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.
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;
Comparing the Investment Behavior of Public and Private Firms
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;
What do Private Firms Look Like?
Farre-Mensa, Joan, J. Asker, and Alexander P. Ljungqvist. "What do Private Firms Look Like?" 2012. (Online Data Appendix to "Comparing the Investment Behavior of Publicly Listed and Privately Held Firms.")
Why Takeover Vulnerability Matters to Debtholders
Farre-Mensa, Joan. "Why Takeover Vulnerability Matters to Debtholders." 2012.
Comparing the Cash Policies of Public and Private Firms
Even among large U.S. firms, most choose to remain private rather than listing on a stock market. I show that an important reason for this choice is public firms' inability to disclose information selectively. This leads to a "two-audiences" problem: Disclosure reduces information asymmetries among investors but also potentially benefits product-market competitors. Being public involves a trade-off between this disclosure cost and the benefit of a lower cost of capital due to the greater liquidity with which shares can be traded on a stock market. Using a rich new dataset on private U.S. firms, I show that firms in industries with high disclosure costs and high information asymmetry are more likely to remain private while firms in industries that require a large scale to operate efficiently are more likely to be public. I then establish a new stylized fact: Public firms hold more cash than private firms, particularly when they operate in industries in which disclosing information to competitors is most costly. This fact is robust to several ways of addressing the endogeneity of the going-public decision, including matching, exploiting within-firm variation, and instrumental variables. Consistent with my model, I find that public firms hoard cash in order to mitigate the disclosure costs associated with raising capital.
Keywords: Private Sector;
Cost of Capital;
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: Financial Statements;
Data and Data Sets;
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;