Early 2023

Ivo Welch
(Ivo Icio Alexander Welch)
ivo.welch@anderson.ucla.edu
ivo.welch@gmail.com

Degrees

Abitur 1982 Alexander-von-Humboldt Gymnasium, Schweinfurt Germany
B.A. 1985 Columbia University (Computer Science) New York
M.B.A. 1989   The University of Chicago Chicago
Ph.D. 1991 The University of Chicago Chicago

Appointments

Assistant Professor 1989-1995 UCLA
Visiting Scholar Summer/Fall 1995 London Business School
Associate Professor 1995-1998 UCLA
Professor 1998-2001 UCLA
Professor 2000-2005 Yale University
Finance and Economics
Professor 2004-2011 Brown University
CV Starr Chair of Finance and Economics
Professor 2011- UCLA
J. Fred Weston Chair
Visiting Winter 2023 Stanford GSB

Research

Most influential work: Informational Cascades.

Selected Publications

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Welch, Ivo. "Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," The Journal of Finance 44-2, June 1989, 421-449. doi:10.1111/j.1540-6261.1989.tb05064.x
First to argue that subsequent offerings and "leaving a good taste in investors' mouths" are a reason for IPO underpricing. First to offer some evidence of large SEO after-market issuing activity by IPO issuers.
Welch, Ivo. "An Empirical Analysis of Models of Contract Choice in Initial Public Offerings," Journal of Financial and Quantitative Analysis 26-4, December 1991, 497-518. doi:10.2307/2331408
An early test of Benveniste and Spindt (1989). Outdated.
Welch, Ivo. "Sequential Sales, Learning, and Cascades," The Journal of Finance 47-2, June 1992, 695-732. doi:10.1111/j.1540-6261.1992.tb04406.x
Shows how to price when buyers cascade on one-another. Probably the first "informational cascades" paper (preceding Banerjee and BHW), but not necessarily the best. Still, winner of a Smith-Breeden Distinguished Paper Award.
Bikhchandani, Sushil, David Hirshleifer, and Ivo Welch. "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades," The Journal of Political Economy 100-5, October 1992, 992-1026. doi:10.1086/261849
Clearly my most influential and best paper. Recognized and developed the importance and ubiquity of informational cascades in a general context. (Featured, e.g., in The Economist, Feb 19, 1994, p.81; Business-Week, Feb 13, 1995, p.84; Fortune, Oct 14, 1996, p49.) See also the informational cascades webpage.
Jegadeesh, Narasimhan, Mark Weinstein, and Ivo Welch. "IPO Signaling and Subsequent Equity Offerings: An Empirical Investigation," Journal of Financial Economics 34-2, October 1993, 153-176. doi:na.
The first formal test of the relation between IPO underpricing and after-market issuing activity. Introduces a "market feedback" hypothesis. Finds that stock value appreciation matters, not just IPO underpricing.
Warga, Arthur, and Ivo Welch. "Bondholder Losses in Leveraged Buyouts," The Review of Financial Studies 6-4, Winter 1993, 959-982. doi:10.1093/rfs/6.4.959
First to reliably document bondholder wealth losses among LBOs and the importance of data sources.
Bhagat, Sanjay, and Ivo Welch. "Corporate R&D Investments: International Comparisons," Joint Symposium by The Journal of Labor Economics and The Journal of Accounting and Economics 19-2/3, 1995, 443-470. doi:10.1016/0165-4101(94)00391-H
An empirical study. Obsolete method(s).
Cornell, Brad, and Ivo Welch. "Culture, Information and Screening Discrimination," The Journal of Political Economy 104-3, June 1996, 542-571. doi:10.1086/262033
Combines information filtering with tournaments to show that individual hiring decisions can disproportionately tend towards an employer's own background.
Welch, Ivo. "Equity Offerings Following the IPO: Theory and Evidence," Journal of Corporate Finance 2, 1996, 227-259. doi:10.1016/0929-1199(95)00010-0
Adds endogenous SEO timing to Welch (1989). First to offer a structural (rather than just intuitive) empirical test of an IPO underpricing model.
Beatty, Randolph, and Ivo Welch. "Legal Liability and Issuer Expenses in Initial Public Offerings," The Journal of Law and Economics 39-2, Oct 1996, 545-603. doi:10.1086/467359
Describes compensation for and influence of IPO experts, especially those of the legal advisors. Also finds that the well-known Carter-Manaster relation between IPO underpricing and underwriter quality is unstable (reverses after the Carter-Manaster period).
Beatty, Randolph, Susan Riffe, and Ivo Welch. "How Firms Make Capital Expenditure Decisions: Financial Signals, Internal Cash Flows, Income Taxes and the Tax Reform Act of 1986," Review of Quantitative Finance and Accounting 9-3, October 1997, 227-250. doi:10.1023/A:1008211016618
Firms drastically shifted capex from 1986 to 1985, just preceding the Tax Reform Act of 1986. B journal.
Welch, Ivo. "Why is Bank Debt Senior? A Theory of Priority Based on Influence Costs," The Review of Financial Studies 10-4, Winter 1997, 1203-1236. doi:10.1093/rfs/10.4.1203
First to argue that (minimizing) potential litigation lobbying expenses in bankruptcy can drive ex-ante capital structure decisions. Sadly, this is the paper whose lack of impact has most disappointed me. I continue to believe that reducing ex-post rent-seeking is an important and widely neglected determinant of capital structure.
Bikhchandani, Sushil, David Hirshleifer, and Ivo Welch. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives 12-3, Summer 1998, 151-170. doi:10.1257/jep.12.3.151
An update and summary of informational cascades. See also the informational cascades webpage.
Teoh, Siew-Hong, Ivo Welch, and T.J. Wong. "Earnings Management and The Post-Issue Underperformance in Seasoned Equity Offerings," Journal of Financial Economics 50-1, Oct 1998, 63-99. doi:na
Shows that SEO issuers who tend to be aggressive in their pre-IPO the biggest post-SEO underperformers. Introduces a Fama-MacBeth type methodology to post-event performance measurement.
Teoh, Siew-Hong, Ivo Welch, and T.J. Wong. " Earnings Management and The Long-Run Market Performance of Initial Public Offerings," The Journal of Finance 53-6, Dec 1998, 1935-1974. doi:10.1111/0022-1082.00079
Shows that IPO issuers tend to be aggressive in their pre-IPO earnings statements, and that the most aggressive earnings overstaters are the worst post-IPO performers.
Teoh, Siew-Hong, Ivo Welch, and Paul Wazzan. "The Effect of Socially Activist Investment Policies on the Financial Markets: Evidence from the South African Boycott," Journal of Business 72-1, Jan 1999, 35-90. doi:na
Finds no evidence of economic effects from sanctions against South Africa. Winner of the 1999 Moskowitz Prize for the best paper on socially responsible investing.
Bernardo, Antonio, Eric Talley, and Ivo Welch. "A Theory of Legal Presumptions," The Journal of Law, Economics, & Organization 16-1, April 2000, 1-49. doi:10.1093/jleo/16.1.1
First to model legal presumptions (e.g., the burden of proof) as a tradeoff between reducing potential future litigation costs and encouraging effort by an agent.
Welch, Ivo and Wessels, David. "The Cross-sectional Determinants of Corporate Capital Expenditures: A Multi-National Comparison," The Schmalenbach Business Review (Zeitschrift fuer Betriebswirtschaftslehre) 52, April 2000, 103-136. doi:na
Finds that the U.S. is not so different from other countries in having high stock returns elicit active investment.
Welch, Ivo. "Views of Financial Economists On The Equity Premium And Other Issues," Journal of Business 73-4, October 2000, 501-537. doi:na.
First survey of finance professors. (Finds an equity premium consensus assessment of about 6% per annum.) Note the update in The Equity Premium Consensus Forecast Revisited.
Allen, Franklin; Bernardo, Antonio; and Ivo Welch. " A Theory of Dividends Based on Tax Clienteles," The Journal of Finance 55-6, December 2000, 2499-2536. doi:10.1111/0022-1082.00298
Argues that the presence of both dividends and dividend smoothing can be caused by the need of firms to attract institutional investor clienteles. (Abstract.) See also A Comment on `A Theory of Dividends Based on Tax Clienteles [Feb 2011].
Welch, Ivo. "Herding Among Security Analysts," Journal of Financial Economics 58-3, December 2000, 369-396. doi:10.1016/S0304-405X(00)00076-3
Develops an econometric methodology to estimate imitation when choices are discrete. Applies it to security analysts' buy and sell recommendations. Won the JFE Fama/DFA 2nd Prize for Capital Markets and Asset Pricing.
Bernardo, Antonio, and Ivo Welch. "On the Evolution of Overconfidence and Entrepreneurs," Journal of Economics and Management Strategy 10-3, Fall 2001, 301-330. doi:na
First to introduce evolutionary group selection arguments into an application paper in economics. Explains the persistence of documentably irrational behavior. This is an unusual piece, and, I hope, well worth reading.
Hirshleifer, David and Ivo Welch. "An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness," Journal of Economics and Management Strategy 11-3, Fall 2002, 379-421. doi:10.1111/j.1430-9134.2002.00379.x
Explains inertia as the outcome of partial memory loss.
Ritter, Jay and Ivo Welch. "A Review of IPO Activity, Pricing and Allocations," Journal of Finance 57-4, August 2002, 1795-1828. doi:10.1111/1540-6261.00478
A survey of recent IPO activity and literature, both in the market and by academics. (Abstract)
Goyal, Amit, and Ivo Welch. "Predicting the Equity Premium With Dividend Ratios," Management Science 49-5, May 2003, 639-654. doi:10.1080/1350485042000318439
Introduces a graphical diagnostic which shows convincingly that dividend ratio regressions have never managed to predict equity premia out of sample—despite popular folklore. Note: the updated data is available here. Do not expect support for the data—you can use it, but you cannot ask us for explanations. (Abstract)
Bernardo, Antonio, and Ivo Welch. "Liquidity and Financial Market Runs," Quarterly Journal of Economics 119-1, February 2004, 135-158. (Abstract). doi:10.1162/003355304772839542
Shows how imperfect sequence in execution can cause liquidity runs, in which every investor tries to take their money out of the stock market first. Unlike Diamond-Dybvig, the argument works in varying price markets.
Ivo Welch. "Capital Structure and Stock Returns," Journal of Political Economy 112-1, February 2004, 106-131. doi:10.1086/379933
(Abstract. Decomposes debt ratio dynamics into stock return caused dynamics (40%) and issuing activity caused dynamics (60%). Other (commonly used) variables have no explanatory power incremental to stock returns, leaving issuing activity dynamics a mystery.
(Abstract. A poor first draft was called "Columbus' Egg: Stock Returns are the Main Determinant of Capital Structure Dynamics".).
Bris, Arturo, Alan Schwartz and Ivo Welch. "Who should pay for bankruptcy costs?," Journal of Legal Studies, 34-2, June 2005, 295-342 (lead article). doi:na
Shows that it would make more sense to allow bankrupt firms to decide on bankruptcy experts' reimbursements, instead of leaving this reimbursement decision to courts and/or a mechanistic rules.
Bris, Arturo and Ivo Welch. "The Optimal Concentration of Creditors", The Journal of Finance, 60-5, October 2005, 2193-2212. doi:10.1111/j.1540-6261.2005.00796.x
Argues that small dispersed creditors are not good at collection, which in turn can induce strategic choice of creditor concentration.
Bris, Arturo, Ivo Welch, and Ning Zhu. "The Costs of Bankruptcy," The Journal of Finance 61-3, June 2006, 1253-1303. doi:10.1111/j.1540-6261.2006.00872.x
Explores a fairly complete dataset of bankruptcies in NY and AZ. Finds that Chapter 7 is not better than Chapter 11—and warns about oversimplified estimates of bankruptcy costs.
Jonathan Ingersoll, Matthew Spiegel, William Goetzmann, and Ivo Welch. "Portfolio Performance Manipulation and Manipulation-proof Performance Measures," Review of Financial Studies 20-5, September 2007, 1503-1546. doi:10.1093/rfs/hhm025
Shows how performance measures, such as the Sharpe Ratio, can easily be gamed, e.g., with derivatives. A utility-based performance measure does not suffer from this obvious flaw. RFS Award Winner.
Amit Goyal and Ivo Welch. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," Review of Financial Studies 21-4, July 2008, 1455-1508. doi:10.1093/rfs/hhm014
Lead Article. Has (out-of-sample) prediction plots that make it trivial to diagnose immediately when what variable works. The startling conclusion is that all existing variables in the literature failed. Moreover, to the extent they fail only moderately badly, it is only because they predicted well the 1974-1975 crash. (Our Management Science paper is much more clever and detailed on the subject of predicting with dividend ratios.) Correction: The copy-editor mistakenly switched order of authors. It should have been Goyal-Welch (not Welch-Goyal). Updates: The data is at Amit's website.
Ivo Welch, Two Common Problems in Capital Structure Research: The Financial-Debt-To-Asset Ratio and Issuing Activity Versus Leverage Changes, International Review of Finance 11-1, 2011, p 1-17.
I know this is not a top journal, but I think the issues are important to anyone doing capital structure research.
Ivo Welch, A Critique of Recent Quantitative and Deep-Structure Modeling in Capital Structure Research and Beyond, Critical Finance Review 2-1, July 2013, 131-172.
(Warning: This paper was published in a journal I edit, although I was not the handling editor.) Widely assigned in Ph.D. courses, together with Whited-Strebulaev and Hennessy critiques of my own critique.
Peter Iliev and Ivo Welch. "A Model of Operational Slack: The Short-Run, Medium-Run, and Long-Run Consequences of Limited Attention," Journal of Law, Economics, and Organization 29-1, Nov 2013, 2-34. Oliver E. Williamson Prize for Best Article in Law, Economics, and Organization. doi:10.1093/jleo/ewr019
Argues that attention limits constrain the ability of firms to take projects, and derives implications for slack.
Bernardo, Antonio, and Ivo Welch. Leverage and preemptive selling of financial institutions (formerly "Leverage and Financial Market Runs"), Journal of Financial Intermediation 22-2, April 2013, 123-151. doi:10.1016/j.jfi.2012.09.004
Argues that financial firms sell risky assets preemptively if they see that their peers are too leveraged. Leverage is endogenous.
Ivo Welch. Referee Recommendations. Review of Financial Studies 9-2014, Sep 2014, 2773-2804. doi:10.1093/rfs/hhu029
Referees in finance and economics have only modest agreement. Referees have strong fixed effects. They disagree on scale and ordering.
Sophocles Mavroeidis, Yuya Sasaki, and Ivo Welch. Estimation of Heterogeneous Autoregressive Parameters with Short Panel Data, Journal of Econometrics 188-1, Sep 2015, 219-235.
Think Arellano-Bond in which each firm has a different adjustment speed. (Yuya is the primary author. Sophocles and I were only secondary, participating only modestly and more in the formulation stage.) doi: 10.1016/j.jeconom.2015.05.001
Bernardo, Antonio, Alan Schwartz, and Ivo Welch. Contracting Externalities and Mandatory Menus in the U.S. Bankruptcy Code. Journal of Law, Economics, and Organization 32-2, 2016, 395-432. doi: 10.1093/jleo/ewv023.
Not allowing firms to contract (opt) out of Chapter 11 can reduce aggregate fire sales at the worst of times. Firms prefer it in the aggregate, even though they would like to evade it individually. The model is a beauty. Atomistic firms can anticipate but not influence outcomes, and yet their choices determine the outcome in the aggregate. (Note: we paid OUP to free this article.)
Ivo Welch. Plausibility: A Fair & Balanced View of 30 Years of Progress in Ecologics. Foundations and Trends in Accounting 2016, 10 2-4, 376-412. doi: 10.1561/1400000050
Bernardo, Antonio, Eric L. Talley, and Ivo Welch. Designing Corporate Bailouts. Journal of Law and Economics 2016, 59-1, 2016, 75-104. doi: 10.1086/685619.
An indifference theorem and analysis as to when government bailouts are harmful (in the presence of agency conflicts).
Ivo Welch. The (Time-Varying) Importance of Disaster Risk. Financial Analysts Journal 72-5, Sep/Oct 2016, 14-30. doi: 10.2469/faj.v72.n5.3.
Below-the-money index put-option prices suggest that no more than 2%/year of the historical 7%/year equity premium could have been risk compensation for disasters that just happened not to have occurred. This paper also provides a novel "conservative diffuse approach" for dealing with black-swan risk.
Jason Alan Snyder and Ivo Welch. Do Powerful Politicians Really Cause Corporate Downsizing? Journal of Political Economy 125-6, Dec 2017, 2225-31. doi: tba.
Earlier results in Cohen, Coval, Malloy (JPE 2011) turn out to be spurious. Powerful committee chairs did not crowd out the investment expenditures of publicly-traded corporations with headquarters in the state. (More likely, but not indisputable, their observed relation was due to an oil-related decline in Texas.)
Yaron Levi and Ivo Welch. Best Practice for Cost-of-Capital Estimates. JFQA 52-2, April 2017. doi: 10.1017/S0022109017000114, sharecode E2A7A562BD7D94C9FA189E3157AECB22. pdf
How to estimate betas and factor loadings, assess risk premia, and use the CAPM or alternatives. This paper should be of great help not only to corporations, but also to researchers. Over the last 60 years, the risk premium has been about 2%/yr, the term premium about 4%/yr, for an equity premium of about 6%/yr.
Nimesh Patel and Ivo Welch, Extended Stock Returns in Response to S&P 500 Index Changes. RAPS 7-2, December 2017, 172-208. doi: /10.1093/rapstu/rax012
Antonio E. Bernardo, Alex Fabisiak and Ivo Welch. Asset Redeployability, Liquidation Value, and Endogenous Capital Structure Heterogeneity. JFQA , August 2019. doi: 10.1017/S0022109019000644.
Firms with lower leverage are not only less likely to experience financial distress but are also better positioned to acquire assets from other distressed firms. With endogenous asset sales and values, each firm’s debt choice then depends on the choices of its industry peers. With indivisible assets, otherwise identical firms may adopt different debt policies--some choosing highly levered operations (to take advantage of ongoing debt benefits), others choosing more conservative policies to wait for acquisition opportunities. Our key empirical implication is that the acquisition channel can induce firms to reduce debt when assets become more redeployable.
Yaron Levi and Ivo Welch. Symmetric and Asymmetric Market Betas and Downside Risk. RFS, June 2020. doi: https://doi.org/10.1093/rfs/hhz108.
Our paper explores whether a symmetric plain or an asymmetric down-beta is a better hedging measure (Roy 1952; Markowitz 1959). Unlike Ang, Chen, and Xing (2006) and Lettau, Maggiori, and Weber (2014), we find that the prevailing plain market beta is the better predictor, even for crashes. It also predicts the subsequent down-beta (i.e., beta measured only on days when the stock market had declined) better than down-beta itself. Stocks with higher down-betas ex ante also do not earn higher average rates of return ex post. Thus, down-betas are useful for neither hedging nor risk-pricing purposes.
Ivo Welch. The Wisdom of the Robinhood Crowd. JF 77:3, June 2022.
Robinhood (RH) investors increased their holdings in the March 2020 COVID bear market, indicating an absence of collective panic and margin calls. This steadfastness was rewarded in the subsequent bull market. Despite unusual interests in some “experience” stocks (e.g., cannabis stocks), they primarily tilted towards stocks with high past share volume and dollar-trading volume, itself mostly big stocks. From mid-2018 to mid-2020, an aggregated crowd consensus portfolio (a proxy for the household-equal-weighted portfolio) had both good timing and good alpha.
Ivo Welch. Simply Better Market Betas . Critical Finance Review 11-1, 37-64, 2022.
The best estimate of future market beta for individual stocks is also the simplest to implement.

Working Papers

Welch, Ivo, 2022: Disaggregating the Increase in Tropical Cyclone Intensity in Kossin et al. (PNAS 2020). Confirming Kossin, C1-C2 cyclones declined less thant C3-C5 cyclones. C3 cyclones increased more than other cyclones. However, C5 cyclones did not increase but declined more than other cyclones --- possibly due to low frequency and power in the data, but nevertheless puzzling and noteworthy. (this is a ``Note''-type paper.)
Welch, Ivo, 2022: Chaney, Sraer and Thesmar (2012), The Collateral Channel: How Real Estate Shocks Affect Corporate Investment, and the American Economic Review. (This is a ``Note''-type paper.) With editorial correspondence --- interesting rejection reason...
Goyal, Amit; Welch, Ivo; Athanasse Zafirov, 2023. A Comprehensive 2021 Look at the Empirical Performance of Equity Premium Prediction II. R&R, Review of Financial Studies.
Bikhchandani, Sushil; David A. Hirshleifer; Omer Tamuz; Ivo Welch, 2023. Information Cascades and Social Learning. R&R, Journal of Economic Literature.
Welch, Ivo, 2023. Increasing Action Choices and Informational Cascades. May 2023.

Ongoing research in private valuation discount, US exports; and now also in climate change, first paper expected end of 2023.

PS: In the paper-by-paper description, when I use the term "first," it does not imply that similar papers were not contemporaneous—only that I wrote this paper independently, not aware of contemporaneous alternatives.

Ongoing Research

See my SSRN Author Web Page.

Teaching and Professional Service

Textbook

Corporate Finance, first edition. published by Prentice-Hall, 2008. Corporate Finance, 2nd-4th edition, 2011-2017.

Corporate Finance, 5th edition, 2022.

A Textbook on Global Climate Change, 2022-.

Teaching

Various classes over the years, including introduction to finance (core), intermediate finance, advanced corporate finance, entrepreneurial finance, statistics, and Ph.D. level courses. 1994 Teaching Award. Various Executive Teaching. More recently: climate change, economics, technology.

Seminars and Presentations

Numerous seminar presentations, conference participations, (keynote) presentations, discussions, session chairings.

Others

Managing Editor: Critical Finance Review, 2011-.

Publisher and associate editor: FAMe, 2013-2015.

Research Associate, NBER Corporate Finance and Asset Pricing group.

Global Economics and Management and Center for Law and Economics at UCLA Associate Faculty.

Humboldt Foundation Scholar, 2015-. Wonderful organization, except that they scheduled the ceremony at the same time as Germany played France in the World Cup in 2016!

Opeds in some influential newspapers, including the New York Times (2014) and LA Times (2014).

Director of the Fink Center at UCLA, 2012-15. Area chair 2022-.

Numerous local university service appointments and committees. Finance area phd program, 2014-5. Some executive education program coordination. Some minor grants. NSF Grant, 2008. Elected board member, AFA 2013-2016. Elected board member, EFA 2021-2023. (Visiting Scholar, Frankfurt Goethe University, 2015-).

Citation Impact Metrics

Probably most-cited financial economist of German-speaking background and as one of the five most-cited economists of German background. (Corrections welcome.) Was ranked among top-100 economists in cite counts (e.g., in the Web of Science (formerly Thomson) ISI 2007 list of most cited economists. They have since abandoned this list.)

Opinion: common cite counts are neither particularly good in methodology, nor useful in judging intellectual quality—much less do they do so across different academic areas or sub-areas. But cite counts are useful in providing basic quantitative metrics of intellectual impact. Think "logarithm" instead of absolute values ((more thoughts here).

(My RePeC impact is quite low, because it heavily weights coauthors and colleagues. This greatly improves the rankings of professors from larger institutions in Boston and Chicago.)

Other

For-Profit Board Service: Tropic BioSciences, 2017-2018. Just Insurance, 2019-.

Background: Schweinfurt, Germany. Native tongue: German. Happily married, three teenage children. Hobbies: Them. Research. Knowledge. Video Background Interview: here.

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