OMT WebOrganization and Management Theory Division of the Academy of Management
We recently had the privilege of interviewing Christopher Yenkey, the winner of OMT's Louis R. Pondy Best Dissertation Paper Award for his paper, “Building Markets from Ethnically Fractionalized Networks: Recruiting Investors into the Nairobi Stock Exchange.”
What inspired you to become interested in Kenya and emerging markets?
I got into economic sociology because I’m interested in how markets are socially constructed, and earlier in grad school I was working on a project about the historically changing meaning of transparency in the U.S. capital market. Specifically, I was looking at disclosure regulations starting with the Securities Act of 1934 and followed the rule changes all the way through Sarbanes-Oxley. From there, I started looking at the global diffusion of stock exchanges: there are about 142 stock exchanges worldwide, half of which are new since Reagan took office in 1980 (not a coincidence) and 2/3’s of these new exchanges are in developing countries. Many of these nascent markets are adopting very strict disclosure regulations as a way to increase transparency, which is often pretty weak in developing countries. I was interested in how these regulatory institutions are exported into developing countries, given that these rules are the product of decades of negotiated experience in Western, developed economies.
As I was working on this, I also started working as an RA on a project with Victor Nee at Cornell, looking at how quality and predictability of government institutions affects capital market development. One day we grabbed a bunch of World Bank data and did a country-level scatterplot of bureaucratic quality on one axis and domestic capital market growth on the other and plotted a trend line- an easy first pass through the data. Kenya was WAY above this line, showing a fast growing capital market despite a dysfunctional state bureaucracy. This seemed like just the kind of unlikely scenario that might make for an interesting dissertation project, so I ran with it. And since I’m an avid mountaineer and rock climber, it didn’t hurt that working in Africa would also give me the chance to climb Kilimanjaro and Mt. Kenya!
How did you initially get access to obtain this data? How were you able to build the relationships from a distance?
I’m very fortunate that the Nairobi Stock Exchange is governed by a set of progressive-minded individuals committed to building a capital market as a public good in Kenya. When I first went to Nairobi for a two-week exploratory trip in 2007, I thought I would have to translate what I meant when I introduced myself by saying, “I am interested in theories of institutional change.” As it turns out, they were up to their necks in Douglas North! They understood both the need to foster a more stable, supportive institutional environment as well as the challenges inherent in doing so. So I got a lot of support right from the start because I was asking the same questions they were, and it helped that I was asking questions and searching for answers rather than offering advice or policy prescriptions. Kenya finances about 95% of government spending from tax revenue, which means it isn’t nearly as dependent on outside funding as other countries in the region (e.g. World Bank, IMF, etc.), and there is a lot of pushback in Kenya against structural adjustment and other externally advocated policy reforms. Cornell also has a pretty good footprint in Kenya, so having that “brand” working for me helped quite a bit.
When I went back for five months in 2008, I hired a local college student as an RA and (among several other parts of the project) we got permission to look for hard copy records of listed firms’ share ownership concentrations. We searched through all the exchange’s storage closets, which were located next to the trading floor and in the basement parking garage. I had NSF money that would cover the cost of digitizing the data, and having an electronic copy would be beneficial to them, so they let us dig around. We found a lot of things in those storage closets (air filters and spare tires for Land Cruisers, plastic Christmas trees…), but our quest for complete share ownership data wasn’t looking good. After I had been in-country for four months (and had spent a lot of NSF money laundering shirts and ties caked with storage closet muck), I was having lunch with the head of the exchange’s IT department, and he says to me, “You know, several of us in the office are wondering when you’re just going to ask for access to the electronic platform.” My jaw hit the floor! Of course I knew that the exchange had operated on an electronic platform since 2004, but Kenya is one of the world’s least transparent societies, and it certainly isn’t the kind of place where you ask to see someone’s digital business records! The idea of asking for access to the electronic infrastructure NEVER occurred to me- I thought it would get me kicked out! From that point, the biggest problem I had was getting Cornell to sign the non-disclosure agreement. Understandably, the university didn’t want to sign a contract in a foreign country, but after several months of lobbying they finally signed and I got the data. Some early analyses uncovered patterns in investor behavior they weren’t aware of, and after showing that I could uncover information of use to them, they agreed to give me access to more fine grained data. That’s how I got access to the town of residence for all investors from their account registration (which wasn’t included in the original data delivery), which then made the network analysis possible that is so critical to this project.
So, the short answer to your question is that they offered the data to me, but only after I demonstrated a strong commitment to being in Nairobi and working on issues of fundamental importance to Kenyan stakeholders.
What are you currently working on? What is your vision for your long-term research program?
This dataset can speak to so many interesting questions, and I’m pursuing several. The “markets from ethnic networks” data is getting deepened with more precise data on the ethnicity of each individual investor (the current version uses town-level proxies for ethnicity within the network), and I’m also working on a version of the paper that looks at attributes of local “seeds,” asking if previous investors that have higher status locally influence new investors more than similar others- sort of a “homophily vs. aspirational mimicry” story. I am also working on a paper that looks at the effect of fraud on investor participation; being cheated by one’s stockbroker isn’t uncommon in Kenya, and they supplied a dataset with the value of shares stolen from each investor and I’m looking how that impacts willingness to continue investing (my hunch is that it doesn’t have a detrimental effect, which runs contrary to most of the trust literature). Yet another set of papers looks at the trading behaviors of inexperienced investors relative to professional investors and how new investors learn different investment strategies as they gain experience in the market. And finally, I’m looking at the behaviors of foreign and domestic institutional investors, modeling how shocks within Kenya that depress equity prices (political instability, drought, etc.) signal either an opportunity to invest (because equities are undervalued) or cause to exit the market (because Kenya comes to be seen as a sinking ship). Basically, after studying mass participation of retail investors in Kenya in several ways, I’m now shifting my focus to the “big fish” institutional investors. I figure by the time I shop these six papers around, the journal editors and readers will be pretty tired of hearing about the Kenyan stock market…
I’m also compiling a portfolio of my results that demonstrates the kinds of questions my methodology can address, which I’ll present to Kenyan policy makers in November. With their support, I hope to form similar relationships with other emerging financial markets both in Africa and elsewhere; so hopefully we’ll see several other capital markets in my dataset before too long. I’m also in the early stages of building a new project on an entirely different type of nascent market structure, but I’m not going to give away any details until I have the data in hand!
How can your past and future research benefit society?
Markets can be welfare enhancing, but markets take lots of forms and not all forms are well suited to all settings. I make a point of staying out of the debate about whether or not the capital market model can drive economic growth in developing countries with weak supporting institutions. The fact of the matter is that lots of these markets do exist and they’re not likely to close up shop, so I take it as my job to discover and explain factors that facilitate or impede their construction and intended function. When I’m in Kenya, the vast majority of my meetings are with policy makers, but at home I interact almost entirely with academics. I love this arrangement because it allows me to contribute to both our theoretical and empirical understanding of market institutions as well as helping make new knowledge accessible and usable to the practitioners that, as we speak, are making decisions that help determine the shape and form of global investor capitalism. If you ask me, that’s not a bad way to spend the workday!
What does winning both the OMT division’s Pondy Award and the Academy-wide Newman Award for best dissertation mean to you?
In a word: tons! This project has been really rewarding for me personally, but having the support and recognition of my peers adds a whole other element. When you decide to do a dissertation in a far flung locale, you shouldn’t expect to move fast enough to have papers published out of the project as you hit the job market; results, much less *significant* results, can be pretty slow in coming. I mean, it took me months just to clean the town of residence measure for my 1.3 million investors, and there was no guarantee that the analysis would show anything! Having my work recognized like this gives the project a great boost as I move toward journal submission, and in the longer term it is really valuable as a junior scholar to have your research program supported and recognized by your senior colleagues. The paper also won the Ron Burt Award from the America Sociological Association’s Economic Sociology Section, so it feels like the project is building a solid head of steam.
But to be sure I don’t tell an all-glory story, I’ll share this quick story in case it gives hope to early grad students (and hopefully my senior colleagues won’t still be reading by this point): after a job talk this winter, a scholar of no small import said to me, “That’s one of the more interesting projects I’ve seen in a while. I can’t say that it’s brilliantly executed, but very interesting.” Another researcher whose work I admire said to me this summer something along the lines of, “It’s an interesting analysis, but you don’t even have a mechanism yet.” Both are probably true, but hey, it’s good enough for a start! The papers still have a ways to go before they live up to the questions being addressed, but I’m pushing hard and am confident that I’m making headway. I don’t think I won the Pondy and Newman awards because I *arrived* at some great conclusion- I think I won them because I asked a big question and put in a massive effort to build resources that start to answer it (and frankly, there’s some luck involved that the results worked out). To paraphrase my dissertation advisor, Richard Swedberg, “If you think you know the answer before you start, your question probably isn’t very interesting.” (Buyer beware: this can be a high risk, high return strategy, so consult your committee before running off to Africa!)
And a final word to all grad students: when you submit your AOM conference paper in January, CHECK THE BOX that asks something like, “do you want this paper to be considered for the grad student paper award”!! I really thought I did, but in fact I did not! I owe a huge thank you to Kenji Klein, a student at UC-Irvine who helped Christine Beckman sort through the OMT paper submissions. He recognized my work from an earlier conference and checked the box for me- thanks Kenji!
Tags: Christopher Yenkey | interview | Kenya | Pondy Award
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