Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio

Minor innovations make up most of a company's development portfolio, on average, but they never generate the growth companies seek. The solution, says Day--the Geoffrey T. Boisi Professor of Marketing and a codirector of the Mack Center for Technological Innovation at Wharton--is for companies to undertake a systematic, disciplined review of their innovation portfolios and increase the number of major innovations at an acceptable level of risk. Two tools can help them do this. The first, called the risk matrix, graphically reveals the distribution of risk across a company's entire innovation portfolio. The matrix allows companies to estimate each project's probability of success or failure, based on how big a stretch it is for the firm to undertake. The less familiar the product or technology and the intended market, the higher the risk. The second tool, dubbed the R-W-W (real-win-worth it) screen, allows companies to evaluate the risks and potential of individual projects by answering six fundamental questions about each one: Is the market real? Explores customers' needs, their willingness to buy, and the size of the potential market. Is the product real? Looks at the feasibility of producing the innovation. Can the product be competitive? and Can our company be competitive? Investigate how well suited the company's resources and management are to compete in the marketplace with the product. Will the product be profitable at an acceptable risk? Explores the financial analysis needed to assess an innovation's commercial viability. Last, Does launching the product make strategic sense? examines the project's fit with company strategy and whether management supports it.     

Asset allocation decisions in retirement accounts: an all-or-nothing proposition?

An examination of survey responses about Individual Retirement Account (IRA) holdings reveals that individuals often take all-or-nothing approaches in their decisions to diversify across the asset categories of cash, bonds, and equity. Two thirds of survey respondents put their entire IRA holdings into a single asset category. A surprisingly large proportion of funds is held in cash, while only a minimal amount is invested in bonds. These findings also contrast with those of Bodie and Crane’s (1997) examination of TIAA-CREF participants, which is heavily weighted with individuals holding fixed income annuities. Our results suggest that there is a compelling need for risk education for investors.     

Is there an Olympic gold medal rush in the stock market?

Investor sentiment and attention are often linked to the same non-economic events making it difficult to understand why and how asset prices are affected. We disentangle these two potential drivers of investment behaviour by analysing a new data-set of medals for the major participating countries and sponsor firms over four Summer Olympic Games. Our results show that trading volume and volatility are substantially reduced following Olympic success although returns appear to be largely unaffected. Analysis of data from online search volumes and surveys measuring investor sentiment also suggests that the market impact of the Olympics is linked to changes in attention.     

Asset sales in the mutual fund industry: Who gains?

We analyze gains from intercorporate sales of mutual fund subsidiaries, using mandated SEC disclosures to assess the performance of mutual funds transferred by these transactions. Sellers are financial conglomerates (banks) using equity-based deals to transfer poorly performing funds to highly focused asset management companies. The transferred funds experience significant improvements in risk-adjusted returns, efficiency, and asset growth. These improvements are closely correlated with the gains in wealth to buyers and sellers at deal announcements, indicating the market efficiently capitalizes expected performance improvements. Our results provide evidence that these transactions transfer assets to acquirers better able to manage them, generating gains for fund holders and buyer and seller shareholders.     

Asset management in an inflationary environment—Are commodities a useful hedge?

The 2008 German investment act now allows insurers to buy commodities. Taking the perspective of a German investor and using techniques of cointegration analysis this paper aims to investigate whether commodity investments can be a useful hedge against inflation. A financial asset can only be considered to be a hedge against inflation if its price is cointegrated with the general price level. The results of the study seem to imply that commodity investments may be considered as a hedge against inflation for German insurers, but only to a limited extend.     

Is implementing the IPSASs an appropriate reform?

The purpose of this paper is to argue that the implementation of the accrual-based IPSASs in European-influenced developing and transition economy countries is not an appropriate reform unless preceded or accompanied by other, essentially managerial, reforms. The nature and extent of these prior reforms depend upon the political and cultural context and, not least, upon the power relationships within and between public institutions. The advocates of the application of the IPSASs appear not to recognize that for the reform to be effective it cannot be treated as simply a technical accounting reform, yet this is what is occurring. The issues identified in this paper are based upon the author’s practical experiences of working in many of these countries.     

Is there Information in an Earnings Announcement Delay?

Using a sample of announcements drawn from the 1980s and early 1990s, we reassess the relation between earnings news and earnings announcement timing. Using analyst forecast errors to proxy for news, we find that early announcements are associated with good news relative to late announcements. The relation between news and timing, however, does not appear to be strictly monotonic. Furthermore, we find that unexpected earnings explain 4% or less of the variation in timing. Finally, we assess whether abnormal returns behave in a manner that is consistent with a good news early, bad news late relation.     

Is an M&A self-dealing? Evidence on international and domestic acquisitions and CEO compensation

We examine the effect of international acquisitions on CEO compensation for US firms from 1995 to 2016 using both domestic acquisition and no acquisition firms as benchmarks. We find that acquisitions lead to a greater increase in CEO compensation (especially incentive-based compensation), which is consistent with agency theory and inconsistent with stewardship or reputation theory. We also find that international acquisitions lead to a greater increase in CEO incentive-based compensation than domestic acquisitions, supporting matching theory given that international acquisitions are larger and more complex to manage. Additionally, we document that CEO tenure has a positive effect on CEO compensation, whereas firm relatedness has a negative effect on post-acquisition CEO compensation. This is the first study of its type based on comprehensive data, and it contributes to our understanding of the role of international and domestic acquisitions in CEO compensation.     

Is the disposition effect in bonds as strong as in stocks? Evidence from an emerging market

Does the disposition effect appear in bond trades as in stocks? We apply Odean's measurement (1998) to a proprietary transaction database with unique investor IDs from an emerging market exchange that holds both stock and bond trading. We find some disposition effect in treasury bonds, but much lower than in stocks, and a positive relation between the two measures by investor. In addition, we find a significant disposition effect for local individuals and family offices, in both markets. In contrast, long-term institutions, brokerage firms, and foreign investors do not exhibit this bias. This is the first study to report evidence of the disposition effect in a fixed-income market.     

Municipal Debt and Marginal Tax Rates: Is There a Tax Premium in Asset Prices?

We study the marginal tax rate incorporated into short‐term municipal rates using municipal swap market data. Using an affine model, we identify the marginal tax rate and the credit/liquidity spread in 1‐week tax‐exempt rates, as well as their associated risk premia. The marginal tax rate averages 38.0% and is related to stock, bond, and commodity returns. The tax risk premium is negative, consistent with the strong countercyclical nature of after‐tax fixed‐income cash flows. These results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni‐bond puzzle.     

Is the January effect still alive in the futures markets?

The January effect concerns the fact that small capitalization stocks have historically outperformed large capitalized stocks in January. We analyze evidence as to whether this anomaly can be exploited in the futures markets as a speculative investment or to add risk-adjusted value to portfolio performance. We find that the January effect is still alive in the futures markets on the Value Line minus S&P 500 spread trade, but that the marginal liquidity of the Value Line stock index futures contract has made it very risky to exploit the effect. Historically from 1982/3 to 2004/5, the trade has been profitable. This anomaly was also exploitable through a Russell 2000 minus S&P 500 spread trade from 1993/4 to 2004/5.

Is trading in the shortest-term index options profitable?

Review of Derivatives Research - The aim of this study is to examine the return rates of the TAIEX options with at most 8 calendar days to maturity using a buy-and-hold strategy. Although our...     

Is VIX an investor fear gauge in BRIC equity markets?

This study examines the intertemporal relationships between CBOE market volatility index (VIX) and stock market returns in Brazil, Russia, India, and China (BRIC), and between VIX and U.S. stock market returns, to uncover if VIX serves as an investor fear gauge in BRIC and U.S. markets. We conduct the VIX-returns analysis for the 1993–2007 period.Our results suggest a strong negative contemporaneous relation between daily changes (innovations) in VIX and U.S. stock market returns. This relation is stronger when VIX is higher and more volatile. A significant negative contemporaneous relation between VIX and equity returns also exists for China and Brazil during 1993–2007 and for India during 1993–1997. Similar to the U.S. market, the immediate negative relation between the Brazilian stock returns and VIX changes is much stronger when VIX is both high and more volatile. Our results also indicate a strong asymmetric relation between innovations in VIX and daily stock market returns in U.S., Brazil, and China, suggesting that VIX is more of a gauge of investor fear than investor positive sentiment. However, the asymmetric relationship between stock market returns and VIX is much weaker when VIX is large and more volatile. These results have potential implications for portfolio diversification and for stock market and option trading timing in the equity markets of Brazil, India, and China. Overall, our results indicate that VIX is not only an investor fear gauge for the U.S. stock market but also for the equity markets of China, Brazil, and India.     

Is neuroaccounting waiting in the wings? An essay

This paper discusses a recently published handbook on neuroeconomics ( and ) and extends the discussion to reasons why this newly emerging discipline should be of interest to behavioral accounting researchers. We evaluate the achieved and potential contribution of neuroeconomics to the study of human economic behavior, and examine what behavioral accounting researchers can learn from neuroeconomics and whether we should expect to see a similar sub-field emerge within behavioral accounting in the near future. We conclude that a separate sub-field within behavioral accounting is not likely in the near future due mostly to practical reasons. However, the behavioral accounting researcher would do well to follow research in this discipline closely, and behavioral accountants in the near future are likely to collaborate with neuroscientists and neuroeconomists on questions of mutual interest.     

Is consumption risk priced in the stock market?

The paper examines whether the risk in the consumption of stockholders caused by incomplete consumption insurance is priced in the cross-section of average stock returns. Using Taylor series expansion of the average marginal utility of consumption, we show that the risk in the consumption of stock market participants can be decomposed into two components, insurable (hedgeable using financial assets) and uninsurable (caused by incomplete consumption insurance) consumption risks. We argue that the growth rate of average consumption may be viewed as a proxy for the insurable component of consumption risk, while the growth rates of the rescaled higher-order cross-sectional consumption distribution moments may be regarded as a multivariate proxy for uninsurable risk in consumption. Exploiting microlevel household quarterly consumption data from the US Consumer Expenditure Survey, we find that both components of consumption risk are significantly priced when the limited stock market participation is taken into account. Neither the insurable and uninsurable components of consumption risk nor the Fama–French risk factors are rejected as capturing important components of systematic risk when tested against each other in an integrated multifactor asset pricing model.     

Single-equation,multiple-regression methodology: Is it an appropriate methodology for the estimation of the structure-performance relationship in banking?

Tests of the structure-performance paradigm of the industrial organization literature have been carried out almost exclusively using a single-equation, multiple-regression methodology. The purpose of this paper is to suggest that where the firms being considered are multiple product in nature and may pursue objectives in addition to maximizing the value of the firm, such a methodology may be inappropriate. The results presented in this paper suggest that the absence of a consistently strong, positive, and statistically significant relationship between market concentration and bank profitability may be traced in part to such an inappropriate methodology.     

Where Is the Market? Evidence from Cross-Listings in the United States

We analyze the location of stock trading for firms with a UScross-listing. The fraction of trading that occurs in the UnitedStates tends to be larger for companies from countries thatare geographically close to the United States and feature lowfinancial development and poor insider trading protection. Forcompanies based in developed countries, trading volume in theUnited States is larger if the company is small, volatile, andtechnology-oriented, while this does not apply to emerging countryfirms. The domestic turnover rate increases in the cross-listingyear and remains higher for firms based in developed markets,but not for emerging market firms. Domestic trading volume actuallydeclines for companies from countries with poor enforcementof insider trading regulation.     

Is there an employee-based gender gap in informal financial markets? International evidence

We study the impact of female production workers on firms' access to trade credits across the world. Using two sources of plausibly exogenous variations in gender bias and a difference-in-differences framework, we document that firms with more female production workers have less access to trade credits in countries with stronger gender beliefs that favor males. This relationship is largely driven by firms in industries with unexpected credit shortages and industries dominated by males. Since female firms rely more on informal finance, this study is relevant for policies that direct female firms towards formal credit markets in highly gender-biased places.     

How Important Is Money in the Conduct of Monetary Policy?

I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long‐run relationship between money growth and inflation. And fourth, I consider reasons why a monetary policy strategy based solely on short‐run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provides a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy.     

Is it punishment? Sovereign defaults and the decline in trade

Sovereign defaults are associated with declines in defaulting countries trade. Are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest? We devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines, bilateral trade with creditor countries should fall more than trade with other countries. We find that this is not the case. The analysis does not yield much evidence of broader punishment strategies including a league of major creditors either. These results contradict the predictions of the trade sanctions theory of sovereign borrowing.