Communicating the originality and relevance of a research idea is arguably more important than the quality of its execution.
What are your current research themes, and could you share with us some of your findings?
One focus of my current research is on the value created by activist investment. Average abnormal returns following Schedule 13D filings, in which an investor announces intentions to engage in an activist campaign, are about 7%. It is not clear how much of these gains are due to treatment (value creation), sample selection, or stock picking, which would earn returns anyway by identifying a mis-priced stock while remaining passive. To disentangle these effects, we propose and estimate a structural model of an investor's filing choice and the market reaction to it. We find that 77.6% of announcement returns are due to treatment, 10.2% to stock picking and 12.2% to sample selection bias. While this result speaks favorably of activism, we also show that the private costs of activism, which we also estimate, preclude value creation in about 60% of passive investments, i.e., Schedule 13G filings, resulting in substantial unrealised welfare gains. (Access the paper here).
In other research I develop a method to decompose firm-specific corporate cash flow risk into its temporary and permanent components. The main finding is that the interaction between permanent and transitory cash flow shocks at the firm level is not only a measure of the firm’s hedging needs, which determines how to manage its liquidity, but also a deeper indicator of the firm’s leadership status within its industry.
In our PhD programme, you teach a core course on Corporate Finance. What do you cover in this advanced course and what do you emphasise?
This course is mainly about developing a toolkit for research in corporate finance. We embed the classic corporate finance frictions into the dynamic neoclassical model of the firm in order to discuss optimal corporate policies, including financing, investment, risk management and pay-outs. These structural models are operational, i.e., are meant to read the data. The course also discusses asset pricing implications of corporate finance frictions and how to exploit share and bond prices to estimate corporate finance structural parameters.
The assessment of your course is based on a written research proposal; what is the objective of this assignment?
The goal of this exercise it to simulate the key early stages of writing a research paper. Communicating the originality and relevance of a research idea is arguably more important than the quality of its execution. Before execution, all good papers must first go through the steps required by this assignment. The researcher must ask the following difficult questions: what research question am I going to answer and why do we care? Has the existing literature provided an answer? Why is this answer unsatisfactory? Is my answer unique and useful? Too many projects are started without asking these questions.
Our PhD programme is mainly open to professionals. Are these doctoral students different from those you are used to?
Yes. Professional doctoral students have more work experience and share it in class whenever relevant to the topic. This makes for a richer discussion in class, much closer to an actual research seminar than a lecture. But traditional PhD students have the advantage that they can focus almost 100% of their time for longer periods in executing a research idea.
You also act as an advisor in the PhD programme. In your opinion, what are the main obstacles to completing a successful dissertation?
Good research can only succeed if it benefits from the feedback of a large network of colleagues. Results need to be presented and discussed often among colleagues in internal seminars and conferences. Also, research can only improve by persevering with the same problem over weeks or months. I find that I lose a lot of traction on a paper if I leave it aside for weeks and try to get back to it later. Finally, one must accept criticism and use it advantageously. Often you like your idea tremendously but few others do. One must learn to take criticism constructively.
Your research has appeared in leading academic journals such as the Journal of Finance or the Journal of Financial Economics, what advice can you give our PhD candidates who would like to publish their research?
Having a good idea that is well executed is necessary but far from sufficient to publish in a top journal. I think a lot of good research is never published because it is poorly written or not disseminated enough before submission. Successful final drafts look vastly different from the first drafts. In fact, they are much better. Expect to rewrite the introduction to your paper at least 20 times before your colleagues like it.