Betrayed by Wall Street during the Great Recession helped shape Assistant Professor David Gomulya’s research interests.
Many investors took a big hit during the Great Recession of 2008. Among those affected was a young postgraduate in Seattle, Washington by the name of David Gomulya.
While he was as badly stung as anyone else, what was particularly painful was the fact he had actually foreseen that the markets would hit the rocks, but had remained invested nonetheless.
"I had some CFA training and I was analysing the trend of the market. I thought the market was going to crash because the moving averages were pretty bad."
He talked to his financial advisor who reassured Mr Gomulya, who was then doing his PhD at the University of Washington, that the markets were doing okay and not to panic.
In early 2008, the stock market appeared began to look even more troubled. Mr Gomulya re-ran his analysis and called his advisor again. And once again, his advisor told him to hang on and not panic.
"Less than a month later, the market crashed."
The salt in the wound was how his advisor had reassured him. "He told me he had connections at Merrill Lynch and maybe I got the analysis wrong."
Merrill Lynch, of course, was one of the companies that had been deeply involved in the subprime mortgage crisis that led to the Great Recession.
While the young postgraduate lost money because of this, the upside of the experience was that it inspired him to focus his research interests on corporate governance. And since obtaining his PhD, he has a written a few papers looking at the behaviour of financially troubled companies.
One of his papers looks at what happens when firms replace their CEO following a misstatement of earnings. Dr Gomulya and his co-author found that companies that wanted to signal that they were serious about fixing their problems picked a successor CEO with three particular characteristics: prior experience, turnaround experience, and elite educational background.
Having a background in finance and accounting was not a criteria, they found.
They then looked at the response from market, analysts and the media following the announcement of the new CEO and found that of all the factors, educational background had the biggest impact. Having an Ivy-league degree was the criteria that was most correlated with a positive response.
"Elite education was a statistically significant finding. Basically, it says that people care about the status."
In another paper, he and his co-authors looked at another, less obvious, aspect of picking a successor CEO following financial misconduct: facial structure.
The study found that when picking a new CEO, analysts and the media had a more positive reaction when the new CEO had a narrow face compared to when the new person had a broader face.
"People with a narrow face have perceived integrity and it seems that that is how firms picks CEOs."
The research found when the successor CEO had a wider face, analysts were more bearish and the media coverage was more negative.
Both findings can be disconcerting because it suggests that we can be too shallow and only focus on superficial attributes, which can give rise to a repeat of such a crisis in the long run.
However, another paper he worked on showed that after firms restate their earnings, stakeholders moved away from looking at earnings (which are relatively easier to manipulate) and instead looked at the book value of the equity (total assets minus liabilities).
"This is heartening because it shows that shareholders are not so gullible," he said.
In addition to doing research on companies that restate earnings, he also does research on entrepreneurship as well.
"It takes so much effort to create value and when bad things happen, value is wiped out. We need to be very careful how we protect the value that we create."
Dr Gomulya has been working as an Assistant Professor in Strategic Management at the Lee Kong Chian School of Business since the beginning of the year. Previously, he taught at the Nanyang Business School.
At Singapore Management University, he also teaches entrepreneurship and business creation, as well as, strategy to undergraduates.
Based on his years of research into the stock market and less than honest firms, his investment advice is simple: "Buy mutual funds or exchange traded funds. But don't buy unless you have the time and the knowledge.”
Alternatively, he said, “find a good financial advisor."
