Chicago Booth Magazine: Winter 2011

CRSP Marks 50 Years

A blue-chip idea pays dividends

By Patricia Houlihan

In 1960, Chicago Booth took a look at stock market data in such a transformational way that it allowed the rates of return on common stock to be measured for the first time. For 50 years, the Center for Research in Security Prices (CRSP) has provided high-quality market and index data to academic researchers and asset managers.

In 1959, associate dean James Lorie fielded an intriguing call from Louis Engel, a vice president at Merrill Lynch, Pierce, Fenner & Smith. The firm wanted to advertise how well people had done investing in common stocks, but Engel needed solid data and wanted Booth faculty to help collect it. With an initial grant of $50,000 from Merrill Lynch, CRSP was born.

Building the first database of information from 1926 to 1960 took three-and-a-half years, a herculean effort by associate professor of finance Lawrence Fisher, whose attention to detail set the standard for producing clean data, said Eugene Fama, MBA ’63, PhD ’64, Robert R. McCormick Distinguished Service Professor of Finance. “The fact that it took so long to

build was mostly Larry getting everything right. It was accurate data on dividends, shares outstanding, splits, all kinds of capital changes—and all on paper,” he said. “And it was pushing the limits of computing because computers were primitive at the time.”

In January 1964, using the CRSP data, Fisher and Lorie published “Rates of Return on Investments in Common Stocks” in the Journal of Business, breaking new ground. The New York Times called the paper “the most comprehensive and accurate measurement so far of the rates of return on common stock investment.” But Lorie was concerned about whether others would embrace CRSP data and encouraged Fama to use it for a study of stock splits. The resulting paper, “The Adjustment of Stock Prices to New Information,” published by the International Economic Review in 1969, was the first to use CRSP data in an academic study. Subsequently, more than 400 universities in 30 countries have become subscribers of CRSP data, proving that Lorie’s concerns were unfounded.

Lorie as Visionary

Lorie’s other idea for promoting CRSP was to host seminars twice yearly for finance professionals where researchers would present their new empirical research on the market. Among those who attended was John “Mac” McQuown, who had heard Fisher and Lorie present their preliminary findings at Merrill Lynch’s New York office in 1963. When McQuown took a job with Wells Fargo, that institution became one of the first to sign up for the CRSP seminars, he said. Fama recalled the events were “very popular among business people. It was a way to introduce all the new research in finance at that time to the business community.”

The seminars, combined with the new databases, played an even more important role. Lorie, working with then-dean W. Allen Wallis, realized that business education in the post-World War II environment needed to become more professional and discipline-based. Moving Chicago Booth to the forefront would take a two-pronged approach: embracing empirical research, and building a community of top thinkers who would draw others to the school. The CRSP database, initially available only to Booth faculty, enabled the faculty to produce quantitative work in finance, and helped create the momentum that ultimately turned the school into a finance powerhouse.

Wallis and Lorie had played critical roles. “Jim Lorie was one of the key people in bringing in those who changed business education,” David Booth, ’71, said. “And he recognized the importance of empirical data. Now, everybody takes empirical research for granted, but back in those days, it was a struggle. Computers weren’t big enough. Databases weren’t available. But he saw it was an important part of what business schools needed to do and the kind of research faculty do, and he made it happen. Since then, every other business school has moved our way.”

CRSP continued to develop new products throughout the 1970s and 1980s, when Booth and Rex Sinquefield, ’72, co-funded the new NASDAQ database with the National Association of Securities Dealers to produce data they used at Dimensional Fund Advisors. CRSP added more products through the 1990s and 2000s. In 2009, after CRSP expanded yet again to offer daily data from before 1962, it became clear that the market was saturated. “It was time to introduce a new product that takes CRSP in a new direction, extending CRSP’s competencies from research into commercial investable products,” said chief operating officer David Barclay, ’70. CRSP introduced the CRSP U.S. Total Market Index at its November forum, the first of seven investable indexes that will ultimately be part of a group of 26 indexes.

Behind it are principles and properties developed by John Heaton, Joseph L. Gidwitz Professor of Finance, and Lubos Pastor, Charles P. McQuaid Professor of Finance; they developed high-level objectives as well as the idea that indexes should reflect how money managers invest, a key consideration being cost. (See “CRSP Launches Investable Indexes,” page 26.)

In addition to creating the investable indexes, CRSP will develop research products from the indexes, providing new and different data for academics. Barclay said, “These new indexes are logical extensions of our core products and a way to continue CRSP’s long-term growth.”

Learn more about the history of CRSP.

Last Updated 3/4/11