Academic journal article NBER Reporter

The Program on Corporate Finance

Academic journal article NBER Reporter

The Program on Corporate Finance

Article excerpt

Narrowly interpreted, corporate finance is the study of the investment and financing policies of corporations. Because corporations are at the center of economic activity, the causes and consequences of corporate finance--and hence the research activities of the program--touch almost every aspect of micro- and macroeconomics, allowing the center of gravity to shift from the narrow concerns of corporate managers.

The NBER Program on Corporate Finance recently completed its 25th year. In his first program report, the founding director, Robert Vishny, described corporate finance as "institutionally oriented, with research often driven by issues of current importance" and the program's empirical studies as "motivated by relevant, applied theory." (1) Back then, the takeover and restructuring wave of the late 1980s was salient; soon afterwards, in the mid-1990s, it was cross-country comparisons of legal systems, governance, enforcement, and financial development, often with implications for emerging institutions in the transitional economies of Eastern Europe and the former Soviet Union. The phenomena were studied with firm-level, market, and institutional data, and with then-novel empirical technologies. Notably, these included event studies and the quasi-experimental analysis of colonial legal origins. The applied theoretical lens was, for the most part, agency problems arising from the separation of ownership and control.

The influence of "issues of current importance" remains as apparent now as in the program's first report. The defining moment for corporate finance over the past decade has been the financial crisis of 2008. Broadly speaking, our program's research has found its greatest impact in exploring the role of credit cycles, the fragility of financial institutions, the behavior of households, and the associated macroeconomic consequences. A boom and bust in credit conditions, stretched bank balance sheets, and contagious defaults in the mortgage market were the proximate causes of the crisis, and the consequences were macroeconomic. So, credit markets, financial institutions, and household finance, including their macroeconomic and regulatory implications, are the current centers of activity among NBER researchers in corporate finance. Traditional topics of corporate investment and financing are receiving less attention. In some ways, this brings the program--which emerged from the NBER Financial Markets and Monetary Economics program, which was founded in the late 1970s and divided into Asset Pricing, Corporate Finance, and Monetary Economics in 1991--back to its roots.

New empirical tools also have emerged. Techniques have been imported from labor economics and other fields. For example, NBER researchers exploit discontinuities in policy, which generate fruitful natural experiments, and design randomized controlled trials in partnership with firms, government agencies, and nongovernmental organizations. The rising demand for empirical rigor in identifying policy-relevant causal mechanisms has meant a microempirical shift, with the study of household financial products, for example, serving as an auspicious lamppost. At the same time, structural estimation of theoretical models is often used to tease out the macroeconomic implications of microempirical insights.

The program's empirical studies are grounded in a wider range of "relevant, applied theory." The seminal work of Merton Miller and Franco Modigliani, approaching its 60th anniversary, continues to be the organizing framework for understanding the market imperfections that allow finance to create or destroy value: whether in firms, as the authors originally intended, or more broadly in households, financial institutions, and the macroeconomy. Agency and information problems remain central imperfections, with a recent focus on conflicts of interest along the chain from savers to household borrowers; so do the costs of financial distress, fire sales, and the fragility of shortterm financing, experienced on a systemic scale with the 2008 failure of Lehman Brothers. …

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