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IN ACTION Fall 2023
INSIDE THIS ISSUE
How Critical Audit Disclosures Can Help Investors Avoid Bad Investment Decisions Assessing the Economic Impact of Student Debt Freezes Uncovering the Hidden Retail Prices of Zero-Commission Stock Trades
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How Critical Audit Disclosures Can Help Investors Avoid Bad Investment Decisions In 2013 the UK initiated a massive worldwide shift in audit reports with the introduction of a new regulation requiring auditors to provide client-specific disclosures about the risks and other significant matters considered in the audit of the company’s financial statements. The new UK rule provided more information for investors, but it also raised compelling questions. What impact would this new reporting have on investors? Could these expanded audit report disclosures be helpful in assessing a company’s financial risk?
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Professor Patricia Wellmeyer of the UCI Paul Merage School of Business, together with her colleagues Maríadel-Mar Camacho Miñano of the University of Madrid, Nora Muñoz-Izquierdo of CUNEF University, Madrid, and Morton Pincus of the UCI Paul Merage School of Business, set out to examine the usefulness of these new audit disclosures in assessing a company’s financial distress risk. The results of their research, recently published in The British Accounting Review under the title “Are Key Audit Matter Disclosures Useful in Assessing the Financial Distress Risk of a Client Firm?” provide insights into how investors can use audit reports to capture the financial distress risk associated with a firm.
Game Changer “This ruling—the first of its kind in over 70 years—forever changed audit opinions,” says Wellmeyer. “Prior to this, an auditor would write a single paragraph that merely affirmed the financial statements fairly represented the company’s transactions. Now, with this new ruling, auditors are required to provide more information to investors regarding the risks of material misstatements present in a company’s financial statements.” These new disclosures, denoted as Key Audit Matters (KAM), give new insights into where independent auditors believe the financial risks for a company lie, providing information auditors previously held proprietary. “There’s a lot more disclosure in the UK regulation that makes it very, very useful to investors and researchers with new data we’ve never had before.”
Risk Factors After the UK ruling in 2013, Wellmeyer and her team decided to make use of the new audit reporting data to determine how these KAM disclosures could help investors, regulators, and practitioners assess more information about a company’s financial standing. “We took a list of 800 premium-listed firms in the UK, followed them for the next six years, and hand-collected the KAM disclosures over that time frame,” she says. “It took a small army to create our own database. After the first three years, we submitted the initial draft of our paper in 2016, then gathered additional data over another three years to produce the report we recently published.” Once the data were gathered, Wellmeyer and her coauthors began analyzing the disclosures they’d collected. “We were curious what these risk areas could potentially signify about the financial health of a company,” she says. “That’s when we started to focus on the idea of financial distress.”
Forecasting Auditors are required to evaluate whether or not a company is in danger of becoming a growing financial concern, so “financial distress” was a positive indicator for their research. “Auditors are tasked with projecting whether a company is likely to remain a viable entity over the next year,” says Wellmeyer. “We have to give our reasons.” Even though this type of reporting is a requirement for auditors, Wellmeyer notes many firm bankruptcies are not preceded by auditor going-concern opinions. “If you look at the history of going-concern opinions and examine the academic research surrounding them,” she says, “what you’ll find is less than 40 percent of companies that went bankrupt typically had goingconcern opinions from their auditors.”
Murky Waters Numerous reasons may lie behind auditors so often failing to issue going-concern opinions when a company is distressed. Wellmeyer believes there may be a few strong possibilities. “Most auditors do the best they 4
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can, but these are complex assessments, and they don’t always get it right. Another possibility is auditors are afraid a going-concern opinion could become a selffulfilling prophecy and create negative investor response that essentially weakens the company financially, leaving them leery of issuing these types of opinions.” With the new auditing disclosure requirements in place, Wellmeyer and her colleagues wanted to know if they might provide a better mechanism for using auditor reporting to gather information about the financial distress levels of companies—the idea being auditors now don’t have to qualify their opinions about the viability of a company to signal financial distress risk. KAM disclosures could provide information that investors could use to make their own assessments about the health of companies. “This is where our study comes in,” says Wellmeyer. “We didn’t know whether KAMs would be associated with the financial distress level of firms, but we imagined if they were, then these disclosures could provide another avenue for investors to use audit information to measure the financial distress of a company.” Wellmeyer and her coauthors’ research focused on examining the relationship between a company’s financial distress level and the type and number of Key Audit Matters that auditors disclose on their expanded reports.
Educational Impact The results of their research showed companies with more KAM disclosures were also more likely to be
in financial distress. “While these results are useful to investors,” she says, “they are also useful in the classroom, as it gives auditing professors much more context in which to illustrate the benefits of applying a risk-based approach to audits. Not every company is the same, so it is important for auditors to understand and correctly identify where the risk areas lie for each company they audit. Illustrating the relationship between risk areas and financial distress gives our students a practical example of the link between risk assessments and company fundamentals.”
New Insights “What really excites us about the results of our study is that it gives financial statement users another avenue— not available in the past—for using auditor report data to assess financial distress levels at firms,” Wellmeyer says. “As investors, we no longer have to rely on an auditor to write a going-concern opinion to alert us to the risk of impending bankruptcy. These opinions haven’t been good signals in the past. We now show KAM disclosures can provide a more accurate and timely signal of financial distress that investors can use to make decisions.”
Future Hopes Now that the research has been published, Wellmeyer is hopeful US regulators will dive deeper into CAM disclosures in the US. “I think it is something of a red flag to our US regulators that US CAM disclosures are so few compared to those for UK companies,” she says. “If we want these disclosures to be meaningful for investors, they need to provide transparent companyspecific information about where auditors assess the risk areas for a particular client.”
Patricia Wellmeyer, co-founded and is the current academic director of the Master of Professional Accountancy (MPAc) program. She has investigated and authored both academic and practice papers on a range of topics related to audit quality, the impact of new regulation on market and financial reporting outcomes, and the impact of information technology on the audit process Wellmeyer is also the founder and current chair of the annual UCI Audit Committee Summit and is a member of the AAA, AICPA, CalCPA, and NACD.
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Assessing the Economic Impact of Student Debt Freezes In 2020 the massive economic disruption caused by the COVID-19 pandemic prompted governments to take drastic measures to provide financial relief for households and businesses. One of those measures included a pause on student loans, temporarily suspending the repayment requirements for millions of borrowers.
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transactions. With this banking data, we can see how While this policy was intended to stimulate the economy much people are consuming, whether they’re getting and relieve financial stress, little is known about the overdraft fees, sending money to a broker, or investing impact of the payment pause on the labor market or more money. We also could see whether individuals on the financial outcomes of those borrowers. A recent were receiving direct deposit for wages, and most study by Ben Lourie the The UCI Paul Merage School of importantly for our research, whether someone is paying, Business, Alexander Nekrasov of the University of Illinois or not paying, their student loans.” Chicago, and Il Sun Yoo of the University of Hawaii at Manoa explores how More Money loan suspension policies What did these individual influenced the workforce. “We wanted to measure financial health. borrowers do with their Their paper, “The Impact Do people have fewer overdrafts? Do they extra money? Did they of Debt Forbearance invest more? Did they on Borrowers’ Financial start investing more, or do they spend spend more? Did they Behavior and Labor Outcomes: Evidence more now that they’re not paying on their improve their financial situation, or did things from Student Loans,” is loans? These are the questions we wanted get worse? “As expected, forthcoming in Finance we found an increase in Research Letters. to find answers to.” consumption for those who Health Check didn’t pay their student Lourie and his co-authors wanted to see how the loans during the pause. Since they had more money, pause in repayments impacted individuals. “We were they were also less likely to overdraft on their accounts. especially curious about how the pause would impact We also found that they sent more money to their personal consumption habits,” Lourie says. “We wanted brokerage accounts. They invested more. That’s to be to measure financial health. Do people have fewer expected, right? If I have more money, I’m probably overdrafts? Do they start investing more, or do they going to use it.” spend more now that they’re not paying on their loans? These are the questions we wanted to find answers to.”
Granular Data To find answers, Lourie and his team used data from a leading analytical company. “The data sample we used included 824,524 borrowers’ quarterly observations,” he says. “We narrowed it down to the two quarters before and after the launch of the forbearance program.” Lourie, Nekrasov, and Yoo analyzed data from a large number of financial institutions. The data included information about the bank accounts and credit cards of a large number of individuals. “Our data didn’t include personal details,” says Lourie, “so we didn’t know who the person was, but we did have very detailed information about their bank accounts and credit card
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pause ends. As Lourie elaborates: “Some people will say it’s a good thing that employees are working more hours, but that’s not necessarily true. Some may end up working too much, or even working themselves to death, as the saying goes. This could lead to negative mental and physical health outcomes for some people. For others, they may decide they need to wait even longer before starting a family or buying a home.”
Unknown Consequences
Unintended Outcomes There was one unexpected result in their study, however, one they didn’t see coming. “What was unexpected was the realization that this relief in financial pressure also caused people to work less,” Lourie says. “What we found was their wages overall began to reduce. It’s not that they stopped working. They just worked fewer hours because their student loan payments were no longer a pressing concern. It seems that those who worked two jobs dropped down to one job. Those who worked longer hours started working fewer hours. Essentially people shifted to a more healthy work/life balance.”
Lourie and his colleagues recommend further research should be conducted to determine the effects of student loan policies across other subgroups of borrowers, specifically those with varying levels of income, debt, and education. “Our study doesn’t measure those types of factors, but there are known consequences for working too much. It gives us a lot to consider now that the payment pause is coming to an end.”
Negative Impact In light of their findings, companies should think about what it means for the workforce once the student loan
Ben Lourie is an assistant professor of accounting at the Merage School. His research interests include financial reporting and disclosure, capital markets, financial analysts and human capital. His work examines, among other issues, equity analysts’ conflicts of interest, psychological biases and the informativeness of human capital measures. Lourie has published in top-tier journals such as The Accounting Review, Journal of Financial Economics, Management Science, Review of Accounting Studies and Review of Finance. His research has been covered by the Wall Street Journal, Financial Times, Business Insider, Bloomberg and International Business Times. He currently teaches financial statement analysis and SAS and STATA boot camp. RESEARCH IN ACTION
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Uncovering the Hidden Retail Prices of Zero-Commission Stock Trades
Commission-free trading has become the norm among retail investment brokers. Although commissions are a thing of the past, transaction costs driven by the gap between buying and selling prices still get passed on to the investor. In a recent study, Professor Christopher Schwarz of the UCI Paul Merage School of Business and colleagues from UCI and other distinguished business schools discovered something surprising: transaction costs for simultaneous, identical market orders dramatically vary from broker to broker, ranging from -0.07% to -0.45%. The findings are causing a stir in the industry and beyond.
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The results of the study are published in an article titled, “The ‘Actual Retail Price’ of Equity Trades,” authored by Professor Schwarz and his collaborators, Brad Barber of the University of California, Davis, Xing Huang of the Olin Business School at Washington University in St. Louis, Phillippe Jorion of the UCI Paul Merage School of Business, and Terrance Odean of the University of California, Berkeley Haas School of Business. Their paper can be downloaded at SSRN by clicking here.
place. There’s lots of limitations with that data. You don’t know the broker it came from, you don’t know the client type. For us the only way to get information broker-bybroker was to generate our own data.”
Stumbling Upon A Discovery
To get there, the team placed 85,417 market order trades between December 2021 and early June 2022. The trades, made for the same number of shares of the same stock, were made simultaneously at different brokers. Using broker disclosures and detailed trade reports, the team could compare results from broker to broker. “We don’t need to proxy anything, because we generated the data,” Professor Schwarz says.
Professor Schwarz and his colleagues uncovered the disparity between brokers while evaluating the strength of an academic algorithm designed to identify retail trades. “It was a Bob Ross happy accident,” he explains.
Professor Schwarz was using a personal brokerage account to make small intraday trades and, to improve the rigor of his experiment, decided to open another account at a different broker. In late December “I was a bit confused how two brokerage 2021, he simultaneously submitted identical, accounts trading the same stocks at the market order trades to both brokers. same time could have such a huge execution
Such a high volume of trades didn’t come without a cost, of course. “Sometimes you’ve got to get your hands dirty,” Professor Schwarz says. “It wasn’t “At the end of that first cheap for us. We lost difference. It made me want to know, is this day, one account lost tens of thousands $150, while the other type of execution difference typical?” of dollars doing this. one made $12,” he says. I’m sure many of our “I was a bit confused colleagues think we’re how two brokerage accounts trading the same stocks crazy. But I had to know, so I started trading.” at the same time could have such a huge execution “We have a really cool data set,” he says. “It was just a difference. It made me want to know, is this type of little expensive.” execution difference typical? What’s actually driving the difference between brokers?” Finding The Root Of The Problem
Putting Their Money Where Their Curiosity Is To answer those questions, Professor Schwarz and his colleagues determined early on that they’d need to build their own dataset. “As academics we rely on aggregate data that’s given to us,” Professor Schwarz says. “The NYSE’s Trades and Quotes Database has data on every trade that takes 12
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As they examined the data, the team identified three potential sources of the outcome discrepancy between brokers: • Venue choice—Fee differences might be driven by the proportions of trades brokers send to various wholesalers. • Stock routing—Brokers could send more trades
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to venues with worse-than-average execution for those particular securities. • Broker execution—Venues could have different price execution for the exact same orders. To everyone’s surprise, the third category—broker execution—turned out to be the source of the discrepancy. To understand why this matters, one needs to understand how brokers make money in a zerocommission world. The industry’s move away from transaction-based commissions was made possible by an offsetting revenue stream from the securities wholesalers that serve as the trading venue for execution of orders. The new revenue comes from “payments for order flow,” or PFOF, through which wholesalers pay most brokers a price, typically a fraction of a penny per share, to be selected as the venue for trades. For market orders, the fee works out well for the trading venues if they earn more than the PFOF amount on the spread between the bid and asking price of each transaction.
The problem, Professor Schwarz says, is that all these disclosures don’t reveal the significant execution differences between brokers. “If you use the PFOF disclosures, you’d expect execution across all the brokers to be the same. It’s a failure of disclosures that execution is not the same. I can’t think of any other consumer finance product where costs are different and it’s not disclosed.” “Most people think that ‘zero commission’ means trading is free,” he says. “But that’s not the case.”
Surprise, Surprise
Zero Commission, Not Zero Cost
The big difference in outcomes between brokers has attracted a lot of attention in the short time the paper has been posted. Several brokers have reached out to Professor Schwarz to talk about the results, but that’s not all. Regulators, exchanges, and legislators have been in touch to learn more about the team’s findings.
PFOF has been criticized for creating potential conflicts of interest, with brokers choosing between better outcomes for their clients and a higher revenue stream for themselves. The regulators have taken note. SEC regulations require broker-dealers to publish quarterly reports summarizing their routing practices, including details about their PFOF outlays. The regulations also give customers the option to request details about how their trades are routed.
We asked Professor Schwarz what retail investors should glean from his experiment. “The first takeaway is that nothing is free. Retail investors should be a little more cautious about what ‘zero commission’ means.” he says. “The other takeaway is that your price execution is going to depend on what broker you use for market orders.” The challenge, at least before Professor Schwarz and his team published their paper, is that no one knew what that difference was.
Christopher Schwarz is a professor of finance at the UCI Paul Merage School of Business. His research interests include the management, disclosure, and operational risk of the investment fund industry and the impact of manager incentives and structure on investment fund performance. His research has been published in such leading academic journals as the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and the Journal of Financial and Quantitative Analysis and included in testimony before the U.S. Congress House Financial Services Committee.
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Research Abstracts Latest Published Work by Merage School Faculty Members
Finance Abstracts Professors Chong Huang and Radhika Lunawat Title: “Disagreement about Public Information Quality and Informational Price Efficiency” Co-author: Qiguang Wang (PhD alumnus) Accepted at: Journal of Financial Economics (Journal on Financial Times Top 50 list) Investors often hold differing opinions on public information quality. This paper shows that such investor disagreement provides a novel explanation for financial market dynamics around earnings announcements. We propose a rational expectations equilibrium model where investors disagree about the precision of a public signal, which separates a pre-news trading period from a post-news trading period. In equilibrium, investor disagreement about public signal precision diminishes informational price efficiency before the news but enhances it afterward. Consequently, investor disagreement leads to a notable jump in informed trading around the news, a decline in abnormal trading volume before the news and a surge immediately after the news, and underreaction of stock price to announced earnings.
Professor Yuhai Xuan Title: “Politically Affiliated Analysts” Co-authors: Dongmin Kong, Chen Lin, and Shasha Liu Accepted at: Management Science (Journal on Financial Times Top 50 list) Government ownership of financial intermediaries is pervasive around the world. In this study, we examine the impact of the common government ownership between the brokerage and listed firms on the information production role of brokerage firms. We show that affiliated analysts issue more optimistic recommendations on stocks of firms controlled by the same government entity that controls their brokerage firms. This optimistic bias is particularly strong during periods of economic shocks. Our study demonstrates this by utilizing additional tariff impositions and tariff exemptions during the U.S.-China trade war as exogenous negative and positive shocks, respectively. We also find that stocks recommended by politically affiliated analysts underperform those recommended by independent analysts, suggesting that the optimism is driven by conflicts of interest rather than advantageous information. Furthermore, we find that sophisticated investors perceive the potential bias and incorporate it into their trading. Consistent with an exchange of favors story, politically affiliated brokerage firms receive more underwriting allocation during the issuance of local government debt, and governments subscribe for more shares during seasoned equity offerings by these connected brokerage firms.
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Marketing Abstracts Professor Tonya Williams Bradford Title: “Race in Consumer Research: Past, Present, and Future” Co-authors: Sonya A Grier, David Crockett, Guillaume D. Johnson, and Kevin D. Thomas Accepted at: Journal of Consumer Research (Journal on Financial Times Top 50 list) Race has been a market force in society for centuries. Still, the question of what constitutes focused and sustainable consumer research engagement with race remains opaque. We propose a guide for scholars and scholarship that extends the current canon of race in consumer research toward understanding race, racism, and related racial dynamics as foundational to global markets and central to consumer research efforts. We discuss the nature, relevance, and meaning of race for consumer research and offer a thematic framework that critically categorizes and synthesizes extant consumer research on race along the following dimensions: (1) racial structuring of consumption and consumer markets, (2) consumer navigation of racialized markets; and (3) consumer resistance and advocacy movements. We build on our discussion to guide future research that foregrounds racial dynamics in consumer research and offers impactful theoretical and practical contributions.
Professor Hope Schau Title: “Metaphor-Enabled Marketplace Sentiment Analysis” Co-authors: Ignacio Luri and Bikram Ghosh Accepted at: Journal of Marketing Research (Journal on Financial Times Top 50 list) Textual data requires an analytical tradeoff between breadth and depth. Automated approaches locate patterns across large swaths of data points but sacrifice qualitative insight because they are not well equipped to deal with context-determined ways to express meaning like figurative language. To strengthen the power of Automated Text Analysis (ATA), researchers seek hybrid methodologies where computer augmented analysis is combined with sociocultural researcher insights based on qualitative textual interpretation. This article demonstrates a new method, that the authors term Metaphor-Enabled Marketplace Sentiment Analysis (MEMSA). Building on existing ATA methodologies linking word lists to sentiments, MEMSA adds metaphors which associate words or phrases across domains. Using MEMSA, researchers can leverage the sentiment potential of these located metaphors and scale insights to the level of big textual data by employing a dictionary approach enhanced by one unique useful linguistic property of metaphors: their predictable structure in text (something is something else). This article shows that metaphors add associative detail to sentiments
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revealing the targets and sources of sentiments that underlie the associations. Understanding nuanced market sentiments allows marketers to identify sentimentbased trends embedded in market discourse toward better formulating, targeting, positioning, and communicating value propositions for products and services.
Professor Hope Schau Title: “From Crisis to Advocacy: Tracing the Emergence and Evolution of the LGBTQIA+ Consumer Market” Co-authors: Montecchi Matteo, Maria Rita Micheli, and Mario Campana Accepted at: Journal of Public Policy and Marketing Although governments and organizations are increasingly addressing the importance of diversity and inclusion policies, LGBTQIA+ consumers still experience instances of discrimination and stigmatization in the market. It is, therefore, imperative that research identifies barriers and struggles that these consumers face in order to inspire more inclusive marketplace practices. By combining bibliometric and automated text mining methods, this article systematically reviews the existing scholarship on LGBTQIA+ issues at the intersection of marketing and public policy and identifies five thematic clusters: consumer experiences, marginalized consumer identities, imagery creation in advertising, marketplace policies, and minority targeting strategies. Further, this article plots the temporal evolution of this literature domain and identifies three substantive phases: crisis, marketization, and advocacy. The outcome is a phasic framework that unpacks how the LGBTQIA+ consumer market emerged and evolved. This conceptual framework can be used to understand and strategically invigorate research that leads to more inclusive marketing and public policy efforts.
Professor Hope Schau Title: “The Stories You Tell: Crafting Managerially Relevant Articles Based on Qualitative Research” Co-author: Melissa Archpru Akaka Accepted at: Journal of Advertising Research Advertisers and marketers leverage big data to track and influence consumer behaviors, (re)evaluate messages, and enhance customer engagement through digital platforms. But these data do not capture the complexity of market contexts or address questions about how or why specific behaviors occur. The authors provide a pathway for unearthing insights from deep data to inform marketing strategy. They call for the use of qualitative research to organize chaos, capture lived experiences, and investigate diffusion of social practices. This paper offers a primer for crafting
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managerially relevant articles. The authors demonstrate how to use qualitative methods through a practitioner-oriented, systematic sensemaking process..
Information Systems PhD Student Jiaqi Shi and Professor Vibhanshu Abhishek Title: “Do Sellers Benefit from Sponsored Product Listings? Evidence from an Online Marketplace” Co-author: Mingyu (Max) Joo Accepted at: Marketing Science (Journal on Financial Times Top 50 list) Sponsored product listings on online marketplaces are third-party sellers’ ads blended in organic product listings. This paper investigates a seller’s managerial question: whether a sponsored listing outperforms an organic listing, and how the performance varies by positions. Our large-scale field study on a mobile app with experimental and natural variation finds consumers prefer organic listings in the top-ranked positions to sponsored listings of the same product/position. Consumers become indifferent between sponsored and organic listings in the lower-ranked positions. A mechanism check suggests top-ranked organic listings are perceived as more credible than sellersubsidized sponsored listings. Despite consumers’ preference for organic listings, a simulation analysis shows an advertising seller may benefit financially if a lower-ranked organic listing can be replaced with a top-ranked sponsored listing.
Strategy and Entrepreneurship Abstracts Professor Violina Rindova Title: “Moral Imagination, the Collective Desirable, and Strategic Purpose” Co-author: Luis L. Martins Accepted at: Strategy Science In contrast to the prevalent outside-in perspectives on corporate purpose as a response to competing normative demands of stakeholders, we introduce an inside-out perspective on purpose as based in firm-specific, agentic commitments to specific values, ideals, and societal goals. Drawing on moral philosophy, we propose how strategists can develop a strategic purpose through moral imagination that involves developing shaping intentions based in values and ideals, empathetic relating, and imaginativeness in stakeholder contexts. These processes support the generation of an emergent theory of value, which we term “the collective desirable.” This theory of value—a creative synthesis of the shaping RESEARCH IN ACTION
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intentions of the firm, and the interests and perspectives of stakeholders—provides the foundation of purpose, which is strategic, dynamic, and generative for the firm and its stakeholders. Such a strategic purpose becomes an organizational logic of action enacted through designated processes for articulation, maintenance, and evolvability, and through blueprints for credible commitments and resource allocations. By theorizing the microfoundations of an agentic, inside-out view of purpose, our theoretical framework articulates a set of mechanisms through which strategists can develop a strategic purpose that is tightly linked to the firm’s future-oriented strategy and the exercise of moral leadership. Our conception of moral imagination as a form of prosocial prospective cognition contributes a novel perspective to the socio-cognitive and subjectivist perspectives on strategy and extends the microfoundations of strategy.
Awards and Honors Professor Leonard Lane Award: 2023 MSOM Responsible Research Award Title: “Can brands claim Ignorance? Unauthorized Subcontracting in Apparel Supply Chains” Co-authors: Felipe Caro and Anna Saez de Tejada Cuenca Accepted at: Management Science (Journal on Financial Times Top 50 list) Unauthorized subcontracting—when suppliers outsource part of their production to a third party without the retailer’s consent—has been common practice in the apparel industry and is often tied to non-compliant working conditions. Because retailers are unaware of the third party, the production process becomes obscure and cannot be tracked. In this paper we present an empirical study of the factors that can lead suppliers to engage in unauthorized subcontracting. We use data provided by a global supply chain manager with over 30,000 orders, of which 36% were subcontracted without authorization. We find that the frequency of unauthorized subcontracting across factories has a pronounced bimodal distribution. Moreover, the degree of unauthorized subcontracting in the past is highly related to the probability of engaging in unauthorized subcontracting in the future, which suggests that factories behave as if they choose a strategic level of unauthorized subcontracting. At the order level, we find that state dependence (i.e., the status of an order carrying over to the next one) and price pressure are the key drivers of unauthorized subcontracting. Buyer reputation and lead time also play a role. Finally, we show that unauthorized subcontracting can be predicted correctly for more than 80% of the orders in out-of-sample tests, and for about 70% of suppliers. This indicates that retailers can use business analytics to predict unauthorized subcontracting and help prevent it. 18
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New Faculty
Violina Rindova
Hope Schau
Associate Dean for Research and PhD Program, Dean’s Leadership Circle Chair, Professor of Strategy and Entrepreneurship
Professor of Marketing
Byungwook Kim
Zuguang Gao
Assistant Professor of Finance
Assistant Professor Operations and Decision Technologies
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Illustrations by Emily Young ’20