The Wharton School

In 1881, American entrepreneur and industrialist Joseph Wharton established the world’s first collegiate school of business at the University of Pennsylvania — a radical idea that revolutionized both business practice and higher education.

Since then, the Wharton School has continued innovating to meet mounting global demand for new ideas, deeper insights, and  transformative leadership. We blaze trails, from the nation’s first collegiate center for entrepreneurship in 1973 to our latest research centers in alternative investments and neuroscience.

Wharton's faculty members generate the intellectual innovations that fuel business growth around the world. Actively engaged with the leading global companies, governments, and non-profit organizations, they represent the world's most comprehensive source of business knowledge.

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  • Publication
    Law and Custom on the Federal Open Market Committee
    (2015-06-01) Zaring, David T
    The Federal Open Market Committee (FOMC), which controls the supply of money in the United States, may be the country’s most important agency.1 The chair of the committee is often dubbed the second most powerful person in Washington, only deferring to the President himself.2 Financial scholars and analysts obsess over the institution, leading to a rich tradition of FOMC Kremlinology, veneration, and second-guessing in business schools and economics departments. But legal scholars have been less entranced by the committee—put off, perhaps, by the fact that the institution has never been checked by the courts or by the Administrative Procedure Act (APA).4 As a result, there has been no effort to come to grips with the administrative law of the FOMC; this article seeks to redress that gap. The FOMC enjoys a legal mandate that shields its discretion to a remarkable degree. The principal claim here is that this shield, combined with the imperatives of bureaucratic organization in an institution whose raison d’etre is stability, has turned the FOMC into an agency governed by internally developed tradition in lieu of externally imposed constraints. The makeup of the committee, the materials that it consults before rendering monetary policy decisions, its voting mechanisms, and the way its decisions are promulgated are products of a mélange of evolving tradition and statutory permissiveness. One might argue that some combination of law and tradition explains what happens in most agencies. But the degree of reliance on tradition sets the FOMC apart. No one worries about the customs governing evidence presentation and voting order on multimember boards like the Securities and Exchange Commission (SEC) or the National Labor Relations Board (NLRB), but they are subjects of scrutiny at the FOMC. By the same token, APA law, rather than traditions such as that of the FOMC’s so-called “beige book,” governs what goes into the record before, say, the EPA or Commerce Department make their factual findings.5 And Supreme Court decisions like Motor Vehicle Manufacturers Ass’n v. State Farm Mutual Automobile Insurance Co. mean that the decisions rendered by most agencies are substantially lengthier, and strive for substantially less ambiguity, than those of the FOMC.6 It is possible that this sort of development of routinized custom might be expected for agencies with few legal constraints. If so, the FOMC is a fine example of an institutional tendency, one that might have particular application in other forms of financial regulation. A mix of tradition and legal constraint are a feature of administrative constraint in that field, where litigation providing definitive opinions on required process is rare, and informal—and often nontransparent—oversight a norm. An account of the FOMC that jibes with the way this sort of regulation works might serve as a prod or a comparator for other accounts of the administrative law of financial oversight. Given this theme, the article makes the following additional points: 1. The FOMC enjoys the sorts of broad delegations that other New Deal agencies benefit from, only more so; the orders issued by the committee at the conclusion of each of its eight annual meetings do not fit within the traditional paradigms of administrative rulemaking or adjudication, leading courts to eschew any effort to review those decisions as committed to the agency’s discretion.7 2. Given its free hand, the FOMC might be expected to be an empire builder. But in reality, it has only expanded its remit with regard to the sort of transactions it takes on, which have moved beyond the purchase and sale of federal government debt to include positions in a broader range of financial assets, as the financial crisis exemplified. 3. The modest problems that the FOMC has endured at the hands of the branches that monitor independent agencies like it—the courts and Congress—have reflected its extraordinary independence and relative opacity. The courts have turned away a series of plaintiffs, including two senators, concerned about the breath of the delegation of power over the economy to the committee and the mechanism of appointment of committee members. Congress has occasionally fretted about the black box within which the committee makes its economy-changing decisions. However, in 1990, Congress removed legislation passed in the 1970s designed to require more reporting from the committee, suggesting that it, too, is cowed by the idea of subjecting the agency to much legislative oversight.8 4. The committee makes decisions in a procedurally consistent but increasingly lengthy and elaborate way. Simple correlations between the transcripts of these meetings (length, size, mood, number of times the chair spoke), the ultimate decision made by the FOMC, and a number of leading economic indicators found one intriguing relationship between attendance and the direction of the federal funds rate.9 There may be some promising research directions available for this sort of analysis. If the above observations are meant to make a descriptive case about the way the FOMC makes decisions, the question arises whether we should regret its distance from traditional sorts of administrative procedure. The FOMC’s procedural uniqueness is a function of its independence; that independence isjustly celebrated. We can live with the irregularities and experiments offered by the idiosyncratic procedures of financial regulation in general, and with the FOMC in particular, though comfort with the independence of the committee does not excuse unfamiliarity with the way it operates. It is accordingly worth determining how the FOMC does its business, and no scholar has yet done so. This lack of coverage by legal scholars of the rules and culture surrounding open market operations is not, to be sure, a terrible dereliction of duty. Administrative lawyers often assume that the subjects they study closely—rulemaking and adjudication by agencies—are quite different from other services provided by the government, including block grants, the management of state-owned enterprises, and, indeed, the oversight of interest rates. These lawyers do not necessarily claim that administrative scholarship should cover the entire waterfront of government action. Moreover, from a disciplinary perspective, although lawyers are very much engaged in financial supervision—that is, the way that the Federal Reserve (the Fed) regulates banks—they have little to do with either the decisionmaking by the FOMC, which expands or shrinks the nation’s monetary supply, or the implementation of its open market orders, which is done by the traders who staff the New York Fed’s open market operations desk. Although these are all good reasons not to place the scrutiny of the government’s open market operations agency at the top of every scholar’s agenda, they do not justify ignorance of the committee. Any lawyer interested in institutional design ought to be interested in the design of one of the government’s signature institutions; by the same token, knowing how law constrains the least rule-bound or adjudicatory of agencies essays an outline of the reach of these legal constraints. In part III of this article, the legal constraints of the FOMC are considered in the classical administrative law vein. As this article discusses, those constraints have not limited the discretion of the FOMC, which enjoys a remarkable degree of independence from Congress, the executive, and the judiciary. Nonetheless, the limitations on the freedom of committee members to do as they wish are reviewed to give the reader a comprehensive sense of how the law, as expressed by the actual practice of the courts and Congress, have constrained the agency. But the analysis of how the FOMC operates begins in part II, where the way that the constraints that do exist have affected the agency’s decisionmaking process is considered. A brief conclusion ends the analysis.
  • Publication
    Measuring Firm Innovation and its Relationship with IPO and M&A Activities
    (2019-05-01) Jiang, Wan
    This paper examines the changes in firms’ innovation performance around initial public offerings (IPO) and mergers and acquisitions (M&A) using innovation data based on patent applications, new product introductions, and scientific article publications. The quantity of innovation is measured by number of innovative outputs and the quality of innovation is measured by a variety of metrics including patent or article citation count and content-based novelty score. Results generally show that innovation quantity increases while innovation quality declines following IPO and M&A events. The findings are consistent among patent-based, product-based, and publication-based metrics, and confirm with the results from previous literature. In addition, innovation performance is found to vary with financial performance and industry characteristics. Firms that exhibit larger asset and cash holdings, higher profitability, and more R&D investments are in general more innovative in terms of both quality and quantity. In post-IPO or post-M&A years, higher industry sales concentration and geographic concentration tend to correlate with lower innovation quantity and higher innovation quality. This paper also attempts to study the mobility of innovative employees around IPO and M&A, but the results lack sufficient insights on whether the observed post-event decline in innovation quality can be explained by changes in the composition of innovators. Overall, despite the ability to produce more innovations after going public or acquiring another company, firms should be mindful of the potential loss in innovation quality.
  • Publication
    Changing Risks Confronting Pension Participants
    (2005-01-01) Borzi, Phyllis C
    The past decade has seen a shift from traditional employer-sponsored defined benefit pensions toward individual account defined contribution plans. This has profound implications for participants’ retirement security, as it involves a reallocation of risks and rewards from the plan sponsor to the employee. While much has been written about the transfer of investment risk and the potential consequences of bad investment choices, less attention has been focused on other potential hazards to retirement security. These include the effect of job changes and other employment factors on contribution patterns, the chance of outliving one’s accumulated assets, and the tension between encouraging participants to save for retirement while allowing access to those assets for a variety of other pressing financial needs. This chapter examines these challenges to participant retirement income security and identifies several legal and policy changes that might enable participants to cope better with such changes.
  • Publication
    Evidence-Based Forecasting for Climate Change
    (2013-02-01) Green, Kesten C; Soon, Willie; Armstrong, J. Scott
    Following Green, Armstrong and Soon’s (IJF 2009) (GAS) naïve extrapolation, Fildes and Kourentzes (IJF 2011) (F&K) found that each of six more-sophisticated, but inexpensive, extrapolation models provided forecasts of global mean temperature for the 20 years to 2007 that were more accurate than the “business as usual” projections provided by the complex and expensive “General Circulation Models” used by the U.N.’s Intergovernmental Panel on Climate Change (IPCC). Their average trend forecast was .007°C per year, and diminishing; less than a quarter of the IPCC’s .030°C projection. F&K extended previous research by combining forecasts from evidence-based short-term forecasting methods. To further extend this work, we suggest researchers: (1) reconsider causal forces; (2) validate with more and longer-term forecasts; (3) adjust validation data for known biases and use alternative data; and (4) damp forecasted trends to compensate for the complexity and uncertainty of the situation. We have made a start in following these suggestions and found that: (1) uncertainty about causal forces is such that they should be avoided in climate forecasting models; (2) long term forecasts should be validated using all available data and much longer series that include representative variations in trend; (3) when tested against temperature data collected by satellite, naïve forecasts are more accurate than F&K’s longer-term (11-20 year) forecasts; and (4) progressive damping improves the accuracy of F&K’s forecasts. In sum, while forecasting a trend may improve the accuracy of forecasts for a few years into the future, improvements rapidly disappear as the forecast horizon lengthens beyond ten years. We conclude that predictions of dangerous manmade global warming and of benefits from climate policies fail to meet the standards of evidence-based forecasting and are not a proper basis for policy decisions.
  • Publication
    Collaboration in Supply Chains: With and Without Trust
    (2007-01-01) MacDuffie, John Paul; Helper, Susan
  • Publication
    Gender Quotas for Corporate Boards: A Holistic Analysis
    (2016-01-01) Choobineh, Neeka
    Gender quotas for corporate boards have risen in popularity ever since Norway implemented the first quota in 2003. Proponents point to economic arguments (i.e. enhanced return on assets and return on equity) as well as social good rationales (i.e. bolstered corporate social responsibility and reduced fraud) to validate their enactment. Advocates further gloss over a moral justification rooted in a broad notion of equality, although more heavily relying on empirical claims. This article demonstrates how empirical rationales in support of gender quotas are unconvincing. Economic evidence is ultimately inconclusive, and the social good justifications alone do not serve as compelling policy objectives. With respect to equality, the article distinguishes between equality of outcome and equality of opportunity, explaining how gender quotas provide equal outcome but do not satisfy equal opportunity. Finally, the article points to two more robust objectives for all gender workplace advancement policies, namely, equal opportunity and autonomy.
  • Publication
    Beyond the Classroom: Using Title IX to Measure the Return to High School Sports
    (2010-05-01) Stevenson, Betsey
    Between 1972 and 1978 U.S. high schools rapidly increased their female athletic participation rates in order to comply with Title IX. This paper examines the causal implications of this expansion by using variation in the level of boys' athletic participation across states before Title IX to instrument for change in girls' athletic participation. Analysis of differences in outcomes across states in changes between pre- and postcohorts reveals that a 10 percentage point rise in state-level female sports participation generates a 1 percentage point increase in female college attendance and a 1 to 2 percentage point rise in female labor force participation.
  • Publication
    Delivering Health
    (2010-12-01) Friedman, Ari B
  • Publication
    Corporations and Economic Inequality Around the World: The Paradox of Hierarchy
    (2010-01-01) Davis, Gerald F; Cobb, J. Adam
    Using time-series data from the US since 1950 and from 53 countries around the world in 2006, this chapter documents a strong negative relation between an economy’s employment concentration (that is, the proportion of the labor force employed by the largest 10, 25, or 50 firms) and its level of income inequality. Within the US, we find that trends in the relative size of the largest employers (up in the 1960s and 1970s, down in the 1980s and 1990s, up in the 2000s) are directly linked to changes in inequality, and that corporate size is a proximal cause of the extravagant increase in social inequality over the past generation. We conclude that organization theory can provide a distinctive contribution to understanding societal outcomes.
  • Publication
    Are U.S. CEOs Paid More Than U.K. CEOs? Inferences From Risk-Adjusted Pay
    (2011-02-01) Conyon, Martin J; Core, John E; Guay, Wayne R
    We compute and compare risk-adjusted CEO pay in the United States and United Kingdom, where the risk adjustment is based on estimated risk premiums stemming from the equity incentives borne by CEOs. Controlling for firm and industry characteristics, we find that U.S. CEOs have higher pay, but also bear much higher stock and option incentives than U.K. CEOs. Using reasonable estimates of risk premiums, we find that risk-adjusted U.S. CEO pay does not appear to be large compared to that of U.K. CEOs. We also examine differences in pay and equity incentives between a sample of non-U.K. European CEOs and a matched sample of U.S. CEOs, and find that risk-adjusting pay may explain about half of the apparent higher pay for U.S. CEOs.