We argue that stock market pressure to generate earnings encourages banks to increase risk. We measure risk using confidential supervisory ratings as well as financial information released in regulatory filings. We document that there is an increase in the risk-taking behavior of banks that become part of publicly traded bank holding companies (BHCs) either through a public listing (IPO) or acquisition by a publicly-traded BHC. This increase in risk is greater than the increase in risk for a control group of banks that intended a private-to-public transition through an IPO or acquisition, but where the deal failed. This finding is robust to instrumenting deal failure with an index of stock returns shortly after deal announcement. There are a number of explanations of this finding, but cross-sectional and time-series evidence points to stock-market earnings pressure. In particular, we find that the relative increase in risk by banks that transition to being publicly held is more pronounced if they have good governance, consistent with the idea that stock-price maximization underlies the incentive to take risk. We also find more pronounced effects in periods when the Fed funds rate and credit spreads are low. This finding is consistent with the idea that when there is downward pressure on bank earnings, publicly-held banks tend to increase risk more than privately-held banks.
David S. Scharfstein
Edmund Cogswell Converse Professor of Finance and Banking
Edmund Cogswell Converse Professor of Finance and Banking
Finance
We show that the use of algorithms to predict race has significant limitations in measuring and understanding the sources of racial disparities in finance, economics, and other contexts. First, we derive theoretically the direction and magnitude of measurement bias in estimates of unconditional disparities that use predicted instead of actual race. If their prediction errors were random, existing algorithms such as BIFSG (Voicu, 2018) would underestimate disparities in credit access for Black borrowers by 30–50%. In practice, the algorithms are systematically biased toward identifying minority borrowers who are likely to experience worse outcomes. Second, we show that in many applications the accuracy of predicted race is illusory, as many empirical methodologies call for the inclusion of location fixed effects and comparison of white and minority individuals within a given geography. As a result, estimates of conditional disparities can be dramatically underestimated, in some of our analyses, by up to 60%. While underestimating conditional disparities, predicted race overstates the importance of location in explaining disparities. Finally, because algorithm accuracy can vary across subsamples, predicted race can under- or overestimate interaction effects meant to measure cross-sectional variation in disparities.
We use the 2020 Small Business Credit Survey to study the sources of racial disparities in use of the Paycheck Protection Program (PPP). Black-owned firms are 8.9 percentage points less likely to receive PPP loans than observably similar white-owned firms. About 55% of this take-up disparity is explained by a disparity in application propensity, while the remainder is explained by a disparity in approval rates. The finding in prior research that Black-owned firms were less likely than white-owned firms to borrow from banks and more likely to borrow from fintech lenders is driven entirely by application behavior. Conditional on applying for PPP, Black-owned firms are 9.9 percentage points less likely than white-owned firms to apply to banks and 7.8 percentage points more likely to apply to fintechs. However, they face similar average approval disparities at banks (7.4 percentage points) and fintechs (8.4 percentage points). Sorting by Black-owned firms away from banks and toward fintechs is significantly stronger in more racially biased counties, and the bank approval disparity is also larger in more racially biased counties. Thus, to the extent that automation at fintechs reduces racial disparities in PPP take-up, it does so by mitigating disparities in loan application rates, not loan approval rates.
Using a large sample of Florida restaurants, we document significant racial disparities in borrowing through the Paycheck Protection Program (PPP) and investigate the causes of these disparities. Black-owned restaurants are 25% less likely to receive PPP loans. Restaurant location explains 5 percentage points of this differential. Restaurant characteristics explain an additional 10 percentage points of the gap in PPP borrowing. On average, prior borrowing relationships do not explain disparities. The remaining 10% disparity is driven by a 17% disparity in PPP borrowing from banks, which is partially offset by greater borrowing from nonbanks, largely fintechs. Disparities in PPP borrowing cannot be attributed to lower awareness of PPP loans or lower demand for PPP loans by minority-owned restaurants. Black-owned restaurants are significantly less likely to receive bank PPP loans in counties with more racial bias. In these counties, Black-owned restaurants are more likely to substitute to nonbank PPP loans. This substitution, however, is not strong enough to eliminate racial disparities in PPP borrowing. Finally, we show that our findings apply more broadly across industries in a sample of firms that were likely eligible for PPP.
This paper examines the effect of pension policy on the structure of financial systems around the world. In particular, I explore the hypothesis that policies that promote pension savings also promote the development of capital markets. I present a model that endogenizes the extent to which savings are intermediated through banks or capital markets, and derive implications for corporate finance, household finance, banking, and the size of the financial sector. I then present a number of facts that are broadly consistent with the theory and examine a variety of alternative explanations of my findings.
We present evidence that high concentration in mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. We isolate the direct effect of concentration and rule out alternative explanations in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where bank mergers increase concentration in mortgage lending. Within a county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, the overall impact of a decline in MBS yields is only 42% as large in a high-concentration county as it is in an average one. In the time series, a decrease in MBS yields today has a 32% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.
This paper proposes a new approach to social cost-benefit analysis using a model in which a benevolent government chooses risky projects in the presence of market failures and tax distortions. The government internalizes market failures and therefore perceives project payoffs differently than do individual private actors. This gives it a "social risk management" motive - projects that generate social benefits are attractive, particularly if those benefits are realized in bad economic states. However, because of tax distortions, government financing is costly, creating a "fiscal risk management" motive. Government projects that require large tax-financed outlays are unattractive, particularly if those outlays tend to occur in bad economic times. At the optimum, the government trades off its social and fiscal risk management motives. Frictions in government financing create interdependence between two otherwise unrelated government projects. As in the theory of portfolio choice, the fiscal risk of a project depends on how its fiscal costs covary with the fiscal costs of the government's overall portfolio of projects. This interdependence means that individual projects should not be evaluated in isolation.
U.S. money market mutual funds (MMFs) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the U.S. MMFs proved to be a source of considerable instability during the financial crisis of 2007–2009, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which we analyze in this paper. We assume that the main goal of MMF reform is safeguarding global financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability than an MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating NAV, may be less effective in protecting financial stability. Our analysis sheds light on the fundamental tensions inherent in regulating the shadow banking system.
The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly for residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or "shadow banking"). Whether the growth of the financial sector has been socially beneficial depends on one's view of active asset management, the increase in household credit, and the growth of shadow banking. While recognizing some of the benefits of professional asset management, we are skeptical about the marginal value of active asset management. We then raise concerns about whether the potential benefits of increased access to household credit—the main output of the shadow banking system—are outweighed by the risks inherent in this new approach to credit delivery.
A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.
David Scharfstein is the Edmund Cogswell Converse Professor of Finance and Banking at Harvard Business School. He has written on a wide range of topics in finance, including risk management, financial distress, corporate investment, capital structure, and venture capital. His current research focuses on financial intermediation and financial regulation, including work on risks in banks and nonbank financial institutions, the structure of the financial system, and private credit. Scharfstein teaches an MBA elective on financial intermediation. He is currently a research associate of the National Bureau of Economic Research. During 2017, Scharfstein was president of the American Finance Association. In 2009-2010, he was a senior advisor to the U.S. Treasury Secretary. He previously was a member of the Financial Advisory Roundtable of the Federal Reserve Bank of New York and a director of the M&T Bank Corporation. From 1987- 2003 he was a finance professor at the MIT Sloan School of Management. Scharfstein received a Ph.D. in Economics from MIT and an A.B. from Princeton University.
- Featured Work
-
We argue that stock market pressure to generate earnings encourages banks to increase risk. We measure risk using confidential supervisory ratings as well as financial information released in regulatory filings. We document that there is an increase in the risk-taking behavior of banks that become part of publicly traded bank holding companies (BHCs) either through a public listing (IPO) or acquisition by a publicly-traded BHC. This increase in risk is greater than the increase in risk for a control group of banks that intended a private-to-public transition through an IPO or acquisition, but where the deal failed. This finding is robust to instrumenting deal failure with an index of stock returns shortly after deal announcement. There are a number of explanations of this finding, but cross-sectional and time-series evidence points to stock-market earnings pressure. In particular, we find that the relative increase in risk by banks that transition to being publicly held is more pronounced if they have good governance, consistent with the idea that stock-price maximization underlies the incentive to take risk. We also find more pronounced effects in periods when the Fed funds rate and credit spreads are low. This finding is consistent with the idea that when there is downward pressure on bank earnings, publicly-held banks tend to increase risk more than privately-held banks.We show that the use of algorithms to predict race has significant limitations in measuring and understanding the sources of racial disparities in finance, economics, and other contexts. First, we derive theoretically the direction and magnitude of measurement bias in estimates of unconditional disparities that use predicted instead of actual race. If their prediction errors were random, existing algorithms such as BIFSG (Voicu, 2018) would underestimate disparities in credit access for Black borrowers by 30–50%. In practice, the algorithms are systematically biased toward identifying minority borrowers who are likely to experience worse outcomes. Second, we show that in many applications the accuracy of predicted race is illusory, as many empirical methodologies call for the inclusion of location fixed effects and comparison of white and minority individuals within a given geography. As a result, estimates of conditional disparities can be dramatically underestimated, in some of our analyses, by up to 60%. While underestimating conditional disparities, predicted race overstates the importance of location in explaining disparities. Finally, because algorithm accuracy can vary across subsamples, predicted race can under- or overestimate interaction effects meant to measure cross-sectional variation in disparities.We use the 2020 Small Business Credit Survey to study the sources of racial disparities in use of the Paycheck Protection Program (PPP). Black-owned firms are 8.9 percentage points less likely to receive PPP loans than observably similar white-owned firms. About 55% of this take-up disparity is explained by a disparity in application propensity, while the remainder is explained by a disparity in approval rates. The finding in prior research that Black-owned firms were less likely than white-owned firms to borrow from banks and more likely to borrow from fintech lenders is driven entirely by application behavior. Conditional on applying for PPP, Black-owned firms are 9.9 percentage points less likely than white-owned firms to apply to banks and 7.8 percentage points more likely to apply to fintechs. However, they face similar average approval disparities at banks (7.4 percentage points) and fintechs (8.4 percentage points). Sorting by Black-owned firms away from banks and toward fintechs is significantly stronger in more racially biased counties, and the bank approval disparity is also larger in more racially biased counties. Thus, to the extent that automation at fintechs reduces racial disparities in PPP take-up, it does so by mitigating disparities in loan application rates, not loan approval rates.Using a large sample of Florida restaurants, we document significant racial disparities in borrowing through the Paycheck Protection Program (PPP) and investigate the causes of these disparities. Black-owned restaurants are 25% less likely to receive PPP loans. Restaurant location explains 5 percentage points of this differential. Restaurant characteristics explain an additional 10 percentage points of the gap in PPP borrowing. On average, prior borrowing relationships do not explain disparities. The remaining 10% disparity is driven by a 17% disparity in PPP borrowing from banks, which is partially offset by greater borrowing from nonbanks, largely fintechs. Disparities in PPP borrowing cannot be attributed to lower awareness of PPP loans or lower demand for PPP loans by minority-owned restaurants. Black-owned restaurants are significantly less likely to receive bank PPP loans in counties with more racial bias. In these counties, Black-owned restaurants are more likely to substitute to nonbank PPP loans. This substitution, however, is not strong enough to eliminate racial disparities in PPP borrowing. Finally, we show that our findings apply more broadly across industries in a sample of firms that were likely eligible for PPP.
This paper examines the effect of pension policy on the structure of financial systems around the world. In particular, I explore the hypothesis that policies that promote pension savings also promote the development of capital markets. I present a model that endogenizes the extent to which savings are intermediated through banks or capital markets, and derive implications for corporate finance, household finance, banking, and the size of the financial sector. I then present a number of facts that are broadly consistent with the theory and examine a variety of alternative explanations of my findings.
We present evidence that high concentration in mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. We isolate the direct effect of concentration and rule out alternative explanations in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where bank mergers increase concentration in mortgage lending. Within a county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, the overall impact of a decline in MBS yields is only 42% as large in a high-concentration county as it is in an average one. In the time series, a decrease in MBS yields today has a 32% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.This paper proposes a new approach to social cost-benefit analysis using a model in which a benevolent government chooses risky projects in the presence of market failures and tax distortions. The government internalizes market failures and therefore perceives project payoffs differently than do individual private actors. This gives it a "social risk management" motive - projects that generate social benefits are attractive, particularly if those benefits are realized in bad economic states. However, because of tax distortions, government financing is costly, creating a "fiscal risk management" motive. Government projects that require large tax-financed outlays are unattractive, particularly if those outlays tend to occur in bad economic times. At the optimum, the government trades off its social and fiscal risk management motives. Frictions in government financing create interdependence between two otherwise unrelated government projects. As in the theory of portfolio choice, the fiscal risk of a project depends on how its fiscal costs covary with the fiscal costs of the government's overall portfolio of projects. This interdependence means that individual projects should not be evaluated in isolation.U.S. money market mutual funds (MMFs) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the U.S. MMFs proved to be a source of considerable instability during the financial crisis of 2007–2009, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which we analyze in this paper. We assume that the main goal of MMF reform is safeguarding global financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability than an MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating NAV, may be less effective in protecting financial stability. Our analysis sheds light on the fundamental tensions inherent in regulating the shadow banking system.
The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly for residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or "shadow banking"). Whether the growth of the financial sector has been socially beneficial depends on one's view of active asset management, the increase in household credit, and the growth of shadow banking. While recognizing some of the benefits of professional asset management, we are skeptical about the marginal value of active asset management. We then raise concerns about whether the potential benefits of increased access to household credit—the main output of the shadow banking system—are outweighed by the risks inherent in this new approach to credit delivery.A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.
- Working Papers
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- Greenwood, Robin, David S. Scharfstein, and Robert Ialenti. "The Evolution of Financial Services in the United States." Working Paper, November 2024. View Details
- Scharfstein, David S., and Sergey Chernenko. "The Limits of Algorithmic Measures of Race in Studies of Outcome Disparities." Working Paper, April 2023. View Details
- Scharfstein, David S., and Antonio Falato. "The Stock Market and Bank Risk-Taking." Working Paper, September 2023. View Details
- Chernenko, Sergey, Nathan Kaplan, Asani Sarkar, and David S. Scharfstein. "Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?" NBER Working Paper Series, No. 31172, April 2023. View Details
- Chernenko, Sergey, and David S. Scharfstein. "Racial Disparities in the Paycheck Protection Program." SSRN Working Paper Series, August 2021. (NBER Working Paper Series, No. 29748, February 2022.) View Details
- Scharfstein, David S., and Antonio Falato. "The Stock Market and Bank Risk-Taking." NBER Working Paper Series, No. 22689, September 2016. View Details
- Falato, Antonio, Giovanni Favara, and David Scharfstein. "Bank Risk-Taking and the Real Economy: Evidence from the Housing Boom and Its Aftermath." Working Paper. View Details
- Scharfstein, David S., and Adi Sunderam. "Market Power in Mortgage Lending and the Transmission of Monetary Policy." April 2015. Mimeo. View Details
- Books
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- Scharfstein, David S., as part of the Squam Lake Working Group. The Squam Lake Report: Fixing the Financial System. Princeton, NJ: Princeton University Press, 2010. View Details
- Journal Articles
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- Scharfstein, David S. "Pension Policy and the Financial System." Journal of Finance 73, no. 4 (August 2018): 1463–1512. View Details
- Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "Social Risk, Fiscal Risk, and the Portfolio of Government Programs." Review of Financial Studies 32, no. 6 (June 2019): 2341–2382. (Internet Appendix Here.) View Details
- Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "An Evaluation of Money Market Fund Reform Proposals." IMF Economic Review 63, no. 4 (November 2015): 984–1023. View Details
- Ivashina, Victoria, David S. Scharfstein, and Jeremy C. Stein. "Dollar Funding and the Lending Behavior of Global Banks." Quarterly Journal of Economics 130, no. 3 (August 2015): 1241–1281. View Details
- Greenwood, Robin, and David S. Scharfstein. "The Growth of Finance." Journal of Economic Perspectives 27, no. 2 (Spring 2013): 3–28. View Details
- Greenwood, Robin, and David S. Scharfstein. "How to Make Finance Work." Harvard Business Review 90, no. 3 (March 2012). View Details
- Ivashina, Victoria, and David S. Scharfstein. "Bank Lending During the Financial Crisis of 2008." Journal of Financial Economics 97, no. 3 (September 2010): 319–338. View Details
- Ivashina, Victoria, and David Scharfstein. "Loan Syndication and Credit Cycles." American Economic Review: Papers and Proceedings 100, no. 2 (May 2010): 57–61. View Details
- Gompers, Paul A., Josh Lerner, David Scharfstein, and Anna Kovner. "Performance Persistence in Entrepreneurship and Venture Capital." Journal of Financial Economics 96, no. 1 (April 2010): 18–32. View Details
- Scharfstein, David S., and Oguzhan Ozbas. "Evidence on the Dark Side of Internal Capital Markets." Review of Financial Studies 23, no. 2 (February 2010): 581–599. View Details
- Coates, John C., IV, and David S. Scharfstein. "Lowering the Cost of Bank Recapitalization." Yale Journal on Regulation 26, no. 2 (Summer 2009): 373–389. View Details
- Gompers, Paul, Anna Kovner, Josh Lerner, and David Scharfstein. "Venture Capital Investment Cycles: The Impact of Public Markets." Journal of Financial Economics 87, no. 1 (January 2008): 1–23. (Earlier versions distributed as National Bureau of Economic Research Working Paper No. 11385.) View Details
- Gompers, Paul A., Josh Lerner, and David S. Scharfstein. "Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999." Journal of Finance 60, no. 2 (April 2005): 577–614. (Earlier version distributed as National Bureau of Economic Research Working Paper No. 9816.) View Details
- Gertner, Robert, Eric Powers, and David S. Scharfstein. "Learning about Internal Capital Markets from Corporate Spinoffs." Journal of Finance 57, no. 6 (December 2002): 2479–2506. View Details
- Scharfstein, David S., and Sendhil Mullainathan. "Do Firm Boundaries Matter?" American Economic Review: Papers and Proceedings 91, no. 2 (May 2001): 195–199. View Details
- Scharfstein, David S., and Jeremy Stein. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment." Journal of Finance 55, no. 6 (December 2000): 2537–2564. View Details
- Scharfstein, David S., and Patrick Bolton. "Corporate Finance, the Theory of the Firm, and Organizations." Journal of Economic Perspectives 12, no. 4 (Fall 1998): 95–114. View Details
- Chevalier, Judith A., and David S. Scharfstein. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence." American Economic Review 86, no. 4 (September 1996): 703–725. View Details
- Scharfstein, David S., and Patrick Bolton. "Optimal Debt Structure and the Number of Creditors." Journal of Political Economy 104, no. 1 (February 1996): 1–25. View Details
- Scharfstein, David S., and Judith A. Chevalier. "Liquidity Constraints and the Cyclical Behavior of Markups." American Economic Review: Papers and Proceedings 85, no. 2 (May 1995): 390–396. View Details
- Froot, K., David S. Scharfstein, and J. Stein. "A Framework for Risk Management." Harvard Business Review 72, no. 6 (November–December 1994): 59–71. (Revised from "Developing a Risk Management Strategy," Harvard Business School Working Paper No. 95-021. Reprinted in Bank of America Journal of Applied Corporate Finance 7, no. 3 (fall 1994): 22-33; Marsh & McLennan Companies' Viewpoint 24 (spring 1995): 21-37; and in Corporate Risk: Strategies and Management, edited by Greg Brown and Don Chew, London: Risk Books, December 1999.) View Details
- Scharfstein, David S., Robert Gertner, and Jeremy Stein. "Internal versus External Capital Markets." Quarterly Journal of Economics 109, no. 4 (November 1994): 1211–1230. View Details
- Scharfstein, David S., Paul Asquith, and Robert Gertner. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers." Quarterly Journal of Economics 109, no. 3 (August 1994): 625–658. View Details
- Froot, K. A., David S. Scharfstein, and J. Stein. "Risk Management: Coordinating Corporate Investment and Financing Policies." Journal of Finance 48, no. 5 (December 1993): 1629–1658. (Revised from NBER Working Paper No. 4084, February 1993. Reprinted in RAE-Revista de Administração de Empresas, Management Journal of Fundação Getulio Vargas (FGV-EAESP), Business School for Administration in Sao Paulo, Brazil, volume no. 48, issue no. 1 (January-March 2008): 87-118. Reprinted in Insurance and Risk Management, Volume II, Corporate Risk Management, Part I: Theory on Why and How Firms Manage Risk, Chapter 3, edited by Gregory R. Niehaus, UK: Edward Elgar Publishing Ltd. (October 2008). Also in M.J. Brennan, The Theory of Corporate Finance from The International Library of Critical Writings in Financial Economics, edited by R. Roll, 1995; and in Merton Miller and Chris Culp, eds. Corporate Hedging in Theory and Practice: Lessons from Metallgesellschaft, Risk Books, 1999.) View Details
- Froot, Kenneth, David S. Scharfstein, and Jeremy Stein. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation." Journal of Finance 47, no. 4 (September 1992): 1461–1484. (Revised from NBER Working Paper No. 3250, February 1990.) View Details
- Scharfstein, David S., and Robert Gertner. "A Theory of Workouts and the Effects of Reorganization Law." Journal of Finance 46, no. 4 (September 1991): 1189–1222. View Details
- Scharfstein, David S., Takeo Hoshi, and Anil Kashyap. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups." Quarterly Journal of Economics 106, no. 1 (February 1991): 33–60. View Details
- Rotemberg, Julio J., and David S. Scharfstein. "Shareholder Value Maximization and Product Market Competition." Review of Financial Studies 3, no. 3 (1990): 367–392. View Details
- Scharfstein, David S., Takeo Hoshi, and Anil Kashyap. "The Role of Banks in Reducing the Costs of Financial Distress in Japan." Journal of Financial Economics 27, no. 1 (September 1990): 67–88. View Details
- Scharfstein, David S., and Jeremy Stein. "Herd Behavior and Investment." American Economic Review 80, no. 3 (June 1990): 465–479. View Details
- Scharfstein, David S., and Patrick Bolton. "A Theory of Predation Based on Agency Problems in Financial Contracting." American Economic Review 80, no. 1 (March 1990). View Details
- Froot, K. A., D. Scharfstein, and J. Stein. "LDC Debt: Forgiveness, Indexation, and Investment Incentives." Journal of Finance 44, no. 5 (December 1989): 1335–1350. (Revised from NBER Working Paper No. 2541, March 1988.) View Details
- Scharfstein, David S., Robert Gertner, and Robert Gibbons. "Simultaneous Signaling to the Capital and Product Markets." RAND Journal of Economics 19, no. 2 (summer 1988): 173–190. View Details
- Scharfstein, David S. "Product Market Competition and Managerial Slack." RAND Journal of Economics 19, no. 1 (spring 1988): 147–155. View Details
- Scharfstein, David S. "The Disciplinary Role of Takeovers." Review of Economic Studies 55, no. 2 (April 1988): 185–200. View Details
- Scharfstein, David S., and Barry Nalebuff. "Testing in Models of Asymmetric Information." Review of Economic Studies (April 1987): 265–277. View Details
- Scharfstein, David S. "A Policy to Prevent Rational Test-Market Predation." RAND Journal of Economics 15, no. 2 (Summer 1984): 229–243. View Details
- Older Working Papers
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- Froot, Kenneth A., J. Stein, and David S. Scharfstein. "Herd on the Street: Informational Inefficiencies in a Market with Short-term Speculation." NBER Working Paper Series, No. 3250, February 1990. (Revised in Journal of Finance 47 (September 1992): 1461-1484.) View Details
- Scharfstein, David S., Takeo Hoshi, and Anil Kashyap. "The Choice Between Public and Private Debt: An Examination of Post-Deregulation Corporate Financing in Japan." NBER Working Paper Series, No. 4421, August 1993. View Details
- Scharfstein, David S. "The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates." NBER Working Paper Series, No. 6352, January 1998. (under revision for Journal of Finance.) View Details
- Scharfstein, David S., and Denis Gromb. "Entrepreneurship in Equilibrium." NBER Working Paper Series, No. 9001, June 2002. View Details
- Cases and Teaching Materials
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- Sen, Ishita, Emil Nuwan Siriwardane, David S. Scharfstein, and Luis M. Viceira. "The Silicon Valley Bank Crisis: MAPFRE USA's Investment in SVB Financial Group Bonds." Harvard Business School Case 224-056, May 2024. (Revised July 2024.) View Details
- Scharfstein, David, and Robert Ialenti. "CoVenture: Financing Innovations in Fintech with Asset-Backed Credit." Harvard Business School Case 224-089, May 2024. View Details
- Scharfstein, David S., and Ryan Gilland. "Zest AI: Machine Learning and Credit Access." Harvard Business School Case 224-033, November 2023. (Revised June 2024.) View Details
- Scharfstein, David S., and Phillip Chvanov. "Affirm: Buy Now?" Harvard Business School Case 224-032, December 2023. (Revised December 2023.) View Details
- Scharfstein, David S., Dean Xu, and Danielle Golan. "Melio: Modernizing Payments for Small Business." Harvard Business School Case 222-076, April 2022. View Details
- Scharfstein, David S., Ishita Sen, and Dean Xu. "Next Insurance: Considering New Markets." Harvard Business School Case 221-090, April 2021. (Revised April 2022.) View Details
- Scharfstein, David S., and Shawn O'Brien. "True Link Financial." Harvard Business School Case 219-104, April 2019. (Revised March 2022.) View Details
- Scharfstein, David S., Emily Williams, and Shawn O'Brien. "Live Oak Bank." Harvard Business School Case 219-103, April 2019. View Details
- Scharfstein, David, and Juliane Begenau. "OnDeck Capital, Inc." Harvard Business School Case 219-100, March 2019. (Revised June 2021.) View Details
- Hanson, Samuel G., Robin Greenwood, David Scharfstein, and Adi Sunderam. "The Financial Crisis: Timothy Geithner and the Stress Tests." Harvard Business School Case 219-038, October 2018. (Revised January 2019.) View Details
- Sunderam, Adi, Robin Greenwood, Sam Hanson, and David Scharfstein. "The Financial Crisis: Hank Paulson in 2008." Harvard Business School Case 219-037, October 2018. (Revised January 2019.) View Details
- Scharfstein, David. "First BanCorp and the Puerto Rico Fiscal Crisis." Harvard Business School Case 218-024, April 2018. View Details
- Coates, John C., John D. Dionne, and David S. Scharfstein. "GE Capital After the Crisis." Harvard Business School Case 217-071, April 2017. (Revised May 2017.) View Details
- Scharfstein, David. "ABRY Partners and NSM Insurance Group." Harvard Business School Case 217-066, March 2017. (Revised January 2021.) View Details
- Scharfstein, David. "The Proposed Merger of M&T Bank and Hudson City Bancorp (B)." Harvard Business School Supplement 216-047, January 2016. View Details
- Scharfstein, David, and Joel Heilprin. "The Proposed Merger of M&T Bank and Hudson City Bancorp (A)." Harvard Business School Case 216-046, January 2016. (Revised January 2017.) View Details
- Scharfstein, David, and Esel Çekin. "Bidding for Finansbank." Harvard Business School Case 216-040, February 2016. (Revised January 2017.) View Details
- Scharfstein, David. "Novantas and Deposit Funding at First Regional Bank." Harvard Business School Case 216-013, August 2015. View Details
- Mugford, Kristin, and David Scharfstein. "Sankaty Advisors: Race Point IV, CLO." Harvard Business School Case 215-055, February 2015. (Revised February 2016.) View Details
- Scharfstein, David. "'Fair Play' at Huntington Bancshares." Harvard Business School Case 215-024, October 2014. (Revised January 2018.) View Details
- Scharfstein, David, Adi Sunderam, and Hafiz Chagani. "Leader Bank, N.A." Harvard Business School Case 214-076, January 2014. View Details
- Scharfstein, David. "The Case of the Unidentified Financial Firms." Harvard Business School Case 214-072, January 2014. (Revised January 2020.) View Details
- Scharfstein, David, Adi Sunderam, John Ference, and Philip Roane. "Lending Club: Time to Join?" Harvard Business School Case 214-046, January 2014. (Revised November 2014.) View Details
- Ivashina, Victoria, and David S. Scharfstein. "Oaktree and the Restructuring of CIT Group (A) and (B)." Harvard Business School Teaching Note 214-058, November 2013. View Details
- Ivashina, Victoria, and David Scharfstein. "Momentive Performance Materials, Inc." Harvard Business School Teaching Note 214-057, November 2013. View Details
- Ivashina, Victoria, and David Scharfstein. "Blackstone and the Sale of Citigroup's Loan Portfolio Teaching Note." Harvard Business School Teaching Note 214-040, October 2013. (Revised December 2013.) View Details
- Ivashina, Victoria, and David Scharfstein. "Blackstone and the Sale of Citigroup's Loan Portfolio." Harvard Business School Case 214-037, October 2013. (Revised November 2013.) View Details
- Ivashina, Victoria, and David Scharfstein. "Oaktree and the Restructuring of CIT Group (B)." Harvard Business School Supplement 214-036, October 2013. View Details
- Ivashina, Victoria, and David Scharfstein. "Oaktree and the Restructuring of CIT Group (A)." Harvard Business School Case 214-035, October 2013. View Details
- Scharfstein, David, Erik Stafford, and Joel Heilprin. "Lin TV Corp." Harvard Business School Case 213-065, October 2012. View Details
- Ivashina, Victoria, and David Scharfstein. "Momentive Performance Materials, Inc." Harvard Business School Case 210-081, June 2010. (Revised November 2013.) View Details
- Scharfstein, David S. "Paul Capital Partners: Secondary Limited Partnership Investing." Harvard Business School Case 209-089, December 2008. (Revised October 2010.) View Details
- Greenwood, Robin, and David S. Scharfstein. "Calculating Free Cash Flows." Harvard Business School Background Note 206-028, October 2005. (Revised February 2010.) View Details
- Perold, Andre F., and David S. Scharfstein. "The Howland Long-Term Opportunity Fund." Harvard Business School Case 207-066, September 2006. (Revised April 2008.) View Details
- Perold, Andre F., and David S. Scharfstein. "Ben Walter." Harvard Business School Case 207-070, October 2006. (Revised April 2008.) View Details
- Greenwood, Robin, David S. Scharfstein, and Arthur I Segel. "The Pilgrim Assurance Building." Harvard Business School Case 206-078, December 2005. (Revised April 2007.) View Details
- Perold, Andre F., and David S. Scharfstein. "Stedman Place: Buy or Rent?" Harvard Business School Case 207-063, September 2006. View Details
- Scharfstein, David S., and Darren R. Smart. "Massachusetts General Hospital and the Enbrel Royalty." Harvard Business School Case 206-075, November 2005. (Revised November 2005.) View Details
- Book Chapters
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- Scharfstein, David S., and Adi Sunderam. "The Economics of Housing Finance Reform." In The Future of Housing Finance: Restructuring the U.S. Residential Mortgage Market, edited by Martin Neil Baily. Brookings Institution Press, 2011. View Details
- Scharfstein, David S., and Patrick Bolton. "Debt Renegotiation." In The New Palgrave Dictionary of Money and Finance, edited by Peter Newman, Murray Milgate, and John Eatwell. London: Palgrave Macmillan, 1992. View Details
- Other Publications and Materials
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- Scharfstein, David S., and Adi Sunderam. "Market Power in Mortgage Lending and the Transmission of Monetary Policy." April 2015. Mimeo. View Details
- Scharfstein, David S. "Perspectives on Money Market Mutual Fund Reforms." Government Testimony, Washington, DC, June 2012. View Details
- Gompers, P., Anna R. Kovner, Josh Lerner, and David S. Scharfstein. "Venture Capital Investment Cycles: The Role of Experience and Specialization." December 2005. View Details
- Scharfstein, David S. "Japanese Corporate Finance and Governance: Implications for the Privatization of Eastern European Economies." December 1991. View Details
- Scharfstein, David S., Anil Kashyap, and David Weil. "The High Price of Land and the Low Cost of Capital: Theory and Evidence from Japan." August 1990. View Details
- Working Papers
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- Greenwood, Robin, David S. Scharfstein, and Robert Ialenti. "The Evolution of Financial Services in the United States." Working Paper, November 2024. View Details
- Scharfstein, David S., and Sergey Chernenko. "The Limits of Algorithmic Measures of Race in Studies of Outcome Disparities." Working Paper, April 2023. View Details
- Scharfstein, David S., and Antonio Falato. "The Stock Market and Bank Risk-Taking." Working Paper, September 2023. View Details
- Chernenko, Sergey, Nathan Kaplan, Asani Sarkar, and David S. Scharfstein. "Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?" NBER Working Paper Series, No. 31172, April 2023. View Details
- Chernenko, Sergey, and David S. Scharfstein. "Racial Disparities in the Paycheck Protection Program." SSRN Working Paper Series, August 2021. (NBER Working Paper Series, No. 29748, February 2022.) View Details
- Scharfstein, David S., and Antonio Falato. "The Stock Market and Bank Risk-Taking." NBER Working Paper Series, No. 22689, September 2016. View Details
- Falato, Antonio, Giovanni Favara, and David Scharfstein. "Bank Risk-Taking and the Real Economy: Evidence from the Housing Boom and Its Aftermath." Working Paper. View Details
- Scharfstein, David S., and Adi Sunderam. "Market Power in Mortgage Lending and the Transmission of Monetary Policy." April 2015. Mimeo. View Details
- Research Summary
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My research focuses on issues related to the structure and functioning of the financial system, including risk, competition and disparities in the banking system
Banking, financial distress, risk management, corporate investment, private equity.
- Teaching
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I teach an MBA course in the elective curriculum called Managing and Innovating in Financial Services. I focus on key functions of the financial system including credit, liquidity, insurance and payments provided by a variety of financial intermediaries including banks, insurance companies, and financial technology firms. The course also covers issues related to financial stability and regulation.
- Additional Information
- Areas of Interest
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- banks and banking
- corporate finance
- financial innovation
- bankruptcy
- private equity
- venture capital
- banking
- North America
Additional TopicsIndustriesGeographies