Conditional conservatism and cost of capital

We empirically test the association between conditional conservatism and cost of equity capital. Conditional conservatism imposes stronger verification requirements for the recognition of economic gains than economic losses, resulting in earnings that reflect losses faster than gains. This asymmetric reporting of gains and losses is predicted to lower firm cost of equity capital by increasing bad news reporting precision, thereby reducing information uncertainty (Guay and Verrecchia 2007) and the volatility of future stock prices (Suijs 2008). Using standard asset-pricing tests, we find a significant negative relation between conditional conservatism and excess average stock returns over the period 1975–2003. This evidence is corroborated by further tests on the association between conditional conservatism and measures of implied cost of capital derived from analysts’ forecasts.     

The rules of engagement: how to motivate consumers to engage with branded mobile apps

ABSTRACT

This research presents and validates a framework, which illustrates how to motivate consumers to engage with branded mobile applications, or apps. The framework shows that consumer involvement with branded apps underpins two sets of consumer perceptions of the benefits that the app offers, which reflect the different motives for engaging with the app, as consumers experience them. These perceptions include the utilitarian motives of security, usefulness and ease of use; and the hedonic motives of interpersonal utility, attachment (with the device) and entertainment. This range of motives leads to the willingness to pay for the app and the willingness to recommend it. This research contributes to marketing theory by clarifying specific details of the psychological process through which it is possible to motivate consumer engagement with branded apps - i.e. by means of binding involvement, perceptions of how apps’ benefits meet individual needs and two key outcomes. The findings also yield managerial relevance. Above all, the outcomes of this research suggest that, by involving and motivating consumers through the improvement of the benefits that a branded app offers, it is possible to increase the app’s revenues and to encourage word-of-mouth, creating value for app providers and consumers.     

Packard Electric/Delphi and the birth of the autopart cluster: the case of Chihuahua,Mexico

The purpose of this article is to describe, from a dual perspective, the birth and evolution of the technological cluster located in Chihuahua, Mexico. It reconstructs Packard Electric–Delphi’s evolutionary path as a dominant company, alongside the technological trajectory of the wiring harness. I build a taxonomy whose purpose is to distinguish different moments in the harness history. This approach to the harness demands systemic distinctions of a dynamic, quantitative and qualitative nature. The formation of the electrical/electronics cluster of automotive parts located in Chihuahua can be understood in the context of Packard Electric’s integration/disintegration dynamics. This regional and international reconstruction process reflects: (1) the accumulation of technological and organizational capabilities inside a firm; (2) technological competition within the sector; (3) the fact that each company follows particular technological learning ‘paths’ as well as a unique regional technological cluster formation (technological path); and (4) that the integration/disintegration dynamics of firms are difficult and unstable processes, dependent on the difference between internal and external transactional costs. L’article décrit lémergence et le développement du district technologique de Chihuahua (Mexique) à travers une approche évolutionniste qui s’attache à reconstituer une double trajectoire: celle d’une firme; Packard Electric–Delphi (PE), et celle d’une technologie, le câblage. Les différentes étapes de la technologie du câblage sont appréhendées en mettant l’accent sur la dynamique systémique de nature quantitative et qualitative. La formation du district technologique du câblage électrique/électronique de Chihuahua est mise en perspective avec la stratégie d’internationalisation et de localisation de la firme multinationale. Cette dynamique est le résultat d’un processus de développement des ressources technologiques et organisationnelles de la firme, du jeu de la concurrence technologique au sein de l’industrie du câblage et de l’articulation entre la trajectoire d’apprentissage technologique de la firme et celle associée à la formation du district technologique. La dynamique d’intégration et de d’externalisation de la firme apparaît ainsi de nature instable, dépendant des différences entre les coûts de transaction interne et externe.     

A tight sufficient condition for Radner-Stiglitz nonconcavity in the value of information

This paper deals with the existence of a nonconcavity in the value of information, as was first explained by Radner and Stiglitz [A nonconcavity in the value of information, in: M. Boyer, R.E. Kihlstrom (Eds.), Bayesian Models in Economic Theory, Elsevier Science Publishers, Amsterdam, 1984, pp. 33-52 (Chapter 3)]. After defining infinitesimal information distance variationIIDV, we find that IIDV=0 is sufficient for a zero marginal value of information at the null. This is a condition only on the information structure and in particular is independent of the decision maker's preferences. This condition is tight: when IIDV>0, there exists a payoff function for which the marginal value of information at the null is positive under general assumptions.     

Promoting Entrepreneurship at the Base of the Social Pyramid via Pricing Systems: A case Study

Historically, microfinance institutions (MFIs) have played a significant social role by helping people at the base of the socio‐economic pyramid escape from social exclusion through the creation of microenterprises. However, international banks have recently started competing in the microfinance sector. In this adverse environment, MFI management tools should be more innovative and technologically advanced to increase efficiency, solvency and profitability and to compete with commercial banks on equal terms. This study therefore strives to develop a credit‐risk management tool based on a multilayer perceptron (MLP) credit‐scoring model for a Peruvian MFI, and to calculate the capital requirements and microcredit pricing on both internal ratings‐based (IRB) and standardized approaches, analysing the impact of these models on the management of the MFI. Our findings show that the implementation of an IRB approach with default probabilities obtained from an MLP credit‐scoring model produces the best benefit by the MFIs in terms of higher accuracy (reduction of misclassification costs by 13.78%), lower capital requirements (in the range of 8.5–78%) and the best risk‐adjusted interest rates. Furthermore, with the establishment of interest rates adjusted to the real risk of each client, MFIs are fairer and more socially engaged by preventing economically viable low‐risk projects from becoming unviable due to excessive interest rates. This leads to the creation of more small businesses by people from the base of the socio‐economic pyramid and greater economic development and social cohesion. The IRB model should therefore be implemented to improve MFI solvency, profitability, efficiency, survival, management and social performance.     

Rudolf Kjellén and modern Swedish geopolitics

This article explores the possibility of developing a more progressive sense of place which recognises the mutual interdependence and interconnection of South America, the Falklands (Malvinas) and the South Atlantic rather than perpetuating exclusive identities and sovereignty. Since the 1982 South Atlantic conflict, there have been considerable improvements in Anglo‐Argentine relations resulting in a decade‐long period of South Atlantic co‐operation and the 14 July 1999 Joint Statement. The difficulties of generating a progressive sense of place in regions where conflict, distrust and bitterness endure remain powerful forces. These endeavours will require all parties to develop a more plural sense of culture, geographical identity and place. The recent public recognition of shared loss by former President Carlos Menem and HRH the Prince of Wales is interpreted as a promising development in the long‐term process of co‐operation and forgiveness. Finally, this investigation considers how political geographers can contribute to these acts of reconciliation and recognition.     

The Economic Determinants of Conditional Conservatism

Abstract:  We study the economic determinants of conditional conservatism. Consistent with prior literature, we find that contracting induces only conditional conservatism and litigation induces both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by showing that taxation and regulation induce not only unconditional conservatism, but conditional conservatism as well. We show that in certain scenarios taxation and regulation create incentives to shift income from periods with high taxation pressure and high public scrutiny to periods with lower taxation pressure and lower public scrutiny. These income shifting strategies are implemented by recognising current economic losses that, given managerial incentives to report aggressively, would not have been recognized otherwise, or by delaying the recognition of current economic gains that would have been recognized had circumstances been different.     

Accounting conservatism and corporate governance

We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of conditional accounting conservatism. Our tests take into account the endogenous nature of corporate governance, and the results are robust to the use of several measures of conservatism (market-based and nonmarket-based). Our evidence is consistent with the direction of causality flowing from governance to conservatism, and not vice versa, indicating that governance and conservatism are not substitutes. Finally, we study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong-governance firms appear to use discretionary accruals to inform investors about bad news in a timelier manner.

Correction to: Framing effects on risk-taking behavior: evidence from a field experiment in multiple choice tests

Experimental Economics -     

Recourse as shadow equity: Evidence from commercial real estate loans

We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders as a substitute for conventional equity. At origination, recourse loans have rate spreads that are about 20 basis points lower and loan-to-value ratios that are almost 3 percentage points higher than nonrecourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID-19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments.