Unraveling the Financial Crisis
Murillo Campello, Lewis H. Durland professor of finance and a research associate with the National Bureau of Economic Research, was cited in Thomson Reuters’s Research Fronts 2013 as one of the most influential researchers on the 2008 financial crisis. His research has attracted the attention of Congress, the President’s Council of Economic Advisors, the U.S. Supreme Court, and as a result, he has had the chance to influence regulators as they approach post-crisis financial policy.
In his research, Campello had already looked at the relationships between the more tangible side of operating a business (topics like price, employment, capital) and the more abstract financial side (equity, debt, loans, and so on). While he always noticed the links between these two fronts of business, the 2008 financial crisis made these connections much clearer than before. As Campello puts it, “to prove causation in economics is very difficult,” but the financial crisis “highlighted” the relationship between how firms raise and spend funds precisely “because it was urgent and big.”
The key findings of his research suggest that “ensuring that firms have access to liquidity during a crisis is paramount for economic recovery and sustainability.” In order for companies to survive a financial crisis, they must have access to cash and lines of credit; this reduces cuts on research and development, employment, and investment.
Campello was also the first to discover that “the way firms manage the maturity of debt matters a lot.” An example he gave is how Greece and the UK had similar amounts of debt, but the difference was that Greek debt was far more short-term than the British debt, and matured much more quickly. Firms in the US had a similar problem in 2008 because many tried to renew their debts or incur new debts at what ended up being a bad time. The lesson learned, then, is that “managing rollover risks and debt renewals is important,” and firms should be watchful over the duration of their debts.
With regard to his advice to Congress, Campello suggested that regulators do their best to unfreeze credit (such as in debt and bond markets) and make it easier for firms to access debt markets. For the Supreme Court, he wrote a memo to clarify how financing constraints affect firms’ decisions to fire employees, close factories, not invest, and disinvest from research and development.
Thomson Reuters’s Research Fronts 2013, which listed Campello as the #4 most influential researcher on the financial crisis, is the premier provider of scientific research rankings, looking primarily at the number of citations an author has received. The recognition that comes with being cited in papers and policy speeches has changed the way Campello is doing research by encouraging him to focus more on real-world policy applications. “I personally feel satisfied. I get satisfaction knowing that I influenced not just knowledge … but policy.” He enjoys the fact that he is being “recognized for something beyond” trying to influence, say, “six professors.”
Looking ahead, Campello is looking at where the financial crisis left off; he is trying to understand how exactly the economy is recovering and the extent to which firms learned the importance of cash. Campello is asking questions such as: How are these lessons affecting firms’ policies? Can this explain why economic recovery is going so slowly? By looking at how recovery influences both company and government policies, Campello hopes to give us an even more complete picture of the causes and effects of the 2008 financial crisis.
– Patrick Braga ’16 is an intern in Marketing and Communications at Johnson.