Education

Ph.D., Financial Economics
Massachusetts Institute of Technology, Sloan School of Management, 1998-2002
Dissertation: “Integration and Corporate Investment”
Committee: Sendhil Mullainathan, David Scharfstein (Chair), Antoinette Schoar

M.S., Industrial Administration
Carnegie Mellon University, Graduate School of Industrial Administration, 1993-1995

B.S., Industrial Engineering
Bogazici University, Faculty of Engineering, 1989-1993


Research Interests

Corporate Finance, Corporate Investment, Internal Capital Markets, Economic Theory of Organizations, Law and Finance


Published Papers

Integration, Organizational Processes, and Allocation of Resources
Journal of Financial Economics, January 2005

Abstract: Does the level of integration of a firm affect the quality of information available to its top decision makers responsible for allocating resources? Motivated by the pervasiveness of specific knowledge in large multi-division firms, I develop a model of internal competition for corporate resources among specialist managers and show that: (i) managers of integrated firms exaggerate the payoffs of their projects to obtain resources despite potentially adverse career consequences, and (ii) the exaggeration problem worsens with increased integration and reduces the allocative efficiency of an integrated firm. Control rights based on asset ownership enable the firm to set "the rules of the game" and improve managerial behavior through organizational processes such as rigid capital budgets, job rotation, centralization and hierarchies.

Evidence on the Dark Side of Internal Capital Markets with David Scharfstein
Review of Financial Studies, Forthcoming

Abstract: This paper documents differences between the Q-sensitivity of investment of stand-alone firms and unrelated segments of conglomerate firms. Unrelated segments exhibit lower Q-sensitivity of investment than stand-alone firms. This fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand-alone firms in high-Q industries. This finding is robust to matching on industry, year, size, age and profitability. The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems explain the investment behavior of conglomerates.


Working Papers

Corporate Diversification and the Cost of Capital with Rebecca Hann and Maria Ogneva

Abstract: This paper examines whether organizational form matters for a firm's cost of capital. We develop a model to show that corporate diversification may reduce not only idiosyncratic risk but also systematic risk. Using measures of implied cost of capital constructed from analyst forecasts, we find that diversified firms have on average a lower cost of capital than stand-alone firms. In addition, the cost of capital is lower when the correlation of cash flows among the diversified firm’s segments is lower. The observed cost of capital reduction yields an average value gain of approximately 6% when moving from the highest to the lowest cash flow correlation quintile. Overall, our results are consistent with the coinsurance effect of diversification lowering a firm’s cost of capital.

Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis with R. Duchin and B. Sensoy

Abstract: We study the effect of the financial crisis that began in August 2007 on corporate investment. The crisis represents an unexplored negative shock to the supply of external finance for non-financial firms. We find that corporate investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. Consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. To address concerns about the endogeneity of firms’ finances to changes in investment opportunities, we measure these financial positions as much as four years prior to the crisis and confirm that we do not find similar results following placebo crises in the summers of 2003-2006. We also do not find similar results following the negative demand shock caused by the events of September 11. These effects weaken considerably beginning in the third quarter of 2008, when the demand-side effects of the crisis became apparent, suggesting that supply constraints may no longer have been binding. Additional analysis suggests an important precautionary savings motive for seemingly excess cash that has not been emphasized in the literature.

Club Deals in Leveraged Buyouts with Micah Officer and Berk Sensoy

Abstract: We analyze the pricing and characteristics of club deal leveraged buyouts (LBOs) – those in which two or more private equity partnerships jointly conduct an LBO. Using a comprehensive sample of completed LBOs of U.S. publicly-traded targets conducted by prominent private equity firms, we find that target shareholders receive approximately 10% less in club deals than in sole-sponsored LBOs. This result is concentrated before 2006, when club deals began to receive heightened media and government scrutiny, and is mitigated by high institutional ownership in the target firm. These results are robust to extensive controls for target and deal characteristics, including size, Q, measures of risk, and time and industry fixed effects. We find little support for benign motivations for club deals based on capital constraints, diversification motives, or the ability of clubs to obtain favorable debt amounts or prices. Our findings are consistent with the view that club deals are detrimental to target shareholders, but it is possible that the lower pricing of club deals is an inadvertent byproduct of a benign motivation for club formation.

When Are Outside Directors Effective? with Ran Duchin and John Matsusaka

Abstract: The paper uses the fact that recent regulations have required some companies to increase the number of outside directors on their boards to provide estimates of the effect of board independence on performance that are largely free from endogeneity problems. Our main finding is that the effectiveness of outside directors depends on the cost of acquiring information about the firm: when the cost of acquiring information is low, performance increases when outsiders are added to the board, and when the cost of information is high, performance worsens when outsiders are added to the board. The estimates provide some of the cleanest estimates to date that board independence matters, and the finding that board effectiveness depends on information cost supports a nascent theoretical literature emphasizing information asymmetry. We also find that firms compose their boards as if they understand that outsider effectiveness varies with information costs.

Market Segmentation and Cross-Predictability of Returns with Lior Menzly

Abstract: We present evidence supporting the hypothesis that due to investor specialization and market segmentation, value-relevant information diffuses gradually in financial markets. Using the stock market as our setting, we find that (i) stocks that are in economically related supplier and customer industries cross-predict each other's returns, (ii) changes in analyst expectations similarly exhibit cross-predictability, (iii) the magnitude of return cross-predictability declines with the number of informed investors in the market as proxied by the level of analyst coverage and institutional ownership, and (iv) changes in the stock holdings of institutional investors mirror the model trading behavior of informed investors.

Corporate Fraud and Real Investment

Abstract: This paper studies the real investment and financing behavior of firms around the period of fraud identified in SEC Accounting and Auditing Enforcement Releases. In the pre-fraud period, the typical fraudulent firm has a higher valuation, invests more and exhibits higher Q-sensitivity of investment than industry peers. The fraud period, by contrast, is characterized by significant drops in valuation and investment. I find no support for the hypothesis that fraudulent firms waste real resources by overinvesting during periods of fraud to signal value. Fraud appears to be an attempt to cover up bad investments made in response to the market's high valuation in the pre-fraud period.

Organizational Scope and Allocation of Resources: Evidence on Rigid Capital Budgets with Zekiye Selvili

Abstract: This paper compares the investment behavior of multi-segment firms (firms with multiple business units) with that of single-segment firms. Models that omit within-firm information and incentive problems predict both set of firms to invest in response to investment opportunities. Our main findings reject this null. In particular, multi-segment firms exhibit a tendency to maintain a fixed level of capital in their business units regardless of investment opportunities. In addition to exhibiting rigid investment behavior, multi-segment firms are also less responsive to investment opportunities than single-segment firms. These effects are especially strong in multi-segment firms with unrelated business units. Our findings support the existence of agency problems within multi-segment firms.

Cross-Industry Momentum with Lior Menzly

Abstract: This paper documents a strong cross-momentum effect among industries that are related to each other along the supply chain. Specifically, trading strategies that buy and sell industries based on respectively high and low past returns in related upstream and downstream industries yield significant profits. Cross-industry momentum is distinct from previously documented stock- and industry-level momentum, and other known return factors.

Capital Rationing: Evidence from Diversified Oil Companies

Abstract: This paper presents evidence that is largely inconsistent with the view that the oil shock of 1986 systematically led diversified oil companies to materially reduce investment in their nonoil business segments. Specifically, I find that the reductions immediately following the oil shock do not correlate with standard measures of costly external finance in the cross-section. Moreover, the time-series evidence, provided in earlier research, is not robust. Evidence from a comprehensive dataset of U.S. petrochemical plants confirms the aforementioned findings. The failure to find strong signs of a capital rationing effect within diversified oil firms in the extreme context of the 1986 oil shock raises doubts about whether such effects are important on an ongoing basis for companies operating in more normal economic conditions. The findings are especially important since the 1986 oil shock constitutes the only exogenous experiment that the literature has provided so far in support of the capital rationing hypothesis.


Work in Progress

Integration and Investment in the Chemicals Industry

Managerial Extrapolation and Corporate Investment

Alpaslan Selvili Ozbas

Yavuz Selvili Ozbas


Teaching Experience

Professor, USC Marshall School of Business
MBA and Undergraduate Elective Course in Corporate Financial Strategy, Fall 2002 - present
PhD Course in Corporate Finance, Fall 2007 - present

Teaching Assistant, MIT Sloan School of Management
MBA Core Course in Corporate Finance, Prof. David Scharfstein, Spring 2001

Teaching Assistant, MIT Sloan School of Management
MBA Core Course in Corporate Finance, Prof. Denis Gromb, Fall 2000

Instructor, Carnegie Mellon University GSIA (received Best Student-Teacher Award)
Introduction to Financial Derivatives (Undergraduate Course), Spring 1995

Teaching Assistant, Carnegie Mellon University GSIA
MBA Core Course in Corporate Finance, Prof. Ronen Israel, Fall 1994


Work Experience

Ford Motor Company, Dearborn MI, 1995-1998
Treasury Associate, Treasurer's Office

Finansbank, Istanbul, Turkey, June-August 1994
Foreign Exchange Trader

Bank of Industrial Investment & Credit, Istanbul, Turkey, June-September 1992
Project Finance Analyst


Fellowships and Honors

Walter A. Rosenblith Fellow, Massachusetts Institute of Technology, 1998-2002
Elliott Dunlap Smith Award, Carnegie Mellon University, 1995
Outstanding Academic Achievement Award, Carnegie Mellon University, 1995
Best Student-Teacher Award, Carnegie Mellon University, 1995
Beta Gamma Sigma, Carnegie Mellon University, 1995
Henry Ford II Scholar, Ford Motor Company, 1994
National Scholar of the Turkish Education Foundation, 1993-1995
TOBB Scholar of the Union of Commodity Exchanges of Turkey, 1989-1993


Professional Activities

Invited Presentations
Harvard Business School (January 2002)
University of Illinois at Urbana-Champaign (January 2002)
University of Minnesota (January 2002)
University of Southern California (January 2002)
University of Michigan (February 2002)
University of Texas, Austin (February 2002)
NBER Organizational Economics Conference (December 2003)
Koç University (December 2003)
AFA Annual Meetings San Diego (January 2004)
University of California, Los Angeles (October 2004)
AFA Annual Meetings Philadelphia (January 2005)
FMA Annual Meetings Chicago (October 2005)
Bilkent University (June 2007)
NBER Summer Institute Corporate Finance (July 2007)
Michigan State University (December 2007)
UCI-UCLA-USC Finance Day (April 2008)
University of Washington (June 2008)
Arizona State University (September 2008)

Discussions
Financial Economics and Accounting Conference (November 2004)
Utah Winter Business Economics Conference (March 2006)
AFA Annual Meetings Chicago (January 2007)
AFA Annual Meetings New Orleans (January 2008), Session Chair

Professional Membership
American Economic Association
American Finance Association
Western Finance Association


Referee Work

American Economic Review, Journal of Economic Behavior and Organization, Journal of Finance, Journal of Financial Economics, Journal of Law, Economics and Organization, Rand Journal of Economics


References

Denis Gromb, London School of Business
Regent's Park, London, United Kingdom NW1 4SA
Phone: 44 (0) 20 7262 5050 ext. 3545, e-mail: dgromb@london.edu

Sendhil Mullainathan, Harvard University Economics Department
Littauer 208, Cambridge, MA 02138
Phone: (617) 496-2720, e-mail: mullain@fas.harvard.edu

David Scharfstein, Harvard Business School
Baker Library 239, Boston, MA 02163
Phone: (617) 496-5067, e-mail: dscharfstein@hbs.edu

Antoinette Schoar, MIT Sloan School of Management
50 Memorial Drive, E52-433, Cambridge, MA 02142
Phone: (617) 253-3763, e-mail: aschoar@mit.edu