Jeremy C. Stein

Visiting Professor of Business Administration

Jeremy C. Stein is the Moise Y. Safra Professor of Economics at Harvard
University, where he teaches courses in finance in the undergraduate and PhD programs.
Before coming to Harvard in 2000, Stein was on the finance faculty of M.I.T.’s
Sloan School of Management for ten years, most recently as the J.C. Penney Professor of
Management. Prior to that, he was an assistant professor of finance at the Harvard
Business School from 1987-1990. He received his AB in economics summa cum laude
from Princeton University in 1983 and his PhD in economics from M.I.T. in 1986.


Stein’s research has covered such topics as: behavioral finance and stock-market
efficiency; corporate investment and financing decisions; risk management; capital
allocation inside firms; banking; financial regulation; and monetary policy. He is
currently a co-editor of the Quarterly Journal of Economics, was previously a co-editor of
the Journal of Economic Perspectives, and has served on the editorial boards of several
other economics and finance journals. He is a fellow of the American Academy of Arts
and Sciences, a research associate at the National Bureau of Economic Research, and a
member of the Federal Reserve Bank of New York’s Financial Advisory Roundtable. In
2008, he was president of the American Finance Association. From February-July of
2009, he served in the Obama Administration, as a senior advisor to the Treasury
Secretary and on the staff of the National Economic Council.

Journal Articles

  1. Monetary Policy and Long-Term Real Rates

    Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis point increase in the two-year nominal yield on an FOMC announcement day is associated with a 42 basis point increase in the ten-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects due to the existence of what we call "yield-oriented" investors. We find some evidence supportive of this channel.

    Citation:

    Hanson, Samuel G., and Jeremy C. Stein. "Monetary Policy and Long-Term Real Rates." Journal of Financial Economics (forthcoming). View Details
  2. A Gap-Filling Theory of Corporate Debt Maturity Choice

    We argue that time-series variation in the maturity of aggregate corporate debt issues arises because firms behave as macro liquidity providers, absorbing the large supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with relatively more short-term debt, firms fill the resulting gap by issuing more long-term debt, and vice-versa. This type of liquidity provision is undertaken more aggressively: i) in periods when the ratio of government debt to total debt is higher; and ii) by firms with stronger balance sheets. Our theory provides a new perspective on the apparent ability of firms to exploit bond-market return predictability with their financing choices.

    Keywords: Business Ventures; Decision Choices and Conditions; Borrowing and Debt; Financial Liquidity; Investment Return; Government and Politics;

    Citation:

    Greenwood, Robin, Samuel G. Hanson, and Jeremy C. Stein. "A Gap-Filling Theory of Corporate Debt Maturity Choice." Journal of Finance 65, no. 3 (June 2010): 993–1028. (Supplementary results in Internet Appendix.) View Details
  3. Corporate Financing Decisions When Investors Take the Path of Least Resistance

    We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed with an SEO. With a merger, acquirer stock is placed in the hands of investors, who, because of inertia, do not resell it all on the open market. If there is downward-sloping demand for acquirer shares, this leads to less price pressure than an SEO, and cheaper equity financing as a result. We develop a simple model to illustrate this idea, and present supporting empirical evidence. Both individual and institutional investors tend to hang on to shares granted them in mergers, with this tendency being much stronger for individuals. Consistent with the model and with this cross-sectional pattern in inertia, acquirers targeting firms with high institutional ownership experience more negative announcement effects and greater announcement volume. Moreover, the results are strongest when the overlap in target and acquirer institutional ownership is low and when the demand curve for the acquirer's shares appears to be steep.

    Keywords: Behavior; Investment; Policy; Corporate Finance;

    Citation:

    Baker, Malcolm, Joshua Coval, and Jeremy Stein. "Corporate Financing Decisions When Investors Take the Path of Least Resistance." Journal of Financial Economics 84, no. 2 (May 2007): 266–298. View Details
  4. Market Liquidity as a Sentiment Indicator

    We build a model that helps to explain why increases in liquidity-such as lower bid-ask spreads, a lower price impact of trade, or higher turnover-predict lower subsequent returns in both firm-level and aggregate data. The model features a class of irrational investors, who underreact to the information contained in order flow, thereby boosting liquidity. In the presence of short-sales constraints, high liquidity is a symptom of the fact that the market is dominated by these irrational investors, and hence is overvalued. This theory can also explain how managers might successfully time the market for seasoned equity offerings, by simply following a rule of thumb that involves issuing when the SEO market is particularly liquid. Empirically, we find that: (i) aggregate measures of equity issuance and share turnover are highly correlated; yet (ii) in a multiple regression, both have incremental predictive power for future equal-weighted market returns.

    Keywords: Markets; Financial Liquidity; Price; Trade; Sales; Equity; Information; Management Analysis, Tools, and Techniques; Accounting Industry;

    Citation:

    Baker, Malcolm, and Jeremy Stein. "Market Liquidity as a Sentiment Indicator." Journal of Financial Markets 7, no. 3 (June 2004): 271–299. View Details
  5. When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms

    We use a simple model of corporate investment to determine when investment will be sensitive to non-fundamental movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are 'equity dependent' - firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model.

    Keywords: Stocks; Price; Investment; Equity; Business Model; Forecasting and Prediction; Rank and Position; Markets;

    Citation:

    Baker, Malcolm, Jeremy Stein, and Jeffrey Wurgler. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms." Quarterly Journal of Economics 118, no. 3 (August 2003): 969–1006. View Details
  6. A New Approach to Capital Budgeting for Financial Institutions

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. A., and J. Stein. "A New Approach to Capital Budgeting for Financial Institutions." Bank of America Journal of Applied Corporate Finance 11, no. 2 (Summer 1998): 59–69. View Details
  7. Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. A., and J. Stein. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach." Journal of Financial Economics 47, no. 1 (January 1998): 55–82. (Winner of Journal of Financial Economics. Jensen Prize. First Place For the best paper published in the Journal of Financial Economics in the areas of corporate finance and organizations. Revised from NBER Working Paper No. 5403, January 1996 and HBS Working Paper 96-030, December 1995.) View Details
  8. A Framework for Risk Management

    Keywords: Framework; Risk Management;

    Citation:

    Froot, K. A., David S. Scharfstein, and J. Stein. "A Framework for Risk Management." Harvard Business Review 72, no. 6 (November–December 1994): 59–71. (Revised from "Developing a Risk Management Strategy," Harvard Business School Working Paper No. 95-021. Reprinted in Bank of America Journal of Applied Corporate Finance 7, no. 3 (fall 1994): 22-33; Marsh & McLennan Companies' Viewpoint 24 (spring 1995): 21-37; and in Corporate Risk: Strategies and Management, edited by Greg Brown and Don Chew, London: Risk Books, December 1999.) View Details
  9. A Framework for Risk Management

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K., David S. Scharfstein, and J. Stein. "A Framework for Risk Management." Harvard Business Review 72, no. 6 (November–December 1994): 59–71. (Revised from "Developing a Risk Management Strategy," Harvard Business School Working Paper No. 95-021. Reprinted in Bank of America Journal of Applied Corporate Finance 7, no. 3 (fall 1994): 22-32; Marsh & McLennan Companies' Viewpoint 24 (spring 1995): 21-37; and in Corporate Risk: Strategies and Management, edited by Greg Brown and Don Chew, London: Risk Books, December 1999.) View Details
  10. Risk Management: Coordinating Corporate Investment and Financing Policies

    Keywords: Catastrophe Risk; corporate finance; Banking and Insurance; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Cost of Capital; Asset Pricing; Insurance Industry;

    Citation:

    Froot, K. A., David S. Scharfstein, and J. Stein. "Risk Management: Coordinating Corporate Investment and Financing Policies." Journal of Finance 48, no. 5 (December 1993): 1629–1658. (Revised from NBER Working Paper No. 4084, February 1993. Reprinted in RAE-Revista de Administração de Empresas, Management Journal of Fundação Getulio Vargas (FGV-EAESP), Business School for Administration in Sao Paulo, Brazil, volume no. 48, issue no. 1 (January-March 2008): 87-118. Reprinted in Insurance and Risk Management, Volume II, Corporate Risk Management, Part I: Theory on Why and How Firms Manage Risk, Chapter 3, edited by Gregory R. Niehaus, UK: Edward Elgar Publishing Ltd. (October 2008). Also in M.J. Brennan, The Theory of Corporate Finance from The International Library of Critical Writings in Financial Economics, edited by R. Roll, 1995; and in Merton Miller and Chris Culp, eds. Corporate Hedging in Theory and Practice: Lessons from Metallgesellschaft, Risk Books, 1999.) View Details
  11. Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

    Keywords: rational expectations; Asset Pricing; Behavioral Finance;

    Citation:

    Froot, Kenneth, David S. Scharfstein, and Jeremy Stein. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation." Journal of Finance 47, no. 4 (September 1992): 1461–1484. (Revised from NBER Working Paper No. 3250, February 1990.) View Details
  12. Shareholder Trading Practices and Corporate Investment Horizons

    Keywords: institutional investing; market efficiency; behavioral finance; equities; stock market; indexing; Financial Markets; Asset Pricing;

    Citation:

    Froot, Kenneth A., André Perold, and J. Stein. "Shareholder Trading Practices and Corporate Investment Horizons." Continental Bank Journal of Applied Corporate Finance 5, no. 2 (summer 1992): 42–58. View Details
  13. Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach

    Keywords: corporate finance; Market imperfections; Foreign Direct Investment; Markets; Financial Instruments; Asset Pricing;

    Citation:

    Froot, K. A., and Jeremy Stein. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach." Quarterly Journal of Economics 106, no. 4 (November, 1991): 1191–1217. (Revised from NBER Working Paper No. 2914, March 1989.) View Details
  14. LDC Debt: Forgiveness, Indexation, and Investment Incentives

    Keywords: Debt reduction; Chapter 7; Default; Debt restructuring; Borrowing and Debt;

    Citation:

    Froot, K. A., D. Scharfstein, and J. Stein. "LDC Debt: Forgiveness, Indexation, and Investment Incentives." Journal of Finance 44, no. 5 (December 1989): 1335–1350. (Revised from NBER Working Paper No. 2541, March 1988.) View Details

Working Papers

  1. When Does the Market Matter? Stock Prices and the Investment of Equity Dependent Firms

    We use a simple model of corporate investment to determine when investment will be sensitive to non-fundamental movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are 'equity dependent' - firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model.

    Keywords: Investment; Equity; Stocks; Price; Mathematical Methods; Forecasting and Prediction;

    Citation:

    Baker, Malcolm, Jeremy Stein, and Jeffrey Wurgler. "When Does the Market Matter? Stock Prices and the Investment of Equity Dependent Firms." NBER Working Paper Series, No. 8750, December 2001. (First draft in 2001.) View Details

Cases and Teaching Materials

  1. Note on the Pricing of Mortgage-Backed Securities

    An introduction to mortgage-backed securities, prepayment risk, and their market pricing.

    Keywords: Price; Debt Securities; Mortgages; Financial Services Industry;

    Citation:

    Light, Jay O., and Jeremy C. Stein. "Note on the Pricing of Mortgage-Backed Securities." Harvard Business School Background Note 287-060, January 1987. (Revised March 1989.) View Details

Other Publications and Materials

  1. An Analysis of the Impact of 'Substantially Heightened' Capital Requirements on Large Financial Institutions

    We examine the impact of "substantially heightened" capital requirements on large financial institutions, and on their customers. Our analysis yields three main conclusions. First, the frictions associated with raising new external equity finance are likely to be greater than the ongoing costs of holding equity on the balance sheet, implying that the new requirements should be phased in gradually. Second, the long-run steady-state impact on loan rates is likely to be modest, in the range of 25 to 45 basis points for a ten percentage-point increase in the capital requirement. Third, due to the unique nature of competition in financial services, even these modest effects raise significant concerns about migration of credit-creation activity to the shadow-banking sector, and the potential for increased fragility of the overall financial system that this might bring. Thus to avoid tilting the playing field in such a way as to generate a variety of damaging unintended consequences, increased regulation of the shadowbanking sector should be seen as an important complement to the reforms that are contemplated for banks and other large financial institutions.

    Keywords: Financial Institutions; Governing Rules, Regulations, and Reforms; Capital; Equity; Financing and Loans; Credit;

    Citation:

    Kashyap, Anil, Jeremy C. Stein, and Samuel G. Hanson. "An Analysis of the Impact of 'Substantially Heightened' Capital Requirements on Large Financial Institutions." 2010. Mimeo. View Details
  2. Do Hedge Funds Profit from Mutual-Fund Distress?

    This paper explores the question of whether hedge funds engage in frontrunning strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds—those suffering large outflows of assets under management—are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advantage of this opportunity. First, in the time series, the average returns of long/short equity hedge funds are significantly higher in those months when a larger fraction of the mutual-fund sector is in distress. Second, at the individualstock level, short interest rises in advance of sales by distressed mutual funds.

    Keywords: Investment Funds; Profit; Strategy; Forecasting and Prediction; Investment Return; Opportunities; Asset Management; Sales;

    Citation:

    Chen, Joseph, Samuel G. Hanson, Harrison Hong, and Jeremy C. Stein. "Do Hedge Funds Profit from Mutual-Fund Distress?" 2008. Mimeo. View Details
  3. Corporate Financing Decisions When Investors Take the Path of Least Resistance

    We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed with an SEO. With a merger, acquirer stock is placed in the hands of investors, who, because of inertia, do not resell it all on the open market. If there is downward-sloping demand for acquirer shares, this leads to less price pressure than an SEO, and cheaper equity financing as a result. We develop a simple model to illustrate this idea, and present supporting empirical evidence. Both individual and institutional investors tend to hang on to shares granted them in mergers, with this tendency being much stronger for individuals. Consistent with the model and with this cross-sectional pattern in inertia, acquirers targeting firms with high institutional ownership experience more negative announcement effects and greater announcement volume. Moreover, the results are strongest when the overlap in target and acquirer institutional ownership is low and when the demand curve for the acquirer's shares appears to be steep.

    Keywords: Decisions; Behavior; Stocks; Mergers and Acquisitions; Policy; Investment; Financial Institutions; Equity; Corporate Finance;

    Citation:

    Baker, Malcolm, Joshua Coval, and Jeremy Stein. "Corporate Financing Decisions When Investors Take the Path of Least Resistance." NBER Working Paper Series, April 2005. (First Draft in 2004.) View Details
  4. Market Liquidity as a Sentiment Indicator

    We build a model that helps to explain why increases in liquidity—such as lower bid–ask spreads, a lower price impact of trade, or higher turnover—predict lower subsequent returns in both firm-level and aggregate data. The model features a class of irrational investors, who underreact to the information contained in order flow, thereby boosting liquidity. In the presence of short-sales constraints, high liquidity is a symptom of the fact that the market is dominated by these irrational investors, and hence is overvalued. This theory can also explain how managers might successfully time the market for seasoned equity offerings, by simply following a rule of thumb that involves issuing when the SEO market is particularly liquid. Empirically, we find that: (i) aggregate measures of equity issuance and share turnover are highly correlated; yet (ii) in a multiple regression, both have incremental predictive power for future equal-weighted market returns.

    Keywords: Price; Financial Liquidity; Trade; Valuation; Markets; Forecasting and Prediction; Equity; Stock Shares; Investment Return;

    Citation:

    Baker, Malcolm, and Jeremy Stein. "Market Liquidity as a Sentiment Indicator." NBER Working Paper Series, 2002. (First draft in 2001.) View Details