China’s economic policymakers have to learn to let go if they want to establish credibility — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From South China Morning Post

The ability of the Chinese government to control is undisputed and unparalleled compared with governments in other countries and, indeed, compared with the Chinese state during imperial times. If the stock market does not go up, then prevent it from going down by shutting it down. If too many investors want to cash out their positions at the same time, just charge them with “malicious intent to sell” and arrest them as proverbial chickens to scare off the monkeys.

The problem is that a government so focused on and obsessed with controls is not one that cares about or is particularly good at establishing credibility. A government needs credibility when it tries to convince others to do its bidding without the ability to dictate actions directly.

In his book, The Courage to Act, Ben Bernanke wrote about how US Federal Reserve officials debated and deliberated long and hard about particular words and phrases, and even about the usage of different punctuation marks, in their communiqués with the public.

The reason is that the effectiveness of the Fed does not depend on its ability to arrest people at will but on how it is perceived by market participants – whether it is perceived as being capable, deliberative and above all credible. If the Fed lost the confidence of the market, much of its influence and leverage would evaporate.

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Credible financial statements help firms raise financing and increase investment — Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

MIT Sloan Assistant Professor Nemit Shroff

From Columbia Law School Blue Sky Blog

One of the primary purposes of financial statements is to facilitate the exchange of capital between investors and companies. The extent to which investors rely on the information reported in financial statements depends on the credibility of those financial statements – that is, the trust or faith investors have in the financial statements presented to them. Typically, companies establish the credibility of their financial statements by having an independent auditor verify the accuracy of those disclosures. However, the effect of auditing on financial statement credibility depends on the independence of the auditor and the rigor with which the audit is performed. An increase in reporting credibility can increase the degree to which investors rely on financial statement information for both writing debt (and other) contracts that govern the terms under which capital is exchanged and informing investors about companies’ operations and performance. As a result, an increase in reporting credibility can increase the company’s access to external finance, which can increase its ability to invest in new projects.

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MIT professor: Syndicates are best approach for equity crowdfunding investors — Christian Catalini

MIT Sloan Professor Christian Catalini

MIT Sloan Professor Christian Catalini

From Crowdfund Insider

MIT Sloan Assistant Professor Christian Catalini has targeted his research on the economics of innovation, entrepreneurial finance and crowdfunding.  Catalini is part of an elite few academicians who are analyzing the emergent investment crowdfunding space, so when he shares his findings, and associated perspective, it is worth paying attention.

Catalini, along with his co-authors, Ajay Agrawal and Avi Goldfarb at the University of Toronto, have labeled syndicates the “killer app of equity crowdfunding”.

There has been much discussion and debate if it is the wisdom of the crowd or herd mentality that reigns in investment crowdfunding, but according to Catalini a hybrid mix of professional insight, alongside the crowd, is easily the best.

In their working paper entitled, “Are Syndicates the Killer App of Equity Crowdfunding?”, the trio affirms that lead investors, be they angels or VCs, can inform potential crowdfunding investors about deals they might not otherwise be aware. Equity crowdfunding syndicates fill a major gap in online investing, at least in part the need for investors to be able to actually meet issuers instead of just communicating virtuatlly.

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Why banks fear Bitcoin — Trond Undheim

MIT Sloan Sr. Lecturer Trond Undheim

From Fortune

Bitcoin heralds a new age more disruptive than that of today’s Internet. Disruption can be a good thing, especially when it affects banking, a failing set of business models which, for all the tweaks, have been virtually unchanged for millennia. Paradoxically, some banks are afraid of Bitcoin because it would force them to innovate.

Bitcoin is but the most famous example of an emerging technology network with the potential to improve banking. It belongs to the new type of financial animal called crypto currencies, i.e. decentralized, secure money storage and money transfer enabled by the Internet. What Bitcoin, and the even more promising Ripple network do, is not to poke a hole in banking’s basic business models—lending, deposits, trading, and money exchange—but to create the embryos for entirely new markets typically referred to as the Internet of Value. That is, a way for regular folks, as well as specialists, to potentially monetize everything, regardless of location, traditional market access and jurisdiction.

Cryptocurrencies have been with us for over five years, an eternity by Internet time. Using the elegance of mathematics they enable almost instant transfer of value at almost no cost between two parties without the need for a trusted third party. The disruption lies exactly there: in disrupting the intermediaries.

For a few years already, we have been talking about the sharing economy. Companies like AirBnb and Uber have enabled previously untapped, idle assets such as your empty bedroom or your second car to be mobilized for financial gain. Liquidizing such stale assets has added convenience in the utterly inefficient markets of room rentals and transportation services.

Read the full post at Fortune.

Trond Undheim is a Senior Lecturer at the MIT Sloan School of Management.

Why 2015 Was a Bad Year for Banking Reforms — Oz Shy

MIT Sloan Senior Lecturer Oz Shy

MIT Sloan Senior Lecturer Oz Shy

From Fortune

Here’s what to watch in 2016

This year is ending the way it began for taxpayers without any sign of relief from the repeated burden of bailing out the banks during the financial crises and continued pressure to modify the Dodd-Frank Act in ways that favor bankers and lessen protections for taxpayers.

A year of continued concessions to the financial industry included: delaying a Dodd-Frank mandate that financial firms sell off bundled debt, known as collateralized loan obligations; exempting some private equity firms from registering with the Securities and Exchange Commission; and loosening regulations on derivatives. The recent requirement that banks increase their capital ratio to 16% or 18% in the next few years still leaves the taxpayer responsible for the remaining 80% of the losses. Read More »