Managerial myopia and the unintended real consequences of conditional conservatism

We examine whether the demand for conditional conservatism produces unintended real consequences that are exacerbated by managerial incentives to report higher earnings. We document a robust positive association between conditional conservatism and real earnings management (REM), particularly for firms whose CEOs face greater compensation incentives and capital market incentives to report higher earnings. Using mediation analyses, we find that conservatism has a negative indirect relation with future returns via REM over the next 1–3 years. In additional tests, we find that the relation between conservatism and REM is attenuated for firms with higher debt-to-equity, which suggests that debtholders moderate the negative relation between conditional conservative reporting and REM. Our findings suggest that, in contrast to its monitoring benefit, conditional conservatism can exacerbate managerial myopia, resulting in negative consequences for future firm value.     

The Cost of Carbon: Capital Market Effects of the Proposed Emission Trading Scheme (ETS)

In March 2008, the Australian Government announced its intention to introduce a national Emissions Trading Scheme (ETS), now expected to start in 2015. This impending development provides an ideal setting to investigate the impact an ETS in Australia will have on the market valuation of Australian Securities Exchange (ASX) firms. This is the first empirical study into the pricing effects of the ETS in Australia. Primarily, we hypothesize that firm value will be negatively related to a firm's carbon intensity profile. That is, there will be a greater impact on firm value for high carbon emitters in the period prior (2007) to the introduction of the ETS, whether for reasons relating to the existence of unbooked liabilities associated with future compliance and/or abatement costs, or for reasons relating to reduced future earnings. Using a sample of 58 Australian listed firms (constrained by the current availability of emissions data) which comprise larger, more profitable and less risky listed Australian firms, we first undertake an event study focusing on five distinct information events argued to impact the probability of the proposed ETS being enacted. Here, we find direct evidence that the capital market is indeed pricing the proposed ETS. Second, using a modified version of the Ohlson ( 1995 ) valuation model, we undertake a valuation analysis designed not only to complement the event study results, but more importantly to provide insights into the capital market's assessment of the magnitude of the economic impact of the proposed ETS as reflected in market capitalization. Here, our results show that the market assesses the most carbon intensive sample firms a market value decrement relative to other sample firms of between 7% and 10% of market capitalization. Further, based on the carbon emission profile of the sample firms we imply a ‘future carbon permit price’ of between AUD$17 per tonne and AUD$26 per tonne of carbon dioxide emitted. This study is more precise than industry reports, which set a carbon price of between AUD$15 to AUD$74 per tonne.     

Consumer understanding of food labels: toward a generic tool for identifying the average consumer

The ‘average consumer’ is referred to as a standard in regulatory contexts when attempts are made to benchmark how consumers are expected to reason while decoding food labels. An attempt is made to operationalize this hypothetical ‘average consumer’ by proposing a tool for measuring the level of informedness of an individual consumer against the national median at any time. Informedness, i.e. the individual consumer's ability to interpret correctly the meaning of the words and signs on a food label is isolated as one essential dimension for dividing consumers into three groups: less-informed, informed, and highly informed consumers. Consumer informedness is assessed using a 60-question test related to information found on a variety of Danish everyday food products and divided into factual questions and informedness about signpost labels. A test was made with 407 respondents who participated in four independent studies on fairness in consumer communication, and the average score for all was 57.6% of correct answers. A score of 64% and beyond would place a consumer in the upper quartile (the group of highly informed consumers), whereas a score of 52% or below would place the individual in the lower quartile (the group of less-informed consumers). Female respondents performed better than males on label recognition, and those around 40 years of age irrespective of gender performed best on factual knowledge, whereas those aged around 30 performed best on label recognition. It is foreseen that independent future studies of consumer behavior and decision making in relation to food products in different contexts could benefit from this type of benchmarking tool.     

Exploring Perceived Channel Price,Quality, and Value as Antecedents of Channel Choice and Usage in Multichannel Shopping

This study investigates consumer perceptions of price-quality-value based on shopping channel attributes as antecedents of channel choice and usage in multichannel shopping environments. Findings indicate that channel usage intention is directly influenced by consumer perceptions of channel value and indirectly by consumer perceptions of channel quality and channel price. Consumer perceptions of channel attributes most important to channel usage intention include utilitarian and hedonic value, service and merchandise quality, and monetary and non-monetary price. Managerial implications for retailers suggest a need for strategic management and differentiation of channel attributes to enhance channel value perceptions and increase channel usage intention.     

Hochwasservorsorge zwischen Staatshilfen und privater Versicherung

The recent flood events in Germany have demonstrated that the nation’s current system of private flood insurance is suboptimal. The article provides novel nationwide survey data on stated flood insurance penetration (suggesting that many households overestimate their own insurance coverage), damage compensation expectations (a significant share of the population expects governmental relief payments), and on the dissemination of private flood mitigation measures. Taking into account fundamental economic considerations and the empirical insights, the authors propose a limited compulsory insurance, covering only the most basic risks and leaving incentives for further private insurance and precaution.     

Periodic strategies in optimal execution with multiplicative price impact

We study the optimal execution problem with multiplicative price impact in algorithmic trading, when an agent holds an initial position of shares of a financial asset. The interselling decision times are modeled by the arrival times of a Poisson process. The criterion to be optimized consists in maximizing the expected net present value of the gains of the agent, and it is proved that an optimal strategy has a barrier form, depending only on the number of shares left and the level of the asset price.     

Cross‐Functional Integration: Concept Clarification and Scale Development

The centrality of cross‐functional integration (CFI) to supply chain theory and practice has long been recognized. Yet researchers continue to struggle with consistently defining or measuring the CFI construct, thus limiting the utility of CFI research. This research develops (1) a comprehensive definition of CFI that synthesizes previous supply chain research and (2) a valid set of scale items that measure the conceptual domain outlined by this definition. The goal is to build a common foundation for extending knowledge on CFI's antecedents and consequences, and ultimately to improve scholars’ ability to guide a broader practitioner community still struggling to achieve integration in their organizations.     

Does Hedging Affect Firm Value? Evidence from the US Airline Industry

Does hedging add value to the firm, and if so, is the source of the added value consistent with hedging theory? We investigate jet fuel hedging behavior of firms in the US airline industry during 1992–2003 to examine whether such hedging is a source of value for these companies. We illustrate that the investment and financing climate in the airline industry conforms well to the theoretical framework of Froot, Scharfstein, and Stein (1993). In general, airline industry investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedgeable, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. Our results show that jet fuel hedging is positively related to airline firm value. The coefficients on the hedging variables in our regression analysis suggest that the “hedging premium” is greater than the 5% documented in Allayannis and Weston (2001), and might be as large as 10%. We find that the positive relation between hedging and value increases in capital investment, and that most of the hedging premium is attributable to the interaction of hedging with investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs.     

EBCT measured coronary artery calcium scores in asymptomatic life insurance applicants

EBCT measured coronary calcium is fast becoming a standard screening tool in asymptomatic patients with and without risk factors who apply for life insurance. Since atherosclerotic plaques become calcified as part of their natural history, the calcium score is an excellent measure of total atherosclerotic burden. Over the past 5 years, various clinical studies have confirmed the predictive value of the coronary calcium score for both soft (revascularization, MI) and hard (MI and sudden cardiac death) events incrementally and independently of traditional coronary risk factors identified by the Framingham Heart Study. Accurate assessment of cardiac mortality risk in asymptomatic applicants for life insurance should include both traditional risk factor assessments in combination with age and gender specific percentiles for coronary calcium. New data from both new and ongoing clinical trials will seek to further support the predictive value of coronary calcium scores as an independent and incremental predictor of hard cardiac events.     

Should business groups be dismantled? The equilibrium costs of efficient internal capital markets

We analyze the relationship between conglomerates’ internal capital markets and the efficiency of economy-wide capital allocation, and we identify a novel cost of conglomeration that arises from an equilibrium framework. Because of financial market imperfections engendered by imperfect investor protection, conglomerates that engage in winner-picking (Stein, 1997 [Internal capital markets and the competition for corporate resources. Journal of Finance 52, 111–133]) find it optimal to allocate scarce capital internally to mediocre projects, even when other firms in the economy have higher-productivity projects that are in need of additional capital. This bias for internal capital allocation can decrease allocative efficiency even when conglomerates have efficient internal capital markets, because a substantial presence of conglomerates might make it harder for other firms in the economy to raise capital. We also argue that the negative externality associated with conglomeration is particularly costly for countries that are at intermediary levels of financial development. In such countries, a high degree of conglomeration, generated, for example, by the control of the corporate sector by family business groups, could decrease the efficiency of the capital market. Our theory generates novel empirical predictions that cannot be derived in models that ignore the equilibrium effects of conglomerates. These predictions are consistent with anecdotal evidence that the presence of business groups in developing countries inhibits the growth of new independent firms because of a lack of finance.