Research
The Finance Department at Ross is one of the world's leading research
groups in financial economics. We have maintained its leadership by recruiting
top scholars and graduate students and by fostering a research culture
that encourages collaboration and cross-disciplinary work. We also provide
material support for research through fellowships
beyond the usual summer support that allow faculty to reduce their teaching
responsibilities and work on resource intensive research projects. The
result has been innovative work that cuts across boundaries within finance
as well as crosses business disciplinary boundaries.
The research culture of our area has also had an enormous impact on our
graduate students who are inculcated into this culture from the time of
their arrival at Ross. The collaborative atmosphere has resulted in several
joint papers with faculty and with other graduate students. Many of these
papers have been published or accepted in top journals.
Our faculty have been leading contributors to the top journals in finance.
During the last three decades, we have been consistently rated as one
of the leading contributors to the top three finance journals (Journal
of Finance, Journal of Financial Economics and The Review
of Financial Studies.)
Many recent examples of our cross disciplinary work, collaborative atmosphere,
and productivity can be found in our publications
and working papers.
While we seek to make fundamental contributions to finance, our research
also has significant implications for the finance and business practitoner.
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Lu Zhang
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Two of our faculty shared the prestigious Smith-Breeden Prize for the
best paper in the Journal of Finance for 2005 for different
works. Professor Lu Zhang received the award for a paper that explains
why value stocks earn higher average returns than growth stocks. Investors
worry more about the risk of downsizing than they get excited about
growth. Since value stocks are more sensitive to downsizing, investors
require higher expected returns for value stocks.
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Tyler Shumway
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Professor Tyler Shumway received the award for a paper that shows that
professional futures traders trade more aggressively in the afternoon
when they have lost money in the morning, which is probably an irrational
way for them to behave. The paper finds that traders that are behaving
irrationally affect prices in the short run, but in the long run more
rational traders trade against them and their behavior does not affect
prices.
- The research of Professors M. P. Narayanan and Nejat Seyhun has been
instrumental in uncovering the practice of options backdating. Their
first research paper that suggested backdating might be going on was
circulated in January 2005, well before the scandal came to limelight.
Their work has been extensively cited in major media outlets such as
New York Times, Wall Street Journal, Financial
Times, Times of London and MSNBC. In a recent
work they estimate the economic loss to shareholders of firms implicated
in the scandal to be more than $400 million per firm while the executives
of these firms benefited less than $3 million on average. For details,
see http://sitemaker.umich.edu/optionsdating/.
- A new performance measure for mutual funds called "Return Gap"
was developed Professor Clemens Sialm and coauthors. The "Return
Gap" compares each fund's overall return with the return on a portfolio
that invests in the most recently disclosed fund holdings. They show
that the return gap captures important unobserved actions of mutual
fund managers and can predict future fund performance. The paper has
received considerable media and industry attention and was cited in
BusinessWeek, the New York Times and the Wall
Street Journal.
- Professor E. Han Kim and coauthor have examined conflicts of interest
in proxy voting by mutual funds. The paper finds that funds are no more
likely to vote with management at client firms than non-clients. At
the policy level, however, the paper finds a positive relation between
the volume of pension business a fund's parent does and its propensity
to vote with management. This work has been cited extensively, including
the recent BusinessWeek article "Fidelity’s Divided
Loyalty."
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