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Andrea L. Eisfeldt

Associate Professor of Finance





Curriculum Vitae




Working Papers:


"Aggregate Issuance and Savings Waves" (with Tyler Muir)



We use firms' decisions in the cross-section about their sources and uses of funds in order to make inferences about the aggregate cost of external finance.  The basic intuition is as follows:  Firms which raise costly external finance can invest the issuance proceeds in productive capital assets, or in liquid financial assets with a low physical rate of return.  If firms raise costly external finance and allocate some of the funds to liquid assets, either the cost of external finance is relatively low, or the total return to liquidity accumulation, including its value as a hedging asset, is particularly high. We construct and estimate a quantitative, dynamic model of firms' financing and savings decisions. We then use the model's predictions for variation in firm policies and implied cross sectional moments, along with empirical moments from Compustat, to infer the average cost of external finance per dollar raised in the US time series 1980-2010.


 

"The Financial Soundness of US Firms 1926-2012" (with Andrew Atkeson and Pierre-Olivier Weill)


                    Insolvency Crises 1929-2012:  Median Distance below 1.


Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms' financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms' financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms.


"The Market for OTC Derivatives" (with Andrew Atkeson and Pierre-Olivier Weill)

We develop a model of equilibrium entry, trade, and price formation in over-the-counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the
size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as "dealers," trading mainly to
provide intermediation services, while medium sized banks endogenously participate as "customers" mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare.



Financing Shortfalls and the Value of Aggregate Liquidity.” (with Adriano Rampini.).

This paper studies the level and dynamics of the value of aggregate liquidity induced by firms’ financing shortfalls. We model liquidity and cash flows as internal funds available for investment in an economy where external funds are costly. We study whether the use of liquidity to hedge investment opportunities can generate substantial liquidity premia with empirically observed countercyclical properties, and show how firms’ financial positions affect the value of aggregate liquidity. Cash flows affect the “natural supply” of liquidity and are procyclical. Thus, we argue that shortfalls between firms’ financing needs and available liquid funds are more likely to occur in bad times when current cash flows are low, rendering liquidity premia countercyclical. We investigate the relationship between such shortfalls and the value of aggregate liquidity empirically using US Flow of Funds and Compustat data.

 

Colonies.” (with  Matthias Doepke.)

In many developing countries, the institutional framework governing economic life has its roots in the colonial period, when the interests of European settlers clashed with those of the native population or imported slaves. We examine the economic implications of this conflict in a framework where institutions are represented by the number of people with property-rights protection, i.e., “gun owners.” In the model, gun owners can protect their own property, they can exploit others who do not own guns, and they may decide to extend property rights by handing out guns to previously unarmed people. The theory generates a “reversal of fortune” between colonies with many and few oppressed: income per capita is initially highest in colonies with many oppressed that can be exploited by gun owners, but later on excessive concentration of economic power becomes a hindrance for development.


Publications:

"The Value and Ownership of Intangible Capital(with Dimitris Papanikolaou.)

American Economic Review, Forthcoming, Papers and Proceedings.


Eisfeldt Papanikolaou Aggregate and Industry Organization Capital Data


Intangible capital which relies on essential human inputs, or "organization capital", presents a unique challenge for measurement.  Organization capital cannot be fully owned by firms' financiers, because it is partly  embodied in key labor inputs.  Instead, cash flows must be shared with key talent and thus neither book nor market values will fully capture its value.  Measurement of organization capital requires a model featuring these unique property rights. We use accounting data along with a simple example of such a model to measure the fraction of the US capital stock which is missing from book and market values.




CEO Turnover in a Competitive Assignment Framework” (with Camelia Kuhnen)

Journal of Financial Economics, August 2013, 351-372.


Eisfeldt Kuhnen CEO Turnover Data:  CSV, Tab Delimited Text

 

There is widespread concern about whether CEOs are appropriately punished for poor performance. While CEOs are more likely to be forced out if their performance is poor relative to the industry average, overall industry performance also matters. This seems puzzling if termination is disciplinary, however, we show that both absolute and relative performance driven turnover can be natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics. The model also has new predictions about replacement managers' equilibrium pay and performance. We document CEO turnover events during 1992-2006 and provide empirical support for our model.




Organization Capital and the Cross-Section of Expected Returns  (with Dimitris Papanikolaou.)

Amundi Smith Breeden First Place Paper Award 2013.

Journal of Finance, August 2013, 1365-1406.


The supplementary appendix contains further details. 

The UCLA Anderson Blog summarizes the paper here.

Organization capital is a production factor that is embodied in the firm's key talent and has an efficiency that is firm specific. Hence, both shareholders and key talent have a claim to its cash flows. We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from the shareholders' perspective. We find that firms with more organization capital have risk adjusted returns that are 4.7% higher than firms with less organization capital.


 Leasing, Ability to Repossess, and Debt Capacity.” (with Adriano Rampini.)
Review of Financial Studies, April 2009, 1621-1657.

This paper studies the role of leasing of productive assets. When capital is leased (or rented), it is more easily repossessed and hence leasing relaxes financing constraints. However, leasing gives rise to an agency problem with regard to the care with which the leased asset is used or maintained. We show that this implies that more credit constrained firms lease capital, while less credit constrained firms buy capital. Our theory is consistent with the explanation of leasing provided by leasing firms, namely that leasing “preserves capital,” which is generally considered a fallacy in the academic literature. We provide empirical evidence that small and credit constrained firms lease a considerably larger fraction of their capital than larger and less constrained firms.


Managerial Incentives, Capital Reallocation, and the Business Cycle.” (with Adriano Rampini.)
Jensen Prize 2008, second place.
Journal of Financial Economics, January 2008, 177-199.

This paper argues that when managers have private information about how productive assets are under their control and receive private benefits, substantial bonuses are required to induce less productive managers to declare that capital should be reallocated. Moreover, the need to provide incentives for managers to let go links aggregate capital reallocation to executive compensation and turnover over the business cycle. Capital reallocation and managerial turnover are procyclical if promised managerial compensation increases with the number of managers hired. The agency problem between owners and managers makes bad times worse because capital is less productively deployed when agency costs render reallocation too costly. Empirically we find that both CEO turnover and executive compensation are remarkably procyclical.


New or Used? Investment with Credit Constraints.” (with Adriano Rampini.)
Journal of Monetary Economics, November 2007, 2656-2681.
(Supplementary appendix.)

Used capital is cheap up front but requires higher maintenance payments later on. We argue that the timing of these investment cash outflows makes used capital attractive to financially constrained firms, since it is cheap when evaluated using their discount factor. In contrast, it may be expensive from the vantage point of an unconstrained agent. We provide an overlapping generations model and determine the price of used capital in equilibrium. Agents with less internal funds are more credit constrained, invest in used capital, and start smaller firms. Empirically, we find that the fraction of investment in used capital is substantially higher for small firms and varies significantly with measures of financial constraints.


Smoothing with Liquid and Illiquid Assets.”
Journal of Monetary Economics, September 2007, 1572-1586.
(Supplementary appendix.)

A quantitative examination of the demand for liquid assets arising from consumption smoothing motives reveals that such demand is very low. Consumers faced with income streams calibrated to match income and unemployment data and returns and transactions costs calibrated to match US Treasury Bill data almost exclusively buy and hold illiquid long term assets even though the return premium on long term assets is quite small. This is because, with standard preferences, savings are highly persistent even when risky income is not. In the calibrated model, the first order autocorrelation of savings is an order of magnitude larger than that of income.


Capital Reallocation and Liquidity.” (with Adriano Rampini.)
Journal of Monetary Economics, April 2006, 369-399. (Lead Article). 

See updated time series, and a link to data, below.

This paper shows that the amount of capital reallocation between firms is procyclical. In contrast, the benefits to capital reallocation appear countercyclical. We measure the amount of reallocation using data on flows of capital across firms and the benefits to capital reallocation using several measures of the cross sectional dispersion of the productivity of capital. We then study a calibrated model economy where capital reallocation is costly and impute the cost of reallocation. We find that the cost of reallocation needs to be substantially countercyclical to be consistent with the observed joint cyclical properties of reallocation and productivity dispersion.


Endogenous Liquidity in Asset Markets.”
Smith Breeden Distinguished Paper Award.
Journal of Finance, February 2004, 59 1-30. (Lead Article).
Reprinted in “Liquidity and Crises,” edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell (Oxford University Press, 2011)

The working paper contains additional comparative statics and details.

This paper analyzes a model in which long-term risky assets are illiquid due to adverse selection. The degree of adverse selection and hence the liquidity of these assets is determined endogenously by the amount of trade for reasons other than private information. I find that higher productivity leads to increased liquidity. Moreover, liquidity magnifies the effects of changes in productivity on investment and volume. High productivity implies that investors initiate larger scale risky projects which increases the riskiness of their incomes. Riskier incomes induce more sales of claims to high quality projects, causing liquidity to increase.







Capital Reallocation and the Business Cycle:  Data Update to EOY 2012

Updated version of Figure 1 from “Capital Reallocation and Liquidity” (joint with Adriano Rampini, JME 2006)

 

Solid green line is the cyclical component of GDP, dotted blue line is the cyclical component of sales of PP&E, and dashed red line is the cyclical component of acquisitions.

The correlation of the cyclical component of GDP with the cyclical component of sales of PP&E plus acquisitions over total book assets is 0.68 with a standard error of 0.10.