The Journal of Finance

In Search of New Foundations

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00262

Luigi Zingales

In this paper I argue that corporate finance theory, empirical research, practical applications, and policy recommendations are deeply rooted in an underlying theory of the firm. I also argue that although the existing theories have delivered very important and useful insights, they seem to be quite ineffective in helping us cope with the new type of firms that is emerging. I outline the characteristics that a new theory of the firm should satisfy and how such a theory could change the way we do corporate finance, both theoretically and empirically.

Presidential Address: Does Finance Benefit Society?

Published: 07/23/2015   |   DOI: 10.1111/jofi.12295

LUIGI ZINGALES

Academics’ view of the benefits of finance vastly exceeds societal perception. This dissonance is at least partly explained by an underappreciation by academia of how, without proper rules, finance can easily degenerate into a rent‐seeking activity. I outline what finance academics can do, from a research point of view and from an educational point of view, to promote good finance and minimize the bad.

Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00039

Luigi Zingales

This paper studies the impact that capital market imperfections have on the natural selection of the most efficient firms by estimating the effect of the prederegulation level of leverage on the survival of trucking firms after the Carter deregulation. Highly leveraged carriers are less likely to survive the deregulation shock, even after controlling for various measures of efficiency. This effect is stronger in the imperfectly competitive segment of the motor carrier industry. High debt seems to affect survival by curtailing investments and reducing the price per ton‐mile that a carrier can afford to charge after deregulation.

The Corporate Governance Role of the Media: Evidence from Russia

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01353.x

ALEXANDER DYCK, NATALYA VOLCHKOVA, LUIGI ZINGALES

We study the effect of media coverage on corporate governance by focusing on Russia in the period 1999 to 2002. We find that an investment fund's lobbying increases coverage of corporate governance violations in the Anglo‐American press. We also find that coverage in the Anglo‐American press increases the probability that a corporate governance violation is reversed. This effect is present even when we instrument coverage with an exogenous determinant, the fund's portfolio composition at the beginning of the period. The fund's strategy seems to work in part by impacting Russian companies' reputation abroad and in part by forcing regulators into action.

What Do We Know about Capital Structure? Some Evidence from International Data

Published: 12/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05184.x

RAGHURAM G. RAJAN, LUIGI ZINGALES

We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G‐7 countries. We find that factors identified by previous studies as correlated in the cross‐section with firm leverage in the United States, are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.

Who Blows the Whistle on Corporate Fraud?

Published: 11/09/2010   |   DOI: 10.1111/j.1540-6261.2010.01614.x

ALEXANDER DYCK, ADAIR MORSE, LUIGI ZINGALES

To identify the most effective mechanisms for detecting corporate fraud, we study all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but rather takes a village, including several nontraditional players (employees, media, and industry regulators). Differences in access to information, as well as monetary and reputational incentives, help to explain this pattern. In‐depth analyses suggest that reputational incentives in general are weak, except for journalists in large cases. By contrast, monetary incentives help explain employee whistleblowing.

Private Benefits of Control: An International Comparison

Published: 03/25/2004   |   DOI: 10.1111/j.1540-6261.2004.00642.x

Alexander Dyck, Luigi Zingales

We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as −4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra‐legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors.

Trusting the Stock Market

Published: 11/11/2008   |   DOI: 10.1111/j.1540-6261.2008.01408.x

LUIGI GUISO, PAOLA SAPIENZA, LUIGI ZINGALES

We study the effect that a general lack of trust can have on stock market participation. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function of the objective characteristics of the stocks and the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. In Dutch and Italian micro data, as well as in cross‐country data, we find evidence consistent with lack of trust being an important factor in explaining the limited participation puzzle.

The Cost of Diversity: The Diversification Discount and Inefficient Investment

Published: 03/31/2007   |   DOI: 10.1111/0022-1082.00200

Raghuram Rajan, Henri Servaes, Luigi Zingales

We model the distortions that internal power struggles can generate in the allocation of resources between divisions of a diversified firm. The model predicts that if divisions are similar in the level of their resources and opportunities, funds will be transferred from divisions with poor opportunities to divisions with good opportunities. When diversity in resources and opportunities increases, however, resources can flow toward the most inefficient division, leading to more inefficient investment and less valuable firms. We test these predictions on a panel of diversified U.S. firms during the period from 1980 to 1993 and find evidence consistent with them.

The Determinants of Attitudes toward Strategic Default on Mortgages

Published: 03/19/2013   |   DOI: 10.1111/jofi.12044

LUIGI GUISO, PAOLA SAPIENZA, LUIGI ZINGALES

We use survey data to measure households’ propensity to default on mortgages even if they can afford to pay them (strategic default) when the value of the mortgage exceeds the value of the house. The willingness to default increases in both the absolute and the relative size of the home‐equity shortfall. Our evidence suggests that this willingness is affected by both pecuniary and non‐pecuniary factors, such as views about fairness and morality. We also find that exposure to other people who strategically defaulted increases the propensity to default strategically because it conveys information about the probability of being sued.

Overconfidence and Preferences for Competition

Published: 02/13/2024   |   DOI: 10.1111/jofi.13314

ERNESTO REUBEN, PAOLA SAPIENZA, LUIGI ZINGALES

We study when preferences for competition are a positive economic trait among high earners and the extent to which this trait can explain the gender gap in income among a master's degree in business administration (MBAs). Consistent with the experimental evidence, preferences for competition are a positive economic trait only for individuals who are not overconfident. Preferences for competition correlate with income only at graduation when bonuses are guaranteed and not a function of performance. Overconfident competition‐loving MBAs observe lower compensation and income growth, and experience greater exit from high‐reward industries and more frequent job interruptions. Preferences for competition do not explain the gender pay gap among MBAs.

Why Do Companies Go Public? An Empirical Analysis

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.25448

Marco Pagano, Fabio Panetta, Luigi Zingales

Using a large database of private firms in Italy, we analyze the determinants of initial public offerings (IPOs) by comparing the ex ante and ex post characteristics of IPOs with those of private firms. The likelihood of an IPO is increasing in the company's size and the industry's market‐to‐book ratio. Companies appear to go public not to finance future investments and growth, but to rebalance their accounts after high investment and growth. IPOs are also followed by lower cost of credit and increased turnover in control.