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Author:Warusawitharana, Missaka 

Working Paper
Corporate asset purchases and sales: theory and evidence

Purchases and sales of operating assets by firms generated $162 billion for shareholders over the past 20 years. This contrasts sharply with the evidence on mergers. This paper characterizes the behavior of value-maximizing firms, which may grow organically, purchase existing assets or sell assets. The approach yields an endogenous selection model that links asset purchases and sales to fundamental properties of the firm. Empirical tests confirm the predictions of the model. In particular, return on assets and size strongly predict when firms purchase or sell assets, and the transaction size ...
Finance and Economics Discussion Series , Paper 2007-27

Working Paper
Equity market misvaluation, financing, and investment

We quantify how much nonfundamental movements in stock prices affect firm decisions. We estimate a dynamic investment model in which firms can finance with equity or cash (net of debt). Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds owing to and from these activities come from either investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Firms respond to misvaluation by adjusting financing more than by adjusting investment. Managers' rational ...
Finance and Economics Discussion Series , Paper 2013-78

Working Paper
Research and development, profits and firm value: a structural estimation

Is the return to private R&D as high as believed? This study identifies a flaw in the production function approach to estimating the return to R&D. I provide new estimates based on a structural estimation approach that incorporates uncertainty about the outcome from R&D. The results shed light on the rate of innovation, the impact of an innovation on profits, and the market value of the R&D stock. The parameter estimates imply a mean return to R&D of 3.7-5.5%, much lower than previous values. The analysis also demonstrates the unsuitability of using the return to R&D as a basis for policy ...
Finance and Economics Discussion Series , Paper 2008-52

Working Paper
Financial market shocks during the Great Depression

This study examines the effect of shocks observed in financial markets on output and employment during the Great Depression. We present three main findings. First, an adverse financial shock leads to a decline in the manufacturing sector's output and employment that peaks about 11 months afterward. Next, this shock has a much greater impact on the durables sector than the nondurables sector. Last, continuing financial market weakness in 1933 and 1934 may have restrained the recovery from the Great Depression. The findings suggest that financial market weakness contributed to the length and ...
Finance and Economics Discussion Series , Paper 2010-22

Working Paper
An efficiency perspective on the gains from mergers and asset purchases

A simple efficiency-based view states that acquisitions shift assets to more productive owners. This implies that expected returns from acquisitions increase with transaction value. We propose using the sensitivity of abnormal returns to scaled transaction value as a measure of efficiency gains. Using this method, we find that the average acquirer obtains an increase of 3% - 5% in the value of the acquired assets. However, efficiency gains vary sharply across acquirer and deal characteristics. We find statistical significance for interactions of relative value and variables known to affect ...
Finance and Economics Discussion Series , Paper 2007-39

Working Paper
Capital ratios and bank lending: a matched bank approach

This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2009, that the relationship between capital ratios and bank lending is insignificant until the recent financial ...
Finance and Economics Discussion Series , Paper 2011-34

Working Paper
Finance and Productivity Growth: Firm-level Evidence

Using data on a broad set of European firms, we find a strong positive relationship between the use of external financing and future productivity (TFP) growth within firms. This relationship is robust to various measures of financing and productivity, and strengthens as financing costs increase. We provide evidence against a reverse-causality explanation by showing that this relationship arises from the component of TFP that is outside the information set of the firm. These findings indicate that financial development supports productivity growth within firms, and helps explain why economic ...
Finance and Economics Discussion Series , Paper 2014-17

Working Paper
Profitability and the lifecycle of firms

Using data on listed and unlisted firms in the U.K., this study documents that average profitability changes systematically with age. In their early years, firms realize substantial profitability increases, while mature firms face slow declines in profitability. A model of endogenous profitability changes arising from product development captures this pattern. Investment in product development generates profitability increases for young firms while competitive pressures from new entrants lead to profitability declines for mature firms. In addition, the model predicts that young firms realize ...
Finance and Economics Discussion Series , Paper 2012-63

Working Paper
The expected real return to equity

The expected return to equity--typically measured as a historical average--is a key variable in the decision making of investors. A recent literature based on analysts forecasts and practitioner surveys finds estimates of expected returns that are sometimes much lower than historical averages. This study presents a novel method that estimates the expected return to equity using only observable data. The method builds on a present value relationship that links dividends, earnings, and investment to market values via expected returns. Given a model that captures this relationship, one can infer ...
Finance and Economics Discussion Series , Paper 2011-14

Working Paper
Mapping Heat in the U.S. Financial System

We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging ...
Finance and Economics Discussion Series , Paper 2015-59


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