IGM 2008 Annual Report
-
Upload
chicago-booth -
Category
Documents
-
view
215 -
download
1
description
Transcript of IGM 2008 Annual Report
executive DiRectoR
Brian Barry
Clinical Associate Professor of Economics
FAculty DiRectoRs
Austan Goolsbee, Co-director
Robert P. Gwinn Professor of Economics
Anil Kashyap, Co-director
Edward Eagle Brown Professor
of Economics and Finance
Christian Leuz
Joseph Sondheimer Professor
of International Economics,
Finance, and Accounting
Tobias J. Moskowitz
Fama Family Professor of Finance
Luigi Zingales
Robert C. McCormack Professor
of Entrepreneurship and Finance
and David G. Booth Faculty Fellow
ADministRAtion
Jennifer Williams, Assistant Director
Janice Luce, Assistant Director
D98876 Cover.r1 2 12/8/08 2:35:49 PM
The massive global movements of capital, products, and talent in the modern economy have fundamentally changed the nature of business in the 21st century. They also have generated confusion among policy makers and the public.
The University of Chicago Booth School
of Business continues its role as a
thought leader on how these markets
work, their effects, and the way they
interact with policies and institutions.
The Initiative on Global Markets organizes
these efforts. It supports original research
by Chicago Booth faculty, prepares our
students to make good decisions in a
rapidly changing business environment,
and fosters an exchange of ideas with
policy makers and leading international
companies about the biggest issues facing
the global economy.
The Initiative on Global Markets spans
three broad areas: 1) international
business, 2) financial markets, and
3) the role of policies and institutions.
Our Purpose
The Initiative on Global Markets is grateful for the generous support provided by the Chicago
Mercantile Exchange (CME) Trust; by our corporate partners, AQR Capital Management,
Barclays, John Deere and Company, and Northern Trust; and by Myron Scholes, MBA ’64, PhD
’70; Eugene Fama, MBA ’63, PhD ’64; Ramsey A. Frank, ’86; and John W. Meriwether, ’73.
Thank You
D98876 Body 1 11/25/08 9:28:17 AM
The Initiative on Global Markets was launched in mid-2006
with two simple ideas in mind. First, global movements
of capital, goods, and people not only play a crucial role in
modern economic life, but also interact with public policies
and institutions in complex and powerful ways. Second,
confusion pervades much of the debate about these markets
and policies, making it even harder for decision makers—
no matter how accountable to the public—to take sensible
actions. The IGM, therefore, was set up to fund research that
sheds light on what is really happening in global markets—
and to disseminate it in ways that promote more informed
and constructive debate.
In our second year, an extraordinary series of market events
and policy decisions—combined with enthusiastic responses
from our lecture audiences and others—have convinced us
that this Initiative is onto something. This report offers a
quick overview of all we are doing.
For obvious reasons, the IGM has been especially willing
to fund promising research on the global credit crisis.
Most notably, we held a conference focused on the roots
of the crisis in February 2008 during our second annual
U.S. Monetary Policy Forum. One of the IGM’s faculty
co-directors, Anil Kashyap, coauthored this year’s USMPF
report, “Leveraged Losses: Lessons from the Mortgage
Market Meltdown.”
The report, which former United States Treasury Secretary
Lawrence Summers has called “the most cogent analysis of
the credit crisis,” looked clearly at the role that high leverage
among financial intermediaries played in amplifying the
fall in housing prices (see page 7). It predicted that market
Letter from the Director
Brian Barry
ExEcutivE DirEctor, iGM
clinical associatE
ProfEssor of EconoMics
D98876 Body 2 11/25/08 9:28:18 AM
stability would hinge on rebuilding the capital of the
banking system. Eight months later, such recapitalizations
were only beginning to occur. The credit crunch has resulted
in the failures of several big financial institutions, along
with even greater turmoil in credit markets and a huge
bailout by the U.S. government.
We also have set up a new website that pulls together
recent views on the credit crisis by our faculty. Please visit
igmchicago.org.
This year, we also helped to launch the China Summer
Institute (see page 9). This symposium, which will meet
annually in China, brings promising researchers together
with experienced scholars who know the country and its
institutions well. The IGM created the China Summer
Institute in concert with two other academic institutions:
Tsinghua University’s School of Economics and Management
and Katholieke Universiteit Leuven’s LICOS Centre for
Institutions and Economic Performance. We are delighted to
be working with them in a partnership that brings scholars
together from China, Europe, and North America.
The IGM also hosts prominent speakers in our Myron
Scholes Forum, which has become a popular lecture series
in Chicago with occasional events in other cities. In addition,
we provide funding for visiting scholars, who typically spend
two weeks on campus giving seminars and collaborating
with our faculty. And the IGM supports a wide range
of other research on international business, financial markets,
and public policy. This report summarizes all of these
activities. We also encourage you to visit our website, on
which we post new research and informed analysis:
research.ChicagoBooth.edu/igm/
D98876 Body.r2 3 12/11/08 2:27:14 AM
The Initiative on Global Markets organizes and supports conferences for scholars doing high-quality research in their fields. Some of these gatherings also draw on the insights of leading practitioners. In 2007–08, the IGM sponsored seven conferences.
6
D98876 Body 6 11/25/08 9:28:18 AM
u.s. MonEtary Policy foruM
7
The IGM held its second annual U.S. Monetary Policy
Forum (USMPF) in New York in February 2008. The USMPF
brings academic researchers, market economists, and
policymakers together. A standing group of academic and
private sector economists share rotating responsibility for
reporting on a critical medium-term issue confronting the
Federal Open Market Committee (FOMC).
The topic of the USMPF’s main report this year was
“Leveraged Losses: Lessons from the Mortgage Market
Meltdown.” David Greenlaw (Morgan Stanley), Jan Hatzius
(Goldman Sachs), Anil Kashyap (Chicago Booth), and Hyun
Shin (Princeton) wrote the report, which focused on the
credit shock resulting from falling prices for houses and
mortgage-backed securities.
The authors emphasized “the role of leverage and mark-
to-market accounting in propagating this shock” and
predicted—in early 2008—that the result would be a
continuing contraction in the balance sheets of financial
institutions. This process, the report warned, would
“include a substantial reduction in credit to businesses
and households.” Two FOMC members presented their
views on the report: Governor Frederic Mishkin, Board
of Governors of the Federal Reserve System, and President
Eric Rosengren, Federal Reserve Bank of Boston.
Vincent Reinhart, resident scholar at the American Enterprise
Institute and former director of the Federal Reserve Board’s
Division of Monetary Affairs, gave a lunch address on
“The Governance, Communication, and Conduct of the Federal
Reserve’s Monetary Policy.”
“the most cogent analysis of the credit crisis” —lawrEncE suMMErs, forMEr u.s. trEasury sEcrEtary
D98876 Body 7 11/25/08 9:28:19 AM
The conference ended with a panel discussion on “Balancing
Financial Stability, Price Stability, and Macroeconomic
Stability: How Important Is Moral Hazard?” The panel
focused on the difficulties of helping struggling financial
institutions—and thus trying to stabilize the wider economy—
in a way that does not provide incentives for those and
other institutions to take misguided risks in the future.
It featured two FOMC members—president Charles L. Evans,
Federal Reserve Bank of Chicago, and president William
Poole, Federal Reserve Bank of St. Louis—as well as Peter
Hooper of Deutsche Bank Securities and Kenneth West
from the University of Wisconsin-Madison. Paul Tucker—
executive director, markets, Bank of England—moderated
the discussion.
The Journal of Accounting Research (JAR) publishes original
research in accounting using analytical, empirical,
experimental, and field-study methods. The IGM hosted
this year’s JAR conference, which was held at the University
of Chicago Booth School of Business’s Gleacher Center in
downtown Chicago in May 2008.
The two-day conference brought together academic researchers
and practitioners from several disciplines to address the
topic “Regulation of Securities Markets: Perspectives from
Accounting, Law, and Financial Economics.” The conference
featured seven presentations by keynote speakers and other
authors of research papers. The speakers included Ray
Ball (University of Chicago Booth School of Business), Paul
Mahoney (University of Virginia School of Law), René M. Stulz
(Ohio State), and Luigi Zingales (University of Chicago Booth
School of Business).
The JAR conference is an annual event and one of the
premier accounting conferences in the world. It provides
a unique forum for top scholars in accounting, economics,
finance, and law to discuss pertinent and cutting-edge
issues relating to the regulation of securities markets. The
conference is cross-disciplinary in nature. It emphasizes
issues that arise from the globalization of securities markets
and that influence how firms raise capital.
8
rEGulation of
sEcuritiEs MarkEts:
Journal of accounting
research confErEncE
D98876 Body 8 11/25/08 9:28:19 AM
In June 2008, the IGM helped to launch a new annual gathering
in China to foster better ties among researchers studying
its economy. Our goal is to create a network of high-quality
scholars that will enhance economic research on China. To do
so, the IGM teamed up with two other research institutions–
Tsinghua University’s School of Economics and Management,
and Katholieke Universiteit Leuven’s LICOS Center for
Institutions and Economic Performance–to form the China
Summer Institute (CSI).
The CSI is designed to foster collaboration. It does this
by bringing together promising junior researchers from
China, Europe, and North America, to present new studies
and work in progress and to share ideas. We have assembled
a committed group of experienced scholars who know
China well, and who can thus provide crucial insights into
important institutional characteristics of China’s economy.
The format combines formal presentations and seminars
with time for collaboration in smaller groups.
We held the first annual gathering in Dalian, China, in
June 2008. From the IGM, Clinical Associate Professor of
Economics Brian Barry and Professor of Economics Chang-
Tai Hsieh attended, and plan to continue playing an active
role in future years.
In February 2008, the IGM held a conference on our London
campus as part of our mission to foster better debate about
international business and public policy. The half-day
conference dealt broadly with issues connecting global
business and politics.
The event began with a lunch address by John Sutton,
Sir John Hicks Professor of Economics at the London School
of Economics. Sutton spoke on “China and India: Moving
to the Frontier.” He offered a detailed look at how many
manufacturing firms in China and India are innovating,
then linked this to an analytical model of how competition
affects entry and exit in many sectors. This framework not
only provided a way to think about the cost pressures facing
manufacturers elsewhere as China and India develop, but
also yielded insights into the way this competition affects
concentration and investment in different sectors.
GloBal BusinEss anD Politics
9
thE china suMMEr institutE
crEatinG a GloBal nEtwork
of china scholars
:
D98876 Body.r1 9 12/8/08 2:30:10 PM
BEyonD liquiDity: MoDEl
frictions in financE anD
MacroEconoMics
thE EMErGEncE of
social orGanization:
what arE wE MissinG?
10
The lunch was followed by two panel discussions: one on
financial market regulation, the other on doing business in
a global environment. The first group of panelists consisted
of Andrew Haldane (Bank of England), Richard Portes (London
Business School), and Emmanuel Roman (GLG Partners LP).
This panel highlighted the complexities of getting financial
regulation right in a politicized environment. Portes also drew
special attention to the failures of ratings agencies.
The second panel’s members were Matthew Gentzkow
(University of Chicago Booth School of Business), Peter Lacy
(EABIS), and Silvana Tenreyro (London School of Economics).
Tenreyro summarized the evidence on how trade benefits
citizens in a wide range of countries. The panelists then
discussed the media’s capacity for reporting such economic
issues clearly, and their incentives to do so, in an effort to
shed light on why the gains from international trade are so
poorly understood.
Financial market crises have the potential to harm the real
economy, as suggested by both historical experience and
recent events. One approach to understanding these crises
is to examine the role of frictions in financial markets, such
as search costs, agency problems, financial constraints, and
informational asymmetries. These frictions, in turn, may
drive distortions in savings, investment, and economic
activitiy.
In May 2008, Chicago Booth faculty members Veronica
Guerrieri and Peter Kondor organized the Beyond Liquidity
conference, which brought together researchers from finance
and macroeconomics who share an interest in these frictions
and their real effects. The conference was held in Chicago
at the University of Chicago Booth School of Business’s
downtown Gleacher Center.
In November 2007, the IGM supported the Conference on
the Emergence of Social Organization, which was organized
by the University of Chicago Booth School of Business and
the Sociology Department at the University of Chicago.
Researchers looked at social organizations using several
paradigms. The conference included presentations on status
effects in technological communities; political connections
in market economies; and the roles of evolving networks and
other social structures in emerging industries.
D98876 Body 10 11/25/08 9:28:19 AM
Political EconoMy in thE
chicaGo arEa (Pica)
11
In May 2008, the IGM hosted the Political Economy in the
Chicago Area (PICA) conference, which was held at the
University of Chicago Booth School of Business’s downtown
Gleacher Center. This conference is a semi-annual event
with a goal of encouraging collaboration across political
economy research groups.
The one-day conference brought together academic
researchers that span business schools, law schools, policy
schools, and political science and economics departments
in the Chicago area. Some of the presenters included
Professor of Economics Chang-Tai Hsieh (Chicago Booth),
Benjamin Jones (Northwestern), and Assistant Professor
of Economics and Neubauer Family Faculty Fellow Jesse
Shapiro (Chicago Booth).
D98876 Body 11 11/25/08 9:28:19 AM
In the Myron Scholes Global Markets Forum, business leaders, policy makers, and distinguished scholars speak publicly on issues of current interest. In the past year, topics have included the subprime mortgage crisis, the outlook for U.S. policy under the next president, the links between growth and trade, and the role of formal and informal labor markets in emerging economies.
Events take various forms, including
discussion panels, political debates, and
lectures by individuals. Featured speakers
range from members of our faculty to global
economic leaders. These events, often held
at the University of Chicago Booth School of
Business’s downtown Gleacher Center or the
Chicago Mercantile Exchange, are open to
the public.They are generously sponsored by
Myron Scholes, MBA ’64, PhD ’70.
14
D98876 Body.r1 14 12/8/08 2:30:10 PM
A year before the bailouts of September and October
2008, faculty from the University of Chicago Booth School
of Business offered competing views on the unfolding
subprime mortgage crisis. John H. Cochrane said that many
financial firms had managed liquidity risk poorly by not
anticipating how illiquid securities could become when
everyone wanted to sell at once. But, he argued, investors
would learn from their mistakes unless a bailout warped
future incentives. Raghuram G. Rajan countered that the
asymmetry of policy regarding liquidity—policymakers
want to do nothing in good times, but markets collapse
if they don’t intervene in bad ones—makes it hard for
governments to avoid this trap. Anil Kashyap said that flaws
in the regulatory system led to arrangements in which a
small shock in housing could roil broader financial markets.
In a friendly discussion in New York, advisers to two
presidential primary candidates agreed that two big
issues facing the next administration will be energy policy,
including climate change, and trends in global financial
and economic flows as such countries as China and India
continue to grow. Austan Goolsbee, Robert P. Gwinn
Professor of Economics and an adviser to Senator Barack
Obama, said the United States must also do more
to invest in skills. Evercore Partners Chairman Roger C.
Altman, ’69, who advised Senator Hillary Rodham Clinton
during her presidential campaign, also called attention
to a severe long-term fiscal outlook in the United States,
including increasingly painful choices for Medicare if the
problem is not addressed soon.
Charles L. Evans, President and CEO of the Federal Reserve
Bank of Chicago, shared some of his views on monetary
policy, including factors that he considered most important
following the market turmoil of August 2007. His remarks
offered insights into how hard it can be to gauge policy risks
in such an environment. Although forecasters at the Chicago
Fed expected economic activity to soften in the autumn of
2007, partly because of falling residential investment, they
also expected growth to recover in 2008, approaching the
economy’s potential growth rate of around 2.5 percent. Yet
many factors complicated this outlook, said Evans, and he
was equally worried about risks in both directions.
unDErstanDinG thE rEcEnt
financial MarkEt turMoil
sEPtEMBEr 25, 2007
aMErica anD thE GloBal EconoMy
octoBEr 18, 2007
thE currEnt EconoMic outlook
octoBEr 22, 2007
15
D98876 Body.r1 15 12/8/08 2:30:17 PM
Clive Crook, United States political affairs columnist for
the Financial Times and National Journal, discussed partisan
polarization in the United States. Crook compared American
politics since the mid-1980s with the “poisoned” political
atmosphere and chronic instability in Britain before
its political system was shaken up: first by Conservative
dominance under Margaret Thatcher, then later by a
reformed Labour party under Tony Blair. Thatcher was
“bitterly partisan,” said Crook, and she won and held power
because the country “rejected the old-school socialist
Labour party and trade-union dominance of the economy.”
This gave a strong incentive to Labour to shed its old
ideology; Britain’s partisanship lessened when Tony Blair
made Labour electable again by positioning the party “very
close to the center.”
One of the most troubling aspects of the subprime mortgage
mess, and its spread to related markets, is that the most
disrupted markets are “the ones in which financial
intermediaries themselves play a pivotal role,” said Anil
Kashyap, Edward Eagle Brown Professor of Economics and
Finance. He discussed a report he coauthored for the U.S.
Monetary Policy Forum that looked at how the losses that
these financial institutions have taken are forcing them
to shed risk by selling more assets, driving down prices
further in a cycle of deleveraging. This analysis, said
Kashyap, implied that financial institutions had still
not found a new equilibrium. He warned that they needed
to rebuild their capital somehow in order for the cycle to
be halted.
Robert E. Lucas, Nobel laureate in economics, discussed
ideas from his working paper “Trade and the Diffusion
of the Industrial Revolution,” which offers a model to
understand growth rates over long periods. Open economies
tend to grow faster, and among open economies, strong
forces exist that help poor ones to grow faster than rich ones,
said Lucas, John Dewey Distinguished Service Professor in
the Department of Economics. But not all countries follow
this pattern; convergence toward rich economies is most
evident, said Lucas, in poor countries with environments—
including education and political systems—that enable them
to tap into these forces of convergence.
PoPulisM & Polarization:
thE liBEral EconoMic
orDEr unDEr thrEat
DEcEMBEr 11, 2007
lEvEraGED lossEs:
lEsson froM thE MortGaGE
MarkEt MEltDown
March 13, 2008
traDE anD thE Diffusion of
thE inDustrial rEvolution
aPril 9, 2008
16
D98876 Body.r1 16 12/8/08 2:30:28 PM
GooD intEntions, BaD outcoMEs:
social Policy, inforMality, anD
EconoMic Growth in MExico
aPril 17, 2008
17
Social programs in Mexico and other Latin American
countries are distorting their labor markets, said Santiago
Levy Algazi, vice president of sectors and knowledge
for the Inter-American Development Bank. Mexico and
other countries require firms to provide health insurance,
pensions, and other social benefits directly to salaried
workers, whereas non-salaried workers get these services
through government pension and insurance programs.
This distinction, and the policies that enforce it, act as a tax
on salaried work and a subsidy to those who do the same job
with the same productivity through informal arrangements.
Salaried benefits in Mexico cost 30 to 35 percent more than
their value to workers, Levy said. This drives workers into
the informal sector, hurting overall growth.
D98876 Body 17 11/25/08 9:28:23 AM
PhiliPPE aGhion
roBErt c. waGGonEr
ProfEssor of EconoMics
harvarD univErsity
May 1–16, 2008
Philippe Aghion does much of his research on economic
growth and contract theory. One aspect of growth that
economists have struggled to pin down is education. Since
people spend more on education as they get richer, how can
we tell when, and how, higher education spending is actually
causing higher growth? Aghion shed some light on this
issue by comparing tertiary education spending across U.S.
states. He presented the work “Exploiting States’ Mistakes to
Identify the Causal Impact of Higher Education on Growth”
in Chicago Booth’s workshop on macroeconomics and
international economics. He also presented work that he has
done with fellow Harvard economist Andrei Shleifer at the
Applications of Economics Seminar.
Aghion also interacted extensively with faculty from the
economics and finance groups during his visit, collaborating
with Luigi Zingales, Robert C. McCormack Professor of
Entrepreneurship and Finance and David G. Booth Faculty
Fellow, to continue research on innovation and governance,
and with Francesco Trebbi, Assistant Professor of Economics,
on two new projects concerning firm size distributions and
political institutions. Aghion was also a discussant of the
paper “Finance and Development: A Tale of Two Sectors” by
Francisco Buera, Joseph Kaboski, and Yongseok Shin (2008)
at the “Beyond Liquidity” IGM conference.
During his visit Aghion also worked actively on the completion
of a second volume of the book Endogenous Growth Theory, which
he coauthored with Peter Howitt of Brown University.
The Initiative on Global Markets sponsors extended visits by prominent faculty from other institutions to contribute to the research environment at the University of Chicago Booth School of Business. The IGM hosted 11 visiting fellows in the 2007–08 academic year.
20
D98876 Body.r1 20 12/8/08 2:30:30 PM
JosEPh altonJi
thoMas DEwitt cuylEr
ProfEssor of EconoMics
yalE univErsity
January 21–fEBruary 1, 2008
21
Joseph Altonji is a labor economist and applied econometrician.
During his visit, he presented “The Determinants of the Wages
of Immigrants in the Home Country and the U.S.” to the faculty
microeconomics workshop. He also presented a second work,
“Identifying Sibling Influence on Teenage Risky Behavior,”
in the demography workshop. During his visit, Altonji attended
various other workshops and met with many members of the
University of Chicago faculty to discuss his and their work.
Nava Ashraf’s main research interests include economic
development, experimental economics, and a variety of topics
related to decision making, such as savings behavior, trust,
and choices within households. During her visit, Ashraf and
Jesse Shapiro, Assistant Professor of Economics at Chicago
Booth, presented research jointly in the applications of
economics workshop in the economics department.
Nathaniel Baum-Snow is an urban economist and has
researched topics such as urban transportation, the
decentralization of cities, and the sources of urban
productivity and wage premiums. During his visit he
attended several workshops and presented at the faculty
microeconomics lunch. Following his productive IGM visit
in February 2008, Baum-Snow has become a visitor at the
University of Chicago’s Harris School of Public Policy Studies
for the entire 2008–09 academic year.
Stephen Haber’s research focuses on the relationship
between political organization and economic growth. Many
of our faculty members are interested in similar topics, and
they found it especially fruitful to have a prominent visitor
who approaches these issues from a political scientist’s
background. Haber presented “Do Natural Resources Fuel
Authoritarianism? A Reappraisal of the Resource Curse”
in the finance workshop. The paper set out to debunk the view
that countries with a lot of revenue from natural resources
tend to have authoritarian governments. Haber also had
many conversations with our junior faculty during his stay.
Given his specialization in political economy, as well as his
interest in financial development, he brought a different and
refreshing perspective to the conversations.
nava ashraf
assistant ProfEssor in thE
nEGotiations, orGanizations,
anD MarkEts unit
harvarD univErsity
octoBEr 1–19, 2007
nathaniEl BauM-snow
assistant ProfEssor
Brown univErsity
fEBruary 4–29, 2008
stEPhEn haBEr
a. a. anD JEannE wElch
MilliGan ProfEssor
stanforD univErsity
aPril 21–May 2, 2008
D98876 Body.r1 21 12/8/08 2:30:30 PM
noBuhiro kiyotaki
ProfEssor of EconoMics
PrincEton univErsity
May 5–16, 2008
Nobuhiro Kiyotaki presented his research “Winners
and Losers in the Housing Market” in the workshop on
macroeconomics and international economics. This work
looks at the interaction between housing prices, aggregate
production, and people’s behavior over a lifetime. Kiyotaki
also participated in the IGM conference on “Beyond
Liquidity” (see page 10), where he presented his research
on “Liquidity, Business Cycles, and Monetary Policy.”
Esteban Rossi-Hansberg does research on macroeconomics,
urban economics, and international trade, including research
into the geographical distribution of economic activity. He
presented “Organizing Growth,” a work done in collaboration
with Professor of Economics and Strategy Luis Garicano, at
the faculty workshop on macroeconomics and international
economics. Using new technology productively requires
the development of organizations to coordinate the work
of experts, which takes time. Rossi-Hansberg’s paper with
Garicano explores whether this can offset the potential
for gains in aggregate productivity through innovations
in information technology.
During her visit Paola Sapienza worked mostly with Marianne
Bertrand, Fred G. Steingraber/A.T. Kearney Professor of
Economics, and Luigi Zingales, Robert C. McCormack
Professor of Entrepreneurship and Finance and David
G. Booth Faculty Fellow. Together they started a project
called “The Face of Success.” Its goals are 1) to determine
whether a relationship exists between career success and
physiognomy, and 2) to identify any cognitive characteristics
(like emotional intelligence) that may explain why some
people have more accurate perceptions of business people
than others.
Sapienza also worked on several other projects with Zingales.
The main one is their paper “Culture, Math, and Gender,”
which received financial support from the IGM and was
published in Science in May 2008. The paper shows that
the gender gap in math scores disappears in countries with
a more gender-equal culture. In addition to this project,
they also completed a paper on “Long Term Persistence,”
which studied the long-term effects of social capital on
economic development.
Sapienza also presented “What Do Independent Directors
Know? Evidence from Their Trading” at the finance lunch.
22
Paola saPiEnza
associatE ProfEssor of financE
anD zEll cEntEr faculty fEllow
northwEstErn univErsity
January 14–March 22, 2008
EstEBan rossi-hansBErG
ProfEssor of EconoMics
anD intErnational affairs
PrincEton univErsity
octoBEr 1–12, 2007
D98876 Body 22 11/25/08 9:28:23 AM
23
Lakshmanan Shivakumar’s principal activity while on
campus was commencing work on a new research project,
jointly with Ray Ball, Sidney Davidson Professor of Accounting,
on the effect of regulatory changes in China on Chinese firms’
financial reporting quality. He also worked with Ronnie
Sadka on an ongoing research project that attempts to
measure the profitability of trading strategies that exploit the
post-earnings-announcement-drift anomaly.
During his visit, Shivakumar presented a research paper,
“Target’s Earnings Quality and Bidder’s Takeover Decisions,”
at the accounting workshop. He also participated in a PhD
seminar class conducted by Ball and interacted with several
other faculty members in the accounting and finance groups.
Annette Vissing-Jorgensen pursued her research on portfolio
choice and asset markets during her visit, including continuing
work with Tobias Moskowitz, Fama Family Professor of Finance.
She also presented her research on the “Aggregate Demand for
Treasury Debt” in the finance brown bag lunch, and worked on
corporate governance by preparing her paper on “A Lobbying
Approach to Evaluating the Sarbanes-Oxley Act of 2002.” She
later presented this paper at the University of Chicago’s
Journal of Accounting Research conference (see page 8). While
in residence Vissing-Jorgensen met with many faculty in the
business school’s finance, economics, and accounting groups,
as well as in the university’s economics department.
Randall Wright presented his work “Inflation and
Unemployment in the Long Run” at the money and banking
workshop in the economics department. He also presented
his work on “Liquidity and Information” at the Chicago Booth
workshop on macroeconomics and international economics.
Moreover, during his visit Wright worked on a joint project
with Veronica Guerrieri, Assistant Professor of Economics,
and Robert Shimer on “Competitive Search with Private
Information.”
lakshManan shivakuMar
ProfEssor of accountinG
lonDon BusinEss school
aPril 7–24, 2008
ranDall wriGht
JaMEs kiM ProfEssor of EconoMics
univErsity of PEnnsylvania
March 3–14, 2008
annEttE vissinG-JorGEnsEn
associatE ProfEssor of financE
northwEstErn univErsity
January 7–March 22, 2008
D98876 Body 23 11/25/08 9:28:24 AM
Luigi ZingalesroBErt c. MccorMack ProfEssor
of EntrEPrEnEurshiP & financE
DaviD G. Booth faculty fEllow
unDErstanDinG trust
Several papers study the effect of trust by using the answer to
the World Values Survey (W VS) question “Generally speaking,
would you say that most people can be trusted or that you
can’t be too careful in dealing with people?” to measure the
level of trust. Glaeser et al. (2000) question the validity of
this measure by showing that it is not correlated with the
first mover’s behavior in the standard trust game, but only
with his trustworthiness. By using a large sample of German
households, Fehr et al. (2003) find the opposite result: W VS-
like measures of trust are correlated with the first mover’s
behavior, but not with his trustworthiness. In this paper,
Zingales, Paola Sapienza, and Anna Toldra Simats resolve this
puzzle by recognizing that trust has two components: a belief-
based one and a preference-based one. While the first mover’s
behavior reflects both, the authors show that W VS-like
measures capture mostly the belief-based component, while
questions on past trusting behavior are better at capturing
the preference component of trust.
social caPital as GooD culturE
Forthcoming in the Journal of the European Economic Association
To explain the extremely long-term persistence (more than
500 years) of positive historical experiences of cooperation
(Putnam 1993), Zingales and coauthors Luigi Guiso and
Paola Sapienza model the intergenerational transmission of
prior beliefs about the trustworthiness of others. They show
that this transmission tends to be biased toward excessively
conservative priors. As a result, societies can be trapped in
a low-trust equilibrium. In this context, a temporary shock
26
D98876 Body 26 11/25/08 9:28:24 AM
to the return to trusting can have a permanent effect
on the level of trust. The authors validate the model by
testing its predictions on the W VS data and the German
Socio-Economic Panel. They also present some anecdotal
evidence that differences in priors across regions are
reflected in the spirit of the novels that originate from
those regions.
Procrastination anD iMPatiEncE
There is a large body of literature documenting
both a preference for immediacy and a tendency to
procrastinate. O’Donoghue and Rabin (1999, 2001)
and Choi et al. (2005) model these behaviors as two
faces of the same phenomenon. In this paper, Zingales
and coauthors Ernesto Reuben and Paola Sapienza
use a combination of lab, field, and survey evidence
to study whether these two types of behavior are
indeed linked. To measure immediacy, they have
subjects choose between a series of smaller-sooner
and larger-later rewards. Both rewards are paid with
a check in order to control for transaction costs. To
measure procrastination, they use the subjects’ actual
behavior in cashing the check and completing tasks
on time. Their results lend support to the hypothesis
that subjects who have a preference for immediacy are
indeed more likely to procrastinate.
Other IGM working papers:
• Is the U.S. Capital MarketLosing Its Competitive Edge?
• Who Blows the Whistle onCorporate Fraud?
The article “Culture, Gender, and Math,” by Zingales, Ferdinando Monte, and Paola Sapienza, was published in Science in May 2008.
27
D98876 Body 27 11/25/08 9:28:25 AM
Christian LeuzJosEPh sonDhEiMEr ProfEssor of
intErnational EconoMics, financE,
anD accountinG
ManDatory ifrs rEPortinG arounD thE worlD:
Early EviDEncE on thE EconoMic consEquEncEs
In this paper, Leuz and coauthors Holger Daske, Luzi Hail,
and Rodrigo Verdi examine the economic consequences
of the introduction of mandatory International Financial
Reporting Standards (IFRS) reporting across the world.
They analyze the effects on market liquidity, cost of equity
capital and Tobin’s q in 26 countries, using a large sample
that includes over 3,800 first-time adopters. They find that
market liquidity increases around the time of the mandatory
introduction of IFRS. The results for firms’ cost of capital
are mixed, but there is evidence indicating an increase in
equity valuations. Partitioning their sample, they find that
the capital market benefits exist only in countries with
strict enforcement regimes and institutional environments
that provide strong reporting incentives. Furthermore, the
effects are weaker when local Generally Accepted Accounting
Principals (GA AP) are closer to IFRS, in countries with
an IFRS convergence strategy, and in industries with
higher voluntary adoption rates. In terms of magnitude,
the capital market effects are most pronounced for firms
that voluntarily switch to IFRS, both in the year when they
switch and again when IFRS becomes mandatory. While
the first result likely reflects selection effects, the latter
result, together with evidence for the sample partitions,
cautions Leuz and his colleagues to attribute the capital
market effects for first-time adopters primarily to IFRS.
Many countries have made concurrent efforts to improve
enforcement and governance regimes, which likely play into
the findings. Overall, the results are consistent with the view
that reporting quality is shaped by many factors in countries’
institutional environments, pointing in particular to the
importance of reporting incentives and enforcement.
Other IGM working papers:
• Cost of Capital Effectsand Changes in Growth Expectations around U.S. Cross-Listings
• Adopting a Label: Heterogeneityin the Economic Consequences of IFRS Adoptions
• Was the Sarbanes-Oxley Actof 2002 Really This Costly?28
D98876 Body 28 11/25/08 9:28:25 AM
Matthew GentzkowassociatE ProfEssor of EconoMics
nEuBauEr faMily faculty fEllow
Jesse M. Shapiroassistant ProfEssor of EconoMics
nEuBauEr faMily faculty fEllow
coMPEtition anD truth in thE MarkEt for nEws
Published in the Journal of Economic Perspectives, Spring 2008
The political traditions, legal doctrine, and regulatory policy
of the United States have all been heavily influenced by the
proposition that competition in news markets promotes truth.
However, many have questioned whether press competition is
so obviously beneficial. In this essay, Gentzkow and Shapiro
evaluate the case for competition in news markets from the
perspective of economics. They consider various mechanisms
by which competition can limit bias or distortions that
originate on both the supply side and the demand side of the
media market, and assess the implications of economic theory
for policy.
Other IGM working papers:
• Market Forces and NewsMedia in Muslim Countries
• What Drives Media Slant?Evidence from U.S. Daily Newspapers
29
D98876 Body 29 11/25/08 9:28:26 AM
Atif MianassociatE ProfEssor of financE
Amir Sufiassistant ProfEssor of financE
thE consEquEncEs of MortGaGE crEDit ExPansion: EviDEncE
froM thE 2007 MortGaGE DEfault crisis
In this paper, Mian and Sufi show that an expansion in the
supply of mortgage credit to zip codes with high latent demand
for it led to a rapid increase in house prices from 2001 to 2005
and subsequent defaults from 2005 to 2007. From 2001 to 2005,
high latent (unfulfilled) demand zip codes experienced relative
declines in mortgage-loan denial rates and interest rates, and
relative increases in mortgage credit and house prices, despite
the fact that these zip codes experienced negative relative
income and employment growth. The growth in securitization
was significantly higher in high latent demand zip codes,
suggesting a possible role of securitization in credit expansion.
30
D98876 Body 30 11/25/08 9:28:26 AM
Steven J. DaviswilliaM h. aBBott ProfEssor of
intErnational BusinEss & EconoMics
MEasurinG thE DynaMics of younG anD sMall BusinEssEs:
intEGratinG thE EMPloyEr anD nonEMPloyEr univErsEs
Steven Davis and coauthors John Haltiwanger, Ron S. Jarmin,
C. J. Krizan, Javier Miranda, Alfred Nucci, and Kristin
Sandusky develop a preliminary version of an integrated
longitudinal business database (ILBD) that combines
administrative records and survey data for all employer and
nonemployer business units in the United States. Unlike other
large-scale business databases, the ILBD tracks business
transitions from nonemployer to employer status. This feature
of the ILBD opens a new frontier for the study of business
formation, early life cycle dynamics, and the precursors to job
creation in the United States economy. There were 5.4 million
nonfarm business firms with employees as of 2000 and another
15.5 million with no employees. The authors’ analysis focuses
on 40 industries that account for nearly half of nonemployers
and 36 percent of nonemployer revenues. Within these
industries, nonemployers account for 14 percent of business
revenues. About 220,000 of the seven million nonemployers
in the selected industries hire workers and migrate to the
employer universe over a three-year horizon. The firms that
make this shift account for 20 percent of revenue among young
employers (three years or less since first hire). Compared to
other nonemployers, the revenue of firms that migrate from
nonemployer to employer status grows very rapidly in the year
prior to and the year of their transition.
31
D98876 Body 31 11/25/08 9:28:26 AM
Course Development
Some of the projects that the IGM supports are carried out explicitly with the classroom in mind. So far we have given course-development and visitor funding to faculty teaching the following MBA courses:
The IGM provided financial support for a new elective
MBA course: Doing Business in Asia (to be renamed Asian
Economies and Business in 2009). The course examines
several overarching trends that will confront managers
and investors doing business in or with Asia. These include
rapid urbanization in parts of the region; the rise of the
mass consumer; the challenges of domestic integration in
two giant and fast-developing economies (China and India);
and the increasing clout and economic integration of East
Asia as a whole. The IGM’s support paid for course-related
research into infrastructure, consumer goods, and retailing
in China and India.
IGM funding helped to purchase access (for one year)
to a database on consumer use of technology, media,
the internet, and related products. These data are used
extensively in the business school’s Telecom, Media, and
Technology class and are an excellent tool for MBA students.
The data are up-to-date and allow the instructor and
students to access information about the prevalence of
various consumer goods and people’s use of websites. This
proved useful in class discussions on topics ranging from the
rise of satellite radio to whether iPods have reduced people’s
demand for new radio technologies.
asian EconoMiEs anD BusinEss
Brian Barry
clinical associatE ProfEssor
of EconoMics
tElEcoM, MEDia, anD tEchnoloGy
austan GoolsBEE
roBErt P. Gwinn
ProfEssor of EconoMics
32
D98876 Body 32 11/25/08 9:28:26 AM
unDErstanDinG cEntral Banks
anil kashyaP
EDwarD EaGlE Brown
ProfEssor of EconoMics
anD financE
intErnational corPoratE financE
raGhuraM G. raJan
Eric J. GlEachEr
DistinGuishED sErvicE
ProfEssor of financE
Central banks are often dominant players in financial
markets. This course provides students a framework
for understanding their actions by combining topics in
macroeconomics, international economics, and finance.
Communication plays a crucial role in shaping investors’
expectations and response to central bank policies. To
help students understand this process, the IGM provided
financial support for a visit by Greg Ip of the Wall Street
Journal, a journalist who has been influential in shaping
opinions about the Fed. It provided students with an
interesting and valuable perspective on communications
strategies and the political economy of central banking.
This is another new elective course with a clear international
focus. It examines the investment and financing decisions
of multinational firms including such issues as the firms’
optimal structure; their ownership and governance; the
factors that influence whether they make, source, or buy; and
the choice of where—and how—to finance. In part, the aim is
to examine financing and investment in environments very
different from industrial country settings, so that students get
a taste of the concerns one might have in conducting business
in those environments. The IGM provided support to fund
visits to companies in emerging markets to do course-
related research.
33
D98876 Body 33 11/25/08 9:28:27 AM
Conferences
BREAD Conference on Development Economics, Fall 2008
BREAD (Bureau for Research and
Economic Analysis of Development) is
dedicated to encouraging research and
scholarship in development economics.
BREAD’s members are a select set of
researchers from top universities around
the world who have made substantial
contributions to development economics,
with a focus on microeconomic issues. The
IGM provided financial support and hosted
BREAD’s thirteenth annual conference at
the University of Chicago Booth School of
Business in the fall of 2008.
Japan’s Bubble, Deflation, and Long-term Stagnation, 2008–09
The Economic and Social Research
Institute (the ESRI), in the Government
of Japan’s Cabinet Office, is initiating a
research project: “The Japanese Economy
and Macroeconomic Policies over the
Last Twenty-Five Years.” One component
of this effort will be an international
collaboration project. It aims to improve
future Japanese economic policy
management by drawing lessons from
Japan’s bubble, deflation, and long-term
stagnation.
U.S. Monetary Policy Forum,
February 2009
The USMPF is an annual conference that
brings academics, market economists, and
policymakers together. A standing group
of academic and private sector economists
has rotating responsibility for producing
a report on a critical medium-term issue
confronting the Federal Open Market
Committee. The third annual USMPF
will be held in New York City.
A Selection of Events and Visitors Planned for the 2008–09 Academic Year
Myron Scholes Global Market Forum
Leszek Balcerowicz: Post-Communist Transition in a Comparative PerspectiveProfessor Balcerowicz is former Deputy
Prime Minister and Finance Minister
of Poland, and the architect of Poland’s
economic transformation from central
planning to market-based capitalism.
He is now Professor of Economics at the
Warsaw School of Economics. (November
10, 2008)
The Credit Crisis: a Five-Part Lecture Series by members of the Chicago Booth facultyAmir Sufi (Assistant Professor of
Finance), Douglas W. Diamond (Merton H.
Miller Distinguished Service Professor of
Finance), Amit Seru (Assistant Professor
of Finance), and Anil Kashyap (Edward
Eagle Brown Professor of Economics and
Finance) share their views of the crisis in
successive weeks. Brian Barry (Clinical
Associate Professor of Economics), John
Cochrane (Myron S. Scholes Professor
of Finance), Steven N. Kaplan (Neubauer
Family Professor of Entrepreneurship and
Finance), and Raghuram G. Rajan (Eric J.
Gleacher Distinguished Service Professor
of Finance) held a forward-looking panel
discussion to wrap up the series. (October
21 to November 18, 2008)
David BrooksNew York Times columnist and commentator
on “The NewsHour with Jim Lehrer”
(December 3, 2008)
Martin WolfAssociate editor and chief economics
commentator at the Financial Times,
London (March 3, 2009)
34
D98876 Body.r1 34 12/8/08 2:30:45 PM
Andrew Abel | Spring 2009
Ronald A. Rosenfeld Professor
of Finance and Economics
Wharton
Hosted by: Anil Kashyap,
Edward Eagle Brown Professor
of Economics and Finance
Manuel Amador | Spring 2009
Assistant Professor
Stanford University
Hosted by: Veronica Guerrieri,
Assistant Professor of Economics
Peter Kondor | Fall 2008
Department of Economics
Central European University
Hosted by: Veronica Guerrieri,
Assistant Professor of Economics
Robert Stambaugh | Spring 2009
Miller Anderson & Sherrerd
Professor in Finance
Wharton
Hosted by: Lubos Pastor,
Professor of Finance
2008–09 Visiting Faculty Fellows
Mark Aguiar | Spring 2009
Associate Professor of Economics
University of Rochester
Hosted by: Erik Hurst,
V. Duane Rath Professor of Economics
and Neubauer Family Faculty Fellow
Michael Greenstone | Fall 2008
3M Professor of Environmental Economics
MIT
Hosted by: Jonathan Guryan,
Associate Professor of Economics
Christian Laux | Fall 2008
Faculty of Economics and Business
Administration
Johann Wolfgang Goethe University
Frankfurt
Hosted by: Christian Leuz,
Joseph Sondheimer Professor
of International Economics, Finance,
and Accounting
Adam Szeidl | Spring 2009
Assistant Professor
UC Berkeley
Hosted by: Jesse Shapiro,
Assistant Professor of Economics and
Neubauer Family Faculty Fellow
35
D98876 Body 35 11/25/08 9:28:27 AM
AQR Capital Management is an investment
management firm that specializes in
using a “disciplined multi-asset, global
research process” to achieve long-term
success in both investment and risk
management. They apply research-driven
models as well as good common sense to a
broad spectrum of products.
www.aqrcaPital.coM
Barclays is a financial services
organization which “moves, lends, invests,
and protects money for more than 27
million customers and clients around
the world.” It is separated into three key
divisions: Barclays Capital, Barclays Global
Investors, and Barclays Wealth. Each
division upholds the goal of anticipating
clients’ needs and then working to meet
their goals.
www.Barclays.coM
Deere and Company is a 170-year-old
Illinois-based company that produces
cutting-edge equipment across three
key areas: agriculture, commercial and
consumer products, and construction
and forestry. The company also includes a
finance division that operates in over 110
countries. Deere and Company’s goal is to
boost productivity and the quality of life
for people throughout the world.
www.DEErE.coM
The Chicago-based Northern Trust is a
premier wealth management firm. With
over 100 years of experience, Northern
Trust has the resources and knowledge
to help their clients reach their wealth
management goals. In addition to personal
management, Northern Trust also provides
a broad range of corporate activities such as
investment management, asset and
fund administration, and fiduciary and
banking solutions.
www.northErntrust.coM
The Initiative on Global Markets was launched with a founding grant from the Chicago Mercantile Exchange (CME) Trust. The CME Trust funds academic research on various aspects of financial markets.
The Initiative on Global Markets Corporate Partners Program is designed to build a deeper
relationship between the private sector and faculty from the University of Chicago Booth
School of Business. Our corporate partners support the research efforts of the world’s best
faculty in accounting, economics, and finance on topics of great importance to financial and
economic decision making around the globe.
3636
D98876 Body 36 11/25/08 9:28:27 AM