Knowledge that Transforms

John R. Graham, Sonali Hazarika, Krishnamoorthy Narasimhan Is the corporate board an asset or a burden when responding to an economic downturn? The authors study what board characteristics were most valuable during the 1930–1938 Depression era, when the corporate sector was shocked by an unprecedented downturn. They found that complex firms exhibited a positive relation between board size and firm value and that simple firms exhibited a negative relation between board size and firm value. The authors suggest that simple firms with large boards or those with a larger number of outside directors did not downsize adequately in response to the severe economic contraction; they invested more (or shrank less) and used more debt during the 1930s. The authors also find that companies with properly aligned governance structures were more likely to replace the company president after poor performance. The insight for management: Size your board according to your company's complexity in order to make appropriate corporate investment and debt usage during downturns to maintain firm value. Julie Wulf, Harbir Singh How do acquirers retain successful target chief executive officers (CEOs)? The authors investigate the conditions under which CEOs are retained in a sample of mergers in the 1990s and find greater retention of better-performing and higher-paid CEOs when the acquirer's governance provisions support managers and when the acquirer's CEO owns more equity. Making commitments to retain and motivate successful top managers is a challenge when contracts are not enforceable, so it is not common for acquirers to retain target CEOs. The insight for management: Acquirers are more likely to retain top CEOs when their governance environment maintains managerial discretion. Kay Giesecke, Baeho Kim, Shilin Zhu How does one measure and price the correlated default risk in portfolios of credit-sensitive assets such as loans and corporate bonds? Dynamic, intensity-based point process models are widely used in conjunction with Monte Carlo simulation for performing computations in these models. The authors evaluate two simulation algorithms for such models. Their algorithms extend the conventional modeling approaches to include unbounded event intensity, which is a common case. The insight for management: New models can help to better assess default risk for loans and corporate bonds. Andrea Lodi, Silvano Martello, Michele Monaci, Claudio Cicconetti, Luciano Lenzini, Enzo Mingozzi, Carl Eklund, Jani Moilanen How can mobile data providers affordably provide high-quality service when faced with dramatic growth in demand? One of the most important trends shaping the mobile industry is the growth of mobile broadband data. The number of broadband data subscribers is forecast to exceed one billion users in 2012. For communication service providers the rapid subscriber growth has meant a tremendous increase in traffic volumes in their networks. Researchers for Nokia Siemens Networks solved the downlink subframe allocation problem in Mobile WiMAX. This highly complex problem had to be solved extremely quickly to be useful. The authors created two highly efficient heuristics that were developed to handle the system practically. The insight for management: Algorithms can offer significant capacity gain in Mobile WiMAX systems that translate to increased operator revenues. Alexandar Angelus How should managers manage inventory when surplus of stock can be sold (i.e., disposed of) in the secondary markets? The presence of a secondary market complicates the structure of the system, thus complicating the inventory and replenishment optimal policy. The author suggests that it is not optimal to both sell off excess stock and replenish inventory. The insight for management: Companies seeking to enter or develop secondary markets for supply chains should consider advanced inventory management policies. Onur Boyabatlı, L. Beril Toktay How does a firm make capacity investments in an uncertain environment and with imperfect capital markets? Furthermore, what type of capacity should a company invest in: flexible or fixed? The authors consider the effect of capital market imperfections that impose financing frictions on the firm. Interestingly, the authors demonstrate that imperfect capital markets may directly affect capacity investment and technology choice. The insight for management: Strategic capacity decisions can be directly affected by imperfect capital markets. Vishal Gaur, Sridhar Seshadri, Marti G. Subrahmanyam Do innovations in capital markets permit investments in real assets that would otherwise not occur because they are too costly to finance? In other words, do such innovations impact real investment decisions? The authors consider the role of an intermediary in creating a market by purchasing claims against these cash flows, pooling them, and selling primary or secondary securities to the investors. The authors find that projects are undertaken because of the intermediary's actions. They also determine the structure of the new securities created by the intermediary and identify how it exploits the arbitrage opportunities available in the market. The insight for management: Financial intermediaries have implications for valuation of real investments, synergies among them, and their financing mechanisms. Kristine Watson Hankins How do financial firms manage risk? The author investigates how firms manage risk by examining the relationship between financial and operational hedging using a sample of bank holding companies. Capital market imperfections make cash flow volatility costly; do financial firms consider this cost or focus exclusively on managing tradable exposures? The authors document that acquisitions provide operational hedging by reducing potentially costly volatility. In addition, the acquisition's level of operational hedging decreases financial hedging. The insight for management: Firms manage aggregate risk, not just tradable exposures, and operational hedging can substitute for financial hedging. Jeremy Berkowitz, Peter Christoffersen, Denis Pelletier The authors investigate disaggregated profit and loss (P/L) and value-at-risk (VaR) forecasts obtained from a large international commercial bank. The data set includes the actual daily P/L generated by four separate business lines within the bank. The authors assessed the accuracy of VaR forecasts by observing each business line daily for at least two years. The insight for management: More accurate VaR forecasting methodologies can improve bank cash flow planning and improve financial performance for banks while mitigating risk. Ankur Goel, Genaro J. Gutierrez What are the optimal procurement distribution policies in a supply chain for a commodity? The authors consider a firm that procures and distributes a commodity from spot and forward markets under randomly fluctuating prices. They develop a model that allows one to compute procurement and distribution policies, and they explore the value of the commodity's market in providing managers with additional flexibility in procurement and information on price dynamics generated through the trading of futures contracts. The insight for management: The presence of the commodity market and the information that it conveys may lead to significant reductions in inventory-related costs; however, to obtain these benefits, both the spot procurement flexibility and the term structure of prices generated by the commodity market must be incorporated in the formulation of the operating policy.

Nitin Bakshi, Stephen E. Flynn, Noah Gans How does terrorism affect international trade? A recently passed U.S. law mandating nonintrusive imaging and radiation detection for 100% of U.S.-bound containers at international ports has provoked widespread concern that the resulting congestion would hinder trade significantly. Using detailed data on container movements gathered from two large international terminals, the authors simulate the impact of the inspection policies that are being considered. They find that the current inspection plan being advanced by the U.S. Department of Homeland Security can handle only a small percentage of the total load, and significant congestion delay will result. An alternate inspection protocol that emphasizes screening—a rapid primary scan of all containers, followed by a more careful secondary scan of only a few containers that fail the primary test—holds promise as a feasible solution for meeting the 100% scanning requirement. The insight for management: New regulations may put a kink in international supply chains, and alternative inspection plans may be necessary. Özge İşlegen, Stefan Reichelstein For fossil fuel power plants to be built in the future, carbon capture and storage (CCS) technologies offer the potential for significant reductions in carbon dioxide (CO 2 ) emissions. The authors determine the break-even value that encourages CCS adoptions—the critical value in the charge for CO 2 emissions that would justify investment in CCS capabilities. The analysis takes into account that the generation of electricity at the wholesale level is organized competitively in some U.S. jurisdictions, but in others a regulated utility provides integrated generation and distribution services. For either market structure, the authors find that emissions charges near $30 per ton of CO 2 would be the break-even value for adopting CCS capabilities at new coal-fired power plants. The break-even values for natural gas plants are substantially higher, near $60 per ton. The estimates serve as a basis for projecting the change in electricity prices once carbon emissions become costly; the net effect of such charges is predicted to be a 30% increase in energy prices at the retail level. Interestingly, competitive power markets might see faster price increases than regulated utilities as such charges are put into place. The insight for management: Adoption of carbon capture of fossil fuel plants will require governmental emissions charges and higher energy prices. Krishnan S. Anand, M. Fazıl Paç, Senthil Veeraraghavan Quality or quantity? An operator or cashier wants to provide ample, high-quality service to each customer to improve their satisfaction with the service provided. But, faced with a queue of customers, individual attention and increased service quality for one customer generally increases the waiting time for all of the others. In such customer-intensive services, the interaction between quality and speed is critical. If the service speed is chosen by the service provider, what is the optimal “quality–speed trade-off”? A provider must define its service parameters based on service quality, delay costs, and price. The authors demonstrate that the customer intensity of the service is a critical driver of equilibrium price, service speed, demand, congestion in queues, and service provider revenues. They show that offering highly customer-intensive service allows the service provider to increase the number of competing servers and increase price, even as the service become slower. The insight for management: In highly customer-intensive service industries, offering longer service times might justify higher prices, even at the cost of longer customer waiting time. Avi Goldfarb, Catherine E. Tucker Do you feel uncomfortable when you conduct an Internet search, and alongside search results come numerous banner advertisements for similar products or services that you searched for? Clearly, what you search for is being used as information; advertisers use online customer data to target their marketing and increase its effectiveness. However, such “big brother” tactics have heightened consumers' privacy concerns. In the European Union (EU), privacy regulation has been passed that restricts advertisers' ability to collect data on Web users in order to target ad campaigns. The authors study how EU privacy regulation has influenced advertising effectiveness by analyzing the responses of 3.3 million survey takers who had been exposed to 9,596 online display (banner) advertising campaigns. They find that, on average, display advertising became far less effective at changing stated purchase intent after the EU laws were enacted, relative to display advertising in other countries. The loss in effectiveness was more pronounced for websites that had general content (such as news sites), where nondata-driven targeting is particularly hard to do. The loss of effectiveness was also more pronounced for ads with a smaller presence on the webpage and for ads that did not have additional interactive, video, or audio features. The insight for management: Online target advertising based on user behavior is effective, but taken too far it might cause user or regulatory backlash that might reduce the effectiveness of online advertising. Privacy laws may reduce online advertising revenues as a result. Craig J. Chapman, Thomas J. Steenburgh Should Campbell's Soup offer coupons and discounts to boost sales, meet earnings estimates, and placate analysts? The authors examine different types of marketing expenditures that are used to boost short-term earnings. They combine supermarket scanner data with firm-level financial data and find that soup manufacturers roughly double the frequency and change the mix of marketing promotions (price discounts, feature advertisements, and aisle displays) at the fiscal quarter-end when they have greater incentive to boost earnings. The authors estimate that marketing actions can be used to boost quarterly net income by up to 5% depending on the depth and duration of promotion. However, there is a price to pay, with the cost in the following period being approximately 7.5% of quarterly net income. Their results confirm managers' stated willingness to sacrifice long-term value in order to smooth earnings and their stated preference to use real actions to boost earnings to meet different types of earnings benchmarks. The insight for management: Meeting earnings estimates might placate investors but, in the case of storable goods, only at a real cost to longer-term profitability. Joseph R. Radzevick, Don A. Moore How much do consultants, engineers, and the like overpromise to make the sale? It depends on the level of competition in the marketplace. The authors investigate how market competition contributes to the expression of overconfidence among those competing for influence. In experiments where advisors try to sell their advice, they find that market competition exacerbates the tendency to express excessive confidence. The insight for management: The tendency in a highly competitive information market is for service providers to overstate capabilities to create differentiation and make the sale. Laura J. Kornish, Karl T. Ulrich A common approach to innovation, parallel search, is to identify a large number of opportunities and then to select a subset for further development, with just a few coming to fruition. For example, a movie studio might consider numerous scripts, eliminating all but the one they choose to pursue. One potential weakness with parallel search is that it permits repetition: The same, or a similar, idea might be generated multiple times, because parallel exploration processes typically operate without information about the ideas that have already been identified. In the movie studio example, many scripts might have the same premise, resulting in wasted effort of studio executives evaluating the same idea multiple times. The authors analyze repetition in five opportunity data sets from online opportunities to classroom technologies comprising 1,368 opportunities and use that analysis to address three questions. (1) When many efforts to generate ideas are conducted in parallel, how likely are the resulting ideas to be redundant? Although there is some redundancy in the ideas generated by aggregating parallel efforts, the authors find that this redundancy is quite small in absolute terms in their data. (2) At the outside, how many opportunities might be generated if there were abundant time to generate them? The authors extrapolate how many unique ideas would result from an unbounded effort by an unlimited number of comparable idea generators and estimate that the total number of unique ideas is approximately one thousand for the most narrowly defined domain and more than two thousand for the more broadly defined opportunities being explored. (3) Are the unique ideas more valuable than those similar to many others? The authors find a positive relationship between the number of similar ideas and idea value: the ideas that are least similar to others are not generally the most valuable ones. The insight for management: Redundancy of ideas has value. When conducting a search for new ideas to pursue, cluster similar ideas first to reduce wasted effort from redundant evaluation efforts, and focus on the ideas with a common theme, which tend to generate the most value. Jasjit Singh, Ajay Agrawal Do hiring firms u

Jeremiah Green, John R. M. Hand, Mark T. Soliman Can market inefficiencies persist? In 1996, Richard Sloan found in his research an accruals anomaly, namely, that hedge fund accruals consistently outperform the market. Sloan noted in a 2004 Business Week article, “[I]nvestors are clamoring to exploit this market inefficiency. They seem in a bit of a frenzy about it, but as more people catch on, this trading opportunity should diminish.” The authors of this research find that, consistent with public statements made by sophisticated practitioners, the accruals anomaly appears to have decayed in U.S. stock markets to the point that it is, on average, no longer reliably positive. The authors suggest that the anomaly's demise in part stems from an increase in the amount of capital invested by hedge funds into exploiting it. The insight for management: The opportunity to leverage market anomalies is short-lived, and the more people who catch on, the shorter the life of the opportunity. Jonah Berger, Devin Pope “I'll bet they come back” is a common halftime wager, but is it a good one? Of course, staking the opposition to a big lead does not bode well for any competitor. However, through the analysis of more than 18,000 professional basketball games, the authors show that being slightly behind at halftime actually leads to a surprising increase in winning percentage. Analysis of more than 45,000 collegiate basketball games finds consistent, though smaller, results. Teams behind by a point at halftime, for example, actually win more often than teams ahead by one, or approximately six percentage points more often than expected. The authors find that being slightly behind increases success because of increased motivation of the losing team. This psychological edge is estimated to be roughly half as large as the vaunted “home field advantage.” The insight for management: Losing can sometimes lead to winning. Catherine Tucker, Juanjuan Zhang Does the bandwagon effect hold for niche products? Popularity information is usually thought to reinforce existing sales trends by encouraging customers to flock to mainstream products with broad appeal. The authors suggest that such popularity information may benefit niche products with narrow appeal even more. If “everybody” is buying a product of narrow appeal, it must “really” be good, whereas lots of people buy a popular product just because it has wide appeal. Through a field experiment from a website that lists wedding service vendors, the authors find that niche vendors benefit from touting the “visitor count” as measured by click-throughs. The authors propose that the visitor count is a better indicator of quality for niche products than for products of broad appeal. The insight for management: Items with narrow appeal benefit more from popularity information than items with broad appeal. Kevin J. Boudreau, Nicola Lacetera, Karim R. Lakhani How many contestants should be allowed in a competition that requires innovation? In 2006, the Internet movie rental company Netflix sponsored a $1 million competition challenging participants to develop a 10% improvement in its movie recommendation algorithm. Netflix encouraged wide participation and received entries from more than 5,000 competitors. InnoCentive.com is a website that posts regular competitions and regularly encourages wide participation. Of course, a multitude of competitors increases the likelihood that at least one competitor will find an extreme-value solution. However, widely held economic theory suggests that greater rivalry reduces the incentives of all competitors in a contest to exert effort and make investments. Using a unique data set of 9,661 software contests, the authors show that the effort-reducing effect of greater rivalry is less important for highly uncertain problems; in these competitions adding competitors systematically increases overall contest performance for high-uncertainty problems. The implications for management: When it comes to competitions with challenging, uncertain problems, the more the merrier; adding competitors increases the chances of breakthrough solutions. Hua Chen, Sung H. Ham, Noah Lim Is the popularity of “March Madness” of the NCAA basketball tournament the result of the massive disparity in potential of the number 1 and number 16 seeds? In an experiment, the authors test whether the presence of “favorites” and “underdogs” actually increases the effort expended in such competitions. The answer is yes; the authors find that both favorites and underdogs exert extra effort as a result of this disparity. They find that the social and psychological elements of such competitions give added incentives. For favorites, the psychological losses from losing carry a social stigma. For underdogs, winning gives them bragging rights. The insight for management: Equal starting points are not necessary to incentivize effort; in fact, the presence of underdogs and favorites actually increases effort. Eric Van den Steen How sure are you? The author suggests that if someone is relatively overconfident about their estimates and predictions, they can make mistakes when presented with new and conflicting information. The more confident someone is about such uncertainties, the more they tend to overestimate the precision of these estimates. The intuition is slightly ironic: When adjusting predictions in the face of new information, the overconfident person will overweight both the information and its precision. The insight for management: Avoid overconfidence bias; such misguided thinking leads to decreased ability to adjust to and benefit from new information. Nathan Williams, P. K. Kannan, Shapour Azarm How did the exclusive AT&T deal with Apple iPhone affect Apple's optimal new product design, in terms of engineering design specifications and profits? Will adding Verizon as a retail channel help Apple? The authors develop a strategic framework that enables them to evaluate both profit and product development implications. They find that, via a monopoly retailer, the design preferences of the price-insensitive customers are better represented. Opening up to multiple retailers exposes the product to a wider variety of customers, increasing overall customer welfare through more popular designs. Interestingly, the single-channel strategy leads to lower profits but a higher probability of success for the manufacturer. The insight for management: A single-retailer strategy reduces risk and design options but can hamper overall profitability and consumer welfare. Iain M. Cockburn, Megan J. MacGarvie To what extent are firms kept out of a market by patents covering related technologies? Do patents held by potential entrants make it easier to enter markets? The authors evaluate the relationship between market entry and patents for 27 narrowly defined categories of software products during the period 1990–2004. They find that a 10% increase in the number of patents relevant to market reduces the rate of entry by 3%–8%. However, potential entrants with patent applications relevant to a market are more likely to enter it. The insight for management: Patents have both entry-deterring and entry-promoting effects for firms. Terrence August, Tunay I. Tunca Who should be responsible for software security? In recent years, vendor liability for software security vulnerabilities has been the center of an important debate in the software community and a topic gaining government attention in legislative committees and hearings. The importance of this question is amplified when one considers the increasing emergence of zero-day attacks where hackers take advantage of vulnerabilities before the software vendor has a chance to release protective patches. The authors compare the effectiveness of three software liability policies: vendor liability for damages, vendor liability for patching costs, and government-imposed security standards. The right choice depends on the cost of software patches and the probability of zero-day attack. The insight for management: There is no single most effective policy for software security policy; tailored solutions must be created based on cost of patches and the probability of a hacker attack. Christopher Beveridge, Mark Joshi What is a fair price for a convertible bond? The sale of a convertible bond is a zero-sum game for the two parties. The authors introduce two new methods to calculate pricing bounds using Monte Carlo simulation and apply the new methods to the pricing of convertible bonds by simulation. The insight for management: Boundaries on bond pricing can be established with new methods. Mohammed Abdellaoui, Enrico Diecidue, Ayse Öncüler Does the timing of a payout affect preferences? Of course, a dollar today is better than a dollar tomorrow. The same two options deferred on year are equivalently delayed, but if there is risk with either option, preference for each can be affected. The researchers evaluate the impact of time on risk preferences, and they report the results of an experimental study that examines how delayed resolution and payment of risky options influence individual choice. The authors find that subjects become more risk tolerant for delayed lotteries. The insight for management: To encourage participation in riskier options, defer payouts; the passage of time on payouts tends to create probabilistic op

Pelin Atahan, Sumit Sarkar How helpful is a website for a user? A regular user might have profile information that helps him use the site more efficiently; for example, weather.com might have the zip codes he has previously queried, or Expedia might retain the last destination he wanted to fly to. These sites might also offer specials, discounts, and other links of interest that relate to his recent visits or profile options. But if the user is new to the site, it cannot effectively target products, promotions, and advertisements. In those situations, the site can learn the profile of a user as the user traverses the site. Naturally, the faster the site can learn a user's profile, the sooner the site can benefit from personalization. The authors develop a technique that sites can use to learn the profile as quickly as possible. The approach effectively learns multiple attributes simultaneously and works particularly well when a user's traversal is influenced by the most recently visited pages on a site. The insight for management: New methods that lead to quick interpretation of mouse clicks can lead to more effective target marketing on the Internet. Michael S. Dahl Who Moved My Cheese? by Dr. Spencer Johnson addresses the psychological elements of change management in organizations; people generally resist change because they are afraid of change. But rarely have researchers considered or quantified this cost on an organizational level. Researchers have quantified the organizational cost of change such as employee attrition, and hiring and firing costs and training costs from loss of productivity as an organization changes direction. The author delves into the cost of change to the employees themselves: What human toll is there, then, in a changing, evolving organization? The author analyzes detailed data on stress-related medicine prescriptions for 92,860 employees working in 1,517 of the largest Danish organizations to analyze the relationship between organizational change and employee health. The findings suggest that the risk of receiving stress-related medication increases significantly for employees at organizations that undergo change and that, as the breadth and scope of the organizational tumult expand, so does the use of such stress-related medication. The insight for management: Radical organizational change has a real cost for your employees. Waverly W. Ding This paper investigates the effect of founders' professional-education background on the adoption of an “open science” technology strategy, which allows a firm's research personnel to do basic science research and publish the results in academic journals. Using a sample of 512 young biotechnology firms, the author finds that firms with proportionally more Ph.D.-holding entrepreneurs on the founding team have a higher probability of adopting an open science policy. This Ph.D. influence on open policy is especially notable in crowded technological niches and in an institutional environment in which open science has yet to become the industry norm. The insight for management: Entrepreneurial founders' background is an important factor in new-venture open science strategy and research structure. Timothy S. Simcoe, Dave M. Waguespack John Grisham, James Patterson, Mary Higgins Clark, and Danielle Steel, among others, are all well-known authors whose works are regularly New York Times Best Sellers. But does nearly every book they write deserve to be a best seller based on the merits of the work, or are they best sellers predominantly because of the reputation of the authors? If the author's name were not on the cover, would the book be as well received? The authors of this article ask this question: How much are we influenced by an author's identity when evaluating the quality of his or her work? The authors find that in academic circles name-based signals can explain up to three-quarters of the difference in publication rates between high- and low-status authors. That is, well-known authors get the benefit of the doubt and are more likely to be accepted for publication than those who are less well known. Interestingly, when attention is scarce, or search costs are high, the reputation effect is more pronounced. So the broader the pool of potential authors, the more pronounced the reputation effect can be. Furthermore, the better the reputation one has, the more attention one's idea gets, which helps give the idea more credibility and momentum, resulting in a virtuous cycle driven by author reputation. The insight for management: Don't be overly swayed by reputation when evaluating the quality of new ideas. Mei Xue, Lorin M. Hitt, Pei-yu Chen What factors drive the decision to adopt an Internet banking service and subsequent customer profitability? The authors examine the drivers of adoption of Internet banking and the linkages among adoption drivers and outcomes such as product acquisition, service activity, profitability, and customer loyalty. They relate Internet banking adoption to customer demand for banking services, the availability of alternative channels, customers' efficiency in service coproduction, and local Internet banking penetration. They find that customers who have greater transaction demand and higher efficiency and reside in areas with a greater density of online banking adopters are faster to adopt online banking. Consistent with prior research the authors find that online customers significantly increase their banking activity, acquire more products, and perform more transactions. These changes in behavior are not associated with short-run increases in customer profitability, but customers who adopt online banking have a lower propensity to leave the bank. Customers who live in areas with a high branch density or high Internet banking penetration increase their product acquisition and transaction activity more than Internet banking adopters in other regions. The insight for management: Efficient customers and those with high service demand show greater postadoption profitability. D. J. Johnstone How are forecasting and risk aversion related? The author evaluates forecasting methodologies in the face of the user's risk aversion and finds that the two are related. Simply, a highly risk-averse forecast user may need a much bolder forecast to obtain the same certainty equivalent as a more risk-tolerant one. Probabilities produced by maximum likelihood estimation can be either too conservative or too bold relative to those found by maximizing utility under more risk-tolerant or risk-averse score functions. A very (not very) risk-averse user who bets characteristically small (large) fractions of wealth based on a conservative forecast is bound to make a rapidly (slowly) increasing bet as the forecast probability becomes progressively bolder or more distant from the market probability. The insight for management: Professional forecasters should anticipate how a client with given risk aversion expects to gain from any given forecast, or forecast revision, before committing resources toward making a better informed forecast. Xue Dong He, Xun Yu Zhou That “losses loom large” is a basic tenet of understanding individuals' choices under uncertainty. The well-known cumulative prospect theory (CPT) holds that most people evaluate an outcome relative to a reference point; falling below that point can create more disutility than exceeding it by the same amount. People tend to evaluate options relative to a benchmark rather than according to a final wealth position. The authors extend CPT with a new measure of loss aversion for large payoffs, called the large-loss aversion degree (LLAD), and they show that the size of the loss relative to a benchmark is important for accurately describing and predicting behaviors. The insight for management: A better understanding of individuals' decision making under uncertainty helps to reveal the psychology and outcomes of investment and other decisions. Guoming Lai, Laurens Debo, Lin Nan Does desire to meet end-of-the quarter sales targets to placate investors and inflate the firm's short-term market value result in “channel stuffing”? A channel stuffing manager ships excess inventory to the downstream channel, allowing him to report sales in excess of demand in order to influence investors' valuation of the firm. The authors' modeling shows that when demand is lower than a certain proportion of the initial inventory level, the manager will pad sales and release the inflated sales report. Interestingly, savvy investors are able to “correct” the reported sales and are able to accurately infer the firm's value. However, when the demand exceeds this proportion of inventory, the manager will report that the initial inventory is sold out. Then the investors infer only that the real demand is relatively high, and the short-term value of the firm can be artificially inflated. Interestingly, this result influences the inventory decision, too. The authors find that both over- and underinvestment in the initial inventory can arise in this situation. The insight for management: Short-term managerial focus can result in inflated sales claims and poor inventory decisions and in some cases will not generate the anticipated short-term boost in company valuation. Jeffrey D. Shulman, Anne T. Coughlan, R. Canan Savaskan The day after Christmas is a nightmare for retailers, as hoards of shoppers descend upon them with merchandise to return. Between one-fifth and one-third of

Paul Glasserman, Zhenyu Wang The Capital Assistance Program (CAP) was created by the U.S. government in February 2009 to provide backup capital to large financial institutions unable to raise sufficient capital from private investors. Under the terms of the CAP, a participating bank receives contingent capital by issuing preferred shares to the Treasury combined with embedded options for both parties: The bank gets the option to redeem the shares or convert them to common equity, with conversion mandatory after seven years, and the Treasury earns dividends on the preferred shares and gets warrants on the bank's common equity. An important question: What is the value of these CAP securities? Based on the 18 publicly held bank holding companies that participated in the Supervisory Capital Assessment Program, the authors estimate that, compared to a market transaction, the CAP securities carry a net value of approximately 30% of the capital invested for a bank participating to the maximum extent allowed under the terms of the program. The insight for management: Despite lack of participation from industry, it appears the CAP program was favorable to participants. Ramon Casadesus-Masanell, Gastón Llanes At one time, Microsoft touted the public position that open-source software was the bane of the industry. Today, Microsoft has softened its position, allowing, for example, modifications to .Net software for use with Linux. Proprietary software companies benefit from intellectual capital rights, resulting in continued investment and improvement in code. However, open source has multitudes of possible user-developers to continue its enhancement. Does “mixed source”—both proprietary and open code in combination—capture the best of both worlds? When would a profit-maximizing software company engage in a hybrid model? The firm can leverage armies of potential coders but must make open modules available for others to use free of charge. The authors show that when the firm's modules are of high quality, the firm is more open under competitor open-source incompatibility than under compatibility, but the opposite is true if modules are of low quality. The authors also find that firms are more likely to open substitute, rather than complementary, modules to existing open-source projects. The insight for management: Open-source and proprietary software companies are exploring mixed-source forms of “coopetition” in software markets. Alexandros Kostakis, Nikolaos Panigirtzoglou, George Skiadopoulos Typical portfolio mix optimization gauges the risk of an asset by its historical valuation variance. The authors develop “risk-adjusted implied distributions”—forward-looking estimates of asset valuation variance based on market option prices. They form optimal portfolios and evaluate their out-of-sample performance and find that the use of their risk estimate makes the investor better off than if she uses historical returns' distributions to calculate her optimal strategy. The insight for management: Historical risk is not an indicator of future risk; better asset allocation strategies can be devised by using future risk estimates from options markets. Salvatore Piccolo, Markus Reisinger Does granting exclusive territory rights to franchises encourage tacit price collusion among manufacturers? Having exclusive territories might soften price pressures on retailers by limiting same-product sales in an area and, in the short run, increase profits. However, retailers might deviate from agreed-upon prices in order to increase retailer profits. If two competing manufacturers both follow exclusive territory rights strategies, are such exclusive territory assignments conducive for creating tacit price collusion between competing supply chains? The authors show that exclusive territories are a more suitable organizational mode for tacit price collusion; however, if the retailer offers substantial demand-enhancing services, it tends to undermine collusive opportunities. The insight for management: Dedicated territories can support tacit collusions in supply chains if retailers do not offer extensive demand-enhancing services. Sudheer Chava, Catalina Stefanescu, Stuart Turnbull The predicted loss distribution is a basic input for calculating the loan loss reserves and the economic capital and for computing portfolio risk metrics such as value-at-risk and expected shortfall. For an individual asset such as a bond or loan, the loss distribution depends on the probability of default and on the recovery rate given default. The authors develop a new model based on the analysis of a default and recovery data set over the horizon 1980–2008. They show that the specification of the default model has a major impact on the predicted loss distribution but that the specification of the recovery model is less important. They find evidence that industry factors and regime dynamics affect the performance of default models, implying that the appropriate choice of default models for loss prediction will depend on the credit cycle and on portfolio characteristics. The insight for management: Default probabilities and recovery rates are negatively correlated, and the magnitude of the correlation varies with seniority class, industry, and credit cycle. Yan Dong, Yuliang Yao, Tony Haitao Cui “Offer not available to existing customers” is a disclaimer often seen in ads from phone, cable, and banking companies seeking to acquire new customers. But how does this make existing customers feel? Despite the synergies between acquisition and retention of customers, should the same organization conduct both acquisition and retention activities? Designing the appropriate incentives to do both may be difficult; efforts toward acquisition of new customers might spoil existing ones. The authors develop incentive mechanisms that simultaneously address acquisition and retention of customers with an emphasis on the interactions between them. The authors find that when customer acquisition and retention are independent pursuits, the firm's profit is higher under direct selling than under delegation; however, when acquisition spoils retention, the firm's profit may be higher under delegation. The insight for management: Despite synergies between the activities, responsibility for acquisition and retention should be combined only when new acquisition does not come at the cost of customer churn due to inattention or other existing customer ill will. Sarang Deo, Itai Gurvich One of the most important operational challenges faced by emergency departments (EDs) in the United States is patient overcrowding. In periods of overcrowding, an ED can ask the emergency medical services (EMS) agency to divert incoming ambulances to neighboring hospitals, a phenomenon known as “ambulance diversion.” The EMS agency may accept this request provided that at least one of the neighboring EDs is not on diversion. From an operations perspective, properly executed ambulance diversion should result in resource pooling and reduce overcrowding and delays in a network of EDs. The authors explain that this potential benefit is not always realized because of decentralized diversion decisions. They show that in some cases EDs act “defensively” and do not accept diverted ambulances from the other ED. The insight for management: Cooperation between emergency rooms might be more effective if centrally planned. Stefan T. Trautmann, Ferdinand M. Vieider, Peter P. Wakker Research has shown that irrelevant details in problem framing reverse the decisions of otherwise rational agents. The authors find that preference reversals depend on ambiguity aversion, that is, the distaste for unknown probabilities of future outcomes. However, the reversals are not a function of context-dependent weightings of attributes. The insight for management: Measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion. Sebastian Ebert, Daniel Wiesen A prudent decision maker avoids downside risk and exercises precautionary savings in anticipation of negative outcomes. The aversion to risk—measured as symmetric variance around expected outcomes—is well known and understood, but skewness—the asymmetry of outcomes—is less studied. Prudence—or anticipatory saving—might be used to offset the risk of negative outcomes. The authors test for prudence and skewness preference in a laboratory setting. The authors find that prudence is observed on the aggregate and individual level and that prudence does not boil down to skewness seeking. The insight for management: Risk-mitigating precautionary saving behaviors are different from other risk-avoidance behaviors and may be more commonly used than other risk strategies.