22.11.2024Visiting Faculty: Jean Helwege

Jean Helwege is a Professor of Finance holding the Anderson Chair in Finance at the University of California, Riverside. Her prior experience includes faculty positions at Penn State, the University of Arizona, and Ohio State University, as well as ten years at the Federal Reserve System. Her research interests include corporate bonds, bank regulation, financial distress, initial public offerings, and capital structure. Jean Helwege is currently at the Department of Finance upon invitation, working on a project with the Basel office of the Bank for International Settlements. Since arriving, she has met with professors and PhD students and attended the department’s research seminars. 

Professor Helwege, your research often focuses on corporate bonds and credit risk. Could you explain the importance of these topics for understanding financial markets? 

For various reasons, most companies prefer to finance new investments with debt rather than equity. On the investor side, risk aversion drives many people to allocate a high fraction of their wealth into fixed income to preserve principal, but this is only a viable strategy if the likelihood of repayment is high. Thus, a good deal of effort goes into evaluating credit risk so that investors are assured of avoiding loss and firms can obtain funds. However, unlike equity markets, debt markets are particularly illiquid, with much less trading than one might expect for such an important source of financing. If investors are keen to turn their bonds or syndicated loans into cash before maturity, they may pay a hefty price for immediacy. This makes the analysis of interest rates more complicated, with many researchers trying to separate compensation for potential credit losses from illiquidity premia. 

You've written extensively about bankruptcy and financial distress. What are the key lessons students should understand about corporate failures?* 

One of the most influential bankruptcy research articles is by Karen Wruck. She wrote that distress and bankruptcy are opportunities to re-evaluate the operations of the failed firm and engage in discussions with creditors to find the most profitable way forward. This perspective acknowledges that in failure, the assets of the company belong to the creditors who are most motivated to maximize recoveries. In some cases, the best way forward is to liquidate the firm, whereas in other situations, it is best to leave operations untouched and focus on changing the firm's mix of debt and equity. 

While creditors view these two extremes as equally palatable if one leads to higher recovery, their view is seldom shared by governments, workers, and management who tend to prefer saving the company no matter how little benefit it offers. Banking regulators in particular view the failure of a large financial firm as a sure path to an economic downturn and often will pay any price to bail out a large firm. 

My research shows that the mechanism linking banking crises to the failure of one financial firm is indirect, if it exists at all. This stands in stark contrast to the domino theory put forth by Federal Reserve Chair Ben Bernanke on 60 Minutes in 2009 when he defended the multibillion-dollar bailout of AIG. He argued that AIG's troubles were like your neighbor's house being on fire and failing to save it would bring down other houses of finance. 

Your papers frequently discuss policy implications. How do you see the relationship between academic research and financial regulation? 

I worked in the Federal Reserve System for ten years—much longer than I would have liked—but sometimes it's hard to put one's career on the right track. Despite my overall negative view of that decade, I admit I learned a lot about markets and financial institutions while working there. Time spent on those topics is time spent away from academic research; once I became a professor, I paid much less attention to policy. 

That said, it was more than typical for a finance professor; many did not study much macroeconomics and almost certainly did not take a PhD course on banking. Regulators often view themselves as firefighters, putting out policy fires quickly. For example, when a bank gets into financial distress, they often find a merger partner over a weekend. 

This approach to decision-making could not be more different from that involved in multiyear research projects dominating one's time as an academic. Regulators have difficulty doing what is right in the long run while academics are often uninformed about details necessary for short-term decisions. It's quite difficult to have your feet in both worlds; academia's incentives lead most people away from policy. When I have leaned that way, it is because I was very interested and could see a publishable research paper on the topic. 

Given your expertise in corporate finance and credit markets, what emerging trends or research areas do you think will be crucial for students to focus on in coming years? 

Artificial intelligence offers many opportunities for young researchers and even some older ones like myself. Research is extremely time-consuming; I am hopeful AI and new computer-related tools will make it faster and allow researchers more time to focus on big-picture issues. 

For Americans, reversing the horrible downward slide in math education would be beneficial as AI is no substitute for that training; I'd like more American finance professors. Europeans—particularly Swiss—have an advantage over Americans here. While it may not lead to huge economic advantages regarding market capitalization or profits—it certainly helps one's success as a finance researcher.