An Asymptotic Theory for Estimating Beta-Pricing Models Using Cross-Sectional Regression

Without the assumption of conditional homoskedasticity, a general asymptotic distribution theory for the two-stage cross-sectional regression method shows that the standard errors produced by the Fama–MacBeth procedure do not necessarily overstate the precision of the risk premium estimates. When factors are misspecified, estimators for risk premiums can be biased, and the t -value of a premium may converge to infinity in probability even when the true premium is zero. However, when a beta-pricing model is misspecified, the t -values for firm characteristics generally converge to infinity in probability, which supports the use of firm characteristics in cross-sectional regressions for detecting model misspecification.     

The Many Faces of Competition

Marketing Letters - Despite a great deal of theoretical research on competition, there has been limited empirical work assessing the type of competitive interaction that actually exists in the...     

THE MAGNITUDE OF PRICING ERRORS IN THE ARBITRAGE PRICING THEORY

In this paper the arbitrage pricing theory (APT) pricing errors for individual securities are estimated employing maximum likelihood factor analysis and Fama-MacBeth style aggregation. Results show that the pricing errors are large and statistically significant and that there is a high degree of variability in pricing errors across securities. This evidence contradicts the prevailing APT intuition that the pricing errors can be ignored as negligible. Pricing errors are also found to be related to residual variance and firm size.     

Hedging customers

You are a marketing director with $5 million to invest in customer acquisition and retention. Which customers do you acquire, and which do you retain? Up to a point, the choice is obvious: Keep the consistent big spenders and lose the erratic small ones. But what about the erratic big spenders and the consistent small ones? It's often unclear whether you should acquire or retain them and at what cost. Businesses have begun dealing with unpredictable customer behavior by following the practices of sophisticated investors who own portfolios comprising dozens of stocks with different, indeed divergent, histories and prospects. Each portfolio is diversified so as to produce the investor's desired returns at the particular level of uncertainty he or she can tolerate. Customers, too, are assets--risky assets. As with stocks, the cost of acquiring them is supposed to reflect the cash-flow values they are likely to generate. The authors explain how to construct a portfolio based on the notion that a customer's risk-adjusted lifetime value depends on its anticipated effect on the riskiness of the group it is joining. They also show how this approach was used to identify the best prospects for Myron Corporation, a global leader in the personalized business-gift industry. The concept of risk-adjusted lifetime value has a transforming power: For companies that rely on it, product managers will be replaced by customer managers, and the current method of accounting for profit and loss--which is by product--will be replaced by one that determines each customer's P&L. Once adjusted for risk, those P&Ls will become the firm's key performance and operational metric.     

Pricing securities with multiple risks: A case of exchangeable debt

Building on the work of Das and Sundaram (2007), we develop a widely applicable model to price securities subject to interest rate, equity, and default risks and use it to price exchangeable bonds. The extension features a trivariate recombining lattice instead of the original model’s bivariate recombining lattice. We also show how to estimate some critical non-observable inputs to implement the model by using current market data so that the model’s prices reflect current market information. We test the model on a sample of exchangeable bonds to determine the model’s empirical performance. Besides exchangeable bonds, we can also use the model to price securities such as reverse exchangeable bonds, bonds exchangeable to indexes, and bonds exchangeable to commodities.     

To Thine Shareholders Be True? Linking Large Corporate Ownership to Firms’ Use of Commitment Human Resource Practices

Human resource practitioners and academics have increasingly realized the importance of corporate governance for firm human resource activities. This study investigates how one important form of corporate governance, namely, ownership within large, publicly traded firms, is associated with a firm's use of commitment human resource practices (CHRPs), specifically, the use of incentive compensation, profit sharing, and participative decision making. Our findings indicate that the types of large investor, namely, family and institutional, are differentially associated with the likelihood of the firm using these CHRPs. Specifically, family owners with their long‐term investment horizon, as well as their stakeholder orientation, increase the likelihood of the firm using these practices. In contrast, large institutional owners with their shorter‐term investment horizon, as well as their investor orientation, decrease the likelihood of the firm using these practices. Furthermore, among institutional investors, transient institutional investors are negatively associated with these practices, while dedicated institutional investors are not associated with these practices. Taken together, our results regarding the positive association of family ownership and this subset of CHRPs and the negative association of transient institutional investors and this set of practices, have important implications for human resource professionals who not only need to understand how ownership affects HR practices but also how to articulate the value of these investments in order to attract investors. © 2015 Wiley Periodicals, Inc.     

Cost-effectiveness of delayed-release dimethyl fumarate for the treatment of relapsing forms of multiple sclerosis in the United States

Objective:

To assess the cost-effectiveness of delayed-release dimethyl fumarate (DMF, also known as gastro-resistant DMF), an effective therapy for relapsing forms of multiple sclerosis (MS), compared with glatiramer acetate and fingolimod, commonly used treatments in the US.

Methods:

A Markov model was developed comparing delayed-release DMF to glatiramer acetate and fingolimod using a US payer perspective and 20-year time horizon. A cohort of patients, mean age 38 years, with relapsing-remitting MS and Kurtzke Expanded Disability Status Scale (EDSS) scores between 0–6 entered the model. Efficacy and safety were estimated by mixed-treatment comparison of data from the DEFINE and CONFIRM trials and clinical trials of other disease-modifying therapies. Data from published studies were used to derive resource use, cost, and utility inputs. Key outcomes included costs, quality-adjusted life-years (QALYs), and incremental cost-effectiveness ratios. Alternative scenarios tested in a sensitivity analysis included drug efficacy, EDSS-related or relapse-related costs, alternative perspectives, drug acquisition costs, and utility.

Results:

Base-case results with a 20-year time horizon indicated that delayed-release DMF increased QALYs +0.450 or +0.359 compared with glatiramer acetate or fingolimod, respectively. Reductions in 20-year costs with delayed-release DMF were ?$70,644 compared with once-daily glatiramer acetate and ?$32,958 compared with fingolimod. In an analysis comparing delayed-release DMF to three-times-weekly glatiramer acetate and assuming similar efficacy and safety to the once-daily formulation, 20-year costs with delayed-release DMF were increased by $15,806 and cost per QALY gained was $35,142. The differences in costs were most sensitive to acquisition cost and inclusion of informal care costs and productivity losses. The differences in QALYs were most sensitive to the impact of delayed-release DMF on disease progression and the EDSS utility weights.

Conclusion:

Delayed-release DMF is likely to increase QALYs for patients with relapsing forms of MS and be cost-effective compared with fingolimod and glatiramer acetate.     

The Anatomy of a Socially Responsible Corporation

Prior research treats corporate social responsibility (CSR) as a unitary construct. Using principal component analysis, we show that CSR activities can be divided into two types: responsive CSR (RCSR), which includes initiatives that address specific concerns caused by firm activity, and adaptive CSR (ACSR), which are initiatives that anticipate concerns before they arise. We find that responsive motives are roughly three times more dominant than adaptive motives. Larger firms, older firms, and more diversified firms invest more in RCSR while younger firms and more focused firms tend to invest more in ACSR.     

Owners on both sides of the deal: mergers and acquisitions and overlapping institutional ownership

Using a corporate governance lens, this study considers owners with a stake in both the acquiring and the target firms in the context of mergers and acquisitions. A possible agency problem arises with regard to monitoring implications as managers may be able to take advantage of compromised monitoring because overlapping owners may focus on the aggregate value for both the acquiring and the target firms and nonoverlapping owners may be interested only in the acquirer's side of the deal. The results suggest that when more owners overlap in their ownership of both the acquiring and target firms, the acquiring firms are more likely to experience decreased shareholder value through merger and acquisition deals. This effect, however, can be constrained by stronger board control. Copyright © 2010 John Wiley & Sons, Ltd.     

How do we measure the intangible? Overcoming the measurement challenge in services

Measuring service tangibility and intangibility aspects has been an interest to service researchers. While the Likert rating scale has been widely employed for measuring mental intangibility or its dimensions, it is not free from issues such as different anchoring, that is, the same words pointing to different attitudes and understanding for different individuals. The present study proposes the usefulness of a discrete choice experiment (DCE), where respondents are asked the same questions (i.e., items) and are presented with a scale while dichotomizing the possible responses for each scale item. We show that our proposed method is accurate and generalizable across contexts and samples through multiple studies. The DCE method gives managers a better way to measure intangibility or similar service constructs like service quality, which can help them manage their service offerings and make customers happier.