What's a business for?

In the wake of the recent corporate scandals, it's time to reconsider the assumptions underlying American-style stock-market capitalism. That heady doctrine--in which the market is king, success is measured in terms of shareholder value, and profits are an end in themselves--enraptured America for a generation, spread to Britain during the 1980s, and recently began to gain acceptance in Continental Europe. But now, many wonder if the American model is corrupt. The American scandals are not just a matter of dubious personal ethics or of rogue companies fudging the odd billion. And the cure for the problems will not come solely from tougher regulations. We must also ask more fundamental questions: Whom and what is a business for? And are traditional ownership and governance structures suited to the knowledge economy? According to corporate law, a company's financiers are its owners, and employees are treated as property and recorded as costs. But while that may have been true in the early days of industry, it does not reflect today's reality. Now a company's assets are increasingly found in the employees who contribute their time and talents rather than in the stockholders who temporarily contribute their money. The language and measures of business must be reversed. In a knowledge economy, a good business is a community with a purpose, not a piece of property. If, like many European companies, a business considers itself a wealth-creating community consisting of members who have certain rights, those members will be more likely to treat one another as valued partners and take responsibility for telling the truth. Such a community can also help repair the image of business by insisting that its purpose is not just to make a profit but to make a profit in order to do something better.     

Accounting’s contribution to a conscious cultural evolution: an end to sustainable development

Influential institutions are acknowledging the need for more change to reverse practices that seriously damage social and ecological systems. The depth and extent of these changes are indicated by the call for a conscious cultural evolution. This paper considers a possible contribution from accounting to comply with such an evolution.A theoretical basis for accounting’s contribution to a conscious cultural evolution is outlined by means of a truth classification scheme developed in this paper as well as the works of Foucault, Giddens, evolutionary biologists and life-world theorists. This theoretical basis is then used to interpret the results of an EU funded research project that was to identify the criteria and specifications for a sustainable development management and accounting tool. The strengths and weaknesses of traditional, social and environmental accounting are evaluated against the needs of sustainable development as identified during the course of this project as well as a proposed balanced accounting. The theoretical basis identified in this paper is further employed to re-evaluate the concept of accounting equity in the context of equitable communities and face-to-face relationships. Finally, the potential resistance to changes of this kind that may exist within contemporary mainstream accounting is considered. The end of sustainable development is considered within the conclusion.     

What's it worth? A general manager's guide to valuation

Behind every major resource-allocation decision a company makes lies some calculation of what that move is worth. So it is not surprising that valuation is the financial analytical skill general managers want to learn more than any other. Managers whose formal training is more than a few years old, however, are likely to have learned approaches that are becoming obsolete. What do generalists need in an updated valuation tool kit? In the 1970s, discounted-cash-flow analysis (DCF) emerged as best practice for valuing corporate assets. And one version of DCF-using the weighted-average cost of capital (WACC)-became the standard. Over the years, WACC has been used by most companies as a one-size-fits-all valuation tool. Today the WACC standard is insufficient. Improvements in computers and new theoretical insights have given rise to tools that outperform WACC in the three basic types of valuation problems managers face. Timothy Luehrman presents an overview of the three tools, explaining how they work and when to use them. For valuing operations, the DCF methodology of adjusted present value allows managers to break a problem into pieces that make managerial sense. For valuing opportunities, option pricing captures the contingent nature of investments in areas such as R&D and marketing. And for valuing ownership claims, the tool of equity cash flows helps managers value their company's stake in a joint venture, a strategic alliance, or an investment that uses project financing.     

What's your story?

When you're in the midst of a major career change, telling stories about your professional self can inspire others' belief in your character and in your capacity to take a leap and land on your feet. It also can help you believe in yourself. A narrative thread will give meaning to your career history; it will assure you that, in moving on to something new, you are not discarding everything you've worked so hard to accomplish. Unfortunately, the authors explain in this article, most of us fail to use the power of storytelling in pursuit of our professional goals, or we do it badly. Tales of transition are especially challenging. Not knowing how to reconcile the built-in discontinuities in our work lives, we often relay just the facts. We present ourselves as safe--and dull and unremarkable. That's not a necessary compromise. A transition story has inherent dramatic appeal. The protagonist is you, of course, and what's at stake is your career. Perhaps you've come to an event or insight that represents a point of no return. It's this kind of break with the past that will force you to discover and reveal who you really are. Discontinuity and tension are part of the experience. If these elements are missing from your career story, the tale will fall flat. With all these twists and turns, how do you demonstrate stability and earn listeners' trust? By emphasizing continuity and causality--in other words, by showing that your past is related to the present and, from that trajectory, conveying that a solid future is in sight. If you can make your story of transition cohere, you will have gone far in convincing the listener--and reassuring yourself--that the change makes sense for you and is likely to bring success.     

What's in a Name? An Experimental Examination of Investment Behavior

A fundamental unresolved issue is whether information asymmetries underlie investors predisposition to invest close to home (i.e., domestically or locally). We conduct experiments in the United States and Canada to investigate agents portfolio allocation decisions, controlling for the availability of information. Providing participants with information about a firms home base, without disclosing its specific identity, is not sufficient to change investment behavior. Rather, participants need to know a firms name and home base. Additional evidence indicates that participants have a greater perceived familiarity with local and domestic securities and, in turn, invest more in such securities.The authors thank Ann Gillette, Josef Zechner (the editor), and two anonymous referees for helpful comments and acknowledge the financial support of the Federal Reserve Bank of Atlanta, Georgia Tech, and Social Sciences and Humanities Research Council of Canada. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.     

Contagion models a la carte: which one to choose?

We propose a copula contagion mixture model for correlated default times. The model includes the well-known factor, copula, and contagion models as its special cases. The key advantage of such a model is that we can study the interaction of different models and their pricing impact. Specifically, we model the default times of the underlying names in a reference portfolio to follow contagion intensity processes with exponential decay coupled with a copula dependence structure. We also model the default time of the counterparty and its dependence structure with the reference portfolio. Numerical tests show that correlation and contagion have an enormous joint impact on the rates of CDO tranches and the corresponding credit value adjustments are extremely high to compensate for the wrong-way risk.     

What's on the Menu? Policies to Reduce Young People's Sugar Consumption

Young people in the UK consume far above the maximum recommended levels of added sugar. It is likely that neither they nor their parents fully take account of the future health, social and economic costs of this high sugar consumption. This provides a rationale for policy intervention. The majority of young people's added sugar consumption occurs in the home, where purchases are typically made by parents. This means that understanding the purchase decisions of adults is important for policy design, even if the policies aim to reduce the consumption of young people. We discuss the merits of popular policies, including taxes, advertising restrictions and restrictions on the availability of specific foods, and we identify promising avenues for future research.     

What's New in Finance?

This paper prepares a list of the 300 most cited articles published in the area of Finance during the period 2000–2006. The articles are ranked based on the ratio of the number of citations and the number of years since publication, as of August 2007. Citation data come from Google Scholar and cover all articles in 29 Finance journals and Finance articles in 21 Economics, six Accounting, and two Operations research journals. The paper also reports the number of highly cited articles by number of authors, journal, research area, and institution.     

What's wrong with strategy?

Why is it that successful strategies are rarely developed as a result of formal planning processes? What is wrong with the way most companies go about developing strategy? Andrew Campbell and Marcus Alexander take a common sense look at why the planning frameworks managers use so often yield disappointing results. Companies often fail to distinguish between purpose (what an organization exists to do) and constraints (what an organization must do in order to survive), the authors say. Many executives mistakenly believe, for example, that satisfying stakeholders is an objective that drives thinking about strategy. In fact, it's a constraint, not an objective. Companies that don't win the loyalty of stakeholders will go out of business. Strategy is not about plans but about insights, the authors add. Strategy development is the process of discovering and understanding insights and should not be confused with planning, which is about turning insights into action. Furthermore, because executives develop most of their insights while actually doing the real work of running a business, it is important for companies not to separate strategy development from implementation. Is there a better way? The answer is not new planning processes or more effort. Instead, managers must understand two fundamental points: the benefit of having a well-articulated, stable purpose and the importance of discovering, understanding, documenting, and exploiting insights about how to create value.     

Beyond Risk Aversion: Why,How and What's Next?

Risk attitudes other than risk aversion (e.g. prudence and temperance) are becoming important both in theoretical and empirical work. While the literature has mainly focused its attention on the intensity of such risk attitudes (e.g. the concepts of absolute prudence and absolute temperance), I consider here an alternative approach related to the direction of these attitudes (i.e. the sign of the successive derivatives of the utility function).     

Computer-assisted teaching and learning in accounting: pedagogy or product?

The availability of cost-effective computer technologies is a dynamic that has the potential to dramatically change university accounting education. There are various motivations for university accounting departments to adopt computers and computer-assisted learning technologies, and a range of applications are available. The application of computer technologies has implications for student performance, efficiency and effectiveness within accounting departments, and course content—all of which should be considered. The possibilities for generating broad accounting education reform with computers are also significant.Computer technology should not be seen as a passive addition to the classroom. If driven by the desire to economise on the inputs to the educational process, or to expand the conventional content of accounting courses, such technology may have dysfunctional consequences.This paper examines the role of computer technologies in accounting education, the motivation for their introduction and use, and the impact they may have on the contemporary education of accounting students.     

How to build a factor portfolio: Does the allocation strategy matter?

Factor-based allocation embraces the idea of factors, as opposed to asset classes, as the ultimate building blocks of investment portfolios. We examine whether there is a superior way of combining factors in a portfolio and provide a comparison of factor-based allocation strategies within a multiple testing framework. Factor-based allocation is profitable beyond exploiting genuine risk premia, even when applying multiple testing corrections. Investment portfolios can be efficiently diversified using factor-based allocation strategies, as demonstrated by robust economic performance over various economic scenarios. The naïve equally weighted factor portfolio, albeit simple and cost-efficient, cannot be outperformed by more sophisticated allocation strategies.     

Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?

Prior research has documented that arbitrage activity significantly reduces or eliminates stock market anomalies. However, if anomalies arise due to unsophisticated investors’ behavioral biases, then these same biases can also apply to unsophisticated arbitrageurs and thereby disrupt the arbitrage process. Consistent with a disruption in the arbitrage process for the post‐earnings announcement drift anomaly, I document that the historically positive autocorrelation in firms’ earnings announcement news has become significantly negative for firms with active exchange‐traded options. For these easy‐to‐arbitrage firms, the firms in the highest decile of prior earnings announcement abnormal return (prior earnings surprise), on average, underperform the firms in the lowest decile by 1.59% (1.43%) at their next earnings announcement. Additional analyses are consistent with investors learning about the post‐earnings announcement drift anomaly and overcompensating. This study suggests that unsophisticated attempts to profit from a well‐known anomaly can significantly reverse a previously documented stock return pattern.     

Vulnerability to climate change: Are innovative countries in a better position?

The impact of climate change on organizations and economies remains one of the most significant yet underestimated threats. Although the consequences of climate change have started to gain attention among policy makers, international business research on this issue is lagging behind. Drawing from the knowledge and innovation literatures, we explore the impact of a country’s degree of innovation on its vulnerability to climate change. Using a longitudinal sample of 73 countries for the years of 1998–2013, we examine the impact of innovation, openness to trade, and regulatory quality on a country’s vulnerability to climate change. We find that R&D expenditures as a percentage of GDP (innovation input), openness to trade, and regulatory quality decrease a country’s vulnerability to climate change. We also find that openness to trade moderates the effect of patenting rates (innovation output) on a country’s vulnerability to climate change.     

Does inequality lead to a financial crisis?

The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.     

The Namesake: Futures; futures studies; futurology; futuristic; foresight—What's in a name?

The term we used to describe the study of alternative futures is important. Disciplines and discourses do not emerge from a vacuum but have a history and a cultural context; and their names can hide as much as they reveal. This paper examines such terms as ‘futurology’ and ‘foresight’, and argues that to emphasise plurality and diversity the study of the future is best served by the moniker ‘futures studies’. It suggests that remembering the history of futures discourse is necessary to resolve the crisis of identity and meaning, and frequent fruitless reinvention, of the field. Finally, it presents Sardar's four laws of futures studies: futures studies are wicked (they deal largely with complex, interconnected problems), MAD (emphasise Mutually Assured Diversity), sceptical (question dominant axioms and assumptions) and futureless (bear fruit largely in the present).