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Haas School Professor Hayne Leland Honored with $100K Financial Economics Prize


Finance Professor Hayne Leland at the University of California, Berkeley's Haas School of Business has won the first-ever Stephen A. Ross Prize from the Foundation for the Advancement of Research in Financial Economics (FARFE) for his research in corporate debt pricing and capital structure.

The foundation is a consortium of finance academics and practitioners from around the world. It created the $100,000 prize in 2007 to recognize and encourage research in financial economics – a field that explains the underpinnings of corporate finance and capital markets.

Leland won the award for his 1994 Journal of Finance paper, "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure." The paper analyzed how firms determine the optimal mix of debt and equity to acquire funding at the lowest cost.

"Just as mathematics has the Fields Medal, finance research now has the Ross Prize to recognize the pioneering discoveries in financial economics," says Haas School Dean Rich Lyons, also a professor of finance. "I couldn’t think of a more deserving individual to be honored with the first Stephen A. Ross Prize than my colleague Professor Hayne Leland."

Andrew Carron, president of NERA Economic Consulting and one of the founding members of FARFE, explains: "'Financial economics is an area that is critical to our understanding of complex capital systems and how they work; the recent global financial turmoil has made advancing this understanding especially important."

Leland's 1994 paper analyzed how firms determine the optimal mix of debt and stock ("equity") to acquire funds at the lowest cost. The optimal use of debt, or "leverage," balances tax advantages with potential default costs. The analysis suggests, for example, that startup firms should use relatively little debt financing, whereas mature firms with stable cash flows can benefit from substantial leverage.

Leland, who is a Professor of the Graduate School and has been teaching at the Haas School of Business since 1974, also examines the determinants of debt value and default. Subsequent research has built on the analysis and insights of this paper to examine how firms adjust the mix of debt and equity over time and how this affects pricing in financial markets. Other extensions include analyzing the interaction between leverage and investment, and the value of corporate risk management.

"I was surprised and delighted to be the first recipient of the Ross prize," said Leland. "Steve Ross is truly one of the brilliant minds in financial economics. His contributions not only have provided remarkable insights into asset pricing and economic behavior, but also have had a profound impact on financial practice. I am also enthusiastic about the creation of FARFE and its mission to encourage research in finance."

FARFE considered more than 350 papers for consideration for the award.

"Hayne Leland's paper stood out not only for the elegant and rigorous approach it took in addressing an important problem in finance, but also for the substantial influence it has had over the years on research in capital structure," says Paul Pfleiderer, the chair of the prize committee and C.O.G. Miller Distinguished Professor of Finance at the Stanford Graduate School of Business.

In addition to Paul Pfleiderer, the prize committee included: Michael Fishman, Norman Strunk Professor of Financial Institutions at Northwestern's Kellogg School of Management; Burton Hollifield, Professor of Financial Economics at Carnegie Mellon's Tepper School of Business; Bengt Holmstrom, Paul A. Samuelson Professor of Economics at MIT; Chi-Fu Huang, Partner at Platinum Grove Asset Management; Richard Roll, Japan Alumni Professor of Finance at UCLA's Anderson School of Management; and Amir Yaron, Associate Professor of Finance at the University of Pennsylvania's Wharton School.

The Ross prize will be awarded biannually for research published in the previous fifteen years that significantly contributed to the understanding of financial economics. For more details about the award-winning paper, the Ross Prize, and FARFE: http://farfe.org.

Leland Bio: http://www.haas.berkeley.edu/faculty/leland.html
Leland video on financial crisis: http://www2.haas.berkeley.edu/Videos/financialforum.aspx

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