Stefano Rossi in the Sea of Risk Management
Financial crises and scandals have exposed the limits of prevailing paradigms and have put the governance mechanisms of corporations at the center of the debate. Corporate governance, meant as the study of the contractual and legislative borrower's incentives, is Stefano Rossi's main field of research. The Full Professor at the Department of Finance and IGIER's Fellow is now holder of the Gruppo Generali Chair in Insurance and Risk Management, to be launched on Monday, 9 April (CLICK HERE for the program). "I am honored to be awarded the Gruppo Generali Chair and I am looking forward to starting a hopefully long and fruitful collaboration", he says. "My research will benefit from it and students will have the chance to network with a potential employer".
Governance failures
Stefano Rossi developed an interest in corporate governance at the time of the Enron and Parmalat scandals. "According to the dominant view, markets were perfect and financial transactions safe. The scandals proved it wrong". Stefano begun working on the subject during his PhD at the London Business School. Making use of a new database, he focused on the long-run evolution of corporate ownership in the United Kingdom in relation to formal investor protection. He then studied acquisitions by focusing on differences in law and regulation across countries. "An empirical analysis conducted on tens of thousands of cases around the world proved that the volume of mergers and acquisitions is significantly larger in countries with stronger shareholder protection. In cross-border acquisitions, buyers are mostly based in countries with the best investor protection".
Shareholders' voting matters
Professor Rossi has recently focused on the equity side of corporate governance. His paper Does Mandatory Shareholder Voting Prevent Bad Acquisitions has contributed to the debate on risky acquisitions, the so-called empire-building. "The mandatory shareholder voting on corporate acquisitions deters value-reducing transactions. When the shareholder approval is discretionary, the CEO requires the shareholder approval only when he can predict a favorable vote. This is an intuitive effect, but it is hard to identify because of statistical and econometric problems". In 2016 Stefano Rossi studied the effect of the courts' monitoring of corporate decisions by analyzing an old case. In 1985, the Delaware Supreme Court ruled that a company had been sold at a too low price and held directors personally liable. In the aftermath of the controversial decision of the court, dynamic firms lost their momentum. A later reform reversed the effects of the first decision. "We showed that the uncertainty connected to legal interventionism exerts a negative impact on the most dynamic sectors of the economy".
Debt and judicial system
During the years he spent at the Stockholm School of Economics, Stefano Rossi studied corporate governance on the debt side, investigating the allocation of the protection mechanisms for lender in different regulatory contexts and drawing a relation between judicial systems and contractual resolutions of financial distress. "In countries with weak investor protection, pledging physical assets to the bank is the only way to resolve financial distress. In countries with a strong investor protection, also intangible assets can be used to guarantee the repayment of the loan". In another paper, Rossi dealt with bankruptcy law, namely, Chapter 11 of the U.S. corporate bankruptcy code. "Bankruptcy judges have a discretional power in the resolution of financial distress. Even if they are unbiased, or leaning towards creditors, they can end up ruling in favor of debtors because of career concerns: they can attract future filings by establishing a pro-debtor reputation".
When the debt is sovereign
Stefano Rossi has more recently dealt with sovereign debt and the theory that governments repay the debt to avoid exclusion from international financial markets. "This has not been the case in Greece and elsewhere. So, the reason governments repay the debt is because it is largely held by domestic banks: a default would destroy their balance sheets, sending shock waves throughout the domestic economy". This study has at least one implication for policy making. When a sizable number of domestic banks hold national debt, it becomes relatively safe and therefore provides a source of liquidity. "The proposed increases in risk-weighted capital requirements may deprive banks, firms and citizens of much needed liquidity".
New frontiers in risk management
In the working paper The Information Content of Dividends: Safer Profits, Not Higher Profits and in the April 2018 lectio inauguralis of the Gruppo Generali Chair, Professor Rossi questions the traditional wisdom on risk management. "Conventional wisdom focuses on derivatives usage, which can be just the tip of the risk-management iceberg, because it does not take into account the fact that a firm can face increased cash flow volatility primarily through its payout policy and cash holdings".
Find out more
Stefano Rossi, Julian Franks, Colin Mayer, Ownership: Evolution and Regulation, Review of Financial Studies 22, 2009.
Stefano Rossi, Paolo Volpin, Cross-Country Determinants of Mergers and Acquisitions, Journal of Financial Economics 74, 2004.
Stefano Rossi, Marco Becht, Andrea Polo, Does Mandatory Shareholder Voting Prevent Bad Acquisitions?, Review of Financial Studies 29, 2016.
Stefano Rossi, Yaniv Grinstein, Good Monitoring, Bad Monitoring, Review of Finance 20, 2016.
Stefano Rossi, Nicola Gennaioli, Contractual Resolutions of Financial Distress, Review of Financial Studies 26, 2013.
Stefano Rossi, Nicola Gennaioli, Judicial Discretion in Corporate Bankruptcy, Review of Financial Studies 23, 2010.
Stefano Rossi, Nicola Gennaioli, Alberto Martin, Sovereign Default, Domestic Banks, and Financial Institutions, Journal of Finance 69, 2014.
Roni Michaely, Stefano Rossi, Michael Weber, The Information Content of Dividends: Safer Profits, Not Higher Profits, working paper, 2018.