Yearly Archives: 2010

Accounting

Usefulness of Expected Values in Liability Valuation: The Role of Expected Value

Colbert, Gary, Murray, Dennis and Nieschwietz, Robert.
Journal of Finance and Accountancy, Volume 4, pp. 1-13.

This study investigates whether the usefulness of expected values to financial statement users depends on portfolio size (N). Given that standard setting boards require some liabilities to be measured at fair value, and given that fair values are often estimated using expected cash flows, the investigation is conducted within the context of liabilities. Expected value is hypothesized to be more useful when N is large because actual cash flow realizations are more centered on their expected value than when N is small. That is, because users will perceive that expected values are more accurate predictors of actual realizations when N is large, valuations assigned to liabilities will be closer to their expected values than when N is small. The results show that when N is large, the valuations assigned by subjects to liabilities are much closer to the expected value of the future cash outflows than when N is small, but users’ perceptions of the accuracy of expected values did not appear to influence their valuations. These results suggest that standard setters should give consideration to the effect of portfolio size on the use of expected value in financial reporting.

Finance, Management, Sustainability

Environmental Risk and Shareholder Returns: Evidence from the Announcement of the Toxic 100 Index

Kenneth Bettenhausen, John Byrd, and Elizabeth S. Cooperman
International Review of Accounting, Banking and Finance, Volume 2, Issue 3, pp. 28~45

This paper examines the stock price response to the announcement that a U.S. company has been named to the Toxic 100 list of the largest air polluters, where rankings are based on data from the Environmental Protection Agency’s (EPA) Risk Screening Environmental Indicator (RSEI) project. We find a significant negative average abnormal return (AR) of – 1.20% in 2006 and – 1.60 % in 2008 over the two – day announcement periods for the Toxic 100 announcements, representing an average drop in market value for the average firm in the index of – $235,944,909 in 2006 and – $237,595,885 in 2008.  Firms in the top 10 ranking of the index had a significantly, larger negative abnormal return than in the bottom 10 ranking. Firms that were not on the 2006 index, but were added to the 2008 index experienced an average abnormal return of -3.5%. The results are interesting for two reasons. One, they show that investors impound environmental risk into their company valuations, implying that environmental disclosure and reporting is important. Two, the results suggest that although analysts had the RSEI data prior to the release of the Toxic 100 lists, they view the Toxic 100 as a significant event. This suggests limits to the semi-strong form of market efficiency, suggesting that the anticipated payoff from computing their own environmental risk assessment may not justify their time and effort required to do so.

Risk Management

A Versatile Copula and Its Application to Risk Measures

Jeungbo Shim, Eun-Joo Lee, Seung-Hwan Lee
International Journal of Business and Economics,Vol. 9, Issue 3, Pages: 213.

This paper proposes a copula that has versatile properties. We apply grouped t and versatile t copulas to estimate Value at Risk and expected shortfall using a sample of firms in the US property-liability insurance industry. We perform goodness-of-fit tests to assess the adequacy of the copula models selected. We find that a versatile copula is effective in estimating dependence structures of non-homogeneous multivariate risks.[PUBLICATION ABSTRACT]
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Management

Power, legitimacy, and urgency in organizational learning: Learning through stakeholder complaints to improve quality in the California nursing home industry

Vinit M. Desai
Journal of Leadership & Organizational Studies, Volume 17 Issue 3, pp. 264-275

Although research suggests that organizations learn through interactions with stakeholders, little is known regarding how this process occurs. The author addresses this void by examining how the power, legitimacy, or urgency related to stakeholders’ interactions influence organizations’ abilities to learn from these interactions. Hypothesis tests on a panel of nursing homes suggest that organizations learn more effectively through interactions with powerful stakeholders or those whose feedback requires immediate response. Findings contribute to organizational learning theory by identifying how different forms of experience vary substantially in their impacts on organizational activity. Related implications for stakeholder management and managerial practice are also discussed.

Management

Using ESI Discovery Teams to Manage Electronic Data Discovery.

Ruhnka, John and Bagby, John
Communications of the ACM; July 2010, Vol. 53 Issue 7, pp. 142-144

The article discusses the management of electronically stored business information in the context of pre-trial legal discovery proceedings. Statistics on the typical amount of litigation faced by U.S. firms are presented, and the usefulness of outsourcing parts of the electronic discovery process is noted. Multi-disciplinary teams are often tasked with handling litigation holds, as such holds impose a legal obligation to preserve any information which could reasonably be considered relevant to an ongoing lawsuit. The issue of proprietary information is also discussed in this context.

Accounting

Four steps to simplify multimeasure performance evaluations using the balanced scorecard

Albright, Thomas L, Burgess, Christopher M, Hibbets, Aleecia R., and Roberts, Michael L.
Journal of Corporate Accounting & Finance, Jul/Aug 2010, Vol. 21 Issue 5, pp. 63-68

Processing complex, unstructured information can be difficult. Since balanced scorecards can include as many as 24 or more measures, this article presents a methodology to help managers manage the complexity. The four-step process explained here can lead to accurate and consistent evaluations using both quantitative and qualitative performance measures.

Management

Building local legitimacy into corporate social responsibility: Gold mining firms in developing nations

Gifford, Blair, Kestler, Andrew, and Anand, Sharmila
Journal of World Business; July 2010, Vol. 45 Issue 3, pp. 304-311, 8p

A transnational model of global strategy suggests that multi-national enterprises generally rely on proven global capabilities to adapt existing business models. Alternatively, this paper argues that the transnational model needs to be amended to allow for a hybrid approach that balances local and global strategies for multi-national gold (MNGs) firms working in developing nations. This is illustrated by Newmont Mining”s efforts to develop local legitimacy through contributions to community development around its gold mining operations in Peru. We then compare the Newmont case with corporate social responsibility (CSR) at other MNGs. We have found that there appears to be an industry-wide institutional environment developing which includes local CSR projects in an attempt to balance the effects of capitalism between global markets and developing nations.

Entrepreneurship, Information Systems

Does Technological Progress Alter the Nature of Information Technology as a Production Input? New Evidence and New Results

Paul Chwelos, Ronald Ramirez, Kenneth L. Kraemer, and Nigel P. Melville
Information Systems Research, Vol. 21, Issue. 2, June 2010, pp. 392–408

Prior research at the firm level finds information technology (IT) to be a net substitute for both labor and non-IT capital inputs. However, it is unclear whether these results hold, given recent IT innovations and continued price declines. In this study we extend prior research to examine whether these input relationships have evolved over time. First, we introduce new price indexes to account for varying technological progress across different types of IT hardware. Second, we use the rental price methodology to measure capital in terms of the flow of services provided. Finally, we use hedonic methods to extend our IT measures to 1998, enabling analysis spanning the emergence of the Internet. Analyzing approximately 9,800 observations from over 800 Fortune 1,000 firms for the years 1987–1998, we find firm demand for IT to be elastic for decentralized IT and inelastic for centralized IT. Moreover, Allen Elasticity of Substitution estimates confirm that through labor substitution, the increasing factor share of IT comes at the expense of labor. Last, we identify a complementary relationship between IT and ordinary capital, suggesting an evolution in this relationship as firms have shifted to more decentralized organizational forms. We discuss these results in terms of prior research, suggest areas of future research, and discuss managerial implications.

Management

Failing to Learn? The Effects of Failure and Success on Organizational Learning in the Global Orbital Launch Vehicle Industry

Peter M. Madsen and Vinit Desai
Academy of Management Journal, Vol. 53, Issue 3, June 2010, pp. 451 – 476

It is unclear whether the common finding of improved organizational performance with increasing organizational experience is driven by learning from success, learning from failure, or some combination of the two. We disaggregate these types of experience and address their relative (and interactive) effects on organizational performance in the orbital launch vehicle industry. We find that organizations learn more effectively from failures than successes, that knowledge from failure depreciates more slowly than knowledge from success, and that prior stocks of experience and the magnitude of failure influence how effectively organizations can learn from various forms of experience.

Management

Self-Assessment of Knowledge: A Cognitive Learning or Affective Measure?

Traci Sitzmann, Katherine Ely, Kenneth G. Brown, Kristina N. Bauer
Academy of Management Learning and Education, Vol. 9  Issue 2,  pp. 169-191

We conducted a meta-analysis to clarify the construct validity of self-assessments of knowledge in education and workplace training. Self-assessment’s strongest correlations were with motivation and satisfaction, two affective evaluation outcomes. The relationship between self-assessment and cognitive learning was moderate. Even under conditions that optimized the self-assessment-cognitive learning relationship (e.g., when learners practiced self-assessing and received feedback on their self-assessments), the relationship was still weaker than the self-assessment-motivation relationship. We also examined how researchers interpreted self-assessed knowledge, and discovered that nearly a third of evaluation studies interpreted self-assessed knowledge data as evidence of cognitive learning. Based on these findings, we offer recommendations for evaluation practice that involve a more limited role for self-assessment.

Management

Rule violations and organizational search: A review and extension

Vinit M. Desai
International Journal of Management Reviews, Jun. 2010, Vol. 12 Issue 2, pp. 184-200

Whether they are formally prescribed or informally agreed upon, rules delineate the types of behavior deemed acceptable or appropriate within organizations. Studies often find that negative outcomes such as decreased group cohesion and higher turnover result when rules are broken. However, research rarely examines the potential positive effects of rule violations. Rules describe expectations about behavior within routines, or patterns of activity in organizations. When rules are violated by individuals, it could be an indication that the associated patterns of activity are no longer appropriate and that changes to the routines are needed. Organizations may learn from these violations if the violations trigger a search for new ways to organize activities, but this connection between violations and the search for new routines is affected by several factors. Drawing from a review and discussion of rules, routines, and research on organizational search and learning, this paper develops propositions regarding how rule violations motivate the search for new routines. This perspective integrates the literatures on rule-breaking and organizational search, and also suggests that managers who attend to patterns of rule-breaking within their organizations may detect drift from their environments and take corrective action earlier than suggested by other organizational learning research.

Management

Do Organizations Have to Change to Learn? Examining the Effects of Technological Change and Learning from Failures in the Natural Gas Distribution Industry

Vinit Desai
Industrial and Corporate Change, Volume 19, Issue 3, Pp. 713-739

Failures contain valuable information. However, organizations vary at learning from them. I ask whether failures prompt organizations to make technological investments, and whether these investments help boost performance beyond improvements gained through direct organizational learning. I test hypotheses on natural gas distributors to determine whether they enhance their performance by learning directly, by recognizing failures as prompts to invest in safer technologies, or through a combination. Results suggest that distributors learn directly, though firms, which also invest in related technologies, are able to gain some additional benefits.

Finance

Financial Policies and the Agency Costs of Free Cash Flow: Evidence from the Oil Industry

John W. Byrd
International Review of Accounting, Banking and Finance, Volume 2, pp. 23-50

Jensen (1986) posits that costly conflicts of interest between managers and shareholders are especially pronounced in companies with substantial amounts of free cash flow. Jensen argues that, all else equal, firms that finance assets with debt will be less prone to this agency problem of overinvestment than other firms. Picchi (1985) and McConnell and Muscarella (1986) provide evidence that investment opportunities in exploration and development were quite limited during the early 1980s. During the same period, cash flows to petroleum producers were large because of high crude oil prices. This research uses data from 1979-1985 for a sample of U.S. oil and gas production and exploration companies to test Jensen’s free cash flow theory. Our evidence indicates that estimated agency costs are inversely related to financial leverage, consistent with the control effects of debt. These results persist across a variety of model specifications and data aggregation methods.

Finance

Explaining Production Inefficiency in China’s Agriculture using Data Envelopment Analysis and Semi-Parametric Bootstrapping

Daniel C. Monchuk, Zhuo Chen and Yosef Bonaparte
China Economic Review,
Vol. 21, Issue 2, June 2010, Pages 346-354,

In this paper we examine more closely the factors associated with production inefficiency in China’s agriculture. The approach we take involves a two-stage process where output efficiency scores are first estimated using data envelopment analysis, and then in the second stage, variation in the resulting efficiency scores is explained using a truncated regression model with inference based on a semi-parametric bootstrap routine. Among the results we find that a heavy industrial presence is associated with reduced agricultural production efficiency and may be an indication that externalities from the industrial process, such as air and ground water pollution, affect agricultural production. We also find evidence that counties with a large percentage of the rural labor force engaged in agriculture tend to be less efficient, and suggests that nurturing and promoting growth of non-primary agriculture may lead to more efficient use of labor resources in agriculture

Business Analytics

A location–allocation model for service providers with application to not-for-profit health care organizations

Syam, Siddhartha S. and Côté, Murray J
Omega, Vol. 38  Issue 3/4,  pp. 157-166.

In this paper, we develop and solve a model for the location and allocation of specialized health care services such as traumatic brain injury (TBI) treatment. The model is based on and applied to one of the Department of Veterans Affairs’ integrated service networks. A cost minimization model with service proportion requirements is solved using simulated annealing. Large instances of the model with 100 candidate medical center locations and 15 open treatment units are solved in about 1000s. In order to test the real-world applicability of our model, an extensive managerial experiment is conducted using data derived from our health care setting. In this experiment, the effects of three critical factors: (1) degree of centralization of services, (2) the role of patient retention as a function of distance to a treatment unit, and (3) the geographic density of the patient population are investigated with respect to the important trade-off between the cost of providing service and the need to provide such service. Our analysis shows that all three factors of the experiment are both relevant and useful to decision-makers when selecting locations for their services.

Information Systems

Research NoteDoes Technological Progress Alter the Nature of Information Technology as a Production Input? New Evidence and New Results

Paul Chwelos, Ronald Ramirez, Kenneth L Kraemer, Nigel P Melville
Information Systems Research,Vol. 21, Issue 2, Pages: 392-408.

Prior research at the firm level finds information technology (IT) to be a net substitute for both labor and non-IT capital inputs. However, it is unclear whether these results hold, given recent IT innovations and continued price declines. In this study we extend prior research to examine whether these input relationships have evolved over time. First, we introduce new price indexes to account for varying technological progress across different types of IT hardware. Second, we use the rental price methodology to measure capital in terms of the …
[Full Text]

Finance

Explaining production inefficiency in China’s agriculture using data envelopment analysis and semi-parametric bootstrapping

Daniel C Monchuk, Zhuo Chen, Yosef Bonaparte
China Economic Review,Vol. 21, Issue 2, Pages: 346-354.

In this paper we examine more closely the factors associated with production inefficiency in China’s agriculture. The approach we take involves a two-stage process where output efficiency scores are first estimated using data envelopment analysis, and then in the second stage, variation in the resulting efficiency scores is explained using a truncated regression model with inference based on a semi-parametric bootstrap routine. Among the results we find that a heavy industrial presence is associated with reduced agricultural …
[Full Text]

Accounting

Return of the Tallahassee Bean Counters: A Case in Forensic Accounting

Dee, Carol Callaway and Durtschi, Cindy
Issues in Accounting Education; May 2010, Vol. 25  Issue 2, pp. 279-321

Your firm has been engaged to conduct a forensic investigation of the Tallahassee BeanCounters (TBC), a privately owned minor league baseball team in Tallahassee, Florida. Team owner Franklin Kennedy has told employees that the audit is related to the mortgage TBC obtained for the recently constructed training facility. However, Mr. Kennedy tells you privately that the investigation is not due to loan requirements; rather, it is due to his concerns arising from an anonymous tip he received in the mail. The assignment requires you and your investigative team to (1) analyze the financial and background data provided; (2) brainstorm the possible ways in which a fraud could be perpetrated and concealed within the organization; (3) determine the additional information you need to confirm or disprove your suspicions; and (4) request this information from the appropriate party at TBC. When your investigation is complete, you will present your written results to the owner, including (1) who committed the fraud, (2) how it was committed, (3) the economic impact of the fraud to TBC, and (4) the financial benefit your suspect(s) received from committing the crime.

Management

Physical Attractiveness Biases in Ratings of Employment Suitability: Tracking Down the “Beauty is Beastly” Effect.

Johnson, Stefanie, Podratz, Kenneth, Dipboye, Robert, and Gibbons, Ellie
Journal of Social Psychology,  May/Jun2010, Vol. 150 Issue 3, p301-318

The “what is beautiful is good” heuristic suggests that physically attractive persons benefit from their attractiveness in a large range of situations, including perceptions of employment suitability. Conversely, the “beauty is beastly” effect suggests that attractiveness can be detrimental to women in certain employment contexts, although these findings have been less consistent than those for the “what is beautiful is good” effect. The current research seeks to uncover situations in which beauty might be detrimental for female applicants. In two studies, we found that attractiveness can be detrimental for women applying for masculine sex-typed jobs for which physical appearance is perceived as unimportant.