Carola Frydman spends most days in a library, poring over public records and other documents as she excavates the world’s economic past. A well-regarded authority on financial history, especially of large firms and public corporations, the Kellogg School of Management finance professor relies on archival research for insight into the social and market conditions that have led to today’s economic climate.
That research could lead to a comprehensive understanding of how corporations have evolved and shaped the modern American economy, as well as how financial markets and institutions can create sustainable long-term growth.
It’s Frydman’s detailed, hands-on research approach that makes her scholarship so robust. The process allows her to dive deep and discover new perspectives, on topics like executive compensation. While much has been made of current executive pay levels — from lucrative “golden parachute” payouts to the ever-increasing CEO-to-worker wage gap — Frydman examines compensation dating back to the 1930s. Her data sets chart the financial forces that have governed compensation from that era to the present, tracking related effects on such economic issues as corporate health and income inequality.
“I don’t think we can truly understand the present without understanding the past,” says Frydman. “History really matters when it comes to the types of institutions and regulations that we have today.”
Her insights have served her well, including while earning her doctorate degree in economics from Harvard in 2006 and serving at the National Bureau of Economic Research since 2007. Frydman joined Kellogg in 2013 and earned tenure last year. Given the scope of her work and the meticulousness of her research, the accolades are well-earned, says Efraim Benmelech, the Harold L. Stuart Professor of Finance at Kellogg.
“She is a perfectionist,” Benmelech says. “She has the qualities of a big thinker while still paying attention to detail.”
Frydman developed her passion for economic history while in school for her undergraduate degree at Universidad de San Andrés in her native Argentina. As a teen, she enjoyed quantitative fields like physics and mathematics, as well as the humanities. In economics, she found the medium for her myriad interests. “Economics provides you with a framework for thinking about social issues,” she says.
As she continued her studies, Frydman found more connections between economic life and life in general and began to wonder whether these correlations had always existed. Her “aha” moment came during sophomore year as she read about the French Revolution in an economic history class. “My professor brought up all these issues about taxation,” she says. “Various economic factors partly triggered the revolution, which was not simply a consequence of the ideas of a few enlightened men, as I had learned in high school. An idea that has always stayed with me is that a lot of the really complex social problems are complex because no single discipline can provide the answer.”
With an eye on how economics has shaped history, Frydman focused on examining corporate governance, the growth of firms, and their relationships to financial markets. Her research stands out in its ability to move past disciplinary constraints and draw upon eclectic institutional frameworks, legal environments, and cultural landscapes. For example, in the early 20th century, firms had to deal with asymmetries of information, when one party in a transaction knows more than the other. The firms knew more about their prospects than did outside investors, which limited firms’ access to external financing and their ability to grow. Companies solved this problem by establishing close relationships with a few prominent investment banks, which acted as informed intermediaries between firms and investors. These relationships allowed firms to obtain resources for their projects at a time when commercial banks were limited in how much they could lend — likely contributing to the development of the American economy.
Over time, those relationships grew and changed, shifting how capital flows through the economy. By looking at the regulatory institutions at the time, Frydman’s work has led to a better understanding of how that shift affects the economy during a financial crisis.
“I think looking at similar questions in different environments, different periods, helps us develop a broader, richer understanding of economic models and outcomes,” she says.
Frydman’s approach has led to several research collaborations since joining Kellogg. These include scholarship with Benmelech, in which they examined the performances of CEOs who served in the military.
In addition, she and Dimitris Papanikolaou analyzed the effects of technological progress on the CEO-to-worker wage gap, an indicator that, though not well understood, has been the focus of recent disclosure rules by the US Securities and Exchange Commission.
With her recent promotion to full professor, Frydman intends to continue her scrupulous approach to economic research. She is currently examining how corporate governance has affected firm growth and the frictions that hinder economic growth. She’s also looking at how financial gains are distributed throughout the workforce, with hopes of providing insights into the causes and consequences of income inequality.
“I have an ambitious goal of understanding very broad, long-term processes, and the way I do that is by writing one paper at a time,” she says. “This allows me to peel the onion and, hopefully, one day get to the core.”