Business Microloans for U.S. Subprime Borrowers
Fracassi, Cesare; Garmaise, Mark J.;
Kogan, Shimon; Natividad, Gabriel. Journal of Financial and Quantitative Analysis. Feb2016, Vol.
51 Issue 1, p55-83.
We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data
on startup loan applicants from a lender that employed an automated algorithm in its application review, we implement a
regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are
dramatically more likely to survive, enjoy higher revenues, and create more jobs. Loans are more consequential for survival
among subprime business owners with more education and less managerial experience.
Combining Value and Momentum
Fisher, Gregg; Shah, Ronnie; Titman, Sheridan. Journal
of Investment Management. 2016 Second Quarter, Vol. 14 Issue 2, p33-48.
This paper considers several popular portfolio implementation techniques that maximize exposure to value and/or momentum
stocks while taking into account transaction costs. Our analysis of long-only strategies illustrates how a strategy that
simultaneously incorporates both value and momentum outperforms a strategy that combines pure-play value and momentum
portfolios that are formed independently. There are two advantages of the simultaneous strategy. The first is the reduction in
transaction costs; the second is better utilization of unfavorable value and momentum information in a long-only portfolio. Our
analysis also addresses the optimal way to combine the faster-moving momentum signal with the slower-moving value signal.
Digital Action Repertoires and Transforming a Social Movement Organization
Lisen; Jarvenpaa, Sirkka L. MIS Quarterly. Jun2016, Vol. 40 Issue 2, p331-352.
The article addresses the question of how values influence the relationships between a social movement organization (SMO),
its supporters and its digital action repertoires in the context of the Swedish affiliate of Amnesty International, a widely
recognized and impactful SMO. It cites investigation on how the Swedish affiliate of Amnesty International responded to
opportunities to use digital action repertoires and how digital action repertoires changes the interactions and transform the
Does Rating Analyst Subjectivity Affect Corporate Debt Pricing?
Fracassi, Cesare; Petry,
Stefan; Tate, Geoffrey. Journal of Financial Economics. Jun2016, Vol. 120 Issue 3, p514-538.
We find evidence of systematic optimism and pessimism among credit analysts, comparing contemporaneous ratings of the
same firm across rating agencies. These differences in perspectives carry through to debt prices and negatively predict future
changes in credit spreads, consistent with mispricing. Moreover, the pricing effects are the largest among firms that are the
most opaque, likely exacerbating financing constraints. We find that masters of business administration (MBAs) provide higher
quality ratings. However, optimism increases and accuracy decreases with tenure covering the firm. Our analysis demonstrates
the role analysts play in shaping investor expectations and its effect on corporate debt markets.
Economic and Business Dimensions Do Patent Commons and Standards-Setting Organizations Help Navigate Patent Thickets?
Wen Wen; Forman, Chris. Communications of the ACM.
May2016, Vol. 59 Issue 5, p42-43.
They authors examine the role of the Economic Patent Commons and standards-setting organizations underlying the patent
system for information and communication technologies (ICT) in navigating patent thickets. They discuss the challenges
brought by patent thickets for ICT producers such as patent infringement, cost of identifying intellectual property rights and
royalties, and the economic impact of The Commons on open source software products and warns about the legal risks of
Explaining Rules-Based Characteristics in U.S. GAAP: Theories and Evidence
Donelson, Dain C.; McInnis, John; Mergenthaler, Richard D. Journal of Accounting Research. Jun2016, Vol. 54 Issue 3, p827-861.
Despite debate on the desirability of rules-based standards, no studies provide evidence on why accounting standards take on
rules-based characteristics. We identify and test five theories from prior research (litigation risk, constraining opportunism,
complexity, transaction frequency, and age) that could explain why some U.S. accounting standards contain rules-based
characteristics. Litigation risk and complexity are most consistently related to cross-sectional and time-series variation in rules-
based characteristics. We find more limited evidence that frequent transactions, age, and desires by regulators to constrain
opportunistic reporting are related to rules-based standards. We note, however, that our findings are necessarily descriptive
because standards arise endogenously from market and political forces, limiting causal interpretation. Further, it is difficult to
perfectly separate rules-based characteristics of the standard from both the complexity of the standard and the characteristics
of the underlying transaction, including the complexity of the transaction.
Gender Diversity on Corporate Boards: Do Women Contribute Unique Skills?
Daehyun; Starks, Laura T. American Economic Review. May2016, Vol. 106 Issue 5, p267-271.
We show that gender diversity in corporate boards could improve firm value because of the contributions that women make to
the board. Prior studies examine valuation effects of gender-diverse boards and reach mixed conclusions. To help resolve this
conundrum, we consider how gender diversity could affect firm value, that is, what mechanisms could explain how female
directors benefit corporate board performance. We hypothesize and provide evidence that women directors contribute to
boards by offering specific functional expertise, often missing from corporate boards. The additional expertise increases board
heterogeneity which Kim and Starks (2015) show can increase firm value.
Improving Patient Flow at a Family Health Clinic
Bard, Jonathan; Shu, Zhichao; Morrice,
Douglas; Wang, Dongyang; Poursani, Ramin; Leykum, Luci. Health Care Management Science.
Jun2016, Vol. 19 Issue 2, p170-191.
This paper presents an analysis of a residency primary care clinic whose majority of patients are underserved. The clinic is
operated by the health system for Bexar County and staffed primarily with physicians in a three-year Family Medicine residency
program at The University of Texas School of Medicine in San Antonio. The objective of the study was to obtain a better
understanding of patient flow through the clinic and to investigate changes to current scheduling rules and operating
procedures. Discrete event simulation was used to establish a baseline and to evaluate a variety of scenarios associated with
appointment scheduling and managing early and late arrivals. The first steps in developing the model were to map the
administrative and diagnostic processes and to collect time-stamped data and fit probability distributions to each. In
conjunction with the initialization and validation steps, various regressions were performed to determine if any relationships
existed between individual providers and patient types, length of stay, and the difference between discharge time and
appointment time. The latter two statistics along with resource utilization and closing time were the primary metrics used to
evaluate system performance. The results showed that up to an 8.5 % reduction in patient length of stay is achievable without
noticeably affecting the other metrics by carefully adjusting appointment times. Reducing the no-show rate from its current
value of 21.8 % or overbooking, however, is likely to overwhelm the system's resources and lead to excessive congestion and
overtime. Another major finding was that the providers are the limiting factor in improving patient flow. With an average
utilization rate above 90 % there is little prospect in shortening the total patient time in the clinic without reducing the
providers' average assessment time. Finally, several suggestions are offered to ensure fairness when dealing with out-of- order
Indexing and Active Fund Management: International Evidence
Cremers, Martijn; Ferreira,
Miguel A.; Matos, Pedro; Starks, Laura. Journal of Financial Economics. Jun2016, Vol. 120 Issue
We examine the relation between indexing and active management in the mutual fund industry worldwide. Explicit indexing
and closet indexing by active funds are associated with countries’ regulatory and financial market environments. We find that
actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost
explicitly indexed funds. A quasi-natural experiment using the exogenous variation in indexed funds generated by the passage
of pension laws supports a causal interpretation of the results. Moreover, the average alpha generated by active management
is higher in countries with more explicit indexing and lower in countries with more closet indexing. Overall, our evidence
suggests that explicit indexing improves competition in the mutual fund industry.
Market Risk, Mortality Risk, and Sustainable Retirement Asset Allocation: A Downside Risk Perspective
Harlow, W. V.; Brown, Keith C. Journal of Investment
Management. 2016 Second Quarter, Vol. 14 Issue 2, p5-32.
Despite its clear importance, there is no consensus on the optimal asset allocation strategy for retirement investors of varying
age, gender, and risk tolerance. This study analyzes the allocation question by focusing on the downside risks that result from
the joint uncertainty over investment returns and life expectancy. Using a new analytical approach, we show that concentrating
on the severity of retirement funding shortfalls, rather than just the probability of ruin, markedly increases the sustainability of
a retirement portfolio. We demonstrate that for retirement investors attempting to minimize downside risk while sustaining
future withdrawals, appropriate equity allocations range between five and 25 percent, levels that are strikingly low compared
to those typically found in life-cycle funds. Further, these optimal portfolio constructions appear to vary; little with alternative
capital market assumptions. We also show that more aggressive investors having substantial bequest motives should still be
relatively conservative in their stock allocations. We conclude that the higher equity allocations commonly employed in practice
significantly underestimate the risks that these higher-volatility portfolios pose to the sustainability) of retirement savings and
Non-Big 4 Local Market Leadership and its Effect on Competition
Keune, Marsha B.; Mayhew, Brian W.; Schmidt, Jaime J. The Accounting Review. May2016, Vol. 91 Issue 3, p907-931.
This study examines local characteristics associated with non-Big 4 local market leadership and the impact of non-Big 4 local
market leadership on competition. We identify non-Big 4 local market leaders by collecting accounting firm rankings from
business publications for 46 of the largest metropolitan statistical areas from 2005- 2010. These rankings are based on the
number of local office employees and provide a more holistic measure of office size than measures based on public company
audit fees. We find local supply and demand factors are significantly associated with non-Big 4 local market leadership and that
non-Big 4 leadership is associated with lower overall audit fees in the local market. We also find that non-Big 4 leaders earn a
fee premium over other non-Big 4 auditors. Our results imply that non-Big 4 leaders increase local market competition.
Opaque Financial Contracting and Toxic Term Sheets in Venture Capital
Brown, Keith C.;
Wiles, Kenneth W. Journal of Applied Corporate Finance. Winter2016, Vol. 28 Issue 1, p72-85.
In a recent article in this journal, the authors documented the growing tendency of emerging growth companies to raise
substantial equity while remaining privately held through private IPOs, or PIPOs. PIPO financing has created scores of 'unicorn'
firms-private enterprises with imputed market values of $1.0 billion or more-while allowing them to avoid the challenges of
being publicly traded. But as has also been noted, the PIPO process, with its multiple financing rounds and increasingly complex
terms, has almost certainly result in some inflated market valuations. Along with inflated values, the contracting process and
many of the provisions that result from it often have economic consequences that are poorly understood by at least some of
the participants, including the potential for significant wealth transfer between stakeholders as well as overall destruction of
enterprise value. And the term sheets containing such provisions appear to become even more 'opaque' and more 'toxic' with
each round of financing. More specifically, the liquidation preferences and ratchets often provided new investors in the later
rounds of PIPOs can greatly affect the allocation of the risks and the ownership shares and, in so doing, transfer significant
wealth from the entrepreneurs and other older owners. Using a numerical analysis of a representative term sheet, the authors
discuss the process of financial contracting for early-stage companies, providing examples of how negotiations can go wrong
and showing exactly when and where the agreed-upon conditions start to turn toxic for some of the stakeholders. The article
closes with the authors' assessment of the disincentives for entrepreneurs and early-stage investors created by this often
confusing and dilutive venture capital contracting and funding process.
Product Line Extensions and Technology Licensing with a Strategic Supplier
Gilbert, Stephen M.; Xia, Yusen. Production and Operations Management. Jun2016, Vol. 25
Issue 6, p1121-1146.
In many industries, original equipment manufacturers (OEMs) must obtain critical components from a few powerful suppliers.
To the extent that the OEMs are also concentrated, the interactions between the suppliers of critical components and the
OEMs are strategic, and have implications for how an incumbent OEM chooses its product line and interacts with potential
rivals. We demonstrate that, by adding a low-end product line extension, an OEM can induce a strategic supplier to offer more
favorable pricing. Moreover, depending upon the cost structure and relative performance of the product line extension, the
OEM may benefit even more from the low-end line extension if it is produced by a rival instead of by itself, even if it cannot
obtain any licensing income from it. Among other things, we show that this can result in a decentralized OEM accommodating
competition from rivals producing product line extensions that would not be developed in a vertically integrated supply chain.
In an extension, we re-examine the common assumption that the supplier unilaterally dictates a single wholesale price that is
available to all downstream buyers. We demonstrate that, by committing to offer a 'lowest available' wholesale price to all
downstream buyers, a supplier can encourage an incumbent OEM to share its technology (or otherwise accommodate the entry
of a rival) so that the supplier, the incumbent OEM, and the rival are all better off.
Robust Optimization Policy Benchmarks and Modeling Errors in Natural Gas
Muthuraman, Kumar; Rardin, Ronal L. European Journal of Operational Research. May2016,
Vol. 250 Issue 3, p807-815.
The problem of regulating natural gas procurement has become a huge burden to regulators, especially due to the plethora of
complicated financial contracts that are now being used by local distribution companies (LDCs) for risk management purposes.
Muthuraman, Aouam, and Rardin (2008) proposed a new benchmarking scheme, called policy benchmarks and showed that
these benchmarks do not suffer from the usual criticisms that are made against existing regulatory methods. Such policy
benchmarks based regulation has however faced hurdles in being adopted. One of the primary reasons has been concerns over
its robustness. We demonstrate in this paper that when modeling errors are present, the policy benchmarks proposed earlier
can backfire and are hence, as suspected, not well suited for regulation. We begin our analysis with a more general model than
the one that has been used earlier by accommodating the LDC’s ability to reduce cost by exerting effort, as in classical
economics. We derive solutions to the LDCÕs problem, find closed form solutions for the regulator’s optimal fee fraction along
with risk sharing implications, and provide insights into the policy benchmark selection. We then construct a robust-
optimization based policy benchmarking mechanism that inherits all the original benefits. We further demonstrate that these,
unlike the earlier benchmarks, are robust against modeling errors.
Scalable Rejection Sampling for Bayesian Hierarchical Models
Braun, Michael; Damien,
Paul. Marketing Science. May/Jun2016, Vol. 35 Issue 3, p427-444.
Bayesian hierarchical modeling is a popular approach to capturing unobserved heterogeneity across individual units. However,
standard estimation methods such as Markov chain Monte Carlo (MCMC) can be impracticable for modeling outcomes from a
large number of units. We develop a new method to sample from posterior distributions of Bayesian models, without using
MCMC. Samples are independent, so they can be collected in parallel, and we do not need to be concerned with issues like
chain convergence and autocorrelation. The algorithm is scalable under the weak assumption that individual units are
conditionally independent, making it applicable for large data sets. It can also be used to compute marginal likelihoods. Data, as
supplemental material, are available at …
University of Texas Roundtable on Financing and Managing Energy Investments in a Low-Price Environment
Adkins, Marshall; Beard, Greg; Clark, Bernard 'Buddy'; Shepherd, Gene;
Vaughan, George; Titman, Sheridan. Journal of Applied Corporate Finance. Winter2016, Vol. 28
Issue 1, p30-45.
During the past 18 months, the U.S. oil industry has seen oil prices plunge from well over $100 a barrel to under $30. In a
session that was part of a recent Private Equity Conference at the University of Texas in Austin, the CEO of a small independent
producer and a representative of a large global oil and gas company discussed the challenges of financing and operating energy
companies in today's low-price environment with the director of energy research at a brokerage firm, the senior partner
responsible for the natural resource investments of a well-known private equity firm, and the head of the oil and gas
restructuring practice of a national law firm. The panelists appeared to reach a consensus on at least the following three
arguments: Although the causes of the oil price crash of 2014-2015 are often identified as the weakness of global (and
particularly Chinese) demand, and the unwillingness of OPEC nations to cut production in the face of the slowdown, the more
fundamental cause has been the dramatic increase in the productivity of the U.S. oil and gas industry and the doubling of U.S.
oil output since 2008 attributable to the new shale gas technology. But if large price drops are the expected consequence of
such technological change and productivity gains, most of the panelists also believe that the current supply-demand imbalance
will disappear in the next few years and prices will return to a level at which efficient 'marginal' U.S. producers earn acceptable
returns-a level the collective best guess put at around $60-65 a barrel., The greatest financial opportunity involves the purchase
of the debt-some of which now trades for as little as 20% of face value-of highly leveraged and distressed U.S. 'E&P' companies,
possibly (though not necessarily) with the aim of gaining control of the company. But if such price discounts represent
investment opportunities for private equity and other distressed investors, they also present opportunities for the companies
themselves find a way to increase their own values by either renegotiating or finding a way to buy back their discounted debt.,
The industry has collectively failed to do a good job of hedging its oil price risk, which has proved especially destructive for
those companies operating with significant financial leverage. For those companies that have hedged, the typical hedges have
extended only 12-18 months forward, thereby failing to provide protection against exposures created by oil reserve lives (on
which debt financings are often premised) that typically run as long as 10-20 years.