufficient to support the investments needed to grow. Although raising equity from venture capital or angel investors is the most well-known source of external finance for high-growth ventures, many entrepreneurs, particularly small business owners, rely on debt and other non-equity sources of capital to finance their ventures, either because equity capital is not available to them or because they want to avoid the ownership dilution and governance constraints associated with equity investments.
This note focuses on these non-equity sources of financing for entrepreneurs, paying particular attention to how the emergence of new technologies in risk assessment have expanded their availability for young firms.
Keywords: entrepreneurial finance;
Financial Services Industry;
What Do Private Firms Look Like?
Private firms in the U.S. are not subject to public reporting requirements, so relatively little is known about their characteristics and behavior—until now. This Data Appendix describes a new database on private U.S. firms, created by Sageworks Inc. in cooperation with hundreds of accounting firms. The contents of the Sageworks database mirror Compustat, the standard database for public U.S. firms. It contains balance sheet and income statement data for 95,297 private firms covering 250,507 firms-years over the period 2002 to 2007. We compare this database to the joint Compustat-CRSP database of public firms and to the Federal Reserve's 2003 National Survey of Small Business Finances.
Keywords: Data and Data Sets;