Using private management standard certification to reduce information asymmetries in corrupt environments

This paper investigates how corruption in the institutional environment influences firms' decisions to obtain third‐party certification to private management standards as signals of desirable conduct. We argue that policy‐specific corruption erodes trust in government efforts to regulate firms' conduct, thus increasing the signaling value of private certifications and the likelihood of certification. However, widespread corruption in the general environment can extend distrust to private certification systems, which reduces the credibility and signaling value of private certifications, thus decreasing the likelihood that firms obtain certification. Our empirical results based on ISO 14001 environmental management system certification among 433 automotive plants in Mexico confirm these relationships. We discuss the implications of our findings for transaction cost economics, institutional theory, research, and practice. Copyright © 2012 John Wiley & Sons, Ltd.     

Did victories in certification contests affect the survival of organizations in the American automobile industry during 1895–1912? A replication study

Research summary: We successfully replicate the highly influential study: “The social construction of reputation…,”(Rao, 1994 ) which reports that cumulative victories in certification contests are negatively associated with firm failure. The replication is robust to the inclusion of additional controls. As in the original, tests of whether the theory is most powerful under higher uncertainty are not supported. Further, placing second, third, or merely participating in races also negatively predicts firm failure, and there is insufficient information in the data to tease out the importance of these predictors versus race victories. We discuss the assumptions under which the evidence can be interpreted as supportive of a more general argument of “loose coupling”, where affiliation with certification contests reduces firm failure. Managerial summary: We successfully replicate a study that related victories in races to the survival of early automobile firms. This result was interpreted as evidence that rank‐order certification contests legitimized firms and led to survival. We then demonstrate that there is insufficient information to tease out the relative importance of victories, as opposed to placing second, third, or merely participating in predicting survival. Our result is consistent with an argument that affiliation with certification contests, not only winning them, increases a firm's chances of survival. It is also consistent with an argument that firms with better quality automobiles won races and survived. An implication of our work is that there is insufficient evidence to determine if firms in new industries should expend finite resources on participation in certification contests or improvement of product quality.     

The Evaluation of Risk in Marine Capital Investments

Future costs and revenues in capital investment opportunities can seldom be predicted with certainty. As a result, there is usually some doubt as to the outcome of an investment. The chance that an investment may not prove profitable represents the investor's risk. This paper considers the problems which uncertainty and risk present in the evaluation of capital investments. Several traditional methods of dealing with uncertainty and risk are considered and shown to be deficient. A relatively new evaluation technique, which utilizes probability theory and computer simulation, is then described and its advantages highlighted. It is suggested that this technique will prove valuable in the evaluation of future marine capital investments.     

Will firms go green if it pays? The impact of disruption,cost, and external factors on the adoption of environmental initiatives

Research summary : Research on the link between financial and environmental performance implicitly assumes that firms will pursue profitable environmental actions. Yet, clearly, factors beyond profitability influence firms' environmental choices. We treat these choices as organizational change decisions and hypothesize that adoption of environmental initiatives is influenced by a combination of profit, level of disruption caused, and external influences. We test our hypotheses by examining firms' choices regarding implementation of energy‐savings initiatives. We find that degree of disruption, number of prior local adopters, and strength of environmental norms affect the adoption decisions. In addition, the effect of disruption is amplified by the implementation costs, but is mitigated by the number of prior local adopters. Managerial summary : Often, in trying to improve firms' environmental performance, academics and stakeholders have focused on actions that simultaneously improve environmental and financial performance. This assumes that firms will undertake projects that offer such dual benefits. We consider what might prevent firms from pursuing such ‘win‐win’ initiatives. We focus on how the degree of disruption of an energy‐saving initiative affects its probability of adoption. We find that firms are significantly more likely to adopt moderately profitable, but easy initiatives than more profitable but disruptive ones. We also examine internal and external factors that moderate the effect of disruption. Our findings suggest that in order to incentivize firms to improve environmental performance, it might be more beneficial make these activities less disruptive than to make them more profitable. Copyright © 2016 John Wiley & Sons, Ltd.     

Stock market reaction to CEO certification: the signaling role of CEO background

As a direct result of the corporate scandals that started with Enron and led to general unrest in the financial markets, the Securities and Exchange Commission required chief executive officers (CEOs) and chief financial officers of large publicly traded companies to certify their financial statements. Using market signaling theory, we propose that attributes of the CEO send important signals to the investment community as to the credibility of the CEO certification and thus the quality of the firm's financial statements, which in turn impact the stock market reaction to the CEO certification. We find that a CEO's shareholdings and external directorships are positively related to the abnormal returns of CEO certification. Further, the stock market penalizes a firm with a CEO who is associated with the firm's prior financial restatement and rewards a firm with a CEO who is appointed after the firm's prior financial restatement. Copyright © 2009 John Wiley & Sons, Ltd.     

The impact of environmental management systems on financial performance in fashion and textiles industries

With rising environmental concerns from consumers and stakeholder groups, environmental management has become an important responsibility for today's fashion and textiles manufacturers. The production of fashion and textiles related products often requires high levels of energy and water consumption, and emits large quantities of pollutants to the environment. Therefore, the adoption of environmental management systems (EMSs) is important and could have a significant impact on these firms' operational performance. This study presents empirical evidence on the performance impact of EMS adoption in the fashion and textiles related industries (FTIs). Although EMSs have emerged as a passport to business in the FTIs, their actual impacts on firms' financial performance have not been explored. We reveal that the adoption of ISO 14000, the most popular EMS, improves manufacturers' profitability in the FTIs over a three-year period as measured by return-on-assets (ROA). Based on our sample, we find that profitability improvement started during the implementation stage and continued at least one year after the firm obtained ISO 14000 certification. We also find that profitability improvement is mainly due to improvement in cost efficiency, measured by return-on-sales (ROS). Specifically, certified firms improved up to 2.9% in ROA and 3.3% in ROS over the three-year period since they implemented ISO 14000. We conclude that there is a positive impact of EMS adoption on firms' financial performance in the FTIs.     

Mental representation and the discovery of new strategies

Research summary : Managers' mental representations affect the perceived payoffs and alternatives that managers consider. Thus, mental representations affect how managers search for profitable strategies as well as the quality of strategies they discover. To study how mental representation and search interact, we formally model the dual search over possible representations and over policy choices of a strategy “landscape.” We analyze when it is preferable to emphasize searching for the best policies rather than the best mental representation, and vice versa. We show that, in the long run, a balance between the two search modes not only results in better expected performance, but also reduces the variation in performance. Additionally, the article describes conditions under which increased accuracy of mental representations can actually worsen firm performance. Managerial summary : Managers' mental representations affect the perceived payoffs and alternatives that managers consider. Thus, mental representations affect the quality of strategies managers can discover. We analyze a computer simulation of how managers use mental representations to search for strategies. This sheds light on how managers should deal with the trade‐off between searching for policies and searching for representations; that is, whether managers should think creatively about how to represent a strategy problem or whether they should just stick to the current problem understanding, and try to find ways to improve performance as suggested by the current representation. We provide insight regarding the balance between the two search modes and describe conditions under which increasingly accurate mental representations can worsen firm performance. Copyright © 2015 John Wiley & Sons, Ltd.     

Consumer surplus vs. welfare standard in a political economy model of merger control

This paper considers the political economy environment that an antitrust agency is operating in and asks under what circumstances a consumer surplus standard yields higher welfare than a welfare standard. In particular, we address how institutional settings—such as transparency and accountability—interact with the choice of an appropriate standard. We consider a framework in which the antitrust agency can be influenced by third parties (at a cost in terms of real resources) and in which the agency is imperfectly monitored. A welfare comparison between the two standards reveals that neither standard dominates. The consumer surplus standard is attractive relative to a welfare standard, when lobbying is efficient, when accountability is low, where mergers are large and when a marginal increase in merger size is highly profitable.     

Do Occupational Regulations Increase Earnings? Evidence from China

We examine the influence of occupational certification and licensing in China. In the empirical analysis, we find that licensing is associated with an average of 15 percent higher wages and certification with a 13–14 percent higher wage based on ordinary least squares estimates. However, using propensity score and instrumental variable estimates suggests that part of the positive effect of certification on wages is due to self‐selection. In addition, the characteristics of a certificate or license, such as the type and quantity, further influence wage determination in China.     

The business case of a network that serves both public safety and commercial subscribers

Deploying a single nationwide broadband wireless network to serve all public safety users would have great advantages over the existing fragmented public safety systems. A nationwide system could be created to serve both public safety and commercial subscribers, which would allow a provider to exploit important economies but force it to meet the more costly requirements of public safety. This paper analyzes the viability of a public-private partnership that serves public safety and commercial subscribers from a for-profit provider's perspective. A model is presented that estimates the net present value (NPV) of a wireless network by calculating costs based on the number of cell sites required and revenue based on the projected number of subscribers acquired. The model is applied to both a network that serves only commercial subscribers on 10 MHz of 700 MHz spectrum and a public-private partnership that serves commercial subscribers and public safety personnel on 20 MHz of 700 MHz spectrum. It is found that NPV is greater for the public-private partnership than for the commercial-only network for any population density, which shows that the value of 10 MHz of spectrum exceeds the cost of meeting public safety requirements. Furthermore, the paper demonstrates that NPV/cell increases with population density, so urban areas are profitable and rural areas are unprofitable. The paper demonstrates that a partnership covering 94% of the US population breaks even because the most urban 56% of population subsidizes coverage for the next 38%. If initial deployment is subsidized, a financially sustainable public-private partnership can serve much more than 94%. Additionally, it is shown that allowing urban municipalities to opt-out of the partnership can significantly increase the subsidies required.     

Who Supports Professional Certification? Insights from Employment Arbitration

Professional certification programmes became commonplace across the occupational structure in recent years, with many emerging and established professions opting to create their own certification programmes for reasons ranging from collective marketing to reducing malpractice litigation risk. Theories of social closure suggest that advantaged and established individual practitioners might want to use certification as a means of distinguishing themselves and enacting barriers to entry, though research on credentials and signalling theory leads to the expectation that certification is most valued by less secure and younger workers seeking to establish themselves in a profession. We use a survey of employment arbitrators as a case study in the dynamics of who supports certification, finding a surprisingly low overall level of support for certification. Arbitrators who are female, racial minorities and those who earn lower hourly rates are most supportive of creating and earning certification, suggesting that the most natural constituency for a new certification programme may be those looking to ‘break in’ to a profession rather than those already well established in their practice.     

Tying in Two‐Sided Markets with Multi‐Homing: Corrigendum and Comment

We identify two issues in Choi's [2010] paper on tying in two‐sided markets published in this Journal, and provide solutions to both of them. First, we point out that the equilibrium in the absence of tying requires more restrictive conditions and does not satisfy a natural equilibrium refinement criterion. We offer an alternative timing structure that validates the equilibrium derived in Choi [2010] under the conditions provided there. Second, we show that his equilibrium analysis with tying ignores a profitable deviation. We rectify this analysis under our alternative timing structure and derive the (mixed‐strategy) equilibrium with tying. We also show by means of simulations that tying is welfare‐enhancing whenever it is profitable, which is consistent with the main finding in Choi [2010].     

A note on vertical market foreclosure

The judicial fear of vertical market foreclosure has been criticized severely in the academic literature. The focus of this criticism isnot that foreclosure is impossible; rather, it is that foreclosure is not a profitable business strategy. In this note, we show that this criticism is not valid under conditions of partial ownership. If effective vertical control can be achieved with partial ownership, vertical market foreclosure can be used to increase the partial owner's profits. We use theduPont (GM) litigation as a vehicle to explore this point.     

Bundling can signal high quality

When consumers have noisy information, bundling experience goods can signal high quality in a simple static model. When consumers are partially informed, bundling has a bigger negative impact on the sales of a low-quality firm than on the sales of a firm with two high-quality products. Bundling can also signal high quality by restricting total sales even when consumers are uninformed. However, I argue this is not a likely explanation for bundling because raising prices is always a more profitable way to restrict total sales than bundling.     

Certifying catfish in Vietnam and Bangladesh: Who will make the grade and will it matter?

Certification is an increasingly pervasive form of market governance through which retailers and NGOs are able to exert control over producers of primary products in order to secure their commercial and institutional interests. This paper assesses the likely outcomes of emerging certification standards intended to govern production of a new global commodity, Pangasius catfish. This evaluation focuses on Pangasius producers in Vietnam and Bangladesh, and one of the key areas which standards seek to regulate; the environment. We conclude that certification is likely to result in greater differentiation and polarisation between larger and smaller farm operators and will increasingly act to exclude of the latter from access to Western European and North American markets, and that any local environmental gains produced may be of relatively minor significance.     

Cheap Exclusion in Markets with Multiple Complements

We extend the theory of exclusive dealing in first-mover environments to settings where the incumbent seller’s product is used with multiple complements in a distribution chain and the incumbent can sign exclusive dealing contracts with more than one of them. The model is motivated by the market for biosimilar pharmaceuticals, where incumbent sellers that face a threat of entry can sign exclusionary contracts with both providers and insurance carriers prior to entry. We show that when the incumbent’s complementors are vertically related, it can be profitable for the incumbent to sign exclusive contracts with indirect buyers, who operate downstream from the direct buyers of the product. Under linear pricing, such exclusion is profitable if the pass-through rate is sufficiently low, and under nonlinear pricing and symmetric Nash bargaining, it is profitable for all pass-through rates. Complementors face a more severe coordination problem than independent buyers that can make anticompetitive exclusion more likely and especially cheap.     

Beating the odds in the innovation arena: The role of market and technology signals classification and noise

Innovation is a risky business. Notwithstanding the attention in research on the determinants of innovation success, the estimates of the extremely high failure rates (ranging from 40% to 90%) have not come down. As a result, new approaches have to be found to address the issues that prevent organizations from reaching innovation success over a longer period of time. In this study, Signal Detection Theory (SDT) is introduced to show that it may be less important to improve innovation practices in companies, than it is to change the nature of the projects that enter the corporate innovation funnel. In our empirical study of 44 innovation projects in the pharmaceutical and electronics industry, we show that pursuing more noisy signals (uncertain technological and market opportunities) is currently beneficial for innovation success. In general, companies allocate too few resources to noisy innovation opportunities. Interestingly, we find a positive, and not an inverted U-shaped, relationship between noise/signal ratios and innovation success. This indicates that there are almost no companies that take too much risk in the current competitive environment and that many can gain from increasing their noise tolerance. The implications from this study are quite counter-intuitive in a sense that ‘risk’ is not the cause of the innovation problems, but may be a solution.     

On the competitive effects of vertical integration by a research laboratory

An independent research laboratory owns a patented process innovation ready to be used by an industry that produces differentiated goods. We analyze whether the laboratory prefers to license the innovation as an external patentee or to merge with one of the firms in the industry, licensing the innovation as an internal patentee. Under linear demand and Cournot competition, we show first, that the vertical merger is profitable only in the case of small innovations, whereas a merger increases welfare only for significant innovations; second, all profitable vertical mergers reduce welfare. However, some profitable mergers are welfare improving under price competition.     

LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS*

The profitability of horizontal mergers is investigated in a situation in which firms face a production shock and therefore are uncertain about their future costs. I show that, due to production rationalization, small‐scale mergers can be profitable if the uncertainty is large. The efficiency gain in production also implies benign welfare consequences. Under cost uncertainty, a profitable merger always improves social welfare if no more than half of the industry's firms are allowed to merge. Finally, I show that the incentives to merge depend on the information structure. Firms are less likely to merge when they possess more information.     

CEO Dismissal: The role of investment analysts

While poor firm performance has been shown to be a predictor of CEO dismissal, little is known about the role of external constituents on the board's decision to dismiss the firm's CEO. In this study, we propose that investment analysts, as legitimate third‐party evaluators of the firm and its leadership, provide certification as to the CEO's ability, or lack thereof, and thus help reduce the ambiguity associated with the board's evaluation of the CEO's efficacy. In addition, the board tends to respond to investment analysts because their stock recommendations influence investors, whom the board wants to appease. Using panel data on the S&P 500 companies for the 2000–2005 period, we find that negative analyst recommendations result in a higher probability of CEO dismissal. Copyright © 2011 John Wiley & Sons, Ltd.