Martin C Schmalz

NBD Bancorp Assistant Professor in Business Administration & Harry H. Jones Research Scholar & Assistant Professor

Finance Area | Stephen M. Ross School of Business | University of Michigan | R5456 | Ann Arbor, MI 48109-1234 | +1 734 763 0304 | schmalz@umich.edu | SSRN author page twitter

CV [pdf]

I am a financial economist.

My projects at the intersection of industrial organization, finance, and corporate governance investigate how common ownership by asset management firms affects competition between portfolio firms.

My papers on Bayesian learning in financial economics detail how the speed of learning depends on the market state when investors are uncertain about the systematic risk exposure of their assets.

A mostly theoretical agenda in behavioral finance analyzes the role of horizon-dependent risk aversion in decision making, belief formation, and asset pricing.

Several projects in corporate and entrepreneurial finance examine the impact of labor relations, collateral constraints, macroeconomic conditions, and heterogeneous beliefs on financing, risk management, and entrepreneurial activity.


Journal Articles

  1. Housing Collateral and Entrepreneurship (with David Sraer and David Thesmar) provides evidence that collateral constraints restrict entrepreneurial activity. [The Journal of Finance, forthcoming]

  2. Can Changes in the Cost of Carry Explain the Dynamics of Corporate Cash Holdings? (with José Azar and Jean-François Kagy) shows that changes in the costs of holding cash can explain secular trends in U.S. corporate cash holdings, as well as cross-country variation in the level of cash. [Review of Financial Studies, 2016, doi:10.1093/rfs/hhw021]

  3. Anxiety in the Face of Risk (with Thomas Eisenbachdescribes the behavior of an agent that is more risk-averse for imminent than for distant risks, derives asset pricing implications, and outlines institutional responses. [Journal of Financial Economics, 2016, doi:10.1016/j.jfineco.2015.10.002]

Book Chapter

Working Papers

Industrial Organization, Finance, and Corporate Governance

Suppose you owned shares of all firms in the same industry. Would you push these firms to compete extra hard with each other? Do you think real-world institutional investors do?

Ultimate Ownership and Bank Competition (with José Azar and Sahil Raina) documents record-high prices of banking products, develops an index of ultimate ownership concentration, and provides evidence that the growth of index funds is related to price increases of banking products. [On the 2016 NBER SI IO program.]

Media coverage: The Economist (1/2), Slate, BloombergView (1/2/3/4/5), Wall Street Journal MoneyBeat, Marginal Revolution, Milanofinanza.it (in Italian), Handelsblad (in Dutch), The New Yorker, Wirtschaftswoche (in print), New York Times, HBR.org

Anti-Competitive Effects of Common Ownership (with José Azar and Isabel Tecu) shows that common ownership of natural competitors by diversified asset managers causes higher product prices. [Online Appendix] [R&R (2nd round) at The Journal of Finance]

Media coverageSlate, Financial Times (1/2), Digitopoly, BloombergView [Matt Levine (1/2/3/4/5/6/7/8/9/10/11/12/13/14/15) & Noah Smith], The Economist (1/2/3), FT Alphaville, Eric Posner, Equitable Growth (1/2), American Bar Association, Atlantico (in French)WSJ Heard on the Street, Economist's View, Bloomberg Businessweek, Wirtschaftswoche (in German)ValueWalkWall Street Journal & WSJ Moneybeat, Handelsblatt, Quartz, Business Standard (India), Bloomberg Business, Lexology (1,2), Fortune, Forbes, Handelsblad (in Dutch), The Atlantic, The New Yorker, HLS Forum on Corporate Governance and Financial Regulation, New York Times, Pro-MarketThe Nation

Related workHere is a case study of mutual funds voting against an activist who asked for more competition. Here is a post on HBR.org that discusses other institutional features that can work as a mechanism. Here is a paper by Einer Elhauge (Harvard Law School) that details legal implications.


Bayesian Learning in Financial Economics

Revealing Downturns (with Sergey Zhuk) shows theoretically and empirically that investors respond more to information in downturns than in upturns. The mechanism reveals that negatively skewed stock returns and conditional volatility are a direct consequence of Bayesian parameter learning. [Online Appendix] [R&R (3rd round) at the Review of Financial Studies]

Fund Flows and Market States (old title: Performance Measurement with Uncertain Risk Loadings, with Francesco Franzoni) documents that retail investors reallocate more capital to outperforming mutual funds when the market moves sideways, compared to times with more extreme factor realizations. A simple Bayesian learning model predicts the documented pattern. [R&R (3rd round) at the Review of Financial Studies.] [Online Appendix]

Behavioral Finance 

Anxiety, Overconfidence, and Excessive Risk Taking (with Thomas Eisenbach) explains why some people sometimes become overconfident and take excessive risks.


Asset Pricing

Asset Pricing with Horizon-dependent Risk Aversion (with Marianne Andries and Thomas Eisenbach) develops solution techniques for dynamic general equilibrium asset pricing models with dynamically inconsistent risk preferences, and thus explains the otherwise puzzling term structure of risk prices in equity markets and the market for volatility risk. [On the Fall 2014 NBER Asset Pricing and 2016 AFA programs.]

The Term Structure of the Price of Variance Risk (with Marianne AndriesThomas Eisenbach, and Yichuan Wang) estimates an option pricing model, finds that the price of variance risk decreases with maturity, and thus helps distinguish between alternative asset pricing models.


Corporate Finance

Disagreement and Optimal Security Design (with Juan Ortner) predicts the optimality of debt, pooling, tranching, and convertibles, based on the assumption that issuers / entrepreneurs are more optimistic than their financiers. [On the AFA 2016 program]

Financing Payouts (with Joan Farre-Mensa and Roni Michaely) shows that a large fraction of dividends and repurchases are financed with simultaneous securities issuances. [R&R at the Journal of Financial Economics]

Unionization, Cash, and Leverage uses a regression discontinuity design on unionization elections to identify the causal effect of unionization on firms' financial policies.

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