IGM Initiative on Global Markets 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
Our Purpose 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.
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 organizes these efforts. It supports original research by Chicago Booth faculty, prepares our students to make good decisions in a
The Initiative on Global Markets spans three broad areas: 1) international business, 2) financial markets, and 3) the role of policies and institutions.
Thank You 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.
Letter from the Director 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. Brian Barry Executive Director, IGM Clinical Associate Professor of Economics
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
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.chicagogsb.edu/igm/
Conferences
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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.
“the most cogent analysis of the credit crisis” —Lawrence Summers, former U.S. Treasury Secretary
U.S. Monetary Policy Forum
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 markto-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.”
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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.
Regulation of Securities Markets: Journal of Accounting Research Conference
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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.
The China Summer Institute : Creating a Global Network of China Scholars
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 ChangTai Hsieh attended, and plan to continue playing an active role in future years.
Global Business and Politics
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.
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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.
Beyond Liquidity: Model Frictions in Finance and
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Macroeconomics
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.
The Emergence of Social Organization: What Are We Missing?
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.
Political Economy in the Chicago Area (PICA)
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 ).
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Forums
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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 roll 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.
Understanding the Recent Financial Market Turmoil September 25, 2007
America and the Global Economy October 18, 2007
The Current Economic Outlook October 22, 2007
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 fairly equally worried about risks in both directions.
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Populism & Polarization: The Liberal Economic Order under Threat December 11, 2007
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Leveraged Losses: Lesson from the Mortgage Market Meltdown March 13, 2008
Trade and the Diffusion of the Industrial Revolution April 9, 2008
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.
Good Intentions, Bad Outcomes: Social Policy, Informality, and Economic Growth in Mexico April 17, 2008
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.
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Visiting Fellows
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.
Philippe Aghion Robert C. Waggoner Professor of Economics Harvard University May 1–16, 2008
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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 Feelow, 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.
Joseph Altonji Thomas DeWitt Cuyler Professor of Economics Yale University January 21–February 1, 2008
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
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.
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Nobuhiro Kiyotaki Professor of Economics Princeton University May 5–16, 2008
Esteban Rossi-Hansberg Professor of Economics and International Affairs Princeton University October 1–12, 2007
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Paola Sapienza Associate Professor of Finance and Zell Center Faculty Fellow Northwestern University January 14–March 22, 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.
Lakshmanan Shivakumar Professor of Accounting London Business School April 7–24, 2008
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 Associate Professor of Finance Northwestern University January 7–March 22, 2008
Randall Wright James Kim Professor of Economics University of Pennsylvania March 3–14, 2008
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.”
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Research
Luigi Zingales Robert C. McCormack Professor of Entrepreneurship & Finance David G. Booth faculty fellow
Understanding Trust
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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 VSlike 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 beliefbased 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
Other IGM working papers: • Is the U.S. Capital Market Losing Its Competitive Edge? • Who Blows the Whistle on Corporate Fraud? The article “Culture, Gender, and Math,” by Zingales, Ferdinando Monte, and Paola Sapienza, was published in Science in May 2008.
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.
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Christian Leuz Joseph Sondheimer Professor of international economics, finance, and accounting
Other IGM working papers:
Mandatory IFRS Reporting around the World:
• Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Early Evidence on the Economic Consequences
• Adopting a Label: Heterogeneity in the Economic Consequences of IFRS Adoptions
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• Was the Sarbanes-Oxley Act of 2002 Really This Costly?
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.
Matthew Gentzkow Associate Professor of Economics Neubauer Family Faculty Fellow
Jesse M. Shapiro Assistant Professor of Economics Neubauer Family Faculty Fellow
Other IGM working papers:
Competition and Truth in the Market for News
• Market Forces and News Media in Muslim Countries
Published in the Journal of Economic Perspectives, Spring 2008
• What Drives Media Slant? Evidence from U.S. Daily Newspapers
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.
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Atif Mian Associate Professor of Finance
Amir Sufi Assistant Professor of Finance
The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
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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.
Steven J. Davis William 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.
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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:
Asian economies and business brian barry clinical associate professor of economics
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telecom, media, and technology Austan goolsbee robert p. gwinn professor of Economics
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.
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 courserelated research.
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A Selection of Events and Visitors Planned for the 2008–09 Academic Year 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.
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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.
Myron Scholes Global Market Forum Leszek Balcerowicz: Post-Communist Transition in a Comparative Perspective Professor 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 faculty Amir 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 Brooks New York Times columnist and commentator on “The NewsHour with Jim Lehrer” (December 3, 2008) Martin Wolf Associate editor and chief economics commentator at the Financial Times, London (March 3, 2009)
2008–09 Visiting Faculty Fellows 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
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
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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.
AQR Capital Management is an investment
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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
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
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
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
IGM Initiative on Global Markets 2008 Annual Report