Analytical Representations for the Basic Affine Jump Diffusion
Li, Lingfei; Mendoza-Arriaga, Rafael; Mitchell, Daniel. Operations Research Letters. Jan 2016, Vol. 44 Issue 1, p121-128.
The Basic Affine Jump Diffusion (BAJD) process is widely used in financial modeling. In this paper, we develop an exact analytical representation for its transition density in terms of a series expansion that is uniformly-absolutely convergent on compacts. Computationally, our formula can be evaluated to high level of accuracy by easily adding new terms which are given explicitly. Furthermore, it can be easily generalized to give an analytical expression for the transition density of the subordinate BAJD process which is more realistic than the BAJD process, while existing approaches cannot.
Cross-Buying After Product Failure Recovery? Depends on How You Feel About It
Umashankar, Nita; Srinivasan, Raji; Parker, Jeffrey R. Journal of Marketing Theory & Practice. Winter 2016, Vol. 24 Issue 1, p1-22.
Cross-selling to customers during product failure recovery (PFR) encounters can be challenging as customers are reluctant to cross-buy after having recently experienced a failure, despite it being recovered. We examine several models of cross-buying and failure/recovery characteristics using a large-scale experiment and secondary transaction data from a Fortune 100 computer systems firm. We find that customers’ integral-affective responses dominate their cognitive responses. Further, customers are more willing to cross-buy when the firm’s recovery effort increases for more severe product failures or those with unstable attributions. Yet, greater recovery effort does little to diminish the negative effect of attributing the failure to the firm. Overall, understanding the relative dominance of a sequence of affective versus cognitive factors and the critical role that contextual factors play in customer cross-buying decisions will help managers design PFR encounters to increase the odds of cross-selling.
Discussion of "Does the Identity of Engagement Partner Matter? An Analysis of Audit Partner Reporting Decisions"
Kinney Jr., William R. Contemporary Accounting Research. Dec 2015, Vol. 32 Issue 4, p1479-1488.
The authors of this provocative study apply commonly used audit quality surrogate measures to a large and unique set of financial and other data on statutory audits of small private companies in Sweden. The paper has received unparalleled attention by the financial press and the PCAOB for its presumed support for regulatory intervention in standards for U.S. public company audits. In this Discussant Comment, I review the paper's content, analyze its predictive validity, and discuss its multiple implications plus, following Conference instructions, I provide constructive suggestions for improvements. Based on predictive validity analysis, I conclude that engagement partner assignment strategy is an important and acknowledged omitted variable that affects the study's internal validity via both the independent variable (partner's prior performance measure) and the dependent variable (borrower's cost of debt capital). The omission also affects construct validities and, if audit firms are applying a plausible assignment strategy, then interpretation of the study's main results would be reversed. Finally, the lack of a standards intervention noted by the authors and the extreme size and other differences between audits of Swedish private companies and U.S. public companies impair external validity and generalization to the U.S. intervention. As to improvements, I suggest that the authors (i) ask Swedish lenders to validate their presumed use of partner performance ratings in determining a borrower's interest rate, and (ii) ask Swedish Big 4 audit firms to provide a few internal partner performance ratings for comparison with the external performance measures used in the study. This two-pronged, multimethod approach might confirm or deny critical assumptions underlying the present study and may substantively inform standards setters, evidence-based standards, and fellow researchers about the validity of commonly applied surrogates for audit quality and the study's stated conclusion.
Do Organic Results Help or Hurt Sponsored Search Performance?
Agarwal, Ashish; Hosanagar, Kartik; Smith, Michael D. Information Systems Research. Dec 2015, Vol. 26 Issue 4, p695-713.
We study the impact of changes in the competitors' listings in organic search results on the performance of sponsored search advertisements. Using data from an online retailer's keyword advertising campaign, we measure the impact of organic competition on both click-through rate and conversion rate of sponsored search advertisements. We find that an increase in organic competition leads to a decrease in the click performance of sponsored advertisements. However, organic competition helps the conversion performance of sponsored ads and leads to higher revenue. We also find that organic competition has a higher negative effect on click performance than does sponsored competition. Our results inform advertisers on how the presence of organic results influences the performance of their sponsored advertisements. Specifically, we show that organic competition acts as a substitute for clicks, but has a complementary effect on the conversion performance.
Does Use Tax Evasion Provide a Competitive Advantage to E-Tailers?
Hoopes, Jeffrey L.; Thornock, Jacob R.; Williams, Braden M. National Tax Journal. Mar 2016, Vol. 69 Issue 1, p133-168.
Many online retail firms (e-tailers) do not collect sales tax from the majority of their customers. This practice provides these firms with a potential competitive advantage over traditional retailers. We examine stock market returns and analysts sales forecast revisions surrounding federal legislative proposals, such as the Marketplace Fairness Act, that could erode this alleged competitive advantage for e-tailers. Following events that indicated an increased likelihood of federal sales tax legislation, we find negative abnormal stock returns for e-tail firms relative to traditional retail firms. We also find that analysts forecast a future reduction in sales revenue for e-tailers. These findings imply the existence of a competitive advantage for e-tailers that will potentially diminish with the enactment of federal sales tax legislation.
Dynamic Valuation of Delinquent Credit-Card Accounts
Chehrazi, Naveed; Weber, Thomas A. Management Science. Dec 2015, Vol. 61 Issue 12, p3077-3096.
This paper introduces a dynamic model of the stochastic repayment behavior exhibited by delinquent credit-card accounts. Based on this model, we construct a dynamic collectability score (DCS) that estimates the account-specific probability of collecting a given portion of the outstanding debt over any given time horizon. The model integrates a variety of information sources, including historical repayment data, account-specific, and time-varying macroeconomic covariates, as well as scheduled account-treatment actions. Two model-identification methods are examined, based on maximum-likelihood estimation and the generalized method of moments. The latter allows for an operational-statistics approach, combining model estimation and performance optimization by tailoring the estimation error to business-relevant loss functions. The DCS framework is applied to a large set of account-level repayment data. The improvements in classification and prediction performance compared to standard bank-internal scoring methods are found to be significant.
Eating Healthy or Feeling Empty? How the "Healthy = Less Filling" Intuition Influences Satiety
Suher, Jacob; Raghunathan, Raj; Hoyer, Wayne D. Journal of the Association of Consumer Research. Jan 2016, Vol. 1 Issue 1, p26-40.
To help understand the unconscious drivers of overeating, we examine the effect of health portrayals on people's judgments of the fillingness of food. An implicit association test and two consumption studies provide evidence that people hold an implicit belief that healthy foods are less filling than unhealthy foods, an effect we label the "healthy = less filling" intuition. The consumption studies provide evidence that people order greater quantities of food, consume more of it, and are less full after consuming a food portrayed as more versus less healthy. In addition, we demonstrate a novel tactic for reversing consumers' intuitions: highlighting the nourishing aspects of healthy food mitigates the belief that it is less filling. Taken together, these findings add to the burgeoning body of work on the psychological causes of weight gain and obesity and point to a way of overturning the pernicious effects of the "healthy = less filling" intuition.
How Courts Adjudicate Patent Definiteness and Disclosure
Allison, John R.; Ouellette, Lisa Larrimore. Duke Law Journal Jan 2016, 65(4):609-695.
Section 112 of the Patent Act requires patentees to clearly explain what their invention is (a requirement known as claim definiteness), as well as how to make and use it (the disclosure requirements of enablement and written description). Many concerns about the modern patent system stem from these requirements. But despite the critical importance of 112 to the functioning of the patent system, there is surprisingly little empirical data about how it has been applied in practice. To remedy the reliance on anecdotes, we have created a hand-coded dataset of 1144 reported court decisions from 1982 to 2012 in which U.S. district courts or the Court of Appeals for the Federal Circuit rendered a decision on the enablement, written-description, or claim-definiteness requirements of 112. We coded validity outcomes under these three doctrines on a novel five-level scale so as to capture significant subtlety in the strength of each decision, and we also classified patents by technology and industry categories. We also coded for a number of litigation characteristics that could arguably influence outcomes. Although one must be cautious about generalizing from reported decisions due to selection effects, our results show some statistically significant disparities in 112 outcomes for different technologies and industries-although fewer than the conventional wisdom suggests, and not always in the direction that many have believed. Just as importantly, our analysis reveals significant relationships between other variables and 112 litigation outcomes, including whether a district court or the Federal Circuit made the last decision in a case, whether a patent claim was drafted in means-plus-function format, and whether a case was decided before or after Markman v. Westview Instruments. Our results showing how 112 has been applied in practice will be helpful in evaluating current proposals for reform, and our rich dataset will enable more systematic studies of these critical doctrines in the future.
Management Speaks, Investors Listen: Are Investors Too Focused on Managerial Disclosures?
Koonce, Lisa; Seybert, Nick; Smith, James. Journal of Behavioral Finance. Jan-Mar 2016, Vol. 17 Issue 1, p31-44.
Market regulators are concerned about the completeness of management-provided explanations in financial reports and other venues. In particular, the Securities and Exchange Commission has articulated the growing problem of firm managers selectively emphasizing information that is favorable to their firm's financial status. In this two-experiment study, we examine whether investors are adversely influenced when firm managers provide only a partial explanation for a firm's financial outcomes, even though the investors have information about all of the causes for a firm's financial outcomes. Our results reveal that investors are misled by partial management explanations. We demonstrate that this effect occurs in situation both when qualitative information is known about the causes and when quantitative information is known about the causes. We document that one way in which this overreliance on management-provided partial information can be mitigated is when investors are provided with a quantitative analysis of the management explanation; with this quantitative analysis we observe that investors are able to distinguish between partial and complete explanations. Our study has implications for regulators and researchers.
Menu Choices in Defined Contribution Pension Plans
Sialm, Clemens. NBER Reporter. 2015, Issue 4, p21-23.
The author presents a summary of his research on menu choices in defined contribution (DC) pension plans. Topics include an overview of the major changes in the retirement saving programs structure, the options available for mutual fund menu, and the difference between discerning and sticky money. Also discussed is the favoritism in defined contribution plans.
Modeling Correlated Discrete Uncertainties in Event Trees with Copulas
Wang, Tianyang; Dyer, James S.; Butler, John C. Risk Analysis: An International Journal. Feb 2016, Vol. 36 Issue 2, p396-410.
Modeling the dependence between uncertainties in decision and risk analyses is an important part of the problem structuring process. We focus on situations where correlated uncertainties are discrete, and extend the concept of the copula-based approach for modeling correlated continuous uncertainties to the representation of correlated discrete uncertainties. This approach reduces the required number of probability assessments significantly compared to approaches requiring direct estimates of conditional probabilities. It also allows the use of multiple dependence measures, including product moment correlation, rank order correlation and tail dependence, and parametric families of copulas such as normal copulas, t-copulas, and Archimedean copulas. This approach can be extended to model the dependence between discrete and continuous uncertainties in the same event tree.
Natural Optimism in Financial Reporting: A State of Mind
Capps, Gregory; Koonce, Lisa; Petroni, Kathy R. Accounting Horizons. Mar 2016, Vol. 30 Issue 1, p79-91.
The objective of this paper is to cohesively introduce the notion of natural optimism into the accounting literature and to provide insights into the role of natural optimism in financial reporting on the part of firm managers. To accomplish this, we first discuss the research that demonstrates that optimism is the natural state of mind for most people and therefore we posit that firm managers involved in preparing financial statements are likely to exhibit naturally occurring optimism. Second, we identify where natural optimism is most likely to have an impact on financial reporting. Third, we address the challenges involved with mitigating or eliminating natural optimism in financial reporting. Finally, we address the relationship between optimism and two other constructs often found in accounting—namely, overconfidence and motivated reasoning.
The Effects of Norms on Investor Reactions to Derivative Use
Koonce, Lisa; Miller, Jeffrey; Winchel, Jennifer. Contemporary Accounting Research. Dec 2015, Vol. 32 Issue 4, p1529-1554.
Prior research indicates that a firm's use of derivatives to manage business risks is viewed favorably by investors. However, these studies do not consider a potentially key factor in this setting—namely, the typical behavior (or norms) regarding derivatives by other firms in the industry or the firm itself. In this paper, we report the results of multiple experiments that test whether norms are influential in affecting investors' evaluations of firms' derivatives choices. Our results show that the generally favorable reactions to derivative use actually reverse and become unfavorable when firms' derivative decisions are inconsistent with industry or firm norms. Somewhat surprisingly, though, we find that industry and firm norms are not viewed similarly by investors. These results expand our understanding of how investors respond to firms' derivative use decisions and demonstrate the role of norms as factors that influence investors' judgments in financial reporting settings. Our results have implications for firm managers making decisions about derivative use.
The Regulatory Contract in the Marketplace
Hammond, Emily; Spence, David B. Vanderbilt Law Review. Jan 2016, Vol. 69 Issue 1, p141-216.
For decades, energy policy has struggled to reconcile two distinct visions for the future: the first seeks ever-more-competitive, efficient, and dynamic electricity markets, while the second seeks an ever-greener mix of electricity generation sources. Caught within this push-and-pull dynamic is the regulatory contract--a nineteenth-century concept that stands more for ordered regulation than competitive markets. This Article examines how piecemeal pursuit of two energy visions has produced mismatches between rapidly evolving markets and governance institutions that cannot change as quickly. To better evaluate these mismatches, the Article develops a framework that accounts not just for market operation and environmental externalities, but also the technical constraints of grid operation and electricity fuels. Relying on the experience of nuclear power, the Article creates an account of how a fuel source can be priced out of the market despite its apparent advantages in reliability and air emissions. With this understanding, the Article evaluates the political economy and governance challenges associated with diverse policy options aimed at better capturing valuable attributes of electricity. Ultimately, this analysis furthers our understanding of the regulatory contract in the marketplace, suggesting an updated vision for its role in mediating the competing goals for electricity markets.
When Do Ineffective Audit Committee Members Experience Turnover?
Kachelmeier, Steven J.; Rasmussen, Stephanie J.; Schmidt, Jaime J. Contemporary Accounting Research. Spring 2016, Vol. 33 Issue 1, p228-260.
We use information extracted from a major proxy advisory service to test predictions from institutional theory regarding when and why audit committee (AC) members experience turnover because of evidence of ineffective governance. First, we broadly categorize AC ineffectiveness concerns as either (i) financial reporting failures or (ii) characteristics of individual AC members. Institutional theory suggests that the visible nature of the first category is more likely to threaten perceptions of AC legitimacy and hence prompt turnover, which is what we find. We then enrich the analysis by interacting the AC-member ineffectiveness indicators with the extent of shareholder protest votes, finding that shareholder dissent elevates the turnover effects of both categories of ineffectiveness, as institutional theory would predict. Finally, we find that otherwise effective AC members face an increased likelihood of turnover if they serve on the AC when financial reporting failures are discovered, even if they were not on the AC when the events precipitating the failures occurred. Overall, our findings support the institutional theoretic premise that boards take remedial actions when necessary to restore perceived legitimacy.
Who Facilitated Misreporting in Securitized Loans?
Griffin, John M.; Maturana, Gonzalo. Review of Financial Studies. Feb 2016, Vol. 29 Issue 2, p384-419.
This paper examines apparent fraud among securitized nonagency loans using three indicators: unreported second liens, owner occupancy misreporting, and appraisal overstatements. We find that around 48% of loans exhibited at least one indicator of misrepresentation. Surprisingly, misreporting is similar in both low and full documentation loans and is associated with a 51% higher likelihood of delinquency. Two-thirds of loans with unreported second liens had the same originator issuing both the first and second lien. Misrepresentations in MBS pools can explain substantial cross-sectional differences in future losses. Losses were predictable and initiating from apparent fraud by MBS underwriters and loan originators.