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Research Seminars & Workshops @ IRES


Professor Wang Neng
Columbia Business School

A Theory of Liquidity and Risk Management Based on the Inalienability of Risky Human Capital


Date:

27 Oct 2014 (Mon)

Time:

3.00 - 5.30pm

Venue:

RMI Executive Seminar Room 21 Heng Mui Keng Terrace, I3 Building, Level 4


Abstract

We analyse a dynamic optimal financial contracting problem in continuous time with risky cash flows between a risk-averse entrepreneur and risk-neutral investors. Two fundamental constraints on the contracting parties are that: 1) the entrepreneur cannot alienate his human capital, and 2) investors have limited liability protection. Given that human capital is risky, the entrepreneur's inability to commit his human capital to the firm generates significant distortions for risk-sharing, corporate investment, and consumption. We show that the optimal contracting problem boils down to a corporate liquidity and risk-management problem for the firm. We also show that equilibrium default on a credit line is optimal when firms face persistent productivity shocks. Finally, we quantitatively value the net benefits of risk and liquidity management and find that they are high. Our analysis thus provides new foundations for liquidity and risk management policies that firms routinely pursue in practice.

About the Speaker

Neng Wang is Chong Khoon Lin Professor of Real Estate and Finance at Columbia Business School and a Research Associate at the National Bureau of Economic Research (NBER). He is also the Honorary Dean and Academic Director at the School of Finance at Shanghai University of Finance and Economics (SUFE). His research interests include private equity, hedge funds, asset allocation, corporate finance, asset pricing, risk management, entrepreneurship and entrepreneurial finance, investor protection, household finance, wealth and income distribution, macroeconomics, real estate finance, and the Chinese economy. His work has been widely published in leading economics and finance journals. Among other awards and honors, he won a Smith-Breeden Distinguished Paper Prize awarded by the Journal of Finance in 2008, and the Bettis Distinguished Scholar Award from W. P. Carey School of Business, Arizona State University in 2011.

He is also a recipient of the “Thousand Talents” Program, one of the most prestigious awards granted by the Chinese central government. He currently serves as a Department Editor of Management Science in the Finance Area and an Associate Editor of the Journal of Finance as well as on editorial boards of other finance, economics, and business journals. He became a tenured Full Professor with an endowed professorship at Columbia University at the age of 33. He taught at the Simon School of Business, University of Rochester and was a visiting professor at Kellogg School of Management, Northwestern University. He was also a special-term professor at Cheung Kong Graduate School of Business (CKGSB), Guanghua School of Management at Peking University, Shanghai Advanced Institute of Finance (SAIF) at Shanghai Jiaotong University (SJTU), and the School of Economics, Zhejiang University. He has taught MBA-level and doctoral courses including entrepreneurial finance and private equity, fixed income securities and markets, financial institutions and risk management, real estate finance, corporate finance theory, and dynamic finance theory. He received B.S. in Physical Chemistry from Nanjing University, China in 1992, M.S. in Chemistry from California Institute of Technology (Caltech) in 1995, M.A. in International Relations and Pacific Studies from University of California, San Diego (UCSD) in 1997, and PhD in Finance from the Graduate School of Business at Stanford University in 2002. He was born in 1973 in Anhui, China.

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