Mariassunta Giannetti, professor with a mission: mitigate the effects of economic shocks

okt. 25, 2016

It all started with a desire to do something difficult. Today, Mariassunta Giannetti is an award-winning professor with one common thread in her research: how institutions can be designed to mitigate financial frictions and the effects of negative economic shocks. “I hope that in the long run, my research has positive effects on economic policies and finance practice”, she says.

An associate editor of several academic journals, a Wim Weisenberg fellow at ECB, receiver of the Chinese Sun Yefang Financial Innovation award and recently nominated a rising star in finance, Mariassunta Giannetti’s research has been drawing quite a bit of international attention. And it all started with a young student’s desire to do something difficult.

“I chose an undergraduate program that was known to be hard, because it was research oriented. It opened a new world, with economic modelling and empirical tests. I really enjoyed it, and I understood that doing this I could answer real questions. And it was much less short term than trying to answer those questions in a consultancy company”, explains Mariassunta Giannetti.

Banking structures and economic shocks
After completing her MSc at Bocconi university in her home country Italy, Mariassunta Giannetti moved across the Atlantic for PhD studies at University of California Los Angeles. Since 2008 she’s a professor at the Stockholm School of Economics and the Swedish House of Finance.

A common thread in her research relates to financial crisis, or more specifically: how to mitigate the effects of economic shocks. One topic that Mariassunta Giannetti is exploring is what kind of banking structures would mitigate these shocks.

“What I’ve been able to show is that when banks have a higher level of concentration, they are more likely to internalize any negative effects of their lending decisions. They take into account that by renewing a loan to a firm, they are not only likely to avoid that firm’s default, but they are also likely to mitigate the effects of the initial shock on suppliers and customers.”

The study of banking structures in economic crises is a good example of why Mariassunta Giannetti enjoys being a researcher, she points out.

“It is rewarding from an intellectual point of view, but it is also something practical that can help policy makers and financial institutions, as well as households, when they make economic decisions.”

Brain gain – not brain drain
Another recent contribution of Mariassunta Giannetti’s is her work on “brain gain” in emerging markets, which was awarded with the Chinese Sun Yefang Financial Innovation award. In collaboration with researchers in China and USA, she showed that individuals returning to China after working abroad are helping the Chinese companies that employ them to raise money or to acquire companies in the countries they have lived in.

The research shows that what has previously been discussed as a “brain drain” may in the long run lead to a “brain gain” in emerging markets.

“Once these highly skilled individuals are back in China, they are likely to join the boards of listed companies. So we looked at what happened to the listed companies when they arrived. We saw that the companies became more profitable, and that these individuals opened doors in the countries they came back from”, says Mariassunta Giannetti.

What are you most proud so far in your career?
“I was very proud to be named rising star in finance this Spring, as it reflects all the research I’ve been doing over the years. One of the contributions I’m particularly proud of is the research that shows that there is a home bias in financial markets. People tend to invest more in things they are already invested in. Some of my research shows a flight home effect, which means that when investor wealth is negatively affected, investors prefer to hold familiar assets. Before the financial crisis, there were a lot of international flows in bank loans. The moment Lehman went down, and the banks’ net worth was negatively affected, the banks stopped lending to faraway borrowers. European banks would rather hold domestic government debt than foreign government debt. These results point to a possible danger of financial integration, as foreign loans might suddenly dry up if foreign banks experience shocks.”

Scandals and market trust
Another area that Mariassunta Giannetti has focused on during her career is how corporate governance affects investors’ willingness to hold stocks.

“If the investors can’t trust the companies, they might decide not to participate in the stock market at all. We can see how shocks affect this – households that are exposed to corporate scandals like Enron realize that the corporate governance of firms is not as good as they thought, and they exit the stock market altogether. Our point is that corporate governance affects the trust that the market participants have in the stock market, and therefore affects their willingness to provide equity.”

What skills do you need to succeed as a researcher?
“You need a lot of perseverance. And you need enthusiasm.”

What’s most fun about your job?
“Several things. First of all I can decide what to work on, and what to think of every day. The interaction with younger people who approach either a professional life or a research life, is also interesting. I think that it is a privilege to shape those minds.”

If you had not become a researcher, what would you have done?
“Perhaps since I like to think of different issues, I would have enjoyed being a consultant.”

What do you think is the strength of the Swedish House of Finance?
“It’s an academic environment that is very open to the rest of the world. There are people with different backgrounds and cultures here, which is a real strength and helps the quality of academic research. To solve problems in different ways and to think in different ways, you need to be exposed to different experiences. And that’s what Swedish House of Finance is trying to do in financial economics.”