Title: Credit Default Swap Research Project
Organizer: Gauri Bhat
Participants: Jeffrey Callen (University of Toronto), Dan Segal (University of Toronto)
Description: The purpose of this study is to examine whether the relation between earnings and CDS premia has changed following the adoption of International Financial Reporting Standards (IFRS) in 2005. The proponents of the change towards IFRS argue that the adoption of IFRS would increase the quality of financial reporting as well as improve the comparability and transparency of the financial reports. Prior studies provide evidence that the adoption of IFRS resulted in increase in liquidity, decrease in cost of capital and increase in equity valuation, particularly in countries with strong legal enforcement. These findings are consistent with the conjecture that IFRS increase the quality of reported earnings. Our study, therefore, would provide additional evidence on whether the change towards IFRS increases the quality of reported earnings visa a vie CDS, which measures default risk. In addition, we intend to examine the impact of the change towards IFRS on CDS premia conditioning on the attributes of financial reporting prior to the adoption of IFRS that are directly relevant to CDS premia.
Results: Credit Risk and IFRS: The Case of Credit Default Swaps (PDF)
Title: Risky Investments in Village Economies
Principal Investigators: Pamela Jakiela (Washington University) & Owen Ozier (University of California, Berkeley)
Description: This project measures the economic impact of social pressure to share income with kin and neighbors within a controlled laboratory environment in rural western Kenya. Building on recent literature which suggests that, in this context, the obligation to share income creates a poverty trap by reducing profitability of investments, we use experimental economic games to quantify behavior which has been difficult to isolate using survey data: the willingness to forgo profitable investment opportunities in order to keep one’s income secret from one’s community. More than 2,000 participants from rural Kenyan communities were invited to take part in an experimental economic game in which they decide how much of an endowment to invest in a risky but profitable project. We first assign endowments randomly across individuals, creating inequality within the lab environment, and then compare the willingness to make the risky investment across two groups of subjects: those randomly chosen to announce their project outcome and earnings to the rest of the participants, and those allowed to keep their project income secret. This provides a measure of the efficiency cost of social pressures to share when individuals are unable to hide positive income shocks from relatives and neighbors. We also measure the willingness to pay, among those chosen to announce project earnings, to avoid public reporting. The experiment allows us to measure the extent to which individuals reduce their investments in expectation of social pressures to share profits, and lets us explore variation in these patterns across demographic categories.
Results: In progress
Title: The Development of Face Threat Sensitivity Measures
Organizer: Dejun Tony Kong
Participants: Ece Tuncel, Judi McLean Parks
Description: We developed the measures of positive face threat sensitivity (PFTS) and negative face threat sensitivity (NFTS) based on Brown and Levinson’s (1987) politeness theory and White, Tynan, Galinsky, and Thompson’s (2004) research, and examined their reliabilities and validities. We found that PFTS is equivalent to hypersensitive narcissism but distinct from neuroticism, social interaction anxiety, and fear of negative evaluation, whereas NFTS is distinct from both neuroticism and hypersensitive narcissism. In addition, in a computer-mediated competitive commercial negotiation, we found that PFTS was strongly predictive of negotiators’ perceptions, emotions, and behaviors, and NFTS was predictive of negotiators’ desire for future negotiation. Finally, we discussed the important theoretical implications of our findings.
Results: In progress
Title: ComScore Marketing Research Project
Organizer: Amar Cheema
Participants: Tat Chan, Seethu Seethamaran
Description: The ComScore panelist-level database captures detailed browsing and buying behavior by one hundred thousand Internet users across the United States. The panel is based on a random sample from a cross-section of more than 1.5 million global Internet users who have given comScore explicit permission to confidentially capture their Web-wide activity. The data also has demographic information on each specific household that is included in the panel. (From: http://wrds.wharton.upenn.edu/ds/comscore/index.shtml). The authors use consumers’ historical online browsing and purchase data to categorize them on the basis of prior browsing behavior (websites visited, time spent online, and products purchased). The authors use this categorization in conjunction with provided demographic information to predict subsequent behavior, and suggest marketing tactics for websites. A couple of examples of such analyses are outlined below.
Results: Modeling Online Multicategory Purchase in Travel
Title: Pharmaceutical Manufacturing Research Project
Organizer: Jackson Nickerson
Participants: Jeffrey Macher
Description: The research project will examine two sets of relationships pertaining to the performance of pharmaceutical manufacturing. First, it will investigate the relationship between regulatory oversight through the FDA's current Good Manufacturing Practice (cGMP) on pharmaceutical behavior and the resulting production and regulatory performance. Second, it will investigate the effect of pharmaceutical manufacturers' organizational factors on production and regulatory performance.
Results: Regulator Heterogeneity and Endogenous Efforts to Close the Information Asymmetry Gap: Evidence from FDA Regulation (PDF)
Title: The Industry Life-Cycle of the Size Distribution of Firms
Organizer: Glenn MacDonald
Participants: Emin Dinlersoz
Description: This project aims to document and analyze the evolution of the size distribution of firms in an industry as industry goes through its life-cycle. The size distribution of firms is intimately related to important industry aggregates, including inter-firm distribution of productivity, as well as to differences among firms in terms of production technology and product mix. Despite the importance of a comprehensive understanding of changes in the size distribution of firms in an industry over time, little has been done so far to uncover the nature of such changes. The empirical analysis in this project requires observations on alternative measures of firm size for all firms over several time periods and across narrowly defined industries. Since no public dataset meets these criteria simultaneously, the authors propose to use the Census Bureau's Longitudinal Research Database (LRD) for the analysis of firm distribution.
Results: The industry life-cycle of the size distribution of firms (PDF)
Title: On the Compensation of Portfolio Managers
Organizer: Heber Farnsworth, Ph.D.
Participants: Jonathan Taylor
Description: Most Americans who invest in the stock market do so through equity mutual funds. For this reason there have been many studies on the performance of mutual funds. Much less attention has been paid to what incentives managers have to perform. In this proposal, we plan to study the form of the compensation contracts given to managers and what incentives they provide. We are particularly interested in how contractual form varies across asset classes, different types of investment companies, or different client groups. We can then invoke modern contract theory to help explain why we see these different types of contracts in these different circumstances.
Results: 396 portfolio managers who work for SEC-registered investment advisory firms filled out a Compensation Survey (*PDF 53k) in 2003. Here are the results. (PDF 147k)
Title: Empirical Analysis of Models of Economic Dynamics
Organizer: Bart Hamilton, Ph.D.
Participants: Tava Olsen, Tat Chan, P. B. Seetharaman, Brian McManus, Jackson Nickerson, Erik Durbin, Robert Pollak, Chuck Moul
Description: The project seeks to understand the role that dynamic issues play in decisions of managers or firms, and the strategic issues firms face in industries characterized by rapid technological and competitive changes. Examples of the problems of interest include how a retailer should alter its menu of lead times and prices to potential consumers; the evolution of health care industry structure and costs in the face of continued technological innovation; and the roles of consumer learning and forward looking behavior in explaining consumer purchasing patterns. A primary goal of the project area is to develop and implement cutting-edge empirical methods to analyze these problems using real world data.
Results: Empirical Analysis of Models of Economic Dynamics (PDF)
Title: Dynamics of Consumer Demand for New Durable Goods
Organizer: Gautam Gowrisankaran and Marc Rysman
Description: This paper specifies and estimates a dynamic model of consumer preferences for new durable goods with persistent heterogeneous consumer tastes, rational expectations about future products and repeat purchases over time. Most new consumer durable goods, particularly consumer electronics, are characterized by relatively high initial prices followed by rapid declines in prices and improvements in quality. The evolving nature of product attributes suggests the importance of modeling dynamics in estimating consumer preferences. We estimate the model on the digital camcorder industry using a panel data set on prices, sales and characteristics. We find that dynamics are a very important determinant of consumer preferences and that estimated coefficients are more plausible than with traditional static models. We use the estimates to investigate the value of new consumer goods and intertemporal elasticities of demand.
Results: Dynamics of Comsumer Demand for New Durable Goods (PDF)
Title: GAAP Goodwill and Debt Contracting Efficiency: Evidence from Net-Worth Covenants
Organizer: Richard Frankel, Chandra Seethamranju, and Tzachi Zach
Description: We study the role of goodwill in promoting contracting efficiency and the effect of SFAS 141 and 142 on this role. We provide three main results. First, when a lending agreement contains some type of minimum net-worth covenant, the probability of a tangible net-worth covenant is decreasing in the borrower’s goodwill. Second, the use of tangible net-worth covenants has increased since the promulgation of SFAS 141 and 142. Finally, covenant slack is not significantly related to the use of tangible net-worth covenants relative to net-worth covenants. These results suggest that contracting parties realize efficiency gains by permitting borrowers’ actions to be restricted by the value of GAAP goodwill. However, recent changes in GAAP have reduced the contracting usefulness of goodwill.
Results: GAAP Goodwill and Debt Contracting Efficiency: Evidence from Net-Worth Covenants (PDF)
Title: Financial Accounting Characteristics and Debt Covenants
Organizer: Richard Frankel and Lubomir Litov
Description: We examine the relation between financial accounting characteristics and accounting-based debt covenants. We hypothesize that use of accounting-based covenants is more likely when asymmetric timeliness is higher and accounting discretion is reduced, because the covenants can more efficiently reduce agency costs in these circumstances. Overall, we find little association between the use of accounting-based debt covenants and three financial reporting characteristics (1) the magnitude of past discretionary accruals, (2) Basu’s (1997) asymmetric timeliness measure, or (3) Ball and Shivakumar’s (2006) asymmetric timeliness measure. We also are unable to find a consistently significant relation between these accounting characteristics and initial-covenant slack. Our results suggest that the relation between the effectiveness of accounting-based and these characteristics is marginal.
Results: Financial Accounting Characteristics and Debt Covenants (PDF)
Title: Strategic Interaction between Corrupt Governments in a Growth Model
Organizer: Tom Skladzien
Description: This paper investigates the consequences of strategic interaction between corrupt governments on economic growth. I derive a growth model where corruption is the endogenous result of a self-seeking government. The implications of endogenous corruption on economic growth are investigated. The model is then expanded to a two-country setting and solved for both the competitive Nash and cooperative equilibrium. The negative consequences of corruption can be significantly reduced through inter-governmental competition, thus providing a further argument for fiscal decentralization in the context of self-seeking governments. An empirical analysis of the effect of decentralization on corruption is performed which supports the main theoretical result.
Results: In Progress
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