Faculty Research Brief: April 2011
Faculty Research Brief is a periodic report designed to inform the Stern community about new faculty research, new publications, awards and grants. Please send your research news to be considered for inclusion to paffairs@stern.nyu.edu.
Featured Research
“Predicting the Next Big Thing: Success as a Signal of Poor Judgment”
Associate Professor of Management and Organizations Christina Fang and her co-author find that individuals who accurately forecast a rare event, such as a breakthrough new product, may, in fact, have poor judgment and forecasting ability. When judgment or forecasting ability is defined as the average level of forecast accuracy over a wide range of forecasts, accurate predictions of an extreme event are likely to be an indication of poor overall forecasting ability. The researchers find that because extreme outcomes are very rare, people who make extreme predictions are more likely to rely on intuition, and this technique is less likely to produce consistent success over a wide range of forecasts. Those who take into account all of the available information are less likely to make such extreme predictions. The study’s results suggest that poor forecasters will be overrepresented among those who are hailed for forecasting extreme events. In addition, the researchers suggest that inferring forecasting ability from a selective set of observations, such as cases of business success, may be more complicated than previously believed. The paper appeared in a recent issue of Management Science.
“When Does the Past Repeat Itself? The Interplay of Behavior Prediction and Personal Norms”
Research Professor of Marketing Vicki Morwitz, along with co-authors Pierre Chandon of INSEAD, Ronn Smith of the University of Arkansas’ Walton College of Business and Eric Spangenberg and David Sprott of Washington State University’s College of Business, examines how self predictions (forecasting one's own future behavior) and personal norms (one's internal standard of conduct) influence the likelihood that a person will repeat past behavior. Their results have implications for public policymakers that seek to reinforce socially beneficial behaviors and weaken socially harmful behaviors. Through several studies, they find that asking questions about future behavior reinforces repetition of that behavior when personal norms are weak or do not exist for that behavior. On the other hand, when personal norms are strong for a particular behavior at the time of the prediction request, behavior prediction diminishes the likelihood of a person repeating his/her behavior. In essence, when personal norms are strong, behavior prediction makes a person more likely to do what they think they should do, even if it’s not what they habitually do. “It is encouraging to see that an easily implemented technique – asking questions regarding a future behavior – can lead to significant changes in behavior,” write the authors. The study was accepted for publication in the Journal of Consumer Research.
Taking the Mystery Out of Executive Compensation
Assistant Professor of Economics Gian Luca Clementi and Paganelli-Bull Professor of Economics Thomas Cooley challenge the public’s perception of executive compensation by demonstrating how widely cited “facts” on the topic are often deceptive. The authors examine several important features of executive compensation in the US from 1993 to 2008. Showing that the distribution of total compensation is highly skewed, the researchers argue that averages are misleading when looking at compensation statistics. They also note that every single year, a large number of CEOs actually lose money – a seldom-cited fact. The researchers noted that during the sample period, companies increased their grant of securities to executives. However, this did not lead to a one-for-one increase in the portion of executives’ wealth that is tied to their companies. In fact, the income accruing to CEOs from the sale of stock increased. The authors find that the sensitivity of pay to performance is substantial, regardless of the measure. However, the debate as to whether or not the sensitivity has increased or not depends heavily on the proxy being used. “Measured as dollar changes in compensation, incentives have strengthened over time; but measured as percentage changes in wealth, they have not changed in any appreciable way,” Professors Clementi and Cooley conclude.
“Capital Market Consequences of Filing Late 10-Qs and 10-Ks”
Research Professor of Accounting Eli Bartov and his co-authors examine the market reaction to companies filing late 10-Q or 10-K forms. They find that investors respond negatively when firms announce that they will file late 10-Qs or 10-Ks, and that the response is more negative for late 10-Qs, driven primarily by firms that report accounting reasons as the cause of the delay. Because 10-Qs require less disclosure than 10-Ks and are unaudited, they are much less onerous to produce than 10-Ks. The researchers therefore suggest that relative to 10-Ks, investors perceive accounting problems that prevent the timely filing of 10-Qs to be more severe. The researchers also find that when accounting reasons explain a 10-Q filing delay, the market anticipates which late filers will subsequently fail to file within the SEC’s allowed grace period. Finally, they also show that while abnormal stock returns of late filers generally continue to decline during the months following a late filing announcement, they do not decline when accounting reasons explain the filing delay. These findings demonstrate that accounting information included in Form NT, the “non timely” form, (which requires management to provide a narrative explanation of the reason for the late filing and to declare whether it expects to subsequently file the late 10-Q or 10-K within the allowed grace period) plays an important role in how market participants interpret the valuation implications of late filings, and that late 10-Q filings have different valuation implications than late 10-K filings.
New Books and Publications
Investments and Portfolio Performance
Nomura Professor of Finance Ned Elton and Professor Emeritus of Finance Martin Gruber published a new book, Investments and Portfolio Performance (World Scientific Books, 2011), which assembles 19 articles, 16 of which were published in leading finance and economic journals in the last 10 years. Endorsed by Nobel Laureate Harry Markowitz and Professor William Sharpe, the book addresses issues of interest to institutional and retail investors. Among the topics covered are performance measurement for mutual funds, pension funds and the construction of an optimum portfolio.
Awards, Accolades and Presentations
Viral Acharya, Bank and Financial Analysts Faculty Fellow and Professor of Finance, was selected by the European Systemic Risk Board (ESRB) as one of the 15 members of its newly established Advisory Scientific Committee. He will participate in improving analytical methodologies for detecting risk and assessing its impact, designing and calibrating effective macro-prudential policy tools, and reviewing macro-prudential strategies and operational frameworks to contribute to the ESRB’s evolving policy framework.
Associate Professor of Finance Jennifer Carpenter has been invited to participate in a panel discussion on “Risk Management for Incentive Compensation” on April 12, as part of a conference entitled, “Risks and Resolutions: Creating a New Foundation for Risk Management,” sponsored by the Center for Financial Services at DePaul University, in conjunction with the Supervision and Regulation Department of the Federal Reserve Bank of Chicago.
Xavier Gabaix, Martin J. Gruber Chair in Asset Management and Professor of Finance, has been awarded the 2010 Bernácer Prize, which is given annually to a European economist under the age of 40 who has made outstanding contributions in the fields of macroeconomics and finance. An award ceremony will be held in June 2011.
Anindya Ghose, Robert L. & Dale Atkins Rosen Faculty Fellow and Associate Professor of Information, Operations and Management Sciences; Panagiotis Ipeirotis, George A. Kellner Faculty Fellow and Associate Professor of Information, Operations and Management Sciences; and PhD student Beibei Li’s co-authored paper, “Towards a Theory Model for Product Search,” received the Best Paper Award at the 20th International World Wide Web Conference (WWW 2011). The paper was chosen from 658 submissions to this year’s conference, which is the premier international event for Internet-related research, drawing upon scholars from across several disciplines and from around the world.
Research Professor of Marketing Vicki Morwitz was elected president of the Society for Consumer Psychology (SCP) in February 2011. She is serving a three-year term in the executive leadership of the Society: one year as president-elect, one year as standing president and one year as immediate past president. The SCP publishes the Journal of Consumer Psychology and the Advertising and Consumer Psychology book series.
Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets and Professor of Economics, received the Lifetime Achievement Award from the Business History Conference (BHC), the leading professional association of business historians, at their April conference in St. Louis, MO. Professor Sylla was president of BHC in 2005-06. The award is a decade old and given every two years to the person who has contributed the most to the Business History Conference and to scholarship in business history. The first recipient was Alfred D. Chandler, widely considered to be the greatest business historian of the 20th century.