Management Insights
A Structural Model of Employee Behavioral Dynamics in Enterprise Social Media (p. 2825)
Yan Huang, Param Vir Singh, Anindya Ghose
To read or to write—that is the blogger’s question. The authors analyze the social-media content creation and consumption behavior (writing and reading blogs) of employees within an enterprise. Users face (1) a trade-off between blog posting and blog reading; and (2) a trade-off between work-related and leisure-related content. The authors review the details of the blog posting and reading behavior over a 15-month period of employees at a Fortune 1000 IT services and consulting firm. Even though they get higher utility from work-related blogging, employees nevertheless publish a significant number of leisure posts. They suggest that this is partially because the creation of leisure posts has a significant positive spillover effect on the readership of work posts. When organizations restrict leisure blogging, the sharing of online work-related knowledge decreases and this in turn can also reduce employee performance ratings. The insight for management: Blogging within enterprises by employees during their work day can have positive long-term benefits for organizations; hence, a policy of abolishing leisure-related content creation can inadvertently have adverse consequences for work-related content creation in an enterprise setting.
Which Skills Matter in the Market for CEOs? Evidence from Pay for CEO Credentials (p. 2845)
Antonio Falato, Dan Li, Todd Milbourn
Which skills matter most for CEOs? Differences in CEO skills lead to potentially large differences in pay, but it is challenging to quantify the CEO skill premium in pay. Based on the detailed biographical information for a large sample of CEOs for a panel of S&P 1500 firms between 1993 and 2005, the authors identify specific reputational, career, and educational credentials that are indicative of skills. Newly appointed CEOs earn up to a 5% or $280,000 total pay premium per credential decile, mostly among which is concentrated among CEOs with better reputations, the very best credentials, and those who run large firms. Furthermore, they find that CEO credentials have a positive impact on firm performance. The performance differential for newly appointed CEOs is up to 0.5% per credential decile and is also concentrated among CEOs with better reputational and career credentials and those at large firms. The insight for management: There are measureable market-based explanations of the overall rise in CEO pay, which is predicated on reputation, career education, and company performance.
Hedging with Futures: Does Anything Beat the Naïve Hedging Strategy? (p. 2870)
Yudong Wang, Chongfeng Wu, Li Yang
Does anything beat the naïve hedging strategy in hedging with futures? The authors say no, regardless of different sample periods, estimation windows, and hedging horizons. The authors compare hedging performance across 24 futures markets where covariance is measured by 18 different econometric models. The insight for management: It is difficult to find a strategy under the minimum variance framework that outperforms the naïve hedging strategy both consistently and significantly.
Hedge Funds and Stock Market Efficiency (p. 2890)
Joni Kokkonen, Matti Suominen
Do hedge funds reduce misevaluation and improve market efficiency? The discounted residual income measure of stocks’ misvaluation significantly explains their future cross-sectional returns. The authors measure the market-level misvaluation (market inefficiency) by the misvaluation spread: the difference in the misvaluation of the most overvalued and undervalued shares. Using data on hedge fund returns, hedge fund industry assets under management, flows, and individual hedge fund holdings, the authors present evidence that hedge funds’ trading reduces market-level misevaluation, regardless of different time periods’ level of market liquidity. The insight for management: Mutual funds do not have the price-correcting effect that hedge funds have; hedge funds do reduce misevaluation and improve market efficiency.
Political Values, Culture, and Corporate Litigation (p. 2905)
Irena Hutton, Danling Jiang, Alok Kumar
Hillary or Donald? Does the political culture of a firm determine its propensity for corporate misconduct? Using one of the largest samples of litigation data available to date, the authors measure political culture using the political contributions of top managers, firm political action committees, and local residents. They show that firms with a Republican culture are more likely to be the subject of civil rights, labor, and environmental litigation than are Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and environmental protection. On the other hand, firms with a Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than are Republican firms, whose party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. The insight for management: Who you vote for might be an indicator of your legal vice; Republican and Democratic firms tend to face different legal battles.
Goal Setting and Monetary Incentives: When Large Stakes Are Not Enough (p. 2926)
Brice Corgnet, Joaquín Gómez-Miñambres, Roberto Hernán-González
What motivates employees—large monetary rewards or challenging but attainable goals? The authors find that managers generally set goals that are challenging but attainable for a worker of average ability. Workers respond to these goals by increasing effort and performance and by decreasing on-the-job leisure activities, as the manager might hope. The authors study the interaction between goal setting and monetary rewards and find that goal setting is most effective when monetary incentives are strong. The insight for management: Goal setting may produce intrinsic motivation and increase workers’ performance beyond what is achieved by using solely monetary incentives.
Entry and Subcontracting in Public Procurement Auctions (p. 2945)
Nicola Branzoli, Francesco Decarolis
How do different auctions affect the level of new entrants and subcontracting in a market? They do in a big way, suggest the authors. The insight for management: The use of first price auctions causes a marked decline in both entry and subcontracting; furthermore, the type of firms entering first price auctions changes with firms becoming more likely to bid jointly with other firms in ad hoc joint ventures.
The Effect of Social Interaction on Economic Transactions: Evidence from Changes in Two Retail Formats (p. 2963)
Avi Goldfarb, Ryan C. McDevitt, Sampsa Samila, Brian S. Silverman
How does the need for social interaction affect purchasing behavior? The authors examine two different retail formats—with high and low social interaction—for some products that may cause embarrassment, and they show that consumers alter their purchases depending on the level of social interaction in a retail environment. They find that the change in behavior coincides with a reduction in the interpersonal interaction required to complete a transaction. The insight for management: Give them their space; less social interaction in some cases may affect the “social friction” that would otherwise inhibit consumers due to an implicit cost associated with ordering certain items in social settings.
Privacy and Marketing Externalities: Evidence from Do Not Call (p. 2982)
Khim-Yong Goh, Kai-Lung Hui, Ivan P. L. Png
If they are not calling you, then they are probably calling me more often! Does membership in the U.S. Do Not Call (DNC) list impose a cost on others? Advertising and direct marketing can inflict nuisance and inconvenience on consumers—an “externality” of the DNC member’s decision. The authors investigate the extent of such externalities in the context of the U.S. DNC registry. The authors conclude that consumer DNC registrations in fact do impose externalities on other consumers. The effect is significant; an increase in the first wave of registrations by 1% was associated with a 3.1% increase in subsequent registrations. This effect was stronger in larger and more educationally or racially heterogeneous markets. The externality was possibly due to unregistered consumers being more receptive to telemarketing and telemarketers increasing the number of calls to them. The insight for management: Managers should facilitate consumer opt-out, especially in larger and more educationally or racially heterogeneous markets.
When Should Firms Expose Themselves to Risk? (p. 3001)
Alexei Alexandrov
When should firms expose themselves to risk? The author suggests that, in many cases, the firm wants to expose itself to risk, which is counterintuitive. For example, the firm may decide whether to choose an advertising campaign with a less certain outcome, then adjust the product’s price after seeing the effects of the campaign. The increased risk actually improves the range of possible outcomes if the firm has a response capability. The insight for management: Risk exposure for a firm is not bad when there are available and effective responses to the outcomes of that risk.
Prospect Theory Explains Newsvendor Behavior: The Role of Reference Points (p. 3009)
Xiaoyang Long, Javad Nasiry
How do people decide on the optimal level of inventory to stock of a perishable item? Existing theory cannot systematically explain the ordering behavior observed in experiments on what’s known as the newsvendor problem, where the newsvendor must decide how many papers to stock before he realizes the actual level of demand. The authors suggest that this is because the newsvendor’s reference point is assumed to be the status quo, or a zero payoff. The insight for management: Reference points affect decisions; updated theory that includes nonzero baselines can, in fact, account for experimental results.
Supply Management in Multiproduct Firms with Fixed Proportions Technology (p. 3013)
Onur Boyabatlı
How should a primary input that is used in fixed proportions and shared between multiple products be allocated? The author studies fixed proportions technology under demand uncertainty in comparison with the flexible and dedicated technologies. The author shows that fixed proportions technology has a cost-pooling value over dedicated technology, which is larger than the capacity-pooling value of flexible technology over dedicated technology. Interestingly, where high demand correlation reduces the capacity-pooling value, the cost-pooling value increases in demand correlation. The author further studies supply management in the presence of contract and spot markets and suggests that, with high contract prices, more contract dependence is advisable, but more spot market participation is best when contract price is low. The insight for management: The supply management strategy for a single input used in fixed proportions adopted as a response to a change in the business environment should differ depending on the contract type.
The Diseconomies of Queue Pooling: An Empirical Investigation of Emergency Department Length of Stay (p. 3032)
Hummy Song, Anita L. Tucker, Karen L. Murrell
Which is better: one queue, many servers, or one queue per server? Theory gives the nod to a single queue for pooled resources, because arrival and service uncertainties can be mitigated by multiple server options. The authors conduct an empirical investigation of the impact of queue management on patients’ average wait time and length of stay (LOS). Using an emergency department’s (ED) patient-level data from 2007 to 2010, they find, contrary to theory, that patients’ average wait time and LOS are longer when physicians are assigned patients under a pooled queuing system compared to a dedicated queuing system of one queue per doctor. They find the dedicated queuing system is associated with a 17% decrease in average LOS and a 9% decrease in average wait time relative to the control group—a 39-minute reduction in LOS and a four-minute reduction in wait time for an average patient of medium severity in this ED. How is this possible? Physicians suggest that improved performance stems from the physicians’ increased ownership over patients, which enables physicians to more actively manage the flow of patients into and out of ED beds. The authors checked to rule out alternate explanations for the reduced average wait time and LOS in the dedicated system, such as stinting and decreased quality of care. The insight for management: Patients may wait longer in a pooled queue for many doctors; the benefits from improved flow management in a dedicated queuing system can be large enough to overcome the longer wait time predicted to arise from nonpooled queues.
Relaxations of Approximate Linear Programs for the Real Option Management of Commodity Storage (p. 3054)
Selvaprabu Nadarajah, François Margot, Nicola Secomandi
Where should natural gas be stored—and how much—given the uncertainty of future demand and regional prices? The approach known as “real option management” helps to determine this but gives rise to intractable “approximate linear programming” (ALP) problems. The authors identify a deficiency of this approach and suggest a novel approach to simplify the problem, known as a “relaxation” of the problem. They apply it to existing natural gas storage problems, and their approach significantly outperforms previous ALP methods. The best ALP relaxation is both near optimal and competitive with, albeit slower than, state-of-the-art methods for computing heuristic policies. The insight for management: A new approach for solving real option management of commodities as well as the valuation of real and financial options has been developed.
Dynamic Valuation of Delinquent Credit-Card Accounts (p. 3077)
Naveed Chehrazi, Thomas A. Weber
At what rate should delinquent credit accounts be devalued as the debt ages? The authors construct a dynamic collectability score (DCS) that estimates the account-specific probability of collecting a given portion of the outstanding debt over any given time horizon. The model integrates a variety of information sources, including historical repayment data, account-specific and time-varying macroeconomic covariates, and scheduled account-treatment actions. The DCS framework is applied to a large set of account-level repayment data. The improvements in classification and prediction performance compared to standard bank-internal scoring methods are found to be significant. The insight for management: A novel approach to valuating delinquent credit accounts may help improve credit scoring and expected collections.
