M. Cecilia Bustamante
Assistant Professor in Finance
London School of Economics
Department of Finance
Houghton Street - Room M 2.13
London WC2A 2AE
Phone: +44 (0)20 7107 5011
E-mail: m (dot) bustamante (at) lse (dot) ac (dot) uk
The dynamics of going public, 2012, Review of Finance 16(2), 577-618.
We derive a model in which firms may use the timing of their IPOs to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares and under-price more during cold markets, and that issuers are younger on average during hot markets.
Strategic investment and Industry Risk Dynamics, Review of Financial Studies, forthcoming.
In this paper we characterize how firms' strategic interaction in product markets affects the industry dynamics of investment and expected returns. Under imperfect competition, a firm's exposure to systematic risk is jointly affected by its own investment strategy and the investment strategies of its industry peers, such that the dynamics of its expected returns depend on the intra-industry value spread. In the model and the data, firms' betas and returns correlate more positively in industries with low value spread, low dispersion in operating mark-ups, and low concentration.
Agency, Firm Growth, and Managerial Turnover (with R. Anderson and S. Guibaud), WFA Annual Meetings 2012, CEPR Annual Meetings 2012, EFA Annual Meetings 2012.
We study managerial incentive provision under moral hazard in a firm subject
to stochastic growth opportunities. In our model, managers are dismissed after
poor performance, but
also when an alternative manager is more capable of growing the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. Firms may pay severance to incentivize their managers to report truthfully the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract implies excessive retention.
How do Frictions affect Corporate Investment? A structural approach, AEA Meetings Paper 2013.
In this paper we propose a neoclassical investment model as an empirical tool to test investment equations. The model has significant power in explaining investment and external financing issues, and yields testable predictions on the probability of investment which have been neglected in previous empirical studies. Using our approach, we quantify firms' real and financing frictions by industry group. We find that firms' costs of investment and financing are explained by industry characteristics such as the capital intensity. And we identify financially constrained firms by measuring the marginal effect of an increase in cash flows on the probability of investment.
Product Market Competition and Industry Returns (with A. Donangelo), Minnesota Mini Asset Pricing Conference 2012, WFA Meetings Paper 2013, EFA Meetings 2013. Online Appendix
This paper documents that product market competition has two opposing effects on asset returns. We find that firms in more competitive industries have less valuable growth options and thus lower loadings on systematic risk. We also find that these firms have lower profit margins which make them more exposed to systematic shocks. The first effect dominates the second, so that firms in more competitive industries earn lower asset returns on average. Our empirical findings are robust to using five alternative empirical measures of competition, and to controlling for the sample selection bias of publicly listed firms.
Early Career Women in Finance Conference [jointly organized with Anna Cieslak, and sponsored by the Kellogg Zell Center for Risk Research of NU] [program]
Website of the Macro Finance Society