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The impact of economic prosperity on CEO ethics

Prior research suggests that economic booms are associated with overconfidence and risk-taking. In a new paper, Emily Bianchi, assistant professor of organization & management, and coauthor Aharon Mohliver (London Business School) build on that research by showing that prosperous times are also associated with more ethical lapses. The authors examined whether CEOs were more likely to backdate their stock options during prosperous economic times. Backdating stock options was relatively common during the late 1990s to early 2000s. It was also unethical. A backdating CEO would receive a stock option grant on one day but report that the options were assigned on an earlier date when the stock price was lower. This would allow the CEO to realize greater gains when he or she sold the stock. Also, it required lying to the SEC and came at the expense of company profits. To test their theory, Bianchi and Mohliver looked at the backdating patterns of 2,139 CEOs of US publically traded companies between 1996 and 2005. They found that CEOs were more likely to backdate in good economic times. They also found that “CEOs who began their careers in prosperous times were more likely to backdate stock option grants later in their careers.” The findings indicate that economic prosperity influences the likelihood of corporate misconduct. Source:

Reconstructing the past to forecast how climate change may alter our future

The scientific world all agrees – climate change is real, it’s here and it is something we need to know more about. As the climate on Earth changes – everything from temperatures, weather patterns, wind rain and snow will all in some way or another be altered. Even minor and fractional adjustments in some aspects of climate may result in drastic differences to temperatures, precipitation, ocean levels and ecology. In order for us to understand the impacts of climate change and to try and predict how populations will have to adapt scientists at the University of Mary Washington are currently working on a long-term project to re -construct past climate by looking at the geochemistry of oyster shells. This research could prove vital as the Chesapeake Bay region is expected to experience more extremes in precipitation with human-caused warming, so more heavy rain events and more prolonged drought events. These changes in rainfall will cause drastic swings in salinity in the Bay from changes in the freshwater river input. It’s important research and the experts at the University of Mary Washington are available to help explain how oyster shells may hold the answer to the region’s future climate challenges. Dr. Pamela Grothe is an Assistant Professor in the Department of Earth and Environmental Sciences as the University of Mary Washington and is an expert on climate change. Dr. Grothe is available to speak with media regarding this subject – simply click on her icon to arrange an interview. Source:

Risk and returns for private equity and venture capital funds

The early success of some well-known private equity and venture capital funds has led to their rapid growth. According to research from Narasimhan Jegadeesh, the Dean’s Distinguished Chair in Finance, Roman Kraussl (U of Luxembourg), and Joshua M. Pollet (U of Illinois), investors should carefully evaluate the future risk and return potential of this asset class and avoid investing primarily because of past successes. Some private equity indices compiled by the industry suggest that these funds offer bigger returns than the public equity market, but prior academic studies offer mixed evidence on performance. Jegadeesh and his coauthors devised a new approach to determine the actual risk and returns by using market prices of funds that primarily invest in unlisted PE and VC funds listed on several European stock exchanges. This approach has a distinct advantage because it uses publicly available market prices rather than self-reported data, which were previously used in other academic studies. Their findings indicate that unlisted PE and VC funds as an asset class are unlikely to yield extraordinary returns as suggested by some self-reported data. They may even yield about the same return as the stock market but are illiquid. Source:

Misreporting in securitized loans

Nonagency mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) derived from MBSs and their role in the recent financial and housing crisis remain a subject of discussion. An MBS is an asset-backed security secured by a mortgage or grouping of mortgages. Non-agency MBSs are not guaranteed by any government-sponsored organization, such as Freddie Mac or Fannie Mae, or the federal government. According to research from Gonzalo Maturana, assistant professor of finance, and John Griffin (U of Texas), the complexity of these structured products made it difficult to learn the true value of the underlying assets. They analyzed “apparent fraud among securitized nonagency loans, looking at unreported second liens, owner occupancy misreporting, and appraisal overstatements.” The study data comes from Lewtan’s ABSNet Loan and HomeVal data sets, along with DataQuick’s Assessor and History files, for the time period between January 2002 and December 2011. The researchers discovered that “48% of loans exhibited at least one indicator of misrepresentation.” The level of misreporting was similar for low- and full-documentation loans. Also, loans with a misreporting were 51% more likely to be delinquent. Maturana and Griffin’s research points to apparent fraud by loan originators and MBS underwriters, and it also suggest that MBS underwriting banks were aware of some of the MBS representations at issuance. Source:

The impact of corporate vs. independent foundations

Debate continues as to whether corporate or independent foundations are more impactful, despite the shared interest in supporting charitable services. In research from Justin Koushyar, doctoral candidate in organization and management (2017), Wesley Longhofer, assistant professor of organization and management, and Peter Roberts, professor of organization and management, the trio determines that the answer is mixed. They used data from a matched random sample of corporate and independent foundations that operated across the United States in 2005 and 2009. With deeper pockets, corporate foundations were able to raise more funds than their nonprofit counterparts. Company sponsorship of a philanthropic foundation also meant that they could operate with lower overhead. However, Koushyar, Longhofer, and Roberts found that corporate foundations are “more dispersed and less relational, and they tend to be governed by more ephemeral groups of officers and trustees.” Simply put, corporate foundations have fewer longterm attachments to the charitable organizations they support. Additionally, “market-based motivations” may influence how they give. Corporate foundations do tend to provide smaller individual grant amounts than independent foundations. These “stakeholder effects” are even more dramatic for the foundations linked to larger publicly traded companies. Source:

Accounting data and volatility predictions

Generally speaking, financial research has studied how past equities and options volatility can help to predict future volatility in the markets. However, new research from Suhas Sridharan, assistant professor of accounting, investigates the impact of supplementing past volatility data with actual financial statement information to forecast future realized volatility. Sridharan used a large sample of 47,398 quarterly observations from 3,078 firms taken from 1996 to 2012. Her results indicate that incorporating accounting-based information, such as “standard deviation of the earnings yield, standard deviation of the change in premium of market value over book value, and the covariance of the two,” into forecasting models lowers forecast errors compared to models based solely on past realized volatility. She finds, “Equity returns volatility is significantly positively related to the earnings yield volatility and the volatility of the change in market to book premium. Volatility is significantly negatively related to the covariance of the earnings yield and change in market to book premium.” Sridharan also discovered that using accounting-based fundamental information in trading strategy could help to predict option returns. Source:

Team leader experience in improvement teams

According to research from George Easton and Eve Rosenzweig, both associate professors of information systems & operations management, a team leader’s social capital and experience leading projects of the same type are factors in the effectiveness of an improvement team. By using six years of six sigma improvement project data from a Fortune 500 consumer products manufacturer, the researchers reached a rather surprising finding regarding a team leader’s social capital. Improvement teams do not appear to benefit from the leader’s experience working with the current team members on prior projects. What matters instead is the team leader’s experience working with a variety of people on prior improvement projects. The researchers suggest that the experience of dealing with many different individuals allows improvement team leaders to better identify suitable people to join their teams. Such a variety of experience also likely makes team leaders more politically astute when determining projects to pursue. In addition, the professors found that a team leader’s experience with the same type of project is important during the early stages of a six sigma implementation. The importance of this kind of experience declines as the system becomes more mature. The professors suggest that in a mature six sigma deployment, the organization’s cumulative body of documented learnings may well substitute for a team leader’s own prior experience leading a particular project type. Source:

CFOs & earnings misrepresentation

The quality of a company’s earnings is determined by controllable factors, such as internal controls and corporate governance, and noncontrollable factors, such as industry and economic conditions. But CFOs also have considerable influence over the communication and presentation of those earnings. In a new research study, Ilia Dichev, Goizueta Foundation Chair, professor of accounting, and coauthors John Graham (Duke U), Campbell R. Harvey (Duke U), and Shiva Rajgopal (Columbia U) note that discretion in accounting methods allows CFOs to misrepresent earnings. CFOs are motivated to misrepresent earnings in order to increase stock price and meet earnings targets, as well as boost their own compensation and career profile. The authors conducted a survey of 375 CFOs to explore their definition of earnings quality and ways to determine earnings misrepresentation. The authors concluded that “in any given period, a remarkable 20% of companies intentionally distort earnings, even while adhering to GAAP (generally accepted accounting principles).” The study found a number of red flags for earnings misrepresentation, including “a lack of correspondence between GAAP earnings and cash flows from operations, and unexplained deviations from peer and industry norms.” Source:

Mobile advertising and crowded locations

As marketers look for new ways to target consumers on their smartphones, they are capitalizing on the ability to use location for mobile advertising. Today, retailers send mobile coupons and alert shoppers to sale items as they roam the aisles of the store. New research from Michelle Andrews, assistant professor of marketing, and coauthors Zheng Fang (Sichuan U), Anindya Ghose (NYU), and Xueming Luo (Temple U), investigates the impact of another type of location on mobile ad effectiveness. The authors studied real-time data from one of the world’s largest telecom providers, compiling responses to mobile advertising by 14,972 mobile phone users on crowded and noncrowded subway trains. Surprisingly, commuters in packed subway trains were twice as likely to respond to and make a purchase from a mobile ad than travelers in less crowded subway trains. The researchers write, “A plausible explanation is mobile immersion: As increased crowding invades one’s physical space, people adaptively turn inwards and become more susceptible to mobile ads.” The research indicates that “hyper-contextual mobile advertising” needs to be a bigger consideration for marketers looking to improve their mobile advertising. Source:

Synergies between product placements and TV ads

As television watchers get inundated with commercials, the temptation to flip the channel grows. In the hopes of better connecting with consumers, advertisers are increasing their efforts to get product placements directly into TV shows. In a research study, David Schweidel, Goizueta Term Chair, Caldwell Research Fellow, and associate professor of marketing, and coauthors Natasha Zhang Foutz (U of Virginia) and Robin J. Tanner (U of Wisconsin) took a look at how the synergy between product placements and traditional commercials can keep viewers from flipping past the ad. The trio found that by simply putting a product in a television show and then immediately following it up with a commercial featuring the same product, viewers were more likely to stay tuned to the commercial. “The audience loss during the ad decreases by 5%,” they note. The effect was intensified when differing products from the same brand were shown in a program and then in a commercial immediately following the TV show. They write, “This indicates a positive synergy between the two activities that can reduce audience decline by more than 10%.” When products of different brands were featured in a television program and in a subsequent commercial, audience loss increased. Source: