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Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance

July 9, 2014 Comments off

Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance
Source: Social Science Research Network

We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.

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Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers

July 8, 2014 Comments off

Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers
Source: Social Science Research Network

This paper contains the statistics of the Equity Premium or Market Risk Premium (MRP) used in 2014 for 88 countries. We got answers for more countries, but we only report the results for 88 countries with more than 6 answers.

37% of the MRP used in 2014 decreased (vs. 2013) and 9% increased.

Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references used to justify the MRP, comments from 30 persons that do not use MRP, and comments from 53 persons that do use MRP.

Simulation in Sport Finance

July 2, 2014 Comments off

Simulation in Sport Finance
Source: Social Science Research Network

Simulations have long been used in business schools to give students experience making real-world decisions in a relatively low risk environment. The OAKLAND A’S BASEBALL BUSINESS SIMULATOR takes a traditional business simulation and applies it to the sport industry, in which sales of tangible products are replaced by sales of experiences provided to fans. The simulator asks students to make decisions about prices for concessions, parking, and merchandise; player payroll expenses; funding for a new stadium; and more. On the basis of these inputs, the program provides detailed information about the state of the franchise after each simulated year, including attendance, winning percentage, revenues versus expenses, revenue sharing, and stadium financing. The use of simulations such as this one enhances students’ organizational skills and students’ ability to think critically and imaginatively about the data while applying relevant knowledge and an appropriate strategy to achieve the best possible results. This is particularly important in the field of sport management, in which few, if any, other simulators exist that are specific to the field.

The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity

June 27, 2014 Comments off

The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity
Source: Social Science Research Network

This paper empirically investigates the statistical relation between levels of patent litigation and venture capital (“VC”) investment in the U.S. We find that VC investment, a major funding source for entrepreneurial activity, initially increases with the number of litigated patents, but that there is a “tipping point” where further increases in the number of patents litigated are associated with decreased VC investment, which suggests an inverted U-shaped relation between patent litigation and VC investment. This appears strongest for technology patents, and negligible for products such as pharmaceuticals. There is some evidence of a similar inverted U-shaped relation between patent litigation and the creation of new small firms. Strikingly, we find evidence that litigation by frequent patent litigators, a proxy for PAE litigation, is directly associated with decreased VC investment with no positive effects initially.

Hat tip: ResearchBuzz.

Not an ‘Ebay for Drugs’: The Cryptomarket ‘Silk Road’ as a Paradigm Shifting Criminal Innovation

June 6, 2014 Comments off

Not an ‘Ebay for Drugs’: The Cryptomarket ‘Silk Road’ as a Paradigm Shifting Criminal Innovation
Source: Social Science Research Network

The online cryptomarket Silk Road has been oft-characterised as an ‘eBay for drugs’ with customers drug consumers making personal use-sized purchases. Our research demonstrates that this was not the case. Using a bespoke web crawler, we downloaded all drugs listings on Silk Road in September 2013. We found that a substantial proportion of transactions on Silk Road are best characterised as ‘business-to-business’, with sales in quantities and at prices typical of purchases made by drug dealers sourcing stock. High price-quantity sales generated between 31-45% of revenue, making sales to drug dealers the key Silk Road drugs business. As such, Silk Road was what we refer to as a transformative, as opposed to incremental, criminal innovation. With the key Silk Road customers actually drug dealers sourcing stock for local street operations, we were witnessing a new breed of retail drug dealer, equipped with a technological subcultural capital skill set for sourcing stock. Sales on Silk Road increased from an estimate of $14.4 million in mid 2012 to $89.7 million by our calculations. This is a more than 600% increase in just over a year, demonstrating the demand for this kind of illicit online marketplace. With Silk Road functioning to considerable degree at the wholesale/broker market level, its virtual location should reduce violence, intimidation and territorialism. Results are discussed in terms of the opportunities cryptomarkets provide for criminologists, who have thus far been reluctant to step outside of social surveys and administrative data to access the world of ‘webometric’ and ‘big data’.

Profiting from Machine Learning in the NBA Draft

June 3, 2014 Comments off

Profiting from Machine Learning in the NBA Draft
Source: Social Science Research Network

I project historical NCAA college basketball performance to subsequent NBA performance for prospects using modern machine learning techniques without snooping bias. I find that the projections would have helped improve the drafting decisions of virtually every team: over the past ten years, teams forfeited an average of about $90,000,000 in lost productivity that could have been theirs had they followed the recommendations of the model. I provide team-by-team breakdowns of who should have been drafted instead, as well as team summaries of lost profit, and draft order comparison. Far from being just another input in making decisions, when used properly, advanced draft analytics can effectively be an additional revenue source in a team’s business model.

The Legal Academy Under Erasure

May 26, 2014 Comments off

The Legal Academy Under Erasure
Source: Social Science Research Network

We hear much about the crisis in legal education: high tuition costs, steep declines in law school enrollment, and graduates unprepared for practice who cannot find jobs. Proposals to address the crisis appear to enjoy wide support and may be poised to dramatically change the landscape of legal education. Such reforms will harm law students and the legal profession, placing the legal academy “under erasure,” by: (1) reorienting it from an academically-grounded education towards vocational training, (2) requiring just two years of study for the J.D. degree, (3) allowing graduates of non-ABA accredited law schools to sit for the bar examination, thereby rendering accreditation a toothless mechanism for ensuring academic quality, and (4) gutting faculty scholarship.

Instead, we must make the value of legal education worth its cost by doing a better job of educating and training our students. Legal education is broken because it fails to prepare students for the demands of modern law practice, which is more complex and interdisciplinary than ever before. We need a three-year program that is more robust, one that teaches the core first-year subjects as well as applications of other disciplines (e.g., accounting, economics, psychology) to everyday law practice, exposes students to a reasonable range of specialty areas, and integrates skills training (e.g., client counseling, advocacy, drafting) throughout the curriculum. To accomplish these goals, we should adapt the medical school model to legal education. This would entail a curriculum that provides a comprehensive foundation in basic legal subjects and legally relevant other disciplines, culminating in a series of clinical rotations where the basic doctrinal and interdisciplinary knowledge is applied in practice. I also explain why we should not gut support for faculty scholarship in the hopes that doing so will cut costs and encourage professors to focus on teaching. Contrary to popular claims, engaged scholars are better teachers, and legal scholarship can contribute meaningfully and substantially (though often in ways not readily apparent) to law practice and legal reform efforts. Finally, I suggest that we address the employment problem and improve educational quality by having fewer but better law schools, producing fewer attorneys.

The Role of the Corporation in Society: An Alternative View and Opportunities for Future Research

May 23, 2014 Comments off

The Role of the Corporation in Society: An Alternative View and Opportunities for Future Research
Source: Social Science Research Network

A long-standing ideology in business education has been that a corporation is run for the sole interest of its shareholders. I present an alternative view where increasing concentration of economic activity and power in the world’s largest corporations, the Global 1000, has opened the way for managers to consider the interests of a broader set of stakeholders rather than only shareholders. Having documented that this alternative view better fits actual corporate conduct, I discuss opportunities for future research. Specifically, I call for research on the materiality of environmental and social issues for the future financial performance of corporations, the design of incentive and control systems to guide strategy execution, corporate reporting, and the role of investors in this new paradigm.

Dark Sarcasm in the Classroom: The Failure of the Courts to Recognize Students’ Severe Emotional Harm as Unconstitutional

May 22, 2014 Comments off

Dark Sarcasm in the Classroom: The Failure of the Courts to Recognize Students’ Severe Emotional Harm as Unconstitutional
Source: Social Science Research Network

Sometimes the very people who are supposed to teach, nurture, and protect students in public schools — the students’ teachers, principals, coaches, and other school officials — are instead the people who harm them. Public school officials have beaten students, causing significant physical harm. They have also left students suffering from depression, suicidal ideation, and Post-Traumatic Stress Disorder. When school officials cause such severe harm to students, all the federal courts of appeals to consider the issue have concluded that the Fourteenth Amendment at least in theory protects them, regardless of whether the form of the harm is emotional or physical. Yet, an analysis of the cases across the circuits reveals that the courts have yet to actually find that a case of severe emotional harm on its own violates the Constitution, even though they have been willing to find physical harm unconstitutional. Not only do the courts not find stand-alone emotional harm sufficient to make out a constitutional violation, they also collectively evaluate students’ emotional harm very differently than their physical harm.

This Article explores the distinction in the way the courts treat standalone emotional harm in public school students’ Fourteenth Amendment cases. It contends that if the courts are going to recognize that the Constitution protects students from severe harm regardless of its physical or emotional form, as they do, then the distinction in treatment of emotional harm is untenable. Drawing on substantive due process theory, psychology, and law and emotions theory, this Article argues that the distinction in treatment is the result of emotions stigma, analogous to the long-recognized phenomenon of mental illness stigma, that discredits students’ emotions-based claims. It proposes a paradigm for evaluating students’ emotional harm that responds to and helps to overcome emotions stigma so the Constitution will protect students when school officials cause them severe emotional harm.

Sentencing in Tax Cases after Booker: Striking the Right Balance between Uniformity and Discretion

May 22, 2014 Comments off

Sentencing in Tax Cases after Booker: Striking the Right Balance between Uniformity and Discretion
Source: Social Science Research Network

It has been nearly ten years since the Supreme Court’s seminal decision in United States v. Booker, in which the Court invalidated the mandatory application of the United States Sentencing Guidelines. In the cases that followed, the Court addressed subsidiary issues regarding the application of the Guidelines and the scope of appellate review. However, despite — or perhaps because of — these opinions, there is little consensus regarding the status and extent of appellate review, as well as the discretion afforded sentencing courts. More troubling, what consensus there is seems to permit judges to impose any sentence they wish, as long as the appropriate sentencing procedures are followed. As a result, we are in danger of returning to “the shameful lack of parity, which the Guidelines sought to remedy.”

The Sentencing Reform Act and the Sentencing Guidelines were designed to reduce disparity in sentencing and to reign in what one commentator described as a “lawless system.” However, the Guidelines as ultimately conceived drastically limited the sentencing judge’s ability to impose a sentence that was appropriate for the conduct and culpability of the defendant, creating a different kind of sentencing disparity. The current, post-Booker system provides more guidance than the pre-Guidelines system, but permits sentencing judges to disregard the Guidelines and develop their own sentencing policy. As a result, rather than having a system that allows for sentences to be tailored to individual defendants, the current system allows sentences to be imposed based on the penal philosophy of individual judges. This will inevitably lead to unwarranted sentencing disparity.

This article traces the recent history of criminal sentencing and, relying on the influential works of John Rawls and H.L.A. Hart on theories of punishment, argues for a better system that allows for both guidance to sentencing judges and appropriately individualized sentencing. My recommendation, although equally applicable to any federal sentence, will be examined through the lens of tax sentencing.

The Contaminating Effects of Building Instrumental Ties: How Networking Can Make Us Feel Dirty

May 16, 2014 Comments off

The Contaminating Effects of Building Instrumental Ties: How Networking Can Make Us Feel Dirty (PDF)
Source: Social Science Research Network

To create social ties to support their professional or personal goals, people actively engage in instrumental networking. Drawing from moral psychology research, we posit that this intentional behavior has unintended consequences for an individual’s morality. Unlike personal networking in pursuit of emotional support or friendship, and unlike social ties that emerge spontaneously, instrumental networking in pursuit of professional goals can impinge on an individual’s moral purity — a psychological state that results from viewing the self as clean from a moral standpoint — and make an individual feel dirty. We theorize that such feelings of dirtiness decrease the frequency of instrumental networking and, as a result, work performance. We also examine sources of variability in networking-induced feelings of dirtiness by proposing that the amount of power people have when they engage in instrumental networking influences how dirty this networking makes them feel. Three laboratory experiments and a survey study of lawyers in a large North American law firm provide support for our predictions. We call for a new direction in network research that investigates how network-related behaviors associated with building social capital influence individuals’ psychological experiences and work outcomes.

What Happens Before? A Field Experiment Exploring How Pay and Representation Differentially Shape Bias on the Pathway into Organizations

May 14, 2014 Comments off

What Happens Before? A Field Experiment Exploring How Pay and Representation Differentially Shape Bias on the Pathway into Organizations
Source: Social Science Research Network

Little is known about how discrimination against women and minorities manifests before individuals formally apply to organizations or how it varies within and between organizations. We address this knowledge gap through an audit study in academia of over 6,500 professors at top U.S. universities drawn from 89 disciplines and 259 institutions. We hypothesized that discrimination would appear at the informal “pathway” preceding entry to academia and would vary by discipline and university as a function of faculty representation and pay. In our experiment, professors were contacted by fictional prospective students seeking to discuss research opportunities prior to applying to a doctoral program. Names of students were randomly assigned to signal gender and race (Caucasian, Black, Hispanic, Indian, Chinese), but messages were otherwise identical. We found that faculty ignored requests from women and minorities at a higher rate than requests from Caucasian males, particularly in higher-paying disciplines and private institutions. Counterintuitively, the representation of women and minorities and discrimination were uncorrelated, suggesting that greater representation cannot be assumed to reduce discrimination. This research highlights the importance of studying what happens before formal entry points into organizations and reveals that discrimination is not evenly distributed within and between organizations.

What Happens Before? A Field Experiment Exploring How Pay and Representation Differentially Shape Bias on the Pathway into Organizations

May 9, 2014 Comments off

What Happens Before? A Field Experiment Exploring How Pay and Representation Differentially Shape Bias on the Pathway into Organizations
Source: Social Science Research Network

Little is known about how discrimination against women and minorities manifests before individuals formally apply to organizations or how it varies within and between organizations. We address this knowledge gap through an audit study in academia of over 6,500 professors at top U.S. universities drawn from 89 disciplines and 259 institutions. We hypothesized that discrimination would appear at the informal “pathway” preceding entry to academia and would vary by discipline and university as a function of faculty representation and pay. In our experiment, professors were contacted by fictional prospective students seeking to discuss research opportunities prior to applying to a doctoral program. Names of students were randomly assigned to signal gender and race (Caucasian, Black, Hispanic, Indian, Chinese), but messages were otherwise identical. We found that faculty ignored requests from women and minorities at a higher rate than requests from Caucasian males, particularly in higher-paying disciplines and private institutions. Counterintuitively, the representation of women and minorities and discrimination were uncorrelated, suggesting that greater representation cannot be assumed to reduce discrimination. This research highlights the importance of studying what happens before formal entry points into organizations and reveals that discrimination is not evenly distributed within and between organizations.

Morality Rebooted: Exploring Simple Fixes to Our Moral Bugs

May 8, 2014 Comments off

Morality Rebooted: Exploring Simple Fixes to Our Moral Bugs
Source: Social Science Research Network

Ethics research developed partly in response to calls from organizations to understand and solve unethical behavior. Departing from prior work that has mainly focused on examining the antecedents and consequences of dishonesty, we examine two approaches to mitigating unethical behavior: (1) values-oriented approaches that broadly appeal to individuals’ preferences to be more moral, and (2) structure-oriented approaches that redesign specific incentives, tasks, and decisions to reduce temptations to cheat in the environment. This paper explores how these approaches can change behavior. We argue that integrating both approaches while avoiding incompatible strategies can reduce the risk of adverse effects that arise from taking a single approach.

The Impact of Corporate Sustainability on Organizational Processes and Performance

May 7, 2014 Comments off

The Impact of Corporate Sustainability on Organizational Processes and Performance
Source: Social Science Research Network

We investigate the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes. Using a matched sample of 180 companies, we find that corporations that voluntarily adopted environmental and social policies many years ago – termed as High Sustainability companies – exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies – termed as Low Sustainability companies. In particular, we find that the boards of directors of these companies are more likely to be responsible for sustainability and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of nonfinancial information. Finally, we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The outperformance is stronger in sectors where the customers are individual consumers instead of companies, companies compete on the basis of brands and reputations, and products significantly depend upon extracting large amounts of natural resources.

Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing

May 5, 2014 Comments off

Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing
Source: Social Science Research Network

Under increased pressure to report environmental impacts, some firms selectively disclose relatively benign impacts, creating an impression of transparency while masking their true performance. We identify key company- and country-level factors that, by intensifying scrutiny on firms and diffusing global norms to their headquarters countries, limit firms’ use of selective disclosure. We test our hypotheses using a novel panel dataset of 4,750 public companies across many industries and headquartered in 45 countries during 2004-2007. Results show that firms that are more environmentally damaging, particularly those in countries where they are more exposed to scrutiny and global norms, are less likely to engage in selective disclosure. We discuss contributions to the literature that spans institutional theory and strategic management and to the literature on information disclosure.

Corporate and Integrated Reporting: A Functional Perspective

April 25, 2014 Comments off

Corporate and Integrated Reporting: A Functional Perspective
Source: Social Science Research Network

In this paper, we present the two primary functions of corporate reporting (information and transformation) and why currently isolated financial and sustainability reporting are not likely to perform effectively those functions. We describe the concept of integrated reporting and why integrated reporting could be a superior mechanism to perform these functions. Moreover, we discuss, through a series of case studies, what constitutes an effective integrated report (Coca-Cola Hellenic Bottling Company) and the role of regulation in integrated reporting (Anglo-American).

The Organizational and Geographic Drivers of Absorptive Capacity: An Empirical Analysis of Pharmaceutical R&D Laboratories

April 24, 2014 Comments off

The Organizational and Geographic Drivers of Absorptive Capacity: An Empirical Analysis of Pharmaceutical R&D Laboratories
Source: Social Science Research Network

Scholars and practitioners alike now recognize that a firm’s capacity to assimilate and use know-how from external sources — what Cohen and Levinthal (1990) called “absorptive capacity” — plays a central role in innovation performance. In recent years, a common strategy pursued by companies to increase their absorptive capacity has been to locate new R&D facilities in close geographic proximity to technology “hotspots” like Cambridge, Massachusetts or the San Francisco Bay Area. Such a strategy is predicated on the assumption that geographic proximity facilitates absorption. Unfortunately, more than two decades after the publication of Cohen and Levinthal’s landmark piece on absorptive capacity, precious little is known about how different organizational strategies and managerial practices — including location choices — actually impact a firm’s ability to exploit external sources of know-how. A key barrier to empirical progress on this front has been a lack of direct measures of absorption. In this paper, we develop a novel measure of absorptive capacity that attempts to directly track the influence of external sources of know-how on the internal R&D activities on individual laboratories. We then use this measure to examine laboratory level differences in absorptive capacity and the degree to which a lab’s geographic proximity to a given knowledge base influences its absorptive capacity. To identify patterns of absorption, we exploit a quasi-natural experiment that has occurred in the pharmaceutical industry over the past two decades. Since 1989, a number of major pharmaceutical companies (Merck, Novartis, Pfizer, etc.) have chosen to locate new laboratories in one or more major life science hotspots (Massachusetts, the San Francisco Bay Area, and San Diego County). Because these are de novo green-field labs, we have an unusual opportunity to study how the capabilities of the lab evolved over time, and whether those capabilities were influenced by the technological activities of the surrounding local scientific and technological ecosystems. Our sample includes 39 R&D laboratories (at varying degrees of distance from three major life sciences hotspots — Massachusetts, San Diego County, and the San Francisco Bay Area). Our findings indicate that geographic proximity is a significant predictor of how much know-how a lab absorbs from a given hotspot. The importance of geographic proximity is also shown to be increasing over time. However, our results also show significant residual variance at both the individual laboratory and company levels, suggesting an important role of managerial practices and policies in driving absorption. The latter finding was consistent with our field interviews of R&D executives from laboratories involved in our study. The study provides further evidence of the geographically bounded nature of knowledge.

Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches

April 23, 2014 Comments off

Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches
Source: Social Science Research Network

Applying a “co-search” algorithm to Internet traffic at the SEC’s EDGAR website, we develop a novel method for identifying economically-related peer firms. Our results show that firms appearing in chronologically adjacent searches by the same individual (Search Based Peers or SBPs) are fundamentally similar on multiple dimensions. In direct tests, SBPs dominate GICS6 industry peers in explaining cross-sectional variations in base firms’ out-of-sample: (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. We show that SBPs are not constrained by standard industry classification, and is more dynamic, pliable, and concentrated. Our results highlight the potential of the collective wisdom of investors ― extracted from co-search patterns ― in addressing long-standing benchmarking problems in finance.

Learning by Thinking: How Reflection Aids Performance

April 21, 2014 Comments off

Learning by Thinking: How Reflection Aids Performance
Source: Social Science Research Network

Research on learning has primarily focused on the role of doing (experience) in fostering progress over time. In this paper, we propose that one of the critical components of learning is reflection, or the intentional attempt to synthesize, abstract, and articulate the key lessons taught by experience. Drawing on dual-process theory, we focus on the reflective dimension of the learning process and propose that learning can be augmented by deliberately focusing on thinking about what one has been doing. We test the resulting dual-process learning model experimentally, using a mixed-method design that combines two laboratory experiments with a field experiment conducted in a large business process outsourcing company in India. We find a performance differential when comparing learning-by-doing alone to learning-by-doing coupled with reflection. Further, we hypothesize and find that the effect of reflection on learning is mediated by greater perceived self-efficacy. Together, our results shed light on the role of reflection as a powerful mechanism behind learning.

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