Research Interests: capital markets, consumer credit, financial intermediation
PhD, University of Chicago, 1995; BA, Yale University, 1987
Wharton: 1995-present(named Ronald O. Perelman Associate Professor in Finance, 2007; Professor, 2008)
Programmer, Trout Trading Company, 1993; Systems Consultant, Roll & Ross Asset Management, 1987-89
David Musto, Gregory Nini, Krista Schwarz (Working), Notes on Bonds: Liquidity at all Costs in the Great Recession.
Abstract: We relate market stress to asset pricing by analyzing a large and systematic discrepancy among off-the-run Treasury securities: bond prices traded as much as five percent below otherwise identical notes, orders of magnitude more than we find concurrent special repo rates to explain. The relatively low lending revenue from holding the note begs the question of why its current holders would not trade it for cheaper yet identical cash flows. The pricing discrepancy persisted for months. We find that liquidity characteristics of Treasury securities explain a large share of the Treasury pricing anomaly. We relate insurers’ transactions in Treasuries to their characteristics. We find that the most highly levered insurers and those that transact most frequently tended to demand notes over bonds during the crisis, contributing to the anomaly.
Description: Alcoa, Inc. (Alcoa), an S&P 500 Index constituent and Dow Jones Industrial Average (DJIA) component, has just announced its fourth quarter 2008 earnings. In the midst of the Global Financial Crisis, Alcoa reported a net loss of US$1.19 billion for the quarter. With aluminum prices off by 56 percent in the last five months and a sharp drop in demand from its end markets, Alcoa announced a major restructuring including a workforce reduction of 15,000 jobs. Joan Davidson, a managing director at Pinnacle Capital (a fictitious investment bank), is scheduled to meet with Alcoa management and needs to strategize to give the company her recommendations on what actions Alcoa should take. The case examines Alcoa's history, current situation, and the potential alternatives it can take. To use this case, please contact email@example.com.
Description: The case follows Elliott Management, one of the world’s largest activist investors, in its campaign in 2014 to buy out Riverbed Technology, a formerly high-flying technology firm. The campaign involves a sequence of moves by Elliott and countermoves by Riverbed. The narrative includes communications between the parties; Riverbed’s earnings announcements and other corporate actions; and the impact on Riverbed’s stock price. To use this case, please contact firstname.lastname@example.org.
Description: Alibaba Group Holding Limited (Alibaba) is finishing up its IPO roadshow. James Miller, an associate at Dragon Fund (a fictitious financial institution), is asked to prepare a recommendation on Alibaba for its upcoming Investment Committee meeting. The case examines Alibaba's history; business model; opportunity in China (and globally); governance structure; valuation (versus potential comparable companies); and the forms of securities it is offering. To use this case, please contact email@example.com.
Description: This case focuses on the strategic decision EMC made to carve out its high-growth subsidiary, VMware. The case examines some of the factors companies use to determine whether or not to carve out a subsidiary and the potential implications. It also examines the valuation impact on both EMC and VMware at IPO. To use this case, please contact firstname.lastname@example.org.
Rich Evans, Christopher Geczy, David Musto, Adam V. Reed (2009), Failure is an Option: Impediments to Short Selling and Options Prices, Review of Financial Studies, Forthcoming.
Abstract: Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. Some of the value of failing passes through to option prices: when failing is cheaper than borrowing, the relation between borrowing costs and option prices is significantly weaker. The remaining value is profit to the market maker, and its ability to profit despite the usual competition between market makers appears to result from a cost advantage of larger market makers at failing.
Abstract: Regulators express growing concern over predatory loans, which the authors take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, they identify the circumstances in which it arises both with and without competition. The authors find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. They use their model to analyze the effects of legislative interventions.
Abstract: Until recently, all Canadian mutual funds were required to disclose all their individual trades, offering a unique and ideal opportunity to measure and analyze the cost and performance of mutual funds’ trades. We find that active management delivers both cheaper trades and better subsequent performance, and that the dissipative effect of flow-driven transactions costs is primarily through forced sales. Fund size associates with both cheaper trades and better subsequent performance, and a series of trades predicts more price movement in the predicted direction, indicating the value to funds of keeping their trading anonymous.
Abstract: The standard analysis of corporate governance assumes that shareholders vote in ratios that firms choose, such as one share-one vote. However, if the cost of unbundling and trading votes is sufficiently low, then shareholders choose the ratios. We document an active market for votes within the U.S. equity loan market, where the average vote sells for zero. We hypothesize that asymmetric information motivates the vote trade and find support in the cross section. More trading occurs for higher-spread and worse-performing firms, especially when voting is close. Vote trading corresponds to support for shareholder proposals and opposition to management proposals.
Abstract: This paper takes a portfolio view of consumer credit. Default models (credit-risk scores) estimate the probability of default of individual loans. But to compute risk-adjusted returns, lenders also need to know the covariances of the returns on their loans with aggregate returns. Covariances are independently relevant for lenders who care directly about the volatility of their portfolios, e.g. because of Value-at-Risk considerations or the structure of the securitization market. Cross-sectional differences in these covariances also provide insight into the nature of the shocks hitting different types of consumers. We use a unique panel dataset of credit bureau records to measure the ‘covariance risk’ of individual consumers, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the cross-sectional distribution of credit, including the effects of credit scores. We obtain two key sets of results. First, there is significant systematic heterogeneity in covariance risk across consumers with different characteristics. Consumers with high covariance risk tend to also have low credit scores (high default probabilities). Second, the amount of credit obtained by consumers significantly increases with their credit scores, and significantly decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller in magnitude. It appears that some lenders take covariance risk into account, at least in part, in determining the amount of credit they provide.
The objective of this course is to give you a broad understanding of the framework and evolution of U.S. capital markets, the instruments that are traded, the mechanisms that facilitate their trading and issuance, and the motivations of issuers and investors across different asset classes. The course will highlight the problems that capital market participants are seeking to solve, which you can use in your post-Wharton careers to evaluate future market innovations. We will consider design, issuance, and pricing of financial instruments, the arbitrage strategies which keep their prices in-line with one another,and the associated economic and financial stability issues. We will draw from events in the aftermath of the recent financial crisis, which illustrate financing innovations and associated risks, as well as policy responses that can change the nature of these markets.
This course combines lectures and cases, and will go through actual situations where companies need to make strategic decisions on raising equity capital. We will address different phases of a company's life cycle. Through these cases, from the decision-makers perspective, we will explore the different paths that can be taken and consider issues such as investor activism, governance and regulatory and valuation impact. FNCE 383 is a half semester course offered in Q3 during the spring semester.
Integrates the work of the various courses and familiarizes the student with the tools and techniques of research.
The objective of this course is to give you a broad understanding of the instruments traded in modern financial markets, the mechanisms that facilitate their trading and issuance, as well as, the motivations of issuers and investors across different asset classes. The course will balance functional and institutional perspectives by highlighting the problems capital markets participants are seeking to solve, as well as, the existing assets and markets which have arisen to accomplish these goals. We will consider design, issuance, and pricing of financial instruments, the arbitrage strategies which keep their prices in-line with one another,and the associated economic and financial stability issues. The course is taught in lecture format, and illustrates key concepts by drawing on a collection of case studies and visits from industry experts.
This course combines lectures and cases, and will go through actual situations where companies need to make strategic decisions on raising equity capital. We will address different phases of a comany's life cycle. Through these cases, from the decision-makers perspective, we will explore the different paths that can be taken and consider issues such as investor activism, governance and regulatory and valuation impact. FNCE 883 is a half semester course offered in Q3 of the spring semester.
This course familiarizes students with financial, strategic and legal issues associated with the restructuring of financially distressed firms. The objective is to give students tools necessary to deal with the often-complex situation facing a failing firm. The participants will gain a basic understanding of the various options available for distressed firms, such as out-of-court workouts, exchange offers, prepackaged and pre-negotiated bankruptcies, distressed asset sales, 363 auctions, and Chapter 11 reorganization. We will explore the difference between economic and financial distress, and the implications for the restructuring process. Since bankruptcy provides a threat point for any distressed restructuring, the course reviews key issues of the legal framework governing bankruptcy and reorganization in the U.S. and internationally. Finally, we will consider distressed debt as an asset class and develop techniques for investing in distressed securities. The course is case based, providing ample opportunity to practice valuation of distressed companies, and hosts several guest speakers from the restructuring industry. It should be of interest for a range of careers, including private equity, investment banking, and turnaround management.
Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. At a minimum, we need a description of the methodology you intend to employ, a bibliography and description of the data that you will use as well as a list of interim deliverables and dates to ensure that you complete the project within the semester. Applications for FNCE 899 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. You must submit your Finance ISP request using the Finance Department's ISP form located at https://fnce.wharton.upenn.edu under the Course ISP section
This course provides students with an overview of the basic contributions in the modern theory of corporate finance and financial institutions. The course is methodology oriented in that students are required to master necessary technical tools for each topic. The topics covered may include capital structure, distribution policy, financial intermediation, incomplete financial contracting, initial and seasoned public offerings, market for corporate control, product market corporate finance interactions, corporate reorganization and bankruptcy, financing in imperfect markets, security design under adverse selection and moral hazard, and some selected topics.
New Wharton research examines how contracts can be structured differently when investors are trying to make money and make the world a better place.Knowledge @ Wharton - 2018/07/17