Bias in the tone of forward‐looking narratives

We extend the prior literature on biased disclosure decisions by examining whether, when and how managers bias the tone of forward‐looking narratives. In order to measure tone we employ techniques of manual content analysis and we aggregate positive, neutral and negative statements into an overall measure of tone.We then analyse the frequency of positive and negative statements for firms with large impending year‐on‐year changes in sales and operating profit margin, and we regress tone cross‐sectionally on four managerial incentive variables that are unrelated to the private signal about future trading, namely loss status, sign of earnings change, business risk, and the existence of an analyst earnings forecast. We find that firms with large impending performance declines bias the tone in the outlook section upwards. Also, we find that loss firms, risky firms and firms with an analyst earnings forecast provide a more positive tone, while firms with an earnings decline provide a more negative tone. Finally, we observe that for a majority of our managerial incentive variables the main vehicle of biasing the tone is to change the number of negative statements, not the number of positive statements. Overall, our findings are difficult to reconcile with predictions from signalling models, but they are consistent with the alternative view of impression management. Our results have policy implications. In particular, they suggest that there is a need to reconsider the current largely unregulated nature of forward‐looking narratives.     

On systematic mortality risk and risk-minimization with survivor swaps

A new market for so-called mortality derivatives is now appearing with survivor swaps (also called mortality swaps), longevity bonds and other specialized solutions. The development of these new financial instruments is triggered by the increased focus on the systematic mortality risk inherent in life insurance contracts, and their main focus is thus to allow the life insurance companies to hedge their systematic mortality risk. At the same time, this new class of financial contract is interesting from an investor's point of view, since it increases the possibility for an investor to diversify the investment portfolio. The systematic mortality risk stems from the uncertainty related to the future development of the mortality intensities. Mathematically, this uncertainty is described by modeling the underlying mortality intensities via stochastic processes. We consider two different portfolios of insured lives, where the underlying mortality intensities are correlated, and study the combined financial and mortality risk inherent in a portfolio of general life insurance contracts. In order to hedge this risk, we allow for investments in survivor swaps and derive risk-minimizing strategies in markets where such contracts are available. The strategies are evaluated numerically.     

Model-independent hedging strategies for variance swaps

A variance swap is a derivative with a path-dependent payoff which allows investors to take positions on the future variability of an asset. In the idealised setting of a continuously monitored variance swap written on an asset with continuous paths, it is well known that the variance swap payoff can be replicated exactly using a portfolio of puts and calls and a dynamic position in the asset. This fact forms the basis of the VIX contract. But what if we are in the more realistic setting where the contract is based on discrete monitoring, and the underlying asset may have jumps? We show that it is possible to derive model-independent, no-arbitrage bounds on the price of the variance swap, and corresponding sub- and super-replicating strategies. Further, we characterise the optimal bounds. The form of the hedges depends crucially on the kernel used to define the variance swap.     

September 11 and Stock Return Expectations of Individual Investors

This study uses data that offers the unique opportunity to analyze how an unprecedented crisis such as the September 11 tragedy influences expected returns and volatility forecasts of individual investors. Via e-mail, we asked a randomly selected group of individual investors with accounts at a German online broker to answer an internet questionnaire at the beginning of August 2001. A second e-mail to the investors who had not yet answered, scheduled five weeks later, was postponed due to the terror attacks until September 20, which was exactly the day with the lowest share prices in Germany in the year 2001. Based on the answers to questions concerning stock market predictions, we find that return forecasts of the investors in our sample are significantly higher after September 11, suggesting a belief in mean reversion. Our results show that investors interpret the large drop in share prices during the ten day period after September 11 mainly as temporary rather than permanent. After the terror attacks, volatility forecasts are higher than before September 11. In two out of four cases, historical volatilities are overestimated. Therefore, investors are not generally overconfident in the way that they underestimate the variance of stock returns. Differences of opinion with regard to return forecasts are lower after the terror attacks whereas differences of opinion concerning volatility forecasts are mainly unaffected.We would like to thank William Goetzmann (the editor), Alexander Klos, Markus Nöth, Jens Reynders, Zacharias Sautner, an anonymous referee, several faculty members of the Fuqua School of Business, and seminar participants at the University of Mannheim for valuable comments and insights. Parts of this paper were written while Markus Glaser was visiting the Fuqua School of Business, Duke University, North Carolina, USA, whose support is gratefully acknowledged. Financial Support from the Deutsche Forschungsgemeinschaft (DFG) is also gratefully acknowledged.     

Implicit Forward Rents as Predictors of Future Rents

This paper investigates the relation between the term structure of rents and future spot rents. A rich database of office rental agreements for various maturities is used to estimate the term structure of rents, and from this structure implicit forward rents are extracted. The data pertain to commercial properties in the three largest Swedish cities for the period 1998–2002. A positive relation between forward and spot rents is found in some regions, but forward rents underestimate future rent levels. Another contribution of the paper lies in the area of rental index construction. We provide evidence that rental indices should not only be quality constant ( i.e. , control for characteristics), but should also be maturity constant.     

Industrial Relations in Transition Economies: Emergent Industrial Relations Institutions in Bulgaria

East European societies currently in transition to market economies are creating new structures for industrial relations. Transition has ambiguous effects upon the relations between industrial relations institutions and the state. On the one hand, economic pluralism implies separation between state and economy and 'depoliticization'. On the other, economic crises and threats to social order require co-operation between state and unions. The influence of the state is greater because of the embryonic form of employer organization and enterprise-level management. This paper examines the political and economic contexts of industrial relations in Bulgaria, as an example of one type of 'constrained' collective bargaining system. The paper emphasizes continuities between the communist and post-communist period, and the central role of trade unions in the transition process.     

Academic entrepreneurs or entrepreneurial academics? research–based ventures and public support mechanisms

The emergence of a new mode of knowledge production, the formation of a 'Triple Helix' of university–industry–government, and the advent of the academic entrepreneur – all these different developments point, in one way or another, to the increased attention that is being paid to the economic utilization of publicly funded research. One way to utilize academic research in a commercial manner is to set up university spin–off companies. We shall discuss the phenomenon of academic entrepreneurship in the context of public support mechanisms and incentive structures. One key finding is that support mechanisms do not necessarily promote academic entrepreneurship but further the development of a behavioural pattern that can be associated with the notion of the 'entrepreneurial academic'– scientists in public sector organizations who are not necessarily interested in setting up a fast–growing company but looking for other avenues in which they can pursue their research interests. Badly targeted support mechanisms can have a negative impact on the growth–pattern of science–based SMEs by providing a distorted set of incentives. We shall discuss some of these support mechanisms in detail and illustrate effects they have had on the development of four research–based ventures.     

Modeling oligopolistic interaction

It is shown that standard versions of overt and tacit collusion under quantity-setting oligopoly are formally equivalent. The two approaches are combined to model collusive behavior when firms expect rivals to react to output changes. The combined model yields a structural equation for firm-level price-cost margins that is consistent with empirical studies using line-of-business data.     

When Product Development Performance Makes a Difference: A Statistical Analysis in the Electronics Industry

Throughout the pages of JPIM and other publications, researchers and practitioners devote considerable effort to identifying the dimensions of new-product development (NPD) performance that relate most closely to business success. Although we may hope to unveil a set of universal truths about the relationship between NPD performance and business success, the relevant NPD performance measures appear to depend on the industry in which a firm competes. In fact, Christian Terwiesch, Christoph Loch, and Martin Niederkofler suggest that the overall relevance of NPD performance to business success depends on the firm's competitive market environment. In a study of 86 business units operating in 12 different electronics industries worldwide, they develop a market contingency framework for understanding the impact of NPD performance on a firm's profitability. Their study uses data from the “Excellence in Electronics” project, a joint research effort by Stanford University, the University of Augsburg, and McKinsey & Co. They describe market context in terms of three dimensions: market share, market growth, and external stability—that is, the average product life cycle duration in the market. Looking at all 86 business units in the study, they find that industry membership accounts for 23% of the variance in profits, with 18 percent of the variance determined by industry profitability and 5% by the three dimensions of market context. For the firms in the study, development performance has the most significant effect in slow-growth markets and in markets with long product life cycles. In these stable industries, low development intensity, product line freshness, and technical product performance increase profitability. The results indicate that NPD performance plays a much more important role for explaining the profitability of dominant firms than that of the low-market-share firms in the study. NPD performance explains 30% of the profitability variance among the high-market-share business units in the study, but none of the variance for the low-market-share business units. Although the profitability of the smaller firms in the study is driven primarily by the industry environment, these firms can compete on the basis of superior technical performance.