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. 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.
Corporate Investment and Stock Market Listing: A Puzzle?
In joint work with John Asker 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 their investment decisions.
The Benefits of Selective Disclosure: Evidence from Private Firms
This paper explores an unexplored benefit of being privately-held: Non-SEC-filing private firms’ ability to disclose confidential information to selected investors minimizes the scope for information asymmetry between the firms and their investors. This decreases private firms’ exposure to misvaluation and leads them to hold lower levels of precautionary cash than similar-sized public firms, as private firms do not need to optimize the timing of their equity issues. Consistent with these predictions, I use a unique panel of non-SEC-filing private U.S. firms to show that the average public firm holds twice as much cash as the average private firm. This cash gap is driven by small- and medium-sized public firms, which are most equity dependent, and is larger in industries with higher exposure to misvaluation shocks.
Do Measures of Financial Constraints Measure Financial Constraints?
Financial constraints are fundamental to empirical research in finance and economics. In joint work with Alexander Ljunqvist, we propose two novel tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms classified as constrained according to five popular measures 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. We propose an alternative proxy for financial constraints, based on Merton’s (1974) distance-to-default measure, which successfully identifies firms whose behavior is consistent with being constrained.
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, in joint work with Roni Michaely and Martin Schmalz 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.