Kellogg World Alumni Magazine, Summer 2004Kellogg School of Management
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The risk behind bank loans
"As a finance scholar, you're not just standing on the sidelines explaining what other people do," says Hagerty. "You are creating knowledge that people are actually going to use, and your research is the driver for tremendous financial innovation."

As an example, Hagerty cites her research that studies the effectiveness of self-regulatory organizations. Hagerty is a member of the National Adjudicatory Council, part of the National Association of Securities Dealers, which writes the rules governing more than 5,000 brokerage firms doing business in the United States.

The research she is engaged in with Kellogg School colleague Janice Eberly, the John L. and Helen Kellogg Distinguished Professor of Finance, seeks to determine how well financial markets function in terms of overall efficiency.

"Traditionally, banks would make loans and hold them," Hagerty says. "Today, they make loans and often sell them."

See the related article: Finance Journal's top research prize a Kellogg tradition
At issue is whether this financial innovation serves to stabilize or destabilize the overall market. Many experts have believed that by more broadly distributing risk, fluctuations in the aggregate market would be smoothed out, explains Hagerty. However, she indicates that there is also risk associated with how the banks are managing their roles.

"The banks are selling these loans, but are they doing so in an efficient way?" asks Hagerty. "Are they selling off the right loans? You have sets of loans and the ones that are more marketable are the lower-risk ones, so banks may sell those and end up holding the riskier ones."

All this financial innovation affords the players more powerful ways to manage risk, but the innovations themselves can create trouble.

"It's like having a bigger gun: If you don't know what you're doing, there are more opportunities to shoot yourself in the foot," Hagerty says.

Issues such as these engage Kellogg School scholars, and drive research, seminars, conferences and student competitions such as the Kellogg Investment Banking Club's first place overall win in the JPMorgan Mergers & Acquisitions Challenge. The club has won top honors in this competition four of the past five years. In April, a Kellogg team also won first place in the Cornell MBA Stock Pitch Challenge, a heated competition for aspiring stock analysts.

Kellogg students also compete for the annual Chookaszian Prize, which offers the winning team $10,000. Funded by former CNA Insurance CEO Dennis Chookaszian, the prize is designed to stimulate student insights into risk management.

The Kellogg School finance mission is also bolstered by The Zell Center for the Study of Decisions, Risk and Risk Perceptions, and the Financial Institutions and Markets Research Center. The Zell Center sponsors an annual conference that draws an impressive array of scholars and experts, as does the Private Equity Conference with its focus on venture capital and buyouts.

© Nathan Mandell
Professor Kathleen Hagerty

"With the strengths of our finance curriculum, faculty and research centers, the Kellogg School has proven itself an innovator in this key arena," says Dean Jain. "Our approach to finance balances rigor and relevance in ways that offer maximum benefits for our students. Our Financial Decisions course is one true reflection of our ability to deliver pragmatic and theoretical insights."

Financial Decisions uses case studies to enhance student understanding of managerial financial decision making, covering a range of topics such as short- and long-term financing, capital structure and dividend decisions, capital budgeting, and mergers and acquisitions.

How executives benefit
Eiven the importance of finance today, executives are also increasingly enrolling in the Kellogg School's Executive Education program, which is expanding its finance offerings to meet student demand. Finance for Executives is one of several such courses held at the James L. Allen Center. It is designed to provide executives who have little or no previous finance experience with the foundational finance insights they need to perform in today's marketplace.

"Executives come to the Allen Center for a full week of intensive finance," says Fishman, who also notes the option of Kellogg custom executive programs in finance. "The class really gets them up to speed, especially if these individuals have recently been promoted into a role where they must learn more details about finance."

Dean Jain is turning his attention toward expanding the role that Kellogg School finance majors play in the contemporary marketplace. He is particularly interested in encouraging finance majors to expand their career choices beyond the traditional avenue of investment banking and consider additional opportunities within corporate finance.

Jain also encourages students to leverage the strengths of the Kellogg School Finance Department

"Finance students are at a real advantage at Kellogg," says Jain. "Students who come here to learn finance are not lost in the crowd as they might be at other schools. "

And once these students arrive — even those who may not have intended to pursue a career in finance — they frequently realize the exciting breadth and scope of the discipline.

"There are a lot of students who come in without a clear understanding of what finance is," says Fishman. "Once they take Financial Decisions they really develop an appreciation for the subject and how the learning can be valuable to them, even if they don't plan on becoming a CFO or investment banker."

But for those who do desire to grab the top rung of the executive finance ladder, Fishman says there will continue to be challenging and rewarding opportunities for MBAs.

Though some have speculated that the Sarbanes-Oxley legislation of 2002 might diminish the stature of corporate CFOs, the department chair believes otherwise.

"This legislation is not going to limit the role of the CFO. It's just going to entail a different set of constraints," explains Fishman. "The regulations have impacted the way firms communicate to the investment world, but the CFO's functional role is essentially the same: They still want to convey information from the firm to the capital markets."

And the Kellogg School is helping train the next generation of financial leaders to excel in every aspect of their demanding role.

©2002 Kellogg School of Management, Northwestern University