On Friday, April 19th, 2019, the UCSC Center for Analytical Finance (CAFIN) held a workshop on recent advances in theoretical corporate finance and firm risk. The objective of the workshop was to gather finance researchers with related work on how firm decisions and financial markets interact to determine optimal leverage and the maturity of debt. The meeting also benefited from the comments and suggestions of other researchers and graduate students who attended the event. The presentations provided new insights on how firms jointly choose optimal debt ratios and debt maturity, as well as how some of the anomalies observed in the data can be rationalized.
Professor Emeritus Hayne Leland, from the Haas School of Business at UC Berkeley, gave the keynote speech and showed how structural models of the firm can be used to study the choice of optimal debt ratios and maturity. Assistant Professor Alejandro Rivera, from the Naveen Jindal School of Management at UT Dallas, analyzed dynamic contracts at the firm level where the manager chooses from short-term and long-term efforts while equity-holders select optimal leverage and the default policies. Interestingly, the short-termism is often more efficient for firm management. Senior Economist Francesca Zucchi, from the Board of Governors of the Federal Reserve System, used a structural model of the firm to show how the term of the debt affects shareholder behavior, suggesting that short-term debt might provide incentives for increasing asset risk. She demonstrated a “rollover trap” effect, when the extra burden of retiring debt can lead to distress.
Associate Professors Yuri Tserlukevich and Oliver Boguth, from the W. P. Carey School of Business at Arizona State University, explained how strategic interactions among firms impact their systematic risk, showing that, in general, competition diminishes systematic risk and reduces asset pricing anomalies regarding firm size. Their work shows that the number of competitors in the industry is an insufficient, and often irrelevant, statistic. Assistant Professor Zhiyao (Nicholas) Chen, from The Chinese University of Hong Kong (CUHK) Business School, showed how two very well-known contradicting puzzles, such as the negative failure probability-return relation and the positive distress risk-return relation, can be rationalized with a structural model of the firm. Ph.D. student Patrick Weiss, from the Vienna Graduate School of Finance, and Assistant Professor Maria Chaderina, from the WU Vienna University of Economics and Business, described how the choice of debt maturity might affect asset pricing, showing that firms with longer maturity of debt have betas that co-vary more with the market price of risk. Finally, Assistant Professor Maria Bustamante, from the Smith Business School at the University of Maryland, used a real options model to characterize how vertical strategic interactions (i.e., firms with their customers and suppliers) affect asset prices.
In sum, the University and the workshop organizers succeeded in gathering a significant group of professors and graduate students working on different aspects of corporate finance policies and firm risk. The meeting produced fruitful discussions among attendees about the new results presented by the researchers, and pointed the way for future research.
