Research

Link to Google Scholar page

Google Scholar citations: 12,631 (as of 7/16/24)

Published papers

Journal Articles

The balance of power in closely held corporations, M. Bennedsen and D. Wolfenzon, Journal of Financial Economics, 58 (1-2), pp. 113-139, 2000

Abstract: We analyze a closely held corporation characterized by the absence of a resale market for its shares. We show that the founder of the firm can optimally choose an ownership structure with several large shareholders to force them to form coalitions to obtain control. By grouping member cash flows, a coalition internalizes to a larger extent the consequences of its actions and hence takes more efficient actions than would any of its individual members. The model has implications for the optimal bundling of cash flow and voting rights, and for the optimal number and size of shareholders.

Investor protection and equity markets, A. Shleifer and D. Wolfenzon, Journal of Financial Economics, 66 (1), pp. 3-57, 2002

• • Lead article

  • Jensen Prize (second place) for “Best Paper on Corporate Finance and Organizations,” published in the Journal of Financial Economics in 2002

  • Gluksman Runner-Up Award for “Best Working Paper in Finance,” 2001/2, Stern, NYU

Abstract: We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (J. Political Econ. 106 (1968) 172) “crime and punishment” framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance. It also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection.

Corporate governance, economic entrenchment and growth, R. Morck, D. Wolfenzon, and B. Yeung, Journal of Economic Literature 43 (3), pp. 655-720, 2005

• • Lead article

Abstract: Outside the United States and the United Kingdom, large corporations usually have controlling owners, who are usually very wealthy families. Pyramidal control structures, cross shareholding, and super-voting rights let such families control corporations without making a commensurate capital investment. In many countries, a few such families end up controlling considerable proportions of their countries' economies. Three points emerge. First, at the firm level, these ownership structures, because they vest dominant control rights with families who often have little real capital invested, permit a range of agency problems and hence resource misallocation. If a few families control large swaths of an economy, such corporate governance problems can attain macroeconomic importance—affecting rates of innovation, economywide resource allocation, and economic growth. If political influence depends on what one controls, rather than what one owns, the controlling owners of pyramids have greatly amplified political influence relative to their actual wealth. This influence can distort public policy regarding property rights protection, capital markets, and other institutions. We denote this phenomenon economic entrenchment, and posit a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one possible equilibrium. The literature suggests key determinants of economic entrenchment, but has many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

The effect of external finance on the equilibrium allocation of capital, H. Almeida, and D. Wolfenzon, Journal of Financial Economics 75 (1), pp. 133-164, 2005

• • Jensen Prize (second place) for “Best Paper on Corporate Finance and Organizations,” published in the Journal of Financial Economics in 2005

  • Fitch Ratings Runner-Up Award for “Best Working Paper in Finance,” 2002/3, Stern, NYU

Abstract: We develop an equilibrium model to understand how the efficiency of capital allocation depends on outside investor protection and the external financing needs of firms. We show that when capital allocation is constrained by poor investor protection, an increase in firms' external financing needs may improve allocative efficiency by fostering the reallocation of capital from low to high productivity projects. We also find novel empirical support for this prediction.

Should business groups be dismantled? The equilibrium costs of efficient internal capital markets, H. Almeida, and D. Wolfenzon, Journal of Financial Economics 79 (1), pp. 99-144, 2006

Abstract: We analyze the relationship between conglomerates’ internal capital markets and the efficiency of economy-wide capital allocation, and we identify a novel cost of conglomeration that arises from an equilibrium framework. Because of financial market imperfections engendered by imperfect investor protection, conglomerates that engage in winner-picking (Stein, 1997 [Internal capital markets and the competition for corporate resources. Journal of Finance 52, 111–133]) find it optimal to allocate scarce capital internally to mediocre projects, even when other firms in the economy have higher-productivity projects that are in need of additional capital. This bias for internal capital allocation can decrease allocative efficiency even when conglomerates have efficient internal capital markets, because a substantial presence of conglomerates might make it harder for other firms in the economy to raise capital. We also argue that the negative externality associated with conglomeration is particularly costly for countries that are at intermediary levels of financial development. In such countries, a high degree of conglomeration, generated, for example, by the control of the corporate sector by family business groups, could decrease the efficiency of the capital market. Our theory generates novel empirical predictions that cannot be derived in models that ignore the equilibrium effects of conglomerates. These predictions are consistent with anecdotal evidence that the presence of business groups in developing countries inhibits the growth of new independent firms because of a lack of finance.

A theory of pyramidal ownership and family business groups, H. Almeida and D. Wolfenzon, Journal of Finance 61 (6), pp. 2637-2680, 2006

• • Finalist for the Brattle Group Awards for “Best Paper in Corporate Finance,” published in  the Journal of Finance in 2007

  • Gluksman First Place Award for “Best Working Paper in Finance,” 2003/4, Stern, NYU

Abstract: We provide a new rationale for pyramidal ownership in family business groups. A pyramid allows a family to access all retained earnings of a firm it already controls to set up a new firm, and to share the new firm's nondiverted payoff with shareholders of the original firm. Our model is consistent with recent evidence of a small separation between ownership and control in some pyramids, and can differentiate between pyramids and dual-class shares, even when either method can achieve the same deviation from one share–one vote. Other predictions of the model are consistent with both systematic and anecdotal evidence.

Inside the family firm: The role of families in succession decisions and performance, M. Bennedsen, K. Nielsen, F. Pérez-González, and D. Wolfenzon, Quarterly Journal of Economics 122 (2), pp. 647- 691, 2007

• • Gluksman First Place Award for “Best Working Paper in Finance,” 2005/6, Stern, NYU

Abstract: This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision-making and the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or external chief executive officer (CEO). The paper uses variation in CEO succession decisions that result from the gender of a departing CEO's firstborn child. This is a plausible instrumental variable (IV), as male first-child firms are more likely to pass on control to a family CEO than are female first-child firms, but the gender of the first child is unlikely to affect firms' outcomes. We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions. Our IV estimates are significantly larger than those obtained using ordinary least squares. Furthermore, we show that family-CEO underperformance is particularly large in fast-growing industries, industries with highly skilled labor force, and relatively large firms. Overall, our empirical results demonstrate that professional, nonfamily CEOs provide extremely valuable services to the organizations they head.

The structure and formation of business groups: Evidence from Korean chaebols, H. Almeida, S. Yong Park, M. Subrahmanyam and D. Wolfenzon, Journal of Financial Economics 99 (2), pp. 447-475, 2011

• • Pacific-Basin Finance Journal Research Excellence Award (Corporate Finance), 2008

Abstract: We study the evolution of Korean chaebols (business groups) using ownership data. Chaebols grow vertically (as pyramids) when the controlling family uses well-established group firms (“central firms”) to acquire firms with low pledgeable income and high acquisition premiums. Chaebols grow horizontally (through direct ownership) when the family acquires firms with high pledgeable income and low acquisition premiums. Central firms trade at a relative discount, due to shareholders’ anticipation of value-destroying acquisitions. Our evidence is consistent with the selection of firms into different positions in the chaebol and ascribes the underperformance of pyramidal firms to a selection effect rather than tunneling.

Governance problems in closely-held corporations, V. Nagar, K. Petroni, and D. Wolfenzon, Journal of Financial and Quantitative Analysis 46 (4), pp. 943-966, 2011

Abstract: A major governance problem in closely held corporations is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large data set of closely held corporations. We find that shared-ownership firms report a substantially larger return on assets and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for endogeneity of ownership structure. We provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

Dissecting the effect of credit supply on trade: Evidence from matched credit-export data, D. Paravisini, V. Rappoport, P. Schnabl, and D. Wolfenzon, Review of Economic Studies 82 (1), pp. 333-359, 2015

• • Rothschild Caesarea Center Annual Academic Conference Best Paper Award, 2010

Abstract: We estimate the elasticity of exports to credit using matched customs and firm-level bank credit data from Peru. To account for non-credit determinants of exports, we compare changes in exports of the same product and to the same destination by firms borrowing from banks differentially affected by capital-flow reversals during the 2008 financial crisis. We find that credit shocks affect the intensive margin of exports, but have no significant impact on entry or exit of firms to new product and destination markets. Our results suggest that credit shortages reduce exports through raising the variable cost of production, rather than the cost of financing sunk entry investments.

The investment behavior of buyout funds: Theory and evidence, A. Ljungqvist, M. Richardson, and D. Wolfenzon, Financial Management, 49 (1), pp. 3-32, 2019

• • Lead article

  • Barclays Global Investors Australia Research Award (winner) for 2007

  • Gluksman Honorable Mention Award for “Best Working Paper in Finance,” 2007/8, Stern

Abstract: We analyze the determinants of buyout funds’ investment decisions. We argue that when there is imperfect competition for private equity funds, the timing of funds’ investment decisions, their risk-taking behavior, and their subsequent returns depend on changes in the demand for private equity, conditions in the credit market, and fund managers’ ability to influence perceptions of their talent. We investigate these hypotheses using a proprietary dataset of 207 U.S. buyout funds that invested in 1,957 buyout targets over a 30-year period. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our findings are as follows. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Finally, following periods of good performance, funds become more conservative, and this effect is stronger for first-time funds.

Drivers of effort: Evidence from employee absenteeism, M. Bennedsen, M. Tsoutsoura, and D. Wolfenzon, Journal of Financial Economics 133 (3), pp. 658-684, 2019

Abstract: We use detailed information on individual absent spells of all employees in 4140 firms in Denmark to show large differences in average absenteeism across firms. Using employees who switch firms, we decompose days absent into an individual component (e.g., motivation, work ethic) and a firm component (e.g., incentives, corporate culture). We find the firm component explains 50%–60% of the difference in absenteeism across firms, with the individual component explaining the rest. We present suggestive evidence of the mechanisms behind the firm effect with family firm status and concentrated ownership strongly correlated with decreases in absenteeism. We also analyze the firm characteristics that correlate with the individual effect and find that firms with stronger career incentives attract lower-absenteeism employees.

Do CEOs matter? Evidence from CEO hospitalization events, M. Bennedsen, F. Pérez-González, and D. Wolfenzon, Journal of Finance 75(4), pp. 1877-1911, 2020

Abstract: Using variation in firms’ exposure to their CEOs resulting from hospitalization, we estimate the effect of chief executive officers (CEOs) on firm policies, holding firm-CEO matches constant. We document three main findings. First, CEOs have a significant effect on profitability and investment. Second, CEO effects are larger for younger CEOs, in growing and family-controlled firms, and in human-capital-intensive industries. Third, CEOs are unique: the hospitalization of other senior executives does not have similar effects on performance. Overall, our findings demonstrate that CEOs are a key driver of firm performance, which suggests that CEO contingency plans are valuable.

Do firms respond to gender pay gap transparency? M. Bennedsen, E. Simintzi, M. Tsoutsoura, and D. Wolfenzon, Journal of Finance 77(4), pp. 2051-2091, 2022

Abstract: We examine the effect of pay transparency on the gender pay gap and firm outcomes. Using a 2006 legislation change in Denmark that requires firms to provide gender-disaggregated wage statistics, detailed employee-employer administrative data, and difference-in-differences and difference-in-discontinuities designs, we find that the law reduces the gender pay gap, primarily by slowing wage growth for male employees. The gender pay gap declines by 2 percentage points, or 13% relative to the prelegislation mean. Despite the reduction of the overall wage bill, the wage transparency mandate does not affect firm profitability, likely because of the offsetting effect of reduced firm productivity.

Business group spillovers, L. Naaraayanan, and D. Wolfenzon, Review of Financial Studies 37 (1), pp. 231-264, 2024

Abstract: We compare the investment of standalone firms across regions after a positive shock to the investment opportunities generated by a large-scale highway development project. We show that the standalones’ investment sensitivity is lower in regions with a higher density of business groups in the local area. We investigate mechanisms driving our results and find support for a financing mechanism whereby banks allocate capital preferentially to group-affiliated firms in responding to the increase in credit demand. Overall, our study documents that business groups have spillover effects on standalone firms.

Entrepreneurship and Regional Windfall Gains: Evidence from the Spanish Christmas Lottery, M. V. Bermejo, M. Ferreira, D. Wolfenzon, and R. Zambrana, Journal of Financial and Quantitative Analysis, forthcoming

• • Best paper prize at the 16th Annual Conference in Financial Economic Research by Eagle Labs (IDC Herzliya, 2019)

Abstract: We show cash windfalls affect the real economy by spurring entrepreneurship. We identify these effects using the Spanish Christmas Lottery, which provides a unique setting as prizes are geographically concentrated and distributed among thousands of households. We find higher start-up entry, job creation, and self-employment in winning regions. Consistent with a financial constraints channel, results are strongest in sectors relying on external finance and regions with limited credit access. Newly created firms are larger, more profitable, and survive longer. For existing firms, however, growth and profitability do not respond to lottery awards, but wages increase due to tighter labor markets.

Book Chapters and Non-refereed Publications

Comment on Alexander Aganin and Paolo Volpin’s History of Corporate Ownership in Italy, D. Wolfenzon, in R. Morck (Ed.), The History of Corporate Governance around the World: Family Business Groups to Professional Managers, 2005 (University of Chicago Press)

The governance of family firms, M. Bennedsen, F. Pérez-González, and D. Wolfenzon, in R. Anderson and K. Baker (Eds), Corporate Governance, 2010 (John Wiley & Sons)

Dissecting the Effect of Credit Supply on Trade, D. Paravisini, V. Rappoport, P. Schnabl, and D. Wolfenzon, VoxEU.org, 27 July 2011

Research: Gender Pay Gaps Shrink When Companies Are Required to Disclose Them, M. Bennedsen, E. Simintzi, M. Tsoutsoura, and D. Wolfenzon, Harvard Business Review Digital Article, January 23, 2019.

Working papers and work in progress

Pay transparency and mental health, M. Bennedsen, D. Scur, E. Simintzi, M. Tsoutsoura, and D. Wolfenzon

The talent gap in family-controlled firms, M. Bennedsen, M. Tsoutsoura, and D. Wolfenzon

Public sector leadership talent crisis, M. Bennedsen, F. Pérez-González, M. Schlier, M. Tsoutsoura, and D. Wolfenzon

The holding company discount, L. Naaraayanan, S. Park, and D. Wolfenzon

A theory of pyramidal ownership, 1999, legacy paper