Associate Professor, Haas Finance Group
Haas School of Business
University of California Berkeley
Adair Morse’s work in economics began when she was fresh out of college. After graduating from Colgate University in 1990, she moved to Poland to teach English. Instead, she wound up starting a business. Poland had just embarked on its rapid transformation to a capitalist economy and at the age of 21, Morse became not just an observer, but also a participant in this radical change. She started a company manufacturing leather goods and began to learn first-hand about the power and responsibility of being an employer. All of her employees had worked in state enterprise up until the transition and for many, her business was their first experience in private enterprise.
“There I was, at 21,” she recollects, laughing, “and of course I don’t know anything at 21.” But she paid in U.S. dollars, which gave her employees a secure footing in a shifting economy. Before her time in Click here to Read More
She brought this commitment back to the United States, where she soon realized that the corporate world was not the right place for her to address problems of poverty and fairness. Working as a controller for a waste management company, Morse noticed that a large chunk of the employees’ paychecks would go to paying fees and interest for services like check cashing and payday loans, “your heart just sinks when to realize the extent to which financial services do not cater to many people.” For Morse, figuring out how to better structure business practices is not a matter of paternalism or beneficence, but rather simple fairness, “in finance there’s a lot of unfairness and corruption and just leveling the playing field can improve the lives of many, many, people, even though it may be through small changes.”
In graduate school, Morse began to address one of the problems that she first noticed in her time as an entrepreneur. Issues of household finance, and particularly the sorts of financial tools that people living paycheck to paycheck rely on, such as payday loans, was central to her work from the very beginning. It was not a given, however, that academic finance would be more receptive to these concerns than the private sector had been. “When I started doing this research,” Morse recounts, “academic finance research typically studied capital markets and big corporations, but there was not much attention paid to average households.” Morse has helped to change this, garnering both numerous academic prizes and also influencing legislation both in the United States and abroad.
Starting in graduate school, Morse conducted two studies on payday lenders. As she demonstrates in her paper, “Payday Lenders: Heroes or Villains?” (Journal of Financial Economics, 2011) part of addressing such financial practices in a rigorous way means adding nuance to how we ethically judge them. Payday lenders draw a great deal of condemnation, but in fact they are a symptom of a much larger problem of financial inequality rather than its cause. Morse demonstrates that in some cases, for people who are not served by traditional financial institutions, payday lenders can offer the bridge financing they need in emergencies. Morse found that the existence of payday lenders mitigated the number of foreclosures in areas hit by natural disasters. The findings are not a celebration of payday lenders, but rather an indication of how few financial options exist for people living in economic precarity. As Morse puts it, “this does not mean, of course, that payday lenders are optimal. But say your car breaks down and you need to drive to work, a payday lender may be your only option to keep your job. Taking away this possibility of bridge finance means taking away possibilities from people who need them most.” Instead of getting rid of services like these, Morse wants to find ways to improve and better regulate them.
Working with a national payday lender, Morse and Marianne Bertrand conducted a second research project in which lenders provided additional financial disclosures including month to month budgeting plans showing exactly how much borrowers would be paying in fees on their loan. Morse and Bertrand found that receiving this information at the same time as the loan led borrowers to repay their loans more quickly and to be less likely to take out loans in the future. Morse and Bertrand’s paper, “Information Disclosure, Cognitive Biases, and Payday Borrowing,” was the lead article in the Journal of Finance (December 2011) and was awarded the journal’s Brattle Prize for best paper in corporate finance. Both the state of Texas and province of Ontario adopted and mandated the disclosures used in this project for payday lenders, impacting an estimated four million borrowers annually. The implications of this research also goes beyond payday lending specifically and speaks to even bigger questions about the role that regulators can play in ensuring financial literacy. While there has been a push to incorporate financial literacy programs into public schools, Morse and Bertrand’s study shows that people learn in the process of using financial institutions and educating people at the point of those transactions can be more effective.
Leveling the financial playing field is both a question of studying the finances of those on the bottom and corrupt practices of those on top. In addition to her work on lower and middle income household finances, Morse develops innovative ways to trace and expose fraud, corruption, and unethical practices on the part of individuals, corporations, and even the Federal Reserve.
Working with Margarita Tsoutsoura and Nikos Artavanis, Morse conducted a highly influential study of tax evasion in Greece. She and her co-authors discovered that banks were offering loans to people that could not be supported by the reported, taxable income of those individuals. They found that the banking industry had its own set of multipliers to estimate actual income based on reported income and occupation. Working with a large Greek bank, they were able both to discover the prevalence of tax evasion, particularly among highly educated upper class professionals, as well as to develop a new method of estimating actual incomes in a semiformal economy. This paper, “Measuring Income Tax Evasion using Bank Credit: Evidence from Greece,” won the 2013 WFA/WRDS Prize for best empirical paper and was published in the Quarterly Journal of Economics in 2016. It was widely covered in the Greek and international media, contributing significantly to an outcry against tax evasion which resulted in parliamentary tax reforms.
While Morse’s work on payday lending and tax evasion has supported regulatory changes, her works has also revealed how federal and regulatory agencies can be at times ineffective at stemming corruption, and indeed even complicit in it. One key problem with leveling the playing field is the closeness of individuals within public financial institutions like the Fed with private investors. Morse and her co-authors Anna Cieslak and Annette Vissing-Jørgensen found correspondences between stock performance and the meetings of the Fed’s Board of Governors, suggesting that information from these meetings is leaked to financial markets through channels like newsletters that charge subscribers high fees for access to private information about these meetings. Their paper, “Stock Returns over the FOMC Cycle,” was named the best conference paper at the 2015 Sonoran Finance Conference and has serious implications for how we understand communication between the Fed and investors. The problem of Federal Reserve leaks was recently brought into the spotlight with the resignation of Federal Reserve Bank of Richmond President Jeffrey Lacker. The problem though, Morse and co-authors argue, is more far reaching than one individual. The members of the Federal Reserve are, as Morse puts it, “supposed to be our public servants, and what we are seeing here is a scandal in progress that we’re hoping will force change in the Federal Reserve.”
In the face of complicity between public and private institutions, there is also a pressing question of how corporate fraud can be detected and regulated. Morse has looked to whistleblowers as key figures to push against fraud and corruption. Being a whistleblower, however, is easier said than done. Morse worked with Alexander Dyck and Luigi Zingales on a close study of individual cases of whistleblowers and found that whistleblowers are so rare because of the immense personal and professional cost. Whistleblowers were often ostracized by their communities because they were perceived to damage the area’s employment opportunities. They would be fired and even if their complaints were justified, other companies would refuse to hire them. Ensuring potential whistleblowers will speak up, Morse argues, requires ensuring their financial security. This finding led to the adoption of the “Bounty Provision” in the Dodd-Frank Law, that whistleblowers can claim some of the penalties that the SEC levies against the company for the fraud.
Morse prides herself more on the public policy applications of her work than on her many academic accolades and prizes. In her wide-ranging research, she follows a simple approach: “I think about things that bother me in the world. And once I think of something that’s bothering me, I try to get creative about how to remedy it in a way that can offer statistically sound research.” When it comes to teaching, she encourages her students to do the same. The most important training, she says, is “to find something that matters and that you care about, and then look to the real world to find your methods.”
Hanna Chair in Entrepreneurship & Professor of Finance
Krannert School of Management
It is not often that major research projects begin with daytime television. But this was the case for a series of groundbreaking studies about the relationships between politicians and firms. As a child growing up in Italy, Mara Faccio watched cartoons on the country’s new commercial TV networks. Those networks would soon turn into the media empire that brought Silvio Berlusconi to the public stage and launched his political career. Faccio was fascinated by Berlusconi’s transition from an entertainment mogul into a politician. Watching his electoral success, Faccio began to wonder how his business empire connected to his political career: “I decided to start to look at his case and to investigate the empirical value of political ties.”
This investigation was the starting point for her article, “Politically Connected Firms,” published in the American Economic Review (2006). The scope of the article went well beyond Berlusconi and Italy. Faccio studied 20,000 firms from around the globe to discover the implications of connections between politicians and firms. She found that political connections significantly added to firm value. By looking at firms from 47 different countries Click here to Read More
in this study, she was also able to draw international comparisons. She found that politically connected firms were especially successful in controlling market share in countries with high levels of corruption: in Russia, for example, politically connected firms controlled 87% of total stock market capitalization as of 2001. While we might expect this in Russian, Faccio also found a surprising number of politically connected firms in more democratic and transparent countries like Britain, which was third after Russia and Thailand for the percentage of market capitalization held by politically connected firms. These finding led Faccio to further questions about how political connectedness works in different national contexts.
Following up on her American Economic Review article (the journal’s most cited article of that year), Faccio has completed two more recent studies about political connectedness, each of them with important political implications. Her cross-country analysis “Political Connections and Corporate Bailouts,” co-authored with Ronald Masulis and John J. McConnell, studied firms across 35 countries between 1997 and 2002. They found that politically connected firms were more likely to be bailed out than similar firms without political connections, especially in countries receiving subsidies from the International Monetary Fund and the World Bank. Their findings reveal both the prevalence of corruption and—building on Faccio’s earlier findings—the ways that this corruption rewards poorer performing firms: among bailed-out firms, those that were politically connected had significantly poorer performance, both at the time of the bailout and following the bailout. In a separate paper, Faccio and co-authors Paul K. Chaney and David C. Parlsey, found that politically connected firms gathered significantly poorer accounting information, concluding that politically connected firms are less subject to market pressure than their non-connected competitors to collect high quality information (“The Quality of Accounting Information in Politically Connected Firms,” 2011).
A subsequent article on private equity, “Politically Connected Private Equity Firms and Employment,” co-authored with Hung-Chia Hsu again addressed a topic ripped from the headlines. Mitt Romney was running for president and Faccio followed the debates that his candidacy sparked over the role of private equity firms like Bain Capital. Faccio and Hsu studied such firms and found that following a buyout, targets of politically connected private equity firms create more jobs than targets of unconnected firms do. The difference is even more pronounced in election years, in places with close races, and in places with high levels of corruption. These findings suggest what Faccio calls “an exchange of favors” between companies and politicians: higher employment bolsters the standing of incumbent politicians, helping them to win reelection, and politicians in turn act favorably toward those companies. At a first glance, increased employment may seem like a win-win. After all, politicians are transparent about celebrating their influence in keeping and creating jobs. But it is more complicated than that. The question, Faccio says, “is what companies get back from the government—are they more likely to win government contracts for example?” As we already know from Faccio’s other work, politically connected firms perform worse in many respects than unconnected ones: the problem is when “our taxes are wasted in providing subsidies to companies that aren’t the best in the market.”
Faccio’s research on politically connected firms represents just one field in which Faccio has published acclaimed papers. A full exploration of her work on taxes, capital structure and allocation, corporate ownership and governance, corporate risk taking, CEO gender, mergers and acquisitions, and pension funds, would take a series of profiles. But her work on political connectedness is typical for Faccio in that she takes a topic of immediate political significance—about which most people no doubt have strong feelings—and offers an empirically sound and analytically nuanced way of understanding them.
Her work on political connectedness is also characteristic for Faccio in that it demonstrates both the international scope of her research and her commitment to understanding financial decisions in relation to culture. Faccio’s work is at the forefront of an expanding field of research in culture and finance. In the introduction to a special issue of the Journal of Corporate Finance
catalyzing this burgeoning field, Faccio and her co-editors reveal what finance has to gain from this innovative and interdisciplinary approach: “Culture influences perceptions, preferences, and behaviors and, therefore, action outcomes by and perceived utilities of the financial decision maker(s). It does so directly by influencing decisions and through institutions by shaping decisions and information costs. Ignoring the role of culture thus risks omitting an important variable from an analysis of financial decision-making.”
Of course, rigorous analysis of financial data in conjunction with attention to culture and a broad international scope presents its own challenges. “Some obvious challenges,” Faccio explains, “are just getting the data, monitoring the quality of the data, and being able to account for differences that vary across countries—issues connected to culture, development, and corruption.” Faccio has developed ways to overcome the challenge of identifying and accounting for these factors, such as focusing first on differences within countries (for example, between politically connected and unconnected firms within one country) before drawing international comparisons.
One testament to the importance and creativity of Mara Faccio’s scholarship is the how widely her work has been cited both within academic journals and in the public press. Multiple articles she has written are among the most cited of their respective journals, and her work has been covered in publications ranging from The Economist, The Nation, and The New York Times to Italia Oggi, the Deutsche Presse-Agentur, and The Hindu BusinessLine. “It is very difficult to know in advance what will be successful and what is not,” she says, but she tells her students that the best starting point is to pick topics that are relevant, “I tell them to read the newspaper, to remain in touch with reality, to see what the big problems are these days.” She also teaches her students to enter projects with a big picture problem instead of a single narrow question: “often we’ll start a project and eventually have to lay it aside, so having a bigger research idea is very important in those cases. If you have a bigger question in mind, then you don’t become discouraged when one topic doesn’t work, you have a long-term interest and can move on to something else.”
Faccio certainly follows her own advice, bringing pressing public questions into her research and maintaining so many long term interests that she is at times working on as many as ten separate journal articles. But still, she remains in touch with reality—and not just by reading the newspaper. She is also an avid athlete, playing golf and soccer when she is not at her desk: “it is nice to be able to have fun in one’s work, but that’s not everything in life. Hopefully!”