Faculty Research Brief: January/February 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
“Active Share and Mutual Fund Performance”
According to research by Visiting Professor of Finance Antti Petajisto, actively managed mutual funds may not be living up to their name. The new study builds on Professor Petajisto’s 2009 study with Martijn Cremers of Yale and uses active share, the extent to which a fund’s holdings differ from its benchmark, and tracking error, a way of assessing a manager’s deviation from the benchmark, to determine the degree of active management of mutual funds. Professor Petajisto establishes that the degree of active management matters considerably for mutual fund performance. Fund managers with the highest active share beat their benchmarks by 1.26 percentage points annually after fees, justifying the fees they charge. However, he determines one third of US stock fund assets are actually managed by “closet indexers,” or funds with active share of less than 60 percent, but claim active management fees. In these cases, investors are overpaying for active management and could get the same results in an index fund for a fraction of the price. One example is American Funds’ Growth Fund of America, which only had 54 percent active share in 2009, and lagged behind the benchmark in 2010. This research therefore suggests investors should divide their portfolios between low-cost index funds and true active managers if they want to beat the benchmark, but also want to limit the risk of falling behind the index.
Are Brands the Opiate of the Nonreligious Masses?
Are brands the “new religion?” In a paper published in Marketing Science, Professor of Marketing Tülin Erdem, with co-authors Ron Schachar of Tel Aviv University and Keisha Cutright and Gavin Fitzsimons of the Fuqua School of Business, theorize that brands and religiosity may serve as substitutes for each other because both allow individuals to express their feelings of self-worth. They find support for this substitution hypothesis with both the US state level data (field study) as well as individual level data, where religiosity is measured as an individual difference across four studies. They also show that this relationship holds only in product categories where brands enable individuals to express themselves (e.g., clothes), but not in primarily "functional" product categories, such as batteries. For example, in one of their Internet-based studies, they asked 356 participants to choose between brand-name and generic goods, with realistic price differences. The authors classified the products as “expressive” (e.g., Ralph Lauren vs. Target sunglasses) or “functional” (e.g., Energizer vs. CVS brand batteries). Following, participants answered questions to measure the role of faith in their lives. Findings showed that people who regularly attended religious services were approximately 20 percent less likely to select an “expressive” brand than those who did not, yet there were no differences in the functional category. The authors also provided evidence for the expression of self-worth as the underlying factor for the negative relationship between religiosity and brand reliance.
“Erosion, Time Compression and Self-displacement of Leaders in Hypercompetitive Environments”
Gonçalo Pacheco-de-Almeida, Assistant Professor of Management and Organizations, examines how leader firms should respond to the erosion of competitive advantages in hypercompetitive environments. He outlines the pressures of such environments, in which companies are compelled to develop advantages over the competition at a faster rate, increasing investment costs while expected returns from new advantages are diminished. Due to decreased financial incentives for developing new competitive advantages, leader firms often slow down the pace of innovation. The likelihood they will be displaced by competitors then increases, not because they are unable to respond to competitive threats but because of their own deliberate decisions to slow down innovation. Professor Pacheco-de-Almeida argues that leader firms should instead respond to hypercompetitive environments by accelerating the development of advantages with high competitive value but low market value. The paper was published in Strategic Management Journal.
Investor Response to Management’s Tone in Quarterly Earnings Reports
Professor of Accounting Joshua Livnat and his co-authors explore whether the qualitative management discussion and analysis (MD&A) section of quarterly earnings reports offers investors additional information beyond quantitative financial measures, such as earnings surprises and accruals. The authors measured the overall tone – optimistic or pessimistic – expressed in companies’ MD&A sections and compared it to the companies’ prior quarterly reports. They found that quarter-to-quarter tone change within the MD&A section is significantly associated with short-term market reactions following companies’ SEC filings, even after controlling for accruals and earnings surprises. In addition, tone change adds significantly to longer-term stock price drift, beyond financial information conveyed by accruals and earnings surprises. The authors found that tone change is incrementally more informative when the information environment surrounding the firm (as measured by size and analyst following) is weaker. The research suggests that market participants use nonfinancial information (e.g., management tone) from MD&A disclosures (or other information that is correlated with it), in addition to the financial information provided routinely by firms. The paper, titled “Management’s Tone Change, Post Earnings Announcement Drift and Accruals,” was published in Review of Accounting Studies.
Anti-Competitive Implications of Minimum Resale Price Maintenance
Associate Professors of Economics John Asker and Heski Bar-Isaac explore the anti-trust implications of allowing manufacturers to use minimum retail price maintenance (RPM), the practice of setting a minimum price at which retailers can sell a product. The authors explain that RPM can facilitate the exclusion of a new manufacturer. Retailers are reluctant to accommodate a new manufacturer, since the fierce competition that ensues would lead to a breakdown of RPM and decrease profits for retailers who compete on price. The paper provides a theory of harm from RPM, which can be quantified and assessed. This is particularly useful for anti-trust practice following the Supreme Court’s 2007 ruling that the legality of RPM should be examined on a case-by-case basis, reversing a century under which RPM was outright illegal. The paper is titled, “Exclusionary Minimum Resale Price Maintenance.”
Awards, Accolades and Presentations
Professor of Finance Viral Acharya discussed the Stern faculty book, Regulating Wall Street, at a number of institutions including ICICI Bank; Indian Banks' Association (IBA), a consortium of risk management heads at banks in India; and the Reserve Bank of India. He presented “Issues Concerning Excellence in Core Responsibility (Monetary Policy),” at the Academic Advisory Council Luncheon of the Federal Reserve Bank of Cleveland and “Flash Crash: What Caused It and What Do We Learn From It?” at a panel discussion held by the Securities Exchange Board of India (SEBI), both in December 2010.
Max L. Heine Professor of Finance Edward Altman received an Innovation Award for his Z-MetricsTM credit analysis tool, which enables investors and lenders to more accurately estimate company credit ratings and default risk probabilities. The award was formally presented at the 2010 Credit Americas Awards, Credit magazine’s annual awards ceremony for the North American credit markets, on November 4 in New York.
Xavier Gabaix, Martin J. Gruber Chair in Asset Management, has been awarded The Fischer Black Prize, considered one of the most prestigious awards among scholars in the field of Finance, which is given to an individual researcher under the age of 40 for a body of original work that is relevant to Finance practice.
On December 2, 2010, Kenneth G. Langone Professor of Business Joel Hasbrouck was one of two academics invited to participate in a Commodities Futures Trading Commission (CFTC) staff roundtable on disruptive trading practices in Washington, DC, to give information and feedback to the CFTC on how to implement certain rules in the Dodd-Frank financial reform bill. A transcript of the session is available online.
Alexander Ljungqvist, Ira Rennert Professor of Finance and Entrepreneurship, received the 2011 Ewing Marion Kauffman Prize Medal for Distinguished Research in Entrepreneurship, which is given biennially to a researcher under 40 years old who has made a significant contribution to the literature in entrepreneurship.
Russell Winer, William H. Joyce Professor of Marketing and Chair of the Marketing Department, received the 2011 AMA/Irwin/McGraw-Hill Distinguished Marketing Educator award. This annual award, designed to be the highest honor a marketing educator can receive, is given to someone who is universally acknowledged as a long-standing leader in marketing education and who has made extensive contributions to marketing education and the marketing discipline in general. Professor Winer will receive the award at the annual AMA Winter Educators' Conference on February 17.