The Corporate Foundations of Asset Pricing

Corporate finance and asset pricing are tightly connected. Investigating asset pricing problems requires an understanding of corporate policies, and investigating corporate finance questions requires an understanding of the market value of risk.

How do corporate frictions affect equity returns, and how do market frictions affect corporate policies?

The integration of corporate finance frictions into asset pricing models generates new predictions for equity returns, and provides a better explanation of the patterns observed in the stock return data. Characterizing and quantifying the effect of information frictions on corporate policies and equity returns should be a prime objective of research.

The theoretical building blocks for this line of research are the work on information frictions that has shaped research in corporate finance since the late 1970s; and the literature on structural models of the firm that examines corporate policies.

By embedding different types of information frictions into structural models of the firm one can generate novel and quantifiable predictions for equity returns that are micro-founded in the policies of the corporation in the presence of asymmetric information. In this way, the debate on cross-sectional and time-series return predictability becomes grounded in its corporate foundations.

Some Ideas in this direction:

The Tortoise and the Snail: Reconciling the Evidence on Capital Structure Stability with Stefano Sacchetto (IESE) and Roberto Steri (HEC Lausanne)

  • SFS Cavalcade 2019 Pittsburgh, Pennsylvania

Levered Returns and Capital Structure Imbalances with Claudio Tebaldi and (HEC Lausanne) Roberto Steri (R&R at the Journal of Monetary Economics)

Corporate Hedging and the Variance of Stock Returns with Kizkitza Biguri (BI Oslo) and Christian Brownlees (UPF)

Leverage Dynamics and Investment with Mattia Bongini and Roberto Steri (HEC Lausanne)

Issuing Equity in the Face of Adverse Selection with Gianmarco Ruzzieri (UPF) and Stefano Sacchetto (IESE)

Bend it Like q: Managerial Moral Hazard and Equity Returns with Stefano Sacchetto (IESE), Roberto Steri (HEC Lausanne) and Nan Xiong (Surrey BS)

Why Predictability of Leverage Implies Predictability of Returns with Roberto Steri (HEC Lausanne) and Dmitry Kuvshinov (UPF)

Time Varying Financial Constraints and Predictability with Roberto Steri (HEC Lausanne) and Ilaria Piatti (Oxford SBS)

Short-Termism: Where is the Inefficiency? with Roberto Steri (HEC Lausanne)

Filippo Ippolito

Director of the Master in Finance, Barcelona GSE

Director of the Summer School in Finance, Barcelona GSE

Associate Professor of Finance, Universitat Pompeu Fabra, Barcelona

Research Affiliate, Centre for Economic Policy Research, London

Department of Economics and Business, Universitat Pompeu Fabra, Ramon Trias Fargas, 25-27, 08005 Barcelona, Spain