For generations, Andrew Sutherland's family had the same calling: bagpipes. Growing up in Halifax, Nova Scotia, in a family with Scottish roots, Sutherland's father, grandfather, and great-grandfather all played the bagpipes competitively, criss-crossing North America. Sutherland's aunts and uncles were pipers too.
But Sutherland did not take to the instrument. He liked math, went to college, entered a PhD program, and emerged as a professor at the MIT Sloan School of Management. Sutherland is an enterprising scholar whose work delves into issues around the financing and auditing of private firms, the effects of financial technology, and even detecting business fraud.
"I was actually the first male in my family to not play the bagpipes, and the first to go to university," Sutherland explains. "The joke is that I'm the shame of the family, since I never picked up the pipes and continued the tradition."
The family bagpiping loss is MIT's gain. While Sutherland's area of specialty is nominally accounting, his work has illuminated business practices more broadly.
"A lot of what we know about the financial system and how companies perform, and about financial statements, comes from big public companies," Sutherland says. "But we have a lot of entrepreneurs come through Sloan looking to found startups, and in the U.S., private firms generate more than half of employment and investment. Until recently, we haven't known a lot about how they get capital, how they make decisions."
For his research and teaching, Sutherland was awarded tenure at MIT last year.
Piper at the gates of college
Sutherland is proud of his family history; his grandfather and great-grandfather have taught generations of bagpipe players in Nova Scotia, with many of their students becoming successful pipers around the world. But Sutherland took to math and business studies, receiving his undergraduate degree in commerce, with honors in accounting, from York University in Toronto. Then he received an MBA from Carnegie Mellon University, with concentrations in finance and quantitative analysis.
Sutherland still wanted to research financial markets, though. How did banks evaluate the private businesses they were lending to? How much were those firms disclosing to investors? How much just comes down to trust? He entered the PhD program at the University of Chicago's Booth School of Business and found scholars encouraging him to pursue those questions.
That included Sutherland's advisor, Christian Leuz; the long-time Chicago professor Douglas Diamond, now a Nobel Prize winner, whom Sutherland calls "one of the most generous researchers I've met" in academia; and a then-assistant professor, Michael Minnis, who shared Sutherland's interest in studying private firms and entrepreneurs.
Sutherland earned his PhD from Chicago in 2015, with a dissertation about the changing nature of banker-to-business relationships, published in 2018. That research studied the effects of transparency-improving technologies on how small businesses obtained credit.
"Twenty years ago, banking was very relationship-based," Sutherland says. "You might play golf with your loan officer once a year and they knew your business and maybe your employees, and they would sponsor the local softball team. Whereas now banking has been really influenced by technology. A lot of companies provide credit through online applications, and the days where you had to supply audited financial statements has gone away." As a result of the expansion in technology-based lending, credit markets have shifted from a relationship basis to a transactional focus.
Sutherland, who is currently an associate professor at MIT, joined the faculty in 2015 and has remained at the Institute ever since. A fan of modern art, his office at MIT Sloan includes an Andy Warhol print, which is part of MIT's art-lending program, as well as reproductions of some of Harold "Doc" Edgerton's famous high-speed photographs.
Sutherland has since written five papers with Minnis (now a deputy dean at Chicago Booth), and other co-authors. Many of their findings highlight the variation in lending and contracting practices in the small business sector. In a 2017 study, they found that banks collected fewer verified financial statements from construction companies during the pre-2008 housing bubble than afterward; before 2008, lending had become lax, similar to what happened in the mortgage markets, and this contributed to the crisis. In another study from that year, they showed how banks with extensive industry and geographic expertise rely more on soft than hard information in lending.
"We're trying to understand the 'Wild West' in accounting and finance more broadly," Sutherland says. "For firms like entrepreneurs and privately held companies, largely unfettered by regulation, what choices do they make, and why? And how can we use economic theory to understand these choices?"
Business, trust, and fraud
Indeed, Sutherland has often homed in on issues around trust, rules, and financial misconduct, something students care about greatly.
"Students are always interested in talking about fraud," Sutherland says. "Our financial system is based on trust. So many of us invest on an entirely anonymous basis - we don't personally know our fund manager or closely watch what they do with our money." And while regulations and a functioning justice system protect against problems, Sutherland notes, finance works partly because "people have some trust in the financial system. But that's a fragile thing. Once people are swindled, they just keep their money in the bank or under the mattress. Often we'll have students from countries with weak institutions or corruption, and they'll say, 'You would never do the things you can do in the U.S., in terms of investing your money.' Without trust, it becomes harder for entrepreneurs to raise capital and undermines the whole vibrant economic system we have."
Some measures can make a big difference. In a 2020 paper published in the Journal of Financial Economics, Sutherland and two co-authors found that a 2010 change to the investment adviser qualification exam, which reduced its focus on ethics, had significant effects: People who passed the exam when it featured more rules and ethics material are one-fourth less likely to commit misconduct. They are also more likely to depart employers during or even before scandals.
"It does seem to matter," Sutherland says. "The person who has had less ethics training is more likely to get in trouble with the industry. You can predict future fraud in a firm by who is quitting. Those with more ethics training are more likely to leave before a scandal breaks."
In the classroom
Sutherland also believes his interests are well-suited to the MIT Sloan School of Management, since many students are looking to found startups.
"One thing that really stands out about Sloan is that we attract a lot of entrepreneurs," Sutherland says. "They're curious about all this stuff: How do I get financing? Should I go to a bank? Should I raise equity? How do I compare myself to competitors? It's striking to me that if that person wanted to work for a big public firm, I could hand them a textbook that answers many of these questions. But when it comes to private firms, a lot of that is unknown. And it motivates me to find answers."
And while Sutherland is a prolific researcher, he views classroom time as being just as important.
"What I hope with every project I work on is that I could take the findings to the classroom, and the students would find it relevant and interesting," Sutherland says.
As much as Sutherland made a big departure from the family business, he still gets to teach, and in a sense perform for an audience. Ask Sutherland about his students, and he sounds an emphatically upbeat note.
"One of the best things about teaching at MIT," Sutherland says, "is that the students are smart enough that you can explain how you did the study, and someone will put up a hand and say: 'What about this, or that?' You can bring research findings to the classroom and they absorb them and challenge you on them. It's the best place in the world to teach, because the students are just so curious and so smart."
