Research Interests: Asset Pricing, Corporate Investment and Financing, Quantitative Investments, Econometrics
Vito D. Gala is a Visiting Associate Professor in the Finance Department at Wharton. Prior to joining Wharton, he was in the Finance Department at the London Business School. His research focuses on the role of real and financial frictions in the determination of equilibrium asset prices and corporate policies, and their estimation in dynamic economic models. His work covers the determinants of corporate investment and financing decisions, their connections to financial markets, and to the macroeconomy. His recent papers develop new applied methods for the estimation and evaluation of asset pricing and structural corporate finance models.
Dr. Gala’s research papers have been widely presented at academic conferences and seminar series around the world. His research has been recognized with numerous research grants and awards, including the Crowell Third Prize from PanAgora Asset Management for his study on the impact of fiscal policies and political cycles on stock returns. His study on the relationship between real investment and returns has been twice finalist for the Lehman Brothers Prize for Research Excellence in Finance. His work has appeared in leading academic journals, such as the Journal of Financial Economics, and edited books, such as the Handbook of the Equity Risk Premium. Dr. Gala’s research has been featured in various media outlets including The Financial, Business Strategy Review, and The Financial Times.
Dr. Gala’s teaching experience includes several courses in the Undergraduate Program, MBA Program, Executive MBA Program, Executive Education Program, and Doctoral Program, at The University of Chicago, Booth School of Business, London Business School and The Wharton School.
Dr. Gala holds a PhD in finance and an MBA from The University of Chicago, Booth School of Business. He received an undergraduate degree in financial economics from Bocconi University. Early in his career, he was a consultant at Bain & Company and he worked in the Financial Institution Group at Credit Suisse.
Dr. Gala’s research focuses on asset pricing, corporate policies, quantitative investments and econometrics. His work shows:
i) how real and financial frictions affect equilibrium asset prices and corporate policies, and their connections to the macroeconomy;
ii) the impact of fiscal policies and political cycles on stock returns;
iii) how to use asset prices efficiently to easily estimate marginal values, and their use in explaining corporate policies and asset returns.
You can download research data including marginal values estimates here.
Vito Gala, Mean-Variance Frontier without Mean.
Abstract: Expected returns are universally considered the most important inputs for mean-variance portfolio selection, and yet, they are also the most difficult inputs to estimate. Contrary to common wisdom, I develop a new methodology to identify and estimate any mean-variance efficient portfolios including the tangency or maximum Sharpe ratio portfolio without knowledge of expected returns. Unlike existing methodologies, efficient portfolios’ weights do not depend on expected returns or any equilibrium model of expected returns. Differently from the 1/N, minimum volatility and risk parity portfolios, which also do not require estimates of expected returns, this new methodology characterizes efficient portfolios. This new representation of the mean-variance frontier without mean dominates existing ones since it allows to achieve more, more easily, and with less assumptions.
Vito Gala, Giovanni Pagliardi, Stavros Zenios, Political Stability, Economic Policy, and International Asset Returns.
Abstract: We investigate the impact of political stability and economic policy effectiveness on international financial markets. Using novel measures of political stability and effectiveness of economic policies, we document predictable variation in economic growth and asset returns across countries. Countries with higher political stability and better economic policies experience higher economic growth and stock market returns. International business cycles, countries characteristics, and standard international risk factors do not account for the pattern in returns across countries. Equity investment strategies that exploit such predictability across countries generate abnormal returns as large as 29.3% per annum. We document similar predictability also in foreign currencies and sovereign fixed income markets. Our results suggest international financial markets underreaction to the predictable effects of political stability and economic policies.
Abstract: What are the economic determinants of firms' market value? We answer this question through the lens of a generalized neoclassical model of investment with physical capital, quasi-fixed labor, and two types of intangible capital inputs. We estimate the structural model using firm-level data on U.S. publicly traded firms and use the parameter values to infer the contribution of each capital input for explaining firms' market value in the last four decades. The model performs well in explaining both cross-sectional and time-series variation of firms' market values. On average, physical capital accounts for 46% of firms' value, installed labor force accounts for 20.5%, organization capital for 23.9%, and knowledge capital accounts for the remaining 9.6%. These values vary substantially across industries and over time. We document that the importance of physical capital for firm value has decreased over time, while the importance of labor input has increased. We also find that the value of labor is more volatile and procyclical than the value of the remaining inputs. Overall, our value decomposition provides direct empirical evidence supporting models with multiple capital inputs as main sources of firm value.
Vito Gala (Working), Equilibrium Value and Size Premia.
Abstract: A general equilibrium production economy with heterogeneous firms and irreversible investment generates the value premium. Investment irreversibility prevents unprofitable value firms from optimally scaling down their capital stock. In contrast, profitable and fast growing - growth - firms can optimally use investment to provide consumption insurance. Value firms are riskier and have higher expected returns than growth firms, especially in bad times when consumption volatility is high. The value premium is larger for small stocks as small value firms are more severely affected by irreversibility. Firms' investment and capital predict the cross-section of stock returns much like book-to-market and market equity both in the model and data. The model can replicate the failure of the unconditional CAPM. Multifactor models, including the Fama and French (1993) factor model, and to a lesser extent, conditional versions of the CAPM, outperform the unconditional CAPM.
Vito Gala, Marginal Values and the Cross-Section of Stock Returns.
Vito Gala, Optimal Style Portfolios.
Vito Gala, Asset Allocation with Mismeasured Returns.
Vito Gala, Sparse Factor Portfolios.
Vito Gala (Working), Measuring Marginal q.
Abstract: Using asset prices I estimate the marginal value of capital in a dynamic stochastic economy under general assumptions about technology and preferences. The new measure of marginal q relies on the joint measurability of the value function, i.e. firm market value, and its underlying firm state variables. Unlike existing methodologies, this new measure of marginal q requires only general restrictions on the stochastic discount factor and the firm investment technology, and it uses simple linear estimation methods. Consistently with a large class of neoclassical investment models, I construct marginal q using the firm capital stock and profitability shocks. I show that this new measure of real investment opportunities is substantially different from the conventional Tobin's Q, it yields more plausible and robust estimates of capital adjustment costs, it increases the correlation with investment and the sensitivity of investment to fundamentals.
Abstract: Current methods to estimate fully specified structural models are both computationally intensive and vulnerable to specification error. This has significantly hampered their widespread use in empirical work. We show how these issues can be circumvented when the value function is observable, as is typically the case in many economic models of firm behavior. Our methodology directly estimates the shadow values of any measurable input through a simple projection approach which, unlike existing methodologies, does not require a detailed specification of the payoff function, the laws of motion for state variables or the stochastic discount factor. Direct estimation of shadow values allows us to uncover the shape of the optimal policy functions and ultimately deep structural parameters of the model. We show that this projection approach dominates existing methodologies, including the VAR-based approach, the Euler equation approach and indirect inference, since it allows to achieve more, more easily, and with less assumptions. Importantly, and unlike existing methodologies, the projection approach uncovers the true shadow values even in the presence of model misspecification.
This course provides an introduction to the theory, the methods, and the concerns of corporate finance. The concepts developed in FNCE 100 form the foundation for all elective finance courses. The main topics include: 1) the time value of money and capital budgeting techniques; 2) uncertainty and the trade-off between risk and return; 3) security market efficiency; 4) optimal capital structure, and 5) dividend policy decisions. During the Fall semester there are honors sections of FNCE 100 offered. The seats in the honors sections are awarded through an application process. Please go to: https://fnce.wharton.upenn.edu/programs/course-applications for additional information.
The objective of this course is to study the major decision-making areas of managerial finance and some selected topics in financial theory. The course reviews the theory and empirical evidence related to the investment and financing policies of the firm and attempts to develop decision-making ability in these areas. This course serves as an extension of FNCE 100 (FNCE 611). Some are as of financial management not covered in FNCE 100 are covered in FNCE 203. These may include leasing, mergers and acquisitions, corporate reorganizations, financial planning and working capital management, and some other selected topics. Other areas that are covered in FNCE 100 are covered more in depth and more rigorously in FNCE 203. These include investment decision making under uncertainty, cost of capital, capital structure, pricing of selected financial instruments and corporate liabilities, and dividend policy. During the Spring semester, Professor Opp does not allow students to take this course pass/fail.
This course is intended for students with prior knowledge of finance or with strong analytical backgrounds. Together with the pre-term preparation course (FNCE604) the foundation for subsequent courses in corporate finance, corporate valuation, investments, and financial derivatives. Its purpose is to develop a framework for analyzing a firm's investment and financial decisions. This course will start where FNCE604 ends. More precisely, it will provide an introduction to capital budgeting techniques under uncertainty, asset valuation, the operation and efficiency of capital markets, the optimal capital structure and dividend policy of the firm and options. In short, it will cover all the topics of a typical semester-long finance introductory class in six weeks. This course assumes that students are familiar with the material covered in FNCE 604. As a result, it is only available to those students who successfully passed the Finance Placement Exam at the end of the pre-term. This course is not suitable for students new to finance and with limited analytical backgrounds. This course is hard. The pace is fast and it requires a major investment of time and effort outside class.