Faculty Research Brief: October 2010
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
Why Does it Take Less Time to Get Home?
Have you ever experienced surprise that, when returning home from a destination, the trip feels shorter than the initial trip to the same destination? In their paper, Marketing Professors Priya Raghubir, Vicki Morwitz and Amitav Chakravarti provide evidence that even though a trip from home to a destination is objectively equal in distance to the trip from that same destination back to home, people systematically feel that the trip back home takes less time. In three experiments, the authors demonstrate that this bias in time perception occurs for short walks or drives of commuting length and for long road trips. They also show that this bias not only occurs for trips to one’s actual home, but also occurs for trips to other familiar locations. While there are many possible reasons for this bias, they provide preliminary evidence for one possible reason: people perceive home as a relatively larger area because of the many familiar landmarks near home. In contrast, because very few landmarks are associated with less familiar destinations, people perceive them to be relatively smaller. This asymmetry affects the sense of trip progress for trips to, versus from, home. This paper was recently accepted for publication at the Journal of Consumer Psychology.
“Does Anyone Read the Fine Print?”
Associate Professor of Information Systems Yannis Bakos, along with co-authors Florencia Marotta-Wurgler of the NYU School of Law and David R. Trossen of the University of California at Berkeley’s Boalt Law School, investigates the validity of the “informed minority” hypothesis – the assumption that in competitive markets, a minority of term-conscious buyers is enough to discipline sellers from offering unfavorable terms in their contracts. The “informed minority” argument is widely invoked to limit intervention from government regulators in consumer transactions. In their study, the researchers follow the online shopping behavior of more than 45,000 households on 66 software company websites, studying the extent to which potential buyers access the associated standard form contract, often referred to as the end-user license agreement. They found that only one or two out of every thousand shoppers chose to access the license agreement. Additionally, the small number of shoppers who did access the license agreement, on average, spent too little time to have read more than a minor portion of the license text. The authors argue that these results cast doubts on the relevance of the "informed minority" assumption in the context of today’s online shopping environment. They also question the effectiveness of policies requiring increased or mandatory consumer disclosure. According to their research, shoppers do not access contract terms regardless of how accessible they are. Therefore, the researchers argue that disclosure is unlikely to work by itself and needs to be combined with policies that reduce the effort required from consumers to read and assess contract terms.
Protecting the Public Can Be Good Business
Assistant Professor of Finance Ashwini Agrawal examines the passage of state investor protection statutes, or blue sky laws, in the US in the early 20th century, when mining scams were widespread, in a paper entitled, “The Impact of Investor Protection Law on Corporate Policy: Evidence from the Blue Sky Laws.” Looking at more than 100 publicly traded mining firms from 1899-1918, he found that states that passed laws to protect investors had superior performance compared to those that had not yet passed such laws. The research indicates that the enactment of blue sky laws caused firms to pay out greater dividends, issue more equity and grow in size. According to Professor Agrawal, the introduction of investor protection laws was also associated with improvements in operating performance and market valuations. These findings cast some doubt on regulatory critics who say that investor protection policies always repress innovation and entrepreneurship, argues Professor Agrawal. He also says that this study may provide some lessons learned for today’s policy makers, who grapple with how to regulate financial markets on the heels of an economic crisis.
How Today’s Current Losses & Profits Affect Tomorrow’s Performance
Research Professor of Accounting Eli Bartov, and two of his former PhD students Karthik Balakrishnan (MPhil ’08, PhD '10) of the University of Pennsylvania’s Wharton School and Lucile Faurel (PhD ’08) of the University of California, Irvine’s Merage School of Business, examine whether investors fully price the implications of current losses or profits for future losses or profits in their paper recently published in the Journal of Accounting and Economics, entitled “Post Loss/Profit Announcement Drift.” Looking at a broad sample of more than 15,000 firms over an extended period spanning 30 years, from 1976 to 2005, the authors find evidence of a loss/profit mispricing. During the 120-trading-day window following the earnings announcement, the 10% of firms with the poorest quarterly earnings experienced a negative average abnormal return of nearly six percent. Conversely, the 10% of firms with the highest quarterly earnings exhibited an average abnormal return of nearly four percent. The authors hypothesize and find that this mispricing is due to investors' failure to fully assess the probability of a loss/profit based on its conditional, rather than unconditional, probability. These findings have implications on investors’ valuation of loss/profit firms.
Awards, Accolades and Presentations
Anindya Ghose, Associate Professor of Information, Operations and Management Sciences, has been selected to join the Marketing Science Institute’s Young Scholar Program. Granted biennially, the Program brings together a small number of the most promising scholars in marketing to enhance their engagement with the marketing science community. Although Professor Ghose's research resides outside of the traditional marketing discipline, his selection into this prestigious program is a testament to the influence of his IS research on the marketing science community.