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Research | Recent Publications

September-December 2011

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  • A Discrete Time Approach for Modeling Two-Factor Mean-Reverting Stochastic Processes

    Hahn, Warren J.; Dyer, James S.

    Decision Analysis - Sep 2011, Vol. 8 Issue 3, p220-232

    Two-factor stochastic processes have been developed to more accurately describe the intertemporal dynamics of variables such as commodity prices. In this paper we develop an approach for modeling these types of stochastic processes in discrete time as two-dimensional binomial sequences. This approach facilitates the numerical solution of dynamic optimization problems such as investment decision making under uncertainty and option valuation related to commodities. We implement this approach in a two-dimensional lattice format, apply it to two hypothetical valuation problems discussed by Schwartz and Smith, and compare the results to those from simulation- and dynamic-programming-based methods.
  • Knowing Where They Stand: The Role of Inferred Distributions of Others in Misestimates of Relative Standing

    Gershoff, Andrew D.; Burson, Katherine A.

    Journal of Consumer Research - Sep 2011, Vol. 38 Issue 3, p407-419

    People often estimate how they compare to other consumers when they make purchase decisions. Unfortunately, they tend to err in this task, and this can lead to negative consequences in their choices. Previous literature has largely argued that these errors in estimates of relative standing are due to underweighting or ignoring the reference group. Using a novel measure of people's perception of the reference group, we show that consumers do attend to that information but err in their estimates of relative standing because they tend to overestimate the dispersion of others' performances and attributes. Three studies support this argument and provide insights that enable marketers to alter consumers' relative assessment process in formerly discounted ways. We demonstrate straightforward tools that can change consumers' impressions of others and thus change relative assessments and purchase decisions.
  • Durable Products, Time Inconsistency, and Lock-in

    Gilbert, Stephen M.; Jonnalagedda, Sreelata

    Management Science - Sep 2011, Vol. 57 Issue 9, p1655-1670

    Many durable products cannot be used without a contingent consumable product, e.g., printers require ink, iPods require songs, razors require blades, etc. For such products, manufacturers may be able to lock in consumers by making their products incompatible with consumables that are produced by other firms. We examine the effectiveness of such a strategy in the presence of strategic consumers who anticipate the future prices of both the durable product and the contingent consumable. Under a lock-in strategy, the manufacturer has pricing power over the contingent consumable, which she can use to extract additional rents from higher valuation consumers, but such pricing power may also reduce consumers' willingness to pay for the durable because it subjects them to being held up with higher consumables prices in the future. Restricting our attention to linear pricing policies, we find that if the manufacturer can commit to shutting down production of her durable after an initial one-time sale, then competition from another consumable of an appropriately degraded level of quality can benefit the manufacturer by mitigating consumers' fears of being held up. On the other hand, when the manufacturer cannot commit to shutting down production of her durable, then her own output of additional durables gives her an incentive to keep consumables prices low, and competition in the consumables market is less beneficial.
  • How Important Is the Financial Media in Global Markets?

    Griffin, John M.; Hirschey, Nicholas H.; Kelly, Patrick J.

    Review of Financial Studies - Dec 2011, Vol. 24 Issue 12, p3941-3992

    This article studies differences in the information content of 870,000 news announcements in 56 markets around the world. In most developed markets, a firm's stock price moves much more on days with public news about the firm. In contrast, in many emerging markets volatility is similar on news and non-news days. We examine several hypotheses for our findings. Cross-country differences in stock price reactions are best explained by insider trading, followed by differences in the quality of the news dissemination mechanism. Our findings are useful for quantifying the extent of insider trading and how the financial media affects international markets.
  • Hallowed Grounds: The Role of Cultural Values, Practices, and Institutions in TMS in an Offshored Complex Engineering Services Project

    Jarvenpaa, Sirkka L.; Keating, Elizabeth

    IEEE Transactions on Engineering Management - Nov 2011, Vol. 58 Issue 4, p786-798

    The globalization of complex engineering services has resulted in physically dispersed teams that can no longer rely on the traditional and familiar oral transmission of engineering expertise nor can they assume knowledge of their team members’ culture. Yet, such teams need to be able coordinate effectively the dispersed knowledge of team members. We know little about how cultural differences among engineering team members impact the coordination of dispersed knowledge, so called transactive memory systems (TMSs)—or “who knows what” and “who knows who knows what.” In this paper, we present a longitudinal case study of a dispersed, cross-cultural team involving U.S. and Romanian engineers. The cultural differences in values, practices, and institutions had a major impact on TMS indicators of specialization, coordination, and credibility. The paper demonstrates how the cultural differences impeded TMS development. The results provide insight into TMS as an implicit coordination mechanism in a global team. We provide advice in terms of interventions that can promote the development of TMS in a culturally diverse team.
  • Boundary Management in Online Communities: Case Studies of the Nine Inch Nails and ccMixter Music Remix Sites

    Jarvenpaa, Sirkka L.; Lang, Karl R.

    Long Range Planning - Oct 2011, Vol. 44 Issue 5/6, p440-45

    Online communities foster unprecedented creativity, but at the same time they challenge the contemporary organisational boundary literature. They represent a new kind of nontraditional, nonhierarchical organization where boundaries go beyond efficient (economic and legal) transaction logics to include boundary logics of identity, power and competence that need to be integratively managed. Moreover, these boundaries are not necessarily under the control of management, but rather are constantly negotiated between the platform providers, community members and content owners whose materials are used in collaborative production. In this paper, we explore the questions of how boundaries interact and how they can be managed integratively to render creative content production. Our empirical study involves an exploratory case research design of two established music remix sites: nin.com and ccMixter.org. We report on the community boundaries and their interdependencies, as well as on how the interdependencies are related to the goals and creative content production of online communities. The paper offers new insight into the role of integrative boundary management.
  • Stepping Into The Internet: New Ventures In Virtual Worlds

    Wasko, Molly; Teigland, Robin; Leidner, Dorothy; Jarvenpaa, Sirkka

    MIS Quarterly - Sep 2011, Vol. 35 Issue 3, p645-652

    An introduction is presented in which the editor discusses various reports within the issue on topics including discursive sensemaking of innovative technologies, virtual reality, and the relationship between internet users and their virtual avatar
  • Pricing equity default swaps under the jump-to-default extended CEV model

    Mendoza-Arriaga, Rafael; Linetsky, Vadim

    Finance & Stochastics - 2011, Vol. 15 Issue 3, p513-540

    Equity default swaps (EDS) are hybrid credit-equity products that provide a bridge from credit default swaps (CDS) to equity derivatives with barriers. This paper develops an analytical solution to the EDS pricing problem under the jump-to-default extended constant elasticity of variance model (JDCEV) of Carr and Linetsky. Mathematically, we obtain an analytical solution to the first passage time problem for the JDCEV diffusion process with killing. In particular, we obtain analytical results for the present values of the protection payoff at the triggering event, periodic premium payments up to the triggering event, and the interest accrued from the previous periodic premium payment up to the triggering event, and we determine arbitrage-free equity default swap rates and compare them with CDS rates. Generally, the EDS rate is strictly greater than the corresponding CDS rate. However, when the triggering barrier is set to be a low percentage of the initial stock price and the volatility of the underlying firm's stock price is moderate, the EDS and CDS rates are quite close. Given the current movement to list CDS contracts on organized derivatives exchanges to alleviate the problems with the counterparty risk and the opacity of over-the-counter CDS trading, we argue that EDS contracts with low triggering barriers may prove to be an interesting alternative to CDS contracts, offering some advantages due to the unambiguity, and transparency of the triggering event based on the observable stock price.
  • Do Debt Constraints Influence Firms' Sensitivity to a Temporary Tax Holiday on Repatriations?

    Albring, Susan M.; Mills, Lillian F.; Newberry, Kaye J.

    Journal of the American Taxation Association - Fall 2011, Vol. 33 Issue 2, p1-27

    We examine whether U.S. multinationals' private and public debt constraints influence their responses to a temporary reduction in repatriation taxes (tax holiday). Using a sample of 421 U.S. multinationals with permanently reinvested earnings, we find that external debt constraints played an important role in determining their responses to the tax holiday. Specifically, we find that firms subject to fewer financial covenants in their private debt agreements or with greater access to public bond markets repatriated significantly more of their eligible funds. Our results suggest that U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, they are the primary beneficiaries of any tax savings. It is unlikely that these firms were the intended target of the American Jobs Creation Act (AJCA) 2004, given the stated legislative goals of directing repatriated funds toward financial stabilization and previously unfunded positive return investments.
  • Sequential clinical scheduling with service criteria

    Turkcan, Ayten; Zeng, Bo; Muthuraman, Kumar; Lawley, Mark

    European Journal of Operational Research - Nov 2011, Vol. 214 Issue 3, p780-795

    This study investigates sequential appointment scheduling with service criteria. It uses a constraint-based approach with service criteria bounded in a constraint set in contrast to the more typical weighted linear objective function. Properties are derived and a sequential scheduling algorithm is developed. Fairness properties of generated schedules are considered in detail, where fairness is the uniformity of performance across patients. New unfairness measures are proposed and used to capture the inequity among patients assigned to different slots. Other criteria such as expectation and variance of patient waiting time, queue length, and overtime are also considered. The fairness/revenue tradeoff is investigated as is the flexibility of the constraint-based approach in handling unavailable time periods.
  • The Repetition-Break Plot Structure Makes Effective Television Advertisements

    Loewenstein, Jeffrey; Raghunathan, Rajagopal; Heath, Chip

    Journal of Marketing - Sep 2011, Vol. 75 Issue 5, p105-119

    The plot structure in television advertisements can enhance consumers' brand attitudes and foster increasing consumer and industry recognition. A corpus analysis of contemporary television advertisements shows that advertisements using the repetition-break plot structure are a small percentage of television advertisements but a large percentage of Clio and Effie award-winning advertisements. They are also likely to attain postings and views on YouTube. Three experiments using television advertisements from contemporary brands show that repetition-break advertisements are persuasive, leading to more favorable brand attitudes and greater purchase intentions than similar plot structures and that this effect is attributable in part to the advertisements being more engaging. Thus, a theoretically explainable and generic plot structure yields effective advertisements. The result is a new and flexible tool for marketing professionals to use to generate advertisements, with guidelines for when and why it should and should not be effective.
  • Innovation and Price Competition in a Two-Sided Market

    Lin, Mei; Li, Shaojin; Whinston, Andrew B.

    Journal of Management Information Systems - Fall 2011, Vol. 28 Issue 2, p171-202

    We examine a platform's optimal two-sided pricing strategy while considering seller-side innovation decisions and price competition. We model the innovation race among sellers in both finite and infinite horizons. In the finite case, we analytically show that the platform's optimal seller-side access fee fully extracts the sellers' surplus, and that the optimal buyer-side access fee mitigates price competition among sellers. The platform's optimal strategy may be to charge or subsidize buyers depending on the degree of variation in the buyers' willingness to pay for quality; this optimal strategy induces full participation on both sides. Furthermore, a wider quality gap among sellers' products lowers the optimal buyer-side fee but leads to a higher optimal seller-side fee. In the infinite innovation race, we perform computations to find the stationary Markov equilibrium of sellers' innovation rate. Our results show that when all sellers innovate, there exists a parameterization under which a higher seller-side access fee stimulates innovation.
  • Moderated Online Communities and Quality of User-Generated Content

    Chen, Jianqing; Xu, Hong; Whinston, Andrew B.

    Journal of Management Information Systems - Fall 2011, Vol. 28 Issue 2, p237-268

    Online communities provide a social sphere for people to share information and knowledge. While information sharing is becoming a ubiquitous online phenomenon, how to ensure information quality or induce quality content remains a challenge because of the anonymity of commentators. This paper introduces moderation into reputation systems. We show that moderation directly affects strategic commentators' incentive to generate useful information, and moderation is generally desirable to improve information quality. We find that when being moderated with different probabilities based on their reputations, commentators might display a pattern of reputation oscillation, in which they generate useful content to build up high reputation and then exploit their reputation. As a result, the expected performance from high-reputation commentators can be inferior to that from low-reputation commentators (reverse reputation). We then investigate the optimal moderation resource allocation and conclude that the seemingly abnormal reverse reputation could arise as an optimal result. Our study underscores the importance of moderation and highlights that the frequency of moderation should be properly chosen for better performance of online communities.
  • Causal reasoning in financial reporting and voluntary disclosure

    Koonce, Lisa; Seybert, Nick; Smith, James

    Accounting, Organizations & Society - May 2011, Vol. 36 Issue 4/5, p209-225

    Causal reasoning involves understanding the cause of events that have already happened (i.e., diagnosis) as well as predicting which future events will occur (i.e., prediction). Although this type of reasoning is an important part of financial reporting and voluntary disclosure, very little research has relied on it as a basis for developing and interpreting testable research ideas. The purpose of this paper is twofold: First, we review key theories from psychology that pertain to causal reasoning. Second, we identify how these theories can be successfully used by behavioral researchers interested in financial reporting and voluntary disclosure.
  • Do Auditor-Provided Tax Services Improve the Estimate of Tax Reserves?

    Gleason, Cristi A.; Mills, Lillian F.

    Contemporary Accounting Research - Winter 2011, Vol. 28 Issue 5, p1484-1509

    We investigate whether auditor-provided tax services (ATS) improve the estimate of tax reserves. ATS could provide auditors with superior knowledge that would improve the quality of the audited financial reports, or they could impair auditor independence.1 A threat to auditor independence arises from any situation that increases the probability the auditor will fail to report the results of his audit and will conceal bad news from shareholders (Simunic 1984: 680).2 Academic research finds limited evidence that general nonaudit services impair auditor independence and, by implication, financial reporting.3 Specific to tax services, Cook, Huston, and Omer (2008) observe no differential management of tax expense to achieve analysts’ forecasts when corporations use ATS, although higher amounts of ATS are associated with greater reductions in effective tax rates. Collectively, prior research finds little evidence that nonaudit services generally, or tax services specifically, are associated with impaired independence. Indeed, auditor-provided nonaudit services might improve financial reporting. If ATS generate knowledge spillover, then information gained from providing tax services can improve the audit and, hence, financial reporting (Simunic 1984; Beck, Frecka, and Solomon 1988; Panel on Audit Effectiveness 2000).4 For the largest corporations, Kinney, Palmrose, and Scholz (2004) observe ATS are associated with fewer restatements. Although their paper does not speculate about why this result might occur, the result is consistent with theory concerning knowledge spillover.5 Based on this evidence, we predict that ATS improve the estimation of tax expense by increasing the adequacy of tax reserves.

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Research-Recent-Publications-September-December-2011