Press Release Announcing the First Ross Prize

Foundation for Advancement of Research in Financial Economics Awards First $100,000 Academic Prize

Finance Scholar Hayne Leland Recognized

December 9, 2008.

Berkeley, CA --- The Foundation for Advancement of Research in Financial Economics (FARFE), a consortium of finance academics and practitioners from around the world, has awarded its first Stephen A. Ross Prize in Financial Economics to University of California scholar Hayne Leland for his influential work on corporate debt pricing and capital structure.

The Foundation established the $100,000 prize last year in order to recognize and encourage significant contributions to research in financial economics. The Ross Prize is given biennially to research published in the previous fifteen years. "Financial economics is an area that is critical to our understanding of complex capital systems and how they work; the recent global financial turmoil has made advancing this understanding especially important," said Andrew Carron, President of NERA Economic Consulting and one of the founding members of FARFE. "By establishing this prestigious award and by taking other positive steps on its mission to advance path-breaking research in financial economics and to foster interaction between research and practice, FARFE can have a significant impact."

The award was given for Leland's 1994 Journal of Finance paper "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure." The paper analyzed how firms determine the optimal mix of debt and equity to acquire funding at the lowest cost. The optimal use of debt, or "leverage," balances tax advantages with potential default costs. Leland, who is the Arno Rayner Professor of Finance and Management at the Haas School of Business at UC Berkeley, builds on the observation that equity holders service debt over time only as long as the value of their claim on the remaining assets is sufficiently high. By paying interest on the outstanding debt, equity holders keep the option to receive their part of the firm's gains alive. If the cost of servicing the debt exceeds the value of their claim, equity holders will choose to default, using bankruptcy protection to limit their losses. Subsequent research has built and expanded on the analysis and insights of this paper by exploring how firms adjust capital structure over time and how this affects pricing in financial markets.

"This is a landmark paper" said Michael Brennan, finance professor at the University of California at Los Angeles and a leading financial economist. "It has inspired an extensive empirical literature that has greatly enhanced our understanding of corporate leverage and its determinants, as well as the determinants of the yields on different classes of corporate debt."

"I was surprised and delighted to be the first recipient of the Ross prize," said Leland. "Steve Ross is truly one of the brilliant minds in financial economics. His contributions not only have provided remarkable insights into asset pricing and economic behavior, but also have had a profound impact on financial practice. I am also enthusiastic about the creation of FARFE and its mission to encourage fundamental research in finance."

"We identified more than 350 papers for consideration for the award," said Paul Pfleiderer, the chair of the prize committee and C.O.G. Miller Distinguished Professor of Finance at the Stanford Graduate School of Business. "Hayne Leland's paper stood out not only for the elegant and rigorous approach it took in addressing an important problem in finance, but also for the substantial influence it has had over the years on research in capital structure."

In addition to Paul Pfleiderer, the prize committee included: Michael Fishman, Norman Strunk Professor of Financial Institutions at Northwestern's Kellogg School of Management; Burton Hollifield, Professor of Financial Economics at Carnegie Mellon's Tepper School of Business; Bengt Holmstrom, Paul A. Samuelson Professor of Economics at MIT; Chi-Fu Huang, Partner at Platinum Grove Asset Management; Richard Roll, Japan Alumni Professor of Finance at UCLA's Anderson School of Management; and Amir Yaron, Associate Professor of Finance at the University of Pennsylvania's Wharton School.

Founded in 2006 by finance academics and practitioners, FARFE is committed to supporting fundamental research in financial economics and to facilitating productive interaction between research and practice in finance. For more details about FARFE, the Ross Prize, and the award-winning paper, see


Leland's Paper

Citation for First Ross Prize

Impact of Leland's Paper

Media Coverage

Listen to an interview with Hayne Leland on the Tom Keane radio program on Bloomberg radio (Wednesday, Dec 10, 6 pm EST).

Wall Street Journal coverage of the Stephen A. Ross Prize announcement.