Faculty & Research

Raghuram G. Rajan

Distinguished Service Professor of Finance

Phone :
1-773-702-4437
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Raghuram Rajan assumed charge as the 23rd Governor of the Reserve Bank of India on September 4th 2013. Rajan is on leave from the University of Chicago, where he is the Distinguished Service Professor of Finance at the Booth School. Between 2003 and 2006, Dr. Rajan was the Chief Economist and Director of Research at the International Monetary Fund.

Dr. Rajan’s research interests are in banking, corporate finance, and economic development, especially the role finance plays in it. He co-authored Saving Capitalism from the Capitalists with Luigi Zingales in 2003. He then wrote Fault Lines: How Hidden Fractures Still Threaten the World Economy, for which he was awarded the Financial Times-Goldman Sachs prize for best business book in 2010.

Dr. Rajan is a member of the Group of Thirty. He was the President of the American Finance Association in 2011 and is a member of the American Academy of Arts and Sciences. In January 2003, the American Finance Association awarded Dr. Rajan the inaugural Fischer Black Prize for the best finance researcher under the age of 40. The other awards he has received include the global Indian of the year award from NASSCOM in 2011, the Infosys prize for the Economic Sciences in 2012, and the Center for Financial Studies-Deutsche Bank Prize for Financial Economics in 2013.

 

Other Interests

Tennis, squash, history, Indian politics.

 

Research Activities

Corporate finance; theory of organizations; financial intermediation and regulation.

“The Corporation in Finance” Journal of Finance (forthcoming).

With Douglas Diamond, “Illiquid Banks, Financial Stability, and Interest Rate Policy,” Journal of Political Economy (forthcoming).

With Leora Klapper and Luc Laeven, “Trade Credit Contracts,” Review of Financial Studies (Mar 2012).

For a listing of research publications please visit ’s university library listing page.

New: The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 19
Date Posted: Dec  30, 2012
Does credit availability exacerbate asset price inflation? What channels could it work through? What are the long run consequences? In this paper we address these questions by examining the farm land price boom (and bust) in the United States that preceded the Great Depression. We find that credit availability likely had a direct effect on inflating land prices. Credit availability may have also amplified the relationship between the perceived improvement in fundamentals and land prices. When th

New: Constituencies and Legislation: The Fight Over the McFadden Act of 1927
Date Posted: Dec  30, 2012
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the act therefore could reflect the strengt

REVISION: Sovereign Debt, Government Myopia, and the Financial Sector
Date Posted: Apr  30, 2012
What determines the sustainability of sovereign debt? In this paper, we develop a model where myopic governments seek electoral popularity bu tcan nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when they become rich because of the adverse consequences to the domestic financial sector. Interestingly, the more myopic a government, thegreater the advant

REVISION: The Corporation in Finance
Date Posted: Mar  23, 2012
The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will ma

REVISION: Constituencies and Legislation: The Fight Over the McFadden Act of 1927
Date Posted: Mar  23, 2012
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the act therefore could reflect the strengt

New: Failed States, Vicious Cycles, and a Proposal
Date Posted: Apr  27, 2011
Rajan examines the problems of failed states, including the repeated return to power of former warlords, which he argues causes institutions to become weaker and people to get poorer. He notes that economic power through property holdings or human capital gives people the means to hold their leaders accountable. In the absence of such distributed power, dictators reign. Rajan argues that in failed states, economic growth leading to empowered citizenry is more likely if a neutral party presides.

New: Income Inequality and the Financial Crisis
Date Posted: Dec  01, 2010
At this year’s conference two panel discussions have been organized to address the most recent financial crisis and the associated policy implications. We recommend that you highlight your program schedule to ensure your participation in these engaging panel sessions.

New: Video: Frontiers of Research on Financial Institutions - Featured Panel
Date Posted: Oct  18, 2010
The current crisis has underlined the crucial importance of this area. Leading researchers in the field Maureen O'Hara, Kose John, Raghuram Rajan, and Anthony Saunders discuss how they approach research in this volatile area.

REVISION: The Internal Governance of Firms
Date Posted: Aug  09, 2010
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-i

REVISION: The Internal Governance of Firms
Date Posted: Aug  09, 2010
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-i

New: Controlled Capital Account Liberalization: A Propasal
Date Posted: Jul  29, 2010
In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportun

New: Trade Credit Contracts
Date Posted: May  25, 2010
This paper provides new evidence on the unique role of trade credit and contracting terms as a way for both sellers and buyers to mange business risk. We use a novel and unique dataset on almost 30,000 supplier contracts for 56 large buyers and over 24,000 suppliers in Europe and North America. Our sample of buyers and suppliers include firms of varying size, investment grade, and sectors. We find evidence in support of four important, and not mutually exclusive, reasons for trade credit: 1) A

New: Fear of Fire Sales and the Credit Freeze
Date Posted: May  05, 2010
Is there any need to “clean” up a banking system in the midst of a crisis, by closing or recapitalizing weak banks and taking bad assets off bank balance sheets, or can one wait till the crisis is over? We argue that an “overhang” of impaired banks that may be forced to sell assets soon can reduce the current price of illiquid assets sufficiently that weak banks have no interest in selling them. Anticipating a potential future fire sale, cash rich buyers have high expected returns to holding cas

New: Aid, Dutch Disease and Manufacturing Growth
Date Posted: Jan  26, 2010
We examine the effects of aid on the growth of manufacturing, using a methodology that exploits the variation within countries and across manufacturing sectors, and corrects for possible reverse causality. We find that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of exportable industries. We provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows.

New: The Internal Governance of Firms
Date Posted: Dec  20, 2009
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. Internal governance works best when both top management and subordinates are important in generating cash flow. External governance, even if crude and uninformed, can complement internal governance a

The Emergence of Strong Property Rights: Speculation from History
Date Posted: Oct  08, 2009
How did citizens acquire rights protecting their property from the depredations of the government? In this paper, we argue that one important factor strengthening respect for property is how it is distributed. When there is some specificity associated with property, and property is held by those who are most productive, the distribution of property becomes relatively easy to defend. By contrast, when property is owned by those who get rents simply by virtue of ownership, the distribution of prop

New: The Credit Crisis: Conjectures About Causes and Remedies
Date Posted: Sep  27, 2009
What caused the financial crisis that is sweeping across the world? What keeps asset prices and lending depressed? What can be done to remedy matters? While it is too early to arrive at definite answers to these questions, it is certainly time to offer informed conjectures, and these are the focus of this paper.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at New: Illiquidity and Interest Rate Policy
Date Posted: Aug  18, 2009
The cheapest way for banks to finance long term illiquid projects is typically to borrow short term from households. But when household needs for funds are high, interest rates will rise sharply, debtors will have to shut down illiquid projects, and in extremis, will face more damaging runs. Authorities may want to push down interest rates to maintain economic activity in the face of such illiquidity, but intervention may not always be feasible, and when feasible, could encourage banks to increa

New: Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th ...
Date Posted: Jul  13, 2009
Economists have argued that a high concentration of land holdings in a country can create powerful interest groups that retard the creation of economic institutions, and thus hold back economic development. Could these arguments apply beyond underdeveloped countries with backward political institutions? We find that in the early 20th century, the distribution of land in the United States is correlated with the extent of banking development. Correcting for state effects, counties with very concen

New: Fear of Fire Sales and the Credit Freeze
Date Posted: Jun  13, 2009
In early 2009, the supply of credit in industrial countries appeared to decline. Could this be because bank balance sheets were “clogged� with illiquid securities? If so, why did banks not attempt to sell them? We argue that an “overhang� of impaired banks that may be forced to sell soon can reduce the current price of illiquid securities sufficiently that banks have no interest in selling. This creates high expected returns to holding cash for potential buyers and an aversion to making

New: The Internal Governance of Firms
Date Posted: Apr  07, 2009
We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. We find that internal governance can mitigate agency problems and ensure firms have substantial value, even without any external governance. Internal governance seems to work best when both top management and subordinates are important to value creation. We then allow for governance provided by external financiers and show that external governance, eve

New: The Contributions of Stewart Myers to the Theory and Practice of Corporate Finance
Date Posted: Feb  19, 2009
These contributions are seen as falling into three main categories: In a 40-plus year career notable for path-breaking work on capital structure and innovations in capital budgeting and valuation, MIT finance professor Stewart Myers has had a remarkable influence on both the theory and practice of corporate finance. In this article, two of his former students, a colleague, and a co-author offer a brief survey of Professor Myers's accomplishments, along with an assessment of their relevance for t

New: Landed Interests and Financial Underdevelopment in the United States
Date Posted: Oct  02, 2008
Landed elites in the United States in the early decades of the twentieth century played a significant role in restricting the development of finance. States that had higher land concentration passed more restrictive banking legislation. At the county level, counties with very concentrated land holdings tended to have disproportionately fewer banks per capita. Banks were especially scarce both when landed elites' incentive to suppress finance, as well as their ability to exercise local influence,

Banks and Markets: The Changing Character of European Finance
Date Posted: Sep  18, 2008
In the last two decades the European financial markets have become more market oriented. We analyze the economic and political forces that have triggered these changes as well as their likely welfare implications. We also try to assess whether this trend will continue. Based on our analysis, we conjecture that even if Europe might benefit from a continuation of the trend, in the near future political support for it is likely to become much weaker. Furthermore, without serious reforms the tre

New: Landed Interests and Financial Underdevelopment in the United States
Date Posted: Sep  11, 2008
Landed elites in the United States in the early decades of the twentieth century played a significant role in restricting the development of finance. States that had higher land concentration passed more restrictive banking legislation. At the county level, counties with very concentrated land holdings tended to have disproportionately fewer banks per capita. Banks were especially scarce both when landed elites' incentive to suppress finance, as well as their ability to exercise local influence

New: A Pragmatic Approach to Capital Account Liberalization
Date Posted: Jun  10, 2008
Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process.

New: A Pragmatic Approach to Capital Account Liberalization
Date Posted: May  23, 2008
Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process.

Power in a Theory of the Firm
Date Posted: Apr  22, 2008
What determines the boundaries of a firm? Is a firm defined solely by the ownership of physical assets as suggested by the property rights theory? This paper presents a theory of the firm based on the well-known idea that the firm improves over the market because it uses ex ante mechanisms to enhance specific investments. Maintaining the contractability assumptions of the property rights view, however, we identify not one but two such mechanisms. One is, of course, the ownership of property

What Do We Know about Capital Structure? Some Evidence From International Data
Date Posted: Apr  22, 2008
We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that the factors identified by previous studies as important in determining the cross-section of capital structure in the US, affect firm leverage in other countries as well. However, a deeper examination of the US and foreign evidence suggests that the theor

The Cost of Diversity: The Diversification Discount and Inefficient Investment
Date Posted: Apr  22, 2008
In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the d

The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms
Date Posted: Apr  22, 2008
In the formative stages of their businesses, entrepreneurs have to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur's response to this problem determines the organization'sinternal structure, growth,anditseventualsize. Large, steep hierarchies will predominate in physical-capital in-tensive industries, and will have seniority-based promotion policies. By contrast, at hierarchies will prevail in human-capital intensi

What Determines Firm Size?
Date Posted: Apr  22, 2008
In this paper we examine data on firm size from Europe to shed light on factors correlated with firm size. In addition to studying broad patterns, we use the data to ask whether it is sufficient to think of the firm as a black box as some theories of the firm that we label "technological" do, or whether we need to be concerned with features such as asset specificity and the process of control that are the focus of "organizational" theories. At the industry level, we find capital-intensive indust

The Tyranny of Inequality
Date Posted: Apr  22, 2008
This paper focuses on the externality that a contractual transfer of fungible resources can have on future interactions. The very fungibility of the resource transferred make it hard to restrict its use, changing the amount the parties involved spend in trying to grab future rents. This spill-over effect can inhibit otherwise valuable transactions, as well as enable otherwise ineffcient transactions. Agreement typically breaks down when the required transfer is large and the proposed recipient o

The Tyranny of Inequality
Date Posted: Apr  22, 2008
When parties are very unequally endowed, agreement may be very difficult to reach, even if the specific transaction is easy to contract on, and fungible resources can be transferred to compensate the losing party. The very fungibility of the transferred resource makes it hard to restrict its use, and changes the amount the parties involved spend in trying to grab future rents. This spill-over effect can inhibit otherwise valuable transactions, as well as enable otherwise inefficient transactions

The Cost of Diversity: The Diversification Discount and Inefficient Investment
Date Posted: Apr  22, 2008
In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions The distortion is greater the more diverse are the investment opportunities of the firm's divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to the d

The Great Reversals: The Politics of Financial Development in the 20th Century
Date Posted: Apr  22, 2008
Indicators of the development of the financial sector do not improve monotonically over time. In particular, we find that by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. This pattern cannot be explained by structural theories that attribute cross-country differences in financial development to time-invariant factors, such as a country's legal origin or culture. We propose an "interest group" theory of finan

The Influence of the Financial Revolution on the Nature of Firms
Date Posted: Apr  22, 2008
Major technological, regulatory, and institutional changes have made finance more widely available in recent years. The ability of financial institutions to price a variety of exotic instruments, and to assess and spread risks, has increased. More data on potential borrowers is now available, and it is also more timely. Improvements in accounting disclosure have resulted in greater borrower transparency. Deregulation has resulted in greater competition and better prices in financial markets. Fin

Financial Systems, Industrial Structure, and Growth
Date Posted: Apr  22, 2008
How does the development of the financial sector affect industrial growth? What effect does it have on the composition of industry, and the size distribution of firms? What is the relative importance of financial institutions and financial markets, and does it depend on the stage of economic growth? How do financial systems differ in their vulnerability to crisis? This paper attempts to provide an answer to these questions based on the current state of empirical research.

What Do We Know About Capital Structure? Some Evidence from International Data
Date Posted: Apr  21, 2008
We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as important in determining the cross- section of capital structure in the U.S. affect firm leverage in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the th

Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking
Date Posted: Apr  17, 2008
Both investors and borrowers are concerned about liquidity. Investors desire liquidity because they are uncertain about when they will want to eliminate their holding of a financial asset. Borrowers are concerned about liquidity because they are uncertain about their ability to continue to attract or retain funding. Because borrowers typically cannot repay investors on demand, investors will require a premium or significant control rights when they lend to borrowers directly, as compensation for

Trade Credit: Theories and Evidence
Date Posted: Mar  25, 2008
In addition to borrowing from financial institutions, firms may be financed by their suppliers. Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while short

Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities Before t...
Date Posted: Mar  19, 2008
This paper investigates how organizational structure can affect a firm's ability to compete. In particular, we examine the two ways in which U.S. commercial banks organized their investment banking operations before the 1933 Glass-Steagall Act forced the banks to leave the securities business: as an internal securities department within the bank and as a separately incorporated and capitalized securities affiliate. We document a strong movement toward the use of the affiliate structure during t

The Paradox of Liquidity
Date Posted: Mar  18, 2008
The more liquid a company's assets, the greater their value in a short-notice liquidation. Liquid assets are generally viewed as increasing debt capacity, other things being equal. This paper focusses on the dark side of liquidity: greater liquidity reduces the ability of borrowers to commit to a specific course of action. It examines the effects of differences in asset liquidity on debt capacity. It suggests an alternative theory of financial intermediation and disintermediation.

New: Foreign Capital and Economic Growth
Date Posted: Dec  04, 2007
We document the recent phenomenon of uphill flows of capital from nonindustrial to industrial countries and analyze whether this pattern of capital flows has hurt growth in nonindustrial economies that export capital. Surprisingly, we find that there is a positive correlation between current account balances and growth among nonindustrial countries, implying that a reduced reliance on foreign capital is associated with higher growth. This result is weaker when we use panel data rather than cross

New: Foreign Capital and Economic Growth
Date Posted: Nov  29, 2007
We document the recent phenomenon of "uphill" flows of capital from nonindustrial to industrial countries and analyze whether this pattern of capital flows has hurt growth in nonindustrial economies that export capital. Surprisingly, we find that there is a positive correlation between current account balances and growth among nonindustrial countries, implying that a reduced reliance on foreign capital is associated with higher growth. This result is weaker when we use panel data rather than cro

New: The Persistence of Underdevelopment: Constituencies and Competitive Rent Preservation
Date Posted: Apr  05, 2007
Why is underdevelopment so persistent? I argue that one reason is the initial inequality in endowments and opportunities, which leads to self-interested constituencies that perpetuate the status quo. Each constituency prefers reforms that preserve only its rents and expand its opportunities, so no comprehensive reform path may command broad support. Though the initial conditions may well be a legacy of the colonial past, persistence does not require the presence of coercive political institution

Aid and Growth: What Does the Cross-Country Evidence Really Show?
Date Posted: Jan  04, 2007
We examine the effects of aid on growth--in cross-sectional and panel data--after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after thiscorrection, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Ou

New: The Persistence of Underdevelopment: Institutions, Human Capital or Constituencies
Date Posted: Dec  20, 2006
Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain wh

The Great Reversals: The Politics of Financial Development in the 20th Century
Date Posted: Sep  29, 2006
We show that the development of the financial sector does not change monotonically over time. In particular, we find that by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. This pattern is inconsistent with most recent theories of why cross-country differences in financial development do not track differences in economic development, since these theories are based upon time-invariant factors, such as a country

New: Has Finance Made the World Riskier?
Date Posted: Sep  22, 2006
Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite f

New: Modernizing China's Growth Paradigm
Date Posted: Sep  05, 2006
In the literature theoretical models have appeared that predict a positive impact of the level of individual wealth on the job exit probability. Empirically this prediction is most likely to be relevant for elderly workers who have been able to accumulate wealth throughout their working life and whose residual working life is relatively short. In the Netherlands, as in other European countries, there is a tendency of introducing more individual choice options in pension schemes. It is likely tha

New: The Persistence of Underdevelopment: Institutions, Human Capital, or Constituencies?
Date Posted: Sep  04, 2006
Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain wh

REVISION: The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies
Date Posted: Aug  29, 2006
Using a detailed database of managerial job descriptions, reporting relationships, and compensation structures in over 300 large U.S. firms, we find that firm hierarchies are becoming flatter. The number of positions reporting directly to the CEO has gone up significantly over time while the number of levels between the division heads and the CEO has decreased. More of these managers now report directly to the CEO and more are being appointed officers of the firm, reflecting a delegation of auth

What Undermines Aid`s Impact on Growth?
Date Posted: Jul  31, 2006
We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies. We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. We find that aid inflows have systematic adverse effects on a country`s competitiveness, as reflected in a decline in the share of labor intensive and trada

India's Pattern of Development: What Happened, What Follows?
Date Posted: May  31, 2006
India has followed an idiosyncratic pattern of development, certainly compared with other fast-growing Asian economies. While the importance of services rather than manufacturing is widely noted, within manufacturing India has emphasized skill-intensive rather than labor-intensive manufacturing, and industries with higher-than-average scale. Some of these distinctive patterns existed prior to the beginning of economic reforms in the 1980s, and stem from the idiosyncratic policies adopted after I

Does Distance Still Matter? The Information Revolution in Small Business Lending
Date Posted: May  25, 2006
The distance between small firms and their lenders in the United States is increasing. Not only are firms choosing more distant lenders, they are also communicating with them in more impersonal ways. After documenting these systematic changes, we demonstrate that they do not stem from small firms locating differently, from simple consolidation in the banking industry, or from biases in the sample. Instead, they seem correlated with improvements in bank productivity. We conjecture that greater, a

A Theory of Bank Capital
Date Posted: May  25, 2006
Banks can create liquidity because their deposits are fragile and prone to runs. Increased uncertainty can make deposits excessively fragile in which case there is a role for outside bank capital. Greater bank capital reduces liquidity creation by the bank but enables the bank to survive more often and avoid distress. A more subtle effect is that banks with different amounts of capital extract different amounts of repayment from borrowers. The optimal bank capital structure trades off the effect

The Cost of Diversity: The Diversification Discount and Inefficient Investment
Date Posted: May  25, 2006
In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions. The distortion is greater the more diverse are the investment opportunities of the firm`s divisions. We test these implications on a panel of diversified firms in the U.S. during the period 1979-1993. We find that i) diversified firms mis-allocate investment funds; ii) the extent of mis-allocation is positively related to th

New: The Persistence of Underdevelopment: Institutions, Human Capital, or Constituencies?
Date Posted: May  14, 2006
Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain wh

Aid and Growth: What Does the Cross-Country Evidence Really Show?
Date Posted: May  11, 2006
We examine the effects of aid on growth - in cross-sectional and panel data - after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.

New: India's Patterns of Development: What Happened, What Follows
Date Posted: Apr  27, 2006
India seems to have followed an idiosyncratic pattern of development, certainly compared to other fast-growing Asian economies. While the emphasis on services rather than manufacturing has been widely noted, within manufacturing India has emphasized skill-intensive rather than labor-intensive manufacturing, and industries with typically higher average scale. We show that some of these distinctive patterns existed even prior to the beginning of economic reforms in the 1980s, and argue they stem f

What Undermines Aid`s Impact on Growth?
Date Posted: Mar  03, 2006
We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies. We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. We find that aid inflows have systematic adverse effects on a country`s competitiveness, as reflected in a decline in the share of labor intensive and trada

Has Financial Development Made the World Riskier?
Date Posted: Jan  25, 2006
Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite f

The Real Effect of Banking Crises
Date Posted: Oct  12, 2005
Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence i

Business Environment and Firm Entry: Evidence from International Data
Date Posted: May  23, 2005
Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing entry. We find entry regulations hamper entry, especially in industries that naturally should have high entry. Also, value added per employee in naturally "high entry" industries grows more slowly in countries with onerous regulations on entry. The consequences of more restrictive entry barriers are seen,

The Real Effect of Banking Crises
Date Posted: May  06, 2005
Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence i

Money in a Theory of Banking
Date Posted: Feb  22, 2005
We explore the connection between money, banks, and aggregate credit. We start with a simple 'real' model without money, where banks make loans repayable in goods and depositors hold claims on the bank payable on demand in goods. Aggregate production may be delayed in the economy. If so, we show that the level of ongoing bank lending, and hence of aggregate future output, can decrease with increases in the real repayment due on deposits: ceteris paribus, the higher the amount due, the more likel

Dollar Shortages and Crises
Date Posted: Nov  02, 2004
Emerging markets do not handle adverse shocks well. In this paper, I will outline an explanation of why emerging markets are so fragile, and why they may adopt contractual mechanisms - such as a dollarized banking system - that increase their fragility. I draw on this analysis to explain why dollarized economies may be prone to dollar shortages and twin crises. The model of crises described here differs in some important aspects from what is now termed the first, second, and third generation mod

Are Perks Purely Managerial Excess?
Date Posted: May  28, 2004
Why do some firms tend to offer executives a variety of perks while others offer none at all? A widespread view in the corporate finance literature is that executive perks are a form of agency or private benefit and a way for managers to misappropriate some of the surplus the firm generates. According to this view, firms with plenty of free cash flow that operate in industries with limited investment prospects should typically offer perks. The theory also suggests that firms that are subject to

Business Environment and Firm Entry: Evidence from International Data
Date Posted: May  27, 2004
Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing entry. We find entry regulations hamper entry, especially in industries that naturally should have high entry. Also, value-added per employee in naturally 'high entry' industries grows more slowly in countries with onerous regulations on entry. Interestingly, regulatory entry barriers have no adverse effe

Business Environment and Firm Entry: Evidence from International Data
Date Posted: May  26, 2004
Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing entry. We find entry regulations hamper entry, especially in industries that naturally should have high entry. Also, value added per employee in naturally "high entry" industries grows more slowly in countries with onerous regulations on entry. Interestingly, regulatory entry barriers have no adverse effe

Does Distance Still Matter? The Information Revolution in Small Business Lending
Date Posted: Mar  01, 2004
The distance between small firms and their lenders is increasing, and they are communicating in more impersonal ways. After documenting these systematic changes, we demonstrate they do not arise from small firms locating differently, consolidation in the banking industry, or biases in the sample. Instead, improvements in lender productivity appear to explain our findings. We also find distant firms no longer have to be the highest quality credits, indicating they have greater access to credit. T

Liquidity Shortages and Banking Crises
Date Posted: Jan  02, 2004
We show in this paper that bank failures can be contagious. Unlike earlier work where contagion stems from depositor panics or ex ante contractual links between banks, we argue bank failures can shrink the common pool of liquidity, creating or exacerbating aggregate liquidity shortages. This could lead to a contagion of failures and a possible total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention. Unfortunately, liquidity problems and s

Which Capitalism? Lessons from the East Asian Crisis
Date Posted: Dec  18, 2003
As a result of the Asian crisis, relationship-based systems are now under attack for being inefficient and corrupt. Yet, till recently, they were proposed as an alternative form of capitalism to the arm's length Anglo-Saxon system. What went wrong? This paper suggests that relationship-based systems work well when contracts are poorly enforced and capital scarce. Power relationships substitute for contracts, and can achieve better outcomes than a primitive contractual system. But a relationship-

Money in a Theory of Banking
Date Posted: Dec  15, 2003
We explore the connection between money, banks, and aggregate credit. We start with a simple 'real' model without money, where banks make loans repayable in goods and depositors hold claims on the bank payable on demand in goods. Aggregate production may be delayed in the economy. If so, we show that the level of ongoing bank lending, and hence of aggregate future output, can decrease with increases in the real repayment due on deposits: ceteris paribus, the higher the amount due, the more likel

Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Ban...
Date Posted: Nov  26, 2003
Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally "difficult" credits, such as firms that do not keep formal financial records. Moreover, c

Liquidity Shortages and Banking Crises
Date Posted: Nov  24, 2003
We show in this paper that bank failures can be contagious. Unlike earlier work where contagion stems from depositor panics or ex ante contractual links between banks, we argue bank failures can shrink the common pool of liquidity, creating or exacerbating aggregate liquidity shortages. This could lead to a contagion of failures and a possible total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention. Unfortunately, liquidity problems and s

Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking
Date Posted: Nov  15, 2003
What ties together the traditional commercial banking activities of deposit-taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities c

Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking
Date Posted: Nov  15, 2003
This paper addresses the following question: what ties together the traditional commercial banking activities of deposit-taking and lending? We begin by observing that since banks often lend via commitments, or credit lines, their lending and deposit-taking may be two manifestations of the same primitive function: the provision of liquidity on demand. After all, once the decision to extend a line of credit has been made, it is really nothing more than a checking account with overdraft privileges

Banks and Markets: The Changing Character of European Finance
Date Posted: Jun  24, 2003
In the last two decades the European financial markets have become more market-oriented. We analyse the economic and political forces that have triggered these changes as well as their likely welfare implications. We also try to assess whether this trend will continue. Based on our analysis, we conjecture that even if Europe might benefit from a continuation of the trend, in the near future political support for it is likely to become much weaker. Furthermore, without serious reforms, the trend

Banks and Markets: The Changing Character of European Finance
Date Posted: Jun  24, 2003
In the last two decades the European financial markets have become more market oriented. We analyze the economic and political forces that have triggered these changes as well as their likely welfare implications. We also try to assess whether this trend will continue. Based on our analysis, we conjecture that even if Europe might benefit from a continuation of the trend, in the near future political support for it is likely to become much weaker. Furthermore, without serious reforms, the trend

The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies
Date Posted: Apr  29, 2003
Using a detailed database of managerial job descriptions, reporting relationships, and compensation structures in over 300 large U.S. firms we find that the number of positions reporting directly to the CEO has gone up significantly over time. We also find that the number of levels between the lowest managers with profit center responsibility (division heads) and the CEO has decreased and more of these managers are reporting directly to the CEO. Moreover, more of these managers are being appoint

Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Ban...
Date Posted: May  22, 2002
Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally 'difficult' credits, such as firms that do not keep formal financial records. Moreover, c

The Influence of the Financial Revolution on the Nature of Firms
Date Posted: Oct  05, 2001
Major technological, regulatory, and institutional changes have made finance more widely available in recent years, amounting to a bone fide 'financial revolution'. In this article, we focus on the impact the financial revolution has had on the way firms are (or should be) organized and managed, and on the policy consequences.

The Governance of the New Enterprise
Date Posted: Oct  05, 2001
The changing nature of the corporation forces us to re-examine much of what we take for granted in corporate governance. What precisely is the entity that is being governed? How does the governance system obtain power over it, and what determines the division of power between various stakeholders? And is the objective of allocating power only to enhance the returns of outside investors? In this paper we argue that, given the changing nature of the firm, the focus of corporate governance must shi

What Determines Firm Size?
Date Posted: Oct  04, 2001
Motivated by theories of the firm, which we classify as technological' or organizational,' we analyze the determinants of firm size across industries and across countries in a sample of 15 European countries. We find that, on average, firms facing larger markets are larger. At the industry level, we find firms in the utility sector are large, perhaps because they enjoy a natural, or officially sanctioned, monopoly. Capital intensive industries, high wage industries, and industries that do a lot

The Influence of the Financial Revolution on the Nature of Firms
Date Posted: May  10, 2001
Major technological, regulatory, and institutional changes have made finance more widely available in recent years, amounting to a bona fide 'financial revolution'. In this article, we focus on the impact the financial revolution has had on the way firms are (or should be) organized and managed, and on the policy consequences.

The Great Reversals: The Politics of Financial Development in the 20th Century
Date Posted: May  03, 2001
We show that the development of the financial sector does not change monotonically over time. In particular, we find that by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. This pattern is inconsistent with most recent theories of why cross-country differences in financial development do not track differences in economic development, since these theories are based upon time-invariant factors, such as a country

Does Distance Still Matter? The Information Revolution in Small Business Lending
Date Posted: Apr  13, 2001
The distance between small firms and their lenders in the United States is increasing. Not only are firms choosing more distant lenders, they are also communicating with them in more impersonal ways. After documenting these systematic changes, we demonstrate that they do not stem from small firms locating differently, from consolidation in the banking industry, or from biases in the sample. Instead, they seem correlated with improvements in bank productivity. We conjecture that greater, and more

The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms
Date Posted: Apr  09, 2001
A fundamental problem entrepreneurs face in the formative stages of their businesses is how to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur's response to this problem will determine the organization's internal structure, growth, and its eventual size. In particular, our model suggests large, steep hierarchies will predominate in physical capital intensive industries, and these will typically have seniority-base

Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications
Date Posted: Apr  01, 2001
Short-term borrowing has often been blamed for precipitating financial crises. We argue that while the empirical association between a financial institution's, or country's, short-term borrowing and susceptibility to crises may, in fact, exist, the direction of causality is often precisely the opposite to the one traditionally suggested by commentators. Institutions like banks that want to enhance their ability to provide liquidity and credit to difficult borrowers have to borrow short-term. Sim

Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities before t...
Date Posted: Mar  07, 2001
The following is a description of the paper, and not the actual abstract: This paper investigates empirically whether the internal organization of the firm can play an important role in affecting a firm's ability to commit to a particular quality of business practices and, if so, whether competition would be sufficient to lead firms to adopt that structure. In particular, we study how commercial banks have developed "firewalls" to address potential conflicts of interest when they are also enga

Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking
Date Posted: Sep  15, 2000
This paper addresses the following question: what ties together the traditional commercial banking activities of deposit-taking and lending? We begin by observing that since banks often lend via commitments, or credit lines, their lending and deposit-taking may be two manifestations of the same primitive function: the provision of liquidity on demand. After all, once the decision to extend a line of credit has been made, it is really nothing more than a checking account with overdraft privileg

Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications
Date Posted: Sep  08, 2000
Short-term borrowing has often been blamed for precipitating financial crises. We argue that while the empirical association between a financial institution's, or country's, short-term borrowing and susceptibility to crises may, in fact, exist, the direction of causality is often precisely the opposite to the one traditionally suggested by commentators. Institutions like banks that want to enhance their ability to provide liquidity and credit to difficult borrowers have to borrow short-term. Sim

The Effect of Credit Market Competition on Lending Relationships
Date Posted: Aug  23, 2000
This paper provides a simple model showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The model has implications about the availability and the price of credit as firms age in different markets. The paper offers evidence for these impl

A Theory of Bank Capital
Date Posted: Jul  20, 2000
Banks can create liquidity because their deposits are fragile and prone to runs. Increased uncertainty can make deposits excessively fragile in which case there is a role for outside bank capital. Greater bank capital reduces liquidity creation by the bank but enables the bank to survive more often and avoid distress. A more subtle effect is that banks with different amounts of capital extract different amounts of repayment from borrowers. The optimal bank capital structure trades off the effect

Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking
Date Posted: Jul  20, 2000
Both investors and borrowers are concerned about liquidity. Investors desire liquidity because they are uncertain about when they will want to eliminate their holding of a financial asset. Borrowers are concerned about liquidity because they are uncertain about their ability to continue to attract or retain funding. We argue that financial intermediation can resolve these liquidity problems that arise in direct lending. Banks enable depositors to withdraw at low cost, as well as buffer firms fro

Power in a Theory of the Firm
Date Posted: Jul  17, 2000
Transactions take place in the firm rather than in the market because the firm offers agents" who make specific investments power. Past literature emphasizes the allocation of ownership as the" primary mechanism by which the firm does this. Within the contractibility assumptions of this" literature, we identify a potentially superior mechanism, the regulation of access to critical resources. " Access can be better than ownership because: i) the power agents get from access is more contingent"

The Tyranny of the Inefficient: An Enquiry into the Adverse Consequences of Power Struggles
Date Posted: Jun  11, 2000
Life is replete with instances where two closely related parties forego mutually advantageous opportunities: peace treaties are not signed, inefficient regulations are not altered, and possibilities for investment are frittered away. Since the parties are in close contact, asymmetric information cannot be an explanation for the failure to agree. The explanation this paper offers is based on the assumption that when two parties interact repeatedly, not all aspects of the relationship are contra

Financial Dependence and Growth
Date Posted: May  13, 2000
Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of ex

The Tyranny of the Inefficient: An Enquiry into the Adverse Consequences of Power Struggles
Date Posted: Mar  22, 2000
There are many instances where two closely related parties do not agree to mutually advantageous transactions even when there are simple enforceable contracts, and side transfers of fungible resources, that would implement them. Peace treaties are not signed, inefficient regulations are not altered, and possibilities for investment are frittered away. One reason, which has been extensively analyzed in the literature, is the presence of informational asymmetries. In this paper we focus on another

Commercial Bank Securities Activities before the Glass-Steagall Act
Date Posted: Sep  01, 1998
This paper investigates empirically whether the internal organization of the firm can play an important role in affecting a firm's ability to commit to a particular quality of business practices and, if so, whether competition would be sufficient to lead firms to adopt that structure. In particular, we study how commercial banks have developed "firewalls" to address potential conflicts of interest when they are also engaged in investment banking. Before the 1933 Glass-Steagall Act forced banks o

The Paradox Of Liquidity
Date Posted: Aug  29, 1998
The more liquid a company's assets, the greater their value in a short-notice liquidation. Liquid assets are generally viewed as increasing debt capacity, other things being equal. This paper focuses on the dark side of liquidity: greater liquidity reduces the ability of borrowers to commit to a specific course of action. It examines the effects of differences in asset liquidity on debt capacity. It suggests an alternative theory of financial intermediation and disintermediation.

Trade Credit: Theories and Evidence
Date Posted: Aug  22, 1998
In addition to borrowing from financial institutions, firms may be financed by their suppliers. Although there are many theories explaining why non financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while short term

Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities before t...
Date Posted: Apr  21, 1998
We examine the two ways in which U.S. commercial banks organized their investment banking operations before the 1933 Glass-Steagall Act forced the banks to leave the securities business: as an internal securities department within the bank and as a separately incorporated affiliate with its own board of directors. While departments underwrote seemingly higher quality firms and securities than did comparable affiliates, the departments obtained lower prices for the issues they underwrote. The h

The Past and Future of Commercial Banking Viewed Through an Incomplete Contract Lens
Date Posted: Apr  11, 1998
Commercial banks emerged at a time when contracts were very incomplete and property rights insecure. They typically offered demand deposits, made loans on demand, and were regulated. Each of these aspects of the institutional structure were essential in helping the bank provide the twin functions of liquidity and safety. I argue that recent theories of banking, which I collectively refer to as "Incomplete Contract" theories of banking, explain well the origins of banking. I also claim that they

What Do We Know about Capital Structure? Some Evidence from International Data
Date Posted: Feb  11, 1998
We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as correlated in the cross-section with firm leverage in the U.S., are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical un

Covenants and Collateral as Incentives to Monitor
Date Posted: Feb  05, 1998
Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender's incentive to engage in costly monitoring. Thus loan contracts must be structured so as to enhance this incentive. Short-term debt gives the lender the power to force renegotiation or liquidation when the debt matures, but this ability is not contingent on monitoring. By contrast, covenants make the loan's effective maturity, and the ability

Covenants and Collateral as Incentives to Monitor
Date Posted: Feb  05, 1998
Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender's incentives to do so. Thus loan contracts must be structured to enhance the lender's incentives to monitor. Covenants make the effective maturity of a loan contingent on monitoring by the lender. The ability to secure a loan makes the effective priority of the loan contingent on monitoring by the lender. Thus both covenants and collateral can

Analyst Following of Initial Public Offerings
Date Posted: Dec  31, 1997
We examine data on analyst following for a sample of initial public offerings (IPOs) completed over the 1975-1987 period to see how they relate to three well-documented IPO anomalies. We find that higher underpricing leads to increased analyst following. Analysts are overoptimistic about the earnings potential of recent IPOs and about their long term growth prospects. More firms complete IPOs when analysts are particularly optimistic about the growth prospects of recent IPOs. In the long run, IP