Operational risk and equity prices

We use an empirical model to categorize firms into portfolios based on operational risk. Using these portfolios, we show that a strategy of buying firms in the highest decile of operational risk and shorting firms in the lowest decile of operational risk earned a positive but insignificant risk-adjusted average return of 0.72% per month from 1990 to 2000. However, from 2001 to 2010, the same strategy earned a significantly negative risk-adjusted average return of ?1.50% per month. This change occurred during a time characterized by an increasing number of high profile operational losses and regulatory changes surrounding operational risk.     

Fixed price equilibria in an overlapping generations model with investment

We study fixed price temporary equilibria (with rationing) and sequences of temporary equilibria in a three commodities (goods, labor, bonds) overlapping generations model with endogenous investment. Young consumers, living two periods, work, consume, and buy bonds for financing next period's consumption. New firms, existing for two periods, make a production plan for the next period, taking into account expected rationing, assumed similar to present rationing. The plan determines the amount of goods to buy as capital, financed by bonds. Old firms produce, using labor and the previously bought capital. Different regimes exist and expectations can be self-fulfilling and self-destroying.We are grateful to the referees for helpful comments.     

Foresighting FLOSS (free/libre/open source software) from a developing country perspective: The case of Turkey

Since free/libre open source software (FLOSS) promotes collaboration and contributions from different parties in software production and innovation processes, it can create a unique opportunity for developing countries, by generating an innovative capability in software technology. To benefit from this opportunity, it is important to understand the strategic factors and future trends that affect the development of an efficient FLOSS economy in developing countries.This paper aims to examine the strategic factors and future trends that are likely to affect the development and deployment of FLOSS in Turkey. Based on the internal and external factors identified through the practice of technological foresight, a SWOT analysis will be carried out to identify the strengths, weaknesses, opportunities and threats for Turkey in creating a competitive software industry that can benefit from the advantages of FLOSS. Accordingly, with regard to the required technical infrastructure, an innovative/competitive business climate, skilled human resources and support for institutional structures, policy suggestions are outlined here that could be usefully implemented by government, industry and universities.     

Payoff uncertainty,bargaining power,and the strategic sequencing of bilateral negotiations

This article investigates the sequencing choice of a buyer who negotiates with the sellers of two complementary objects with uncertain payoffs. The possibility of inefficient trade may generate strict sequencing preference. The buyer begins with the weaker seller if the sellers have diverse bargaining powers and with the stronger one if both sellers are strong bargainers. This sequencing is likely to increase the social surplus. Moreover, the buyer may find it optimal to raise her own acquisition cost by committing to a minimum purchase price or outsourcing. The first‐ and second‐mover advantages for the sellers are also identified.     

Leverage, options liabilities, and corporate bond pricing

The two major problems with typical structural models are the failure to attain a positive credit spread in the very short term, and overestimation of the overall level of the credit spread. We recognize the presence of option liabilities in a firm’s capital structure and the effect they have on the firm’s credit spread. Including option liabilities and employing a regime switching interest rate process to capture the business cycle resolves the above-mentioned drawbacks in explaining credit spreads. We find that the credit spread overestimation problem in one of the structural models, Collin-Dufresne and Goldstein (J Finan 56:1929–1957, 2001), can be resolved by combining option liabilities and the regime-switching interest rate process when dealing with an investment grade bond, whereas with junk bonds, only the regime-switching interest rate process is needed. We also examine vulnerable option values, debt values, and zero-coupon bond values with different model settings and leverage ratios.      

Less is more: A theory of minimalist luxury

We show theoretically that when high-quality, low-price counterfeits exist and are visibly indistinguishable from authentic products, the status-seeking wealthy may embrace a “less is more” purchasing strategy or what we refer to as the minimalist luxury strategy, to signal their status. These are the wealthy who have a high disutility of shopping for counterfeits. Specifically, in our model, only buyers know the authenticity of their own purchases. Because of this information asymmetry, these wealthy buyers may purposefully restrain from consuming luxury goods as a sacrifice of functional utility to stand out, a signaling strategy that the rest are not willing to mimic. Thus, “less” functional utility allows those status-seeking wealthy to enjoy “more” symbolic utility that the society bestows on their perceived status. This minimalist luxury strategy is in sharp contrast to Veblen's conspicuous consumption strategy, as well as to the maximalist luxury strategy proposed by Liu et al. We derive this minimalist luxury equilibrium, discuss how signaling in our context can differ from that of Veblen and Liu et al., and explore its managerial implications for the luxury goods industry.     

Strategic automation and decision-making authority

This paper studies how automation impacts the structure of decision-making in organizations. We develop a theoretical model of a firm, where a principal makes a decision about how much to prioritize the new product development division when the division is led by a manager who holds private information specific to this division and has misaligned preferences with the principal. The principal chooses whether to decentralize this decision by delegating it to the manager, resulting in more informed but unbiased decision. In this setting, we investigate how automation which reduces operational variability may alter this choice of organizational structure. The findings from our analysis show that firms deploy automation resources differently depending on their organizational structure: centralized firms choose to automate divisions that face more uncertainty, while decentralized firms do the opposite. Moreover, increasing access to automation results in higher centralization of decision-making in firms. In the extensions, we show that the strategic use of automation reduces the informativeness of intrafirm communication, and also, that automation can be a strategic substitute to monetary contracts.     

Cost and profit efficiencies in transition banking: the case of new EU members

This paper analyses cost and profit efficiencies in commercial banking in the eight Central and Eastern European countries that became new members to the European Union. Common stochastic cost and profit frontiers with country-specific variables are employed in order to take into account macro-economic and financial sector conditions that vary over time and across countries. The impact of foreign ownership on performance is also examined. The results indicate a wide range of cost and profit inefficiency scores across countries and across different size groups. All banking systems in the sample display significant levels of cost and profit inefficiency and there does not seem to be any continuous improvement in performance over time. There is also some evidence that foreign banks perform, on average, better than domestic banks.     

Linking investment spikes and productivity growth

We investigate the relationship between productivity growth and investment spikes using Census Bureau’s plant-level dataset for the U.S. food manufacturing industry. There are differences in productivity growth and investment spike patterns across different sub-industries and food manufacturing industry in general. Our study finds empirical support for the learning-by-doing hypothesis by identifying some cases where the impact of investment spikes on TFP growth presents a U-shaped investment age–productivity growth pattern. However, efficiency and the learning period associated with investment spikes differ among plants across industries. The most pronounced impact of investment age on productivity growth (5.3 % for meat products, 4% for dairy products, and 2.8 % in all food manufacturing plants) occurs during the fifth year of post-investment spike. Thus, in general, the productivity gains tend to be fully realized with a 5-year technology learning period for this industry.