海角社区下载

feb. 20, 2017

Elegant models, freedom and talent 鈥� those are some of the things that attracted professor Per Strömberg to finance, and to research. The freedom to be able to contribute in many different ways, in research and practice. And the talent he finds amongst his colleagues.

鈥淭o be part of the international community of talented researchers is incredibly stimulating鈥�, says Per Str枚mberg from the Swedish House of Finance.

In his third year of studies at 海角社区下载 School of Economics, SSE, Per Str枚mberg found something that truly fascinated him: finance. What caught his attention was the combination of soft and hard 鈥� how finance is about politics and people, but at the same time rational and quantifiable.

鈥淭hat鈥檚 a combination I truly enjoy. And finance has a powerful paradigm. The models are incredibly consistent and elegant, and very applicable鈥�, explains Per Str枚mberg.

Per started studying for his PhD at SSE, but was recruited to Carnegie Mellon already during the first semester. When he encountered the American academic world, he immediately knew that research was what he wanted work with.
鈥淪SE was a good school, but the American academic culture was entirely different. I was completely smitten鈥�, he recollects.

 

Research on buyout funds
Per Str枚mberg鈥檚 research is primarily focused on two areas: bankruptcy and private equity finance. In one of his papers, Per studied whether buyout funds are short term in their investment. As these funds only are active for ten years, their investment horizon is only four to seven years.

鈥淧eople are concerned that this might lead to short-termism. We studied this by looking at how much as invested in innovation, and how many patents the companies applied for. What we saw was an opposite affect: the efficiency of innovations seemed to improve, so that the companies became even more valuable when they were sold鈥�, says Per Str枚mberg.

Another aspect of the buyout market that Per has studied is capital structure.
鈥淏uyout funds borrow a lot when they purchase companies. When we asked them why, they argued that it was in order to increase their returns. That was confusing to us academics, as according to the Miller Modigliani theorem there is a mechanical relationship between debt and return on equity. High debt increases risk, which means that the risk adjusted return on equity is actually not higher. So, we asked ourselves 鈥� why do the people who manage buyout funds not care about the risk adjusted returns?鈥�

 

Bank loans diminish risk in buyout funds
Per and his co-authors thought that the importance of debt might be due to a conflict of interest between fund managers and investors 鈥� a theory that was consistent with empirical results.

鈥淥ur theoretical hypothesis was that the investors were concerned that the fund managers might prefer to invest in something bad, rather than not investing at all. Fund managers are compensated with a commission on revenue. So if they do not invest at all, they know they will not make any money. But if they invest in a bad company, at least there is some chance of revenue鈥�, Per explains.

Per and his colleagues argued that when the fund borrows, the banks come to function as a control mechanism.
鈥淲hen fund managers find a company to purchase, they have to convince a bank of the investment. This diminishes the risk of buying bad companies. However, this model will only work as long as the banks have credit discipline. In some periods this discipline fails 鈥� and then you might end up with over investments鈥�, Per Str枚mberg states.

Another observation made is that private equity funds raised in good times often have lower returns than those raised in bad times. According to the model, this is because the banks鈥� credit discipline is lacking at the peak of the cycle.
鈥淲hen it鈥檚 easy to borrow, you tend to borrow too much and pay too much for your purchases鈥�, Per says.

 

From pensions advise to Riksbank Prize in memory of Alfred Nobel
Apart from his research, Per Str枚mberg is frequently engaged as an advisor by government agencies and corporates. His expertise has been requested by the Swedish Ministry of Finance (Finansdepartementet), Norway鈥檚 Bank Investment Management and the Swedish Financial Supervision Authority (Finansinspektionen) to name a few. He is also a member of the board at the Swedish pension fund The Sixth AP Fund (AP6).
鈥淚t鈥檚 great to be able to help improve the pensions of the Swedish people鈥�, Per comments.

Since 2015, Per Str枚mberg is also the chairman of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Last year, the laureates Oliver Hart and Bengt Holmstr枚m were awarded the prize for their research on contract theory 鈥� a field that lies close to heart for Per Str枚mberg, as it鈥檚 been an important base for his own research.

 

Why is contract theory important?
鈥淏ecause economy is a lot about cooperation 鈥� whenever we do transactions or work together to build a company for example, we need to cooperate. Cooperation is trivial if everyone shares the same targets and motivation, but in reality it鈥檚 about compromise. So how do you design a cooperation, despite conflicts of interest? Contract theory is an important building block for a lot of economic research. And it鈥檚 also applied in the labor market, as well as in law and in political sciences. How should we design the political contract in order to make our elected officials do the right things?鈥�

 

Popular teacher
When colleagues speak of Per Str枚mberg, enthusiasm is a word often used. Per has the ability to inspire enthusiasm in others. At Chicago, where he still teaches a course every year, he has been elected professor of the year no less than seven times.
鈥淚 enjoy teaching鈥�, he states. 鈥淚t鈥檚 fun to try and explain complex things in a simple way. To find ways to explain, and to see the insights land in people.鈥�

 

Other than teaching, what鈥檚 most fun about your job?
鈥淚t鈥檚 fun to have the freedom to work on what you enjoy. If I鈥檓 interested in understanding a certain phenomenon I can do that. I also have the freedom to work on other things, such as work with policy, interact with media, or start your own business, although that is not something I have done. You also get to hang out with, and work with, very gifted people. It鈥檚 incredibly stimulating to be part of this international community鈥�, says Per Str枚mberg.