Noe's 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
Noe 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.
"Blood and money: Kin altruism and the governance of the family firm"
Management and CEO compensation
Noe's 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, Noe 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, Noe believes that the conventional view is based on faulty understanding of the actual role of CEOs. According to Noe, 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).
"Optimal corporate governance and compensation in a dynamic world”
"Tunnel-proofing the executive suite: transparency, temptation, and the design of executive compensation" Evolutionary biology and corporate governance
Board design and shareholder democracy
Noe 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.
Does pay activism pay off for shareholders? Shareholder democracy and its discontents
Board structures around the world: An experimental investigation (with A. Gillette and M. Rebello), Review of Finance 12, 93-140, 2007.
Securities design, capital structure, and payout policy
Noe's 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. Noe's work on payout policy provides an explanation for why financially constrained firms do not immediately increase capital investment when they experience large cash infusions. Noe 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.
"Optimal design of securities under asymmetric information" (with David Nachman) Review of Financial Studies 7, 1--44, 1994
Where did all the dollars go? The effect of cash flows on capital and asset structure (with S. Dasgupa and Z. Wang). Journal of Financial and Quantitative Economics 46, 1259–1294, 2011.
"Legal-system arbitrage and parent-subsidiary capital structures"
In this paper, published in Management Science, Noe 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.
"Systemic risk in financial systems" Management Science 47, 236--249, 2001.
Noe's 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.
"Product market efficiency: The bright side of myopic, uninformed, and passive external finance" (with M. Rebello and T. Rietz), forthcoming in Management Science.
Noe's work considers the effect of a limited supply of talented investment bankers on IPO waves. Noe 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. Noe shows that these effects can cause IPO waves in new technology stocks.
Good IPOs draw in bad: Inelastic banking capacity and hot markets (with N. Khanna and R. Sonti), Review of Financial Studies 21, 1873-1906, 2008.