Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices

Firms developing new products often face the challenge of making investment decisions under uncertain input–cost conditions due to the price volatilities of the materials they use. These decisions need to be made long before the final products are launched on the market. Therefore, firms that invest in the opportunity to switch materials in a timely manner will have the flexibility to react to material price changes and realize competitive advantages. However, volatile material prices may also cause a firm to delay investment. Using real‐options reasoning, this paper studies the influence of input‐cost fluctuations on the timing decision to start new product development (NPD) and thus create the follow‐on opportunity to later replace an existing product. A model that combines waiting and switching options to derive influencing factors of the flexibility value that triggers the investment is developed and tested on a sample of material substitution projects from manufacturing firms. The results show how price uncertainty of the new and the old material, their joint price development, the expected project duration, and competitive preemption are related to the propensity to delay the start of NPD. The findings provide new insights on how timing in adopting materials can be used to hedge exposure to volatile material prices. The insights are relevant for adopters and producers of new materials, as well as for policy makers who strive for supporting the diffusion of new materials.     

Mobilizing crisis management networks — Entrepreneurial behavior in turbulent contexts

Severe socio-economic issues that threaten peace, life or wellbeing of humans in specific regions of the world cannot be solved by any single actor. Wide networks of political, business, governmental, non-profit and humanitarian organizations are to be involved to change existing practices. Despite conflicting interests and competing behavior, involved organizations need to act collectively to initiate the change of commonly accepted practices, i.e. institutions. This is the space in the present study for examining network mobilization as a collective means to change institutions. Our aim is to answer the question: How are networks mobilized in crisis management to initiate institutional change processes in socio-economically turbulent contexts? We provide a framework of network mobilization for institutional change built on the IMP rooted network mobilization research and institutional entrepreneurship discussion. The framework is reflected upon by means of insights from an interview-based case study with representatives of governmental and non-governmental organizations involved in worldwide humanitarian peace-building. We identify, firstly, incentivizing, reticent and adaptational behaviors of network mobilizers to utilize legitimacy and relationship sediments as mobilization enablers. Secondly, these behaviors help network mobilizers to overcome actor visibility and unpredictability as mobilization obstacles in turbulent contexts.     

Target ratcheting and effort reduction

In this paper, we examine how retail store managers reduce their sales activity in response to target ratcheting. We find that managers with favorable sales performance in the first three quarters reduce their sales activity in the final quarter. We also document that managers who engage in sales reducing activities enhance their likelihood of meeting their next-year sales target, which is based on their current sales. That is, managers who reduce their sales activity in the final quarter are more likely to beat their next-year sales targets than managers who refrain from reducing their final-quarter sales.     

Social strategies that work

Although most companies have collected lots of friends and followers on social platforms such as Facebook, few have succeeded in generating profits there. That's because they merely port their digital strategies into social environments by broadcasting their commercial messages or seeking customer feedback. To succeed on social platforms, says Harvard Business School's Piskorski, businesses need to devise social strategies that are consistent with users' expectations and behavior in these venues--namely, people want to connect with other people, not with companies. The author defines successful social strategies as those that reduce costs or increase customers' willingness to pay by helping people establish or strengthen relationships through doing free work on a company's behalf. Citing successes at Zynga, eBay, American Express, and Yelp, Piskorski shows that social strategies can generate profits by helping people connect in exchange for tasks that benefit the company such as customer acquisition, marketing, and content creation. He lays out a systematic way to build a social strategy and shows how a major credit card company he advised used the method to roll out its own strategy.     

Foreign competition and the durability of US firm investments

How does the exposure to product market competition affect the investment horizon of firms? We study if firms have an incentive to shift investments toward more short‐term assets when exposed to tougher competition. Based on a stylized firm investment model, we derive a within‐firm estimator using variation across investments with different durabilities. Exploiting the Chinese World Trade Organization (WTO) accession, we estimate the effects of product market competition on the composition of US firm investments. Firms that experienced tougher competition shifted their expenditures toward investments with a shorter durability. This effect is larger for firms with lower total factor productivity.     

The link between the share of banks’ Level 3 assets and their default risk and default costs

Review of Quantitative Finance and Accounting - We empirically explore the risk relevance of Level 3 fair value estimates. Thereby we focus on banks’ default risk as well as banks’...     

Disentangling types of liquidity and testing limits-to-arbitrage theories in the CDS–bond basis

We disentangle asset-specific, market, and funding liquidity in the CDS–bond basis outside and during the 2007–9 global financial crisis. Our findings stress the importance of separating different types of liquidity, since all three measures have independently negative impacts on the basis. Funding liquidity emerges as the economically most important liquidity metric. While asset-specific liquidity is cross-correlated in both the cash and derivative markets, funding and market liquidity only matter for the cash market. We exploit the decomposition of the basis to test predictions of limits-to-arbitrage theories. We find strong evidence in favor of margin-based asset pricing and flight-to-quality effects.     

Credit cycles and macro fundamentals

We use an intensity-based framework to study the relation between macroeconomic fundamentals and cycles in defaults and rating activity. Using Standard and Poor's U.S. corporate rating transition and default data over the period 1980–2005, we directly estimate the default and rating cycle from micro data. We relate this cycle to the business cycle, bank lending conditions, and financial market variables. In line with earlier studies, the macro variables appear to explain part of the default cycle. However, we strongly reject the correct dynamic specification of these models. The problem is solved by adding an unobserved dynamic component to the model, which can be interpreted as an omitted systematic credit risk factor. By accounting for this latent factor, many of the observed macro variables loose their significance. There are a few exceptions, but the economic impact of the observed macro variables for credit risk remains low. We also show that systematic credit risk factors differ over transition types, with risk factors for downgrades being noticeably different from those for upgrades. We conclude that portfolio credit risk models based only on observable systematic risk factors omit one of the strongest determinants of credit risk at the portfolio level. This has obvious consequences for current modeling and risk management practices.     

Japan’s imports of technology

Intereconomics - There are important reasons why Japan’s policy regarding imports of technology should find its place in the literature devoted to the economic development of Asia, Africa and...