Thomas Noe is the Ernest Butten Professor of Management Studies at Saïd Business School, and an expert on corporate finance and corporate governance. His work has influenced the way companies are financed through the issuance of securities, contributed to the way we analyse systemic risk for firms, and provoked a re-evaluation of the way senior managers are compensated. His work has appeared frequently in all leading Finance journals and so many leading economics and management science journals. Currently he is an Associate Editor of the Review of Finance, The Review of Corporate Finance Studies, and is a co-editor of the Journal of Economics and Management Strategy. He has visited academic and research institutions on five continents, including the Federal Reserve Bank, Hong Kong University of Science and Technology, Massachusetts Institute of Technology, University of Auckland, Universidad de Chile, Universidad los Andes and the University of Queensland.
Prior to joining Saïd Business School, Thomas held the A. B. Freeman Chair in Finance at Tulane University. He is a professorial fellow at Balliol College, and a research associate at the Oxford-Man Institute and the Centre for Corporate Reputation at Oxford University, and the European Institute for Corporate Governance.
Areas of expertise include:
Thomas' main areas of research fall within corporate finance and corporate governance focusing on developing and experimentally validating rational choice models of financing, investment, governance, and management compensation. Much of his work is related to the problem of designing incentive, control and contact systems, to maximise shareholder value, or to the effect of actual financial and managerial contract structures on corporate value.
His current research focuses on such topics as the optimal design of governance and CEO compensation in a dynamic context, the effect of external finance on the incentives for opportunistic corporate behaviour, the relation between the IPO cycles and the market for investment banking labour, and the effect of intra-family altruism on the investment and financing policies of family firms.
Finance and evolutionary biology
Thomas is expanding the basic economic perspective on the corporation by using insights from evolutionary biology. In particular, he is investigating corporate governance in family firms, and the formation and behaviour of family firms in the light of the evolutionary biology theories of "inclusive-fitness" or "kin-selection" developed by academics William Donald Hamilton and JBS Haldane. This work models family firms and shows that family ownership and management improves effort incentives and reduces monitoring incentives. The trade-off between incentive benefits and increased monitoring costs determines the overall effectiveness of family governance and identifies conditions under which private equity buyouts can improve firm performance.
Optimal Design of Contests
Thomas' recent work on contest design focuses on competitions where contestants choose between strategies with uncertain payoffs (e.g., hedge fund managers making portfolio investments) when the agents are rewarded rank-based prizes. This work shows, in a very general setting, that when rank-based rewards are skewed toward the top-performers, agents will adopt highly skewed “win-small---lose big strategies,” that risk extremely bad outcomes for the sake of a slightly higher chance of reaching the top of the ranking hierarchy.
Personality and Investment Manager Risk Taking
Thomas is also exploring the role of personality in business decisions. His recent work has documented that, as economic theory predicts, when managers make personal investment decisions risk/return preferences determine their choices. However, when these same managers make group decisions, personality traits rather than risk/return preferences govern their actions. In group settings, regardless of their risk taking preferences, managers with aggressive personalities favour aggressive high-risk strategies.
Management and CEO compensation
Thomas' recent research questions the conventional wisdom, that CEO bonuses, options, and incentive payment should be triggered only by very high attained levels of performance. Convention, Thomas argues, paints the CEO as a super worker with a greater ability to create value and the role of compensation being to motivate effort.
However, Thomas believes that the conventional view is based on faulty understanding of the actual role of CEOs. According to Thomas, the CEO’s role is twofold - a trustee of the firm's assets, and a strategic decision-maker. As a trustee, the CEO ensures that firm assets are not appropriated for private use, and as a decision-maker the CEO makes crucial but infrequent strategic decisions which determine the long-run viability of the firm.
In this framework, the combination of board monitoring, the prospect of sacking, and bonus payments triggered by moderately good performance, is a more efficient and lower cost means of aligning CEO/shareholder interests than high-powered compensation. This research has been published in leading academic journals, mentioned in general and professional media outlets, such as the Financial Times, and led to invitations to deliver the keynote address at practitioner and academic conferences in the UK, Singapore, and India (Kolkata).
Board design and shareholder democracy
Thomas considers the effectiveness of boards and shareholders in deterring opportunistic behaviour by managers. He research shows that, on the one hand, when the nature of the agency conflicts between the firm and insiders are clearly understood by shareholders, shareholders can control managerial opportunism through the appointment outsider majority boards. On the other hand, when shareholders have incomplete information regarding motivations of directors, the preferences of managers, and the quality of the firm's investment opportunity set, shareholders' attempts to exercise control can be counterproductive. Such attempts may simply lead corrupt boards, which aim to both enrich managers and protect their own reputation, to funnel private benefits indirectly to managers through wasteful manager-preferred corporate policies. These policies may be much more costly to shareholders than the simple overpayment that would have resulted from weaker shareholder control.
Securities design, capital structure, and payout policy
Thomas' early work on security design and asymmetric information challenged the prevalent "pecking-order theory" that asymmetric information between inside owners and outsiders should lead firms to prefer raising external funds using debt rather than equity finance. His work provided the necessary and sufficient conditions for optimal security issuance polices under asymmetric information. It has subsequently proved to be the foundation for recent dynamic contracting models of security design. His more recent work has focused on the design of parent and subsidiary structures and explains why firms borrow funds at both the parent and subsidiary level. Thomas' work on payout policy provides an explanation for why financially constrained firms do not immediately increase capital investment when they experience large cash infusions. Thomas shows that investment does increase but at a lag because financially constrained firms first use cash infusions to build cash balances and pay down debt.
In this paper, published in Management Science, Thomas was one of the first people to successfully address the problem of resolving financial distress when systemic risk leads to multiple defaults by firms with interconnected liabilities. This work has been used to estimate exposure to systemic default risk both in recent academic work, and by applied researchers analysing bank risk exposure in the UK, Switzerland, and Austria.
Thomas' work on reputation considers the effect of incentives to maintain corporate reputation on the firm's choice of financing policy. His paper show that financing with short term debt finance, which many associate with incentives to underinvest in long-term reputation building activities, can actually be used to commit firms to reputable behaviour.
Thomas' work considers the effect of a limited supply of talented investment bankers on IPO waves. Thomas argues that a sudden increase in the number of potential IPOs in a given industry combined with a fixed supply of investment banking talent capability of screening that industry's firms can lead to a shortage of industry-specific investment banking talent. Such talent shortages lead to laxer screening standards. Lax standards in turn lead to more marginal firms attempting to obtain IPO financing. This in turn puts more pressure on the market for investment banking talent and leads to a further weakening of standards. Thomas shows that these effects can cause IPO waves in new technology stocks.
Thomas engages with practitioners and policymakers and the broader academic community in a number of ways.
He has consulted with a number of organisations such as the Federal Reserve Bank and Mirant Corporation. He has lectured widely to industry conferences including, for example DZ bank conference and has delivered keynote addresses for gatherings such as the 50 Anniversary Finance Conference at IIM-Calcutta and the 3rd Annual Singapore International Finance conference at the National University of Singapore.
He is the associate editor of a number of leading academic journals including Financial Management, The Review of Corporate Finance Studies and, in addition, serves as a co-editor of the Journal of Economics and Management Strategy. He also serves on the conference organising committees of the leading research conferences on corporate finance, both in North America (Western Finance and American Finance), Europe (Paris Spring Conference), and Asia (Singapore International Conference).
Over the span of his career, he has taught and researched at institutions on five continents, including the Federal Reserve Bank, Indian Statistical Institute, New Delhi, Hong Kong University of Science and Technology, National University of Singapore, NTU, Singapore Management University, and IIM-Calcutta, the Massachusetts Institute of Technology, University of Auckland, Universidad de Chile, Universidad los Andes, and the University of Queensland.
Thomas has won a number of research awards, including at leading academic meetings in North America (Western Finance Association), Asia (China International Conference), and Australia (Australasian Finance and Banking Conference).
Thomas is motivated by the desire to improve the practice of finance internationally and to increase the understanding of both practitioners and policy makers in the areas in which he works.
Thomas teaches Corporate Finance in the MSc in Financial Economics programme; Theory of Finance in the M.Phil Economics and D.Phil Finance programmes and also tutors Balliol college undergraduates in Finance and Financial Management.
The core model of financial economics lies at the centre of all Thomas' teaching. He believes it is the only logically consistent model for corporate financial decision-making that is simple enough to apply to practical capital budgeting decisions as it is founded on the trade-off between risk and return and rational arbitrage-free pricing of corporate securities.
At the same time, the core model does not reflect a number of important first order effects on financing policy, including collateral, asymmetric information, incentives, and the costs of financial distress. These factors are amenable to logical internally consistent economic modelling, but the resulting models are rarely of sufficient transparency to directly apply to real-world decisions. In teaching students about these topics he employs a much more interactive approach: working through the models and aiming to demonstrate as many practical insights as possible.
The students start with real-world decision problems and, through case analysis and class discussion, develop an appreciation of the role of theory in organising their analysis of these problems.
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