Sharada Sridhar surveys the papers presented and the key points discussed at the recently held Summer Research Conference in Finance at the ISB Hyderabad Campus.
On the weekend of 28-29 July 2017, researchers from premier institutions across India, the United Kingdom (UK), China and the United States of America (USA) gathered at the Indian School of Business (ISB), Hyderabad campus to participate in the annual flagship Summer Research Conference in Finance (SRC). The SRC was organized by Professor Krishnamurthy Subramanian and Prasanna Tantri of the ISB, and by ISB Finance Area Coordinator, Professor Ravi Jagannathan, Chicago Mercantile Exchange/John F Sandner Professor of Finance at Northwestern University’s Kellogg School of Management.
The conference saw the presentation of cutting-edge techniques and ideas on topics as diverse as macro-finance, innovation, start-up finance, asset pricing, emerging markets, banking and household finance. The cherry on top of this ‘sundae’ was the keynote address by Professor Viral V Acharya, Deputy Governor, Reserve Bank of India, and C.V. Starr Professor of Economics, Stern School of Business, New York University.
Relationship between Access and Success
The connection between access and success in the finance domain has been, and continues to be, studied in a plethora of ways. In fact, definitions of access and success also vary greatly. In the papers discussed at the SRC, access referred to trust, physical distance, social networks and having banking capability; success was understood as innovation, expanding networks and financial gain.
Fei Xie, Associate Professor of Finance, Alfred Lerner College of Business and Economics, University of Delaware presented a paper titled, “Does Trust Create a Culture of Innovation?” He and his co-authors considered the role trust plays in mitigating the risk underlying “contracting innovation.” Using data from the Orbis patent database to measure innovation, and results from the World Values Survey, to quantitatively score trust, they found a positive and significant relationship between trust and innovation. This, in turn, encourages economic and productivity growth. In response, audience members asked for the differences between inter-/intra-group trust, for example, within and across race or religious communities, to be elaborated.
Also talking innovation, Lora Dimitrova, Lecturer at the Xfi Centre for Finance and Investment, Business School, University of Exeter, discussed her collaborative paper “Financial Innovation and Real Innovation”. The paper employed hand collected panel data, covering three decades, and indicated that firms with better physical access to financial centres have greater cash flows. This in turn led to an increase in patents and citations. However, these authors also found that the greater the access to syndicated lending, the weaker the relationship between derivatives and innovation.
Along with his PhD adviser, Bhuvaneshwaran Venugopal, PhD Candidate in Finance, CT Bauer College of Business, University of Houston, explored how angel investors grow their networks in “How do Investors Accumulate Network Capital? Evidence from Angel Networks”. Compiling data from crowdsourced websites that contain information on start-ups and investors, these authors found that successful angel investors gain greater access to other investors and investment deals. An open issue at the end was whether luck or skill determines the angel investor’s success.
Professor Shashwat Alok of the ISB presented “Banking the Unbanked: What do 255 Million New Bank Accounts Reveal about Financial Access?” He and his co-authors studied how expanding financial access in India affected the economy. Their findings from administrative bank data showed that only a fifth of such new accounts are in use; further, the effects of this bank account growth on GDP and inflation are trivial. On the flipside, however, some preliminary results by these authors also revealed how the programme aided in meeting emergency expenses, especially hitherto prohibitive expenses related to healthcare. Audience members were also immensely curious to learn about the behaviour or attributes of the 18% of individuals who are using these new bank accounts.
“Wisdom of the Crowd”
Economic analysis often aims to eliminate the idiosyncrasies and biases existent at the individual, firm, industry or country levels. Several papers strove to apply the law of large numbers by harnessing the “wisdom of the crowd.”
In his paper, “Profit Sharing: A Contracting Solution to Harness the Wisdom of the Crowd”, Jiasun Li, Assistant Professor of Finance, School of Business, George Mason University evaluated the notion of profit expected under “full information disclosure.” His evidence indicated that an evenly split profit scheme, dependent only on the self-reported risk tolerance of each investor, provides the best possible outcome.
Jeramia Allan Poland, Fellow in Management, Financial Economics, ISB along with fellow ISB researchers also probed the ‘wisdom of the crowd’ in a paper titled “Margin Credit and Stock Predictability”. These ISB authors demonstrated that margin credit, collected from the New York Stock Exchange and aggregated across investors, was the best predictor of returns of the Standard and Poor’s 500 index. Its predictive ability held up well even in comparison to current industry standards such as the short interest and sentiment indices. Researchers in the audience noted that behavioural issues must be considered when using margin credit as a predictor for future returns.
Policy and Politics
An evergreen research subject was the impact of policy and politics on the economy, and specifically, how supply of credit, interest rates, and lending behaviour changes with the evolving legal system. At the SRC, certain papers discussed the effect of mere announcements, and others considered the aftermath of implementation.
Sascha Steffen, Professor of Finance and the Chair of Financial Markets, Business School, University of Mannheim presented highly topical work on “Brexit and the Contraction of Syndicated Lending”. He and his co-authors analysed how the Brexit impacted syndicating lending practices in UK based banks. They found that not only do these financial institutions lend less to UK-based firms, as opposed to firms abroad, but that the demand for credit in the UK, and the attractiveness of the pound itself are dropping. Audience members suggested that the authors also look into any bounce-back effect after the announcement of Brexit, especially with the results of the most recent British elections.
Arkodipta Sarkar, PhD Student in Finance, London Business School, University of London explored borrowing and investment behaviour under political uncertainty in his paper “Firm Boundaries and Political Uncertainty: Evidence Using State Elections”. Using Indian state elections data and data on Indian firms, he showed that stand-alone companies, versus conglomerates, are more likely to have a drop in leverage and investment, and an increase in interest rates, during times of political uncertainty. One idea from the audience was to see if firms that are more politically connected are less affected by political uncertainty.
Another paper in this vein, presented by Sudip Gupta, Visiting Assistant Professor of Finance, Kelley School of Business, Indiana University and his collaborators, was “JOBS Act Spill over Effects in the Syndicated Loan Market”. The JOBS Act 2012 is an initiative in the US to encourage lending to small businesses by easing certain Security and Exchange Council regulations. Using data from DealScan database, these authors argued that firms targeted by the JOBS Act – those with less than a billion dollars in revenue per year – evinced a greater demand for loans. These institutions also saw a decrease in interest rates and collateral requirements when contracting a loan. Moreover, the banks shouldered more responsibility of loans, with hopes of future underwriting channels including Initial Public Offerings. Audience members felt that further studies on the firms targeted by the JOBS Act and the increase they saw in loans through crowdsourcing and from venture capitalists would be fruitful.
Effects of Exposure and Experience
How do environment and past experience affect behaviour? This was another classic question tackled at the SRC.
In his paper “Losers Buy Beta”, Koustav De, PhD Candidate, Finance, Ross Business School, University of Michigan, tried to explain why people buy stocks. Specifically, using investor stock data from Finland, he found that higher losses in the past cause higher future risk (measured here by β). He also noted that this risk usually occurred immediately after a loss but that behaviour quickly bounced back to betting against β. Audience members recommended that the authors study if β is buying a first order effect or if it comes further down the line.
“Systemic Bank Panics in Financial Networks”, presented by Zhen Zhou, Assistant Professor, PBC School of Finance, Tsinghua University, teased out the role of financial panics on the stability of financial networks. His theoretical findings showed that the greater the number of financial connections a bank had, the less stable it was during a panic. Furthermore, core banks, due to greater exposure, were more fragile than those on the periphery. Participants suggested a robustness check to see if the benefits of having financial connections outweighed instability during panics.
The winner of the National Stock Exchange (NSE) Best Paper Award was Ankit Kalda, PhD Candidate, Finance, Olin Business School, Washington University in St Louis, who presented “Peer Financial Distress and Household Debt”. Mr Kalda explored the effects of social learning on risk behaviour. Using data from an anonymous major financial institution, he found that peer financial distress and health shocks decreased both leverage and amount of future debt. This in turn led to lower delinquency rates, and better credit scores. The author also suggested that there were ensuing effects on consumption on a macro scale. Among the queries by audience members were whether health shocks could be seen as a symptom of widespread unemployment or other economic issues.
Lessons for the Future
The discussions following the presentations were constructive, with many conference participants suggesting ways of strengthening the results through use of alternate methodologies or by widening or narrowing the data samples. But, the consistent takeaway was the need for greater transparency in data.
A number of papers hit a roadblock when it came to analysing deeper questions due to lack of clarity in or access to data. For example, with “Banking the Unbanked: What do 255 Million New Bank Accounts Reveal about Financial Access”, one suggestion was to look closer into the activity of the 18% of individuals who were actually using their new bank accounts. The author, Professor Shashwat Alok acknowledged that would be the natural next step, but pointed out that with the existing data, it was impossible to follow an individual’s behaviour over time. This was because privacy of customer information was as an important concern for the banks. Nonetheless, it was agreed that certain methods could be used to create anonymous customers.
In the discussion for “How do Investors Accumulate Network Capital? Evidence from Angel Networks”, it was similarly proposed that observing market shocks might help understand whether luck or skill allow for angel investors to succeed. In this case, the data is publicly available and could add robustness to the results.
These were just a few of the conversations at the SRC 2017. Together, they indicate the ideas that garnered the most interest over the two day conference. Beyond the academic and practical results presented, a clear managerial take-away was the centrality of high quality and readily available data. Data could make all the difference in making our understanding of finance more nuanced, while opening up novel and important questions in the future.
For a shorter version of this report, see this Research Spotlight.
