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Cesare Fracassi

Assistant Professor of Finance

 

McCombs School of Business

The University of Texas at Austin

Finance Department

2110 Speedway Stop B6600

Austin, TX, 78712

(map it)

 

E-mail: cesare.fracassi@mccombs.utexas.edu

Office: GSB 5.165

Work phone: 512-232-6843

Fax: 512-471-5073

 

Curriculum Vitae (pdf)

 

 

Research

 

Published Papers

 

·         External Networking and Internal Firm Governance  with Geoffrey Tate. The Journal of Finance, 67 Issue 1 (February) 2012 pp 153-194

 We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO-director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. We also find that firms with more CEO-director ties engage in more value-destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.

Online Appendix

 

·         Lost In Translation? The Effect of Cultural Values on Mergers Around the World with Kenneth R. Ahern and Daniele DaminelliForthcoming on the Journal of Financial Economics, 2012 and Winner of the CEG Research Prize in Corporate Finance at the Finance Down Under Conference

We find strong evidence that three key dimensions of national culture (trust, hierarchy, and individualism) affect merger volume and synergy gains.  The volume of cross-border mergers is lower when countries are more culturally distant. In addition, greater cultural distance in trust and individualism leads to lower combined announcement returns. These findings are robust to year and country-level fixed effects, time-varying country-pair and deal-level variables, as well as instrumental variables for cultural differences based on genetic and somatic differences. The results are the first large-scale evidence that cultural differences have substantial impacts on multiple aspects of cross-border mergers.

Online Appendix

 

Working Papers

  

·         Technological Specialization and Corporate Diversification [Dec 2013] with Fernando Anjos

We develop a dynamic model of diversifying mergers, with three key features: (i) synergies from combining complementary technologies are a affected by an exogenous level of technological specialization; (ii) conglomerates incur a marginal cost associated with organizational complexity; (iii) mergers are modeled as a search-and-matching process. A calibrated version of the model simultaneously matches three corporate-diversification magnitudes: the proportion of assets allocated to conglomerates; the diversification discount; and a positive association between conglomerate value and segment distance, an industry-network measure of technological complementarity. The calibrated model also shows how an increase in technological specialization can account for empirical corporate-diversification trends.

 

·         Are Credit Ratings Subjective? The Role of Credit Analysts in Determining Ratings   [Aug 2013] with Stefan Petry and Geoffrey Tate.

Credit ratings affect firms’ access to capital and investment choices. We show that the identity of the credit analysts covering a firm significantly affects the firm’s rating, comparing ratings for the same firm at the same time across agencies. Analyst effects account for 30% of the within variation in ratings. Moreover, the rating biases of analysts carry through to credit spreads on the rated firms’ outstanding debt and the terms offered on new public debt issues. As a result, firms covered by more pessimistic analysts issue less debt, lean more on cash and equity financing, and experience slower revenue growth than firms covered by optimistic analysts. We also find that the quality of ratings varies with observable analyst traits. Analysts with MBAs provide less optimistic and more accurate ratings; however, optimism increases and accuracy decreases with tenure covering the firm, particularly among information-sensitive firms.

 

·         Business Microloans for U.S. Subprime Borrowers   [Jan 2014] with Mark J. Garmaise, Shimon Kogan, and Gabriel Natividad – Revise and Resubmit at the Journal of Financial and Quantitative Analysis

We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data on startup loan applicants from a lender that employed an automated algorithm in its application review,  we implement a regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues and create more jobs. Loans are more consequential for survival among subprime business owners with more education and less managerial experience.

 

·         Shopping for Information? Diversification and the Network of Industries  [Sep 2013] with Fernando AnjosRevise and Resubmit at Management Science

We propose a view of corporate diversification as a strategy that aims to exploit internal information markets, bringing together information scattered across the economy. We test this hypothesis constructing an inter-industry network using input-output data. First, we introduce a network proxy for a conglomerate’s informational advantage relative to specialized firms, named excess centrality. Second, we show that high-excess-centrality conglomerates have greater value, even when variation in conglomerate network position is exogenously driven by changes to the overall network structure. Finally, and consistent with our informational-advantage hypothesis, we find that high-excess-centrality conglomerates produce more and better patents. Online Appendix

 

·         Corporate Finance Policies and Social Networks [Sep 2012] – Revise and Resubmit at the Journal of Financial and Quantitative Analysis 

Social network theory suggests that individuals' preferences and decisions are affected by the actions of others. Such decision externalities arise from constraints on our ability to process or obtain costly information. This paper provides evidence that managers are influenced by their social peers when making corporate finance policy decisions. We create a matrix of social ties using data on current employment, past employment, education, and other activities for key executives and directors of US companies. We find that the more social connections two companies share with each other, the more similar their levels of investment are, as are their investment changes over time. To address endogeneity concerns, we find that two companies invest less similarly when an individual connecting them dies. The results extend to other discretionary corporate finance policies. Furthermore, companies positioned more centrally in the universe of social networks invest in a less idiosyncratic way, and exhibit better economic performance.

Online Appendix

 

·         Directors Networks [Sep 2012] – with Amir Barnea, and Ilan Guedj    Revise and Resubmit at the Journal of Financial Intermediation

This paper investigates the role of director networks in firms' governance. We map the entire network of director connections (through sharing the same board) in S&P 1,500 firms, and generate centrality measures that account for each director's importance in the network. We find strong evidence that there is a negative relationship between corporate governance and directors' centrality: CEO pay is higher, CEO pay is less sensitive to firm performance, and CEO turnover is less sensitive to firm performance in firms whose directors are more central in the network. We also find that well-connected directors are more likely to be awarded more additional directorships in the future. We control for endogeneity and alternative explanations using time-varying control variables, in addition to director, CEO, and firm fixed effects. We also rule out reverse causality arguments using director retirement as an exogenous shock to a firm's position in the network. The evidence supports the social capital hypothesis, in which well-connected individuals in a network trust and help each other.

 

·         Stock Price Sensitivity to Dividend Changes [July 2008]

This paper examines the sensitivity of stock prices to dividend changes. The Dividend Signaling, Free-Cash-Flow, Maturity and Catering Hypotheses all predict an average positive (negative) reaction to announcement of a dividend increase (decrease). However, these hypotheses have different cross-sectional predictions. This paper documents that the positive stock price response to dividend increases is due primarily to the signaling of higher future earnings, to the managers catering to the time-varying premium assigned by the market to dividend paying stocks, and partially to the reduction of agency problems. By contrast, the negative price response to dividend decreases is mainly due to the transition from a mature life-cycle stage to a decline stage with higher systematic risk, as maintained by the Maturity Hypothesis.

 

 

Teaching

 

·         Valuation – MBA FIN 286 – Fall 2013/Spring 2012/Fall 2010/Spring 2010

·         Valuation – MBA FNCE 728 (Wharton) – Fall 2012

·         Financial Planning for Large Corporations – Undergraduate FIN 374C - Fall 2010