Research Abstracts

Latest Published Work by Merage School Faculty Members August 2017–2018

Accounting

Professor Elizabeth Chuk

Title: “The Economic Consequences of Accounting Standards: Evidence from Risk-taking in Pension Plans” Co-author: Divya Anantharaman Accepted at: The Accounting Review

Experts have long conjectured that pension accounting rules, by which pension expense depends on a managerial estimate that is directly tied to the riskiness of plan assets (i.e., the expected rate of return or “ERR” on plan assets), encourage risk-taking with pension investments. The recent passage of IAS 19 Employee Benefits (Revised) (hereafter, “IAS 19R”) eliminates the ERR and replaces it with a managerial estimate unrelated to plan asset riskiness (the discount rate). We demonstrate that a sample of Canadian firms affected by IAS 19R reduces risk-taking in pension investments post-IAS 19R, compared to a control sample of US firms unaffected by IAS 19R. Therefore, removing firms’ ability to recognize immediately in net income the expected higher returns from risk-taking (via a higher ERR) reduces their propensity for that risk-taking - providing some of the first empirical evidence on the economic consequences of eliminating the ERR-based pension accounting model.

Professor Ben Lourie

Title: “The Revolving-Door of Sell-Side Analysts” Accepted at: The Accounting Review

Equity analysts are often hired by firms they cover. I document the extent to which this revolving door phenomenon impairs analysts’ independence. I do this by examining the presence of biased research reports issued during the year before analysts are employed by a firm they cover. I find that during their final year, revolving door analysts bias their EPS forecasts, their target prices, and their recommendations in a direction that suggests they are attempting to gain favor from their prospective employers. Specifically, relative to other analysts, revolving door analysts issue more optimistic reports on the firms that hire them, and they issue more pessimistic reports on firms that do not hire them. These results suggest the presence of strategic bias, although more innocuous interpretations cannot be completely ruled out.

Professor Terry Shevlin

Title: “Corporate Tax Aggressiveness and Insider Trading” Co-authors: Sung Gon Chung, Beng Wee Goh and Jimmy Lee Accepted at:

In this research, we examine the association between corporate tax aggressiveness and the profitability of insider trading under the assumption that insider trading profits reflect managerial opportunism. We document that insider purchase profitability, but not sales profitability, is significantly higher on average in more tax aggressive firms. We also find that the positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and is accentuated for firms with a more opaque information environment. In addition, we provide empirical evidence that tax aggressiveness is significantly associated with greater insider sales volume in the fiscal year prior to a stock price crash. Finally, we find that the association between tax aggressiveness and insider purchase profitability weakens after the introduction of FIN 48, consistent with the increased transparency of tax positions under the new disclosure requirement reducing insiders’ information advantage and hence their ability to profit from insider trading. To the extent that insider trading profits reflect managerial opportunism, our results are consistent with managers exploiting the opacity arising from tax aggressive activities to extract rent from shareholders, particularly those who sold their shares to the managers. Our findings are particularly important in light of the number of studies relying on the agency view of tax avoidance to develop arguments or to draw inferences.

Professor Terry Shevlin

Co-authors: Peng-Chia Chiu (PhD alumnus) and Alexander Nekrasov Accepted at:

In this paper, we examine the role of January in the relation between expected losses/profits and future stock returns. We predict and find that the relation between expected losses/profits and future returns reverses from the usual positive relation in non-January months to a negative one in January. The reverse January relation is consistent across sample years, is observed in the United States and international markets, and is incremental to other variables associated with January returns. At least part of the reverse January relation is explained by tax-loss selling. Further analysis shows that the reverse January relation results in a temporary price drift away from fundamental value. In other words, we find that abnormal positive (negative) future returns

do not always indicate past under/over-valuation. Overall, our results illustrate the importance of controlling for the effect of January when examining how investors price expected losses/profits.

Professor Terry Shevlin

and Opportunities Missed” Accepted at:

“Participating in this special issue has given me the opportunity to reflect on my career in terms of the choices I made, the lessons I learned, and the missed opportunities. I start with a brief history of my academic career to provide context for some of the lessons I have learned. After the chronological history, I discuss lessons learned, missed opportunities, and offer my thoughts on teaching, research, publishing, and service to the academic profession. I conclude with some takeaways that may be useful to doctoral students and junior faculty.”

Professor Siew Hong Teoh

Title: “Headline Salience, Managerial Opportunism, and Over- and Underreactions to Earnings” Co-authors: Xuan Huang (PhD alumnus) and Alex Nekrasov Accepted at: The Accounting Review

Limited attention theory predicts that higher salience of earnings news implies a stronger immediate market reaction to earnings news and a weaker post-earnings announcement drift (PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with SALIENCE effects. Higher SALIENCE is associated with stronger announcement reaction and subsequent PEAR. Managers are more likely to choose higher SALIENCE before selling shares in the post-announcement period and when earnings are high but less persistent, and to choose lower SALIENCE before stock option grants. The results are robust to using residual SALIENCE and an extended set of control variables. The findings are consistent with managers opportunistically headlining positive financial information in the earnings press release to incite overoptimism in investors with limited attention.

Professor Siew Hong Teoh

Title: “The Promise and Challenges of New Datasets for Accounting Research” Accepted at:

I describe a brief summary of the development of databases used in accounting research and discuss the research questions addressed in traditional databases and “new” databases. The new data include online searches such as Google Trends data; textual data from corporate disclosures, analyst reports, conference call transcripts, earnings press releases, and news media articles; social network and social media data from Twitter, LinkedIn, Glassdoor, and other data. New data holds promise for research on attention or cognitive processing constraints, and on tone/valence, affect, deceptiveness and credibility for capital market and financial reporting outcomes. I examine the econometric challenges of new data and suggest the potential for new data to offer new auditing tools to detect poor financial reporting, which will help to discourage earnings management.

Economics/Public Policy

Professor Edward Coulson

Title: “Reassessing Taylor Rules Using Improved Housing Rent Data” Co-authors: Brent Ambrose and Jiro Yoshida Accepted at: Journal of Macroeconomics

There is a debate whether the federal funds rate deviated from the Taylor rule. We present evidence that standard inflation measures do not reflect the contemporaneous state of housing rents, which is a large part of consumption. Using a new housing rent index (RRI) developed by Ambrose et al. (2015), we compute the RRI-based Taylor rule for the period from 2000 to 2010. The modified Taylor rule indicates that seemingly large deviations are better understood as delays due to the stale information regarding housing rents. It also provides a justification for Quantitative Easing and a better alternative to other versions of Taylor rules.

Finance

Professors David Hirshleifer

Title: “A Theory of Costly Sequential Bidding” Co-author: Kent Daniel Accepted at: Review of Finance

We model sequential bidding in a private value English auction when it is costly to submit or revise a bid. We show that, even when bid costs approach zero, bidding occurs in repeated jumps, consistent with certain types of natural auctions such as takeover contests. In contrast with most past models of bids as valuation signals, every bidder has the opportunity to signal and increase the bid by a jump. Jumps communicate bidders’ information rapidly, leading to contests that are completed in a few bids. The model additionally predicts informative delays in the start of bidding, that the probability of a second bid decreases in, and the jump increases in the first bid, that objects are sold to the highest valuation bidder; and revenue and effciency relationships between different auctions.

Professors David Hirshleifer and Siew Hong Teoh

Title: “Social Transmission Bias and the Cultural Evolution of Folk Economic Beliefs” Accepted at:

Evolved psychological predispositions influence, but do not determine, how people think about economic issues. Boyer and Peterson provide important new insights, but neglect a crucial level of explanation: the social transmission process. The need for a social explanation for the evolution of economic attitudes is evidenced, for example, by variations in socialist versus libertarian beliefs over time and across individuals.

Information Systems

Professors Mingdi Xin and Vidyanand Choudhary

Title: “IT Investment under Competition: The Role of Implementation Failure” Accepted at: Management Science

How does competition impact firms’ incentive to innovate through information technology (IT) investment? Prior literature suggests opposite predictions on the direction in which competition drives IT investment. This paper analyzes a

game theoretic model of duopoly competition and shows that an important feature of IT sheds new light on firms’ investment decisions: IT implementation can fail. Without the possibility of implementation failure, the opportunity to invest in IT hurts firms’ profits because the productivity gains are competed away. Implementation failure creates a possibility of cost-based differentiation and mitigates competition, although these two effects can drive firms’ IT investment in opposite directions. Interestingly, a higher probability of implementation failure can lead to lower investment risks and higher expected profits. Firms in highly competitive markets are better able to recoup the returns to their IT investments and, therefore, more motivated to invest in risky IT than firms in less competitive markets.

Marketing

Professor Sreya Kolay

Title: “Tie-in Contracts with Downstream Competition” Accepted at:

Sellers often offer their buyers tie-in pricing contracts, i.e., contracts that offer buyers a product only as a part of a bundle of two or more products and not by itself outside the bundle. Such frequently-used contracts have been accused of being used for exclusionary purposes. Specifically, the concern is that a firm that is dominant in a primary product market can utilize such contracts to force buyers to purchase the secondary product from it, thereby excluding a more efficient rival from the secondary market. Most notably in the late 1990s, Microsoft came under considerable fire for tying its browser Internet Explorer to its dominant Windows operating system when it sold its products to PC manufacturers allegedly for the purpose of driving out its rival Netscape Navigator. Recently, Google has been the subject of concern among antitrust authorities with regard to the tying of its applications like Google Play, Google Search, Google Maps and YouTube with its dominant Android operating system for mobile phones. The majority of tie-in contracts that have historically generated concern among antitrust authorities are ones extended by upstream firms to buyers who compete in downstream markets. This paper examines the incentives of a firm to offer exclusionary tie-in contracts when it sells its products through downstream competing retailers. We show that the profitability of exclusionary tying is related to two important factors: (i) the ability to commit to prices by the upstream firms and (ii) nature of downstream competition among the retailers. Specifically, when retailers compete in prices, then regardless of whether the entrant is able to commit to its own prices, an exclusionary tie-in strategy is profitable (not profitable) for the incumbent when it is able (unable) to commit to prices. However, when retailers compete

in quantities, the entrant’s commitment ability does matter. Specifically, an exclusionary tie-in strategy (i) may be unprofitable for an incumbent when both upstream firms are able to commit to their prices, depending on the degree of cost advantage of the entrant; (ii) is always profitable when it alone can commit to its price; and (iii) is unprofitable when both upstream firms cannot commit to their prices. Our results extend to situations where the products are complementary or substitutes and where the retailers may be asymmetric in nature. Overall, we show industry circumstances where exclusionary tie-in pricing contracts are likely to arise, and where they are not.

Professor Eric Spangenberg

Book Chapter: “Engaging with Brands: The Engagement on Customer Advocacy” Co-authors: Richie L. Liu, David Sprott and Sandor Czellar Published in:

Considerable branding research has focused on understanding the processes underlying consumers’ engagement with brands, exploring both dispositional and situational forms of engagement. Scholars, however, have yet to conceptualize and empirically assess the relationship between dispositional and situational engagement. Motivated by this gap in understanding, we explore the influence of dispositional brand engagement on customer advocacy (i.e., positive word-of-mouth and “liking” on Facebook), as mediated through situational engagement with a specific brand.

Operations and Decision Technologies

Professor Robin Keller

Title: Designing Safety Regulations for High- Authors: Committee for a Study of PerformanceBased Safety Regulation Publisher: The National Academies Press

TRB Special Report 324: Designing Safety Regulations for High-Hazard Industries, examines key factors relevant to government safety regulators when choosing among regulatory design types, particularly for preventing lowfrequency, high consequence events. In such contexts, safety regulations are often scrutinized after an incident, but their effectiveness can be inherently difficult to assess when their main purpose is to reduce catastrophic failures that are rare to begin with. Nevertheless, regulators of high-hazard industries must have reasoned basis for making their regulatory design choices. Asked to compare the advantages and

disadvantages of so-called “prescriptive” and “performance-based” regulatory designs, the study committee explains how these labels are often used in an inconsistent and misleading manner that can obfuscate regulatory choices and hinder the ability of regulators to justify their choices. The report focuses instead on whether a regulation requires the use of a means or the attainment of some ends—and whether it targets individual components of a larger problem (microlevel) or directs attention to that larger problem itself (macro-level). On the basis of these salient features of any regulation, four main types of regulatory design are identified, and the rationale for and challenges associated with each are examined under different high-hazard applications. Informed by academic research and by insights from case studies of the regulatory regimes of four countries governing two high-hazard industries, the report concludes that too much emphasis is placed on simplistic lists of generic advantages and disadvantages of regulatory design types. The report explains how a safety regulator will want to choose a regulatory design, or combination of designs, suited to the nature of the problem, characteristics of the regulated industry, and the regulator’s own capacity to promote and enforce compliance. This explanation, along with the regulatory design concepts offered in this report, is intended to help regulators of high-hazard industries make better informed and articulated regulatory design choices.

Professor Robin Keller

Title: “Do Pictographs Affect Probability Comprehension and Risk Perception of MultipleRisk Communications?” Co-author: James Leonhardt (PhD alumnus) Accepted at:

Pictographs can be used to visually present probabilistic information using a matrix of icons. Previous research on pictographs has focused on single rather than multiple-risk options. The present research conducts a behavioral experiment to assess the effect of pictographs on probability comprehension and risk perception for single and multiple-risk options. The creation of the experimental stimuli is informed by a review of the Centers for Disease Control and Prevention’s vaccine information sheets. The results provide initial evidence that, in the context of childhood vaccines, the inclusion of pictographs alongside numeric (e.g., 1 in 5) probability information can result in higher probability comprehension and lower risk perception for multiple-risk options but not for single-risk options. These findings have implications for how health-related risks are communicated to the public.

Professors Luyi Gui and Shuya Yin

Title: “Improving Micro-Retailer and Consumer Welfare in Developing Economies: Replenishment Strategies and Market Entries” Co-author: Chris S. Tang Accepted at: Manufacturing & Service Operations Management

Micro-retailers in remote rural areas in developing countries face high replenishment cost due to poor road infrastructure and the lack of formal distribution channels. This paper investigates the effectiveness of two innovative replenishment strategies (purchasing cooperatives and nonprofit wholesaler) deployed by NGOs to reduce micro-retailers’ replenishment cost and improve consumer welfare. The problem is relevant in practice as travel cost has been documented as a major cost burden that leads to meager earnings for the micro-retailers, few retailers in the market, and high prices to the consumers (due to less competition). Analyzing how these innovative strategies alleviate the above problems enable us to develop practical insights as well as fill an important gap in the literature. We adopt a stylized model that captures price competition, consumer welfare, and market entry decision of micro-retailers under the replenishment strategies considered. We compare the equilibrium retailer profit, consumer welfare, and the number of retailers entering the market under these strategies. We find that in a regulated market, a non-profit wholesaler creates supply chain inefficiency, and thus can lead to a higher retail price, which benefits the retailers yet harms the consumers. However, with free market entry (unregulated market), we show that under certain market conditions, both the cooperative and the non-profit wholesaler strategies can be Pareto improving. Yet between these two strategies, there typically exists a trade-off in both regulated and unregulated markets, i.e., the cooperative strategy enhances consumer welfare while the wholesaler strategy leads to higher retailer profits. Our results indicate that the policy maker needs to be mindful about the market conditions and the relative emphasis between the profit and market participation of micro-retailers and consumer welfare when choosing and implementing the purchasing cooperative and the non-profit wholesaler strategies.

Organization and Management

Professor Gerardo Okhuysen

Title: “Discovery Within Validation Logic: Deliberately Surfacing, Complementing, and Substituting Abductive Reasoning in HypotheticDeductive Inquiry” Co-author: Kristin Behfar Accepted at: Organization Science

We propose a more explicit role for abductive reasoning, or the development of initial explanation, in hypothetic-deductive (H-D) inquiry. We begin by describing the roots of abduction in pragmatism and its role in exploration and discovery. Recognizing that pragmatism treats abductive reasoning as inevitable, we argue that it can also be a deliberate form of reasoning in scientific inquiry, articulating the unique place it can have in hypotheticdeductive theorizing. We explain the opportunities from surfacing abductive reasoning in H-D where it already exists, from explicitly acknowledging abductive reasoning as a complement in building logical chains in H-D, and from using abductive reasoning as a substitute for H-D logic when a body of knowledge exhibits inconsistent, contradictory, or discrepant results. We elaborate strategies for data search/selection, data production and compilation, and analytical corroboration. Our overall argument is that the deliberate use of abductive reasoning in hypothetic-deductive projects has distinct advantages stemming from an explicitly tight connection between data and theory. We end by explaining the benefits of actively recognizing the role of abductive reasoning in organizational and management theorizing.

Strategy

Professor John Joseph

Title: “The Growth of the Firm: An Attention- Based View” Co-author: Alex Wilson Accepted at: Strategic Management Journal

Although most theories of growth presume that it varies with the focus and limits of managerial attention, the actual role played by attention has remained largely implicit. In contrast, this paper explicitly considers attention structure and the processes that place sustained focus on growth issues. We explain how attention structure— specialized attention within a particular unit and integrated attention between units—affects both bottom-up (stimulus-driven) and topdown (schema-driven) attentional processing of new issues. We also examine the relationship between attention structure and divisional interdependencies, identifying conditions under which different attentional patterns generate organizational tensions that lead to architectural

elaboration: the delineation of new organizational units. This logic is illustrated with examples from Motorola, a large telecommunications equipment provider, during a period of sustained growth. In linking theories of growth with the attention-based view, we augment both perspectives and offer an approach which provides a better understanding of growth’s cognitive underpinnings.

Professor Margarethe Wiersema

Title: “Analyzing Analyst Research: A Review of Past Coverage and Recommendations for Future Research” Co-author: Matthias Brauer Accepted at: Journal of Management

As visible and knowledgeable experts who constantly collect, analyze and disseminate information about the future prospects of publicly listed firms, financial analysts fulfill an important information brokerage and monitoring function for investors. By providing investment advice, financial analysts also influence the demand for a firm’s stock and thus its price. As a result, executives pay close attention to financial analysts’ earnings forecasts and recommendations and in fact are frequently criticized for an excessive focus on analysts’ earnings forecasts at the expense of the longterm interests of the firm. But, while the scope of research on analysts in management is steadily growing, we lack a coherent understanding of the extent and nature of analysts’ diverse influences on executives’ and investors’ decision-making, and the context in which analysts operate. This is largely due to the fragmentation of the literature and the absence of prior reviews or metaanalyses on the topic. By organizing, synthesizing and analyzing extant research efforts on analysts in the various domains of strategic management research, we aim to advance our knowledge of the influence of analysts on firms and investors. Further, we hope that our analyses and recommendations help further increase research coverage on this important organizational stakeholder.

Professor Margarethe Wiersema

Title: “Global Strategic Context and CEO Appointments: The Importance of a Global Mindset” Co-authors: Yannick Thams and Aya Chacar Accepted at:

The appointment of a new CEO is among the most pivotal and visible decisions made by a board of directors. While prior research has surveyed the impact of performance and governance related-factors on CEO selection decisions, our understanding of the implications of a firm’s global context is limited. This paper explores the influence of home country globalization, international diversification, and the undertaking of major cross-border acquisitions on the appointment of a CEO with a global mindset. Using a sample of European and US

firms from the Global 500 ranking from 2005 to 2010, we find that companies are likely to match the characteristics of new CEOs with their global strategic context.

In this paper, we highlight the interplay between a firm’s global context and CEO selection. Our findings indicate that executives aspiring to the executive suite should be highly attuned to the imperatives of aligning their knowledge bases, mindsets, perspectives, and social capital toward the challenges that face companies operating within a global context. From the board’s perspective the selection of a new CEO provides the opportunity to assess the firm’s future strategic direction and enables the board to select an executive with the requisite dynamic managerial capabilities required to address the challenges of globalization.