The Centre for Analytical Finance (CAF) at the Indian School of Business (ISB) hosted the Summer Research Conference 2007, during August 9-12, 2007. The theme of the Conference was - 'Recent Advances in Corporate Finance'. The purpose of the Conference was to serve as a platform for an exchange of ideas between the best financial researchers across the globe on some of the most important topics in corporate financing.

The Conference attracted a total of hundred research papers submitted by finance scholars around the world, out of which sixteen were selected. The criteria, as always, were originality of topic and innovative approach. The number as well as the high quality of submissions resulted in keen competition for selection. All accepted papers went through several rounds of reviewing: an initial round for appropriateness and quality and a final round when they were ranked against each other. The final reviewing committee included twenty world-wide experts, including the likes of Franklin Allen (Wharton), Bhagwan Chowdhry (UCLA), Stijn Claessens (IMF), and Francesca Cornelli (London Business School).


The Keynote Address

Professor Raghuram Rajan delivered the Keynote Address on Foreign Capital and Economic Growth in Developing Countries: Issues and Challenges. Professor Rajan is currently Eric J. Gleacher Distinguished Service Professor of Finance, Graduate School of Business, University of Chicago. Until recently, he was the Economic Counsellor and Director of Research at the International Monetary Fund - the first and youngest finance researcher to hold this very influential research position. Professor Rajan was the first Area Leader in Finance, during ISB’s formative years and had drafted the concept note on the CAF, playing a key role in its set up.

In his address Professor Rajan highlighted facts like:
 
  • Capital is not flowing more to poor countries over time as they improve their financial systems. In fact, flow is reversing in recent times.
  • Non-industrial countries that have utilized the most foreign capital, have tended to grow more slowly.
  • For non-industrial countries, given a level of investment, the more it is financed through domestic savings, the higher the associated growth is.
  • Foreign capital usage is negatively correlated with growth.
  • Countries are more likely to grow if they consume less and save more during growth spurts.

The following were some conclusions drawn:

Foreign capital, as a form of net financing, does not play much of a role in the growth of non-industrial countries, while it does play a role in industrial countries because -

  • Non-industrial countries may have limited ability to absorb it.
  • Financial sector may not be able to allocate arm’s length capital.
  • Countries may be more prone to exchange rate overvaluation.

This does not necessarily mean countries should close themselves to capital flows – foreign capital could play a role in enhancing absorptive capacity. It does suggest, though, a greater focus on enhancing absorptive capacity, enhancing the capacity of the domestic financial system and enhancing other forms of domestic capacity – e.g. domestic savings and domestic human capital


Citigroup Awards

A USD 5,000 award was generously funded by Citigroup for the best paper presented at the conference. The award went to Viral V Acharya (London Business School and CEPR) and Krishnamurthy Subramanian (Emory University) for their paper entitled Bankruptcy Codes and Innovation. The paper posed the question-‘Do legal institutions governing financial contracts affect the nature of real investments in the economy?’



The authors presented a simple model and provided evidence that the answer to this question is ‘yes’. Bankruptcy codes in different countries play a central role in determining whether the firm is continued or liquidated in case of financial distress. When the code is creditor-friendly, excessive liquidations cause the firms to shy away from innovations. In contrast, by promoting continuation upon failure, a debtor-friendly code induces greater innovation.


For more information on the CAF Summer Research Conference 2007, please visit: http://www.isb.edu/PostSummerResearchConference/Index.html
 

Contributions are invited for the October 2007 issue of Alma Matters. Please send in information on any events that have taken place or are being planned in your chapter as well as personal milestones that you would like to share with the ISB alumni community to Smita_Hopper@isb.eduedu