Audit committees and financial reporting quality
Jaime Schmidt, Assistant Professor, Department of Accounting
Michael "Dalton" Rodriquez, Undergraduate Research Assistant
The project will investigate whether improving or diminishing audit committee effectiveness (ACE) affects subsequent financial reporting quality (FRQ). Recent legislation has increased the responsibility of audit committees to oversee the financial reporting process and has mandated certain aspects of ACE (e.g., financial expertise and independence). However, we know very little about which characteristics of audit committees and aspects of ACE are most important for effective oversight. Using unique data already purchased with a grant obtained from the American Accounting Association, we plan to examine the effects on FRQ of both improving and diminishing ACE and categorize ACE by types previously believed important by policy makers. Overall, our study should contribute to the literature by helping legislators and companies know what qualities are most necessary for an audit committee to provide effective financial reporting oversight.
Management Incentives and the Communication Role of Financial Markets
Michael Williamson, Associate Professor, Department of Accounting
Volker Laux, Associate Professor, Department of Accounting
Luyao Chen, Undergraduate Research Assistant
We investigate the potential role financial markets play in communicating valuable information to management and how management’s incentive systems affect this role. We will explore these issues using a computerized laboratory market. Luyao Chen, our undergraduate research assistant, is building the computer program that will facilitate this laboratory market. She will also help us run the experimental sessions and analyze the data from this session.
A Project-Level Analysis of Value Creation in Firms
Jonathan Cohn, Assistant Professor, Department of Finance
Doug Daniels, Undergraduate Research Assistant
We are analyzing stock returns around the announcements of new products or new client relationships by companies in order to understand how the stock market assesses the value created by new business activity. We are focusing on how the stock market response varies with characteristics of the announcement itself, the announcing company, and its management and governance structure that are likely to affect the credibility of an announcement. For example, we are parsing the announcement text to determine whether the stock market treats an announcement as more credible when it offers more specific details and less vague language. We are also interested in whether the market uses information about executive compensation and incentives to inform its response.
Labor Mobility and Firm Risk: Evidence from Brazil Employers-Employee matched Data
Andres Donangelo, Assistant Professor, Department of Finance
Alejandro Drexler, Assistant Professor, 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. Traditional analysis of human capital distinguishes between firm-specific, industry-specific, and generic skills. The relative importance of specific versus generic skills affects labor mobility. For instance, workers that possess specialized industry-specific skills are, in some sense, “locked” inside their industries of specialization. In contrast, workers with skills useful across industries (i.e. more generic skills) are likely to find similarly paying jobs regardless of the industry they choose to work for, and thus have higher labor mobility. The extent to which firms need firm-specific, industry-specific, and generic skills should then affect the firm risk taking. The interaction between labor mobility and firm risk has been remarkably under-researched until now due to the scarcity of comprehensive data bridging labor and financial markets. Our project addresses this gap in the literature by using a remarkably detailed Brazilian linked employer-employee dataset.
Crowding Out Effects of Government Debt
Clemens Sialm, Associate Professor, Department of Finance
Government debt has obtained a lot of attention recently as governments across the world experienced substantial budget deficits following the economic and financial crisis. The recent U.S. debt ceiling debate as well as the sovereign debt crises in Greece and several other Euro countries indicate that government debt is a matter of first order importance. In our research project we investigate whether government debt crowds out corporate debt.
Situational moderation of gendered backlash in negotiations
Emily Amanatullah, Assistant Professor, Department of Management
Alex Baird, Undergraduate Research Assistant
The project explores the unique constraints faced by women seeking to achieve success and advancement in the masculine environment of the business world and how these constraints can be attenuated. My approach to studying gender departs from earlier work in the field, which treated variation in behavior of men and women as inherent sex differences. Instead, I see gender as a complex social construction that creates expectations and social norms which in turn constrain individuals to act within confined boundaries in order to avoid social sanctions for being perceived as counter-normative. Theorizing about gender in this way, as a social construction rather than a biological hardwiring, opens up the opportunity to explore how situational variation may modify gendered expectations in particular contexts to magnify and/or mitigate these social constraints, thereby helping to identify practical interventions to rectify gender inequities in the workplace.
Cross-Understanding and Shared Mental Models in Group Cognition
Kyle Lewis, Associate Professor, Department of Management
Mark Bayer, Doctoral Student, Department of Management
Mayra Chapa, Undergraduate Research Assistant
More and more, firms are utilizing work groups to accomplish important tasks. This practice is based on the belief that groups of people can produce superior decisions, products, and ideas that add value for firms, due primarily to the quantity and variety of knowledge that exists in a collective. In the group cognition literature, shared mental model theory holds that groups will experience better coordination and performance if their task-relevant structured knowledge sets, or mental models, are very similar across members. However, it could be that instead of mental model similarity, cross-member understanding of mental models could also lead to effective coordination and group performance. Cross-understanding is a group-level compositional construct that reflects the extent to which group members have an accurate understanding of one another’s task-relevant mental models. The viewpoint focuses not on whether group members’ mental models are similar or different, but rather on how well members understand each others’ mental models. Cross-understanding is theorized to have beneficial effects on group learning and product quality via three mechanisms: 1) enhanced communication and comprehension; 2) increased mental model elaboration and usefulness; and 3) improved inter-member anticipation and coordination. Our research examines this tension between shared mental model theory and cross-understanding. In particular, we hypothesize that cross-understanding will improve groups’ coordination and performance via the three mechanisms mentioned above, and further, that groups may suffer from low shared mental models and yet still perform at a high level if they have high cross-understanding. This alternative explanation for coordination and group performance extends the group cognition literature in a new direction and expands the field’s understanding of the cognitive factors that influence group performance.
Sense-Making and Decision-Making
Jennifer Whitson, Assistant Professor, Department of Management
Cecilia Hoeft, Undergraduate Research Assistant
My project explores how power and control influence the way people make sense of the world. Past research shows that the powerful are more prone to action, but had not yet discovered why. I look into how the possession of power changes the way people process risk and reward such that they are more likely to act. I also examine how lack of control increases the tendency to see illusory patterns (making connections between random or unconnected stimuli) across many arenas – from seeing images in static and patterns in the stock market, to making superstitious connections, to perceiving conspiracies where there are none.
Voice flows to and around leaders: Is more always better for unit performance?
Ethan Burris, Associate Professor, Department of Management
Milu Thomas, Undergraduate Research Assistant
My co-authors and I have recently been requested to revise and resubmit this research project to Administrative Science Quarterly. We examine a taken-for-granted, yet largely untested, premise that improvement-oriented voice is consistently good for organizations. We do so by integrating insights from the voice, leadership, social network, and other literatures to theorize whether and how flows of voice to and around leaders increase their units’ performance. We test hypotheses about the outcomes of several distinct forms of voice flows using time-lagged field data from 801 employees and 93 managers in 93 units in nine North American financial service organizations. Our study demonstrates that some voice flows are positively related, and some are negatively related, to subsequent unit effectiveness. We thus establish the importance of simultaneously studying an array of voice flows – some that mirror chain-of-command structures and others that constitute an informal communication structure within organizations. Theoretically, we refine understanding by drawing on “free flow” and “restricted flow” perspectives on voice. We combine these with our empirical results to offer a “directed flow” hybrid perspective that argues that voice flowing from particular types of senders to particular types of targets helps or hinders a unit.
Information Sharing in Goal Pursuit
Susan Broniarczyk, Professor, Department of Marketing
This research project focuses on goal pursuit and information sharing behavior. All of us are pursuing important goals in our lives; the pursuit of goals such as a higher degree, better health, or other personal desires drives our consumption behaviors. Interestingly, we are often not alone in the pursuit of these goals; in fact, we may know a few friends who are also trying to lose weight. How, then, do we interact with these people who are pursuing the same goals as us? More specifically, when one learns about an effective means that can help one advance in the pursuit of an important goal, what motivates this person to share, or not to share, this tip with others who are also pursuing the same goal? In addition, when one shares the information about this effective means, whom does one share it with—the people who have achieved a similar level of progress, those who are far behind, or those who are far advanced in the pursuit? This research question is important for several reasons. From the consumers’ perspective, sharing tips with others may help to enhance one’s own confidence and perceived self-efficacy in the pursuit, leading to greater subsequent motivation to attain the goal. On a collective level, facilitating knowledge exchange among those who are pursuing similar goals could turn out to be beneficial to everyone in the network, and thus lead to greater consumer welfare. From the marketers’ perspective, consumers’ autonomous information-sharing behavior can help to generate word-of-mouth and serve as a free, yet credible, advertisement to further promote their products and services.
The Role of Marketing Information Availability and Complexity on Speed and Decision Making in the IPO Process
Jade DeKinder, Assistant Professor, Department of Marketing
Many firms that are operating as successful private companies choose to initiate the initial public offering (IPO) process to raise additional capital they require to achieve their strategic goals. Firms that decide to IPO must enter the registration process through the Securities and Exchange Commission (SEC). However, not all firms that enter this process ultimately conclude with an IPO. Many times firms withdraw from the IPO process, resulting in financial and reputational loss for the potential issuer, underwriter (usually an investment bank), and the investors. This loss makes it critical to understand what drives the decision of a firm to withdraw versus IPO. In addition to the ultimate decision, the time in the registration process can be costly as well. It is therefore critical to investigate the ultimate decision as well as what drives the length of time a firm uses to make a decision. After entering the registration process a firm conducts the price discovery process with its underwriter and potential investors. The goal of this process is for the issuing firm and market investors to agree on a price, i.e., the firm’s value. This process progresses with a considerable amount of information asymmetry between the issuer firm and the investors. We argue that this information asymmetry will be reduced by the issuers’ signals of their market potential. As such, in this research we argue that the availability and complexity of the issuer firms’ market signals will affect the outcome and the resolution speed of the price discovery process.
Consumer Identity and Happiness
Julie Irwin, Professor, Department of Marketing
Conspicuous Consumption and Dynamic Pricing
Raghunath Rao, Assistant Professor, Department of Marketing
Caroline Thomas, Undergraduate Research Assistant
The resources devoted to the creation of fashion goods form significant part of economy. Sociologists argue that fashion is a manifestation of “social demands” wherein fashion goods help consumers to signal their self-identities. The purpose of this project is to understand the marketing of fashion goods through a formal analytical model wherein firms react to consumers’ desire for self-expression and how this, in equilibrium, feeds into their pricing policies and product offerings. In this project, we study a producer’s dynamic pricing policy when marketing a durable good, particularly an item that provides consumer utility via two distinct mechanisms: an intrinsic consumption utility, as well as a “fashion utility,” modeled through an externality that depends on the product’s conspicuousness, characterized by its visibility and exclusivity. We show that products with high intrinsic quality command higher prices because of greater input costs: With a higher retail price, such products become exclusive and, hence, more fashionable, when consumption is visible. Capturing product conspicuousness through our novel formulation of fashion utility, we derive a series of empirically testable propositions arising from our dynamic model. In particular, we show that, all else being equal, products with higher visibility depreciate faster. As an extension to our model, we include a producer’s decision to make investments that allow consumers to differentiate by time of purchase.
When is good product design good business?
Raji Srinivasan, Associate Professor, Department of Marketing
Mary Beth Williams, Undergraduate Research Assistant