Firm behaviour under uncertainty: a simple parametric model

In this paper, we model production technology in a state‐contingent framework. We assume that all the firms use the same stochastic technology, but they may have different risk attitudes and information sets, and ex post they may operate in different production environments. Firms maximise ex ante their preference function subject to a stochastic technology constraint; in other words, they are assumed to act rationally, thereby leaving no room for either technical or allocative inefficiency. We provide a simple parametric functional form to represent the state‐contingent technology. Using simple numerical examples, we illustrate how optimal input–output choices are dramatically affected when firms have different preferences and information sets. Thus, we show that the observed disparateness of production choices among different firms can actually be attributed to the stochastic nature of the decision environment.     

On sequential comparisons of means of first-order autoregressive models

The problem of estimating a linear combination,μ, of means ofp-independent, first-order autoregressive models is considered. Sequential procedures are derived (i) to estimateμ pointwise using the linear combination of sample means, subject to a loss function (squared error plus cost per observation), and (ii) to arrive at a fixed-width confidence interval forμ. It is observed that in the case of point estimation we do not require a sampling scheme, where as in the case of interval estimation we do require a sampling scheme and a scheme similar to the one given in Mukhopadhyay and Liberman (1989) is proposed. All the first order efficiency properties of the sequential procedures involved here are derived. This paper is an extension of results of Sriram (1987) involving one time series to multiple time series. Research supported by AFOSR Grant number 89-0225.     

Auditor realignment and 8−K disclosures—Usefulness for investor decision making

This study extends prior studies on auditor changes by testing (1) whether investors react to 8-K disclosures, and (2) the probability of investors anticipating a potential switch. The study includes 136 firms that both switched and did not switch auditors. It is hypothesized that investors would find it difficult to ascertain the true motives behind auditor changes. Event methodology and logit analysis are used. The results indicate a negative drift in abnormal returns prior to the switch, followed by significant positive abnormal returns on the day of the switch, and a positive drift after the switch.     

Foreign competition for shares and the pricing of information asymmetry: Evidence from equity market liberalization

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.     

A comparison of the relative costs of financial distress models: artificial neural networks,logit and multivariate discriminant analysis

This study uses two artificial neural networks (ANNs), categorical learning/instar ANNs and probabilistic (PNN) ANNs, suitable for classification and prediction type issues, and compares them to traditional multivariate discriminant analysis (MDA) and logit to examine financial distress one to three years prior to failure. The results indicate that traditional MDA and logit perform best with the lowest overall error rates. However, when the relative error costs are considered, the ANNs perform better than traditional logit or MDA. Also, as the time period moves farther away from the eventual failure date, ANNs perform more accurately and with lower relative error costs than logit or MDA. This supports the conclusion that for auditors and other evaluators interested in early warning techniques, categorical learning network and probabilistic ANNs would be useful. © 1997 John Wiley & Sons, Ltd.     

Empirical investigation of channel reactions to brand introductions

We investigate how incumbent manufacturers and retailers alter their pricing behavior in response to new product introduction. In performing our analysis, we need to be cognizant of the fact that the observed price changes can be due to entry-induced changes in a) demand conditions or b) costs or, on the other hand, to the competitive behavior of c) manufacturers and/or d) the retailer. In order to separate these four changes, we posit that manufacturer and retailer pricing is an outcome of maximizing a combination of shares and profits. This enhanced objective function allows us to measure competitive conduct benchmarked as less or more competitive than under the Bertrand-Nash framework. Our empirical analysis is based on the toothpaste category for the time period January 1993–February 1995. During this period, there were three brand introductions in two rounds of entry. Using the estimates from the demand and the supply model, we compute the changes in the retail and wholesale prices that are attributable to changes in demand conditions, manufacturer and retailer competitive conduct, and cost changes. These results support our conjecture that inferring the change in conduct solely based on a change in observed prices is likely to be erroneous. For the first new brand entry, we find that the brand introduction did not significantly increase competition between manufacturers. As a result, the balance of channel power between the manufacturers and the retailers remained unaltered. Both retailer and manufacturer profit margins increased after the first entry. However, subsequent to the second entry, retailer share of channel profits increased at the expense of the manufacturers; manufacturers even saw a decline in their absolute profit margins. We believe that this research will provide insight for manufacturers and retailers regarding how the various channel participants are likely to react to new product introduction. Furthermore, policymakers interested in understanding competitive reactions to new product introduction should find this research useful.     

Error management at different organizational levels - Frontline, manager, and company

The influence of service recovery efforts in the form of apology (error management) at three organizational levels - frontline, manager, and company - on consumer satisfaction and behavioral intentions was examined with a 2 × 2 × 2 experimental study. Results support the main effects of all three apology levels on consumer satisfaction with the service exchange (recovery) process. The results also indicate that frontline apology has greater influence on consumers’ satisfaction when a manager's apology is also present. Moreover, the study identifies perceived control and fairness as mediators of the relationships between apology levels and consumer satisfaction indicating potential theoretical and managerial implications.     

Dynamic relationships among R&D,advertising, inventory and firm performance

Firms’ spending on R&D, advertising, and inventory holding affect firm performance, which in turn affects future spending in each of these three areas. Effective allocation of resources across R&D, advertising, and inventory holding is challenging since an understanding of their dynamic inter-relationships is necessary. Past research has not examined these spending issues simultaneously. We estimate inter-relationships among the effects of firms’ R&D spending, advertising spending, and inventory holding on sales and firm value (as measured by its Tobin’s Q) using a vector auto regression model of a panel of publicly listed U.S. high technology manufacturing firms. Insights from the computation of long-term effects indicate that advertising spending and inventory holding increase sales, while R&D spending does not, and advertising and R&D spending increase firm value, while inventory holding does not. In addition, firm spending in all three functions is positively affected by sales but negatively by firm value. We discuss the implications of the study for marketing literature and managerial practice.