Research in Action Fifth Edition | Fall 2018
3 A Note from the Dean 4 Shifting the Takeover Decision to the Shareholders 8 Online Marketing of E-Cigarettes Targets Minority Groups 12 Better Customer Service and Increased Income for On-Demand Businesses 16 Volatile Rental-Housing Rates May Be Measured More Accurately to Determine Price Indexes 20 Research Abstracts 32 Appointments, Awards and Honors 33 Welcome New Faculty Members
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A Note from the Dean
The research subjects showcased in this edition of Research in Action are both varied and topical. One of these research papers explores the advantages of shareholders directly controlling corporate takeover decisions empowered with previously hardVQ ¨PF KPHQTOCVKQP PQY CXCKNCDNG QPNKPG $PQVJGT RWDNKUJGF article examines the practice of targeting minority groups with online e-cigarette marketing. An alternative commission UVTWEVWTG YJKEJ OC[ DG OQTG RTQ¨VCDNG HQT QP FGOCPF UGTXKEGU like Uber, is the focus of a third published paper. We also explore a study suggesting that measurements of the housing component within the consumer price index do not accurately TG©GEV TGPVCN TCVGU The depth and breadth of research activity within the Merage School spans just about every industry. In the last several years, the focus on the realities of digital transformation has greatly impacted the topics that our faculty members investigate – regardless of their academic specialty. Please visit merage.uci.edu/abstracts to view all of our faculty research and learn more about future research collaboration opportunities. Enjoy,
b Eric R. Spangenberg Dean and Professor of Marketing
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Research Highlights
Shifting the Takeover Decision to the Shareholders by Laurie McLaughlin
There was a time when shareholders found it hard to gather information about the companies in which they JGNF UVQEM 7QFC[ VJG HCEVU CPF ¨IWTGU they need are available online, and shareholders’ ability to make an informed choice about a takeover of the company of which they are a part – and replace the conventional board of directors’ decision-making power – is greater than ever.
Vidyanand (VC) Choudhary Professor of Information Systems
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RESEARCH IN ACTION FALL 2018 5
“Under the proposed takeover governance model, “acquirers will know that any takeover offer made will be heard and voted on directly by the target ¨TO UJCTGJQNFGTU 7JKU KU NKMGN[ to encourage competitive offers, YJKEJ YKNN DGPG¨V VJG VCTIGV ¨TO UJCTGJQNFGTU
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hareholders have unprecedented access to information about the companies in which they have invested. Websites, such as SeekingAlpha.com and others, provide public information, and of course, many firms provide free online access to their annual reports, transcripts of conference calls, SEC filings and other investor materials. Plenty of information is also available from a wide selection of third-party providers; for example, EarningsCast.com offers digital recordings of earnings conference calls. Information Systems Professor Vidyanand Choudhary of UCI’s Paul Merage School of Business, and UCI alumnus Joseph Vithayathil, assistant professor of computer management and information systems at Southern Illinois University Edwardsville, examined the potential for online information and electronic voting to improve shareholder surplus by facilitating an owner-governance structure versus the common delegated-governance by companies’ traditional boards of directors. They issued the results of this research in their study, “Governance of Corporate Takeovers: Time for Say-on-Takeovers?” published in the March 2018 MIS Quarterly. With particular focus on unsolicited takeover actions, the study proposes “a new takeover governance model where shareholders directly control the takeover decision, bypassing the board.” This would eliminate the agency problems that may arise from a “misalignment of interest between shareholders … and the board that is their agent,” state the authors. “While this proposed model eliminates the agency problem, it has the disadvantage that diffuse shareholders cannot negotiate with the acquirer and have less
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information compared to the board. However, the internet information age makes shareholders increasingly well informed and therefore, mitigates the informational disadvantage.” Under the traditional delegated-governance structure, potential agency issues emerge with a takeover when board members weigh the tradeoff between reputational benefits of a successful takeover and the loss of incumbency. Boards may implicitly take into account the fact that a takeover will bring their directorship at the target firm to an end. Entrenchment through anti-takeover provisions reduces the likelihood of a successful takeover and thus benefits board members. Incumbent boards are widely known to protect themselves through poison pills and the use of staggered boards. Some have argued that such entrenchment helps them drive a hard bargain with an acquirer. The researchers believe that such entrenchment levels are often greater than what shareholders would prefer. Acquirers may not make takeover offers when they know that the board is entrenched. The resulting reduction in corporate takeovers is detrimental to shareholders and more broadly, it hurts the economy by allowing mediocre management to perpetuate itself. Board-accepted takeover offers are routinely approved by shareholders, and when takeovers are not accepted, the shareholders do not have occasion to voice their preference. Boards also have both public and private information to inform their decisions (as does the acquirer), and shareholders get their information through publicly available information – the turning point was about the year 2000 for timely access to online,
digital information on public companies – which has significantly increased in quality, quantity, variety and thoroughness in recent years. The digital age also provides support for the practicality of owner-governance because the increased quality and accessibility of costeffective electronic voting platforms have made proxy voting easier via the internet. “Our proposed model of owner-governance is consistent with the trend toward greater shareholder control,” say the authors. Choudhary and Vithayathil suggest a takeaway for shareholders is that “boards can survey their shareholders periodically and get hard data on the premium demanded by shareholders in order to sell. Alternatively, or in conjunction, third parties can survey shareholders, collect this information, and publish it.” As for acquirers, under the proposed takeover governance model, “they will know that any takeover offer made will be heard and voted on directly by the target firm shareholders. This is likely to encourage competitive offers, which will benefit the target firm shareholders.” The authors suggest that if a delegatedgovernance structure remains in place, the board should be made aware of shareholders’ preferred premium at which each will sell. But, they underscore, actual “owner-governance gives control to shareholders, and there is a large body of evidence showing that securities providing greater control to the security holder command higher prices than securities with less control. Hence, it is conceivable that shares with ownergovernance privileges on takeovers will be valued more highly in the securities markets.”
Information Systems Professor Vidyanand (VC) Choudhary is a faculty member at the UCI Paul Merage School of Business. Previously, he was a faculty member at Carnegie Mellon University in Pittsburgh. He currently teaches courses related to global business, and analytics and data mining in the Merage School’s MBA program. He also teaches both undergraduate and Ph.D. courses. Choudhary conducts research on a variety of topics, including investment in innovation and information technology, recommender systems and search, governance, marketing strategy, pricing and impact of cloud, targeted marketing strategies, and global outsourcing. His research has been published in a variety of top-tier journals, including Management Science and Information Systems Research. Joseph Vithayathil, who earned a PhD from UCI, is an assistant professor of computer management and information systems at Southern Illinois University Edwardsville. He was previously in the technology industry and has extensive professional and entrepreneurial experience in global information technology and executive management. He serves on the board of a technology company that designs, develops and RTQFWEGU GPGTI[ GH¨EKGPV RQYGT UGOKEQPFWEVQTU and subsystems using silicon carbide. Vithayathil teaches graduate and undergraduate courses on e-commerce, information technology infrastructure, business analytics, security and cloud computing. His research has been published in leading journals, including Journal of Management Information Systems, Information Systems Journal and the Journal of Strategic Information Systems.
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Connie Pechmann Professor of Marketing
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Online Marketing of E-Cigarettes Targets Minority Groups by Christine Byrd
In the 1998 Master Settlement Agreement (MSA), tobacco companies agreed to stop advertising smoking via TV commercials and billboards or by targeting children. But new, largely unregulated technologies have converged to transform the landscape for marketing nicotine. Online advertising, for example, is not regulated by the MSA, nor are e-cigarettes, which deliver nicotine and other chemicals without burning tobacco like a traditional cigarette. UCI Merage School Marketing Professor Connie Pechmann, who has studied nicotine advertisements and addiction for decades, says, “It’s the wild, wild West out there on the internet.”
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everal unique aspects of online advertising make the medium appealing to e-cigarette vendors. Chief among those is the relative affordability of digital ads, which especially appeal to small vendors who have huge growth potential. In fact, previous research found website banner ads to be the third-greatest source of exposure to e-cigarettes and similar products among all US adults. Previous studies explored the content of ads for vaping, and while others examined the demographic reach of e-cigarette marketing, Pechmann and her colleagues from UCI’s Program in Public Health— David Timberlake, Jennifer Garcia-Cano, Samantha Cino and Margarita Savkinda, and Dmitiriy Nikitin of Gillings School of Global Public Health at University of North Carolina at Chapel Hill– set out to combine the two areas of research to answer the question: How does the
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content of ads for vaping differ across targeted demographic groups? Their research is published in the journal Tobacco Control. Competing with Cigarettes Over the years, Pechmann has studied the impact of different types of advertisements and found that comparative ads are by far the most effective. These are ads in which a lesser-known, upstart brand claims to be better than a highly recognizable leading brand. Pechmann’s research showed that these types of ads not only made viewers prefer the upstart, but look less favorably on the leading name brand. Comparative ads “yield greater attention, awareness, information processing, purchase intentions and purchase behaviors” as opposed to non-comparative advertisements, the researchers write. This type of marketing is so effective, Pechmann says, that it is banned in Europe.
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Pechmann and her colleagues set out to identify the 194 distinct e-cigarette brands that were using online advertising in 2015. These brands put out 932 unique ads, which three UCI students then coded based on their content. For example, was the ad encouraging users to vape to help quit cigarettes, or telling them that vaping is more convenient because it can provide a hit of nicotine even in locations where cigarettes are banned? Researchers grouped all of the ads featuring smoking cessation, harm reduction, convenience, greater savings, less impact on the environment, and social/lifestyle benefits (like less odor) under the umbrella of “comparative” ads. All other ads were considered non-comparative. Ads claiming that the vaping devices were better than traditional cigarettes were excluded because they focused on similarities between the two. Teasing Out Demographic Differences Public health research has thoroughly covered the disparities in tobacco-related diseases. For example, African American men who smoke have higher incidents of lung, pancreatic and head/ neck cancers compared to white smokers. How, then, does marketing to ethnic groups differ? Researchers used data from the ad measurement firm comScore to estimate the racial or ethnic identity of visitors to a given website. In the process, some websites were eliminated because not enough people visited to create valid data. Ultimately, 551 unique ads from 152 brands of e-cigarettes or other vaping devices appearing on 1,206 different websites were included in the analysis. Not all websites have equivalent demographic reach. Therefore, the researchers determined which websites appealed more strongly to certain demographics by utilizing demographic data about internet users overall from the 2015 Health Information National Trends Survey. Concern for the Hispanic Market Since previous research has shown whites are more likely to be aware of and to use vaping products, researchers expected to find that group was seeing more ads. And their research bore that out.
But what surprised them was the type of ads they were seeing. Websites that attracted larger white audiences had significantly lower odds of displaying the most effective type of ads: the comparative ads. When minorities are shown ads for vaping, they are much more likely see the highly effective comparative type of ad. Websites that had greater appeal to Hispanics had significantly greater odds of comparing vaping products to traditional cigarettes. “We need to worry about the Hispanic market,” says Pechmann. “They’re seeing the more persuasive ads for vaping, and we’re not sure why. It may have something to do with the fact that different ad agencies usually handle the Hispanic market.” Because the ads compare the newer e-cigarettes to traditional cigarettes, Pechmann assumes they are targeting people who are already smokers. “The good news is they’re not trying to get new people, they’re targeting people who are already smokers,” she says. “But the problem is they’re saying, ‘keep smoking.’” What’s not yet clear is whether these more effective ads are leading more Hispanics to take up vaping, and if they are, what the health impact will be. Possibly, this marketing trend is helping Hispanics who are addicted to nicotine take up vaping to help stop smoking cigarettes. But just as likely, vaping is keeping Hispanics from quitting by giving them new methods to feed their nicotine cravings – at the mall or other locations where cigarettes aren’t permitted. In 2016, the Food and Drug Administration stepped up its efforts to regulate e-cigarettes by prohibiting e-cigarette manufacturers from claiming that they’re less dangerous than traditional tobacco products, without researchbased evidence. Additionally, the FDA put in place an expensive application process to approve any new tobacco product can be marketed in the US. Most likely, the smaller brands that have been most profuse in online advertising will be the hardest hit. This will significantly disrupt the online marketing efforts the researchers saw between 2009 and 2015. Nevertheless, no new regulation can undo the impact that those ads have already made on millions of internet users.
Cornelia (Connie) Pechmann is a professor of marketing in the UCI Paul Merage School of Business. She studies the effects of advertising, social media, product labeling, brand names and retail store locations on consumers and she has published more than 80 articles, reports and papers. Pechmann has received numerous grants and more than $1.5 million to study youths’ responses to pro- and anti-smoking ads and product placements in movies. This research persuaded movie studios to place anti-smoking ads on movie DVDs if the movies target youth and depict smoking. She is currently studying how to form effective online communities on Twitter for smoking cessation funded by a $2.5 million R01 grant from National Institutes of Health. For more Information, visit tweet2quit.merage.uci.edu.
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Rick So Professor of Operations and Decision Technologies 12 THE PAUL MERAGE SCHOOL OF BUSINESS
Better Customer Service and Increased Income for On-Demand Businesses by Laurie McLaughlin
On-demand business platforms provide a wide range of services – food delivery, transportation, pet care and more – and routinely contend with the supply-and-demand balance between the availability of independent service providers and the needs of impatient customers counting the minutes as they wait for their dinner, a ride or a dog-walker. The authors of a new study suggest offering independent service providers a combination of time-based RTKEKPI CPF XCTKCDNG RC[QWV TCVKQU VJCV ©WEVWCVG CEEQTFKPI VQ FGOCPF EQWNF result in quicker service for customers and increased income for both the service providers and on-demand business platforms.
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“We argue that time-based pricing in combination with a ©GZKDNG RC[QWV TCVKQ UJQWNF DG considered and more readily CFQRVGF KP RTCEVKEG
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n-demand services have long been part of the business landscape. In recent years, the sharing economy – a revitalized marketplace of goods and services that are utilized or borrowed without having to purchase the product or means for the service – has grown quickly. Many of these services are well known, such as Uber and Lyft (ridehailing services), Blue Apron (meal delivery), Google Express (grocery delivery), GrubHub (delivery from restaurants) and Wag! (pet-care service). “To meet dynamic customer demand anytime/anywhere, it is economical for ondemand service firms to use independent providers (or agents) to fulfill customer requests quickly. However, using independent agents to deliver on-demand services can be challenging, as work participation of independent providers is primarily driven by earnings,” say the authors in the study, “Coordinating Supply and Demand on an On-demand Service Platform for Impatient Customers,” to be published in a forthcoming issue of Manufacturing and Service Operations Management. “As independent agents do not get compensated for idle times, earnings depend on wage rate and utilization, whereas utilization depends on customer demand, … [and] customers depend on two key factors: price and waiting time.” The authors look at the need for a profitable balance between the number of providers (Uber drivers, for example) available and the demand from customers (people who need a ride) from the point of view of an on-demand service firm or business platform (which arranges for the drivers to pick up the passengers). The authors suggest
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that in addition to adopting time-based pricing – a pre-set price structure that rises and falls with demand – the firms can also use a variable payratio structure that increases or decreases the percentage of the fee that independent providers receive from the business platform according to demand load. For example, Uber pays independent providers 65 percent to 80 percent of the payment received by the customer, but determining that ratio isn’t necessarily used to regulate – or incentivize or disincentivize – the number of drivers available. It’s best to have fewer willing drivers during slow times, so that those who are available can be better utilized to match the low demand; and of course, it’s best to have many drivers during busy times. “We argue that it’s actually better, if possible, to use a different payout ratio at different times, which we find is more valuable to both the platform and the service providers,” says one of the paper’s authors, UCI Merage School Professor of Operations and Decision Technologies Rick So. “During peak hours, the platform should lower its commission rate and entice more service providers to participate to serve the high demand. During the low-demand period, they should increase the commission rate, which of course, lowers the payout ratio, in order to reduce the number of service providers during that time.” So contends that the reduction of commission for the firm/platform during peak demand would capture more potential customers with the increase of available independent providers serving customers who know they may rely on
the business to deliver quick service when they are in a hurry. “As a result, while the platform receives less commission with each transaction, they are able to serve more customers and profit may actually be higher,” says So. “We argue that time-based pricing in combination with a flexible payout ratio should be considered and more readily adopted in practice.” Adoption of both time-based pricing and variable payout ratios and ensuring a supplyand-demand balance requires companies to have a deep understanding of their usage data. “By understanding the demand pattern, the platform is able to forecast accurately what the demand might be at different times of the day,” says So. For this study, researchers specifically examined their model from the point of view of a single platform – a business with a monopoly on a particular market. “But, in a market where you have strong competition, you also have to react to what other platforms are doing in competing for both the service providers and customers, and we are looking into how that would change the dynamics,” says So. “Our future research will examine how platforms can compete against other businesses for service providers.” The study’s authors are Merage School PhD alumnus Jiaru Bai of Binghamton University School of Management, Rick So of the UCI Paul Merage School of Business, Chris Tang of UCLA’s Anderson School, Xiqun Chen of Zhejiang University’s College of Civil Engineering and Architecture and Hai Wang of Singapore Management University’s School of Information Systems.
Rick So is a professor of operations and decision technologies at UCI Paul Merage School of Business. His research expertise is in the areas of operations management, supply chain management, design of production and service systems, and business process management. So has published more than 45 research articles in major academic journals and has presented his research at conferences worldwide. He was a recent recipient of the Excellence in MBA Teaching Award, Senior Faculty Research Award and Faculty Service Award. So served as the associate dean of undergraduate programs from 2009 to 2012 and from 2014 to 2016. Previously, he worked at the AT&T Bell Laboratories, where he served as an internal consultant to various AT&T manufacturing facilities. He also served as the head of the department of management at the Hong Kong Polytechnic University and held visiting professorships at the University of Hong Kong, International University of Japan and the National University of Singapore. So earned a BS in mathematics and computing and information science from Roosevelt University and MS and PhD degrees in operations research from Stanford University.
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N. Edward Coulson Director of The Center for Real Estate
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Volatile Rental-Housing Rates May Be Measured More Accurately to Determine Price Indexes by Laurie McLaughlin
By applying their model measuring current national rental-housing rates, three researchers suggest that rents fall more rapidly during economic downturns and rise more rapidly during upturns than KU TG©GEVGF KP VJG EQPUWOGT RTKEG KPFGZ issued by the Bureau of Labor Statistics, which uses rental-rate data that is many months old. As housing prices are a large RCTV QH VJG KP©CVKQP ECNEWNCVKQP WUKPI contemporaneous rental data would have UWDUVCPVKCN KORNKECVKQPU HQT JQY KP©CVKQP is measured.
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he Bureau of Labor Statistics’ consumer price index (CPI) is integral to the way most Americans live. Predominantly a measure of inflation, the index is used by government, businesses and individuals when making economic decisions, and the index influences Social Security payments, lease and labor contracts, income tax brackets, economic policy and much more, in addition to helping determine real gross domestic product. Within the index’s market basket is a measurement of the housing component. In a recent paper, “Housing Rents and Inflation Rates,” released in April 2018, three researchers suggest that the measurements within the index do not
accurately reflect rental rates. “Since changes in housing rents comprise a significant portion of price inflation and given the importance of housing to the economy, we focus on how differences in measuring the housing component affect the construction of the CPI,” state the authors, Edward Coulson of UC Irvine’s Center for Real Estate, and Brent Ambrose and Jiro Yoshida of Penn State. “We then demonstrate that current estimates of housing rent inflation, which understate the variation in the actual rent inflation with significant lags, can have material and economically significant effects on a variety of economic policies and decisions.”
COMPARISON OF CONSUMER PRICE INDEXES 6
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Therefore, “the official [inflation] rate was overestimated by 1.7% to 4.2% annually during the Great Recession but is underestimated by 0.3% to 0.9% annually during the current expansionary period.” The researchers computed rental rates across the United States in their model with calculations incorporating data from newly-signed leases as well as the data on the value of rental buildings and the rentto-value ratio, all of which results in a calculation of rental rates that more accurately reflects current market conditions. This is in contrast to the Bureau of Labor Statistics’ use of unchanging rental rates for sitting tenants, which don’t accurately reflect fluctuations in the housing market. (The researchers’ nationwide collection of data also distinguishes their study from other similar reports that sample much smaller regional areas.) “The Federal Reserve bases its policy on what they observe the inflation rate is, and there’s often been talk as we are coming out of the recession of waiting until we had a 2 percent inflation rate before interest rates should be raised,” says Coulson. “We found that using our measurement instead of the official measures, we reached the 2 percent mark a couple of years ahead of the official measure. “So inflation was higher coming out of the recession, and inflation was a lot lower, in our opinion, as we entered the recession. Rents fell by a much faster rate than what the BLS measured, and we should have had expansionary monetary policy sooner.” “The impact of measurement errors can be enormous because these price indexes are the basis of a wide range of economic statistics, contracts, public policy programs, asset prices, and most importantly, corporate and consumer decision making,” state the authors in the study, their third paper in a series exploring the impact that housing rents have on the measurement of inflation. “Anything that’s indexed to inflation would be affected by what we are doing, because it changes the way you measure inflation,” says Coulson. “We are trying to make the inflation rate more responsive to current market conditions.”
N. Edward Coulson is a professor of economics and the director of the Center for Real Estate at The Paul Merage School of Business, which he joined in 2017. Coulson has published widely in real estate, urban economics, housing GEQPQOKEU CPF TGNCVGF ¨GNFU +G KU EQ GFKVQT of Journal of Regional Science, and he serves on other editorial boards of leading journals in the ¨GNF +KU EQ GFKVGF DQQM (PGTI[ (H¨EKGPE[ CPF the Future of Real Estate, was published in 2017 by Palgrave Press. From 2006 through 2014, Coulson was co-editor of Real Estate Economics, the journal of the American Real Estate and Urban Economics Association, which he served as president in 2016. In 2009, he was named a Fellow of the Weimer School for Advanced Real Estate Studies. From 2014 through 2016, he was director of the Lied Institute for Real Estate Studies at the University of Nevada, Las Vegas; prior to that position, he was for many years professor of economics and King Faculty Fellow in Real Estate at The Pennsylvania State University. Coulson was a visiting scholar at the Federal Reserve Banks of Philadelphia and New York, at the University of Auckland and elsewhere. He earned a Bachelor of Science in economics from UC Riverside and a PhD from UC San Diego, where he studied under the direction of Nobel Laureate Robert Engle.
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Research Abstracts Latest Published Work by Merage School Faculty Members August 2017–2018
Accounting Professor Elizabeth Chuk
Title: “The Economic Consequences of Accounting Standards: Evidence from Risk-taking in Pension Plans” Co-author: Divya Anantharaman Accepted at: The Accounting Review Experts have long conjectured that pension accounting rules, by which pension expense depends on a managerial estimate that is directly tied to the riskiness of plan assets (i.e., the expected rate of return or “ERR” on plan assets), encourage risk-taking with pension investments. The recent passage of IAS 19 Employee Benefits (Revised) (hereafter, “IAS 19R”) eliminates the ERR and replaces it with a managerial estimate unrelated to plan asset riskiness (the discount rate). We demonstrate that a sample of Canadian firms affected by IAS 19R reduces risk-taking in pension investments post-IAS 19R, compared to a control sample of US firms unaffected by IAS 19R. Therefore, removing firms’ ability to recognize immediately in net income the expected higher returns from risk-taking (via a higher ERR) reduces their propensity for that risk-taking providing some of the first empirical evidence on the economic consequences of eliminating the ERR-based pension accounting model.
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Professor Ben Lourie
Title: “The Revolving-Door of Sell-Side Analysts” Accepted at: The Accounting Review Equity analysts are often hired by firms they cover. I document the extent to which this revolving door phenomenon impairs analysts’ independence. I do this by examining the presence of biased research reports issued during the year before analysts are employed by a firm they cover. I find that during their final year, revolving door analysts bias their EPS forecasts, their target prices, and their recommendations in a direction that suggests they are attempting to gain favor from their prospective employers. Specifically, relative to other analysts, revolving door analysts issue more optimistic reports on the firms that hire them, and they issue more pessimistic reports on firms that do not hire them. These results suggest the presence of strategic bias, although more innocuous interpretations cannot be completely ruled out.
Professor Terry Shevlin
Title: “Corporate Tax Aggressiveness and Insider Trading” Co-authors: Sung Gon Chung, Beng Wee Goh and Jimmy Lee Accepted at: &QPVGORQTCT[ $EEQWPVKPI 5GUGCTEJ In this research, we examine the association between corporate tax aggressiveness and the profitability of insider trading under the assumption that insider trading profits reflect managerial opportunism. We document that insider purchase profitability, but not sales profitability, is significantly higher on average in more tax aggressive firms. We also find that the positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and is accentuated for firms with a more opaque information environment. In addition, we provide empirical evidence that tax aggressiveness is significantly associated with greater insider sales volume in the fiscal year prior to a stock price crash. Finally, we find that the association between tax aggressiveness and insider purchase profitability weakens after the introduction of FIN 48, consistent with the increased transparency of tax positions under the new disclosure requirement reducing insiders’ information advantage and hence their ability to profit from insider trading. To the extent that insider trading profits reflect managerial opportunism, our results
are consistent with managers exploiting the opacity arising from tax aggressive activities to extract rent from shareholders, particularly those who sold their shares to the managers. Our findings are particularly important in light of the number of studies relying on the agency view of tax avoidance to develop arguments or to draw inferences.
Professor Terry Shevlin 7KVNG 7JG RTKEKPI QH ¨TOU YKVJ GZRGEVGF NQUUGU RTQ¨VU 7JG TQNG QH -CPWCT[ Co-authors: Peng-Chia Chiu (PhD alumnus) and Alexander Nekrasov Accepted at: -QWTPCN QH %WUKPGUU )KPCPEG CPF $EEQWPVKPI In this paper, we examine the role of January in the relation between expected losses/profits and future stock returns. We predict and find that the relation between expected losses/profits and future returns reverses from the usual positive relation in non-January months to a negative one in January. The reverse January relation is consistent across sample years, is observed in the United States and international markets, and is incremental to other variables associated with January returns. At least part of the reverse January relation is explained by tax-loss selling. Further analysis shows that the reverse January relation results in a temporary price drift away from fundamental value. In other words, we find that abnormal positive (negative) future returns
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do not always indicate past under/over-valuation. Overall, our results illustrate the importance of controlling for the effect of January when examining how investors price expected losses/profits.
Professor Terry Shevlin 7KVNG 5G©GEVKQPU QP 0[ &CTGGT /GUUQPU /GCTPGF and Opportunities Missed” Accepted at: ,UUWGU KP $EEQWPVKPI (FWECVKQP “Participating in this special issue has given me the opportunity to reflect on my career in terms of the choices I made, the lessons I learned, and the missed opportunities. I start with a brief history of my academic career to provide context for some of the lessons I have learned. After the chronological history, I discuss lessons learned, missed opportunities, and offer my thoughts on teaching, research, publishing, and service to the academic profession. I conclude with some takeaways that may be useful to doctoral students and junior faculty.”
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Professor Siew Hong Teoh
Title: “Headline Salience, Managerial Opportunism, and Over- and Underreactions to Earnings” Co-authors: Xuan Huang (PhD alumnus) and Alex Nekrasov Accepted at: The Accounting Review Limited attention theory predicts that higher salience of earnings news implies a stronger immediate market reaction to earnings news and a weaker post-earnings announcement drift (PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with SALIENCE effects. Higher SALIENCE is associated with stronger announcement reaction and subsequent PEAR. Managers are more likely to choose higher SALIENCE before selling shares in the post-announcement period and when earnings are high but less persistent, and to choose lower SALIENCE before stock option grants. The results are robust to using residual SALIENCE and an extended set of control variables. The findings are consistent with managers opportunistically headlining positive financial information in the earnings press release to incite overoptimism in investors with limited attention.
Professor Siew Hong Teoh
Title: “The Promise and Challenges of New Datasets for Accounting Research” Accepted at: $EEQWPVKPI 2TICPK\CVKQPU CPF 6QEKGV[ I describe a brief summary of the development of databases used in accounting research and discuss the research questions addressed in traditional databases and “new” databases. The new data include online searches such as Google Trends data; textual data from corporate disclosures, analyst reports, conference call transcripts, earnings press releases, and news media articles; social network and social media data from Twitter, LinkedIn, Glassdoor, and other data. New data holds promise for research on attention or cognitive processing constraints, and on tone/valence, affect, deceptiveness and credibility for capital market and financial reporting outcomes. I examine the econometric challenges of new data and suggest the potential for new data to offer new auditing tools to detect poor financial reporting, which will help to discourage earnings management.
Economics/Public Policy Professor Edward Coulson
Title: “Reassessing Taylor Rules Using Improved Housing Rent Data” Co-authors: Brent Ambrose and Jiro Yoshida Accepted at: Journal of Macroeconomics There is a debate whether the federal funds rate deviated from the Taylor rule. We present evidence that standard inflation measures do not reflect the contemporaneous state of housing rents, which is a large part of consumption. Using a new housing rent index (RRI) developed by Ambrose et al. (2015), we compute the RRI-based Taylor rule for the period from 2000 to 2010. The modified Taylor rule indicates that seemingly large deviations are better understood as delays due to the stale information regarding housing rents. It also provides a justification for Quantitative Easing and a better alternative to other versions of Taylor rules.
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Finance Professors David Hirshleifer
Title: “A Theory of Costly Sequential Bidding” Co-author: Kent Daniel Accepted at: Review of Finance We model sequential bidding in a private value English auction when it is costly to submit or revise a bid. We show that, even when bid costs approach zero, bidding occurs in repeated jumps, consistent with certain types of natural auctions such as takeover contests. In contrast with most past models of bids as valuation signals, every bidder has the opportunity to signal and increase the bid by a jump. Jumps communicate bidders’ information rapidly, leading to contests that are completed in a few bids. The model additionally predicts informative delays in the start of bidding, that the probability of a second bid decreases in, and the jump increases in the first bid, that objects are sold to the highest valuation bidder; and revenue and effciency relationships between different auctions.
Professors David Hirshleifer and Siew Hong Teoh
Title: “Social Transmission Bias and the Cultural Evolution of Folk Economic Beliefs” Accepted at: %GJCXKQTCN CPF %TCKP 6EKGPEGU Evolved psychological predispositions influence, but do not determine, how people think about economic issues. Boyer and Peterson provide important new insights, but neglect a crucial level of explanation: the social transmission process. The need for a social explanation for the evolution of economic attitudes is evidenced, for example, by variations in socialist versus libertarian beliefs over time and across individuals.
Information Systems Professors Mingdi Xin and Vidyanand Choudhary
Title: “IT Investment under Competition: The Role of Implementation Failure” Accepted at: Management Science How does competition impact firms’ incentive to innovate through information technology (IT) investment? Prior literature suggests opposite predictions on the direction in which competition drives IT investment. This paper analyzes a
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game theoretic model of duopoly competition and shows that an important feature of IT sheds new light on firms’ investment decisions: IT implementation can fail. Without the possibility of implementation failure, the opportunity to invest in IT hurts firms’ profits because the productivity gains are competed away. Implementation failure creates a possibility of cost-based differentiation and mitigates competition, although these two effects can drive firms’ IT investment in opposite directions. Interestingly, a higher probability of implementation failure can lead to lower investment risks and higher expected profits. Firms in highly competitive markets are better able to recoup the returns to their IT investments and, therefore, more motivated to invest in risky IT than firms in less competitive markets.
Marketing Professor Sreya Kolay
Title: “Tie-in Contracts with Downstream Competition” Accepted at: 4WCPVKVCVKXG 0CTMGVKPI CPF (EQPQOKEU Sellers often offer their buyers tie-in pricing contracts, i.e., contracts that offer buyers a product only as a part of a bundle of two or more products and not by itself outside the bundle. Such frequently-used contracts have been accused of being used for exclusionary purposes.
Specifically, the concern is that a firm that is dominant in a primary product market can utilize such contracts to force buyers to purchase the secondary product from it, thereby excluding a more efficient rival from the secondary market. Most notably in the late 1990s, Microsoft came under considerable fire for tying its browser Internet Explorer to its dominant Windows operating system when it sold its products to PC manufacturers allegedly for the purpose of driving out its rival Netscape Navigator. Recently, Google has been the subject of concern among antitrust authorities with regard to the tying of its applications like Google Play, Google Search, Google Maps and YouTube with its dominant Android operating system for mobile phones. The majority of tie-in contracts that have historically generated concern among antitrust authorities are ones extended by upstream firms to buyers who compete in downstream markets. This paper examines the incentives of a firm to offer exclusionary tie-in contracts when it sells its products through downstream competing retailers. We show that the profitability of exclusionary tying is related to two important factors: (i) the ability to commit to prices by the upstream firms and (ii) nature of downstream competition among the retailers. Specifically, when retailers compete in prices, then regardless of whether the entrant is able to commit to its own prices, an exclusionary tie-in strategy is profitable (not profitable) for the incumbent when it is able (unable) to commit to prices. However, when retailers compete
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in quantities, the entrant’s commitment ability does matter. Specifically, an exclusionary tie-in strategy (i) may be unprofitable for an incumbent when both upstream firms are able to commit to their prices, depending on the degree of cost advantage of the entrant; (ii) is always profitable when it alone can commit to its price; and (iii) is unprofitable when both upstream firms cannot commit to their prices. Our results extend to situations where the products are complementary or substitutes and where the retailers may be asymmetric in nature. Overall, we show industry circumstances where exclusionary tie-in pricing contracts are likely to arise, and where they are not.
Professor Eric Spangenberg
Book Chapter: “Engaging with Brands: The ,P©WGPEG QH 'KURQUKVKQPCN CPF 6KVWCVKQPCN %TCPF Engagement on Customer Advocacy” Co-authors: Richie L. Liu, David Sprott and Sandor Czellar Published in: &WUVQOGT (PICIGOGPV 0CTMGVKPI Considerable branding research has focused on understanding the processes underlying consumers’ engagement with brands, exploring both dispositional and situational forms of engagement. Scholars, however, have yet to conceptualize and empirically assess the relationship between dispositional and situational engagement. Motivated by this gap in understanding, we explore the influence of
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dispositional brand engagement on customer advocacy (i.e., positive word-of-mouth and “liking” on Facebook), as mediated through situational engagement with a specific brand.
Operations and Decision Technologies Professor Robin Keller
Title: Designing Safety Regulations for High+C\CTF ,PFWUVTKGU Authors: Committee for a Study of PerformanceBased Safety Regulation Publisher: The National Academies Press TRB Special Report 324: Designing Safety Regulations for High-Hazard Industries, examines key factors relevant to government safety regulators when choosing among regulatory design types, particularly for preventing lowfrequency, high consequence events. In such contexts, safety regulations are often scrutinized after an incident, but their effectiveness can be inherently difficult to assess when their main purpose is to reduce catastrophic failures that are rare to begin with. Nevertheless, regulators of high-hazard industries must have reasoned basis for making their regulatory design choices. Asked to compare the advantages and
disadvantages of so-called “prescriptive” and “performance-based” regulatory designs, the study committee explains how these labels are often used in an inconsistent and misleading manner that can obfuscate regulatory choices and hinder the ability of regulators to justify their choices. The report focuses instead on whether a regulation requires the use of a means or the attainment of some ends—and whether it targets individual components of a larger problem (microlevel) or directs attention to that larger problem itself (macro-level). On the basis of these salient features of any regulation, four main types of regulatory design are identified, and the rationale for and challenges associated with each are examined under different high-hazard applications. Informed by academic research and by insights from case studies of the regulatory regimes of four countries governing two high-hazard industries, the report concludes that too much emphasis is placed on simplistic lists of generic advantages and disadvantages of regulatory design types. The report explains how a safety regulator will want to choose a regulatory design, or combination of designs, suited to the nature of the problem, characteristics of the regulated industry, and the regulator’s own capacity to promote and enforce compliance. This explanation, along with the regulatory design concepts offered in this report, is intended to help regulators of high-hazard industries make better informed and articulated regulatory design choices.
Professor Robin Keller
Title: “Do Pictographs Affect Probability Comprehension and Risk Perception of MultipleRisk Communications?” Co-author: James Leonhardt (PhD alumnus) Accepted at: -QWTPCN QH &QPUWOGT $HHCKTU Pictographs can be used to visually present probabilistic information using a matrix of icons. Previous research on pictographs has focused on single rather than multiple-risk options. The present research conducts a behavioral experiment to assess the effect of pictographs on probability comprehension and risk perception for single and multiple-risk options. The creation of the experimental stimuli is informed by a review of the Centers for Disease Control and Prevention’s vaccine information sheets. The results provide initial evidence that, in the context of childhood vaccines, the inclusion of pictographs alongside numeric (e.g., 1 in 5) probability information can result in higher probability comprehension and lower risk perception for multiple-risk options but not for single-risk options. These findings have implications for how health-related risks are communicated to the public.
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Professors Luyi Gui and Shuya Yin
Title: “Improving Micro-Retailer and Consumer Welfare in Developing Economies: Replenishment Strategies and Market Entries” Co-author: Chris S. Tang Accepted at: Manufacturing & Service Operations Management
Micro-retailers in remote rural areas in developing countries face high replenishment cost due to poor road infrastructure and the lack of formal distribution channels. This paper investigates the effectiveness of two innovative replenishment strategies (purchasing cooperatives and nonprofit wholesaler) deployed by NGOs to reduce micro-retailers’ replenishment cost and improve consumer welfare. The problem is relevant in practice as travel cost has been documented as a major cost burden that leads to meager earnings for the micro-retailers, few retailers in the market, and high prices to the consumers (due to less competition). Analyzing how these innovative strategies alleviate the above problems enable us to develop practical insights as well as fill an important gap in the literature. We adopt a stylized model that captures price competition, consumer welfare, and market entry decision of micro-retailers under the replenishment strategies considered. We compare the equilibrium retailer profit, consumer welfare, and the number of retailers entering the market under these strategies. We find that in a regulated market, a non-profit wholesaler creates supply chain
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inefficiency, and thus can lead to a higher retail price, which benefits the retailers yet harms the consumers. However, with free market entry (unregulated market), we show that under certain market conditions, both the cooperative and the non-profit wholesaler strategies can be Pareto improving. Yet between these two strategies, there typically exists a trade-off in both regulated and unregulated markets, i.e., the cooperative strategy enhances consumer welfare while the wholesaler strategy leads to higher retailer profits. Our results indicate that the policy maker needs to be mindful about the market conditions and the relative emphasis between the profit and market participation of micro-retailers and consumer welfare when choosing and implementing the purchasing cooperative and the non-profit wholesaler strategies.
Organization and Management Professor Gerardo Okhuysen
Title: “Discovery Within Validation Logic: Deliberately Surfacing, Complementing, and Substituting Abductive Reasoning in HypotheticDeductive Inquiry” Co-author: Kristin Behfar Accepted at: Organization Science We propose a more explicit role for abductive reasoning, or the development of initial explanation, in hypothetic-deductive (H-D) inquiry. We begin by describing the roots of abduction in pragmatism and its role in exploration and discovery. Recognizing that pragmatism treats abductive reasoning as inevitable, we argue that it can also be a deliberate form of reasoning in scientific inquiry, articulating the unique place it can have in hypotheticdeductive theorizing. We explain the opportunities from surfacing abductive reasoning in H-D where it already exists, from explicitly acknowledging abductive reasoning as a complement in building logical chains in H-D, and from using abductive reasoning as a substitute for H-D logic when a body of knowledge exhibits inconsistent, contradictory, or discrepant results. We elaborate strategies for data search/selection, data production and compilation, and analytical corroboration. Our overall argument is that the deliberate use of abductive
reasoning in hypothetic-deductive projects has distinct advantages stemming from an explicitly tight connection between data and theory. We end by explaining the benefits of actively recognizing the role of abductive reasoning in organizational and management theorizing.
Strategy Professor John Joseph
Title: “The Growth of the Firm: An AttentionBased View” Co-author: Alex Wilson Accepted at: Strategic Management Journal Although most theories of growth presume that it varies with the focus and limits of managerial attention, the actual role played by attention has remained largely implicit. In contrast, this paper explicitly considers attention structure and the processes that place sustained focus on growth issues. We explain how attention structure— specialized attention within a particular unit and integrated attention between units—affects both bottom-up (stimulus-driven) and topdown (schema-driven) attentional processing of new issues. We also examine the relationship between attention structure and divisional interdependencies, identifying conditions under which different attentional patterns generate organizational tensions that lead to architectural
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elaboration: the delineation of new organizational units. This logic is illustrated with examples from Motorola, a large telecommunications equipment provider, during a period of sustained growth. In linking theories of growth with the attention-based view, we augment both perspectives and offer an approach which provides a better understanding of growth’s cognitive underpinnings.
Professor Margarethe Wiersema
Title: “Analyzing Analyst Research: A Review of Past Coverage and Recommendations for Future Research” Co-author: Matthias Brauer Accepted at: Journal of Management As visible and knowledgeable experts who constantly collect, analyze and disseminate information about the future prospects of publicly listed firms, financial analysts fulfill an important information brokerage and monitoring function for investors. By providing investment advice, financial analysts also influence the demand for a firm’s stock and thus its price. As a result, executives pay close attention to financial analysts’ earnings forecasts and recommendations and in fact are frequently criticized for an excessive focus on analysts’ earnings forecasts at the expense of the longterm interests of the firm. But, while the scope of research on analysts in management is steadily growing, we lack a coherent understanding of the
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extent and nature of analysts’ diverse influences on executives’ and investors’ decision-making, and the context in which analysts operate. This is largely due to the fragmentation of the literature and the absence of prior reviews or metaanalyses on the topic. By organizing, synthesizing and analyzing extant research efforts on analysts in the various domains of strategic management research, we aim to advance our knowledge of the influence of analysts on firms and investors. Further, we hope that our analyses and recommendations help further increase research coverage on this important organizational stakeholder.
Professor Margarethe Wiersema
Title: “Global Strategic Context and CEO Appointments: The Importance of a Global Mindset” Co-authors: Yannick Thams and Aya Chacar Accepted at: *NQDCN 6VTCVGI[ -QWTPCN The appointment of a new CEO is among the most pivotal and visible decisions made by a board of directors. While prior research has surveyed the impact of performance and governance related-factors on CEO selection decisions, our understanding of the implications of a firm’s global context is limited. This paper explores the influence of home country globalization, international diversification, and the undertaking of major cross-border acquisitions on the appointment of a CEO with a global mindset. Using a sample of European and US
firms from the Global 500 ranking from 2005 to 2010, we find that companies are likely to match the characteristics of new CEOs with their global strategic context. In this paper, we highlight the interplay between a firm’s global context and CEO selection. Our findings indicate that executives aspiring to the executive suite should be highly attuned to the imperatives of aligning their knowledge bases, mindsets, perspectives, and social capital toward the challenges that face companies operating within a global context. From the board’s perspective the selection of a new CEO provides the opportunity to assess the firm’s future strategic direction and enables the board to select an executive with the requisite dynamic managerial capabilities required to address the challenges of globalization.
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Appointments, Awards and Honors Professor Vidyanand (VC) Choudhary, information systems, has been appointed senior associate dean effective January 1, 2019.
Professor Maia Young, organization and management, is the newly appointed associate dean for Undergraduate Programs effective July 1, 2018.
Professor Luyi Gui was highlighted in a recent edition of Informs regarding her new study, “Design Incentives Under Collective Extended Producer Responsibility: A Network Perspective,” published recently in Management Science.
Professor David Hirshleifer and PhD alumna Lin Sun were chosen as winners of the 2017 Hillcrest Behavioral Finance Award for their paper “Short and Long Horizon Behavioral Factors.”
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Professor Terry Shevlin received the 2017 Tax Manuscript Award from the American Taxation Association during the association’s annual conference held in San Diego. Shevlin was recognized for his work titled, “Incentives for tax planning and avoidance: Evidence from the field,” which was co-authored by Michelle Hanlon, John Graham and Nemit Shroff, and published in The Accounting Review. This is the fourth time Shevlin has received this particular award. Previous honors took place in 2004, 1995 and 1992.
Welcome New Faculty Members Vibhanshu Abhishek
Luke Rhee
Associate Professor of Information Systems
Assistant Professor of Strategy
Previously an assistant professor at Carnegie Mellon University’s Heinz College, Vibhanshu Abhishek has joined the Merage School as an associate professor of information systems. Abhishek’s research focuses on the effect of emerging technologies on consumers’ behavior, business strategy and market structure, and he is particularly interested in multi-channel coordination and examining issues of multichannel retail, advertising and pricing. Abhishek has published research in top management journals and has been cited in popular press outlets, including Sloan Management Review, the New York Times, Forbes and others. Abhishek has consulted for several firms including McKinsey, Adobe, Flipkart and Sequoia Capital, and regularly works with hi-tech startups. He earned a bachelor’s degree at the Indian Institute of Technology, and a Master of Arts and PhD at the University of Pennsylvania.
Prior to his position as assistant professor of strategy at the Merage School, Luke Rhee was an assistant professor of technology management at the Tandon School of Engineering and an affiliated faculty of management and organizations at New York University’s Stern School of Business; Rhee was also a software engineer at IBM Almaden Research Center. His research areas include behavioral strategy, cognition, creativity and innovation, and social networks. His recent research has been published (or is forthcoming) in Harvard Business Review, Organization Science and Strategic Management Journal, and he received best conference paper awards from the Academy of Management and the Strategic Management Society. Rhee earned a Bachelor of Science from Seoul National University, a Master of Science from UC Berkeley and a PhD from Northwestern University.
Chuchu Liang
Assistant Professor of Finance
Joining the Accounting area as an assistant professor, Chuchu Liang’s current primary research interests are accounting issues related to intangibles, corporate disclosures, information acquisition and transfers, and financial reporting choices. Liang is also interested in exploring big data and applying textual analysis in studying decisionmaking among market participants, including managers, investors and auditors. She earned a Bachelor of Science and a Master of Accounting from Tsinghua University and a PhD from Cornell University, where she was also an instructor in graduate accounting courses.
Jinfei Sheng joins The Paul Merage School of Business as an assistant professor of finance. He earned his PhD in finance from the University of British Columbia, and his primary research fields are empirical asset pricing, investments and behavioral finance. A central theme of his research is to understand the role of information in financial markets and macroeconomic news, earnings announcements, media coverage and online reviews. He is excited about using big data, machine learning and textual analysis to tackle fundamental questions in finance and economics. Sheng has presented papers at many national and international conferences and is a reviewer for top finance journals and conferences.
Jinfei Sheng
Assistant Professor of Accounting
4293 Pereira Drive Irvine, CA 92697-3125
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