Joan Farre-Mensa

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.

Journal Articles

  1. 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;

    Citation:

    Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist. "Corporate Investment and Stock Market Listing: A Puzzle?" Review of Financial Studies (forthcoming). 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;

    Citation:

    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, forthcoming. View Details

Working Papers

  1. Financing Payouts

    Joan Farre-Mensa, Roni Michaely and Martin Schmalz

    Despite the obvious interest in payout policy, no paper to date has systematically analyzed how payouts are funded, perhaps because the answer might have appeared just too obvious: payouts are funded with free cash flow—at least over long enough time periods. In stark contrast to this commonly held view, we find that firms rely on the capital markets to finance a third of aggregate payouts, mainly with debt but also with equity. Such “financed payouts” are widespread, persistent, prevalent both among dividend-paying and repurchasing firms, and large in magnitude. Standard interpretations of agency or signaling theories are unable to explain this behavior. We argue, however, that our findings are consistent with a reinterpretation of ideas related to agency conflicts and a holistic view of corporate financial strategy that examines payout and capital structure decisions jointly.

    Keywords: Payout policy; financing decisions; debt issues; equity issues; capital structure;

    Citation:

    Farre-Mensa, Joan, Roni Michaely, and Martin Schmalz. "Financing Payouts." Harvard Business School Working Paper, No. 15-049, December 2014. View Details
  2. Comparing the Cash Policies of Public and Private Firms

    Joan Farre-Mensa

    I document that the cash-to-assets ratio of public U.S. firms is on average over ten percentage points higher than that of privately held firms. This difference is not uniform: While precautionary motives lead smaller and riskier public firms to have higher cash holdings than larger and safer ones, I find that private firms have little demand for precautionary cash, regardless of their size or risk. As a result, the cash gap between public and private firms is decreasing in firm size and increasing in firm risk. My results suggest that differences in the extent to which public and private firms are subject to misvaluation shocks and engage in market timing in response to these shocks are a key driver of public firms' higher demand for precautionary cash.

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

    Citation:

    Farre-Mensa, Joan. "Comparing the Cash Policies of Public and Private Firms." Harvard Business School Working Paper, No. 14-095, April 2014. View Details
  3. Do Measures of Financial Constraints Measure Financial Constraints?

    Joan Farre-Mensa and Alexander Ljungqvist

    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.

    Keywords: finance; Finance; Financial Services Industry;

    Citation:

    Farre-Mensa, Joan, and Alexander Ljungqvist. "Do Measures of Financial Constraints Measure Financial Constraints?" NBER Working Paper Series, No. 19551, December 2014. View Details
  4. 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. 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;

    Citation:

    Farre-Mensa, Joan. "Entrepreneurial Finance Lab: Scaling an Innovative Start-up Financing Venture." Harvard Business School Teaching Note 815-064, September 2014. View Details
  2. 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;

    Citation:

    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
  3. 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;

    Citation:

    Farre-Mensa, Joan, Ramana Nanda, and Piyush Jain. "Non-Equity Financing for Entrepreneurial Ventures." Harvard Business School Technical Note 814-005, October 2013. 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;

    Citation:

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