175 (4)

Enrique R. Arzac is a financial economist and an Emeritus Professor of finance and economics at the Graduate School of Business of Columbia University in New York, where he taught corporate finance and capital markets, and served as Senior Vice Dean and Chairman of Finance. He holds a BA (CPN) degree from the University of Buenos Aires and MBA, MA in economics and Ph.D. in financial economics from Columbia University.

Before joining Columbia University, he taught at the University of Buenos Aires, was Chief Economist of the Latin American Economic Research Foundation and Director of Management Control of the Argentine National Council of Development. He has been a visiting professor at the Theseus International Management Institute in France, Graduate School of Business Administration Zurich, Di Tella University of Argentina, Autonomous University of Madrid, Duxx Graduate School of Business Leadership of Mexico and London Business School. At the London Business School he established and directed the Mergers and Acquisitions program for executives.

Professor Arzac is the author of Valuation of Merges, Buyouts and Restructuring, the advanced standard reference on the subject which has been translated to the Japanese and Chinese. He is author of many articles published in the leading finance and economic journals, and has been a consultant to corporations and financial institutions in North America, South America, Europe, Africa and the Middle East. He has also testified as an expert witness in matters of financial valuation. Professor Arzac serves on the Board of Directors of the investment companies at Adams Funds (formerly The Adams Express Company), Mirea Asset Discovery Funds, ETF Securities USA LLC, and Credit Suisse Next Investors LLC. Previously he was Chairman of the Board of Directors of Credit Suisse Asset Management Closed-End Funds, Trustee of Credit Suisse Asset Management Funds, Director of Credit Suisse Park View BDC, Chairman of Aberdeen Asset Management Emerging Market Funds, Director of Epoch Holding Corporation, and Director of Starcomms PLC.

Professor Arzac’s research spans several areas of financial economics: asset pricing, commodity markets, and corporate finance, including his development of the capital asset pricing model under loss-aversion in “Portfolio Choice and Equilibrium in Capital Markets with Safety-First Investors,” (with V. Bawa), Journal of Financial Economics,  May 1977. In 1989, Arzac proposed a market solution to the output uncertainty problem faced by unincorporated primary producers that do not expose insurers to moral hazard in “Income Insurance with Uncertain Output,” International Economic Review, August 1989. His work anticipated the government-sponsored and private crop insurance programs offered in the U.S.A, Canada, Brazil, India and other countries, as well as the crop yield insurance and options contracts launched by the Chicago Board of Trade in 1995.

A series of papers co-authored with Maurice Wilkinson studied the cycles of livestock and grain markets, developed the first micro-econometric model integrating those markets, and used it to study the implications of economic policies toward them in “A Quarterly Econometric Model of the United States Livestock and Feed Grain Markets and some of its Policy Implications,” American Journal of Agricultural Economics, May 1979. The model incorporates quarterly, semi-annual and annual endogenous variables into individual structural equations and determines commodity prices by market equilibrium conditions rather by time-series techniques, both were innovations in the econometrics of commodity markets. Arzac and Wilkinson applied optimal control techniques to their model and demonstrated how farm prices and the retail cost of meat can be stabilized by optimal control relative to an unregulated market but that there a is a definitive limit to the stabilization gain. See “Stabilization Policies for the United States Feed Grain and Livestock Markets,” (with M. Wilkinson), Journal of Economic Dynamics and Control, January 1979.

In “A Reconsideration of Tax Shield Valuation,” (with L. R. Glosten), European Financial Management, September 2005, the authors derive a general result on the value of tax shields, obtain the correct value of tax shields for perpetuities and the valuation formulas for arbitrary cash flows under a constant leverage financial policy. Their results confirm and generalize Miles and Ezzell’s 1 examination of the value of tax shields under a constant leverage ratio, and clarify an important question in valuation practice.

In “Valuation of Highly Leveraged Firms,” Financial Analysts Journal, July/August 1996, Arzac provided a solution to the valuation of firms with uncertain leverage such as firms undergoing financial restructuring, leveraged buyouts and project finance. In a related paper “On the Capital Structure of Leveraged Buyouts,”  Financial Management,  Spring 1992, Arzac provided a rationale for the choice of capital structure by leveraged buyout sponsors as a signaling equilibrium.

“The Leveraged Structure of Interest Rates,” (coauthored with R.A. Schwartz and D.K. Whitcomb), Journal of Money, Credit and Banking, February 1981, demonstrated that a competitive credit market generates an increasing leverage structure of interest rates and avoids credit rationing. Credit rationing results from the imposition of a flat leverage structure as in the model of credit rationing of Jaffe and Modigliani].2

Arzac’s contributions to the theory of firm include his study of the implications of safety-first behavior in the case of quantity-setting behavior under price uncertainty in “Profits and Safety in the Theory of the Firm Under Price Uncertainty,” International Economic Review, February 1976. In “A Mechanism for the Allocation of Corporate Investment,” Journal of Financial and Quantitative Analysis, June 1983, he developed an allocation mechanism capable of attaining production plans that are unanimously preferred by stockholders and that satisfies a natural notion of optimality applicable to a stock market economy in which each firm has access to many production activities. Corporate investment in an economy without a complete set of claim markets has the characteristic of a public good in the sense that the stockholders’ consumption plans cannot be separated from but depend on the specific investment plans of the firms.  Arzac’s paper extends the seminal works Drèze3 and Grossman and Hart4 by proposing a mechanism that attains Lindahl production allocations5 if stockholders do not engage in strategic gaming. While gaming cannot be ruled out a priori, the experimental results reported by Smith using somewhat similar mechanisms suggest that gaming is not a problem6

In “Structural Planning Under Controllable Business Risk,” Journal of Finance, December 1975, Arzac extended Vickers’ theory of the firm 7 by allowing business risk to be endogenous and depend on production and investment decisions. It derives a criterion for investment decisions under general uncertainty and market organization conditions when business risk is endogenous. The effect of investment decisions on business risk has been studied under the conditions of idealized uncertainty assumed in the Sharpe-Lintner capital market theory. The investment criterion derived in this paper is shown to be generalization of theirs, and of the one obtained by Modigliani and Miller under the constant risk class assumption. Both are shown to be cases of Arzac’s general criterion. His work established the important link between the theory of the firm and capital market theory.

  1. Miles, J. A. and J. R. Ezzell, “A reformulation of tax shield valuation,” Journal of Finance, December 1985.
  2. Jaffe, D. M. and F. Modigliani, “Theory and Test of Credit Rationing,” American Economic Review, December 1969.
  3. Drèze, J. H., “Investment under Private Ownership,” in Allocation under Uncertainty, J.H. Drèze, ed., John Wiley & Sons, 1974.
  4. Grossman, S. J. and O. D. Hart, “A Theory of Competitive Equilibrium in Stock Market Economies,” Econometrica, March 1979.
  5. Walker, M., “A Simple Incentive Compatible Scheme for Attaining Lindhal Allocations,” Econometrica, January 1981.
  6. Smith, V. L., “The Principle of Unanimity and Voluntary Consent in Social Choice,” Journal of Political Economy, 1977.
  7. Vickers, D. Theory of the Firm: Production, Capital and Finance, McGraw-Hill, 1968.