IGMInitiative on Global Markets

2008 AnnuAl RepoRt

IGM

Initiative on Global M

arkets 20

08

Annual R

eport

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

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

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

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

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

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

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

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

:

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.

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).

Forums

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.

14

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.

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

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

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.

Visiting Fellows

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

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.

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

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

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

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

Research

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

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

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

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

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

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

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

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

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

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

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.

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IGM

Initiative on Global M

arkets 20

08

Annual R

eport