Professor Neng Wang from the Columbia University gives a talk at the Department of Finance
Date: 2019-10-31

In the afternoon of October 14, 2019, in response to the invitation of Associate Professor Zhaojun Yang, Chong Khoon Lin Professor of Real Estate and Finance at Columbia Business School, Neng Wang, who is also the Honorary Dean of the School of Finance at Shanghai University of Finance and Economics, Winner of the Special Expert of Chinese Government, Member of Luo Hantang Academic Committee and a Research Associate (Senior Research Fellow) at the National Bureau of Economic Research, visited the Department of Finance of the Southern University of Science and Technology (SUSTech), and delivered a lecture on "Corporate Finacne, Optimal Contracting, and Financial Markets" in Classroom 506 at The First Lecture Hall.

 

Professor Neng Wang first asked whether the students know the Miller-Modigliani theorem (MM theorem). After some students responded, Professor Neng Wang said that Corporate Finance is about implications of deviation from MM, such as tax distortions, financial distress, and informational friction, Moral hazard and agent conflicts, inalienability of human capital and limited commitment, transaction costs, behavioral biases and inefficient capital markets, etcs.

 

Professor Neng Wang started with the company's balance sheet. Specifically, the left side of the company's balance sheet consists of cash and projects, and the right side of the balance sheet consists of debt and equity. Much of Corporate Finance studies is about debt and equity, that is, research on corporate capital structure. However, the cash, which is on the left side of the company's balance sheet, is also an important state variable for the company's value. For example, a CFO survey conducted by Graham and Harvey reveal that liquidity and risk management considerations are CFO's top priorities. Besides, The Economist published an article "All you need is cash" in the year 2008, which also stress the importance of liquidity. But in the theoretical literature, corporate liquidity models seem under-developed, compared with capital structure models.

 

How about the risk management? Professor Neng Wang pointed out that from the perspective of economic, it is precisely because the market deviates from the assumptions in the MM theorem that there are various frictions, and therefore it is necessary to manage risks. From the functional perspective, commonly used methods like Value at Risk, delta hedges, insurance and CDS can help companies optimize their value, and therefore corporations also require risk management. How to integrate functional and economic perspective needs to think about.

 

Later, Professor Neng Wang introduced the development of Corporate Finance theory, which were divided into five generations: I. Identifying Key Frictions, II. Contracting and Security Design, and III. Dynamic Corporate Finance, IV. The Role of Financial Spanning, V. General Equilibrium.

 

Professor Neng Wang pointed out that in Corporate Finance, the first-generation model take securities as exogenously given and then analyze the implications of frictions on corporate securities, the key idea of which consists of taxations, conflicts of interests(e.g., risk shifting, debt overhang), nexus of contracts, costly external financing and liquidity demand, hedging. The main toolboxes used for those model are mainly about optimization, information economics, agency theory. The second-generation(Security-design) models take securities as endogenous determined so as to response to frictions. The key is the “micro foundation”. The main toolboxes include  mechanism design and contract theory.

 

The third-generation model extends Corporate Finance research to dynamic processes, where dynamics matter for insights, mechanisms, valuation, and real-world implementation and recommendations. The themes present here mainly include: a. Tradeoff theory of capital structure, b. Transaction-costs-based theory of corporate Liquidity and risk management, c. Moral-hazard-based Optimal contracting model , d. Limited-commitment-based corporate liquidity and capital structure models, e.  Corporate liquidity and risk management theory based on the inalienability of Human capital. In this generation, dynamic stochastic optimization and continuous-time methods prove to be very helpful.

 

The fourth-generation model mainly studies the role of incomplete financial spanning, that is, the company's risks cannot be fully hedged or there are defaults. The fifth-generation model extends the problems of Corporate Finance to a general equilibrium framework.

 

In the end, Professor Neng Wang concluded that corporate liquidity is a natural state variable (almost) everywhere. Professor Neng Wang discussed with some faculty and students about the issues related to Corporate Finance research, and responded to the questions raised, such as how to evaluate the Nobel Prize winners this year, the impact of FinTech on the world, and the trends of economic in the future. Professor Wang Neng's rich research experience, in-depth analysis, and vivid explanations benefited the teachers and students all. The meeting ended in a warm atmosphere.


Professor Neng Wang from the Columbia University give a lecture to students of Department of Finance

 


Neng Wang Bio.

Finance and Economics Division

Columbia Business School


Neng Wang is Chong Khoon Lin Professor of Real Estate and Finance at Columbia Business School and a Research Associate (Senior Research Fellow) at the National Bureau of Economic Research (NBER). He is an Associate Editor at the Journal of Finance and was an Editor in the Finance area at the Management Science. He has widely published in leading economics, finance, and business journals. Among other awards and honors, he won a Smith-Breeden Distinguished Paper Prize awarded by the Journal of Finance, and the Bettis Distinguished Scholar Award from Carey School of Business, Arizona State University.

His research interests include Corporate Finance, contract theory, asset pricing, asset allocation, sovereign debt and international finance, risk management, entrepreneurial finance, household finance, wealth distribution, macroeconomics, private equity, hedge funds, investor protection, real estate finance, FinTech, and the Chinese economy. He taught at the Simon School of Business, University of Rochester before joining Columbia University. He is an Academic Member of the Luohan Academy. He held visiting professorships at various academic institutions. He has taught courses at both MBA and PhD levels including advanced Corporate Finance, entrepreneurial finance and private equity, fixed income securities and markets, financial institutions, risk management, real estate finance, Corporate Finance theory, and continuous-time finance.

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 from the University of California, San Diego (UCSD) in 1997, and Ph.D. in Finance from the Graduate School of Business at Stanford University in 2002. He was born in 1973 in Anhui, China.