2018 Publications
Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns
Travis L. Johnson and Eric C. So ; Journal of Accounting Research, 56(1) 217-263
We show that the cost of trading on negative news, relative to positive news, increases before earnings announcements. Our evidence suggests that this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. This asymmetry creates a predictable upward bias in prices that increases preannouncement, and subsequently reverses, confounding short‐window announcement returns as measures of earnings news and risk premia. These findings provide an alternative explanation for asymmetric return reactions to firms’ earnings news, and help explain puzzling prior evidence that announcement risk premia precede the actual announcements. Our study informs methods for research centering on earnings announcements and offers a possible explanation for patterns in returns around anticipated periods of heightened inventory risks, including alternative firm‐level, industry‐level, and macroeconomic information events.
Bayesian estimation of the Cox model under different hazard rate shape assumptions via slice sampling
Thomas Kirschenmann, Paul Damien , and Stephen Walker ; Journal of Applied Statistics, 45(12) 2295-2306
In this paper, we provide a full Bayesian analysis for Cox’s proportional hazards model under different hazard rate shape assumptions. To this end, we select the modified Weibull distribution family to model failure rates. A novel Markov chain Monte Carlo method allows one to tackle both exact and right-censored failure time data. Both simulated and real data are used to illustrate the methods.
Coordinated Scheduling for a Multi-server Network in Outpatient Pre-operative Care
Dongyang Wang, Douglas J. Morrice , Kumar Muthuraman, Jonathan F. Bard, Luci K. Leykum, and Susan H. Noorily ; Production and Operations Management, 27(3) 458-479
Many parts of the healthcare system remain fragmented and outpatient surgical care is no exception. In this study, we develop a coordinated pre‐operative scheduling approach between Anesthesiology and Internal Medicine to optimize patients’ medical conditions prior to surgery. Coordinating these two services has conceptual appeal because any health issues discovered by the anesthesiologist can often be addressed by a general internist. We design a patient‐centered approach that allows the patient to see both providers, if necessary, on a single visit. This problem is modeled as a two‐station stochastic network, where each station (or clinic) may be staffed by multiple parallel providers and patients see the first available provider. To solve the scheduling problem, we formulate an optimization model to maximize the net benefit of scheduling patients. The objective balances benefits against patient waiting time and clinic overtime costs. We develop a scheduling method with a booking limit to create a balanced network schedule. Due to the complexity of this problem, the solution approach is myopic. In addition, we develop a hybrid method that combines analytical calculation and simulation‐based optimization. We demonstrate our approach on a healthcare network at The University of Texas Health Sciences Center in San Antonio. We compare our method against other policies and show that it yields high quality and robust results. Based on the level of generality of our model and results, the insights gained are not limited to the particular application, but can be applied to other patient‐centered models where scheduling coordination can be used.
Corporate Board Interlocks and New Product Introductions
Raji Srinivasan, Stefan Wuyts, and Girish Mallapragada ; Journal of Marketing, 82(1) 132-150
overlooked. Addressing this gap, the authors consider the effect of the firm’s board interlock centrality, the extent to which board members are connected to boards of other firms, on its new product introductions. They propose that board interlock centrality provides firms access to market intelligence, creating opportunities to introduce incremental new products. Applying the motivation-opportunity-ability theory, the authors propose that two aspects of board leadership moderate this relationship: internal (vs. external) leadership and marketing leadership. They test the hypotheses using a panel of publicly listed U.S. consumer packaged goods firms, in which most new products are incremental innovations. As hypothesized, board interlock centrality increases new product introductions. This effect is stronger when firms have high internal leadership, internal marketing leadership, and a marketing CEO; it is weaker with high intra-industry external leadership. The findings highlight the unexpected role of board interlocks on innovation outcomes and advance the literature on marketing leadership, board interlocks, and social networks.
Destabilizing Financial Advice: Evidence from Pension Fund Reallocations
Zhi Da, Borja Larrain, Clemens Sialm , and Jose Tessada ; Review of Financial Studies, 31(1) 3720-3755
We document a novel channel through which coordinated trading exerts externalities on financial markets. We study the impact of a financial advisory firm that recommends frequent reallocations between equity and bond funds to Chilean pension investors. The recommendations generate large and coordinated fund flows that are exacerbated by the strategic complementarity arising from fund trading restrictions. The recommendations generate significant price pressure and increased volatility in the stock market. In response to these large trade flows, pension funds shift their allocations to more liquid securities. Our findings suggest that giving retirement savers unconstrained reallocation opportunities can destabilize financial markets.
Accounting standards, regulatory enforcement, and innovation
Volker Laux and Phillip C. Stocken ; Journal of Accounting and Economics, 65(43864) 221-236
We examine the effects of accounting standards and regulatory enforcement on entrepreneurial innovation and social welfare. When the entrepreneur issues a financial report that violates the accounting standards, a regulatory agency may detect the violation and bring charges. We find that when regulatory penalties are relatively insensitive to the magnitude of the violation, optimal standards are sufficiently low that they induce full compliance, and increase as the intensity of enforcement increases. In contrast, when regulatory penalties are sensitive to the magnitude of the violation, optimal standards induce non-compliance and decline as the intensity of enforcement increases.
AIQ : how people and machines are smarter together
Nick Polson and James Scott ; Martin’s Press
Dozens of times per day, we all interact with intelligent machines that are constantly learning from the wealth of data now available to them. These machines, from smart phones to talking robots to self-driving cars, are remaking the world in the 21st century in the same way that the Industrial Revolution remade the world in the 19th century. AIQ is based on a simple premise: if you want to understand the modern world, then you have to know a little bit of the mathematical language spoken by intelligent machines. AIQ will teach you that language—but in an unconventional way, anchored in stories rather than equations. You will meet a fascinating cast of historical characters who have a lot to teach you about data, probability, and better thinking. Along the way, you’ll see how these same ideas are playing out in the modern age of big data and intelligent machines—and how these technologies will soon help you to overcome some of your built-in cognitive weaknesses, giving you a chance to lead a happier, healthier, more fulfilled life.
Awareness of SEC Enforcement and Auditor Reporting Decisions
Mark L. Defond, Jere R. Francis, and Nicholas Hallman ; Contemporary Accounting Research, 35(1) 277-313
We find that non‐Big 4 audit offices with greater awareness of SEC enforcement are more likely to issue first‐time going‐concern reports to distressed clients; where SEC “awareness” is measured using (i) audit office proximity to SEC regional offices, and (ii) proximity to specific SEC enforcement actions against auditors. We also show that these non‐Big 4 audit offices issue more going‐concern opinions to clients who do not subsequently fail, indicating a conservative bias that reduces the informativeness of audit reports. This conservative reporting bias is also associated with higher audit fees and higher auditor switching rates. These findings are important because non‐Big 4 firms now audit 39 percent of SEC registrants and issue 88 percent of going‐concern audit reports. For Big 4 offices, we find some evidence that awareness of SEC enforcement may improve reporting accuracy by reducing Type II errors (failing to issue a going‐concern report to a company that fails), although the number of cases is small.
Can Transient Institutions Correctly Interpret Small Negative Earnings Surprises in the Absence of Access to Management’s Private Information?
Gang Hu, Bin Ke, and Yong Yu ; Journal of Accounting, Auditing and Finance, 33(1) 3-33
Using a proprietary database of institutional investors’ daily stock trading records in the post-Regulation FD period, this study examines whether transient institutions have the independent ability to correctly process small negative earnings surprise announcements, which management claims transient institutions have difficulty in interpreting. We find economically significant abnormal selling by transient institutions in response to small negative earnings surprises. Transient institutions’ selling in response to small negative earnings surprises is also associated with significant contemporaneous stock price declines. However, we find no evidence that transient institutions’ trading in response to small negative earnings surprises is an overreaction as there is no reversal of stock prices subsequent to transient institutions’ trading. More importantly, we show that transient institutions’ trading in response to small negative earnings surprises helps improve the informational efficiency of share prices.
Complex Mortgages
Gene Amromin, Jennifer Huang, Clemens Sialm , and Edward Zhong ; Review of Finance , 22(6) 1975-2007
Complex mortgages became a popular borrowing instrument during the bullish housing market of the early 2000s but vanished rapidly during the subsequent downturn. These non-traditional loans, including interest-only and negative-amortization mortgages, enable households to postpone loan repayment in contrast to fully amortizing traditional mortgages. Contrary to common perception, complex mortgages are used by households with high-income levels and prime credit scores, quite unlike the low-income population targeted by subprime mortgages. Nonetheless, we find that complex-mortgage borrowers become delinquent on their mortgages at rates twice as high as borrowers with plain-vanilla fixed-rate contracts even after controlling for household and loan characteristics. Our findings suggest a link between innovations in mortgage markets focused on prime borrowers and the financial crisis.
A new era of voluntary disclosure? Empirical evidence on how employee postings on social media relate to future corporate disclosures
Jeffrey W. Hales, J. R. Moon, and L. Swenson ; Accounting, Organizations and Society, 68() 88-108
With the advent of social media, individual public opinions about firms can be more easily accessed and aggregated, and recent research suggests that various platforms, such as Twitter, Seeking Alpha, and Estimize, provide information relevant in predicting future corporate disclosures. Rather than focusing on the general public’s opinion, we examine a public platform designed to convey insider information – Glassdoor.com, where employees voluntarily share their opinions on a number of issues, including the company’s near-term business outlook. Using a sample of approximately 150,000 employee reviews, we extract both employees’ explicit assessments of outlook and a measure of their latent outlook derived from factor analysis. We then examine whether the opinions employees share on social media relate to future corporate disclosures. In particular, we find evidence that employee opinions are useful in predicting growth in key income statement information, transitory reporting items (e.g., restructuring charges), earnings surprises, and management forecast news. While voluntary disclosures about firm performance have traditionally come from executives, our evidence suggests that rank-and-file employees are chipping away at upper-level management’s exclusive control over that channel.
Benefits and risks of central clearing in the repurchase agreement market
Viktoria Baklanova, Ocean Dalton, and Stathis Tompaidis ; Journal of Financial Market Infrastructures, 7(1) 43844
Recent regulatory changes have raised the cost of activity in the repurchase agreement (repo) market for bank-affiliated dealers. Many transactions between dealers are centrally cleared. Expanding the use of central clearing to transactions between dealers and nondealers could reduce costs and improve market access for market participants. But what are the trade-offs? Data from the Office of Financial Research’s interagency bilateral repo data collection pilot indicates that dealers could reduce their risk exposures if repo transactions conducted by nondealer clients were centrally cleared. However, this would also increase the potential risks that central counterparties themselves face from larger exposures.
Complementary Technologies and Returns to Disclosure during Standard Setting
Cameron D. Miller and PK Toh ; Proceedings of the Seventy-eighth Annual Meeting of the Academy of Management.
In industries with many technological components that need to be interoperable, coordination is increasingly achieved via firms’ disclosure to Standard Setting Organizations. We study whether and how disclosure generates returns to the firm during standard setting. Departing from the convention of focusing on disclosed standard essential patents (SEPs), we examine the role of the firm’s non-disclosed complementary technologies in generating returns. Main results show that firms with more non-disclosed complementary technologies experience greater returns to stock prices over disclosure events, and these technologies gain more in value (indicated by patent citations) over disclosure, at rates higher than even that of the disclosed SEPs. Our findings suggest that, in these systems, a firm is using its larger technological portfolio to appropriate value from coordinating a smaller part of it with others via standard setting, and that a systemic view of the firm’s portfolio is important in understanding strategy within these systems.
Crew Decision Assist: System for Optimizing Crew Assignments at BNSF Railway
Brian Roth, Anantaram Balakrishnan, Pooja Dewan, and April Kuo ; Interfaces, 48(5) 436-448
Rail is the preferred mode of transport for many categories of freight because of its low cost and energy efficiency. Rail accounts for approximately 40%, measured in ton-miles, of all freight movements in the United States. To maintain their competitive advantage and effectively utilize their large investments in rail infrastructure, freight railroad companies place considerable emphasis on improving the cost efficiency of their operations. Crew costs, including payments to crew members and expenses for crew repositioning and lodging at stations away from the home base, constitute a significant portion of railroad operating expenses. This paper describes the development of an optimization model and solution method and the implementation of a system called “crew decision assist” to support crew scheduling at BNSF Railway. The work was motivated by the company’s desire to replace its current manual crew-planning process with a systematic and effective approach. Preexisting crew-scheduling models did not adequately capture all the options and constraints that arise in practice, such as the option to use extra crew members or policies to jointly reposition engineers and conductors. We, therefore, developed a tailored model and solution approach that incorporates various practical features and requirements for crew assignment at BNSF and accounts for uncertainty in train schedules. Our decision support system, based on this method, interfaces with existing information systems to retrieve the necessary data and quickly generate effective crew-deployment plans when train schedules change. The system was recently introduced for use by crew planners at BNSF and has already reduced crew costs, yielding estimated annual savings of several million dollars.
Disclaiming the Future: Investigating the Impact of Cautionary Disclaimers on Investor Judgments Before and After Experiencing Economic Loss
H. S. Asay and Jeffrey W. Hales ; The Accounting Review, 93(4) 81-99
We examine how cautionary disclaimers about forward-looking statements affect investor judgments both before making an investment and after having suffered an investment loss. In our first experiment, a cautionary disclaimer appears to effectively communicate to nonprofessional investors that forward-looking statements may not be reliable, but we find little evidence that the disclaimer alters the extent to which forward-looking statements influence nonprofessional investors’ valuation judgments. In our second experiment, we shift our focus to ex post judgments and find that the disclaimer influences the extent to which investors feel wronged and entitled to compensation after an investment loss, consistent with investors attending to the disclaimer and acting as if it were, ex ante, effective. Notably, investors continue to feel more wronged and entitled to financial compensation when available evidence suggests that management knowingly issued false or misleading forward-looking statements—even if disclaimed. Together, these results provide support for recent judicial efforts to erode the sweeping safe harbor provisions currently granted to companies.
A Simple Multimarket Measure of Information Asymmetry
Travis L. Johnson and Eric C. So ; Management Science, 64(3) 1055-1080
We develop and implement a new measure of information asymmetry among traders. Our measure is based on the intuition that informed traders are more likely than uninformed traders to generate abnormal volume in options or stock markets. We formalize this intuition theoretically and compute the resulting measure, MIA, for firm-days as a function of unsigned volume totals and without estimating a structural model. Empirically, MIA has many desirable properties: it is positively correlated with spreads, price impact, and absolute order imbalances; predicts future volatility; is an effective conditioning variable for trading strategies stemming from price pressure; and detects exogenous shocks to information asymmetry.
A Three-State Early Warning System for the European Union
Savas Papadopoulos, Pantelis Stavroulias, Thomas W. Sager , and Etti Baranoff ; Journal of Risk, 21(1) 1-36
The global financial crisis of 2007–8 focused the attention of the financial authorities on improving forecasting methods in order to avoid future financial crises of similar magnitude. We contribute to the literature on crisis prediction in several important ways. First, we develop an early warning system (EWS) that provides between seven and twelve quarters’ advance warning with high accuracy in out-of-sample testing. Second, our EWS applies region-wide to the leading economies in the European Union. Third, the methodology is transparent, utilizing only publicly available macrolevel data and comparing standard statistical classification methodology (multinomial logistic regression, discriminant analysis and neural networks). Fourth, we employ two relatively novel methodological innovations in EWS modeling: three-state (ternary) classification to guarantee a minimum advance warning period, and a fitting and evaluation criterion (the total harmonic mean) that prioritizes avoiding classification errors for the relatively infrequent events of most interest. As a consequence, a policy maker who uses these methods will enjoy a high probability that future crises could be signaled well in advance and that crisis warnings will not be false alarms. Finally, since we focus on EU15, we provide an overall response on where the most common macroeconomic indicators can be used uniformly for that region.
Analysts’ stock ownership and stock recommendations
Jesse Chan, Steve Lin, Yong Yu, and Wuyang Zhao ; Journal of Accounting and Economics , 66(43864) 476-498
Using hand-collected information, we find that analysts who own stock in a company they follow make more informative recommendations and exert more effort in covering the company. However, we also find that analysts with stock ownership issue more optimistic target price forecasts. These findings suggest that analysts’ stock ownership enhances the credibility of their recommendations by conveying their superior information, but also induces analysts to bias upwards their target price forecasts. Surprisingly, we find that 56% of analysts owning stock terminate their ownership while having a buy recommendation outstanding, suggesting a potentially widespread violation of the regulations on analysts’ research.
Combining stock-and-flow, agent-based, and social network methods to model team performance
Edward G. Anderson, Kyle Lewis, and Gorkem Turgut Ozer ; System Dynamics Review, 34(4) 527-574
Across disciplines, there has been an increasing interest in combining different simulation methods. Team science provides a particularly challenging context because of the interplay across levels of analysis. For example, team performance is decisively influenced by accumulated individual attributes, the interactions among individuals and emergent team structures—each of which is affected by multiple feedback loops at different levels of analysis. To address these challenges, we compare the modeling methods of stock‐and‐flow models, agent‐based models and social network analysis to argue for the advantages of a hybrid approach to formal mathematical modeling in a team science context. We develop a proof‐of‐concept model, which combines aspects of all three methods, to investigate the effects of expertise, the patterns of members’ interactions and diversity‐based subgroups on team performance. Novel, important insights into team science theory result from this investigation, including, among others, the dynamic tradeoff between diversity and homogeneity on teams’ performance and the importance of the communication network structure in affecting that tradeoff.
Competition–cooperation interplay during multifirm technology coordination: The effect of firm heterogeneity on conflict and consensus in a technology standards organization
Ramkumar Ranganathan,Anindya Ghosh, and Lori Rosenkopf ; Strategic Management Journal , 39(12) 3193-3221
Research Summary: We examine how competitive tensions and cooperative motivations together shape firms’ interactions and group‐level outcomes during technology coordination activities in multifirm settings. Analyzing the communication and voting behavior of 115 firms across three subcommittees of a computing industry technology standards‐setting organization over 14 years, we find that existing product‐market positions influence how firms with highly overlapped technological resources differ in their interactions: when their product‐markets are more competitive, they exhibit greater support for the emerging standard, as evidenced by positivity and certainty of interaction tone; but when they possess a broader array of complementary products, support is tempered. At the subcommittee level, after accounting for aggregate competitive tensions in prior interactions, heterogeneity in both firms’ relational influence as well as their prior multiparty experience improve consensus.
Managerial Summary: In innovation ecosystems, competing firms are often obligated to collaborate with each other in large multifirm forums to develop the technical standards that enable interoperability between their products. We show how the networks of technical and commercial relationships between firms shape such standards activities in two steps. First, firms who share many common technology interests with others communicate their support for new standards more vigorously when they participate in more competitive product‐markets, but less vigorously when they possess more complementary products. Second, communities find broader support for standards when there is greater imbalance across both firms’ prior collaborative experiences as well as their pattern of relationships. We demonstrate these results in a study of 115 firms participating in computer peripherals standards development over 14 years.