Massive global movements of capital, products, and
talent have changed the nature of business in the
21st century. Powerful economic forces are driving
these flows, and much depends on people’s ability to make
sense of them. Yet across the world, these shifts have generated
confusion among business managers, policymakers, and the public. Chicago GSB thus has a crucial role to play, since
it is in a unique position to shed light on how modern global
markets work, their effects, and the way they interact with
policies and institutions. To organize its efforts, the GSB set
up the Initiative on Global Markets (IGM) in mid-2006 after
receiving a founding grant from the CME Trust.
The IGM pulls together work by GSB researchers in many different fields, from microeconomics and development economics to accounting, corporate finance, and asset pricing. Pooling the school’s talents in these areas is helping us tackle some of the thorniest issues facing the modern global economy. The IGM’s goal is not only to fund much more of this research, but also to make the research easier for people to find, understand, debate, and apply to tough decisions: from the challenges facing companies and government regulators to the choices facing investors and voters.
Besides funding research, the IGM supports extended visits by prominent scholars to the GSB and puts on several conferences a year. Through our Myron Scholes Forum, we host lectures by business and government leaders that are open to the public and have been drawing big crowds. For the latest information on all of these visitors and events, see ChicagoGSB.edu/igm.
This issue of Capital Ideas highlights four papers produced by IGM researchers, and gives a good sense of the Initiative’s scope and mission.
The first paper, by Adair Morse, Luigi Zingales, and Alexander Dyck, takes a close look at corporate fraud. Managers who commit fraud pose a double threat to modern global markets. Their misdeeds not only impose direct costs on people, but the harm they inflict also can undermine public support for private enterprise, leading to all sorts of indirect damage. Finding ways to detect and rein in fraud is crucial.
For starters, Morse, Zingales, and Dyck asked a simple and important question: who detects corporate fraud? They looked at 230 fraud cases in the United States between 1996 and 2004 and found that numerous people play a part in bringing fraud to light. Financial analysts and short sellers spot many cases of fraud before anyone else, and a wide range of other parties tend to pick up what they miss, including external stockholders, suppliers, clients, competitors, the media, auditors, and employees who blow the whistle. Meanwhile, financial regulators and plaintiff lawyers, regarded by many as important watchdogs, do not actually uncover many misdeeds. Their article describes more of their findings and some conclusions about policy.
The second paper, by Matthew Gentzkow and Jesse Shapiro, looks at newspapers in the United States. It is hard to find anyone in America who does not have an opinion about how the media shape the news that they report. Yet it is much harder to measure this “media slant” and the forces that drive it. Gentzkow and Shapiro have filled this void by examining the newspaper industry in a clever and persuasive way. They show how you can learn a great deal about the media by looking at the intersection of two related markets: in one, politicians compete for votes; in the other, newspapers try to attract readers.
Members of Congress tend to use different phrases for the same thing, depending on their party affiliation. Whereas Democrats often refer to an “estate tax,” for example, which they tend to support, Republicans prefer to call it a “death tax” and argue against it. By scouring phrases in Congressional speeches and comparing them to newspapers’ preferred phrases, Gentzkow and Shapiro built an objective partisan index that captured how closely each newspaper’s language patterns resemble those of Democrats or Republicans. They then looked at several features of the newspaper industry to see what causes this partisan “slant” to vary across publications. They found that newspapers tend to slant their coverage toward the ideology of the readers in their local markets. This battle to match their customers’ tastes matters much more than other factors, such as the political leanings of a particular newspaper’s owner. In short, profit-seeking American newspapers appear to cater to the beliefs of their local readers, much as vote-seeking politicians cater to those of their constituents.
The third paper, by Andrea Frazzini, Lauren Cohen, and Christopher Malloy, looks at a much less visible information channel: the social networks that result from common educational ties. They try to gauge whether these networks transmit important information that feeds into investment decisions. They find that mutual fund managers tend to invest in companies that have board members who went to the same university, especially if the board members and fund managers were at the same college within the university at the same time. These investments tend to be among the best performing ones that a fund manager makes, and much of the good performance is concentrated around the time of news announcements. The researchers point out that this is “consistent with mutual fund managers gaining an informational advantage through the education networks.”
The final paper, by Christian Broda and David Weinstein, looks at the role that quality improvements play in raising American living standards, and suggests that the country’s official statistics are badly underestimating these gains. Economists have long understood that the consumer price index accounts poorly for the role of product creation and destruction in boosting quality. For rapidly changing products, such as digital cameras, each new generation is much better than the preceding one, and is thus worth much more to consumers. Thus, rising prices for these goods are not just pure inflation but rather a combination of inflation and improved quality (thus real consumption is higher). Statistical agencies have a hard time disentangling the two. Broda and Weinstein use a massive new data set on household purchase patterns to document the extent of product churning, providing the first systematic look at its effect on inflation measures. They conclude that inflation has likely been overstated (and consumption understated) by between one-half and one percentage point a year.
The IGM supports a wide range of other research projects, thanks to donations from the CME Trust and our corporate partners, which so far include AQR Capital Management, Barclays Bank, and Northern Trust. We encourage you to visit the IGM website (ChicagoGSB.edu/igm) to learn more about research in progress and the working papers that have been produced so far.