Financial Economics and
Economic Organization
The Transition From Student to
Researcher
• A key goal of this course is to help you make the transition
from student to researcher
• You must think like a producer and a competitor in the
world of research, not a consumer
• A consumer reads papers (or just skims the abstracts or
introductions) and tends to take the results at face value
• A producer/competitor looks deeper and asks “How did the
author do this?” “Could I do this?” “If not, why not?”
“Could I improve on this literature in any way?” and so on
Research Approaches
• We will emphasize research that stays close to observable
data: “applied work”
• The standard approach in applied work is to predict the
behavior of the agents of interest and then test to determine
whether the predictions are correct
• In the research we will discuss, the main agents of interest
are firms, individuals in firms, and investors
Positive Models in Economics
• Scientific progress occurs through the process of
generating testable hypotheses, testing them, and refining
the hypotheses
• There are alternative approaches to generating testable
hypotheses
• In the finance and strategy literatures, hypotheses are often
based on discussion of the previous literature or on loose
reasoning
• In economics, formal models are more common
• In formal models, assumptions are precise, and the use of
mathematics ensures that the hypotheses follow logically
from the assumptions
Testable Hypotheses
• Testable hypotheses are essentially predictions about
relationships between economic variables
• Hypotheses may be testable in principle but not in practice
• Other things equal, the most useful hypotheses are those
that can be tested using observable data
• For example, the literature on the theory of the firm has
generated several predictions about how behavior depends
on transaction costs and the use of incomplete contracts,
but transaction costs and measures of contractual
incompleteness are difficult to come up with
Testing Hypotheses
• Testing hypotheses in economics typically involves
collecting or assembling data and using statistical or
econometric techniques to analyze it
• Most of the focus is on testing candidate hypotheses
against alternatives
• In many cases, alternatives are lacking
• The “alternative” is often simply a null hypothesis that
there is no relationship between the variables of interest
• A stronger paper considers real alternatives
Verifying Assumptions
• In general, applied work does not pay much attention to
verifying the assumptions that generate the hypotheses in
the first place
• Clearly, an empirical analysis is stronger if it can verify the
assumptions underlying the theory
• Many assumptions used in economics are standard, such as
rational optimizing behavior, equilibrium, perfect
foresight, etc., and typically no attempt is made to verify
these assumptions
• Other assumption are more model-specific, such as the
assumption that an equity link creates closer ties between
firms in Filson and Morales (2004)
Distinguishing Between Alternative
Explanations
• The strongest empirical work can distinguish between
alternative explanations
• Often this is not possible using available data
• We will see in Filson and Morales (2004) that there are
alternative explanations for the observed empirical
relationships
Positive vs. Normative Analysis
• Often economists are interested in normative conclusions
• Should the government subsidize research and
development? Should it increase the taxes on corporate
profits or dividends?
• Proper normative analysis requires an accurate positive
model; we must be able to predict the behavior of the
agents in the economy before we can assess the impacts of
policy changes
• Thus, positive analysis precedes normative analysis
Other Types of Analysis
• There are other types of analysis that are not directly
involved in either generating or testing hypotheses but are
indirectly related to these efforts
• For example, some work in econometrics involves
developing new estimation techniques
• Other work focuses on estimating unknown parameters
(such as demand function parameters) or even unknown
variables (such as product quality)
• These techniques and estimates can be used in other
studies to test hypotheses
Other Types of Analysis
• Some work in theory develops concepts or frameworks,
which may not be testable themselves but are critical for
structuring subsequent research (transaction costs; CAPM)
• Some work is more historical/descriptive; often work on
institutions is of this nature
• Some work reviews and assesses the literature in a
particular area; this can be useful for introducing nonspecialists to the area, determining where researchers agree
and disagree, and highlighting open questions
Data Sources
• One of the key difficulties researchers have is collecting
adequate data to test interesting hypotheses
• When you read an empirical paper, it is important to ask
“Where did the author get the data?” “Could I get this
data?” “Could I get better data?”
• Along with these questions, you can also ask “Could I use
better econometric techniques?” but for now let’s
emphasize data
Public vs. Private Sources
• The advantage of publicly available data is that it is
available; the disadvantage is that it may have already been
exploited
• The advantage of private data is that it is unique to you; the
disadvantage is that it is difficult to obtain
• Data sources vary by field
• Finance uses mostly public data: WRDS, CRSP,
Compustat
• In Industrial Organization and Strategy some studies use
public data, but many use private data provided by firms or
data collection companies
Public vs. Private Sources
• A large amount of data on the banking industry is publicly
available
• In general, more data is available for regulated industries
where firms have to provide information to the public
• I have a large amount of data on biotechnology firms
• I collected this data from the web at a time when it was
publicly available from a consulting company; now the
company charges for the data
• If anyone is interested, they could participate in a study of
firm value, growth and decline, and R&D success/failure
using the biotech data and other sources
Public vs. Private Data
• In studies that attempt to get inside the firm, there is very
little good publicly available data
• Compustat provides some division-level financial data for
firms
• There is some available data on CEO compensation
contracts
• There are some contracts data that researchers have
collected and put in the public domain
• Much of the data in this area is private
Data Sources
Econlit and Web of Science are particularly useful for
literature reviews; ABI Inform is also useful for
management sources not covered by Econlit
Lexis-Nexis is extremely good for company press releases and
other industry information
Compustat provides company-specific financial information
Gross Product by Industry is Census data organized by SIC
code going back over 50 years
Data Sources
Other online library resources that may be useful are:
Dow Jones/Factiva: Financial information going back to 2000
Mergent Online/FIS Online: Securities and Exchange
Commission (SEC) filings for the past 10 years
Wall Street Journal Online: WSJ news going back to 1986
Data Sources
Other online resources not provided through the library are:
www.rfe.org: Resources For Economists
www.nber.org: National Bureau of Economic Research
www.yahoo.com: Yahoo! Finance provides historical stock
market quotes and other financial information for publicly
traded companies (many other sites do this, too)
Data Sources
Standard & Poors Industry Surveys survey particular
industries on a periodic basis and describe the main firms,
industry trends, and provide lists of other industry
publications
Trade Journals: Essentially all industries have one or more
trade journals that describe the activities of firms, industry
trends, etc.
Industry Associations: Industry Associations may provide
online or offline information (for example, Recording
Industry Association of America provides online reports)
Journals
There are many economics, finance, and strategy journals,
and it is important to be aware of their relative importance;
it affects what you cite and where you try to publish
Practitioners generally agree on the list of the top “general
interest” journals within each field
In Economics:
American Economic Review, Journal of Political Economy,
Quarterly Journal of Economics, Econometrica
Journals
In Finance:
Journal of Finance, Journal of Financial Economics, Journal
of Business, Journal of Financial and Quantitative
Analysis, Review of Financial Studies, Financial
Management, Journal of Banking & Finance
In Strategy:
Strategic Management Journal
Second Tier Journals
There are a large number of “second tier” general interest
economics journals, and there is not as much agreement
about the relative importance of these journals
Some examples that frequently have good articles on
contracts and the theory of the firm:
Economic Inquiry, the Journal of the Western Economics
Association
Journal of Economic Behavior & Organization
Journals
Two other leading economics journals provided by the
American Economic Association specialize in articles for
general audiences
The articles are typically much more readable than most
economics journal articles. The articles are primarily
literature reviews and are often aimed at those unfamiliar
with the topic:
Journal of Economic Literature, Journal of Economic
Perspectives
Industrial Organization Journals
Every field in Economics has its own “field journals”
In Industrial Organization:
Rand Journal of Economics, Journal of Law and Economics,
Journal of Economics & Management Strategy, Journal of
Industrial Economics, International Journal of Industrial
Organization
Studies that Rank Journals
• It is useful to follow studies that rank journals
• This is an active area of research with its own
methodological issues
• Which journal set is considered?
• Impacts outside a predetermined set of journals are
ignored, so journals like Journal of Health Economics,
which has an impact in medical journals, are underweighted
• It makes a big difference whether or not finance journals
are included when economics journals are ranked
• The studies are best used as rough guides
Studies that Rank Journals
• Arnold et al. “Impact: What Influences Finance
Research?” Journal of Business 76:2 (April 2003): 343-61.
• Lists high impact articles and journals – the articles are
useful for identifying critical contributions in particular
areas of research
• Katailzidakis, Mamuneas, and Stengas “Rankings of
Academic Journals and Institutions in Economics” Journal
of the European Economic Association 1:6 (December
2003): 1346-66. Available online:
www.econ.ucy.ac.cy/papers/0110.pdf
WRDS
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PhD students can apply for their own account
I can also set up a class account if needed
To apply for an account, go to wrds.wharton.upenn.edu
Follow the links:
account request
request a user account
acct type: PhD
school: Claremont McKenna College