Tag: Cox School of Business

Culture, Society & Family Economics & Statistics

Data-driven assessment ranks U.S. Metropolitan Areas by arts and cultural assets

Post author By Margaret Allen
Post date January 29, 2015

NCAR, SMU’s National Center for Arts Research, creates index to measure arts vibrancy of U.S. Metropolitan Areas

NCAR, SMU’s National Center for Arts Research, today released its first annual Arts Vibrancy Index.

The index ranks more than 900 communities across the country. Vibrancy is measured as the level of supply, demand and government support for arts and culture on a per capita basis. The report highlights the top 20 large markets and top 20 medium and small markets. NCAR provides rank scores on all measures for every U.S. county on the interactive heat map.

“The numbers are only the start of the story, not the end. Each city in our report is unique in what makes it a vibrant community for the arts,” said Zannie Giraud Voss, director of NCAR and chair and professor of arts management and arts entrepreneurship in SMU’s Meadows School of the Arts and Cox School of Business. “Our intention in developing this report is to stimulate conversation about what makes a city vibrant in the arts and how arts vibrancy varies across cities.”

The overall index is composed of three dimensions.

Supply is assessed by the total number of arts providers in the community, including the number of independent artists, arts, culture and entertainment employees, and arts organizations.

Demand is gauged by the total nonprofit arts dollars in the community, including program revenue, contributed revenue, total expenses and total compensation.

Level of government support is based on state arts dollars and grants and federal arts dollars and grants.

girls, virtual reality, say no, sexual violence, assertiveness training, Rowe, Jouriles, McDonald, SMU

supervolcano, fossil, Italy, James Quick, Sesia Valley

Meltzer, contraception, couples, happiness

Morrison Formation, Jurassic, climate, ancient soil, Myers, paleosols

Geographically, the rankings utilize Metropolitan Statistical Areas (MSAs), which are delineated geographic areas consisting of one or more counties that have high social and economic integration with an urban core as defined by the Office of Management and Budget. By focusing on MSAs, the index captures the network of suburbs that rise up around a city or town rather than considering them separately.

Among cities with populations of 1 million or more, the five most vibrant arts communities are as follows:

Washington-Arlington-Alexandria, D.C.-Virginia-Maryland-West Virginia
Nashville-Davidson-Murfreesboro-Franklin, Tennessee
New York-Jersey City-White Plains, New York-New Jersey
Boston, Massachusetts
San Francisco-Redwood City-South San Francisco, California

For medium and small cities, with population under 1 million, the top five cities are all in the West:

Glenwood Springs, Colorado
Santa Fe, New Mexico
Jackson, Wyoming-Idaho
Breckenridge, Colorado
Edwards, Colorado

The full top-20 lists are available on the NCAR Arts Vibrancy Index, including scores on each of the three dimensions of supply, demand and government support.

Beyond the specific rankings, select key findings in the Arts Vibrancy Index include:

No region has cornered the market on arts vibrancy. Cities large and small from every region appear in the top 40 cities, although there is high representation from Western communities in the set of Medium-Small cities.

Arts vibrancy takes many shapes and forms. Some cities have impressive financial resources invested in nonprofit arts and cultural institutions, others are filled with many smaller organizations and venues, some are tourist destinations and still others are artist colonies. Some cities are strong in numerous arts sectors while others are capitals of a particular art form.

There are interesting differences across very large Metropolitan Statistical Areas (MSAs). Those that made the list tend either to have a strong concentration of arts vibrancy in an urban core and less going on in surrounding communities, or they are vibrant throughout the greater metropolitan area, and less so in the city center.

The majority of arts vibrant cities have a population either under 300,000 or between 1,000,000 and 3,000,000.

In 2012, Meadows and Cox launched NCAR, the first of its kind in the nation. NCAR analyzes the largest database of arts research ever assembled, investigates important issues in arts management and patronage, and makes its findings available to arts leaders, funders, policymakers, researchers and the general public.

With data from the Cultural Data Project (CDP) and other national and government sources such as the Theatre Communications Group, the National Endowment for the Arts, the Census Bureau and the National Center for Charitable Statistics, NCAR is creating the most complete picture of the health of the arts sector in the U.S.

The project’s indices and dashboard were created in partnership with IBM, TRG Arts and Nonprofit Finance Fund. The Center also partnered with the Boston Consulting Group to develop its mission, vision and long-term strategies.

NCAR is led by Zannie Voss and Glenn Voss, Endowed Professor of Marketing at Cox.

Meadows, one of the foremost arts education institutions in the United States, offers undergraduate and graduate degrees in advertising, art, art history, arts management and arts entrepreneurship, communication studies, creative computation, dance, film and media arts, journalism, music and theatre.

Cox offers a full range of undergraduate and graduate business education programs.

Follow SMUResearch.com on twitter at @smuresearch.

SMU is a nationally ranked private university in Dallas founded 100 years ago. Today, SMU enrolls nearly 11,000 students who benefit from the academic opportunities and international reach of seven degree-granting schools. For more information see www.smu.edu.

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with an SMU expert or book an SMU guest in the studio, call SMU News & Communications at 214-768-7650.

Tags Cox School of Business, Meadows School of the Arts, National Center for Arts Research, Zannie Giraud Voss

Culture, Society & Family

Conventional vs. modern: Repertoire drives opera house identity, market share

Post author By Margaret Allen
Post date April 9, 2014

Opera houses in a competitive market can distinguish themselves from the competition through the repertoire they feature

The Palais Garnier of the Paris Opera, one of the world's most famous opera houses. (Credit: Peter Rivera, Paris Opera) — The Palais Garnier of the Paris Opera, one of the world’s most famous opera houses. (Credit: Peter Rivera, Paris Opera)

Though opera companies are often monopolies in their respective area, they have the ability to distinguish themselves from other opera companies and competition from other performing arts venues that vie for audiences.

In new research, Strategy Professor Bo Kyung Kim of SMU’s Cox School of Business and co-author Michael Jensen, University of Michigan, Ann Arbor, explore the options opera companies have to address their competitive positioning. Paradoxically, the authors find, to create space for unconventional repertoire choices it may be necessary to make yet more conventional choices.

A firm’s market identity is a categorization of how the outside world views the firm and their product offerings.

“There are different ways opera companies can claim their own market identity, and one way is through different repertoires in opera settings,” said Kim. “Audiences categorize companies based on several cues; repertoire is a significant cue for audiences.”

For example, the authors mention that a microbrewery sets up certain expectations from consumers that differ from, say, the large, conventional Coors Brewery. The same type of categorization affects opera and performing arts venues.

The research published recently in Organization Science, “Great, Madama Butterfly Again! How robust market identity shapes opera repertoires.”

Opera houses develop market identity to compete for audience share
Generally, opera is a conservative art form and the European opera has come to define widely accepted conventions in the Unite States. In contrast, modern operas are regarded as a challenge to traditional opera standards. The choice between offering traditional and modern opera is a way for companies to differentiate themselves and to claim their market identities. An opera company that schedules only traditional or modern operas has a “distinct” market identity; an opera company that allows audiences to categorize it as either a traditional or modern opera company by systematically balancing both types of operas has a “robust” market identity, say the authors.

Tenor Plácido Domingo, when first becoming Los Angeles Opera’s artistic director, stressed the importance of balancing repertoire choices. The authors noted his dedication to new opera but continuing commitment to Verdi and Puccini to allay fears over too much of the avant-garde. Opera companies try to appeal to both the majority audience preferring traditional Italian opera and the important minority audiences seeking more unconventional opera experiences. This challenge is met by simultaneously adding Puccini’s “Madama Butterfly” and Glass’s modern “Einstein on the Beach” to the repertoire. The authors’ findings imply that offering a very conventional opera and a very unconventional opera in the same repertoire is typically a better solution than offering two intermediate operas.

“If you include more modern operas in a repertoire,” says Kim, “then the conventionality of the traditional operas should increase. You need to perform Puccini’s ‘Madame Butterfly’ instead of his less well-known works. This is the balancing of operas in a repertoire.” That is to say, when adding modern operas into the product mix, the conventional choices become more conventional. Opera companies will then want to include even more popular operas or blockbusters — Puccini’s “La Bohème,” Verdi’s “La Traviata,” or Bizet’s “Carmen.”

Robust market identities sometimes less important
Some large metropolitan markets such as New York City and Chicago are home to more than one company. Even if an opera company is a local monopoly, some opera companies are located in closer geographical proximity to other opera companies. As opera companies face more competitive pressures from other opera companies, robust market identities become less important. This translates into these opera companies balancing conventional and unconventional repertoire choices less tightly.

“We map the physical distance between opera companies,” stated Kim. “Attendees will choose to go to other nearby cities if they prefer that opera’s repertoire. If there are more opera companies nearby, then companies need not worry about the repertoire balancing act.”

Kim explains that in some markets, competition can evolve into opera-to-opera rather than opera-to-musical theater.

“With more opera companies in a vicinity as in Chicago, Tulsa, and New York, more competition exists within the category of opera than between-category competition that includes other performing arts,” she said. “In that case, an opera company worries less about simultaneously meeting differing demands — majority or important minority demands — and focus on one of them.”

That’s not the case in markets where opera houses are few and far between.

“In Fargo, North Dakota, in contrast, with few opera competitors nearby, a company has to address all the differing audience demands,” Kim said. “You will need to focus more on a robust market identity in that case, and choose repertoire accordingly.”

The authors’ analyses showed that companies indeed balance conventional and unconventional operas in a way that is consistent with enacting a robust market identity, their hypothesis. And this identity is more important when opera companies have more divergent audiences and is less important when companies experience more within-opera competition, owing to a greater number of opera companies within geographic proximity.

The research sample for the study included all the professional opera companies in the United States, except seven in sub-genres of opera, from 1995 to 2005. This final sample includes 96 professional opera companies, which resulted in 496 observations.

“Earlier work of ours addresses the interesting dilemma about differing demands in opera settings,” noted Kim. “Attendees or season ticket holders want more traditional operas; critics want modern opera. Our earlier research indicated that through changing the order of operas in a repertoire, this traditional-modern opera repertoire dilemma can be resolved.”

Findings can apply to other areas with divergent audiences
This study contributes to research on why performing arts such as theater, classical music and opera tend to favor conventional repertoires. Importantly, conventionality may actually facilitate unconventional repertoire choices, say the authors. Their line of research may also apply in other situations with divergent audiences. For example, they note that universities have to balance teaching and research, while auto manufacturers must balance safety, fuel efficiency and performance.

Interestingly, Kim said, “For most opera companies that add modern opera, their repertoires are not more than 20 percent of the mix. General attendances still want the Italian and Germans operas.” — Jennifer Warren

Follow SMUResearch.com on Twitter.

For more information, www.smuresearch.com.

Tags Bo Kyung Kim, Cox School of Business

Culture, Society & Family Researcher news SMU In The News

The New York Times: Study Finds a Gender Gap at the Top Museums

Post author By Margaret Allen
Post date March 18, 2014

At small and midsize museums, with budgets under $15 million, women have essentially achieved parity

Reporter Hilarie M. Sheets with The New York Times has covered the research of Ann Marie Gan, an SMU student in the MA/MBA in Arts Management in the Cox School of Business and Meadows School of the Arts.

The article, Study Finds a Gender Gap at the Top Museums, published March 7.

Gan authored the study with Zannie Giraud Voss, director of the National Center for Arts Research, NCAR, at Southern Methodist University, and Christine Anagnos, executive director of the Association of Art Museum Directors, AAMD.

The research study was designed to understand the gender gap in art museum directorships and to explore potential factors to help AAMD member institutions advance toward greater gender equality.

Through a combination of quantitative analysis and interviews, the researchers examined the current and historical factors of the gender gap in art museum directorships.

The study, The Gender Gap in Art Museum Directorships, found that women hold fewer than 50 percent of directorships and that the average female director’s salary lags behind that of the average male director — with overall disparities driven by mostly the largest museums.

The Association of Art Museum Directors represents 236 art museum directors in the U.S., Canada, and Mexico. It promotes the vital role of art museums throughout North America and advances the profession by cultivating leadership and communicating standards of excellence in museum practice.

The Meadows School of the Arts is one of the foremost U.S. arts education institutions. It offers undergraduate and graduate degrees in advertising, art, art history, arts management and arts entrepreneurship, communication studies, creative computation, dance, film and media arts, journalism, music and theatre. It shares with the Cox School of Business at SMU the dual-degree MA/MBA in arts management. For more information, visit www.smu.edu/meadows.

Read the full story.

EXCERPT:

By Hilarie M. Sheets
The New York Times
Women run just a quarter of the biggest art museums in the United States and Canada, and they earn about a third less than their male counterparts, according to a report released on Friday by the Association of Art Museum Directors, a professional organization.

The group examined salary data on the 217 members it had last year through the prism of gender, for the first time. The report noted strides made by women at small and midsize museums, with budgets under $15 million, often university or contemporary-art institutions. Here, women have basically achieved parity, holding nearly half of the directorships and earning just about the same as men. But the gap is glaring at big institutions, those with budgets over $15 million: Only 24 percent are led by women, and they make 29 percent less than their male peers.

And just five of the 33 most prominent art museums — those with budgets greater than $20 million — have women at the helm.

“There is a difference if a woman is running one of these big museums,” said Elizabeth Easton, director of the Center for Curatorial Leadership, a training program in New York that has helped place nine women in directorships, but none at the country’s most influential museums. “Those directors are the most loud and authoritative voices. It sets the tone.” ….

…. Written in partnership with the National Center for Arts Research, the report, called “The Gender Gap in Museum Directorships,” explores the factors contributing to the gulf at the top and frames the findings within the debate provoked by Sheryl Sandberg’s book “Lean In” and Anne-Marie Slaughter’s 2012 article “Why Women Still Can’t Have It All” in The Atlantic.

Combining large and small institutions, the report found that an average of 42 percent of the association’s museum directors were women. That is certainly a different picture from 25 years ago, when only 14 percent of museums in the association were run by women, and a slight improvement from 38 percent five years ago.

On average, however, women who run art institutions earned 21 percent less than their male counterparts in 2013 — a bigger difference than the 18 percent overall median pay split between the sexes reported by the federal Bureau of Labor Statistics.

The report, which incorporated observations from interviews with six executive search recruiters, considered reasons for the gap, including the ratio of men to women on museum boards, which hire directors. While the recruiters agreed that boards were no longer all-male clubs — women now outnumber men, 59 to 30, on the board of the Museum of Fine Arts, Houston, for instance — gender ratios remain uneven. At the Metropolitan Museum of Art, the male voting members still outnumber female ones, 23 to 10. At the National Gallery, the board has seven men and two women. ….

Read the full story.

Follow SMUResearch.com on Twitter.

For more information, www.smuresearch.com.

SMU is a nationally ranked private university in Dallas founded 100 years ago. Today, SMU enrolls nearly 11,000 students who benefit from the academic opportunities and international reach of seven degree-granting schools. For more information see www.smu.edu.

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with an SMU expert or book an SMU guest in the studio, call SMU News & Communications at 214-768-7650.

Tags Ann Marie Gan, Cox School of Business, Meadows School of the Arts, Zannie Giraud Voss

Categories
Culture, Society & Family Economics & Statistics

Women have made strides for equality in society, but gender gap still exists in art museum directorships

Post author By Margaret Allen

Post date March 17, 2014

New study examines the current and historical factors of the gender gap in art museum directorships, particularly at large museums

Book a live interview

To book a live or taped interview with Dr. Zannie Giraud Voss in the SMU News Broadcast Studio call SMU News at 214-768-7650 or email news@smu.edu.

Book a live interview

To book a live or taped interview with masters degree student Anne Marie Gan in the SMU News Broadcast Studio call SMU News at 214-768-7650 or email news@smu.edu.

Related links

Ann Marie Gan
Zannie Giraud Voss
The Gender Gap in Art Museum Directorships
SMU National Center for Arts Research
Meadows School of the Arts
Cox School of Business

More SMU Research news

Search for dark matter covers new ground with CDMS experiment in Minnesota

NOvA experiment glimpses neutrinos, one of nature’s most abundant, and elusive particles

$NetQuakes, Azle, SMU, fracking, study$ SMU scientists to deploy seismic monitors in North Texas region near Azle, Texas

Parents less likely to spank after reading briefly about its links to problems in children

Wall Street’s short sellers wrongly maligned — detected red flags ahead of US financial crisis

A director’s skills, experiences and workload drive their compensation, SMU study finds

Gut reaction of marital partners could foretell their marriage satisfaction

Fossil supervolcano discovered in Italy by SMU-led team is now key feature of new UNESCO Geopark

The Association of Art Museum Directors, AAMD, and the National Center for Arts Research, NCAR, at Southern Methodist University have released findings from a research study designed to understand the gender gap in art museum directorships and to explore potential factors to help AAMD member institutions advance toward greater gender equality.

Through a combination of quantitative analysis and interviews, NCAR and AAMD researchers — led by Zannie Giraud Voss, director of SMU NCAR, and Christine Anagnos, executive director of AAMD — examined the current and historical factors of the gender gap in art museum directorships.

The study, The Gender Gap in Art Museum Directorships, found that women hold fewer than 50 percent of directorships and that the average female director’s salary lags behind that of the average male director — with overall disparities driven by mostly the largest museums. Lead author was Ann Marie Gan, a student in the MA/MBA in Arts Management in SMU’s Cox School of Business and Meadows School of the Arts.

In 2013, AAMD conducted a survey of its members, with 211 responding, or 97 percent. The data collected included each institution’s operating budget, endowment, the director’s or top official’s salary and the director’s gender. Additional research was collected on each director’s tenure in his or her current position and on the position held prior to his or her current directorship. Previous position data was found for 193 of the 211 directors.

Study looked at current state of women in art museum directorships and factors driving any gender gap
The study sought to answer two main questions: What is the current state of women in art museum directorships? What are some factors that may drive the gender gap? The NCAR and AAMD study had several key findings:

— Out of the 211 directors included in the AAMD survey, 90 directors were female; women held 42.6 percent of art museum directorships.

— On average, female directors earned $.79 cents for $1 that male directors earned. In 2013, the U.S. Bureau of Labor Statistics reported that the median pay of women nationwide is 82 percent of that of men.

— Segmented by operating budget, these gender disparities are concentrated in museums with a budget of over $15 million roughly the top quarter of museums. In this segment of museums, there are fewer female directors than male directors, and female directors earn less on average than their male counterparts — $.71 cents for $1 a male earns.

— At museums with budgets under $15 million, the number of female directors is nearly equal to the number of male directors, and, on average, the women earn slightly more — $1.02 for every $1 a male director earns.

Directors promoted internally suffer salary disadantage compared to peers hired from the outside
Other factors besides gender that may have influenced the salary and representation differentials noted above were examined through qualitative analysis and interviews with executive search consultants who work with art museums. The study found that a position a director held before entering his or her current position had an effect on average salary: if the person attained the position through internal promotion, he or she was at a salary disadvantage compared to peers hired from other institutions.

Directors who previously held a non-director job were also at a salary disadvantage when compared to their peers who had previously held the top position at another institution. These observations are true for both men and women, but the number of women who have become directors through internal promotion is greater, and these factors may have contributed in part to salary disparities.

A visual summary of the study can be found online at the National Center for Arts Research. In addition to Voss and Anagnos, co-authors of the study are Anne Marie Gan, SMU MA/MBA Class of 2015, and Alison D. Wade, Chief Administrator, Association of Art Museum Directors.

The Association of Art Museum Directors represents 236 art museum directors in the U.S., Canada, and Mexico. It promotes the vital role of art museums throughout North America and advances the profession by cultivating leadership and communicating standards of excellence in museum practice.

The Meadows School of the Arts is one of the foremost U.S. arts education institutions. It offers undergraduate and graduate degrees in advertising, art, art history, arts management and arts entrepreneurship, communication studies, creative computation, dance, film and media arts, journalism, music and theatre. It shares with the Cox School of Business at SMU the dual-degree MA/MBA in arts management. For more information, visit www.smu.edu/meadows.

SMU’s Cox School of Business offers a full range of undergraduate and graduate business education programs. — SMU Meadows

Follow SMUResearch.com on Twitter.

For more information, www.smuresearch.com.

SMU is a nationally ranked private university in Dallas founded 100 years ago. Today, SMU enrolls nearly 11,000 students who benefit from the academic opportunities and international reach of seven degree-granting schools. For more information see www.smu.edu.

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with an SMU expert or book an SMU guest in the studio, call SMU News & Communications at 214-768-7650.

Tags Ann Marie Gan, Cox School of Business, Meadows School of the Arts, Zannie Giraud Voss

Categories
Culture, Society & Family Economics & Statistics Researcher news

Wall Street’s short sellers wrongly maligned — detected red flags ahead of US financial crisis

Post author By Margaret Allen

Post date January 8, 2014

Short sellers were first to react to impending crisis among the financial intermediaries examined, including equity analysts, ratings agencies and auditors.

Book a live interview

To book a live or taped interview with Dr. Hemang Desai in the SMU Broadcast Studio call News and Communications at 214-768-7650 or email news@smu.edu.

Related links

Hemang Desai

Social Science Research Network: “Did information intermediaries see the warning signals of the banking crisis from leading indicators in banks’ financial statements?”

SMU Cox School of Business

More SMU Research news

A director’s skills, experiences and workload drive their compensation, SMU study finds

Gut reaction of marital partners could foretell their marriage satisfaction

Fossil supervolcano discovered in Italy by SMU-led team is now key feature of new UNESCO Geopark

NPR: “Boiling Hot: How Fracking’s Gusher of Geothermal Energy is Wasted”

KERA, NOVA: SMU researcher Peter Weyand discusses the upper limits of human speed.

The Undying Radio: Familiarity breeds content when it comes to listeners and music

Mosquito indexing system identifies best time to act against potential West Nile Virus outbreaks

Sweden, SMU psychologists partner to launch parenting program that reduces child abuse

Chemical probe confirms that body makes its own rotten egg gas, H₂S, to benefit health

Study: High-volume Bitcoin exchanges less likely to fail, but more likely to suffer breach

Musicians who learn a new melody demonstrate enhanced skill after a night’s sleep

Study finds that newlyweds who are satisfied with marriage are more likely to gain weight

Fruit flies fed organic diets are healthier than flies fed nonorganic diets, study finds

Center for Creative Leadership to study innovative learning method of SMU Lyle School of Engineering

NOvA neutrino detector in Minnesota records first 3-D particle tracks in search to understand universe

Parenting program tackles child abuse and neglect among formerly homeless families

Hiding in plain sight: How invisibility saved New Mexico’s Jicarilla Apache

Study: Most Texas ISDs that are teaching the Bible are skirting 2007 state law

Numerous banks in the United States failed during the recent financial crisis — and more would have, absent governmental intervention, writes short-selling expert Hemang Desai, a professor at Southern Methodist University.

Subsequently, a substantial contraction of credit occurred and the effect on the economy was devastating for businesses and households. In new research, Desai and co-authors provide evidence that short sellers were sensitive to the leading indicators of the crisis from banks’ financial statements. They were first to react to the impending crisis among the financial intermediaries examined, including equity analysts, ratings agencies and auditors, according to Desai, an accounting professor in the SMU Cox School of Business and nationally recognized researcher on mergers and acquisitions, corporate restructuring, short selling and financial reporting.

Even from the highest levels of leadership in the financial sector, the suggestion was that academia, regulators and the Federal Reserve “missed” the warning signs of the banking and financial crisis. Did financial statements of the banks provide an early warning of their upcoming distress? Commentators have argued that transparency was lacking in banks’ financial statements. And, why did few observers foresee impending problems at banks? The United States has the most developed financial system in the world with arguably the most sophisticated information intermediaries.

“The notion that everybody missed it is just not true,” states Desai. “This is not the first time we have had a wave of overvaluation — or that banks have failed. We have seen overvaluation in other sectors, like the technology bubble in the late 1990s.” In this case, there was a bubble in the housing market and the financial sector was overheated. Prior work finds that short sellers are sensitive to indicators of overvaluation; it follows that they would have been sensitive to indicators of overvaluation in the housing or the financial sector.

Short sellers saw warning signs of bank distress
The research indicates that short sellers were sensitive to the warnings signs of bank distress in the banks’ financials.

“We looked at the financial statement indicators of bank distress,” says Desai. “We find that these indicators are correlated with the short interest in banks, which suggests that the information set of short sellers was correlated with information in banks’ financials.” Short interest is a market-sentiment indicator that tells whether investors think a stock’s price is likely to fall.

“Short sellers consider a company’s business model,” explains Desai, “and if the model is conflicted and the firm’s valuation is not justified, then such stocks invite scrutiny and are shorted.” When the firm’s fundamentals, prospects and performance are not in alignment, that’s likely to catch the attention of short sellers.

A number of factors played into the perfect storm that became the financial and economic crises. From 1997 to mid-2006, housing and other real estate prices rose sharply before the crisis, which drove growth in the overall economy. Real estate represents the biggest asset class not only in the United States but also on banks’ balance sheets, dominating both loans and securities. In early 2004 to mid-2007, just before the crisis, the cost of debt capital fell and market liquidity rose sharply. Leverage was very high throughout the economy. Some banks relied on cheap but hot short-term funding to maintain their spreads.

Other signs began to manifest. Modest but growing levels of early payment defaults and repurchase requests began to be reported for subprime home equity mortgages in late-2005 and for subprime mortgages in early- to mid-2006. In November 2006, the Case-Schiller National House Price Index reported that house prices fell from June to September 2006. The subprime crisis began in February 2007.

That crisis was primarily a housing or real-estate driven crisis, Desai observes. “Home prices were going up but income levels were not. While the number of subprime loans originated and securitized by banks was increasing dramatically, the quality of the loans was deteriorating,” he says. “This information was likely observed by the short sellers.”

The majority of the subprime loans were designed to either default or be refinanced, explained Desai. “Thus, given the dramatic growth in these loans in the years prior to the crisis, there was either going to be a wave of refinancing or defaults. Additionally, the refinancing was predicated on a continued increase in housing prices. Once the housing prices peaked, we had a massive default.” It appears that short sellers were sensitive to the developments in the housing market and were targeting banks due to their exposure to the housing market, Desai offers.

“These guys were smart enough — I do not know how everyone ‘missed it,'” notes Desai. That the short interest was higher for banks that failed subsequently provides further evidence to support the authors’ conclusion that short sellers were sensitive to the warnings indicators.

The evidence shows short sellers were the first to react
In the study, four types of intermediaries’ responses to the unraveling situation were analyzed: short-sellers, equity analysts, Standard & Poor’s credit ratings and auditors. The authors examined the actions of the intermediaries well in advance of the onset of the crisis. Banks’ financial statements did reflect, at least partially, the risks that were building up prior to 2008. They find that the indicators from the fourth quarter of 2007 are associated with bank failures over the period 2008-2010. In terms of the actions of the intermediaries, their research indicates that there is a dramatic increase in the level of “abnormal” short interest from March 2005 to March 2007 and a further increase in March 2008.

Thus, short sellers apparently recognized that the banks’ valuation and performance could not be sustained — well before the crisis unfolded. Short sellers were the first to react, followed by equity analysts. Credit ratings were sluggish in responding to information about bank distress.

The trigger point for short sellers to act was the drop in housing prices — the bubble burst. When home prices declined, homeowners could not refinance, and a huge wave of defaults occurred. The banks also had implicit guarantees embedded in the securitization transactions, holding riskier tranches.

Shorts sellers unfairly maligned, instead they can provide market oversight
“Our evidence suggests that the financial statements did reflect some footprints of the crisis,” says Desai. “The short sellers were sensitive to it. Thus, financial statements were not as uninformative as some have claimed.”

Short sellers have been unfairly maligned. “There is value in tracking their actions, which are informative,” Desai relays. “As the banks have become bigger and more complex, the regulators are looking to capital markets to provide discipline and to supplement their own oversight. Our evidence suggests that the short sellers potentially provided this discipline.”

From society’s point of view, over-valuation is not desirable. Desai explains, “If growth expectations are overblown, it results in overinvestment and misallocation of resources and this destroys value in the long run. The actions of short sellers have the potential to keep firms’ valuations in check. This is an important role that short sellers play in the economy.”

Capital markets function best when the optimists and the pessimists have an opportunity to reflect their views through trading, according to Desai. “Pessimists do play an important role because it is their business to ferret out adverse information; they are instrumental in identifying firms that should not be valued so highly and therefore should not be investing more.” Desai suggests that there can be misallocation in the financial sector in particular. For example, with banks, it is difficult to know what their portfolios contain. Short sellers provide oversight that can be helpful to regulators, directing them toward the banks they should pay attention to.

The results suggest that the proposed restrictions on short selling by politicians, regulators and CEOs need to be tempered in light of the evidence reported in this study. Short sellers were sensitive to red flags of upcoming bank distress, and their actions provided a timely warning about the fragility of the banking system.

The paper, “Were the Information Intermediaries Sensitive to the Financial Statement Based Leading Indicators of Bank Distress Prior to the Financial Crisis?” by Desai; Shiva Rajgopal, Goizueta Business School, Emory University; and Jeff Jiewei Yu, SMU Cox, is under review.

Desai, the Robert B. Cullum Professor of Accounting in Cox School of Business since 2007, is often quoted in publications such as The Wall Street Journal, Barron’s and The New York Times, among others. — by Jennifer Warren

Follow SMUResearch.com on Twitter.

For more information, www.smuresearch.com.

SMU is a nationally ranked private university in Dallas founded 100 years ago. Today, SMU enrolls nearly 11,000 students who benefit from the academic opportunities and international reach of seven degree-granting schools. For more information see www.smu.edu.

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with an SMU expert or book an SMU guest in the studio, call SMU News & Communications at 214-768-7650.

Tags Cox School of Business, Hemang Desai, Jeff Jiewei

Posts navigation

Newer Posts 1 2 3 … 6 Older Posts