This issue of Capital Ideas features some of the research that underlies Chicago GSB�s new Initiative on Global Financial Markets (GFM). The GFM initiative is aimed at supporting original research by Chicago GSB faculty, preparing our students to operate in the rapidly changing global business environment, and engaging policymakers and leading global companies in critical and constructive dialogue on the major issues facing the global economy. The GFM core faculty teach accounting, economics, and finance and share interests in international business, financial markets, and public policies and institutions. The initiative was launched in July 2006 with a founding grant by the CME Trust. In 2007 we began adding corporate partners, starting with AQR Capital, which will offer additional support.

The first paper by Marianne Bertrand and Antoinette Schoar is a natural outgrowth of their interests in development and corporate finance. This paper starts by noting that although family-run firms are very important around the world, relatively little is known about why they are so much more common in some countries than others. Bertrand and Schoar explain that there are both efficiency (e.g., the ease of contracting) and cultural explanations for why businesses might be organized this way, and they delve into what the evidence says on the question. They find a significant role for occurrences such as cultural norms in the success and prevalence of family-run business around the world, and raise many promising directions for further research into the subject.

The second paper, by Luigi Zingales and his frequent collaborators Luigi Guiso and Paola Sapienza, looks at another aspect of culture: the role of trust on international trade and investments. By using survey data on how citizens of one European country trust citizens of another, Zingales, Guiso, and Sapienza are able to isolate a component of trust that is driven by cultural, not economic, considerations. They then show that this component of trust has a significant impact on international trade and investments even when all other traditional economic forces have been accounted for.

In our third paper, Christian Leuz and Felix Oberholzer-Gee look at a case of culture gone bad, using the corruption that was rampant in the Suharto regime in Indonesia to study the functioning of financial markets. The cronyism under Suharto created a set of firms with preferred access to financing, explaining why these firms were reluctant to raise capital abroad, especially if this meant more transparency and scrutiny from outsiders. This domestic access to capital disappeared when the government changed and the firms partially responded by looking for additional funding from foreign sources. Thus, the previous lack of foreign financing was a choice that reflected the ease of getting financing domestically rather than barriers in the external markets. The authors continue to examine the role of cross-border financing in their current research supported by the GFM.

The fourth paper, by Wendy Dobson and Anil Kashyap, focuses on the recent developments in the Chinese banking system. As they note, the transformation has been remarkable: in the late 1970s China had a single bank; in October 2006, a Chinese bank raised the most money ever in an initial public offering. Dobson and Kashyap argue that nonetheless the largest banks are still hamstrung by the communist legacy and they assemble microeconomic, macroeconomic, and anecdotal data suggesting that the banks are making many politically motivated, economically unsound loans. They argue that the next time Chinese growth slows, many of these loans will be revealed to be bad and, absent reform, the bad lending will continue.

One of the costs of the dysfunction of the Chinese banks is that the return to saving there is low. In the final paper in the issue, Tobias Moskowitz, Chris Malloy, and Annette Vissing- J�rgensen look at how individual choices between consumption and saving affect the values of publicly traded companies. As they explain, a central reason for investing is to provide future income and hence consumption. This suggests that stocks offering solid returns when additional consumption would be most desirable should have high valuations. They assemble new, better data on stockholders� long-run consumption patterns and find that indeed these data more accurately follow stock returns, both over time and across different firms.

With over 20 faculty projects supported under the GFM, picking a handful to showcase was a challenge. We encourage you to visit the GFM Web site to learn more about the research in progress; the working papers produced with GFM support also can be found there: chicagobooth.edu/gfm/.

While research is an integral piece of the GFM initiative, it also will support visits by other prominent scholars to the GSB, public lectures by leading corporate and government officials, conferences, and a new outreach program for media members. While most of these components other pieces will begin in 2007, the visitors program is already well underway. We were delighted to host Bengt Holmstrom and John Sutton, two of the most distinguished economists of the past 30 years, as our inaugural GFM visiting faculty fellows. Their thoughts on their visiting experience are briefly described in the interview that concludes this issue of Capital Ideas.

Finally, as the inaugural co-directors of the GFM initiative, we are just two members of the Executive Board. Christian Leuz, Tobias Moskowitz, and Luigi Zingales also oversee the governance of the project. The five of us welcome your support and ideas for helping continue Chicago GSB�s thought leadership in international business, financial markets, and public policies and institutions. We hope to see you at a GFM event soon.