External Venturing and Discontinuous Strategic Renewal: An Options Perspective

This study examines the relationship between a firm's venturing activities and its undertaking of strategic renewal. The study was motivated by some important gaps in the corporate entrepreneurship literature on venturing and renewal. The extant literature has not focused on the different types and dimensions of firms' renewal activities. In particular, discontinuous renewal involving shifts in firms' core businesses is not well understood. Moreover, the conditions that drive firms to undertake strategic renewal have not been examined. For example, it is not known how venturing increases or reduces the benefits of undertaking renewal. This study focuses on a discontinuous form of renewal involving major changes in firms' core businesses and examines firms' external venturing activities that complement their internal development. We examine corporate venture capital (CVC) investments, which are direct minority equity investments made by established companies in privately held ventures. Discontinuous renewal is conceptualized as resulting from a set of related, and often sequential, managerial decisions. The first managerial decision is to initiate growth in a business that is relatively newer or smaller for the organization. The second decision is to move away, or even withdraw completely, from the current core business that enabled prior growth and prosperity for the firm and served as its primary revenue earner. Employing a real options perspective, we argue that CVC investments create growth options in new and existing businesses but do not result in firms' withdrawal from existing businesses. Therefore, we expect CVC activity to be negatively associated with the likelihood of a firm undertaking discontinuous renewal. We also propose that the benefits of withdrawing from existing businesses are even lower, and the costs even higher, for firms in dynamic industries and for firms that possess strong internal capabilities. The predictions of the study are tested using longitudinal data on 477 firms from the 1990 Fortune 500 list for the period 1990–2000. We find support for all our predicted hypotheses. These results help address important limitations in the corporate entrepreneurship literature. The study also contributes to the real options and organizational capabilities literatures.     

A Formal Study of Distributed Meeting Scheduling

Automating routine organizational tasks, such as meeting scheduling, requires a careful balance between the individual (respecting his or her privacy and personal preferences) and the organization (making efficient use of time and other resources). We argue that meeting scheduling is an inherently distributed process, and that negotiating over meetings can be viewed as a distributed search process. Keeping the process tractable requires introducing heuristics to guide distributed schedulers' decisions about what information to exchange and whether or not to propose the same tentative time for several meetings. While we have intuitions about how such heuristics could affect scheduling performance and efficiency, verifying these intuitions requires a more formal model of the meeting schedule problem and process. We present our preliminary work toward this goal, as well as experimental results that validate some of the predictions of our formal model. We also investigate scheduling in overconstrained situations, namely, scheduling of high priority meetings at short notice, which requires cancellation and rescheduling of previously scheduled meetings. Our model provides a springboard into deeper investigations of important issues in distributed artificial intelligence as well, and we outline our ongoing work in this direction.     

An experimental study of strategic information transmission

Summary We examine strategic information transmission in an experiment. Senders are privately informed about a state. They send messages to Receivers, who choose actions resulting in payoffs to Senders and Receivers. The payoffs depend on the action and the state. We vary the degree to which the Receivers' and the Senders' preferences diverge. We examine the relationship between the Senders' messages and the true state as well as that between actions and the true state and contrast the ability of different equilibrium message sets to explain the data.When preferences are closely aligned Senders disclose more. We assess two comparative statics: (i) as preferences diverge, state and action are less frequently matched, and (ii) messages tend to become less informative as preferences diverge. The first result is weakly confirmed for adjacent treatments but is considerably stronger when non-adjacent treatments are compared. We find that as preferences diverge messages become less informative. While the ex-ante Pareto-optimal Bayesian Nash Equilibrium does not explain our conditions, the equilibrium message sets supported by the data are similar to the ex-ante Pareto Optimal message sets.We would like to thank seminar participants at the Economic Science Association meetings, the University of Iowa, the University of Minnesota, Northwestern University and the Society for the Advancement of Economic Theory meetings for their comments. We would like to thank Beth Allen, Joyce Berg, Robert Forsythe, Yong-Gwan Kim, Antonio Merlo, Leonard Mirman, In-Uck Park, Charles Plott, Jennifer Reinganum and an anonymous referee for their suggestions. Financial support from the Accounting Research Center at the University of Minnesota is also acknowledge.     

The Asymptotic Optimality of Residual Income Maximization

Residual income subtracts from operating income an interest charge for invested capital. Residual income can be calculated each period from current accounting information, unlike discounted cash flow (DCF), which requires the knowledge of future cash flows. This paper provides a normative justification for residual-income maximization by showing that if investment decisions are made myopically each period to maximize residual income, the resulting path asymptotically maximizes discounted cash flow. Thus, under the assumptions of the model, residual-income maximization is a heuristic that leads to the long-run DCF-optimum.     

Relations Between Stock Returns and Fundamental Variables: Evidence from a Segmented Market

This study examines relations between stock returns and potential explanatory factors in Korea, an important and segmented emerging market. Our results show that Korean stock returns in general and returns on stocks listed in Section 1 in particular are significantly positively related to book-to-market, sales-price, and debt-equity ratios, but not significantly related to market value of equity. Returns on stocks listed in Section 2 are, however, negatively related to market value of equity and not significantly related to the other three variables. Among the variables investigated by us, book-to-market ratio has the greatest explanatory power for stock returns and it indicates superior returns for value stocks. Our findings strengthen the international evidence of the role of book-to-market ratio in explaining stock returns by demonstrating its significance even in the segmented Korean market.     

A simple example of complex dynamics

Summary. A discrete tatonnement process is analysed within the context of a two-person, two-good exchange economy where each person has a Cobb-Douglas utility function. This process is shown to exhibit period doubling bifurcation, topological and ergodic chaos. Received: June 22, 1998; revised version: July 15, 1998     

How do auditors respond to low annual report readability?

We show that increased audit effort is associated with lower annual report readability to compensate for a perceived increase in the risk of financial misstatement for United States (US) firms. In particular, we find that lower annual report readability is associated with longer audit delays and higher audit fees for Form 10-K for US auditors, suggesting that auditors spend more effort auditing clients when annual reports have lower readability. We also find that low readability increases the likelihood of auditors using more explanatory language in unqualified audit reports.