The Journal of Finance

The WACC Fallacy: The Real Effects of Using a Unique Discount Rate

Published: 02/06/2015   |   DOI: 10.1111/jofi.12250

PHILIPP KRÜGER, AUGUSTIN LANDIER, DAVID THESMAR

In this paper, we test whether firms properly adjust for risk in their capital budgeting decisions. If managers use a single discount rate within firms, we expect that conglomerates underinvest (overinvest) in relatively safe (risky) divisions. We measure division relative risk as the difference between the division's asset beta and a firm‐wide beta. We establish a robust and significant positive relationship between division‐level investment and division relative risk. Next, we measure the value loss due to this behavior in the context of acquisitions. When the bidder's beta is lower than that of the target, announcement returns are significantly lower.

Wholesale Funding Dry‐Ups

Published: 10/10/2017   |   DOI: 10.1111/jofi.12592

CHRISTOPHE PÉRIGNON, DAVID THESMAR, GUILLAUME VUILLEMEY

We empirically explore the fragility of wholesale funding of banks, using transaction‐level data on short‐term, unsecured certificates of deposit in the European market. We do not observe a market‐wide freeze during the 2008 to 2014 period. Yet, many banks suddenly experience funding dry‐ups. Dry‐ups predict, but do not cause, future deterioration in bank performance. Furthermore, during periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. We therefore fail to find evidence consistent with adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders.

Individual Investors and Volatility

Published: 07/19/2011   |   DOI: 10.1111/j.1540-6261.2011.01668.x

THIERRY FOUCAULT, DAVID SRAER, DAVID J. THESMAR

We show that retail trading activity has a positive effect on the volatility of stock returns, which suggests that retail investors behave as noise traders. To identify this effect, we use a reform of the French stock market that raises the relative cost of speculative trading for retail investors. The daily return volatility of the stocks affected by the reform falls by 20 basis points (a quarter of the sample standard deviation of the return volatility) relative to other stocks. For affected stocks, we also find a significant decrease in the magnitude of return reversals and the price impact of trades.

Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01218.x

MARIANNE BERTRAND, ANTOINETTE SCHOAR, DAVID THESMAR

We investigate how the deregulation of the French banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets. Following deregulation, banks are less willing to bail out poorly performing firms and firms in the more bank‐dependent sectors are more likely to undertake restructuring activities. At the industry level, we observe an increase in asset and job reallocation, an improvement in allocative efficiency across firms, and a decline in concentration. Overall, these findings support the view that a more efficient banking sector helps foster a Schumpeterian process of “creative destruction.”

Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France

Published: 01/22/2020   |   DOI: 10.1111/jofi.12880

JOHAN HOMBERT, ANTOINETTE SCHOAR, DAVID SRAER, DAVID THESMAR

We evaluate the effect of downside insurance on self‐employment. We exploit a large‐scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one‐for‐one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.

Housing Collateral and Entrepreneurship

Published: 09/21/2016   |   DOI: 10.1111/jofi.12468

MARTIN C. SCHMALZ, DAVID A. SRAER, DAVID THESMAR

We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross‐sectional variation in local house‐price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.

Sticky Expectations and the Profitability Anomaly

Published: 10/07/2018   |   DOI: 10.1111/jofi.12734

JEAN‐PHILIPPE BOUCHAUD, PHILIPP KRÜGER, AUGUSTIN LANDIER, DAVID THESMAR

We propose a theory of the “profitability” anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional model predictions: (1) analysts are on average too pessimistic regarding the future profits of high‐profit firms, (2) the profitability anomaly is stronger for stocks that are followed by stickier analysts, and (3) the profitability anomaly is stronger for stocks with more persistent profits.

Quantifying Reduced‐Form Evidence on Collateral Constraints

Published: 05/25/2022   |   DOI: 10.1111/jofi.13158

SYLVAIN CATHERINE, THOMAS CHANEY, ZONGBO HUANG, DAVID SRAER, DAVID THESMAR

This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic investment model with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced‐form coefficient from the recent corporate finance literature that connects exogenous debt capacity shocks to corporate investment. Relative to a frictionless benchmark, collateral constraints induce losses of 7.1% for output and 1.4% for total factor productivity (TFP) (misallocation). We show these estimated losses tend to be more robust to misspecification than estimates obtained by targeting leverage.