Carry

We apply the concept of carry, which has been studied almost exclusively in currency markets, to any asset. A security’s expected return is decomposed into its “carry,” an ex-ante and model-free characteristic, and its expected price appreciation. Carry predicts returns cross-sectionally and in time series for a host of different asset classes, including global equities, global bonds, commodities, US Treasuries, credit, and options. Carry is not explained by known predictors of returns from these asset classes, and it captures many of these predictors, providing a unifying framework for return predictability. We reject a generalized version of Uncovered Interest Parity and the Expectations Hypothesis in favor of models with varying risk premia, in which carry strategies are commonly exposed to global recession, liquidity, and volatility risks, though none fully explains carry’s premium.     

IQ and Audit Quality: Do Smarter Auditors Deliver Better Audits?

This study examines the role of an individual auditor's cognitive ability in delivering high‐quality audits. Our results from analyzing archival data from Sweden show that audit partners' IQ scores obtained from psychological tests are positively associated with going‐concern audit reporting accuracy and audit fee premiums. We also find some, albeit weak, evidence that audit partners' IQ scores are negatively associated with the income‐increasing abnormal accruals of the client. These results suggest that, although audit services are standardized through various control mechanisms and audits are conducted by teams rather than by individual auditors, the cognitive ability of audit partners responsible for an audit remains important in delivering high‐quality audit services.     

Bidding for Firms with Unknown Characteristics

When a region successfully attracts a firm by offering subsidies, the firm often commits itself to performance targets in terms of employment. In this paper, we interpret these firm‐specific targets as a consequence of incomplete information. We analyze a model of two regions that compete for a firm, assuming that the firm's productivity is ex ante unknown. We show that performance targets often induce overemployment in high‐productivity firms, and that tax credits are often superior to lump‐sum payments. Moreover, when regions differ in wage rates, the low‐wage region wins the bid and has a higher surplus than under complete information. Finally, we show that, under incomplete information, bidding might not lead to efficient firm location.     

Fiscal equalisation schemes under competition

This paper considers optimal fiscal equalisation in a federation that competes with other federations for business tax base. It formalises the argument that, under certain circumstances, federations have an incentive to foster tax competition among their subunits in order to attract tax base from other federations. We show that optimal fiscal equalisation serves the purpose of redistributing income from rich to poor subunits and of choosing an optimal level of tax competition. The latter is chosen as a trade-off between three goals. First, decentralised tax rate setting has positive fiscal externalities within the federation and, thus, tax rates are inefficiently low. Second, in the presence of hold-up problems in investment, tax rates may be inefficiently high. Then, tax competition serves as a commitment device for low future tax rates and is, thus, welfare enhancing. Third, generous fiscal equalisation within the federation is a commitment to not aggressively compete with subunits outside the federation for tax base; as a consequence, with optimal equalisation, equilibrium tax rates are higher within and outside the federation—and even higher than in the case of centralised (i.e. federal level) tax rate setting.     

The Effects of Executive,Firm, and Board Characteristics on Executive Exit

We estimate a hazard model of the probability of top corporate executives exiting their firms over the period 1996–2010. Our main findings are that: (1) female executives have greater likelihoods of exit than males, (2) the likelihood of exit increases with the independence of the board and decreases with the fraction of the board that is female and the average age of board members, and (3) a higher percentage of independent directors on the board lowers the probability of exit more for females than for males. Further, controlling for exit risk reduces the well‐documented compensation differential between men and women.     

Adaptation and inertia in dynamic environments

Research summary : We address conflicting claims and mixed empirical findings about adaptation as a response to increased environmental dynamism. We disentangle distinct dimensions of environmental dynamism—the direction, magnitude, and frequency of change—and identify how selection shapes adaptive responses to these dimensions. Our results show how frequent directional changes undermine the value of exploration and decisively shift performance advantages to inert organizations that restrict exploration. In contrast, increased environmental variance rewards exploration. Our results also show that, in dynamic environments, the best‐performing organizations are generally more inert than less successful organizations. Managerial summary : Our research helps managers to understand under what business conditions investments into exploration and strategic flexibility are more likely to pay off. Dynamic business environments characterized by persistent trends and by large, infrequently occurring structural shocks reward strategic pursuit of temporary advantage. Thus, exploration and strategic flexibility are preferred strategies. In contrast, the challenge in frequently changing environments with fleeting opportunities is to identify and to focus on strategic actions whose payoffs on average are high, independent of environmental volatility. Low levels of exploration and long‐term strategic focus are preferred strategies in these circumstances. Copyright © 2015 John Wiley & Sons, Ltd.     

Market-Oriented Management: A Systems-Based Perspective

Market orientation has received substantial academic and practitioner interest over the last decade. However, previous research has not addressed the issue how a company's management systems can be designed in a market-oriented way. Starting from a systems-based perspective of management, the authors develop and validate a scale measuring the extent of market orientation of a business organization's management systems including the organization system, the information system, the planning system, the controlling system, and the human resource management system. Empirical results reveal a substantial positive impact of market-oriented management on market performance which in turn leads to financial performance.     

The jump component of S&P 500 volatility and the VIX index

Much research has investigated the differences between option implied volatilities and econometric model-based forecasts. Implied volatility is a market determined forecast, in contrast to model-based forecasts that employ some degree of smoothing of past volatility to generate forecasts. Implied volatility has the potential to reflect information that a model-based forecast could not. This paper considers two issues relating to the informational content of the S&P 500 VIX implied volatility index. First, whether it subsumes information on how historical jump activity contributed to the price volatility, followed by whether the VIX reflects any incremental information pertaining to future jump activity relative to model-based forecasts. It is found that the VIX index both subsumes information relating to past jump contributions to total volatility and reflects incremental information pertaining to future jump activity. This issue has not been examined previously and expands our understanding of how option markets form their volatility forecasts.     

On the cost of delayed currency fixing announcements

In Foreign Exchange Markets vanilla and barrier options are traded frequently. The market standard is a cutoff time of 10:00 a.m. in New York for the strike of vanillas and a knock-out event based on a continuously observed barrier in the inter bank market. However, many clients, particularly from Italy, prefer the cutoff and knock-out event to be based on the fixing published by the European Central Bank on the Reuters Page ECB37. These barrier options are called discretely monitored barrier options. While these options can be priced in several models by various techniques, the ECB source of the fixing causes two problems. First of all, it is not tradable, and secondly it is published with a delay of about 10–20 min. We examine here the effect of these problems on the hedge of those options and consequently suggest a cost based on the additional uncertainty encountered.      

Strategic human resource management at Herman Miller

This article describes the Human Resource Management system in place at Herman Miller, Inc. (HMI). HMI's HR strategy is comprised of three primary goals: (1) building employee capabilities, (2) building employee commitment, and (3) improving the professional capabilities of the HR function itself. Key emphases of HMI's HR management infrastructure include (1) employee competency identification and development, (2) building employee participation, (3) building business literacy, (4) creating a “corporate community” through strong values and a sense of “belonging”, (5) community responsibility and environmental protection, (6) competently delivering the HR “fundamentals”, and (7) developing innovative partnerships with suppliers. Key challenges for the future include (1) change management, (2) clarifying HR's strategic role throughout the firm, and (3) attracting and retaining a diverse workforce. © 1999 John Wiley & Sons, Inc.