Tag Archives: Chicago Booth

Updates from Chicago Booth

Leading through Unprecedented Times
By Claire Zulkey – Classes for the 2021–22 school year don’t formally begin until September 27, but 40 second-year, Full-Time MBA students arrived on campus shortly after Labor Day to prepare for their role as LEAD facilitators. One of the first experiential MBA leadership development courses at a major business school, LEAD is an integral component of all MBA programs at Booth, with varied formats for Full-Time, Evening, Weekend, and Executive MBA cohorts. All first-year Booth students participate in LEAD, but only a select group of them come back as facilitators their second year to help mentor incoming students.

Traditionally, LEAD is conducted entirely in-person, and even includes an overnight trip to Lake Geneva, Wisconsin, where students participate in ropes courses, improv, scavenger hunts, ultimate frisbee, and other activities that foster collaboration, creativity, and camaraderie. Last year’s programming faced the challenge of moving online due to the COVID-19 pandemic. Even virtually, many first-year students gained valuable experience through the LEAD program, and were inspired to come back as LEAD facilitators this year. That includes Peter McNally, who recently completed a summer internship with the Boston Consulting Group. Prior to Booth, he built a research and consulting organization at the University of Pennsylvania focused on social issues around the globe.

“Last year’s LEAD facilitators did a good job making it feel welcoming. They brought a lot of enthusiasm and made it feel like this is a warm, positive space,” McNally says of his eight-person squad of other first-year students. “That’s easier said than done on Zoom.” He refers to each squad as “this little family.” He continues, “I’m not sure if this is something unique to Booth, but there’s a positive sense of competition: we want our cohort to be the happiest, the most welcoming.” more>

Updates from Chicago Booth

Who is right about inflation?
The US Fed and consumers have very different expectations about the future
By Brian Wallheimer – Inflation chatter started heating up this spring, along with inflation itself. In April 2021, the US Consumer Price Index, which measures how fast prices change, rose at a 4.2 percent annual rate, more than double the usual target rate. Then in May, the inflation rate soared to 5 percent. With the worst of the pandemic seemingly easing, US consumers were apparently venturing out again and spending at a fast clip.

The figures took inflation watchers off guard. The Wall Street Journal’s editorial page noted that Federal Reserve chairman Jerome Powell had wanted some inflation but would likely be surprised by the force of April’s numbers, saying, “Powell’s inflation ship has come in, albeit more rudely than he probably wanted.”

Financial journalists and investors, always looking for signs of how the central bank will react to signs of inflation or deflation, kicked into high gear, trying to anticipate the timing of any Fed actions.

But consumers—who actually drive inflation—seemed unfazed, apparently already operating with the understanding that prices were rising fast, and would continue to do so. Homeowners remodeling their homes during the pandemic were aware of historically high lumber prices. Home cooks felt the impact on food prices. Buyers of both new and used cars saw prices surge due to a shortage of computer chips. more>

Related>

Updates from Chicago Booth

Booth Staff – Celebrating a Momentous Achievement
Here at Booth, we’d like to congratulate the Class of 2021 on the time, dedication, and perseverance they devoted to complete their MBAs and PhDs amid a uniquely challenging year. In honor of this momentous achievement, we invited a few of our brand new alumni to reflect on their experience at Booth and what they’ll miss most as they embark on the next chapter of their personal and professional journeys.

Alex Brewer, ’21 A graduate of the Full-Time MBA Program, Alex Brewer will move to Los Angeles after graduation to work as an associate brand manager for Johnson & Johnson on their skincare and beauty brands.

John and William Swee, ’21 John and William Swee graduated from the Evening and Full-Time MBA programs, respectively, as Wallman Scholars, Booth’s high honors distinction. John also received the part-time programs’ Award for Finance. The brothers are both partners at boutique investment firms and aspire to continue building their respective firms using the skills they honed at Booth.

Anne Tong, ’21 Anne Tong is graduating from the Full-Time MBA Program. After graduation, she plans to move to Seattle, where she’ll serve as an associate brand manager for Nestle’s Starbucks and Chameleon Cold Brew brands. more>

Updates from Chicago Booth

Building Hope
With support from Booth alumni mentors, students at a Near West Side high school are launching successful entrepreneurial ventures.
By Margaret Currie – David Lewis, ’13, has always been passionate about education. A board member for Booth’s Alumni Club of Chicago, he also serves on the board of Chicago Hope Academy, a Christian high school on the city’s Near West Side with a student body that’s primarily Black and Latinx.

Last spring, Lewis began thinking about how he could leverage Booth’s alumni network to invest in the Hope community.

“The kids from Chicago Hope look a lot like I did when I was growing up in Gary, Indiana,” said Lewis, cofounder of Circumspect Capital. “I wanted to find a way to tap into Booth’s resources to support a cause that’s dear to my heart, particularly for this socioeconomic demographic.”

Lewis approached Chicago Hope leaders with the idea of forming a partnership between the school and Booth’s Chicago-based alumni club. The initial plan was that Booth alumni would lead a resume workshop at Hope, but the partnership quickly expanded into a four-part speaker series complemented by one-on-one mentoring.

“When we reached out to alumni, they told us that they wanted to do more than read a few resumes,” Lewis said. “They wanted to create relationships that allow them to not only help students build their personal brand but also be a sounding board for ideas and considerations.” more>

Updates from Chicago Booth

Take a family approach to genetic testing
By Brian Wallheimer – Knowing whether you’re a genetic carrier for a disease can be invaluable. A patient who learns she’s at heightened risk for breast cancer, for example, may opt for more frequent mammograms or have a preventative mastectomy, potentially adding many happy and healthy years to her life.

The US Preventive Services Task Force currently advises that individuals who have a family history of a disease should consider genetic testing. But taking a family approach to testing, applying one patient’s results to understand the risks to other family members, could generate comparable health benefits at less cost, suggests research by Chicago Booth’s Dan Adelman and Kanix Wang.

In theory, everyone could be tested for a wide array of potential diseases. But that’s a cost-prohibitive proposition, so what’s the optimal testing system? The researchers studied the issue by simulating the testing of 5 million people for the BRCA1 and BRCA2 genes, which are associated with an increased risk of developing breast cancer. The algorithm Adelman and Wang developed can determine who needs to be tested and can rule out the possibility that some family members are at risk on the basis of others’ results.

At $750 per test, an optimal family-testing policy involving these genes alone would add nearly 300,000 quality-adjusted life years to at-risk people over their lifetimes, 3,000 more QALYs than would be added by testing all people who meet the USPSTF’s guidelines, for $500 million less. A QALY is a measure used by economists to tally the quality and quantity of a life, and one QALY equates to a year of perfect health. more>

Related>

Updates from Chicago Booth

Don’t kill a company to collect a debt
By Emily Lambert – There’s a sizable gap between what a company is worth in liquidation and what it’s worth while still operating, according to University of California at Berkeley’s Amir Kermani and Chicago Booth’s Yueran Ma. Companies going through Chapter 11 restructuring are worth about twice as much when they are going concerns rather than liquidated, they write.

The finding is part of a larger study of corporate debt, in which Kermani and Ma examine the size and composition of the debt loads held by nonfinancial companies. They distinguish between asset-based debt (issued against discrete assets) and cash flow–based debt (issued against the operating value of a company). In doing so, they wondered about companies’ cash-flow and asset values—essentially, how much more a company might be worth alive rather than dead.

It took the researchers more than a year to amass the data needed to answer the question. They hand-collected information from 387 public, nonfinancial companies that filed for Chapter 11 restructuring between 2000 and 2016, plus pulled from other databases including Compustat.

Assessing the value of assets took quite a bit of effort, Ma says. She and Kermani were able to find comprehensive appraisals that were disclosed in court cases. They also performed extensive checks using data from other sources. more>

Related>

Updates from Chicago Booth

Who is driving stock prices?
Some investors influence valuations more than others do, research suggests
By Emily Lambert – When stock prices fluctuate, commentators often attribute the moves to demand from certain groups of investors. A radio report might attribute a daily rise in the S&P 500 to sentiment-driven retail investors—or maybe hedge funds, pension funds, or sovereign-wealth funds.

But some investors drive valuations more than others do, suggests research by Chicago Booth’s Ralph S. J. Koijen, NYU’s Robert J. Richmond, and Princeton’s Motohiro Yogo. In traditional stock-valuation methods, it doesn’t matter who owns a stock. Indeed, someone valuing a company’s stock typically estimates the company’s expected profits, and then discounts these profits using an appropriate discount rate as implied by, for instance, the capital asset pricing model (CAPM). The demand of a particular group of investors matters only to the extent that it affects the market risk premium and therefore the discount rate, producing a typically small effect. But some research is starting to chip away at the gap between narratives about investor-driven market swings and traditional finance models.

The latter assume that markets are highly elastic, Koijen explains—if prices deviate slightly from their fair values, investors rush in to arbitrage such small mispricings away. But the market is far less elastic than thought, a growing literature demonstrates. In this case, differences in investor demand have a meaningful impact on prices.

If asset prices reflect differences in demand for the shares, who is driving that? Koijen, Richmond, and Yogo developed a framework to trace back differences in valuation ratios and expected returns to various investors. They assembled investors into eight groups, from passively managed behemoths such as the Vanguard Group, to smaller, actively managed investment advisers and hedge funds. They then modeled how valuations would shift if all the assets of one group were to be redistributed to other institutional investors in proportion to their assets—if all hedge fund assets, for example, were held instead by other institutions in the market. The effect of that would depend on an investor’s size and strategy compared with others in the market, the researchers show.

Overall, small, active investment advisers have the largest influence on valuations, according to the researchers. Controlling for size, they find that hedge funds tend to be the most influential. “Per dollar of capital, they are much more influential than pension funds and insurance companies,” says Koijen. more>

Related>

Updates from Chicago Booth

How central bankers misjudge forward guidance
By Rose Jacobs – One of the best ways to spur an economy is to get people spending, and policy makers have a number of tools to do that. Yet growing evidence suggests a favored approach of late—forward guidance by central banks—doesn’t work. Such guidance, usually focusing on the outlook for interest rates, is meant to make clear to consumers that prices are likely to rise soon, so buying big items now would be smart.

While people may agree with the buy-now logic, they still may not react as economists and policy makers expect, according to Boston College’s Francesco D’Acunto, Karlsruhe Institute of Technology’s Daniel Hoang, and Chicago Booth’s Michael Weber. That’s because they don’t understand the signal, the researchers find.

“If you’re an economist too much stuck in your model world, this is very surprising to you,” Weber says. On the other hand, he acknowledges that not everyone can follow the logic chain that leads from a central banker predicting depressed interest rates, to lower borrowing costs, to higher inflation, to the urgency of buying now. “If you’re not too detached from reality, it’s not surprising,” Weber says.

The researchers analyzed two events in which governments or central banks signaled that prices were set to rise. One was a 2005 announcement by the German government that the country’s value-added tax (similar to the US sales tax) would increase from 16 percent to 19 percent in 2007. The second was a 2013 statement by then European Central Bank president Mario Draghi that interest rates would stay low or decline further for some time. To economists, this statement was a clear signal that price inflation would soon follow. more>

Related>

Updates from Chicago Booth

This one ubiquitous job actually has four distinct roles
The avatars of the strategist
By Ram Shivakumar – Among the occupational titles that have become ubiquitous in the 21st century, “strategist” remains something of a mystery. What does the strategist do? What skills and mindset distinguish the strategist from others?

Is the strategist a visionary whose mandate is to look into the future and set a course of direction? A planner whose charter is to develop and implement the company’s strategic plan? An organization builder whose mission is to inspire a vibrant and energetic culture? Or is it all of the above?

Academic scholarship does not settle this question. Over the past 50 years, many competing schools of thought on strategy have emerged. The two most prominent are the positioning school and the people school. The positioning school, closely associated with ideas developed by Harvard’s Michael Porter, argues that strategy is all about distinctiveness and not operational efficiency. In this view, the acquisition of a valuable position depends on the unique combination of activities that an organization performs (or controls). The people school, closely associated with the ideas of Stanford’s Jeffrey Pfeffer, posits that the principal difference between high-performance organizations and others lies in how each group manages its most important resource—people. In this view, high-performance organizations foster a culture that reward teamwork, integrity, and commitment.

Because these two schools differ in their doctrines (assumptions and beliefs) and principles (ideas and insights), each envisions a distinct role for the strategist. more>

Related>

Updates from Chicago Booth

How can banks create safe money? Balance competition
By Áine Doris – A conundrum underscores the banking system: banks issue liquid deposits but at the same time supply loans to finance illiquid projects, such as startups. In doing this, they expose themselves to liquidity risk—the kind that can lead to bank runs. It’s a precarious way to build a banking system.

Chicago Booth PhD candidate Douglas Xu tackles this liquidity paradox in a model that identifies two market failures or “inefficiencies” that regulators and policy makers need to keep in balance to reduce systematic risks.

Banks have long occupied a critical role in the creation of money. In today’s global economy, governments create only 3 percent of the money exchanged for goods, products, and services: the paper money and coins issued by central banks or monetary authorities whose trustworthiness or integrity underscore their value. Banks create the rest of the world’s cash—a staggering 97 percent.

From early record-keeping tokens to today’s deposit taking and loan making, banks have long been in the business of issuing money-like assets in one form or another. These assets function as credible payment media and thereby facilitate the kinds of activities and transactions that drive economic fluidity and growth.

But these assets bring inherent risk. Xu created a framework that captures the way that banks create money in the economy and integrates two key concepts: banks’ intrinsic vulnerability to illiquidity, and the so-called money-multiplier effect—the chain of transactions created when a bank makes a loan that generates a concomitant deposit elsewhere in the system. Put simply, loans generate a fresh supply of deposits. more>

Related>