Research in Action - Spring 2022 by UCI Paul Merage School of Business

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IN ACTION Twelfth Edition | Spring 2022

INSIDE THIS ISSUE

Understanding the Entrepreneur’s Trade-off: Faster Alone, But Farther Together How The Sharing Economy Creates Opportunities for All Corporate Social Responsibility Yields Surprising Returns

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Research Highlights

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Understanding the Entrepreneur’s Tradeoff: Faster Alone, But Farther Together by Keith Giles

An African proverb says, “If you want to go fast, go alone. If you want to go far, go together.” Many entrepreneurs find that what’s true for travel also applies to starting a new business. Early on, they confront the question: “Do I want to go solo, or should I find co-founders to launch my startup?”

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Travis Howell, assistant professor of strategy at the The UCI Paul Merage School of Business, set out with colleagues to find an answer. Along with Chris Bingham and Bradley Hendricks of the University of North Carolina Kenan-Flagler Business School, Howell left no stone unturned. The results of their research are reported in the article, “Going Alone or Together? A Configurational Analysis of Solo Founding vs Cofounding,” forthcoming in Organization Science.

Lots of Opinions, Little Data Is an entrepreneur better off going alone? “This was a question that I kept hearing from students and entrepreneurs I was consulting with regularly,” says Howell. “I tried looking online and while there are tons of discussions and Reddit threads out there with opinions, when it came to actual data there wasn’t much to go on.” Finding the answer to this seemingly simple question proved more of a challenge than anyone expected. “We started the project over five years ago,” says Howell, “and our paper is only being published now. It was a long process. “We started off small, looking at data sets that were already collected. Because there wasn’t much out there, I spent a few years interviewing hundreds of entrepreneurs, trying to determine what was working, what wasn’t and why. We conducted over 120 interviews with people in incubators and accelerators—sometimes returning to talk with the same people multiple times to get the data we needed.”

Undermining Conventional Wisdom Before starting his research, Howell was keenly aware of the conventional wisdom. “Everyone always assumes you need co-founders. This has become even more accepted in recent years, 4

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to the degree that accelerators and venture capitalists tend to have explicit policies saying they will not accept startups unless they have co-founders. Some startup gurus even say that the number one reason why startups fail is that they don’t have co-founders. So, in many cases you can’t go solo if you want to attract investors or participate in an accelerator program.” The examples of the big unicorn startups—Facebook, Apple, Microsoft and others—back up the conventional wisdom. All of them were started by co-founders and not solo founders. But those examples may not always be the best ones to follow. “Some research suggests that, on average, co-founders do perform better than solo founders,” says Howell. “But it doesn’t mean you always need co-founders. One of the reasons why I say this is that, when you look at startups, one of the many causes of failure is ‘co-founder drama.’ So, yes, it can be the reason you succeed, but it can also be the reason your startup fails. What’s more, there are several great examples of big companies such as Amazon, Dell and eBay, that were started by solo founders, so we know it can be done.”

Exposing the SoloFounder Myth Howell was surprised to discover that not all successful solo founders are strictly working alone. “Amazon [Jeff Bezos] and Dell Computer [Michael Dell] are examples of companies that many tout as

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successful solo-founded founder in the startup companies, but if we look “Jeff Bezos may be praised as the founder phase.” deeper, we see that those Never Alone of Amazon but a lot of us forget that he founders benefitted greatly Now that the research is from co-creators—hidden had parents who gave him thousands of published, Howell is more figures behind the scenes confident about how best that didn’t get as much dollars to start, and his now ex-wife was a to answer the age-old of the credit, but certainly question of whether an helped them start their huge contributor as well. ” entrepreneur should strike company. These would out alone or find a partner. be early employees, “The data shows us that no one ever really goes alone,” alliance partners, other organizations they partnered Howell says. “So, going solo is not really an option. with and benefactors who helped the founder with no You could go with co-founders, or you might find coexpectation of reciprocation.” creators to help you along the way, but you never go As Howell and his team soon discovered, these sorts of alone. It just depends on who you go with.” hidden benefactors were quite essential to the success So, the real question seems to be, “Do you go with of most so-called solo founders they interviewed. “One co-founders or do you go with co-creators?” As solo founder we talked with needed equipment and Howell’s research suggests, going with considered a co-founder to acquire it, but instead co-creators might be the better option. he found a friend whose business already had the Especially if you’d like to retain the equipment and allowed him to use it free of charge. equity and control of your company We found several examples of these co-creators or without all the usual co-founder benefactors in our research.” drama that typically sinks startups Many higher-profile solo founders were also helped before they can get off the ground. along the way. “Jeff Bezos, for example, may be praised “If you truly do go alone or go as the founder of Amazon,” says Howell, “but a lot of with bad co-founders, there’s a us forget that he had parents who gave him thousands very good chance your startup of dollars to start, and his now ex-wife was a huge will fail,” says Howell. “But, if contributor as well, and there were many others who you find the right co-creators helped him succeed where he could never have done willing to help you, then so alone. So, these would be examples of co-creators your chances of success are to the business—but not traditional co-founders—who greatly increased.” provide a significant amount of support to the solo

Travis Howell’s research primarily focuses on founders; namely, how to build and sustain a good founding team, how founders maintain control as their firms grow, and when it is best to go solo rather than find co-founders. Some of his recent work also addresses the increasing popularity of co-working spaces, where communities of founders interact with and learn from one another. His research has been funded by the Kauffman Foundation, the Strategy Research Foundation, and the Kenan Institute of Private Enterprise.

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How The Sharing Economy Creates Opportunities for All by Keith Giles

While waiting in an airport lounge six years ago, Vibhanshu Abhishek, Associate Professor at the UCI Paul Merage School of Business, took the time to scribble out an idea for a research project on a napkin. “I was very interested in the new sharing economy which, at the time, was gaining attention, both academically and in the public and private markets,” says Abhishek. “So, I wanted to look into those models, to find out what this new sharing economy is and how is it different from everything that we’ve seen so far.”

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As Abhishek reflected while looking down at his napkin, he came to an inspiring realization. “Sitting there in the airport, it hit me that what’s enabling the rapid growth of the sharing economy is what’s called the spare capacity factor,” he says. “Someone has a house, or an empty room, or a car in the garage that’s sitting around because no one is driving it. This spare capacity is what drives the P2P market. That got me thinking, and it became the genesis of this paper.”

Collecting revenue instead of dust Fast-forward six years, and that paper—Business Models in the sharing economy: Manufacturing Durable Goods in the Presence of Peer-to-Peer Rental Markets, authored by Abhishek, Jose A. Guajardo, Associate Professor at The UC Berkeley Haas School of Business, and Zhe Zhan, Teaching Fellow at The UC San Diego Rady School of Management—is finally scheduled for publication in Information Systems Research.

“A lot of my work is based in economics,” says Abhishek. “So, I build models of consumer behavior, and so I started to work on modeling how consumers make decisions in this new sharing economy.”

Shedding new light on the sharing economy Abhishek and his research partners studied the notion of this infrequency— something no one in academia had yet studied. “Your car may be used every day, but someone else’s vehicle may sit around 80 percent of the time unused,” says Abhishek. “So, people have these different levels of usage rate, and this is something everyone was talking about in the literature, but no one was modeling it mathematically.”

Abhishek and his research partners decided to dig into the data to uncover the variables surrounding the new shared economy, hoping to better understand the phenomenon. “The assets being rented out for additional income are typically not unwanted or unused assets,” Abhishek and his partners went about creating their he explains. “The owner still see value in their property, model to identify the unique characteristics and drivers which is why they continue to hold on to it. So, when of these P2P markets. “For me, it seemed rather obvious the sharing economy comes along, that heterogeneity was an important they see an opportunity to monetize driver,” he says. “The second factor their spare assets to earn additional “Your car may be used every was to look at the varying levels of income.” value for the products. Someone day, but someone else’s vehicle may have low usage rates, but high Armed with these ideas, Abhishek valuation whenever they do. For got to work building the may sit around 80 percent of example, I may only use my vehicle mathematical model for his paper. twice a month, but when I do, it’s to “People value their property,” he the time unused. ” drive my loved ones to the doctor. says. “But their usage is irregular Others might use their car to see and uncertain. When they’re not a movie now and then, so their using the asset, they can monetize valuation would be comparatively low.” it and make it available in the shared economic system. I wanted to understand how this infrequency of use impacted the market, and also understand how this P2P model impacted manufacturers.”

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Before the sharing economy, products were priced based on an average estimate between usage and valuation for everyone. As a result, high-value or high-

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usage consumers are getting an increased value from their purchases. This is why you now can rent a Tesla directly from the Tesla Network. The manufacturers are beginning to see the opportunity, and they’re responding accordingly.”

Good for you, and good for business

usage consumers end up buying the car while everyone else chooses the rental option. With the introduction of the new sharing economy, customers are segmented into two buckets: those with high valuation, and those with high usage. Each can be priced accordingly. “This leads to some very interesting dynamics in the market,” says Abhishek. “For example, thanks to the new sharing economy model, someone who has a low usage rate may decide to buy the car now so they can rent it out when it’s not being used and earn extra income. That’s the kind of variable we wanted to explore in our paper.” One of the surprising things they found in their research was how the sharing economy benefits everyone, not just consumers. “We tend to only think of this P2P market as being beneficial to consumers,” he says. “But looking at it from a game theory perspective, it’s good for the manufacturers as well. They can now increase their prices because both high usage and low

According to their research, the key takeaway for manufacturers is that this new sharing economy is good for business. “For most companies, supporting the P2P market makes a lot of sense,” says Abhishek. “Not only does it take away a lot of the risk of setting up your own rental business, but it also increases the valuation of your products for the consumers who can monetize their purchase at the same time. Our research also provides different models to help manufacturers understand when it’s best to support the P2P side and when it’s not.” As Americans deal with supply shortages related to the impact of the coronavirus, this could be the perfect opportunity for the sharing economy to shine. “While products sit on ships waiting to be unloaded, or as manufacturing slows down and shelves are empty, this could be a huge opportunity for the sharing economy to respond to this supply chain crisis,” says Abhishek. One thing is sure, the sharing economy model is here to stay. Manufacturers who understand the model, and how to capitalize on it, will be the most successful in the years to come.

Vibhanshu Abhishek’s research focuses on the effect of emerging technologies on consumers’ behavior, business strategy and market structure. He is particularly interested in multi-channel coordination and examines issues in multi-channel retail, advertising and pricing. He studies how consumers respond to different forms of advertising and how companies can strategically use new advertising channels to connect with their consumers. He also examines the dynamics of e-commerce marketplaces and their interaction with traditional retail.

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Corporate Social Responsibility Yields Surprising Returns by Keith Giles

Corporate Social Responsibility, or CSR, demands that businesses care for more than just profit. Somewhere in the middle of the bottom line and bottom dollar are opportunities to do good, by the world and by people. Consequently, the outcome is an unexpected competitive edge that brings a hefty price tag at its beginning stages. Professor of Accounting Joanna Ho of the UCI Paul Merage School of Business has studied CSR for a long time. In a recent study, she and her colleagues discovered that doing good for people and the world also does good for business.

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“I’ve always been very concerned about issues like global warming and child labor,” says Ho. “But many corporations tend to approach CSR in terms of how much it’s going to cost them because it can be very expensive. No one talks about CSR from an ROI perspective.” To examine the potential benefits of CSR for businesses, Ho teamed up with Fu-Hsuan Hsu of National Taiwan University and Chia-Ling Lee of National Chengchi University. The results of their study will be published in an article titled “Business Strategy, Corporate Social Responsibility Activities, and Financial Performance,” forthcoming from the Journal of International Accounting Research.

With CSR, one size does not fit all Businesses naturally favor activities that increase profits over initiatives that do not. Conventional thinking suggests that CSR is not a source of profit growth. Ho and her colleagues set out to determine if that thinking might be misplaced. “We wanted to know if CSR could become a competitive advantage, rather than merely an expense if companies can approach it in the right way,” Ho says. “If so, how can we demonstrate the ideal balance between the two?” As Ho and her team began to find answers to these questions, another factor emerged. “We were really curious about 12

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how the alignment between different corporate business strategies impacted the ways CSR impacts the bottom line,” she says. “Some companies are positioned in their market as a defender, or a price leader, like Walmart. On the other hand, more innovation-based companies, such as Apple or Nordstrom, are considered prospectors. What sort of CSR activities make a stronger financial impact for these different strategies?” Most research into CSR has lumped companies together without differentiating between the types of company strategies. “We are already aware that there are a variety of CSR initiatives out there,” says Ho. “Companies can focus on the environment, diversity, human rights or other charity-based giving. Some of these are internally focused, and others are more externally focused. Not all CSR activities are the same.”

Digging into the data Ho and her research partners knew where to find the financial data to discover answers. “The earnings and accounting information and stock return data we needed were already available for faculty and students at the Merage School,” Ho says. “The only thing we were lacking at the time was the corresponding CSR activity of those companies.” Thanks to a generous research grant, the team gained access to the social research database maintained by KLD Research & Analytics, Inc. They used the database to examine the 3,000 largest companies in the U.S. “By looking at the top 3,000 U.S. companies, we knew our results would be very convincing.” So, what did they find? “Luckily, our results supported our hypothesis,” says Ho. “Of course, in academia,

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you’re always aware that some might doubt your results based on your narrow definitions and limited variables. We intentionally ran a slew of alternative measures for business strategies. Not everything is black and white and there are always questions about how to categorize.”

“If a company is more “If a company is more of a price leader, they of a price leader, they should be focusing should be focusing more on employee benefits, more on employee benefits, development, development and training. If they’re more of and training. If they’re an innovator, our research demonstrates the more of an innovator, our research demonstrates the importance of importance of external CSR activities.” external CSR activities,” says Ho. “We’re not saying they should put everything into one category. But there really is an ROI to CSR if you understand how to Sorting through the CSR data raised important align your business strategy properly. questions. “While everyone can agree that employee relations are internal and environmental activities are external, some activities like diversity that aren’t so obvious,” Ho says. “We ran different measures for internally vs. externally focused CSR activities and compared results for the various categories, and the results were quite robust.”

The right kind of responsibility is good for you As they suspected, the positive impact of CSR on a company’s bottom line was directly related to the alignment of the organization’s business strategy with certain types of CSR focus. Whether due to public pressure or social awareness, CSR is becoming less of an option and more of a necessity. But thanks to Ho’s research, companies can make better choices about the types of CSR activities they embrace, depending on their business strategy, to better serve the public and increase their market share.

Joanna Ho is a professor of accounting at the UCI Paul Merage School of Business and former editor-inchief (senior editor) of the Journal of International Accounting Research. Holding a BBA and MBA from the National Taiwan University and a PhD from the University of Texas at Austin, Ho is a noteworthy researcher whose work is showcased in publications and presentations worldwide. In addition to her worldwide journalistic accolades, Ho is the recipient of many designated awards, including the KPMG Peak Marwick Research Opportunities in Auditing Grant, GSM Excellence in Teaching award and UniversityWide Celebration of Excellence in Teaching award. RESEARCH IN ACTION

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Research Abstracts Latest Published Work by Merage School Faculty Members

Accounting Abstracts Professor Emeritus Mort Pincus Title: “Enhancing and Updating Cohen, Dey, and Lys’s (2008) Methodological Framework to Re-Examine the Relation between Accrual-Based and Real Earnings Management After SOX” Co-author: Shijia Wu (PhD alumna) Accepted at: Journal of Financial Reporting We respond to and rebut a number of comments in Daniel Cohen and Thomas Lys’s commentary (2022) (hereinafter CL) on our paper (Pincus, Wu, and Hwang, 2022), which re-examines and extends the research in Cohen, Dey, and Lys (2008) (hereinafter CDL). Specifically, we rebut most of the claims CL make regarding the lack of a conceptual framework and research design limitations, and we clarify CL’s misinterpretation on the inconsistency between our findings and prior published work. CL argue for the need to adjust the methodology that CDL employed, but fail to acknowledge the enhancements we made to CDL’s methodological framework, which enabled us to separate the substitution effects associated with the pre-SOX and postSOX periods.

Professor Emeritus Mort Pincus Title: “Did Accrual Earnings Management Decline and Real Earnings Management Increase Post-SOX? A Re-Examination Over an Extended Post-SOX Period and A Closer Look at REM-AEM Substitution” Co-authors: Shijia Wu (PhD alumna) and Jasper Hwang (UCI alumna) Accepted at: Journal of Financial Reporting A widely cited paper, Cohen, Dey, and Lys (2008, hereinafter CDL), examines accrual (AEM) and real earnings management (REM) pre- and post-Sarbanes Oxley and provides evidence that, in the period immediately following SOX, accruals management declined and was substituted by REM. We re-visit CDL and ask whether CDL’s main results extend to recent periods and hold using updated research design choices. We find AEM declines in the period immediately after SOX, but the results are sensitive to some design choices. We also find AEM generally declines over our entire extended post-SOX period, suggesting that the components of SOX were largely successful in constraining AEM. REM is higher post-SOX but with an insignificant trend over the entire extended post-SOX period. Additionally, the results indicate REM and AEM behave as substitutes in the period preceding SOX, but the substitution effect significantly weakens post-SOX.

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Professor Terry Shevlin Title: “Taxes in non-GAAP reporting: Evidence of strategic behavior in selecting tax rates applied to exclusions” Co-authors: Novia X. Chen (PhD alumna), Peng-Chia Chiu (PhD alumnus) and Jiani Wang Accepted at: Management Science (Journal on Financial Times Top 50 list) When reporting after-tax non-GAAP earnings, firms are required to adjust for the tax effects of exclusions. Since 2010, the SEC has issued and updated Compliance and Disclosure Interpretations (hereafter, C&DIs) which specifically require firms to disclose the tax effects of exclusions. We assemble a detailed, hand-collected dataset of S&P 1500 firms’ disclosures to provide the first large-sample evidence on the reporting of the tax effects of non-GAAP exclusions. We find three key results. First, echoing the SEC’s concern, a significant proportion of non-GAAP reporting firms do not follow the C&DIs’ guidelines (i.e., they do not disclose the tax effects of exclusions). Second, among firms that disclose the tax effects of exclusions, we find that managers strategically select the tax rates applied to exclusions to achieve after-tax earnings targets. Third, manager-reported non-GAAP earnings are less persistent for future operating earnings and cash flows, relative to non-GAAP earnings calculated by applying various benchmark tax rates to exclusions. This evidence suggests that managers’ strategic behavior in selecting the tax rates applied to exclusions pollutes reported non-GAAP earnings and reduces their usefulness for predicting future performance. Overall, our results shed light on a specific channel through which firms use non-GAAP reporting to meet or beat earnings expectations.

Professor Terry Shevlin Title: “The persistence and pricing of changes in multinational firms’ foreign cash holdings” Co-authors: Novia X. Chen (PhD alumna) and Peng-Chia Chiu (PhD alumnus) Accepted at: Review of Accounting Studies (Journal on Financial Times Top 50 list) Using a hand-collected sample of U.S. multinational firms’ foreign and domestic cash holdings, we evaluate the earnings persistence implications of changes in foreign and domestic cash and whether stock prices reflect such implications. Building on the earnings decomposition approach in Dechow, Richardson, and Sloan (2008), we find that, in the overall sample, changes in foreign cash are as persistent for future earnings as changes in domestic cash. In the cross-section, we find that foreign cash changes have higher persistence when foreign operations offer better growth opportunities and when repatriation taxes are lower. We then examine whether investors correctly RESEARCH IN ACTION

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price the persistence implications of foreign and domestic cash changes. We find a positive association between current foreign cash changes and one-year-ahead stock returns, suggesting that investors underreact to foreign cash changes, or equivalently, underestimate the earnings persistence of foreign cash changes. We further document that investors are more likely to misprice foreign cash changes when information processing costs are higher and when firms have poorer information environments. Our study sheds light on a recent paper, Harford, Wang, and Zhang (2017), who find that investors discount foreign cash changes, which they attribute to agency costs and investment inefficiencies. Our findings suggest that the discount is more likely due to investor mispricing of foreign cash changes.

Professor Terry Shevlin Title: “The effect of tax avoidance on capital structure choices” Co-authors: Yoojin Lee (PhD alumna) and Aruhn Venkat (PhD alumnus) Accepted at: The Journal of the American Taxation Association Existing studies find that tax avoidance affects the cost of debt and equity in different ways but does not examine the consequences of these associations. This study examines a direct and important implication of the effect of tax avoidance on the cost of debt and equity: capital structure choices. Using logit regressions, we find that tax avoidance is positively associated with the probability of issuing equity rather than debt. We use mediation (i.e., path) analyses to provide evidence that the effects of overall tax avoidance and risky tax avoidance on pre-corporate tax cost of equity and debt partially explain our main effects. For stronger identification, we exploit a plausibly exogenous 9th Circuit decision to implement a difference-in-differences design. Finally, we find indirect evidence that GAAP ETRs are associated with financing choices. This result is consistent with managerial focus on GAAP ETR to estimate the after-tax cost of debt (Graham et al. 2017) partially explaining our main results.

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Economics and Public Policy Abstracts Professor Ed Coulson Title: “Job Match and Housing Tenure” Co-authors: Walter D’Lima and David Jinkins Accepted at: Real Estate Economics Homeownership, though it brings both private and social benefits, entails substantial fixed costs. Standard personal financial advice suggests that homeownership should only be undertaken when one’s job situation is stable and job movement is not likely in the near future. Little research has asked whether this advice is followed. Our goal is to rectify that omission. To test this hypothesis, we employ detailed information on workers and housing decisions from Danish administrative data. We construct a measure of job mismatch and find evidence suggesting that homeowners are indeed better matched at their jobs than renters, and that an improved match leads renters to become homeowners. An examination of job durations suggests that homeownership is correlated with longer job duration both because of a direct causal effect and also due to an indirect effect through selection into homeownership.

Professor Ed Coulson Title: “Housing Rents and Inflation Rates” Co-authors: Brent Ambrose and Jiro Yoshida Accepted at: Journal of Money, Credit, and Banking This paper develops a quality-adjusted measure of marginal housing rents using a monthly statistic of landlord net rental income. The Marginal Rent Index (MRI) exhibits deflation during recessions and leads the official rent index by seven months. The modified inflation rate based on MRI suggests that the annual official inflation rate was overestimated by 1.7 to 4.1% during the Great Recession but underestimated by 0.3 to 0.7% during the subsequent expansionary period.

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Finance Abstracts Professor Jinfei Sheng Title: “Macroeconomic Attention and Announcement Risk Premia” Co-authors: Adlai Fisher and Charles Martineau Accepted at: Review of Financial Studies (Journal on Financial Times Top 50 list) We construct macroeconomic attention indices (MAI), new measures of attention to different macroeconomic risks including monetary policy and employment. Individual MAI increase several days before a related announcement, on average. MAI also respond to changes in macroeconomic fundamentals, with bad news raising attention more than good news. Across announcements, attention predicts announcement risk premia and implied volatility changes with large economic magnitudes. Our findings support theories of endogenous attention and announcement risk premia while demonstrating future research directions, including that announcements can raise new concerns. Macroeconomic announcements are important not only for contents and timing, but also attention.

Marketing Abstracts Professor Imran Currim Title: “National Customer Orientation: A Framework, Propositions, and Agenda for Future Research” Co-authors: Ofer Mintz (PhD alumnus) and Rohit Deshpande Accepted at: European Journal of Marketing This paper proposes a new country-level construct, national customer orientation, to provide a benchmark for global headquartered managers’ decisions and scholars investigating cross-national research. A conceptual framework and unique propositions are developed that focus on how one macro-economic driver, e.g., the wealth of a country, and one macro-marketing driver, e.g., customer price sensitivity, affect national customer orientation during and after global economic downturns such as recessions and a pandemic. An agenda setting section proposes distinct theoretical, empirical, and managerial themes for future research aimed at testing the propositions at the country and organization levels over time. Research on market and customer orientation is consistently designated a priority by academics and practitioners. However, most previous studies exclusively focus at the micro organizational-level, with less known on how customer orientation varies at the macro country-level and over

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time. Although the new construct offers substantial benefits for scholars and managers, current measures of national customer orientation are limited to data provided by the World Economic Forum or expensive primary survey-based research that restrict the number of countries, respondents, and time periods. The new national-level customer orientation construct and propositions about its drivers over time promise to provide global managers a country-level customer-based benchmark so that they can better understand, set expectations, and manage customer orientation across different countries over time.

Operations and Decision Technologies Abstracts PhD Student Alexander Robinson and Professor Robin Keller Title: “Building Insights on True Positives vs. False Positives: Bayes’ Rule” Co-author: Cristina del Campo Accepted at: Decision Sciences Journal of Innovative Education Covid-19 pandemic policies requiring disease testing provide a rich context to build insights on true positives vs false positives. Our main contribution to the pedagogy of data analytics and statistics is to propose a method for teaching updating of probabilities using Bayes’ Rule reasoning to build understanding that true positives and false positives depend on the prior probability. Our instructional approach has three parts. First, we show how to construct and interpret raw frequency data tables, instead of using probabilities. Then, we use dynamic visual displays to develop insights and help overcome calculation avoidance or errors. For greater insights, we look at graphs of positive predictive values and negative predictive values for different priors. The learning activities we use include lectures, in-class discussions and exercises, breakout group problem solving sessions, and homework. Beyond learning to update the probability of having the disease given a positive test result, material can cover naive estimates of the positive predictive value, the common mistake of ignoring the disease’s base rate, debating the relative harm from a false positive versus a false negative, and creating a new disease test.

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Professor Shuya Yin Title: “Retail Power in Distribution Channels: A Double-Edged Sword for Upstream Suppliers” Co-authors: Yuhong He (PhD alumna) and Saibal Ray Accepted at: Production and Operations Management (Journal on Financial Times Top 50 list) In distribution channels, the growing popularity of downstream retailers is a cause of both delight and despair for their upstream suppliers. While such retailers can generate more sales for the suppliers, they may also have higher leverage during any bargaining. This paper uses an analytical model to explore how a supplier’s preference about the structure of her retail distribution channel is shaped by (1) the level of substitutability between the end products sold by the retailers, (2) the correlation between the popularity of the retailers and their bargaining power, and (3) the intensity of competition from other channels. In our base model, a monopolist supplier sells two substitutable products to two retailers who then sell to end customers. The two retailers are asymmetric in their ability to attract customers and their bargaining power during any contract negotiation with the supplier is proportional to that attraction potential. Analysis of the model and its extension reveals a number of robust insights, irrespective of whether the negotiation between the channel partners is about profit allocation or about wholesale price. First, an ideal situation for the supplier is that less asymmetric retailers sell differentiated products while more asymmetric ones sell similar products. That is, a supplier whose products are quite substitutable should not be too concerned about a dominant retail partner, but one selling differentiated products should be worried. Second, a stronger correlation between the retailers’ popularity and their bargaining power makes the retail structure with less asymmetric retailers preferable from the supplier’s perspective. Finally, the presence of competing channels selling substitutable variants significantly impacts the supplier’s preference about its own channel structure, and a high level of channel competition reverses some of the above findings.

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Organization and Management Abstracts Senior Associate Dean Gerardo Okhuysen Title: “An Examination of Mind Perception and Moral Reasoning in Ethical Decision Making: A Mixed Methods Approach” Co-authors: Isaac H. Smith, Andrew T. Soderberg and Ekaterina Netchaeva Accepted at: Journal of Business Ethics (Journal on Financial Times Top 50 list) Taking an abductive, mixed-methods approach, we explore the content of people’s moral deliberations. In Study 1, we gather qualitative data from small groups of graduate business students discussing moral dilemmas. We analyze their conversations with a focus on how participants perceive others’ thoughts, opinions, and evaluations about the dilemmas and incorporate them into their reasoning. Ascribing such capacities to think and feel to others—i.e., mind perception—is central to morality. We use the conversations in Study 1 to identify whose minds participants perceive. Study 1 also identifies how particular elements of deliberation—including the exploration of consequences, acknowledging ambivalence, seeking alternative options, the development of deep feelings, and the search for a moral compass—are linked to these perceptions of others’ minds. In Study 2 (an exploratory, online experiment with 378 participants), we find that priming individuals with specific forms of mind perception can influence the elements of moral reasoning they employ, and we find evidence that the presence of elements of reasoning are linked to participants’ final choices in a businessrelated ethical dilemma.

Strategy Abstracts Professor Leonard Lane Title: “Mend Your Supply Chain to Prevent a Brand Disaster” Co-authors: Anna Sáez de Tejada Cuenca and Felipe Caro Accepted at: IESE Business School Insight The article provides insights into the question: would you know if your suppliers were using unauthorized subcontractors. Research from the fashion Industry reveals some key predictors of the practice. Knowing these can help you build an end-to-end sustainable supply chain.

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SPRING 2022

Awards and Honors Professor Imran Currim 2021 Marketing Science Institute Robert D. Buzzell Best Paper Award Title: The Right Metrics for Marketing Mix Decisions Co-authors: Ofer Mintz (PhD alumnus), Timothy Gilbride, and Peter Lenk Accepted at: International Journal of Research in Marketing Description: This study addresses the following question: For a given managerial, firm, and industry setting, which individual metrics are effective for making marketingmix decisions that improve perceived performance outcomes? We articulate the key managerial takeaways based on testing a multi-stage behavioral framework that links decision context, metrics selection, and performance outcomes. Our statistical model adjusts for potential endogeneity bias in estimating metric effectiveness due to selection effects and differs from past literature in that managers can strategically choose metrics based on their ex-ante expected effectiveness. The key findings of our analysis of 439 US managers making 1,287 decisions are that customer-mindset marketing metrics such as awareness and willingness to recommend are the most effective metrics for managers to employ while financial metrics such as target volume and net present value are the least effective. However, relative to financial metrics, managers are more uncertain about the ex-ante effectiveness of customer-mindset marketing metrics, which attenuates their use. A second study on 142 managers helps provide detailed underlying rationale for these key results. The implications of metric effectiveness for dashboards and automated decision systems based on machine learning systems are discussed.

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Professor Libby Weber Best Paper Proceedings for the 2022 Academy of Management Conference Title: Manipulating Perceptions of Asset Specificity in Alliances: A Microfoundational Approach Co-author: Russell Coff Abstract: In interfirm exchanges such as alliances and joint ventures, transaction cost economics theory (TCE) argues that asset specificity, a key contracting hazard, largely determines specific attributes of hybrid governance, namely control mechanisms. Despite the importance of this concept, asset specificity is often unobservable. Instead, governance decisions largely rely on negotiator perceptions of asset specificity. While traditional TCE assumes negotiators are intendedly accurate to mitigate transaction costs, they are motivated to manipulate perceptions to maximize value capture for their firm. Thus, theory does not incorporate the impact of manipulated perceptions on governance attributes. Taking a microfoundational approach, we explore the impact of suppliers manipulating buyer managers’ perception of task characteristics to inflate their perceived asset specificity, on hybrid governance attributes. We offer a theoretical framework to predict the direction of asset specificity perception manipulation and when perceptions are most malleable. As a result, we incorporate negotiator cognitions and motives (maximize their firm’s value captured), leading to a more complete understanding of hybrid governance design.

Professor L. Robin Keller, along with Merage School PhD alumnus Jeffrey L. Guyse and PhD alumna Candice Huynh (2020), was awarded the Clemen– Kleinmuntz Decision Analysis Best Paper Award accompanied with a $2000 prize for their paper, “Valuing sequences of lives lost or saved over time: Preference for uniform sequences” accepted at Decision Analysis 17(1):24–38.

RESEARCH IN ACTION

SPRING 2022

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Illustrations by Emily Young ’20