2008–2009

​Access to Markets in Developed and Emerging Economies

Brian Barry, Clinical Associate Professor of Economics
Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance

Summary: We plan to write a book on the political economy of markets in developed and emerging economies. It will explore the role that competition and access to markets play in raising the welfare of poor and middle-income people, and the additional benefits that these forces could deliver if better policies were pursued. The book will also attempt to offer some broadly applicable ideas about why such policies are not pursued all that consistently in democratic countries, and why they so often tend to be opposed by political parties and other groups that draw most of their support from poor and middle-income citizens.

​Who Use Fair-value Accounting for Non-financial Assets Following IFRS Adoption?

Hans B. Christensen, Assistant Professor of Accounting
Valeri Nikolaev, Assistant Professor of Accounting

Summary: The benefits of fair value accounting are heavily debated by regulators and practitioners around the world. The Security and Exchange Commission has recently announced its consideration of mandatory adoption of International Financial Accounting Standards (IFRS) in the US which, if adopted, will extensively expand US firms' opportunities to use fair value accounting for nonfinancial assets. While conceptually sound, fair value accounting has received a lot of criticism on the grounds of its subjectivity and the lack of verifiability. This study will examine whether and why firms prefer to recognize non-financial assets on their balance sheets at fair value rather than historical cost in a setting where they are provided with an opportunity to choose between the two valuation methods. Specifically, we will exploit changes in valuation practices around mandatory IFRS adoption in the United Kingdom and Germany, aiming to understand practitioners' preferences for fair value accounting.

Durable Goods Adoption Decisions: A New Approach to Measuring Consumer Preferences and Expectations

Jean-Pierre Dubé, Sigmond E. Edelstone Professor of Marketing
Günter Hitsch, Associate Professor of Marketing

Summary: We propose a new approach to understanding, measuring, and forecasting how consumers make durable goods adoption decisions over time. Durable goods adoptions are difficult to model, because the adoption decisions depend not only on preferences among alternative products, but also on subjective expectations about future market conditions and the consumer's discount factor. Current durable goods demand estimation methods in industrial organization and marketing are based on observational data, such as market shares and prices or household-level purchases. Due to a fundamental identification problem, this literature assumes a specific value for the discount factor and the specific process by which consumers form expectations. We propose a new approach that avoids these restrictive assumptions and allows us to estimate the discount factors and the expectations formation process. Our approach is based on a specific design of a conjoint experiment, which we explain in detail in our attached research proposal. We expect that our approach will be useful to industrial organization economists who want to measure market power or the welfare from new products in durable goods markets. Our approach should also be useful to firms that want to forecast the diffusion of a new product. More generally, we expect that our approach will be useful for the consumption literature in macroeconomics.

Using US Consumer Migration Data to Study the Formation of Brand Preferences

Jean Pierre Dubé, Sigmond E. Edelstone Professor of Marketing
Matthew Gentzkow, Associate Professor of Economics

Summary: We study the determinants of consumer brand preferences using a novel dataset that links household purchases of branded goods to the locations where household members lived at different stages of their lives. We first estimate to what extent the location in which an individual lived in the past predicts their brand preferences holding constant where they live now. We then estimate a model in which exposure to advertising and past consumption affect long-term preferences for brands and assess the implications for firm strategies and the importance of first-mover advantage.

​World Labor Supply

Chang-Tai Hsieh, Professor of Economics
Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow

Summary: Our goal is to measure how much productivity growth in developing countries is driven by the substitution of low productivity household work to higher productivity market work. There are two reasons to believe this substitution may have occurred in many countries. First, many countries have heavily invested in water and electricity grids. Access to water and electricity may have allowed families to substitute time gathering water and cooking fuels to time working in the market. Second, the population in many countries is now largely urban. Urbanization have also have increased average hours worked in the market, both because of better access to water and electricity in cities and also because workers are closer to potential employers in cities.

We have two objectives in this research. First, we will put together comprehensive cross-country data on hours worked over the last three decades. Many developing countries have detailed household surveys spanning the several decades. For example, the micro-data from the Indian National Sample Survey starting in the early 1980s is publicly available. At a minimum, we will be able to measure hours worked in the market with these data, which will allow us to measure the contribution of increases in market work to aggregate growth in GDP per capita. In addition, several surveys have detailed time use and household consumption modules. For the countries with this data, we will be able to directly measure the substitution of household work for market work. Second, with some assumptions, data on hours worked will allow us to provide estimates of GDP growth that measure the value of household production.

​Voting and Ideology

Emir Kamenica, Assistant Professor of Economics

Summary: In most democratic societies, the mean income is well above the median income. Why do the poorer voters not engage in large-scale expropriation through redistribution? Why do they vote against redistributive measures? Many observers, such as Thomas Frank in his book What's the Matter with Kansas?, claim that the poor are duped into voting against their self-interest. This claim, however, fails to recognize that rational self-interested voters are individuals and not necessarily members of a voting block. If there is any ideological utility obtained from casting a particular vote, rational individuals will vote solely on the basis of their ideology rather than their monetary self-interest because the probability of being marginal is extremely small. The Voting and Ideology project analyzes the importance of this consideration for redistributive outcomes by running laboratory experiments that compare votes cast in a referendum to those cast when the individual voter is a dictator.

​Which Investor Characteristics and Abilities Matter?

Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance

Summary: As a follow up to our previous paper on CEO assessments, Morten and I will use assessments of candidates for private equity investor positions (PE), buyout (LBO), and venture capital (VC). We intend to study how investor characteristics and abilities relate to hiring decisions and subsequent performance. PE investors are assessed in five general areas—leadership, personal, intellectual, motivational, interpersonal—and in areas specific to PE investing. This will add to our knowledge of how to measure ability.

​The Effects of Stock Lending

Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance

Summary: There has always been a great deal of interest in the costs and benefits of allowing short selling. That interest has intensified in recent months. It is difficult to isolate the effect of short selling because it is very difficult to run a controlled experiment with real data. In this research effort, Berk Sensoy will run such an experiment.

Working with a sizeable (and anonymous) money manager, we will randomly lend out some of the stocks in the manager's portfolio while randomly withholding or not lending out a matched sample of stocks in the portfolio. We will then compare the subsequent returns and volatility of the two samples to study the effects of making shares available.

​Who is Targeted for Say on Pay?

Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance

Summary: Say-on-Pay proposals have become increasingly popular, particularly in the last two years. There are two possible motivations for these proposals. First, some claim the proposals are motivated to challenge pay policies that are not in shareholder interest. Alternatively, others argue that the proposals are motivated by political considerations. In this paper, we intend to distinguish between these two motivations by studying whether the companies targeted for Say-on-Pay type votes overpay their CEOs, do not pay their CEOs based on stock performance, are underperformers, and have unionized employees, all relative to non-targeted companies.

Assessing the Impact of the Global Financial Crisis on Real Economic Activity

Randall Kroszner, Norman R. Bobins Professor of Economics

Summary: The freezing up of many credit markets and the difficulty of obtaining credit from intermediaries have been key characteristics of the current financial crisis and likely the key channels through which the financial crisis has had a strong negative impact on real economic activity. Many extraordinary measures to combat the effects of the crisis have been undertaken or are being contemplated for different sectors of the economy, both in the US and in other countries. Central banks, for example, have begun to use their balance sheets to try to ease financing conditions in particular markets through direct provision of credit or through direct purchase of (private) securities. Fiscal authorities also have been providing credit or support to particular sectors, such as autos. Little work, however, has attempted to evaluate systematically which firms or sectors have been most affected through the credit channel and where policy could be most effective in easing the real effects of the contraction of credit. In joint work with Luc Laeven, this project would use measures of external sources of finance, that is, borrowing from the markets or from intermediaries rather than financing a firm's operations primarily through internally generated cash flow, to assess whether such externally dependent firms are experiencing the greatest contraction and then to evaluate policies that have the potential to mitigate these effects.

Information versus Access: Why Do Firms Become Politically Active?

Randall Kroszner, Norman R. Bobins Professor of Economics

Summary: The motivations for why firms choose to become politically active have received little systematic empirical investigation. In this project with Thomas Stratmann, I propose to investigate characteristics of firms that set up a political action committee (PAC) and undertaking lobbying expenditures. In particular, there is an ongoing debate about whether PAC contributions are primarily about access and lobbying is primarily about providing information into the political process. Firms that are involved in more technical fields, such as those that have a large stock of patents and that undertake a large amount of R&D, might have a relatively high demand to provide information into the political process so that their activities can be understood. In contrast, firms with poor corporate governance or entrenched manager may have relatively high demand for access compared with their demand to inform since their non-market activity may be important to protect them from challenges in the marketplace. Gaining a better understanding of the motivations for different types of political activity can then have important policy implications for the impact of regulating, limiting, or banning particular practices.

The Dynamics of Organization Form and Corporate Socialism: A Structural Approach

Gregor Matvos, Assistant Professor of Finance
Amit Seru, Assistant Professor of Finance

Summary: The ultimate goal of the paper will be to construct an estimatable structural model of internal capital markets. In contrast to previous work, we emphasize examining the dynamic efficiency of organizations (and their interaction with external capital markets). By doing so, we hope to be able to provide a significantly better understanding to economic forces that set the boundary of a firm.

​Sovereign Wealth Funds: Portfolio Tilt, Corporate Governance and Real Economy Impacts

Adair Morse, Assistant Professor of Finance

Summary: A significant and increasing portion of world capital flows are going through entities known as sovereign wealth funds (SWF). Fueled by growing foreign exchange reserves in Asia and oil surpluses in the Middle East and elsewhere, SWFs already have an estimated $2.5 to $3 trillion in assets under management today, thus exceeding that of private equity and hedge funds preleverage) (Jen, 2008). The size of SWFs will only grow in the future, with most analysts projecting net additions of at least a trillion per year over the next decade. How do these actors allocate their resources today? How are they likely to do so in the future? Most importantly, how will the emergence into prominence of these state controlled players affect established actors in these markets, financial markets more generally, and ultimately the real economy?

A Distinguishing Test of Rational versus Behavioral Theories for Value and Momentum

Tobias Moskowitz, Fama Family Professor of Finance

Summary: The two biggest CAPM anomalies, value and momentum, are at the center of the asset pricing debate both because of their magnitudes relative to standard models and their pervasiveness across assets and markets. These two styles of investing can capture a substantial fraction of the cross-sectional variation in returns, and hence have become focal points for discussions of rational and behavioral models of asset pricing. While many rational and behavioral theories for the efficacy of value and momentum strategies have been put forth, the empirical evidence on these two investment styles focuses exclusively on capital market securities, dominated mostly by US equities. I propose a new testing ground for value and momentum that helps distinguish between rational and behavioral stories for value and momentum—sports betting markets. The idea is simple. Sports betting markets, because they offer risky gambles, should be subject to the same behavioral biases that are claimed to drive value and momentum in financial security markets. On the other hand, rational stories for value and momentum that hinge on covariation with aggregate systematic risks should have no bearing for the cross-section of sports betting contracts. Using a unique database of more than 150,000 betting contracts across six different sports, I test the efficacy of value and momentum strategies and compare their effectiveness with those found in financial markets.

Global Market and Funding Liquidity Risk Across Asset Classes

Tobias Moskowitz, Fama Family Professor of Finance

Summary: We examine whether market and funding liquidity indicators are correlated with each other and across markets and asset classes globally, especially during times of crisis. We construct a global illiquidity factor that captures high trading costs in world markets, high funding costs, poor conditions for the financial sector, and low credit availability. Our liquidity measure explains the returns of liquid‐minus‐illiquid securities within an asset class and returns across the major asset classes. We also examine whether liquidity risk can shed new light on the risk free rate puzzle, the term premium, the equity premium puzzle, puzzles related to the returns in private equity, corporate bonds, and options.

​Intrafirm Trade and International Macro Dynamics

Brent Neiman, Assistant Professor of Economics

Summary: About forty percent of all US international trades occurs between related parties, or intrafirm, such as trades between a parent and subsidiary of the same multinational corporation. Despite a rich theoretical literature on the determinants of vertical integration, very little empirical work has aimed at explaining its repercussions for cross-country relative price fluctuations and shock transmission. Using a good-level dataset that distinguishes arm's length from intrafirm trades, I study differences in the behavior of intrafirm prices with respect to price duration, synchronization, and exchange rate pass through.

The Mechanics of External Adjustment

Brent Neiman, Assistant Professor of Economics

Summary: The purpose of this project is to better understand the process of external macro adjustment. For instance, as the US savings rate rises and the current account balance improves, is the key mechanism simply a deterioration in the terms of trade, or might there be other important margins driving adjustment, such as the changing composition of goods or the number of firms that enter and exit import/export markets. Together with my coauthor Gita Gopinath, I would like to examine this topic because the established results in both the macro and micro-based literatures on exchange rate pass-through find a surprising disconnect between trade prices and dollar movements. The novel micro data we seek to purchase offers the ability to examine new margins of such an adjustment, as well as additional questions outlined in the proposal, and spans a period of dramatic movement in the exchange rate and external balance.

The Role of Global Organization in Management Behavior in Multi-national Firms

Jonathan Rogers, Associate Professor of Accounting

Summary: Globalization is one of the most important issues facing companies today. A long-standing debate in the theory of the firm concerns its proper degree of decentralization, where the optimal level of decentralization requires balancing the costs of bad decisions owing to poor information with those associated with inconsistent objectives. This is a particularly salient issue in multinational firms that operate in numerous political, cultural, legal, and economic environments, and by necessity must sometimes delegate decisions to local managers. We use a confidential dataset to construct an objective measure of the extent of decentralization for more than 100,000 subsidiaries of more than 7,000 US-based multinational firms from 1982 through 2006 doing business within nearly every national boundary. Our research question is whether the internal organization of global firms affects the information that is communicated to external stakeholders via the potential loss of information within the firm that may occur as a consequence of decentralized decision making.

​Impact of Chinese Consumer Products on Consumer Prices

John Romalis, Associate Professor of Economics

Summary: We are building a database of where bar-coded consumer goods are manufactured. We will systematically scan product barcodes and enter country of origin information for each product. We will scan 100,000 unique codes. This data will then be merged with the ACNielsen Homescan database on household purchases, extending its international economics research applications. We will directly assess the impact of Chinese products on the welfare of consumers through their impact on prices. A second project will study how retail prices respond to exchange-rate changes—there is likely to be much subtlety to this, and rather than all of the impact coming through a rapid change in "normal" prices, we will also see changes to promotional activity and product distribution. A third application will be to study the competition effects of low-priced Chinese goods, since we closely observe retail prices and sales of competing producers using the AC Nielsen database.

​Identifying Lender Moral Hazard: Evidence from Subprime Loan Defaults

Amit Seru, Assistant Professor of Finance

Summary: Identifying lender moral hazard is empirically a challenging task. The changing nature of servicing and restructuring activity in the subprime market allows us a unique opportunity to provide insights on moral hazard activity of subprime lenders. The results show that ownership of risk of a loan has a causal impact on whether the loan is monitored. Our empirical strategy allows us to isolate confounding considerations such as borrower screening and lender strategic adverse selection. By doing so, we demonstrate the potential costs of taking the central ingredient of monitoring—risk bearing—outside the boundaries of the firm.

​The Industrial Organization of K Street: What Do Lobbyists Do? How Much are They Paid and Why?

Francesco Trebbi, Associate Professor of Finance

Summary: Theoretical work on lobbying abounds and posits radically diverging views on the role of lobbying and economic special interest influence. Under certain assumptions lobbying exerts a welfare-diminishing role (say, because policy is bought by lobbies, a view prevalent among economists), while under different assumptions lobbying is welfare-enhancing (say, because lobbyists provide information, a view prevalent among political scientists). This is an open empirical question whose answer we hope to contribute.

The purpose of this research project is to provide a detailed study of the industrial organization of the US federal lobbying sector using an almost untapped information source and to provide a methodology to exploit the richest lobbying report data set available to shed light on the different potential roles played by lobbyists. This fundamental component of the political process is, as of now, basically obscure to both Political Scientists and Economists and to the best of our knowledge lacks a detailed systematic empirical characterization.

​Debt-equity Conflicts of Interest from the Perspective of Debt and Equity Analysts

Regina Wittenberg Moerman, Assistant Professor of Accounting and Neubauer Family Faculty Fellow

Summary: We examine the conflict of interest between debt and equity investors (conflicts hereafter) through the lens of debt and equity sell-side analysts. While in theory this conflict could be significant, existing empirical evidence is mixed and limited, particularly from the perspective of debt holders. The detailed discussion and analysis provided by debt and equity analysts in their reports allows us to analyze these conflicts with greater precision. For example, we measure the frequency, surprise, and surprise direction (favorable versus unfavorable) of conflicts. This analysis will better reveal the true wealth impact of debt-equity conflicts of interest. Our research question is made possible by a unique dataset of 15,918 sell-side debt analysts' reports for 633 US firms, combined with a matched sample of equity analysts' reports. By systematically documenting the content of debt analysts' reports, this project will also enhance our understanding of debt analysts' role in the capital markets.

​Educational Attainment, Productivity, and Growth

Luigi Zingales, Robert C. McCormick Professor of Entrepreneurship and Finance

Summary: In this project we study the relationship between educational attainment and economic performance by measuring both the direct and indirect effects of education. We plan to collect data on education among the population of different Italian cities going back several generations ago and then correlate today performance across cities to measures of education of the currently productive population as well as the education of generations that are no longer productive or even generations that have already passed. By using this micro dataset, we plan to study the effect of changes in education on GDP, productivity, and growth.

​The Effects of Educational Syles

Luigi Zingales, Robert C. McCormick Professor of Entrepreneurship and Finance

Summary: With IGM funding we collected data from 825 students of 47 different nationalities on the educational style of the schools they attended. We are now seeking additional funding to explore two angles. First, the correlation of this educational style with the family of origin of a country legal system. Second, the correlation between educational style and the performance in the PISA evaluation tests.