Do you have a well-designed organization?

For most companies, organization design is neither a science nor an art; it's an oxymoron. Organizational structures evolve in fits and starts, shaped more by politics than by policies. Although most executives can sense when their organization designs are not working well, few take meaningful action, partly because they lack a practical framework to guide them. The authors of this article provide just such a framework; they present nine tests that can be used to either evaluate an existing organization design or create a new one. Four "fit" tests offer an initial screen: The market advantage test asks whether a design directs sufficient management attention to the company's sources of competitive advantage; the parenting advantage test determines whether the design gives enough attention to the corporate-level activities that provide real value to the company; the people test shows whether the design reflects the employees' strengths; and the feasibility test looks at constraints that may impede implementation. Five "good design" tests can help a company refine its prospective design. The specialist cultures test ensures that there's sufficient insulation for units that need to be different from the prevailing culture; the difficult-links test determines whether a design offers solutions for potentially problematic unit-to-unit links; the redundant-hierarchy test asks whether the design has too many parent levels; the accountability test looks at whether every unit has suitable controls; and the flexibility test ensures that the design lets the company adapt to change. Once a design is altered, the tests should be repeated. Organizational decisions are inevitably complex, and tweaking one part of the design may produce unanticipated consequences elsewhere.     

Is there a CSI-leverage nexus?

We examine how various measures of consumer sentiment index (CSI) affect firms' debt policy decisions. Using U.S. firm-level quarterly data from 1993 to 2017, we provide a strong positive relationship between CSI measures and corporate debt policy, implying that firms use external borrowing during a positive economic outlook and reap the tax-shield benefit. We also find that improved household optimism over financial and business sentiments leads to future household consumption. The CSI-leverage nexus is moderated by the state of firms' financial condition, reputation, and profitability. Importantly, our results are robust to sub-sample analysis, firm-level and macroeconomic controls, econometric specifications, alternative measures of sentiment including Shiller's cyclically adjusted price-earnings ratio (i.e., CAPE_SH), Baker and Wurgler (2006)’s stock market sentiment index (i.e., SENT_BW) and search-based uncertainty measure such as FEARS (i.e., Financial and Economic Attitudes Revealed by Search) index of Da, Engelberg, and Gao (2015).     

Is momentum a self-fulfilling prophecy?

The author shows in a simple framework that momentum trading can exist in equilibrium and that momentum trading is profitable. A property of the model is that the relation between risk, reward, and the intensity of momentum trading provides a natural limit to the amount of momentum trading that will exist in equilibrium. Properties of the model fit the empirics well. First, the model captures in a parsimonious manner both short-term overreaction and long-term reversals. Second, it predicts that momentum and long-term reversals should be observed in any market where there is noise. Thus, the model gives theoretical support to the empirical evidence that these anomalies are not artifacts of data snooping and to the extant empirical evidence that these anomalies are pervasive. Momentum traders observe noise shocks and trade on it as information. This trading incorporates a predictive role to the noise. That is, if agents believe a past price change to be informative of future price changes and act on this belief, it will be true and trading on this belief will be profitable. Thus, momentum trading is a self-fulfilling action.     

Is management still a science?

New technologies are transforming products, markets, and entire industries. Yet the more science and technology reshape the essence of business, the less useful the concept of management itself as a science seems to be. On reflection, this paradox is not so surprising. The traditional scientific approach to management promised to provide managers with the capacity to analyze, predict, and control the behavior of the complex organizations they led. But the world most managers currently inhabit often appears to be unpredictable, uncertain, and even uncontrollable. In the face of this more volatile business environment, the old-style mechanisms of "scientific management" seem positively counterproductive. And science itself appears less and less relevant to the practical concerns of managers. In this article, science journalist David Freedman argues that the problem lies less in the shortcomings of a scientific approach to management than in managers' understanding of science. What most managers think of as scientific management is based on a conception of science that few current scientists would defend. What's more, just as managers have become more preoccupied with the volatility of the business environment, scientists have also become preoccupied with the inherent volatility--the "chaos" and "complexity"--of nature. They are developing new rules for complex behavior in physical systems that have intriguing parallels to the kind of organizational behaviors companies are trying to encourage. In fact, science, long esteemed by business as a source of technological innovation, may ultimately prove of greatest value to managers as a source of something else: useful ways of looking at the world.     

The growing role of informal controls: does organization learning empower or subjugate workers?

Several management theorists have called for organizations to incorporate organization learning, empowerment, open-book management, and similar initiatives to generate better value from an important strategic resource: employees. What does this mean for the controlled? Do extensions of the management control system’s ability to implement the strategy of the firm offer workers a more central role in creating their future? Or is this “progress" just another means to extract extra effort from workers for the benefit of owners? This paper is developed in two parts. The first argues that seeking better value from workers is here to stay, and that the implications for management control system bear consideration. In particular, the five disciplines of Senge’s (1990) Organization Learning are introduced to illustrate growing ways informal controls enhance workers’ knowledge contributions. The second half of the paper examines implications of this increasing control. Some argue that it is naive to expect organization learning will lead managers to willingly realign existing lopsided rewards. However, as a natural response to change, these controls are themselves dynamic and evolutionary. This paper suggests that the growing dependence on employee’s superior knowledge recalibrates power arrangements. Further there is a growing awareness that many managers’ self-interest is mitigated by their sense of fairness. Consequently, an increasingly shared authority combined with the self-reflection and transparency of organization learning raises the possibility of an environment where those who perform the work share more equally in its rewards.     

Is the Renminbi a safe haven?

We investigate the relationship between market uncertainty and the relative value of the Renminbi in the offshore market against currencies that the safe haven literature typically considers as the traditional safe haven currency candidates. Our sample spans the February 2011 to May 2017 period. Band spectral regression models enable us to capture that the relationship between market uncertainty and the relative value of the Renminbi is frequency dependent. While we find evidence of some degree of safe haven currency behavior of the Renminbi during the early part of our sample, our findings do not support the suggestion that the Renminbi is currently a safe haven currency or that the Renminbi is progressing towards safe haven currency status.     

Is Germany a model for managers?

Most American managers have a hard time making sense of Germany. The country has a fraction of the resources and less than one-third the population of the United States. Labor costs are substantially higher, paid vacations are at least three times as long, and strong unions are deeply involved at all levels of business, from the local plant to the corporate boardroom. Yet German companies manage to produce internationally competitive products in key manufacturing sectors, making Germany the greatest competitive threat to the United States after Japan. The seemingly paradoxical nature of the German economy typically evokes one of two diametrically opposed responses. The first is to celebrate the German economy as a "model" worth emulating--indeed, as the answer to declining U.S. competitiveness. The alternative, more skeptical response is to question Germany's staying power in a new, more competitive global economy. According to Kirsten Wever and Christopher Allen, the problem with both points of view is that they miss the forest for the trees. Observers are so preoccupied with praising--or blaming--individual components of the German economy that they fail to see the dynamic logic that ties these components together into a coherent system. In their review of recent research on the German business system, Wever and Allen argue that managers can learn an important lesson from Germany. In the global economy, competition isn't just between companies but between entire socioeconomic systems. Germany's ability to design a cohesive economic and social system that adapts continuously to changing requirements goes a long way toward explaining that country's competitive success.     

Is the Term Premium a Risk Premium?

This paper explores whether excess holding period returns on long vis-a-vis short-term securities behave in a manner that is consistent with (1) market efficiency, (2) the time-varying-term-premium variant of the expectations hypothesis, and (3) theories of the term premium that view it as a reward for risk bearing. Both traditional and modern theories of the term premium imply that it should evolve fairly slowly over time as attitudes toward risk and/or perceived covariances with wealth or consumption change. This implies that this period's term premium should have some predictive ability for next period's. However, we find that this quarter's ex-post term premium has zero predictive ability. For monthly rates and returns, the evidence is less clear cut, but again the implied term premia do not behave in a manner consistent with existing theories.     

Is There a Replication Crisis in Finance?

Several papers argue that financial economics faces a replication crisis because the majority of studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions. The majority of asset pricing factors (i) can be replicated; (ii) can be clustered into 13 themes, the majority of which are significant parts of the tangency portfolio; (iii) work out-of-sample in a new large data set covering 93 countries; and (iv) have evidence that is strengthened (not weakened) by the large number of observed factors.     

Choice-based learning: lecture-based or team learning?

This study investigates choice-based learning as a choice between lecture-based or team learning in a large class at a large university in a European country. The study was designed as a between-subjects quasi-experiment where students were allocated their preferred learning approach. Data were collected for eight consecutive years (2008–2016). Based on quantitative and qualitative data, this study investigates the effect of choice-based learning on choice satisfaction, student selection and on student learning outcomes. The results show that team learning has a positive effect on learning outcomes. If students are faced with the choice, the majority select lecture-based learning. Additionally, both student groups are satisfied with their selected learning paths but selected them for specific reasons. Finally, choice-based learning provides job satisfaction for the instructors of both learning paths. These results can re-energize the ongoing discussion on why and how to engage students in learning activities.     

Is Managerial Myopia a Persistent Governance Problem?

Critics of U.S. corporations have long argued that companies are overly focused on short‐term results and, as a consequence, sacrifice their own long‐run value and competitiveness. These criticisms have expanded in recent years to include those from prominent politicians, investors, consultants, and academics. If such criticisms have merit, they would imply a massive governance failure in which there has been decades of underinvestment with little adjustment on the part of managers, boards, or the market for corporate control. This article evaluates the economic underpinnings of these criticisms and analyzes their implications in the context of empirical evidence produced by several decades of research on corporate investment policies, the outcomes of corporate control events, investor horizons, and the market pricing of companies with little if any earnings. In reviewing the findings of these studies, the author finds little evidence to support the view that U.S. companies sacrifice long‐run value and competitiveness by systematically underinvesting. First, although U.S. companies have indeed cut back on tangible investments such as property, plant, and equipment, these cutbacks have been more than offset by the dramatic growth in investment in intangibles, such as spending on developing knowledge capital, brand‐building, and IT infrastructure. Second, when subjected to events that have the effect of reducing managerial control over investment policies and transferring control to outside investors—such as leveraged buyouts and recapitalizations, forced CEO dismissals, and shareholder activist campaigns—companies tend to reduce, not increase, investment spending. In fact, it is difficult to find any corporate control threats that have had the goal or effect of increasing investment. Third, and at the same time, the rising concentration of large institutional investors, including indexers such as BlackRock and Vanguard, suggests that investors have become, if anything, more long‐term oriented over time. Fourth, there is no evidence that the market shuns companies that have yet to report large (or indeed any) earnings. These findings suggest that curbing overinvestment, and not discouraging myopia and underinvestment, may well still be the larger corporate governance challenge facing investors when monitoring and attempting to influence the performance of U.S. companies.     

Is Innovativeness a Link between Pay and Performance?

The relationship between innovativeness and pay-performance sensitivity is theoretically ambiguous because innovative activities simultaneously enhance the productivity of executives in creating shareholder value (productivity effect) and increase the volatility of the firm's performance (volatility effect). The empirical findings from the pooled sample suggest that innovativeness and executive pay-performance sensitivity are inversely related. The extent to which the volatility effect outweighed the productivity effect was especially pronounced during the 2000-2003 market crash period. While the productivity effect is stronger than the volatility effect in both the CEO and low-free-cash-flow subsamples, the volatility effect is stronger than the productivity effect in both the non-CEO and high-free-cash-flow subsamples.     

Is a pure TIPS strategy truly risk free?

A Treasury Inflation-Protected Security (TIPS) is virtually risk free. As an obligation of the U.S. Treasury, it is mostly free of default risk. As an inflation-indexed security held to maturity, it is risk free in terms of purchasing power. However, investing in a TIPS-only portfolio for retirement is not risk free. This paper presents the results of a simulation analysis designed to evaluate the performance of a portfolio of inflation-indexed Treasury coupon bonds. This study demonstrates that significant shortfall risk exists for TIPS-only portfolios across a range of savings plans and the securities selection rules.     

What Is the Expected Return on a Stock?

We derive a formula for the expected return on a stock in terms of the risk‐neutral variance of the market and the stock's excess risk‐neutral variance relative to that of the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.     

Is Polaris a HOG? A Case Study*

The main usefulness of a general purpose financial statement centers on its comparability to the financials produced by an entity's competition. This case works for both undergraduate and graduate students because it offers comparisons between two well known recreation industry companies. Financial statement analysis is a lesson which serves as an appropriate capstone to financial accounting education. Analyzing the financial statements of competing entities explains “why” accountants must implement the intricate “how” which produces the statements and the resulting decision models such as ratios and common‐sized statements. Compared to previous generations, current students will be more responsible for managing their own retirement funds. This case can help students start to appreciate investment analysis by providing enough detail for any level student to conduct financial statement evaluations that make comparisons to find successful fundamental business strategies.     

Is rising RTS a figment of poor data?

While using detailed firm-level data from the private business sector, this study identifies two empirical puzzles: (i) returns-to-scale (RTS) parameter estimates rise at higher levels of data aggregation and (ii) estimates from the firm level suggest decreasing returns to scale. The analysis shows that, although consistent with rising estimates, neither entry/exit nor the Basu-Fernald [Returns to scale in U.S. production: estimates and implications. Journal of Political Economy 105, 249-283) aggregation-bias effect drives this result. Rather, rising and too low RTS estimates seem to reflect a mixture of random errors in factor inputs at the firm level. It turns out, in fact, that a 7.5-10 percent error in labor (hours worked) can explain both puzzles.