Research Espresso | Feb 2023 Issue 19

Research INSIGHT

Business cycles: Torn between Reason and Passion?

RESEARCH INSIGHT

It has been said by a political commentator that facts don’t care about your feelings. While this may well be true, can feelings–or sentiments–count as much as facts for firms trying to decide what they should do as the demand for their products changes? Sentiments and real business cycles, a recent paper, seeks to answer this question by exploring whether individual firms react to sentiments as much as they do to facts despite being, as per economic theory, purely rational actors.

Many standard real business cycle (RBC) models predict that overall economic outcomes are entirely driven by changes in fundamental conditions. Thus, as firms encounter technological shocks such as the introduction of ChatGPT, they will – on aggregate –make accurate estimates about market demand and adjust their production accordingly, a situation dubbed traditional equilibrium. But what happens when firms only have incomplete information on demand (a state of affairs that seems intuitively more realistic)? Unable to differentiate the exact proportion of demand that is driven by fundamentals, the research suggests that

optimistic managers will interpret favorable sentiments as equivalent – at least partly – to strong demand for their firm’s products. Excited about these developments, firms will increase production and investments. As total supply rises due to new capacity being added across the industry, selling prices eventually decline just as real wages surge, leading to even higher household consumption while bringing more idle individuals back to work. In such a sentiment-driven equilibrium model, waves of either pure optimism or unadulterated pessimism can thus trigger large fluctuations in the business cycles. So can sentiments drive business cycles or are business cycles purely rational?

It turns out that sentiments do matter! Using data from the US economy to study real business cycles across various scenarios, it appears that the volatility of output under the fundamental equilibrium is as much as 31% lower than that occurring under the sentiment-driven equilibrium. This is explained in part by the lack of information that producers of intermediate goods have about both the demand for their own products and the demand for final goods. Lacking a direct connection

with consumers, they react mostly to the information embedded in the orders they receive from the producers of final goods. Prone to confuse market exuberance and/ or gloom with fundamental changes in demand, they are thus vulnerable to adjusting production or making investments based on the market’s mood swings. The notion that such sentiment shocks can play an important role in amplifying fluctuations in real business cycles is further supported by the fact that labor market volatility under the sentiment-driven equilibrium is empirically more reasonable than that predicted by the

fundamental equilibrium: more workers get hired quickly in the early stage of an optimistic boom, although the momentum dies quickly once the pendulum swings in the opposite direction. Reality always bites at the end!

Dr. Fei ZHOU Assistant Professor Department of Accountancy, Economics and Finance

HKBU School of Business hosts international workshop on “China and the World: Growth, ESG outcomes and impact investment”

The Centre for Sustainable Development Studies (CSDS) of the HKBU School of Business organised an international workshop themed “China and the World: Growth, ESG outcomes and Impact Investment” on 21 February 2023. The one-day event gathered distinguished academics, researchers from influential think tanks and experienced practitioners in impact investment to share ideas and experiences on China’s ESG efforts, outcomes and impacts after decades of high growth.

Prof. Ed Snape, Dean of the HKBU School of Business, welcomed the guests to the HKBU campus, highlighting how this important topic resonates with the School’s long-standing commitment to inspire and promote corporate sustainability. ‘As part of the School’s endeavour to nurture ethical business leaders with global vision, the CSDS was founded to conduct research and organise knowledge transfer activities related to the achievement of the United Nations’ Sustainable Development Goals (SDGs). This workshop provides a platform for stakeholders to examine the evolving ESG practices of Chinese companies and to consider next steps.’

Prof. Ed Snape, Dean of the School of Business, welcomed the guests by stressing the School’s commitment to corporate sustainability, highlighting the fact that the School was the first university in Hong Kong to join the UN-supported Principles for Responsible Management Education (PRME).

Prof. Yuk Shing Cheng, Director of the Centre for Sustainable Development Studies, led the Workshop by sharing his views on “China’s Climate Action – the Big Push for Renewable Energy”.

Sharing insights on China’s ESG practice and outcomes, speakers assessed the latest developments and discussed recent findings on the performance of China’s ESG investment, the nexus between common prosperity and China's current economic slowdown and the implications of the rapid expansion of China’s renewable energy industry. To channel more funding for sustainable development, the importance of adopting a common policy framework for sustainable finance across countries was highlighted. Speakers also discussed the ESG impacts of Chinese companies in overseas investments in the context of the government’s “going out” strategy. A number of case studies helped analyse how the growing concern for ESG impact created opportunities and challenges for China’s outward investments and overseas infrastructure projects.

The panel discussion on “China’s ESG practice and impact investment from the perspectives of practitioners” featured panelists working on projects aimed at generating social and environmental impact with positive financial returns. Speakers from global and Chinese impact investing networks assessed the development and prospects of impact investment in China as well as around the world. Experts on microcredit and financial inclusion shared their changing practices in response to the rapidly evolving social and economic environment in China.

Established in July 2022, the CSDS focuses on how institutions, policies and practices affect the achievement of the selected SDGs in the global and local context. The Centre is currently working on projects in two major areas: poverty, inequality and mobility (addressing SDG 1 “No Poverty” and SDG 10 “Reduced Inequalities”) and climate policy, clean energy and environmental protection (addressing SDG 7 “Affordable and Clean Energy” and SDG 13 “Climate Action”).

research

Centre’s website

Visit the

for more details on its

and future activities.

(From left) Ms. Maud Savary-Mornet, Senior Advisor, The Global Impact Investing Network Hong Kong Office; Dr. Duoguang Bei, President, Chinese Academy of Financial Inclusion; Dr. Enjiang Cheng, Program Officer, Ford Foundation, Beijing; Dr. Zhong Wu, Director General, The Finance Centre for South-South Cooperation; Ms. Yigu Lin, Vice President, China Impact Investing Network; Mr. Dongwen Liu, Chief Executive Officer, Chongho Bridge

(From left) Prof. Xiuli Xu, Dean, College of International Development and Global Agriculture, China Agricultural University; Dr. Shui Ki Wan, Associate Dean, HKBU School of Business; Dr. Jun Ma, President, Hong Kong Green Finance Association; Prof. Kevin Chen, International Dean, China Academy for Rural Development, Zhejiang University; Dr. Fusheng Li, Deputy Director General, The New Century Academy of Transnational Corporations

(From left) Prof. Yuk Shing Cheng, Director of CSDS; Mr. Jiantuo Yu, Deputy Director General, China Development Research Foundation, Development Research Institute, State Council; Prof. Guanghua Wan, Director, Institute of World Economy, Fudan University; Dr. Kin Ming Wong, Associate Director of CSDS; Prof. Yan Hong, Deputy Dean for Academic Affairs and Faculty and Director, Center for Sustainable Investment, Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University; Prof. Bohui Zhang, Executive Dean, School of Management and Economics, Chinese University of Hong Kong, Shenzhen

Research EXCELLENCE

Department of Accountancy, Economics and Finance

Employee Output Response to Stock Market Wealth Shocks

Journal of Financial Economics

http://doi.org/10.1016/ j.jfineco.2021.11.005

Department of Management, Marketing & Information Systems

Informal institutions and absorptive capacity: A cross-country metaanalytic study

Journal of International Business Studies

http://dx.doi.org/10.1057/s41267020-00361-7

Department of Management, Marketing & Information Systems

Fast or Slow: How Temporal Work Design Shapes Experienced Passage of Time and Job Performance

Academy of Management

Journal

http://doi.org/10.5465/ amj.2019.1110

Dr. Song CHANG

Dr. Peng Rocky CHEN

Dr. Xin ZOU

Prof. Christy M. K. CHEUNG

Department of Management, Marketing and Information Systems

How Technostressors Influence Job and Family Satisfaction: Exploring the Role of Work–Family Conflict

Information Systems Journal

https://onlinelibrary.wiley.com/ doi/10.1111/isj.12431

Prof. Cheung has been recently appointed as

• Associate Editor Information System Research

• Senior Editor

Prof. Liqun WEI

Department of Management, Marketing & Information Systems

Informal Institutions, Entrepreneurs' Political Participation, and Venture Internationalization

Journal of International Business Studies

https://doi.org/10.1057/ s41267-021-00402-9

Workplace ostracism: Its nature, antecedents, and consequences

Personnel Psychology

http://doi.org/10.1111/ peps.12531

Upcoming EVENTS

Research Seminars

Date Speaker Topic Economics

3 March 2023

9:00-10:30

Zoom

Joint with NTU, NYU-Shanghai, Sinica, and SMU

17 March 2023

16:00-17:30

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Joint with NTU, NYU-Shanghai, Sinica, and SMU

22 March 2023

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18 April 2023

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Joint with Kyoto, NTU, Osaka, and Sinica

7 March 2023

9:00-10:30

Zoom

Dr. Scott DAVIS

Federal Reserve Bank of Dallas

Prof. Ricardo REIS

London School of Economics and Political Science

Prof. Lynette ONG University of Toronto

Prof. Francesco GIOVANNONI University of Bristol

A Theory of the Global Financial Cycle

Jumpstarting an International Currency

Outsourcing Repression

Pricing Novel Goods

Centre for Business Analytics and the Digital Economy

Joint with Kyoto, NTU, Osaka, and Sinica

8 March 2023

9:00-10:30

Zoom

Joint with CEIBS, NTU, and NUS

22 March 2023

9:00-10:30

Zoom

Joint with CEIBS, NTU, and NUS

Prof. Alexander WOLITZKY

Massachusett Institute of Technology

Monitoring versus Discounting in Repeated Games

Prof. Kenneth SHOTTS

Stanford University

Prof. Lynette ONG

University of Toronto

Veto Players and Policy Development

Outsourcing Repression

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The Research Espresso, a bimonthly e-publication covering everything you need to know about the latest research developments at the HKBU School of Business, focuses on four key areas: Research Insights (the main research topic of the month), Research Excellence (recognition of faculty members’ research achievements), News (research-related updates), and Seminars (sharing research skills and knowledge).

The idea is to provide business practitioners with the most recent research findings from the School‘s faculty. We want to build links between research and practice and to ensure that the School's research has business and societal impact.

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