I do not like awards. They always create jealousies, and one cannot help that whenever a committee is involved, something may not have gone right. I am thus quite happy that economists give very few awards. It makes their CVs look bad compared to other scientists, but that is the price for a relative peace in the profession.
But we still have some prizes. The Nobel one, which is not really part of the Nobel family but is still attributed much prestige is always under much scrutiny. And in the end, the right people tend to win it. There have been a few controversial cases, Myrdal, Hayek, Buchanan and Ostrom come to mind as example where quite a few eyebrows were raised, but overall this award works well.
The American Economic Association gives an award that is considered to be even more difficult to get than the Nobel Prize: the Clark Medal, given to an American aged under 40. It is difficult to get because only one is awarded every year (no joint winners) and until recently it was given every second year. When comparing to the Nobel Prize, it is relevant to understand that American get a vast majority of them.
Now let us have a look at the past few year for the Clark award:
2011: Jonathan Levin, PhD MIT, Faculty at Stanford
2010: Esther Duflo, PhD MIT, Faculty at MIT
2009: Emmanuel Saez, PhD MIT, Faculty Harvard then Berkeley
2007: Susan Athey, PhD Stanford, Faculty at MIT then Stanford and Harvard
2005: Daron Acemoglu, PhD LSE, Faculty at MIT
2003: Steven Levitt, PhD MIT, Fellow at Harvard then faculty at Chicago
2001: Matthew Rabin, PhD MIT, Faculty at Berkeley
1999: Andrei Shleifer, PhD MIT, Faculty at Princeton, Chicago and Harvard
Do you see a pattern? Well I do, and others have, too. I am not saying these awardees are not bright and promising economists, but is there really no other qualifying economists that could have received it? Of course, John List comes to mind, who has no connection with MIT (or Harvard). But it actually worse than that. The award is given by a small committee, designated by the AEA. The AEA leadership is stacked with people with MIT and Harvard connections, so they also nominate their friends to the various committees, and you see the result.
It is even worse. In 2010, Ester Duflo was considered to be in the pool of strong candidates for the award. Guess who was on the awarding committee? Abhijit Banerjee, her PhD advisor, frequent co-author and colleague at MIT. In such a situation, an ethical person would decline the invitation to serve on the committee. That does not seem to have crossed the mind of Banerjee, who may be used to this cronyism.
There is another award, this time given by the European Economic Association: the Yrjö Jahnsson Award, to an European economist under age 45. It is given every two years, but can have several recipients. This awards has looked much cleaner because the committees and awardees have been distributed all over Europe. Europeans are indeed very sensitive to this. The last one was a shocker, though. Armin Falk won it to the surprise of many. And guess who chaired the awarding committee? His advisor, Ernst Fehr. Again, ethics would have indicated that if Falk had a chance of winning it, Fehr should have recused himself not just from chairing the committee, but from participating in it. In retrospect, this is not Fehr's first wrongdoing: two years earlier he was also on the committee when Fabrizio Zilibotti co-won the award. Zilibotti is a colleague of Fehr in Zurich.
I think we should do away with these two awards. It simply does not work.
Showing posts with label ethics. Show all posts
Showing posts with label ethics. Show all posts
Saturday, August 20, 2011
Saturday, April 30, 2011
On the ethics of research cloning
Even though the Journal of Economic Perspectives recently went open access, a move the American Economic Association should be applauded for, I am still receiving physical copies. It is a nice journal to read while lounging in the garden or on a plane ride. The last issue has as usual a good set of interesting articles, including one I had reported on earlier when it was still a working paper. But while checking what I had said about it, I noticed something rather odd: the paper I discussed was ultimately published in the Journal of Economic Behavior and Organization. I had to investigate.
The two papers are by Bruno Frey, David Savage and Benno Torgler. They both report on the sinking of the Titanic and discuss the characteristics of the passengers who survived versus those who perished. Both papers come to the same conclusions. The texts are different, though, and the published regressions are slightly different, with no explanation why, because there is no reference to the other paper. One has therefore to read in much detail to understand what the contribution of each paper is, if there is any.
All this is very fishy. It really looks like the authors are playing games here, trying to get multiple publications out of the same work. They do not mention the other work to fool editors and referees into thinking these are original contributions, as required for any submission to those journals. They tweak the results and rewrite the text so that they cannot be accused of blatant self-plagiarism. This is unethical behavior, but it is not unheard of in the profession.
But like a late-night infomercial, there is a bonus. Looking at the author's CVs, I notice that they have a third publication with the same topic and results, in the Proceedings of the National Academy of Sciences. Bruno Frey has also published two short pieces in German in magazines prior to the academic publications: 1, 2, both pdf.
Now, who are the authors? David Savage is a PhD student at Queensland University of Technology. He must have been following orders of the more senior authors, either without realizing their unethical behavior or watching in horror and not being able to do something about it. Let us give him the benefit of the doubt. His adviser is Benno Torgler, who has already an impressive track record for someone whose first refereed publication was in 2002. His RePEc profile lists 105 working papers and 52 journal articles. Looking at the published works, it seems to like to revisit previous papers by adding new twists to them. Nothing wrong with that, but it may explain why there is no major hit in the publications. There is simply too much slicing and no single slice is a major contribution worth a good publication. But early in his career, he published a series of articles on tax morale using the World Values Survey. Using the same data and the same methodology, he managed to publish several articles whose distinguishing feature is only that they look at a different set of countries: Asia, transition countries, Canada, Latin America, and possibly more. While I must confess that I have not read the papers in detail, there is simply too much material, and Benno Torgler may be innocent, I still find these patterns very disturbing.
It took me some time to figure out where Benno Torgler earned his doctorate. It is at the University of Basel, under the supervision of René Frey (Basel) and Bruno Frey (Zurich), who are brothers, after undergraduate studies at the University of Zurich. Which bring us to Bruno Frey. He is a researcher of international recognition, mostly for his work on welfare economics, happiness research, and critiques of fundamental assumptions in economic models. He credits himself with over 600 published articles and books, an astounding number in Economics. Of course, if this number comes about by slicing papers or republishing known results as described above, this number is less surprising. Looking at his list of major articles, one can surely suspect something is not quite right. I do not have the time (or the will) to go all of this, but there is indeed a lot of rehashing the same themes, which is OK when one uses new data sets or new approaches. But seeing those quantities, that seem unlikely.
Another aspect that I find disturbing in Bruno Frey's record is that his recent work has been railing against the tendency of academics (and especially their administrators and grant makers) to look for quantifiable evidence of their productivity, what he calls "evaluitis." He writes against the pressure to publish and the prominence of rankings of research output. I have reported about some of this writing myself (1, 2, 3). But again he seems to be repeating himself a lot, even in published articles, essentially criticizing a game that he seems to be excelling at. Either he is sarcastic or hypocritical, I cannot decide.
I realize the accusations I am making here can have severe consequences. But I am only accusing, not condemning. I leave the reader the opportunity to make her own opinion, as I have linked to plenty of evidence. I hope to be proven wrong, that these three individuals are indeed extremely innovative and productive. But from what I have seen so far, my prejudice is strongly negative in this regard.
Update (Sunday): I have been alerted that there is a fourth publication about the same Titanic study, in Rationality and Study.
Further update: A follow-up post.
The two papers are by Bruno Frey, David Savage and Benno Torgler. They both report on the sinking of the Titanic and discuss the characteristics of the passengers who survived versus those who perished. Both papers come to the same conclusions. The texts are different, though, and the published regressions are slightly different, with no explanation why, because there is no reference to the other paper. One has therefore to read in much detail to understand what the contribution of each paper is, if there is any.
All this is very fishy. It really looks like the authors are playing games here, trying to get multiple publications out of the same work. They do not mention the other work to fool editors and referees into thinking these are original contributions, as required for any submission to those journals. They tweak the results and rewrite the text so that they cannot be accused of blatant self-plagiarism. This is unethical behavior, but it is not unheard of in the profession.
But like a late-night infomercial, there is a bonus. Looking at the author's CVs, I notice that they have a third publication with the same topic and results, in the Proceedings of the National Academy of Sciences. Bruno Frey has also published two short pieces in German in magazines prior to the academic publications: 1, 2, both pdf.
Now, who are the authors? David Savage is a PhD student at Queensland University of Technology. He must have been following orders of the more senior authors, either without realizing their unethical behavior or watching in horror and not being able to do something about it. Let us give him the benefit of the doubt. His adviser is Benno Torgler, who has already an impressive track record for someone whose first refereed publication was in 2002. His RePEc profile lists 105 working papers and 52 journal articles. Looking at the published works, it seems to like to revisit previous papers by adding new twists to them. Nothing wrong with that, but it may explain why there is no major hit in the publications. There is simply too much slicing and no single slice is a major contribution worth a good publication. But early in his career, he published a series of articles on tax morale using the World Values Survey. Using the same data and the same methodology, he managed to publish several articles whose distinguishing feature is only that they look at a different set of countries: Asia, transition countries, Canada, Latin America, and possibly more. While I must confess that I have not read the papers in detail, there is simply too much material, and Benno Torgler may be innocent, I still find these patterns very disturbing.
It took me some time to figure out where Benno Torgler earned his doctorate. It is at the University of Basel, under the supervision of René Frey (Basel) and Bruno Frey (Zurich), who are brothers, after undergraduate studies at the University of Zurich. Which bring us to Bruno Frey. He is a researcher of international recognition, mostly for his work on welfare economics, happiness research, and critiques of fundamental assumptions in economic models. He credits himself with over 600 published articles and books, an astounding number in Economics. Of course, if this number comes about by slicing papers or republishing known results as described above, this number is less surprising. Looking at his list of major articles, one can surely suspect something is not quite right. I do not have the time (or the will) to go all of this, but there is indeed a lot of rehashing the same themes, which is OK when one uses new data sets or new approaches. But seeing those quantities, that seem unlikely.
Another aspect that I find disturbing in Bruno Frey's record is that his recent work has been railing against the tendency of academics (and especially their administrators and grant makers) to look for quantifiable evidence of their productivity, what he calls "evaluitis." He writes against the pressure to publish and the prominence of rankings of research output. I have reported about some of this writing myself (1, 2, 3). But again he seems to be repeating himself a lot, even in published articles, essentially criticizing a game that he seems to be excelling at. Either he is sarcastic or hypocritical, I cannot decide.
I realize the accusations I am making here can have severe consequences. But I am only accusing, not condemning. I leave the reader the opportunity to make her own opinion, as I have linked to plenty of evidence. I hope to be proven wrong, that these three individuals are indeed extremely innovative and productive. But from what I have seen so far, my prejudice is strongly negative in this regard.
Update (Sunday): I have been alerted that there is a fourth publication about the same Titanic study, in Rationality and Study.
Further update: A follow-up post.
Wednesday, March 30, 2011
Fraud cycles
The evolution of crime over time is much studied, and there is a lot of agreement that demographics are very important for many crime categories that are the "specialty" of young adults, like violent crimes. Fraud, however, cannot be tied to a particular age category, yet fraud statistics exhibit a remarkable cyclical pattern, a pattern that is not correlated across fraud categories or with the business cycle. What could give rise to such cycles?
Jiong Gong, Preston McAfee and Michael Williams come up with a theory that can rationalize these cycles. Once a lot of fraud cases make the news, people become more careful and new laws are put in place, which makes fraud more difficult. As fraud then disappears from the picture, people become less careful, and fraudsters find new and innovative ways to make money, and statistics show a comeback. That reminds me of privatization-nationalization cycles.
Of course, fraud statistics are not perfect. Indeed, they only measure fraud arrests, not fraud occurrence. One could argue that more people get arrested for fraud when victims are more vigilant, not less. That would be an entirely different story of fraud cycles.
Jiong Gong, Preston McAfee and Michael Williams come up with a theory that can rationalize these cycles. Once a lot of fraud cases make the news, people become more careful and new laws are put in place, which makes fraud more difficult. As fraud then disappears from the picture, people become less careful, and fraudsters find new and innovative ways to make money, and statistics show a comeback. That reminds me of privatization-nationalization cycles.
Of course, fraud statistics are not perfect. Indeed, they only measure fraud arrests, not fraud occurrence. One could argue that more people get arrested for fraud when victims are more vigilant, not less. That would be an entirely different story of fraud cycles.
Saturday, February 19, 2011
Ethics in Economics
Ethical behavior in the Economics profession has so far never been codified or even much thought about. Indeed, economists have the reputation to be easy to buy, just ask any lawyer needing a "expert" to testify. But the recent movie Inside Job has brought to the general public the issue of conflict of interest in the profession, and the American Economic Association seems to have finally picked up the ball. As it is set to draw a code of ethical standards for the profession (New York Times article), one has to evaluate the large task ahead given the many ways in which economists have breached basic scientific conduct guidelines, with rather small consequences. Let me quickly go through a serious of examples to show how little unethical behavior has been sanctioned so far.
The prime example is, of course, the case of Andrei Shleifer, Harvard professor who was a major consultant for the Russian government during the massive privatization of its state-owned industry. Shleifer amassed substantial wealth during this process in ways many think where not legitimate, and in particular the US Department of Justice thought so. In the end, Harvard paid much of the fines, Shleifer is still a professor there and probably one of the richest people in the profession (more).
Or Florencio Lopez-de-Silanes, coincidentally student and frequent co-author of Shleifer, who as director of the Yale Center for Corporate Governance ironically double-billed US$150'000 worth of travel expenses. He was fired despite tenure, but landed on his feet, still active in the profession as a professor in France. (more).
A bit too frequently, the issue is that if someone gets caught with the hand in the cookie jar, he just resigns and lands a job elsewhere where no one suspects anything. The next examples are not documented online or in print, so I will not give names.
Professor A has help full-time appointments at two universities, with none of the two knowing about it. Colleagues grew suspicious when Prof. A would have strange schedules, rearrange classes in odd ways and never be available. The scheme was finally discovered after a few years, and Prof A was summarily fired. However, a few years later he was again holding two full-time positions at different universities...
PhD student B gets caught in massive plagiarism, we are talking here about copy-and-pasting a dozen full articles. Administrators get alerted and promise to dismiss the student. Student B still graduated with a PhD and is now a "respected" free-lance analyst.
PhD student C gets caught copy-and-pasting the entirety of a term paper from a published article. During the investigation it turns out Student C is a repeat offender, the teacher in the previous case failed to follow the proper procedure, Summarily dismissed, the student enrolls in another PhD program and is now close to graduate and already has a research job.
Professor D publishes as sole author the term paper of a student. Gets caught and dismissed. Moves to another country and now holds a chair.
Professor E plagiarizes and gets caught. Is asked to leave from a well-respected US department, applies for a well-endowed chair in another country. The university is impressed to see a candidate of such prestige and hires Professor E, oblivious to the baggage.
Is the AEA going to be able to take care of all these cases? Most likely not, as it is going to focus on conflict of interest. For the other cases, it is going to argue that every university has internal procedures to enforce ethics and in particular plagiarism. But as I showed with the cases above, this is of little use when offenders can simply walk away and act like a virgin elsewhere.
RePEc has a new initiative that would take care at least of the plagiarism cases by exposing them. As the blog post explains, the goal is the shame plagiarizing authors (after proper procedures have been followed) as was as shaming administrations in imposing proper sanctions. I applaud this initiative and I hope it will set an example and reduce the staggering among of plagiarism going on, and perhaps instill more ethical behavior into economists.
The prime example is, of course, the case of Andrei Shleifer, Harvard professor who was a major consultant for the Russian government during the massive privatization of its state-owned industry. Shleifer amassed substantial wealth during this process in ways many think where not legitimate, and in particular the US Department of Justice thought so. In the end, Harvard paid much of the fines, Shleifer is still a professor there and probably one of the richest people in the profession (more).
Or Florencio Lopez-de-Silanes, coincidentally student and frequent co-author of Shleifer, who as director of the Yale Center for Corporate Governance ironically double-billed US$150'000 worth of travel expenses. He was fired despite tenure, but landed on his feet, still active in the profession as a professor in France. (more).
A bit too frequently, the issue is that if someone gets caught with the hand in the cookie jar, he just resigns and lands a job elsewhere where no one suspects anything. The next examples are not documented online or in print, so I will not give names.
Professor A has help full-time appointments at two universities, with none of the two knowing about it. Colleagues grew suspicious when Prof. A would have strange schedules, rearrange classes in odd ways and never be available. The scheme was finally discovered after a few years, and Prof A was summarily fired. However, a few years later he was again holding two full-time positions at different universities...
PhD student B gets caught in massive plagiarism, we are talking here about copy-and-pasting a dozen full articles. Administrators get alerted and promise to dismiss the student. Student B still graduated with a PhD and is now a "respected" free-lance analyst.
PhD student C gets caught copy-and-pasting the entirety of a term paper from a published article. During the investigation it turns out Student C is a repeat offender, the teacher in the previous case failed to follow the proper procedure, Summarily dismissed, the student enrolls in another PhD program and is now close to graduate and already has a research job.
Professor D publishes as sole author the term paper of a student. Gets caught and dismissed. Moves to another country and now holds a chair.
Professor E plagiarizes and gets caught. Is asked to leave from a well-respected US department, applies for a well-endowed chair in another country. The university is impressed to see a candidate of such prestige and hires Professor E, oblivious to the baggage.
Is the AEA going to be able to take care of all these cases? Most likely not, as it is going to focus on conflict of interest. For the other cases, it is going to argue that every university has internal procedures to enforce ethics and in particular plagiarism. But as I showed with the cases above, this is of little use when offenders can simply walk away and act like a virgin elsewhere.
RePEc has a new initiative that would take care at least of the plagiarism cases by exposing them. As the blog post explains, the goal is the shame plagiarizing authors (after proper procedures have been followed) as was as shaming administrations in imposing proper sanctions. I applaud this initiative and I hope it will set an example and reduce the staggering among of plagiarism going on, and perhaps instill more ethical behavior into economists.
Monday, August 16, 2010
Laws and attitudes: which comes first?
It is said that laws reflect current morals and that laws cannot influence morals. I imagine that it is rather difficult to find more than anecdotal data to test such a hypothesis.
Niklas Jakobsson and Andreas Kotsadam claim to have found the right natural experiment. In January 2009, buying sex became a criminal offense in Norway. The explicit goal of the law was to change the attitude of the people towards buying sex. Looking at Norway and Sweden (where there was no such change on law), they find that attitudes did not change more in Norway than in Sweden, if anything, people become a little more liberal. Save for one case: Oslo. There, prostitution is more visible, thus people were more aware of it and responded the way the lawmakers wanted.
The analysis is based on survey data. It would be interesting to know whether the actual purchases of sexual services were also affected. Indeed, it does not matter much if someone who would not buy sex anyway now has a negative attitude towards it. The paper clearly shows that people who are not close to the problem are not affected. Those that are at the margin of changing a decision are those you would want to affect. And only market data can reveal their choices.
Niklas Jakobsson and Andreas Kotsadam claim to have found the right natural experiment. In January 2009, buying sex became a criminal offense in Norway. The explicit goal of the law was to change the attitude of the people towards buying sex. Looking at Norway and Sweden (where there was no such change on law), they find that attitudes did not change more in Norway than in Sweden, if anything, people become a little more liberal. Save for one case: Oslo. There, prostitution is more visible, thus people were more aware of it and responded the way the lawmakers wanted.
The analysis is based on survey data. It would be interesting to know whether the actual purchases of sexual services were also affected. Indeed, it does not matter much if someone who would not buy sex anyway now has a negative attitude towards it. The paper clearly shows that people who are not close to the problem are not affected. Those that are at the margin of changing a decision are those you would want to affect. And only market data can reveal their choices.
Thursday, March 25, 2010
Neoliberalism and the Church
When I talk to representatives of some churches, or to anti-globalisation advocates, they constantly blames all the evils in the world on neoliberalism, and us economists are the ones who have imposed neoliberalism on the world. Yet, I do not know what neoliberalism is.
I just read through Stan Duplessis' dissection of the Accra Declaration and I take this opportunity to highlight the disconnect between the Church and Economics. The Accra Declaration was adopted in 2004 at a meeting of the World Alliance of Reformed Churches. The Declaration first lists all the ills of the current world: poverty, famine, wars, limited access to drugs, environmental degradation, and pandemic disease. Then it argues without transition that they are "directly related to the development of neoliberal economic globalisation... an ideology that claims to be without alternative, demanding an endless flow of sacrifices from the poor and creation", and then argues that Neoliberalism "...makes false promises that it can save the world through the creation of wealth and prosperity, claiming sovereignty over life and demanding total allegiance, which amounts to idolatry". Wow. Neoliberalism appears thus to be a powerful cult, that could be thus be competing against established religions.
What are the tenets of Neoliberalism? Again, I need to refer to the Declaration, through the quotes in Duplessis' piece to get a definition:
What this defines is complete anarchy, with no role whatsoever for the government. I cannot think of a single economist who would argue for such an agenda. Even, I would say that economists continuously grapple with many forms of market imperfections or failures and how to define policies (implemented by a government) that deal with these issues. It is true that economists point out that governments have weaknesses, and that markets and prices are powerful allocation mechanisms, but they have recognized limits. Liberalization has its place in some situations, and the resistance to it comes usually from some parties that lose rents from regulation. No one advocates liberalization at any cost, and transition costs are recognized to be often large.
Our world is rich, but unevenly so. I am particularly annoyed when people push for limits to the flow of this wealth across the world in order to satisfy entrenched interests. For example, those who have the most to gain from free trade are the poor of this world, because it gives them access to larger markets, allows them to obtain jobs and income that pulls them from their traps. The world economy is not a zero sum game, where whenever someone gains somebody else must be losing. The gains from exchange are substantial. Churches should learn this, instead of offering resistance to any change and accuse a supposed ideology of all the ills, many of which actually could be at least partitially be solved by opening up. Churches should give the poor a chance to participate in this world.
I just read through Stan Duplessis' dissection of the Accra Declaration and I take this opportunity to highlight the disconnect between the Church and Economics. The Accra Declaration was adopted in 2004 at a meeting of the World Alliance of Reformed Churches. The Declaration first lists all the ills of the current world: poverty, famine, wars, limited access to drugs, environmental degradation, and pandemic disease. Then it argues without transition that they are "directly related to the development of neoliberal economic globalisation... an ideology that claims to be without alternative, demanding an endless flow of sacrifices from the poor and creation", and then argues that Neoliberalism "...makes false promises that it can save the world through the creation of wealth and prosperity, claiming sovereignty over life and demanding total allegiance, which amounts to idolatry". Wow. Neoliberalism appears thus to be a powerful cult, that could be thus be competing against established religions.
What are the tenets of Neoliberalism? Again, I need to refer to the Declaration, through the quotes in Duplessis' piece to get a definition:
- Unrestrained competition, consumerism and the unlimited economic growth and accumulation of wealth are the best for the whole world;
- The ownership of private property has no social obligation;
- Capital speculation, liberalization and deregulation of the market, privatization of public utilities and national resources, unrestricted access for foreign investments and imports, lower taxes and the unrestricted movement of capital will achieve wealth for all;
- Social obligations, protection of the poor and the weak, trade unions, and relationships between people are subordinate to the processes of economic growth and capital accumulation.
What this defines is complete anarchy, with no role whatsoever for the government. I cannot think of a single economist who would argue for such an agenda. Even, I would say that economists continuously grapple with many forms of market imperfections or failures and how to define policies (implemented by a government) that deal with these issues. It is true that economists point out that governments have weaknesses, and that markets and prices are powerful allocation mechanisms, but they have recognized limits. Liberalization has its place in some situations, and the resistance to it comes usually from some parties that lose rents from regulation. No one advocates liberalization at any cost, and transition costs are recognized to be often large.
Our world is rich, but unevenly so. I am particularly annoyed when people push for limits to the flow of this wealth across the world in order to satisfy entrenched interests. For example, those who have the most to gain from free trade are the poor of this world, because it gives them access to larger markets, allows them to obtain jobs and income that pulls them from their traps. The world economy is not a zero sum game, where whenever someone gains somebody else must be losing. The gains from exchange are substantial. Churches should learn this, instead of offering resistance to any change and accuse a supposed ideology of all the ills, many of which actually could be at least partitially be solved by opening up. Churches should give the poor a chance to participate in this world.
Monday, October 20, 2008
Generalized fraud on Wall Street
If you still think that people are honest on Wall Street, you need to read the article on forensic finance in the latest issue of the Journal of Economic Perspectives. Jay Ritter documents several frauds that were so widespread that they were discovered by looking at aggregate data, thus instigating investigations.
Ritter documents four examples. The first the so-called late trading of mutual funds. Their price is set at the end of the trading day, but predictable market movements, say due to major announcements made while the market is closed, implies that their value continues changing. Yet some sold shares at old prices, because either they were in exchange allowed to invest in vehicles that were generating high fees, or employees where plainly enriching themselves.
The second example pertains to employee stock options backdating, whereby options where given with an exercise price set at the market price of the share, as required by law, but at the lowest price in recent trading. In other words, firms where pretending their filing was late, while it was really on time with an old price. Just from looking at abnormal stock returns around stock option grants, it became obvious that those returns where more than 3% lower on aggregate for firms that do not have a fixed stock option granting calendar. A major scandal ensued, and it uncovered that firms that were backdating lost 7% on the stock market. All this for allowing executives to gain on average half a million dollars annually per firm.
The third example is the so-called spinning of IPOs, that is, offering underpriced new shares to privileged people. As IPOs were generally oversubscribed (and could thus have been priced higher), bookrunners could choose whom to sell them. Of course, they chose those who could provide them with other favors, either separate deals or in the case of executives, loyalty. And said executives were fine with the underpricing that cost their firms.
The final example pertains to something that looked like fraud, but ended up being "just" incompetence. The Thomson Financial I/B/E/S database of analyst recommendations had at some times about 30% of the recommendations altered after the fact, putting them more in line with actual outcomes. While this looked like rewriting history to highlight the competence of these analysts, it turns out the coding and data entry policies were horrendous. Yet plenty of investors relied on this data. Such incompetence seem also present in rating agencies and elsewhere.
Some have called the increased government involvement in financial markets a step back. But looking as these generalized frauds or examples of incompetence, it seems regulation and consistent disclosure requirements that are also verified are necessary.
Ritter documents four examples. The first the so-called late trading of mutual funds. Their price is set at the end of the trading day, but predictable market movements, say due to major announcements made while the market is closed, implies that their value continues changing. Yet some sold shares at old prices, because either they were in exchange allowed to invest in vehicles that were generating high fees, or employees where plainly enriching themselves.
The second example pertains to employee stock options backdating, whereby options where given with an exercise price set at the market price of the share, as required by law, but at the lowest price in recent trading. In other words, firms where pretending their filing was late, while it was really on time with an old price. Just from looking at abnormal stock returns around stock option grants, it became obvious that those returns where more than 3% lower on aggregate for firms that do not have a fixed stock option granting calendar. A major scandal ensued, and it uncovered that firms that were backdating lost 7% on the stock market. All this for allowing executives to gain on average half a million dollars annually per firm.
The third example is the so-called spinning of IPOs, that is, offering underpriced new shares to privileged people. As IPOs were generally oversubscribed (and could thus have been priced higher), bookrunners could choose whom to sell them. Of course, they chose those who could provide them with other favors, either separate deals or in the case of executives, loyalty. And said executives were fine with the underpricing that cost their firms.
The final example pertains to something that looked like fraud, but ended up being "just" incompetence. The Thomson Financial I/B/E/S database of analyst recommendations had at some times about 30% of the recommendations altered after the fact, putting them more in line with actual outcomes. While this looked like rewriting history to highlight the competence of these analysts, it turns out the coding and data entry policies were horrendous. Yet plenty of investors relied on this data. Such incompetence seem also present in rating agencies and elsewhere.
Some have called the increased government involvement in financial markets a step back. But looking as these generalized frauds or examples of incompetence, it seems regulation and consistent disclosure requirements that are also verified are necessary.
Wednesday, July 16, 2008
Reforming the IMF
The International Monetary Fund was created in 1944 to encourage policies that lead to macroeconomic stabilization and in particular avert spillovers on other countries. A crucial part was the management of a sound exchange rate system. That was 64 years ago, ans since the role of the IMF has fundamentally transformed itself. As a consequence, it is time to reform it.
While the IMF was initially serving a set of countries that could need its services: countries could be borrowers or lenders. Nowadays it is only serving developing and transition economies, with the developed economies only providing funding. This means that latter cannot be disciplined by the IMF. Furthermore, developed economies can through the IMF set conditions on troubled economies that they would not put on themselves, as they would never get into such a situation. In other words, the initial IMF was working on a principle of symmetry that is lost today. Hence the need for reform.
The solution: give developing and transition economies more voting rights. Currently, they are roughly proportional to the provided funding. The formula needs to be substantially tilted against the rich countries. The latter will be then more reluctant to impose on others what they would not impose on themselves.
While the IMF was initially serving a set of countries that could need its services: countries could be borrowers or lenders. Nowadays it is only serving developing and transition economies, with the developed economies only providing funding. This means that latter cannot be disciplined by the IMF. Furthermore, developed economies can through the IMF set conditions on troubled economies that they would not put on themselves, as they would never get into such a situation. In other words, the initial IMF was working on a principle of symmetry that is lost today. Hence the need for reform.
The solution: give developing and transition economies more voting rights. Currently, they are roughly proportional to the provided funding. The formula needs to be substantially tilted against the rich countries. The latter will be then more reluctant to impose on others what they would not impose on themselves.
Thursday, July 10, 2008
Legal corruption
Now that the presidential campaign in the US is getting really serious, and other congressional races are starting to get some interest, once more the talk is about money. Not the money that good policies could generate, but rather that money that candidates manages to raise.
While I can understand that for some trades it is useful to be a good money raiser (charities, religious organizations, i.e., organizations that have little to offer but good feelings), I fail to see how this would help in running a country. The government can finance itself by mandatory taxation, there is no need to coax people into paying. But what is worse is that contributors are expecting, and getting, influence on policy decisions.
Not only is this practice tolerated by the law, it is openly discussed in the US as something that is normal. Yes, this is normal from an economic point of view: one is willing to pay to change a policy as much as the benefit from this policy change. But it is inefficient, for two main reasons: 1) the private optimum may not coincide with the social optimum; 2) the bidding between two lobbyists for opposing may expend huge resources when they outbid each other as each bid is a sunk cost once spent.
It is well known that resources spent on corruption are taken away from productive uses. Political contributions are just the same. They are legal in the US, but that does not make them good.
While I can understand that for some trades it is useful to be a good money raiser (charities, religious organizations, i.e., organizations that have little to offer but good feelings), I fail to see how this would help in running a country. The government can finance itself by mandatory taxation, there is no need to coax people into paying. But what is worse is that contributors are expecting, and getting, influence on policy decisions.
Not only is this practice tolerated by the law, it is openly discussed in the US as something that is normal. Yes, this is normal from an economic point of view: one is willing to pay to change a policy as much as the benefit from this policy change. But it is inefficient, for two main reasons: 1) the private optimum may not coincide with the social optimum; 2) the bidding between two lobbyists for opposing may expend huge resources when they outbid each other as each bid is a sunk cost once spent.
It is well known that resources spent on corruption are taken away from productive uses. Political contributions are just the same. They are legal in the US, but that does not make them good.
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