The “Bright Star” of B-School Research: Finance

While other academic fields lie almost fallow — drawing criticism for lack of relevance — examples abound of finance research that makes a difference.

Our Tuesday article, “Business School for Dummies?” looked at the drive at accrediting group ACCSB to move research in the direction of providing more useful lessons for the business world.

Even as business schools draw fire for producing too little research of real relevance to Corporate America, the area of finance may be the single most notable exception — an area in which theory after theory is used to solve daily business problems.

“Finance is the bright star,” says professor Gabriel Hawawini, one member of the AACSB “Impact of Research” task force, which strongly suggested in its recent report pressing for academic studies to do more to fill the needs presented by American business. “If you ask what contributions have been made, you would put finance at the top of the list for models, principles, and theories that are in use today,” adds the Hawawini, currently a visiting professor of finance at the University of Pennsylvania’s Wharton School.

He declines to join the crowd of critics who say business schools have failed miserably in practical research in non-finance areas — critics who emerged in force when the AACSB’s task force published its draft report last August. Rather, the problem to Hawawini is a matter of balance between pure research and pragmatic study. And the overbalance toward less-relevant research in the United States comes from “how academics come across the problems they study, when they decide to tackle a subject.” If researchers are reading only the academic work of others, and that work is aimed only at academics and not business people, a certain amount of inbreeding can result, he suggests.

“That’s why it’s important to create bridges between the academic world and the business world,” he says. “Academic and practicing business do overlap.”

The Bridges of Chicago

In finance, the existing bridges often have the look of eight-lane thoroughfares.

The AACSB task force noted the work on stock-option backdating done in recent years by professors at the University of Iowa and New York University, which lay the groundwork for policy changes — and perhaps even prosecutions of managers who abused the system by picking artificially low strike prices that gave executives “in the money” compensation that wasn’t properly recorded and taxed. Hawawini ticks off numerous other finance-related contributions made by academia: from portfolio-analysis, risk-pricing, and efficient-markets theory, to the capital asset pricing model and the Black-Scholes stock-option pricing system.

Much of the finance research “has revolutionized the science of mutual funds,” he notes. “It’s made major contributions. In fact, over the last 40 to 50 years, the whole revolution in finance has come, I would argue, from two major drivers: academic contributions, and the computer and IT.”

Of course, those two drivers are often intertwined these days. “The computer has allowed for the rapid analysis we now see,” according to the professor, noting the benefits of data analysis involved with the stock-option backdating research. “That’s part of the revolution, as researchers fish around and dig into the data. And we’re going to see more of that.”

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