10/27/97 ANAT ADMATI

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ANAT ADMATI
Professor of Finance, Stanford
Peel away layers of assumptions about how markets work. Analyze using complex mathematical models. Discover the answers aren't so simple.
That's the nature of market microstructures. ''We study the workings of financial markets and how that environment affects what happens to the terms and costs of a trade,'' says Anat R. Admati, 41, an economics and finance professor at the Graduate School of Business at Stanford University. The Israeli academic has won some of the field's top awards and is ''probably the most influential woman in finance,'' says one prominent finance professor.
Admati had never taken a finance course when she began her PhD in operations research at Yale University 18 years ago. But she became intrigued with the field and began using mathematics and statistics to look at simple market questions in complex ways.
For instance, most financial models assume that a company's performance doesn't depend on its owners. But Admati showed that when large shareholders become activists, their monitoring can improve a company's returns. Ultimately, the cost of capital can drop. Still, it isn't cost efficient for large shareholders to do a lot of monitoring. Understanding the trade-offs in this relationship is important to both companies and their shareholders.
Another example: portfolio-manager compensation. It's common practice to pay managers based on how they perform relative to an index such as the Standard & Poor's 500-stock index. Admati and frequent collaborator Paul Pfleiderer, also of Stanford, showed that it could be better to pay managers based on the portfolio's absolute return, regardless of external benchmarks.
Admati and Pfleiderer are passionate about their work, and their theoretical discussions in Palo Alto cafes have gotten so heated that they have been asked to quiet down. This year, though, Admati and her husband, noted Stanford economist David M. Kreps, are in Israel with their two children, visiting Admati's family. ''I'm doing my research by E-mail,'' she says. It's calmer that way.
By Susan Jackson in New Haven

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