Left side is article headline, which is Points of Pride, and deck text, which is "Moments showcasing Haas' pioneering impact on the business world." Right side is a photo of a woman standing under one of the arches on the Haas campus looking out at a giant world.

Shake On It

Personal relationships matter in lending

A man and woman shaking hands while sitting on a rocket fashioned out of a 100-dollar bill. The rocket is pointed upwards.

Numbers are important when it comes to loans. Lenders look at companies’ financial statements and loan history when determining interest rates or loan terms.

But in the competitive landscape of loan acquisition, it’s not just about crunching numbers. Loan officers and borrowing managers are people, after all, and those who do repeat business build relationships. New research co-authored by Asst. Prof. Omri Even-Tov shows that the soft information accumulated in these relationships can reduce the costs of screening and monitoring and thus reduce the cost of debt.

“These relationships foster trust and reduce information gaps, allowing lenders to gain valuable information about a borrower’s sense of responsibility and overall creditworthiness,” says Even-Tov.

In fact, established relationships between loan officers and borrowing managers not only increase the likelihood of a loan but tend to improve loan conditions for the borrower without increasing risk for the lender.

Using a sample of loans from 1996 to 2016, Even-Tov and his colleagues compared one-off interactions with loans conducted by the same parties. In established relationships, the borrowers saw better interest rates and the lenders got better screening and monitoring as evidenced by fewer rating downgrades.

They also found that when a borrowing manager and loan officer left their jobs, the two firms were roughly 70% less likely to engage in business together.

Professor Yaniv Konchitchki: Is a soft landing still possible?

In this live interview on Wharton Business Daily, Associate Professor Yaniv Konchitchki discusses whether a soft landing is still possible and provides insights about the current state of the capital markets and the macroeconomy. Konchitchki argues, based on his research, that the Federal Reserve has made systematic and predictable errors, waiting too long to raise interest rates and letting inflation get out of control. He comments on whether further interest rates hikes are necessary, whether the Fed’s 2% inflation target is the right one, and discusses whether inflation can get under control without further hurting consumers, businesses, households, and the economy.

Konchitchki also refers to his new working paper, “Predictable Errors in Monetary Policy Communications and Decisions,” coauthored with Berkeley Haas professors Don Moore and Biwen Zhang.

Listen to the full interview:

Absent fees, retail traders do better

A new study is the first to document how removing commission fees on trading platforms improves returns for the average trader.

Photo of a professional woman looking at two monitors showing stock prices
Photo: iStock

The advent of no-fee trading on platforms such as Robinhood has helped fuel an explosion in retail investing—and raised concerns that novices would be tempted to trade too often and would lose more money.

New research co-authored by Berkeley Haas assistant professor Omri Even-Tov shows this fear may be exaggerated: While average investors trade more when fees are removed, they also earn more.

“There is a lot of debate about whether more activity among retail traders will harm their performance, and we show that portfolios don’t underperform just because of greater activity,” Even-Tov says. “In fact, net performance improves by about 11% annually, and this improvement is driven by savings from the removal of fees rather than changes in the returns of trades.”

In a new working paper, co-authored by Berkeley Haas doctoral student Kimberlyn George and professors Shimon Kogan from the University of Pennsylvania and Eric So from MIT, the researchers took advantage of a natural experiment by international trading platform eToro, which dropped fees on certain trades in different countries at different times over the past several years. The research also concluded that individuals craft more diverse portfolios when trading is free.

Boom in retail trading

The popularity of retail investor trading has skyrocketed in recent years. In 2020, more than 10 million Americans opened a new brokerage account. In the month of January 2021, six million more downloaded a financial trading app. There is, according to Deloitte, “an emerging class of individual retail investors” that now accounts for approximately 20% of all trading volume in U.S. stock and options.

A confluence of factors is behind these numbers, from accessibility through smartphones to stay-at-home orders during the pandemic. But central to this growth is the introduction of zero-commission trades, in which startups like Robinhood have done away with the longstanding convention of charging a fee for each trade.

“They’ve found other ways to support their operations, and now regulators are looking at whether or not these new methods need to be reined in,” says Berkeley Haas assistant professor Omri Even-Tov. “But what happens if we reintroduce commission fees? Nobody has an answer to that question.”

No fees means more trading and better performance

The trading platform eToro’s staggered removal of trading fees in different countries allowed the researchers to compare investors’ behavior before and after fees were gone. Even-Tov and his co-authors looked at these patterns for over 40,000 investors between October 2018 and November 2019.

The research design proved particularly powerful as it cut across three different dimensions of trading behavior. First, the researchers could look at how individuals changed their own behavior (if at all) when trading fees were removed. Second, they could compare trading behavior between individuals in countries with and without fees. And third, they could compare how individuals traded stocks that had no commission (non-leveraged trades) as opposed to those that continued to have a commission (leveraged and short sale trades).

Even-Tov and his colleagues found, first and most intuitively, that the removal of fees increased trading frequency by an average of about 30%. Having no fees also drew more people to the eToro platform: New users grew by 172% in countries without fees and only 18% in countries where fees remained in place. Interestingly, the removal of fees also led people to hold significantly more diverse portfolios. Most important, taking away fees improved net performance among traders.

The regulatory question

These results come at time when the U.S. Securities and Exchange Commission is considering whether to regulate one of the main ways that retail brokerage firms make revenue outside of commission, a process called payment for order flow. Though the new study looked at markets outside the U.S., Even-Tov and his colleagues ran an analysis to demonstrate that the kind of retail trading conducted by the subjects of their research maps neatly onto the kind of trading taking place on American platforms.

As a result, one of the implications from this work is that while stricter scrutiny of payment for order flow may be important for several reasons, regulatory bodies should be wary of pushing online trading platforms back toward a commission model when putting new policies in place.

“There is a common belief in this idea that if people trade more they will lose more, and that getting rid of fees encourages all kinds of irresponsible trading behavior,” Even-Tov says. “In fact, we found that a reduction in fees resulted in net savings, among other positive outcomes. So the SEC should tread carefully when it looks to monitor how retail trading platforms charge their users.”

Read the paper:

Fee the People: Retail Investor Behavior and Trading Commission Fees
By Omri Even-Tov, Kimberlyn George, Shimon Kogan, and Eric C. So
June 2023

In the data-driven world of lending, a personal relationship can still mean a better deal

Closeup shot of two two men shaking hands in an office
Credit: Peopleimages for iStock

In getting a good deal on a loan, numbers matter: Lenders look at companies’ financial statements and payback on past loans. Strong financial statements could mean a lower interest rate or better terms for the borrower.

But in the competitive landscape of loan acquisition, it’s not just about crunching numbers. Loan officers and borrowing managers are people, after all, and those who do repeat business build relationships and trust over time. The soft information accumulated in these relationships can reduce the costs of screening and monitoring, and thus reduce the cost of debt, according to new Berkeley Haas research.

“While two companies with the same credit score may appear similar on paper, our research shows that individual lending relationships can reveal important differences between them,” said Omri Even-Tov, assistant professor of accounting at the Haas School of Business. “These relationships foster trust and reduce information gaps, allowing lenders to gain valuable soft information about a borrower’s sense of responsibility and overall creditworthiness.”

Even-Tov’s forthcoming paper in the Review of Accounting Studies—coauthored by Xinlei Li of the Hong Kong University of Science and Technology, Hui Wang of the Renmin University of China, and Christopher Williams of the University of Michigan—shows that established relationships between a loan officer and a borrowing manager not only increase the likelihood of a loan, but tend to make the conditions of that loan better for the borrower without increasing risk for the lender.

These results, the researchers suggest, are increasingly important as technological innovation means fewer personal relationships in banking—and beyond.

Unique dataset

Even-Tov and his colleagues examined a sample of loans from between 1996 and 2016. They manually collected the signatures on these loans to determine the names of two key actors who are typically engaged in contracting negotiations and interact extensively. This laborious process allowed them to create a dataset comprising nearly 4,000 loans with 2,800 unique borrowing managers and 2,100 unique loan offices. The vast majority of these loans were one-off interactions, but some of them were conducted by the same loan officer and borrowing manager two or more times.

Comparing these groups, the researchers found that established relationships between lenders and borrowers proved favorable for both parties. For the borrowers, they led to better interest rates. For the lenders, they allowed for better screening and monitoring as evidenced by fewer rating downgrades.

The cost of turnover

They also found that when a borrowing manager and loan officer left their jobs, the two firms were roughly 70% less likely to engage in business together. These results were especially pronounced among smaller institutions, and with loan officers who manage fewer transactions, as these two groups rely more heavily on soft information accumulated in their relationships.

“This really quantifies a lot of anecdotal evidence about the importance of relationships, and it also sheds light on an underappreciated cost of turnover,” Even-Tov said. When an employee leaves a company, it’s a loss not only of their knowledge and skills, but their relationships, too. If a company loses its CFO, it has not only lost that distinct set of talents, but possibly the chance of getter better deals on loans. “Companies need to factor in these less-tangible assets of their employees.”

Decline in professional relationships

Even-Tov highlighted two related implications raised by this paper: New technological tools are driving a decline in professional relationships, and this is happening in industries beyond banking. He gave the auditing industry as an example. Auditors in previous years would be embedded in clients’ offices. They got to know the companies they were auditing, and the people who worked there. Today, a great deal of auditing is done remotely, or even automatically. The same is true for consulting, real estate, venture capital, and private equity. 

“We need to think about what we lose when technologies allow us to bypass the need for interaction between individuals,” Even-Tov said. “There are advantages to doing this work more quickly or from a distance, of course. But these changes also introduce costs, and this work makes some of those costs clear.”


Read the paper:

The Importance of Individual-Pair Lending Relationships
By Omri Even-Tov, Xinlei Li, Hui Wang, and Christopher Williams
Review of Accounting Studies (forthcoming)


Executives ignore SEC legal requirements to warn investors about inflation risk, new research finds

Illustration of a stock market graph next to a dollar bill
iStock/Getty Images

New research published in the Journal of Monetary Economics

BERKELEY, Calif.—Inflation is back with a vengeance. Prices of goods and services have risen at rates not seen since the 1980s, slamming households, small businesses, corporations, and governments at all levels.

But new research by Berkeley Haas Associate Professor Yaniv Konchitchki finds that most corporations that face significant risk from inflation have failed to disclose it. Inflation has caused trillions of dollars in shareholder stock price loss damages thus far and is threatening major additional losses for shareholders.

In a paper published in the Journal of Monetary Economics and coauthored with Jin Xie of Peking University’s HSBC Business School, the authors show that when it comes to inflation, companies widely ignore U.S. Securities and Exchange Commission (SEC) legal rules requiring them to disclose important risks to their business. The authors developed a novel approach to extracting the attitudes and beliefs of corporate managers toward inflation risk from SEC reports, by examining over 65,000 10-K annual reports filed by major corporations with the SEC from January 2005 to April 2021. They discovered that, despite SEC legal requirements to disclose risk factors, more than 61% of the companies at high risk when prices rise never mentioned inflation or used inflation-related words in the risk disclosure section of those reports.

The failure of exposed companies to disclose inflation risk is not a trivial matter. Securities laws require public companies to disclose risks to their business in order to protect investors. “Corporate executives do not follow the legal requirement to warn shareholders about inflation risk,” said Konchitchki, an expert on the interface between capital markets, corporate financial reporting, and macroeconomics. “Several trillions of dollars in shareholders’ wealth have been damaged, and more are at stake.”

Consider the losses on stocks over the past one-to-two years of rising inflation. Any individual or institutional investor who holds shares in companies, directly or indirectly—such as through retirement accounts—has suffered losses, Konchitchki said.

“Our textual analysis of corporate reports filed with the SEC reveal that executives in many of these companies never mentioned—even once over the past several years of our sample period—the word inflation, inflation-related phrases, or that the companies are highly exposed to inflation risk,” he added. “Diligent investors, plaintiff attorneys, and regulators should ask, and will probably be asking, ‘Why didn’t you tell us?’”

The paper’s findings and framework enable the identification and evaluation of shareholder damages—especially for firms with inadequate risk disclosures—and could transform corporate disclosure practices, inflation expectations, and monetary policy, Konchitchki said.

The risks of inflation

Inflation can hurt companies in a variety of ways. For example, companies currently hold in total hundreds of billions of dollars in cash on their balance sheets. “Inflation erodes the purchasing power of these cash amounts, generating massive losses that are not shown in their financial statements because the U.S. financial reporting regime is nominal—i.e., it ignores inflation effects,” Konchitchki said.

Furthermore, the authors show that inflation risk exposure is common across almost all industries. Restaurant chains that can’t raise menu prices as fast as the soaring costs of food see their profit margins squeezed—imagine a burrito and the avocados that go into it. Utility companies that need a regulator’s approval to raise prices when costs rise are also highly exposed to inflation shocks. Silicon Valley Bank collapsed recently because it was holding billions of dollars in long-term government bonds that plunged in value as the Federal Reserve raised interest rates to combat inflation.

Given inflation’s increasing prevalence, there are emerging examples across many industries that Konchitchki said he is monitoring to study the macroeconomic effects of inflation.

Damages to shareholders

Konchitchki and Xie identified companies highly vulnerable to inflation by looking for those that had seen their share prices drop following inflation shocks, that is, when inflation data was released showing prices had risen more than had been forecasted. “We developed a measure to determine the extent to which shareholder value was damaged by unexpected inflation,” Konchitchki explained. The authors found that 14-18% of the companies in their sample, calculated across all industries, are exposed to rising prices.

The failure to be warned about inflation risk could be devastating for shareholders. Konchitchki and Xie created a model to simulate stock price losses if inflation shocks occurred in a 2-6% range over three years. The model projected total shareholder damages of $0.9 trillion to $2.8 trillion for shareholders of inflation-exposed companies.

One thing did seem to change the practices of corporate executives: getting sued. Companies exposed to inflation that had been targets of shareholders’ securities class action lawsuits were more likely to begin disclosing inflation risk, the authors discovered. In contrast, companies that were not exposed to inflation risk did not change their reporting practices following such class action lawsuits.

‘Rational inattention’

Why would companies not discuss inflation dangers in their annual reports? Konchitchki doesn’t believe that executives are trying to pull the wool over investors’ eyes. After all, a failure to provide adequate disclosure puts executives and their companies in jeopardy of legal action and regulatory sanctions.

The most probable explanation, Konchitchki said, is “rational inattention”—the economic theory that decisionmakers can’t process all available information but can rationally choose which pieces of information to pay attention to. The potential damage from rising prices just isn’t on the corporate radar screen—perhaps especially among Gen X and Millennial managers who have never experienced periods of runaway prices. “Because inflation has been relatively low over the past decades and/or identifying the damages from inflation might have been too costly, executives haven’t been attuned to it,” he suggests. He predicts that in coming years executives will be more liable, and thus will pay more attention to inflation if they wish to reduce their legal liability and excel in their jobs.

This lack of attention is also a problem for Federal Reserve policymakers who have been loudly warning about inflation and its risks in a bid to manage expectations of corporations and other players in the economy. Konchitchki’s and Xie’s research shows that many executives aren’t getting the message.

Larger lesson

As a founder of a new research area that he termed macro-accounting, Konchitchki pioneered the examination of linkages between accounting data, capital markets, and the macroeconomy. He believes there’s a larger lesson in the failure to recognize the threat of rising prices in financial reports.

“There is a disconnect between executives and an understanding of the macroeconomy,” he said. “We’ve seen shortcomings in appreciation of how inflation can be disruptive. It’s important that corporate managers become more familiar with macroeconomic and accounting research and take a more holistic approach, considering how economic turbulence will affect the financial performance of their businesses.”

Going forward, given the increase in the level and fluctuations of inflation, the effects analyzed in the paper will be even more critical for executives, shareholders, attorneys, and the macroeconomy, he said. And the methodology developed in the paper can be generalized to other macroeconomic risks. “Executives can improve their companies’ performance and risk management by adopting a macro-accounting, research-based approach, which focuses on assessing the effects of current and forecasted macroeconomic fluctuations—such as inflation, recessions, wars, and other economic uncertainties—on their accounting performance metrics.”

Read the full paper:

Undisclosed Material Inflation Risk
By Yaniv Konchitchki (University of California, Berkeley) and Jin Xie (Peking University)
Journal of Monetary Economics­, March 2023

Counties cut public welfare spending when forced to disclose pension costs, study finds

Business man and woman working at office with laptop and documents showing high costs
Photo: Natee Meepian for iStock/Getty

When local governments were required to disclose their long-term pension liabilities, they responded by diverting funds away from public welfare, salaries, and hiring, a new study has shown.

The study, in press at the Journal of Accounting and Economics, examined the economic impacts of a 2015 rule known as GASB 68 issued by the Governmental Accounting Standards Board (GASB). While the rule did not directly affect pension plans themselves, it aimed to make governments more accountable by requiring them to disclose their full defined-benefit pension obligations, which are among the most significant liabilities for local governments.

“The disclosure requirements increased awareness and clarity about future funding requirements of pension obligations,” said co-author Omri Even-Tov, an assistant professor of accounting at the Haas School of Business, UC Berkeley. “In other words, the new requirement changed the information set of county managers who did not previously understand the future cash flow requirements of their pension plan.”

Even-Tov collaborated on the paper with Michael Dambra, an associate professor of accounting at the University at Buffalo School of Management and James Naughton, an assistant professor of accounting at the University of Virginia Darden School of Business.

Chronic pension underfunding

About 83% of full-time public sector employees—or more than 25 million people—participated in a defined benefit pension plan as of 2018, with annual payments costing governments more than $300 billion. However, long-term unfunded obligations far exceed these yearly payments: According to a recent study, the national public pension funding shortfall reached $6.5 trillion as of 2021.

Despite those obligations, municipalities tend to rely more heavily on their cash budgets in managing their annual financial cycle, the researchers wrote.

Even-Tov, an authority on the impact of accounting rule changes who has also studied how conflict minerals disclosure requirements reduced violence in Central Africa and how relaxed disclosures enacted to stimulate the IPO market harmed investors, wanted to know whether governments would change their budgeting when required to make their full pension liabilities public.

Public welfare reductions

The researchers analyzed data from census bureau reports and hand-collected GASB financial statements for 432 counties across 45 states from 2013 to 2016. About half of the counties in the sample had already been reporting their pension liabilities, but the other half had been exempt from disclosure rules because their pension liabilities were only reported as part of their states’ pension plans. GASB 68 removed this exemption, requiring them to report their share.

The analysis found that when counties disclosed underfunded pension costs for the first time, they reduced public welfare expenses by 6%, payroll by 2.5%, and employee headcounts by 2%. They generally accomplished this by freezing their budgets relative to the counties that had already been disclosing their pension obligations, rather than by raising taxes or finding other ways to increase revenues.

The findings are important because they demonstrate the real impact of financial regulation on governments.

“Despite the economic importance of the government sector, we know relatively little about how GASB financial statements influence the provision of resources,” Dambra said in a press release from the University at Buffalo. “Our study shows that mandatory disclosure in the public sector can influence local-level managerial decisions.”


Read the full study:

The economic consequences of GASB financial statement disclosure
By Michael Dambra, Omri Even-Tov, and James P. Naughton
Journal of Accounting and Economics (forthcoming)

After SVB failure, Haas faculty raise concerns about systemic weaknesses in banking

A pedestrian passes a closed Silicon Valley Bank branch in San Francisco on Monday, March 13, 2023.
A pedestrian passes a closed Silicon Valley Bank branch in San Francisco on Monday, March 13, 2023. (AP Photo/Jeff Chiu)

As repercussions from the stunning collapse of Silicon Valley Bank (SVB) continue to ripple through the banking industry, we asked Haas experts for their views on where the system broke down and whether there may be broader trouble viewing. 

Professors Ross Levine, Panos Patatoukas, and Nancy Wallace said SVB’s problems were “banking 101” and that its management and board failed in their fiduciary duties.  Levine, a banking industry expert, said the situation “suggests stunningly incompetent bank supervision and regulation,” and cited research that Silicon Valley Bank may be “the tip of a gigantic iceberg.” Patatoukas agreed, asking  “If (regulators) cannot spot something as straightforward as SVB’s issues, then what else are they missing?” 

Professor Ross Levine, Willis H. Booth Chair in Banking and Finance, Haas Economic Analysis & Policy Group

Ross Levine
Prof. Ross Levine

“Silicon Valley Bank (SVB) failed in the simplest and most vanilla way. It had long-term assets, including Treasury securities and other U.S. government backed-securities, and short-term liabilities, namely deposits. This exposed the SVB to interest rate risk because long-term securities are much more sensitive to interest rate changes than deposits. As interest rates went up over the last year, the price of long-term securities went down, challenging SVB’s solvency.

Regulators at the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) did not need sophisticated supervisory and regulatory skills or elaborate training to recognize such interest rate risk. It is banking 101.

While new information might emerge, current knowledge suggests stunningly incompetent bank supervision and regulation. The Federal Reserve and FDIC regulators need to explain why they did not require SVB to hedge interest rate risk three years ago, two years ago, etc.

The apparent failure of Federal Reserve and FDIC regulators in the case of SVB raises questions about the effectiveness of U.S. regulatory authorities in general. First, if regulators failed to address the most basic of risks—interest rate risk—in SVB, did they miss this interest rate risk in other banks? Second, have regulators effectively addressed the more complex risks that some banks take? Third, did regulators allow systemic risks to grow in the U.S. banking system?

Recent research provides an alarming answer to whether the Federal Reserve and FDIC blew it on interest rate risk beyond SVB, suggesting that SVB is the tip of a gigantic iceberg. A study conducted over the weekend indicates that the market value of U.S. banking assets is about $2 trillion dollars less than the reported book value due to increases in interest rates during the last year. It is impossible to determine the degree to which banks used derivatives to hedge interest rate risk. Thus, one cannot conclude definitively that the U.S. banking system experienced a loss of $2 trillion. However, these statistics, in conjunction with the details on SVB, scare me.

While Secretary of the Treasury Janet Yellen and Jay Powell, Chair of the Federal Reserve Board, might claim that the U.S. banking system is very well capitalized and very well supervised and regulated, they have some explaining to do.

Recent events also raise concerns about the competency of U.S. monetary policy, which, like much of bank regulation, is conducted by the Federal Reserve. The Federal Reserve started raising interest rates a year ago to combat inflation. (As a side point, the Federal Reserve created the inflation it is now combating.) It should have been evident to the Federal Reserve that banks with long-term assets and short-term liabilities that had not hedged interest rate risk would experience significant losses as interest rates rose. Moreover, the Fed has or can obtain information on banks’ assets and liabilities and the degree to which they were hedging interest rate risk. Thus, they knew—or should have known—which banks were most exposed to interest rate risk as they started raising interest rates. As a result, even if bank regulators failed to force banks to address interest rate risk before the Federal Reserve began to raise rates, the Fed should have been aware of this vulnerability as it started tightening monetary policy to fight inflation.”

 Associate Professor Panos Patatoukas, the L.H. Penney Chair in Accounting, Haas Accounting Group

Panos N. Patatoukas
Panos N. Patatoukas

“The SVB management and board failed in their fiduciary duties. The Fed also failed in its supervisory role since it failed to spot a basic duration mismatch and a massive run-prone deposit base, together with a lack of interest rate risk management on the part of SVB. It would have been straightforward to see from SVB’s financial statements that its (tier 1) liquidity ratio was much lower after accounting for the accumulated but unrecognized losses from the revaluation of their long-term bond portfolio, which basically indicates that SVB had elevated risk well before the run on the bank.

The SVB failure raises concerns about structural problems impacting regional banks, their depositors, and capital providers. It also raises concerns about the ability of regulators to spot risks ahead of time. If they cannot spot something as straightforward as SVB’s issues, then what else are they missing?”

Professor Nancy Wallace, Lisle and Roslyn Payne Chair in Real Estate and Capital Markets

Berkeley Haas Prof. Nancy Wallace
Prof. Nancy Wallace

“This is a monumental failure of risk management on the part of both the bank and the regulators.  Interest rate risk is basic banking 101. Added to that is the very large depositor concentration from one industry. I also suspect that the loans on (Silicon Valley Bank’s) balance sheet are likely to be poorly underwritten given the overly cosy relationship between the bank and the king makers in Silicon Valley. They frequently provided loans to startups as a bridge between funding rounds.  They did this to protect startup founders from the dilution effects of additional equity rounds—the more normal way to fund startups.”


Good Deals

Moving ESG investing forward

A sun and mountainside with an arrow delineating the side of the mountain, as if on a budget sheet.

As investors pay increasing attention to companies’ track records on environmental, social, and governance issues, trillions of dollars have flowed into the ESG investing industry.

Assets in so-called ESG funds have risen 38% globally in the past year alone, to $2.7 trillion by the end of March, according to Morningstar Direct. While Europe still dominates with 82% of the market, a burgeoning class of U.S. financial products promises investors an ROI aligned with their values.

At the same time, a backlash is growing against the sustainable investing industry, disparaged by some political and business leaders as “woke capitalism.”

In June, Associate Professor Panos Patatoukas, the faculty director of the Center for Financial Reporting and Management, brought together high-level ESG investing thinkers with wide-ranging perspectives on the direction of the industry. Berkeley Haas asked Patatoukas to synthesize some of the major discussion points.

Some argue that ESG issues cover so many variables as to be meaningless. What do you think?

I think everybody understands that environmental activities are significant, corporate governance matters, and social issues are becoming increasingly important. Where people disagree is: How do we define and verify the different types of carbon emissions? What are the corporate activities that fall under the “S” of ESG? What constitutes good or bad governance? Because there’s a disagreement of what constitutes ESG, there’s disagreement on the measurement of those dimensions.

Pooling environmental, social, and governance together into one single measure is problematic since it’s missing the granularity of the underlying data. You could think of a company with “bad” governance, with an entrenched CEO who has all the power and shareholders who lack voting power, but that same CEO might prioritize reducing the organization’s carbon footprint.

If we can agree on the definitions and measurement and we have external auditor assurance, that will completely change the field. The accounting firms can play a significant role in the transformation that’s happening and accelerate the convergence of policy, regulation, and technology that’s rewriting the ESG investing playbook.

Does removing a “brown” company from a portfolio drive change?

The goal of ESG investing is not just to make money for ESG-motivated investors but also to change companies’ behavior through engagement and divestment. One example is divesting from fossil fuel companies that have negative environmental impacts and buying “green” companies in other sectors.

But will divesting from fossil fuel companies accelerate the path to decarbonization? Where will the technology that will change our lives come from—an entirely different sector or from leading companies in this sector?

Outright divesting should be contrasted with selective divesting. Within the fossil fuel sector, there are leading companies that are innovating, investing in new technologies, and there are lagging companies that are continuing their dirty practices. An alternative would be to divest only from the laggards and reallocate this capital to the leaders. In other words, blending divestment with engagement.

What are you most optimistic about?

I think over time, we will have more transparency and more tools that will allow everyday investors to invest with their values and be more aware of what they’re investing in. And we’re going to have better data to overcome the measurement challenges, monitor corporate impact, align management incentives with long-term sustainability goals, and facilitate the allocation of capital in ideas and technologies that will drive change for good.

Quality Check

The unintended consequences of the JOBS Act

Forex chart on cityscape with tall buildings background multi exposure. Financial research concept.

In the decade since the 2012 Jumpstart Our Business Startups (JOBS) Act relaxed initial public offering requirements for companies with revenues under $1 billion, a growing number of them have taken advantage of the option to disclose less financial information in their IPOs.

This reduced-disclosure provision may have helped stimulate the market, but it came at a cost: lower IPO quality and more risk exposure for individual investors, concluded a new study by accounting professors Omri Even-Tov and Panos Patatoukas, with PhD candidate Young Yoon.

“The evidence shows that nearly two-thirds of the reduced-disclosure issuers underperform the market in the three years after they go public,” says Even-Tov. “While we find evidence that institutional investors have the ability to use publicly available information to avoid the worst-performing IPO stocks, individual investors tend to ignore fundamentals when investing in IPO stocks and are more exposed to the risks.”

Based on their findings, the researchers argue that the SEC should require all IPO issuers to disclose at least three years of audited financial information—up from the two years allowed under the JOBS Act.

“We recommend that regulators balance the benefits of increasing the number of IPO registrants against the costs of enabling speculative issuers to go public with reduced financial disclosures,” says Patatoukas, the L.H. Penney Chair in Accounting. “The quality of IPOs is as important, if not more so, than the quantity.”

Politics won’t stop ESG progress: Q&A with Panos Patatoukas (Part 1)

As investors pay increasing attention to companies’ track records on environmental, social, and governance issues such as executive compensation, trillions of dollars have flowed into the ESG investing industry. 

Assets in so-called ESG funds have risen 38% globally in the past year alone, to $2.7 trillion by the end of March, according to Morningstar Direct. While Europe still dominates with 82% of the market, a burgeoning class of U.S. financial products promises investors an ROI aligned with their values.

Yet as the SEC considers new regulations, a backlash is growing against the sustainable investing industry, disparaged by some political and business leaders as “woke capitalism” and even a “scam.” 

This month, the Center for Financial Reporting and Management’s (CFRM) annual conference brought together high-level ESG investing thinkers with a wide range of perspectives on the direction of the industry. Among them were SEC Commissioner Hester M. Peirce, a Republican appointed by former President Trump; Janine Guillot, CEO of the Value Reporting Foundation and former CEO of the Sustainability Accounting Standards Board (SASB), which has developed the leading framework for ESG data; Andrew Behar, CEO of shareholder advocacy nonprofit As You Sow, AJ Lindeman, who leads index and ESG quant research at Bloomberg; Karen Wong, who leads ESG & Sustainable Investing for State Street Global Advisors; and Wall Street Journal Senior Columnist James Mackintosh, an ESG investing skeptic.

Panos N. Patatoukas
Panos N. Patatoukas

“I wanted to bring all these perspectives together and have a structured discussion around ESG disclosures in order to gain new understanding and figure out how to move forward,” said Associate Professor Panos Patatoukas, L.H. Penney Chair in Accounting and faculty director of CFRM, who organized the ESG accounting conference.

In Part 1 of this two-part interview, we asked Patatoukas to synthesize some of the major discussion points around ESG measurement and disclosure, as well as reporting standards and assurance by external auditors.

Part 2 of the interview, publishing July 1, will address the SEC’s proposed ESG rules, valuation and investing, as well as divestment versus engagement—two different investor approaches to pressuring companies to change their ways.

Haas News: There’s a growing backlash against ESG investing. Recently, some politicians and business and financial leaders are dismissing ESG as “woke capitalism” and even “a scam” (Elon Musk). They argue these issues aren’t relevant to investors, whose job is to maximize returns. Is this an existential threat to the industry?

Panos Patatoukas: Will political rhetoric get in the way of progress and meaningful change? I just don’t believe that. ESG becomes de facto relevant when you have so many investors who want to invest with their values and don’t want to be misled. The reality is that this growth has been driven by demand from investors. With respect to ESG disclosures, improved access to higher quality data will allow investors, especially individual investors, to invest with their values and will mitigate the risk of greenwashing.

What is greenwashing, in terms of financial products?

Greenwashing is the result of the lack of clarity in the ESG setting. Let’s say you have a preference for “green” companies and you are willing to pay a premium to get access to a green fund. Let’s now consider the possibility that the index fund manager is actually deviating from the presumed investment objective and they are actually investing in green and not-so-green stocks. Labeling the fund as a green fund could be misleading, especially for individual investors that are not fully attuned to fund characteristics and may not be fully aware of what they actually own when they invest in this particular fund. This goes to the core of greenwashing issues. And the problem is that many of these ESG products are marketed to individual investors as a way for fund managers and advisers to charge management fees  in excess of what they would make in a plain vanilla, non-ESG product. But because of bad data or limited access to good data, investors effectively may be getting the same old thing packaged  in a different way. Transparent financial products that allow you to invest in alignment with your values at low management fees should be accessible to everyone, but we are not there. Not just yet.

Why is it so hard to get there?

Let’s first talk about E+S+G measurement. I think everybody understands that environmental activities are very important, corporate governance matters, and social issues are becoming increasingly important. Where people really disagree is: How do we define, measure, and verify the different types of carbon emissions? What are the corporate activities that fall under the “S” of ESG and how should we measure those? What is important to measure on governance and what constitutes good or bad governance?

Because there’s a disagreement in terms of what adds up to ESG, there is disagreement on the measurement of those dimensions. That shows up in the weak correlation on ESG ratings across rating agencies. If it was 100% clear as to what it is we’re trying to measure, the correlation across agencies would be much higher.

Some people argue that E, S, and G issues cover so many different things as to be meaningless. What do you think?

Pooling environmental, social, and governance together into one single measure is problematic. These are different things that might be interacting with each other and that may even trade-off against each other. For example, you could think of a company with “bad” governance, with an entrenched CEO who has all the power and the shareholders who don’t have much voting power, but on the other hand, that same CEO might prioritize reducing the carbon footprint of the organization. So those things would be in opposition. And within each one of these dimensions—environment, social issues, and governance—there are going to be strengths and weaknesses. It’s not always the case that you can offset a negative in one area by doing something good in another. The practice of pooling different activities together to generate a single ESG score is a bad practice, in my opinion, since it’s missing the granularity of the underlying data.

So all this uncertainty about measurement must also make it difficult to define what companies should be required to disclose.

There are different views not only on how much companies should be required to disclose, but who should be responsible, and to what extent, for the assurance of the reliability of these disclosures. What I mean by assurance is external auditors attesting to the validity of the data, which is already happening when it comes to financial activities. Disclosures without assurance may not be reliable. What’s going to change the game is assurance of ESG data, because when auditors attest to the validity of the data, they can be held liable and take on the risk that what they’re signing off on is actually true and verifiable.

What became clear in our discussion is that there is real demand for more consistent, comparable and decision-useful information. We call that “material’ information, which means  any information that may impact a reasonable investor’s decision making. Material ESG data need to be verifiable and audited. If we can agree on the definitions, and we agree on the measurement, and we have external auditor assurance, that will completely change the field. That will be a real revolution, or an evolution, depending on how you want to see it. We can end up in a market setting where everyday investors will have access to more accurate data based on which they can make informed decisions and invest with their values. The accounting firms can play a significant role in the transformation that’s happening and accelerate the convergence of policy, regulation, and technology that’s rewriting the ESG investing playbook.

At the conference, Janine Guillot, CEO of the Value Reporting Foundation and former CEO of the Sustainability Accounting Standards Board (SASB), explained that they’ve merged with others to create a global baseline of ESG standards through the International Sustainability Standards Board (ISSB). These standards have already been adopted by 65% of S&P 500 companies. Is this getting us closer to standardization?

The SASB started a decade ago as a private, nonprofit organization with the mission to develop and disseminate industry-specific sustainability accounting standards that help businesses “disclose material, decision-useful information to investors.. This is the framework that seems to be the frontrunner, and stewardship of the SASB Standards is now passing to the International Sustainability Standards Board.

However, the SASB framework is, in essence, a disclosure template that has helped companies and investors develop a common language around ESG issues. So adopting the SASB standards doesn’t necessarily mean that the data that companies disclose is meaningful. The point here is that a higher adoption rate of a sustainability reporting framework, like the one developed by SASB, is not necessarily a measure of success of the sustainability accounting standard-setting process. 

So how do we define success in sustainability standard-setting? Well, it would be interesting to systematically evaluate whether the adoption of sustainability standards will ultimately have a real impact on emissions, new technologies, productivity, and social welfare. Higher adoption rates among corporations and fund managers and more licensing fees to private standard-setting organizations for using their sustainability reporting framework does not necessarily translate into a more sustainable and equitable future for everyone.

Berkeley Haas welcomes nine new professors

New Berkeley Haas faculty members 2022
From top row, left to right: New Berkeley Haas assistant professors Tanya Paul, Ali Kakhbod, Carolyn Stein; Sa-Kiera Hudson, Ambar La Forgia, Sytkse Wijnsma, Sarah Moshary, Matthew Backus, and Valerie Zhang.

Nine new assistant professors have joined the Haas School of Business faculty this year, with cutting-edge research interests that range from illicit supply chains to unequal social hierarchies; from financial crises to the incentives that shape innovation; and from health care management to decentralized finance to marketing and the demand for firearms.

The nine tenure-track hires are the result of a concerted effort by Dean Ann E. Harrison and other Haas leaders to expand and diversify the faculty.

“We are thrilled to welcome this wonderful, diverse new group of academic superstars to Berkeley Haas,” says Dean Ann E. Harrison. “We clearly are bringing the best to Haas, increasing the depth and breadth of our world-renowned faculty, and reinforcing our place among the world’s best business schools.”

The new faculty members have hometowns throughout the U.S. and around the world, including Texas, New York, Massachusetts, and Illinois; Iran, the Dominican Republic, China, and the Netherlands. Seven of them are women; one is Black, and one is Latinx.

“This is our most diverse cohort of new faculty ever, each one a rock star in their own right,” says Jennifer Chatman, Associate Dean for Academic Affairs and the Paul J. Cortese Distinguished Professor of Management. “We are very proud that we were able to lure them to Berkeley Haas.”

The new faculty members start on July 1, with most beginning to teach in spring 2023. They bring the total size of the ladder faculty to 88, up from 78 in 2020-2021.

Meet the faculty

Matthew Backus
Matthew Backus

Assistant Professor Matthew Backus, Economic Analysis & Policy

Hometown: Chicago, Ill.

PhD, Economics, University of Michigan, Ann Arbor
MA, Economics, University of Toronto
BA, Economics and Philosophy, American University

Research focus: Industrial organization

Introduction: I’m an economist with broad interests. Most recently, I’m interested in how we can use the tools developed by the industrial organization community to understand inequality and the distributional effects of policy.

Teaching: Microeconomics and Antitrust Economics (MBA)

Most excited about: After spending a year visiting, I’m most excited about the economics community at Berkeley.

Fun fact: I have a border collie, who is in training as a herding dog.


Sa-Kiera Hudson
Sa-Kiera Hudson

Assistant Professor Sa-kiera (Kiera) Tiarra Jolynn Hudson, Management of Organizations 

Hometown: Albany, NY

PhD/MA, Social Psychology, Harvard University
BA, Psychology and Biology, Williams College

Research focus: I study the psychological processes involved in the formation, maintenance, and intersections of unequal social hierarchies, with a focus on empathic/spiteful emotions, stereotypes, and legitimizing myths.

Introduction: I am a social psychologist by training, focusing on the nature of intergroup relations as dominance and power hierarchies. I have studied several psychological processes, including the role of legitimizing myths in justifying unequal societal conditions, the role of group stereotypes in the experience and perception of prejudice, and the role of empathic and spiteful emotions in supporting intergroup harm. My work is multidisciplinary, incorporating quantitative as well as qualitative methods from various disciplines such as political science, sociology, and public policy.

I am a fierce advocate for building community, providing mentorship, and supporting authentic inclusion for everyone. I believe it is a moral imperative to be present as a vocal, queer-identified Black women in academe, given the lack of representation, and I’m excited to see how I can contribute to diversity, equity, and inclusion efforts at Haas.

Teaching: Core Diversity, Equity, and Inclusion (MBA)

Most excited about: I identify UC Berkeley as my intellectual birthplace. It was during a summer internship program through the psychology department in 2010 where I first became interested in studying power structures and intergroup relations simultaneously. My overall research interests haven’t changed since that fateful summer. Being a faculty member here is truly a dream come true!

Fun fact: I love organizing and planning, so much so I taught myself how to use Adobe InDesign to create my own planner. I am also an avid foodie and cannot wait to check out the Bay’s food and wine scenes.


Ali Kakhbod
Ali Kakhbod

Assistant Professor Ali Kakhbod, Finance

Hometown: Isfahan, Iran

PhD, Economics, MIT
PhD, Electrical Engineering & Computer Science (EECS), University of Michigan

Research focus: Information frictions; liquidity; market microstructure; big data; and contracts

Introduction: I am a financial economist with research interests in financial intermediation, liquidity, contracts, big (alternative) data, banking and financial crises. A common theme of my research agenda is to study various informational settings and their financial and economic implications. For example: When does securitization lead to a financial crisis? Why is there heterogeneity in the means of providing advice in corporate governance? How does information disclosure in OTC (over-the-count) markets affect market efficiency? My research has both theory and empirical components with policy implications.

Teaching: Deep Learning in Finance (MFE)

Most excited about: Berkeley Haas is the heart of what’s next with world-class faculty working on exciting and innovative research. Given that my interdisciplinary research interests span finance, economics and big data issues, I could not ask for a better fit.

Fun fact: In my free time, I like to ski, sail, hike, and enjoy the outdoors.


Ambar La Forgia
Ambar La Forgia

Assistant Professor Ambar La Forgia, Management of Organizations

Hometown: I was born in Santo Domingo, Dominican Republic, but I grew up in Washington, DC and São Paulo, Brazil.

PhD, Applied Economics and Managerial Science, The Wharton School, University of Pennsylvania
BA, Economics and Mathematics, Swarthmore College

Research focus: Health care management; mergers and acquisitions; firm performance

Introduction: My research studies the relationship between organizational and managerial strategies and performance outcomes in the health care sector. In particular, I use quantitative methods to study how the strategic decisions of corporations to merge, acquire, or partner with other organizations can change managerial processes in ways that impact both financial and clinical performance. A secondary research strand studies how health care organizations adapt their service delivery and prices following changes in state and federal legislation. 

Before joining UC Berkeley, I was an assistant professor of health policy and management at Columbia University’s Mailman School of Public Health. I am excited to continue to explore issues of healthcare quality, equity, and cost, while digging deeper into the management practices and organizational structures that could influence these outcomes.

Teaching: Leading People (EWMBA)

Most excited about: It is an honor to join the world-class faculty at Haas, and I am so excited to learn from and collaborate with my MORs colleagues on both the macro and micro side. Since my research is interdisciplinary, I also look forward to connecting with scholars in the School of Public Health.

As a self-proclaimed “city girl,”  I am excited to get out of my comfort zone and explore the natural beauty of Northern California.

Fun fact: My hobbies include yoga, urban gardening, adopting animals and stand-up comedy.


Sarah Moshary
Sarah Moshary

Assistant Professor Sarah Moshary, Marketing

Hometown: New York City, NY

Phd, Economics, MIT
AB, Economics, Harvard College

Research focus: Marketing and industrial organization

Introduction: My research interests span quantitative marketing, industrial organization, and political economy. I am currently working on projects related to paid search advertising, the pink tax (price gap in products targeted to women), and the demand for firearms. Before joining Haas, I worked at the University of Chicago Booth School of Business and at the University of Pennsylvania.

Teaching: Pricing (MBA)

Most excited about: I am excited to get to know my future colleagues!

Fun fact: My two hobbies are running and pottery—though I am more enthusiastic than talented at either :).


Tanya Paul
Tanya Paul

Assistant Professor Tanya Paul, Accounting

Hometown: Murphy, Texas

PhD, Accounting, The Wharton School, University of Pennsylvania
BS, Economics, Statistics and Finance, The Wharton School, University of Pennsylvania

Research focus: Standard-setting and financial reporting; the determinants and consequences of voluntary disclosures

Introduction: After getting my PhD, I spent a year at the Financial Accounting Standards Board learning about contemporary accounting issues and understanding the types of questions that standard setters are grappling with. I hope to continue working on research that is helpful to standard setters in coming up with standards that ultimately improve financial reporting.

Teaching: Corporate Financial Reporting (MBA)

Most excited about: ​​I love how interconnected the area groups are within Haas. There are so many potential learning opportunities, especially for a newly minted researcher like me.

Fun fact: In my free time, I love to read and play the piano—I had learned it as a child and am trying to relearn it now as an adult.


Carolyn Stein
Carolyn Stein

Assistant Professor Carolyn Stein, Economic Analysis & Policy

Hometown: Lexington, Mass.

PhD, Economics, MIT
AB, Applied Mathematics and Economics, Harvard College

Research focus: Economics of science, innovation, and applied microeconomics

Introduction: I study the economics of science and innovation. My research combines data and economic theory to understand the incentives that scientists face and decisions that they make, and how this in turn shapes the production of new knowledge.

One thing I love about economics is that it’s less of a narrow subject area, and more a set of tools and principles that apply to a stunningly wide array of topics. I’m excited to work with Haas students to help them understand how economic principles can improve their decision-making, both in their careers and in other areas of their lives—maybe even in ways that surprise them!

Teaching: Microeconomics (EWMBA)

Most excited about: I’m excited to be part of a large and superb applied microeconomics community—at Haas, and more broadly at Berkeley as a whole.

Fun fact: I am an avid cyclist and skier, and I was on the cycling team at MIT. Since moving to the Bay Area, I’ve loved the hills and mountains in the area. I’m working on taking my riding off road (gravel and mountain biking) and skiing off-piste (backcountry).


Sytske Wijnsma
Sytske Wijnsma

Assistant Professor Sytkse Wijnsma, Operations and IT Management

Hometown: Amsterdam, the Netherlands

PhD, Management Science and Operations, Judge Business School, University of Cambridge
MPhil, Management Science and Operations, Judge Business School, University of Cambridge
BSc & MSc, Economics and Finance, VU University, Amsterdam

Research focus: My primary research interest is designing supply chain and policy interventions that help solve real-world challenges with social and environmental impact.

Introduction: I am very excited about my projects on illicit supply chains and how they undermine social and environmental goals. The context of these projects spans a wide range of areas, from illicit waste management to illegal deforestation. I am also excited to deepen and expand ongoing research collaborations with governments and industry to investigate these issues.

Teaching: Sustainability in Business (Undergraduate)

Most excited about: Many things! Berkeley Haas, being at the forefront of sustainability, has a unique position that combines the same ideals that drive my research with opportunities for collaborative research with serious impact. The amazing colleagues and close connections to industry make it even more exciting to join this community!

Fun fact: My first and last name originate from Fryslân, a northern province in the Netherlands, where it is still tradition to name your children after family members. So although my name is quite rare in the rest of the world, in our family it crops up in every generation!


Valerie Zhang
Valerie Zhang

Assistant Professor Valerie Zhang, Accounting

Hometown: Shanghai, China

PhD, Northwestern Kellogg School of Management
MA, Economics, University of Toronto
BCom, Finance and Economics, University of Toronto

Research focus: Information dissemination; information cascades on social media; retail investor behavior; decentralized finance

Introduction: I am passionate about doing research or working on personal projects that can express my creativity. I enjoy merging disjointed ideas and working on interdisciplinary research. My dissertation combines two literatures: one in computer science on information cascades on social media, and another in finance and accounting on the effects of disseminating financial news. I am also very curious about emerging technologies that are reshaping the financial industry. Since I work on areas that are new to the research community, I sometimes feel like a lone traveler exploring completely new territories. It is terrifying but also extremely rewarding!

Teaching: Financial Accounting (Undergraduate)

Most excited about: I look forward to inspiring my students to be entrepreneurial and to come up with creative business ideas or projects.

Fun fact/hobby: I write short stories. The one I am working on has an alien and a squirrel in it.