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Ruediger Fahlenbrach Swiss Finance Institute Assistant Professor of Finance at EPFL (Ecole Polytechnique Fédérale de Lausanne) Email: ruediger.fahlenbrach [at] epfl.ch
Curriculum Vitae
Here is a link to my CV
Publications Cronqvist, Henrik, and Ruediger Fahlenbrach, 2009, Large Shareholders and Corporate Policies, forthcoming Review of Financial Studies We develop an empirical framework that allows us to analyze the effects of heterogeneity across large shareholders, and we construct a new blockholder-firm panel data set in which we can track all unique blockholders among large
Dlugosz, Jennifer, Fahlenbrach, Ruediger, Gompers, Paul, and Andrew Metrick, 2006, Large Blocks of Stock: Prevalence, Size, and Measurement, Journal of Corporate Finance 12, 594-618. Large blocks of stock play an important role in many studies of corporate governance and finance. Despite this important role, there is no standardized data set for these blocks, and the best available data source, Compact Disclosure, has many mistakes and biases. In this paper, we document these mistakes and show how to fix them. The mistakes and biases tend to increase with the level of reported blockholdings: in firms where Compact Disclosure reports that aggregate blockholdings are greater than 50 percent, these aggregate holdings are incorrect more than half the time and average holdings for these incorrect firms are overstated by almost 30 percentage points. For researchers using uncorrected blockholder data as a dependent variable, these errors will increase the standard error of coefficient estimates but do not appear to cause bias. However, we find that if blockholders are used as an independent variable, economically significant errors-in-variables biases can occur. We demonstrate these biases using a representative analysis of the relationship between firm value and outside blockholders. An online appendix to our paper provides a "clean" data set for our sample firms and time period. For researchers who need to work outside of this sample, we also test the efficacy of alternative (cheaper) fixes to this data problem, and find that truncating or winsorizing the sample can reduce about half of the bias in our representative application.
Fahlenbrach, Ruediger, 2009, Founder-CEOs, Investment Decisions, and Stock Market Performance, Journal of Financial and Quantitative Analysis 44, 439-466. Eleven percent of the largest public Fahlenbrach, Ruediger, 2009, Shareholder Rights, Boards, and Executive Compensation, Review of Finance 13, 81-113. I analyze the role of executive compensation in corporate governance. As proxies for corporate governance, I use board size, board independence, CEO-chair duality, institutional ownership concentration, CEO tenure, and an index of shareholder rights. The results from a broad cross-section of large
Fahlenbrach, Ruediger, Angie Low, and Rene M. Stulz, 2009, Why Do Firms Appoint CEOs as Outside Directors?, forthcoming Journal of Financial Economics
Appointments of outside CEOs to boards are highly sought after by companies. To understand why this is so, we examine the determinants of appointments of CEOs to boards, the stock market's reaction to such appointments, and how these appointments impact the appointing companies. We find that CEOs are most likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance mechanisms to their own firms. Though the first appointment of a CEO to a board has a higher stock-price reaction than the appointment of another outside director, subsequent CEO appointments are not associated with a higher stock-price reaction. Outside CEO director appointments are followed by decreases in the appointing firm's operating performance in the case of interlocks, but otherwise CEO directors have no impact on the appointing firm's operating performance, its decision-making, the compensation of its CEO, and the monitoring of management by the board. Consequently, to the extent that the appointment of an outside CEO to a board is beneficial to the appointing firm, it is because it certifies the firm rather than because it improves governance. Except in the case of interlocks, none of our evidence supports the view that CEO director appointments help entrench the appointing firm's CEO.
Fahlenbrach, Ruediger, and Patrik Sandas, 2009, Co-movements of Index Options and Futures Quotes, Journal of Empirical Finance 16, 151-163. We report evidence that the co-movements of index options and index futures quotes differ sharply from perfect correlation in periods with option trades. In half-hour intervals with (without) option trades 25% (12%) of call option quote changes have either the opposite sign or are larger in magnitude than the corresponding index futures quote changes. We calibrate a stochastic volatility model that allows for trade and no-trade periods using real data and simulate the joint co-movements of index quotes and option quotes in this model. We show that for trade intervals the observed co-movements differ from the benchmark case established by our simulations approximately three times too often. We provide empirical evidence that market microstructure effects - specifically, stale quotes and aggressive quotes - explain the majority of the deviations from the benchmark. Our findings are relevant for techniques that use estimates of local co-movements as inputs to price or hedge options.
Fahlenbrach, Ruediger, and Rene M. Stulz, 2009, Managerial Ownership Dynamics and Firm Value, Journal of Financial Economics 92, 342-361. From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well, but not more likely to increase their ownership when their firms have poor performance. Because investors learn about the total change in managerial ownership with a lag, changes in Tobin's q in a period can be affected by changes in managerial ownership in the previous period. In an efficient market, it is unlikely that changes in managerial ownership in one period are caused by future changes in q. When controlling for past stock returns, we find that large increases in managerial ownership increase q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We argue that our evidence cannot be wholly explained by existing theories and propose a managerial discretion theory of ownership consistent with our evidence. Working Papers Please find the newest versions of my working papers here. Bank CEO Incentives and the Credit Crisis, 2009, Ohio State University and Swiss Finance Institute Working Paper (joint with Rene Stulz). Abstract: We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.
Estimating the Effects of Large Shareholders Using a Geographic Instrument, 2009, Ohio State University working paper (joint with Bo Becker and Henrik Cronqvist). Abstract: Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument - the density of wealthy individuals near a firm's headquarters - for the presence of a large, non-managerial individual shareholders in a firm. These shareholders have a large impact on firms, controlling for selection effects. Consistent with theories of large shareholders as monitors, we find that they increase total payouts to shareholders, reduce corporate cash holdings, reduce executive compensation and may increase firm profitability. In addition, large sharholders reduce the liquidity of the firm's stock. On average, they do not appear to affect capital structure. Former CEO Directors: Lingering CEOs or Valuable Resources?, Ohio State University Working Paper (joint with Bernadette Minton and Carrie Pan). Abstract: A firm is more likely to reappoint a former CEO to its board of directors after retirement the better is the firm's market-adjusted stock performance, the longer is the CEO's tenure, if the CEO is a founder of the firm, and the more inexperienced is the successor CEO. Firms with former CEO directors make different corporate decisions. The relative performance-turnover sensitivity of the successor CEO is higher and there is better firm performance when the former CEO is a director. After extremely poor firm performance under their successors, former CEOs often return to the CEO position. When they do so, their firms do as well as industry and past performance matched firms. Do Funds Need Governance? Evidence from Variable Annuity-Mutual Fund Twins, 2008, Ohio State University working paper (joint with Richard Evans) Abstract: We study the roles of traditional governance (boards, sponsors, etc.) and market governance(investors voting with their feet) in mutual funds and variable annuities. We find that market governance is less pronounced for variable annuity investors. Using a matched sample of variable annuity-mutual fund twins, we find that variable annuity investors are less sensitive to poor performance and high fees than mutual fund investors. Given the weaker role played by market governance, we then examine the role played by traditional governance in variable annuities. Variable annuity boards and sponsors add alternative investment options and replace advisors on behalf of their investors after poor performance and high fees. These traditional governance mechanisms are, however, less effective when conflicts of interest exist between variable annuity sponsors and fund advisors. Teaching in the MFE Program Introduction to Finance Private Equity
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