Does uncertainty matter for loan charge-offs?

Using a stylized real options model, we show that discretion over the timing of charging off a non-performing loan could be economically justified when collateral values are uncertain and there is a chance of loan recovery. The implied hypothesis of an “uncertainty dependence” aspect in loan charge-offs is empirically tested and validated using a panel of European banks. A welfare-maximizing regulator might want to let banks pursue such discretionary loan charge-off behavior, with the problem of distinguishing it from alternative capital management and income smoothing objectives, while transparency-seeking accounting standards setters would presumably not.     

Arbitrage and the Law of One Price in the market for American depository receipts

Ours is the first paper to highlight pairs trading as the main price-correcting mechanism by which arbitrage can maintain stock–ADR parity. We show that arbitraging stock–ADR pairs extracts small per-trade profits which accumulate to a substantial aggregate return. The observed strong tendency of pricing disequilibria to mean-revert, along with the two-way convertibility between stocks and ADRs, mean that arbitrageurs face minimal risks toward price divergence. They do, however, face uncertainty about the duration of individual trades. The magnitude of this uncertainty relates directly to the profit target arbitrageurs set after a long/short position is established. This fact can explain why some disequilibria go unexploited. Overall, our work provides evidence against automatically efficient prices, and supports the view that mispricings incentivize arbitrageurs to enforce market efficiency.     

The perceived fairness of performance evaluation: The role of uncertainty

This paper investigates the relationship between performance evaluation procedures and managerial perceptions of procedural justice. We examine two metric and two process characteristics. Metric characteristics are the diversity of metrics used by superiors and their reliance on outcome vs. effort metrics. Regarding process characteristics, we analyse the amount of subordinate's voice in the performance evaluation process, and the extent of formalization of the process. Using uncertainty management theory, we argue that justice effects of performance evaluation procedures may not be direct but are instead conditional on the amount of task uncertainty managers face in the their job context as well as on managers’ tolerance for ambiguity. Using a sample of 178 managers from the banking industry, we find that all four performance evaluation characteristics are related to justice perceptions, yet their effect depends on the level of task uncertainty and tolerance for ambiguity. These findings explain some inconsistencies in extant studies on fairness of performance evaluation procedures.     

Decomposing the effect of supplier development on relationship benefits: The role of relational capital

Buyers invest considerably in developing their suppliers, yet the performance effects of such investments are not universal. Drawing on social capital theory, this research investigates whether the relationship between supplier development and relationship benefits may be facilitated by the generation of relational capital. The authors examine mediating and moderating roles of relational capital in the relationship between two aspects of supplier development (capability development, supplier governance) and two dimensions of relationship benefits (supplier benefits, buyer benefits), using survey data collected from 185 suppliers of a large manufacturing firm. Investment in supplier development does not automatically result in benefits for the supplier or reciprocated benefits for the buyer. Rather, relational capital “bridges” supplier development and relationship benefits. Without relational capital, benefits from capability development do not accrue, and the impact of a supplier governance regime can be even detrimental. In conditions of high relational capital, capability development results in lower perceived buyer benefits. The results can help managers ensure that the benefits from their supplier development efforts fully materialize.     

Performance hypothesis testing with the Sharpe ratio: The case of hedge funds

As recent research highlights that the Sharpe ratio has a decision theoretic foundation even in the case of asymmetric or fat-tailed excess returns and thus is adequate even for the evaluation of hedge funds, this note provides the first Sharpe ratio based performance analysis of the hedge fund market. Furthermore, it addresses the important practical question whether the choice of hypothesis test used to statistically compare Sharpe ratios can influence an investor’s hedge fund selection process. Our key findings are as follows: (i) Only a small fraction of hedge funds in our large dataset can significantly outperform passive investments in corresponding hedge fund indices. (ii) Especially in the presence of autocorrelated or skewed excess returns, the traditional test of Jobson and Korkie, 1981, Memmel, 2003 tends to overstate the number of significant outperformers and thus provides potentially misleading information for investors. Decision makers are advised to use the bootstrap test of Ledoit and Wolf (2008) allowing robust and more reliable inference.     

The Economic Benefits of Australian University Degrees: Bachelor and Research Higher Degrees

The investment in Australian bachelor and research degrees results in significant economic benefits for the individual and for society.     

Wheat variety yield data: Do commercial and public performance tests provide the same information?

Wheat yields from reported performance test results are of economic importance to wheat producers, since their profits depend on selecting the optimal variety for their location. However, our data shows differences in absolute and relative wheat yields between commercial and public wheat breeding program's performance test data in Kansas. Newly available data are used to test if the difference in yields arose from potential selectivity bias, and to determine the contribution of private and public wheat breeding programs to varietal yield improvement during 2007–2012. Both Heckman selection models and multiple regression showed no statistical evidence of the potential presence of selectivity bias rather, managerial practices, agronomic conditions, field location, and inherent genetic traits of the seed variety were identify as the source of yield differences.     

AN EXAMINATION OF THE UNDERLYING DYNAMICS OF STRATEGIC DECISIONS SUBJECT TO UPWARD INFLUENCE ACTIVITY

This study examines the underlying dynamics of strategic decisions that are subject to upward influence activity. The results suggest that the strategymaking process deviates considerably from typical rational comprehensive approaches in that strategies are affected by: initial sense-making activity, perceptions of risk and return, and power and negotiation skills. Differences due to functional area of the manager involved in the influence activity are discussed.