FACULTY RESEARCH AREAS

Corporate Finance

The finance faculty members are highly respected for their innovative research in corporate finance. Most recently, they have investigated the financing and realized rates of return on corporate real assets in general, and of intellectual capital (R&D) in particular. An additional area of research is in the application of social psychology to corporate finance. Ongoing research projects include the effect of cultures on cross-border mergers, social peers on CEOs pay, familiarity on CEOs' decision to divest, and marketing financial securities. The faculty also studies how firms respond to asymmetric information and agency problems in the case of financing for large and small businesses.

Asset Pricing

The finance faculty has published numerous asset pricing studies in the field's premier journals. In one particular study, they were the first to look at the relation between return, risk, and yield using expectation data. They also had several path-breaking studies document and explore causes of the January effect, the most important stock return seasonal pattern. Two additional pioneering studies investigate time-varying risk and how it affects asset pricing, and other studies explore the emerging area of cross-autocorrelations in stock returns, or how one group of securities leads another. The finance faculty's most recent study was among the first to show the importance of liquidity for asset pricing.

Derivatives and Risk Management

Understanding the complexities of financial derivatives is of critical importance in today's economic climate. The impact of futures, options and swap contracts on corporate risk management and portfolio hedging strategies can mean the difference in protecting capital and possible bankruptcy. Finance faculty examine the impact of derivatives for portfolio performance, option pricing and the risk premiums within derivatives contracts, and interaction between options markets and equity markets. Their findings are leading to a better grasp of how derivates should be implemented in today's volatile times at the corporate- and individual-investor level.

Legal System and Corporate Finance

In order to have a well-functioning marketplace, participants must be able to rely on the enforcement of contracts through a legal process. For example, people will be unwilling to invest money in a firm unless they can rely on the information provided by management and they believe management will act in their best interests. On the other hand, the legal system can also distort the incentives of market participants. Research conducted by the finance faculty as to how the legal environment affects the functioning of markets is a valuable tool for academics, investors and policy-makers alike.

International Payment System

A country's payment system is composed of cash, checks, and debit and credit cards used for transactions at the point of sale along with electronic bill payments and direct deposit of payroll. Wire transfers are used to pay for almost all financial stock, bond, foreign exchange, derivative, and large value inter-business transactions. It is the banking system's most socially important service and can account for 1 to 2 percent of GDP. Research by finance faculty has focused on reducing payment costs by switching to electronic methods and outlining ways the risk of loss in financial transactions can be reduced on wire transfer networks.

Investor Psychology and Financial Markets

Finance faculty members are engaged in research emphasizing investor psychology in financial markets, including issues such as how to measure stock market mispricing, how effective different trading strategies are in exploiting the mispricing, how stock mispricing affects corporate financial and investment policy, how investors change their trading behaviors in response to trading outcomes, and how firms exploit market mispricing and investor psychology. Findings show stock mispricing affects not only individual firms but also the overall stock markets. Additionally, it affects not only firms' decision for equity issuance and repurchases but also how they market the issuance. A better understanding of investor psychology can lead to a deeper understanding of security returns, investor trading, and firm behaviors.

Corporate Payout Policy

Given the growth in the popularity of share repurchases, a study of corporate payout policy, dividends and share repurchases, has become very important. Research finds dividends are associated with permanent earnings, while share repurchases are associated with temporary earnings. The two are imperfect substitutes. Further, share repurchases tend to be associated with the undervaluation. Repurchasing firms that do not pay dividends tend to be smaller, less profitable, at a relatively earlier stage of financing life cycle, and experience higher profit volatility, as compared to repurchasing firms that pay dividends.