Labor Mobility and Firm Risk: Direct Evidence from Brazilian Employer-Employee Linked Data
Andres Donangelo, Department of Finance
Human capital is the most important input for the production of goods and services in the economy and the main source of aggregate wealth. However, unlike physical capital, such as buildings or machines, human capital can literally walk away from the firm as managers and other employees switch employers, carrying with them some of the firm’s productivity. The interaction between labor mobility and firm risk has been remarkable under-researched until now due to the scarcity of comprehensive data bridging labor and financial markets.
We hypothesize that differences in the level of specificity of skills demanded across firms affect how risk is split between shareholders and workers. We will use a novel Brazilian employee-firm matched panel dataset to investigate this idea. In particular, we will study how employment decisions and individual workers and firms over time are related to observable characteristics and past stories. This project should provide a better understanding of the interrelation between human and physical capital.
A Reexamination of the Effect of Financial Incentives on Intrinsic Motivation
Michael Williamson, Department of Accounting
I examine the effects of performance-based incentives on creativity for individuals already intrinsically motivated to work hard on their creative tasks. Both academic research and the popular press argue that performance-based pay schemes found in many organizations can destroy intrinsic motivation for creative tasks. If so, performance-based pay, rather than playing its intended motivational effect, could actually decrease effort and reduce the creative output of employees. Running counter to this widely held belief, my research suggests that the detrimental effect of performance-based pay is limited to a very specific type of creative task. In fact, my research suggests that performance-based pay can actually boost creative output for those already intrinsically motivated to work hard. As such, my research has important implications for the design of performance-based pay within organizations valuing employees’ creative efforts.
Did more Reputable Investments Banks Issue better Structured Products?
John Griffin, Department of Finance
Richard Lowery, Department of Finance
We investigate the role of reputation in the market for complex structured financial products. Conventional wisdom suggests that securities underwriters with concern for their reputation will tend to produce and sell better securities to avoid losing this valuable if intangible asset. Insights from economic theory, however, suggest that highly reputable individuals and firms face powerful incentives to exploit any reputation they develop. We develop a model to investigate these effects and argue that the ``best'' underwriters may in fact produce securities that perform worse during economic downturns.
The main focus of the project, then, is to determine empirically whether reputation predicts better or worse performance of structured products before and after the financial crisis. We have collected a very large dataset covering MBS, ABS, CLO, and CDOs. Our empirical approach is to test whether securities issued by underwriters with the best reputations were downgraded more or less severely, and how this interacts with the complexity of the securities in question.
Which factors influence tax-motivated income shifting?
Lillian Mills, Department of Accounting
Jeri Seidman, Department of Accounting
Spring-loading when no one is looking? Earnings and cash flow management around acquisitions
Shuping Chen, Department of Accounting
The project, “Spring-loading when no one is looking? Earnings and cash flow management around acquisitions”, is a joint paper by Shuping Chen (McCombs faculty) and two researchers at Yale University, Jake Thomas and Frank Zhang. This paper investigates an important earnings management behavior: the potential collaboration between targets and acquirers during the quiet period, the period from acquisition announcement to completion, when no formal reports are filed with the SEC. Such collaboration, in particular target’s understatement of earnings and cash flows during the quiet period, can lead to overstatement of acquirer earnings and cash flows post acquisition. This is an important earnings management behavior that has been discussed prominently in practitioners’ publications. The Chen et al. paper is the first academic paper to document and investigate this behavior systematically. As mergers & acquisitions are arguably the most important investment decision a manager can make and earnings management can lead to dead weight loss, the findings of this paper have important implications for regulators and users of financial statements.
Capital Structure and Workplace Safety
Jonathan Cohn, Department of Finance
Biases of credit rating analysts
Cesare Fracassi, Department of Finance
Innovation Battles of Digital Knowledge Ownership: Implications for Firm Policies and Processes
Sirkka L. Jarvenpa, Department of IROM
Hüseyin Tanriverdi, Department of IROM
Organizations face a serious dilemma in terms of how to institute policies and processes that promote innovation, but at the same time allocate the legal ownership rights and the financial returns that satisfy owners of the firms and creators of the innovations. For example, open innovation is beginning to face disappointing outcomes as there are increasing questions about the equitable distribution of ownership rights and economic wealth. The goal of our study is to understand how managerial policies and practices designed to achieve one of the objectives of a firm (creating new knowledge and profiting from new knowledge) may have unintended consequences for the other one and how to minimize such unintended consequences.
The disputes over the ownership of knowledge resources are escalating as: (a) employees gain more self-determination and autonomy in virtual environments, (b) knowledge assets become digitized and distributed at a large scale, and (c) emerging innovation models such as open innovation, and emerging competition models such as platform-based competition and ecosystem-based competition enable companies to gain access to digitized knowledge assets of very large numbers of individual innovators around the globe. The context of creation and innovation can have significant impact to whom knowledge is attributed to and the nature of potential knowledge ownership disputes. The disputes reduce the firm’s ability to profit from the new knowledge. The disputes can also negatively affect the creators by leading to the potential loss of employment, dignity and identity.
Optimal Coupon Targeting: Sequential Decision Making and the Value of Information
Frenkel ter Hofstede, Department of Marketing
Vijay Mahajan, Department of Marketing
Carlos M. Carvalho, Department of IROM
Targeting coupons to individual customers is a relatively new phenomenon in retailing. Traditional coupon strategies involve bulk coupons as inserts in newspapers or catalogs which are not specific to individual customers’ purchase patterns. The upsurge in data collection, data storage and information technology, however, has made it possible for retailers to target individual customers based on their individual response behavior. While previous research has looked at computing the face value of coupons that maximize a retailer’s immediate profits, to our knowledge, no study has taken into account the value of information provided by a targeted coupon strategy. In this study, we take such an approach.
We develop a new methodology that optimizes coupon targeting by jointly maximizing category profits and the value of information. We propose a response model that explains a customer’s purchase behavior over time as a function of prices and coupons offered. To derive the optimal coupon targeting strategy, we take a decision-theoretic approach and view the retailer’s coupon decisions as a sequential-decision problem, taking into consideration the expected future behavior of customers when making current targeting decisions. Our methodology will be applied to data collected in a simulated environment. We believe the study will offer great potential for retailers to develop customized coupon targeting strategies and allow us to understand what the value is of such strategies in gaining information about customers.