Joan Farre-Mensa

Assistant Professor of Business Administration (Leave of Absence)

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. His research is situated at the intersection of entrepreneurial and corporate finance, with a particular focus on understanding how a firm’s listing status affects its financing environment and its real and financial policies. 

Joan’s research is motivated by a number of important empirical facts. The number of listed firms in the U.S. has more than halved since 1997, driven by a marked decline in small-firm IPOs. This trend has raised considerable concern among commentators and policymakers. Implicit behind these worries is the assumption that entrepreneurs that want to go public are being held back by regulatory overreach or frictions in the capital markets that prevent them from taking their companies to the next level. Yet despite these concerns, there is relatively little academic research on the differences between public and private firms and the trade-offs associated with a public listing.

Joan’s goal is to help fill this major void in the literature. In particular, his work has identified two important advantages of being a privately held firm: private firms face no restrictions in their ability to disclose confidential information to selected investors and their investment decisions are not distorted by investors' pressures to deliver short-term results. By contrast, perhaps the most salient benefit of being a public company is that a stock market listing allows firms to sell their shares to the general public, thus giving public firms access to a deep pool of relatively low cost equity capital. Some of Joan's most recent work aims to explore this benefit, and in particular the extent to which being public eases firms’ financial constraints. 

Joan 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.

Journal Articles

  1. Do Measures of Financial Constraints Measure Financial Constraints?

    Joan Farre-Mensa and Alexander Ljungqvist

    Financial constraints are fundamental to empirical research in finance and economics. We propose two tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms typically classified as constrained do not in fact behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and they use the proceeds of equity issues to increase payouts to shareholders. Our evidence suggests that extant findings that have been attributed to constraints may instead reflect differences in the growth and financing policies of firms at different stages of their lifecycles.

    Keywords: Corporate Finance;


    Farre-Mensa, Joan, and Alexander Ljungqvist. "Do Measures of Financial Constraints Measure Financial Constraints?"Review of Financial Studies 29, no. 2 (February 2016): 271–308. View Details
  2. Corporate Investment and Stock Market Listing: A Puzzle?

    John Asker, Joan Farre-Mensa and Alexander Ljungqvist

    We investigate whether short-termism distorts the investment decisions of stock market listed firms. To do so, we compare the investment behavior of observably similar public and private firms using a new data source on private U.S. firms, assuming for identification that closely held private firms are subject to fewer short-termist pressures. Our results show that compared to private firms, public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news. These findings are consistent with the notion that short-termist pressures distort investment decisions.

    Keywords: Private Ownership; Public Ownership; Corporate Finance;


    Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist. "Corporate Investment and Stock Market Listing: A Puzzle?"Review of Financial Studies 28, no. 2 (February 2015): 342–390. View Details

Book Chapters

  1. Payout Policy

    Joan Farre-Mensa, Roni Michaely and Martin Schmalz

    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 were 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.

    Keywords: investment; finance; Investment; Financial Services Industry;


    Farre-Mensa, Joan, Roni Michaely, and Martin Schmalz. "Payout Policy." In Annual Review of Financial Economics, Volume 6, edited by Andrew W. Lo and Robert C. Merton. Palo Alto, CA: Annual Reviews, 2014. View Details

Working Papers

  1. Patent Trolls and Small Business Employment

    Ian Appel, Joan Farre-Mensa and Elena Simintzi

    We analyze how frivolous patent-infringement claims made by “patent trolls” affect small firms’ ability to create jobs, raise capital, and survive. Our identification strategy exploits the staggered passage of anti-patent-troll laws at the state level. We find that the passage of this legislation leads to a 2% increase in employment at small firms in high-tech industries, which are a frequent target of patent trolls. By contrast, the laws have no significant impact on employment at larger or non-high-tech firms. Anti-troll legislation is also associated with fewer business bankruptcies. Financing appears to be a key channel driving our findings: in states with an already established VC presence, the passage of anti-troll laws leads to a 19% increase in the number of firms receiving VC funding. Our findings suggest that measures aimed at curbing the litigation threat posed by patent trolls may play an important role in reducing both the real and financing frictions faced by small businesses.

    Keywords: employment; Patent trolls; venture capital; Patents; Employment; Venture Capital;


    Appel, Ian, Joan Farre-Mensa, and Elena Simintzi. "Patent Trolls and Small Business Employment." Harvard Business School Working Paper, No. 17-072, February 2017. View Details
  2. What Is a Patent Worth? Evidence from the U.S. Patent 'Lottery'

    Joan Farre-Mensa, Deepak Hegde and Alexander Ljungqvist

    We provide evidence on the value of patents to start-ups by leveraging the random assignment of applications to examiners with different propensities to grant patents. Using unique data on all first-time applications filed at the U.S. Patent Office since 2001, we find that start-ups that win the patent “lottery” by drawing lenient examiners have, on average, 55% higher employment growth and 80% higher sales growth five years later. Patent winners also pursue more, and higher quality, follow-on innovation. Winning a first patent boosts a start-up’s subsequent growth and innovation by facilitating access to funding from VCs, banks, and public investors.

    Keywords: Patents; Business Startups; Innovation and Invention;


    Farre-Mensa, Joan, Deepak Hegde, and Alexander Ljungqvist. "What Is a Patent Worth? Evidence from the U.S. Patent 'Lottery'." NBER Working Paper Series, No. 23268, March 2017. (Previous version circulated under the title “The Bright Side of Patents”.) View Details
  3. Financing Payouts

    Joan Farre-Mensa, Roni Michaely and Martin Schmalz

    We study the extent to which firms rely on the capital markets to fund their payouts. We find that 42% of firms that pay out capital also initiate debt or equity issues in the same year, resulting in 32% of aggregate payouts being externally financed. Most firms with simultaneous payouts and security issues do not generate enough operating cash flow to fund both their investment and payouts without the proceeds of these issues. Firms devote more external capital to finance their share repurchases than to avoid regular dividend cuts. Debt is the main source of capital used to externally finance payouts, particularly when credit market conditions are favorable. Firms’ desire to jointly manage their capital structure and liquidity policies—for tax or agency reasons—appears to be a key driver of their decision to simultaneously raise and pay out capital.

    Keywords: Payout policy; financing decisions; debt issues; equity issues; capital structure; Capital Structure; Decision Making; Financing and Loans; Corporate Finance;


    Farre-Mensa, Joan, Roni Michaely, and Martin Schmalz. "Financing Payouts." Harvard Business School Working Paper, No. 15-049, December 2014. (Revised December 2016.) View Details
  4. The Benefits of Selective Disclosure: Evidence from Private Firms

    Joan Farre-Mensa

    Private firms’ ability to communicate confidentially with selected investors implies that valuation disagreements between firms and investors are larger at public firms than at private ones. Consistent with the notion that misvaluation concerns lead public firms to hoard cash to be able to optimize the timing of their equity issues, I show that small and medium public firms hold substantially more cash than similar-sized private ones. This difference is driven by public firms with high misevaluation exposure, which use their cash to avoid raising equity when they are hit by a cash flow shock and their equity is likely undervalued.

    Keywords: finance; equity; Private companies; Corporate cash; Precautionary motives; Market timing; Share issuance; IPOs; Selective disclosure; Private Ownership; Cash; Market Timing; Corporate Finance; Public Ownership; Corporate Disclosure; United States;


    Farre-Mensa, Joan. "The Benefits of Selective Disclosure: Evidence from Private Firms." Harvard Business School Working Paper, No. 14-095, April 2014. (Revised March 2017.) View Details
  5. Why Takeover Vulnerability Matters to Debtholders

    Joan Farre-Mensa

    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.

    Keywords: Acquisition; Borrowing and Debt; Cost; Equity; Banks and Banking; Investment Portfolio; Risk Management; Agreements and Arrangements; Business and Shareholder Relations; Conflict and Resolution;

Cases and Teaching Materials

  1. Brentwood Associates: Exiting Zoës Kitchen

    Joan Farre-Mensa and Stephanie Siu

    The case discusses the trade-offs associated with the different exit options that private equity firm Brentwood Associates contemplated for its investment in Zoës Kitchen during the summer of 2013: an IPO, a sale to a strategic or financial acquirer, or waiting a few more years before exiting the investment.

    Keywords: entrepreneurship; finance; Entrepreneurship; Food and Beverage Industry; California;


    Farre-Mensa, Joan, and Stephanie Siu. "Brentwood Associates: Exiting Zoës Kitchen." Harvard Business School Case 815-102, January 2015. View Details
  2. Entrepreneurial Finance Lab: Scaling an Innovative Start-up Financing Venture

    Joan Farre-Mensa

    The Entrepreneurial Finance Lab (EFL) is a financial technology start-up that has developed a new tool that uses psychometric tests to aid banks in developing markets with credit scoring of business loan applicants. EFL's ultimate goal is to solve the financing gap problem faced by small- and medium-size enterprises (SMEs) in the developing world. While plenty of opportunities still exist for expansion into new countries and even into new markets such as consumer lending, EFL has just discovered that LAB, which is still the company's largest customer, is unlikely to renew its contract. EFL now needs to decide whether to continue its expansion or retrench and re-evaluate its business model.

    Keywords: entrepreneurial finance; Entrepreneurship; Financial Services Industry;


    Farre-Mensa, Joan. "Entrepreneurial Finance Lab: Scaling an Innovative Start-up Financing Venture." Harvard Business School Teaching Note 815-064, September 2014. View Details
  3. Entrepreneurial Finance Lab: Scaling an Innovative Start-up Financing Venture

    Joan Farre-Mensa, William R. Kerr and Alexis Brownell

    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.

    Keywords: entrepreneurship; finance; developing countries; lending; psychometrics; scaling; Entrepreneurship; Credit; Developing Countries and Economies; Growth and Development Strategy; Financial Services Industry; Banking Industry; Africa; Latin America;


    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. View Details
  4. Non-Equity Financing for Entrepreneurial Ventures

    Joan Farre-Mensa, Ramana Nanda and Piyush Jain

    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; finance; Entrepreneurship; Finance; Financial Services Industry;


    Farre-Mensa, Joan, Ramana Nanda, and Piyush Jain. "Non-Equity Financing for Entrepreneurial Ventures." Harvard Business School Technical Note 814-005, October 2013. (Revised July 2015.) View Details

Other Publications and Materials

  1. What Do Private Firms Look Like?

    John Asker, Joan Farre-Mensa and Alexander Ljungqvist

    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; Behavior; Public Sector; Corporate Disclosure; Private Sector; Financial Statements; United States;


    Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist. "What Do Private Firms Look Like?" 2011. View Details