Fall Research Rundown
A collection of cutting-edge research happening at the Tepper School.
The Ethics of Delivering Bad News
Emily DeJeu, Assistant Professor in Business Communications
Impression management (IM) involves how people work to control others' impressions of them. Business communication textbooks offer IM strategies to help students learn how to soften bad news (e.g., denying customers' requests, laying off employees, reporting poor financial information). But corporations sometimes use these strategies in ethically questionable ways, and recent years have seen a growing number of legal battles related to the IM strategies firms use when reporting financial data to investors.
A new study analyzed IM strategies in a 1996 landmark case of ethically dubious corporate financial reporting. The study found that in their writing and release of press releases, the pharmaceutical company IVAX manipulated three standard IM strategies by overamplifying the firm's power to fix a financial crisis, substantially downplaying bad news, and concealing damaging information. IVAX also used a fourth, less familiar strategy, burying contradictory information in legal disclaimers. The study's author concludes with suggestions for updating guidance around using IM strategies to mitigate bad news and offers flexible guidelines for using the strategies ethnically.
The article, The Ethics of Delivering Bad News: Evaluating Impression Management Strategies in Corporate Financial Reporting, appears in the Journal of Business and Technical Communication and is authored by DeJeu, EB (Carnegie Mellon University).
Gendered Assumptions About Job Candidate Commitment
Oliver Hahl, Associate Professor of Organization Theory, Strategy, and Entrepreneurship
Job candidates who are overqualified for a job typically have less success getting the job than those who are not overqualified. But unfair discounting of women's qualifications and negative assumptions about women's commitment to their careers imply that female candidates must be overqualified to achieve the same outcomes as males.
Two new studies support this assertion, showing that gender differences in how overqualification affects hiring are due to the type of commitment--to firm or career--most prominent during evaluations. Specifically, overqualified men are perceived to be less committed to the prospective firm and are therefore less likely to be hired than sufficiently qualified men. But overqualified women are perceived to be more committed to their careers than qualified women because overqualification helps overcome negative assumptions about women’s career commitment.
The findings of this research suggest that women must demonstrate their commitment to both the firm and their career, while men need demonstrate their commitment only to the firm. The research shows that differences in how overqualification affects male and female candidates' chances of being hired are evidence of gender inequality in hiring processes that operate through gendered assumptions about commitment.
The article, He's Overqualified, She's Highly Committed: Qualification Signals and Gendered Assumptions About Job Candidate Commitment, appears in Organization Science and is authored by Campbell, EL (University of California, San Diego), and Hahl, O (Carnegie Mellon University). Copyright 2022 INFORMS. All rights reserved.
Tae Wan Kim, Associate Professor of Business Ethics
The piece brings together 20 authors across 5+ disciplines to argue for a new approach to ethics in the machine age –a topic of critical scientific and societal interest that arguably stands to have an enormous impact on our future. This work is a call for research and action. It argues for the need and opportunity to develop new research directions that aim to help us (and future generations) ensure the artificial intelligence systems we develop and use are ethical, safe, and beneficial for all. This innovative interdisciplinary research will also allow us to unlock age-old mysteries about human ethics and related philosophical questions that have broad implications about our social, economic, and political systems.
The article, Computational Ethics, is published in Trends in Cognitive Sciences and is authored by Edmond Awad, Sydney Levine, Michael Anderson, Susan Leigh Anderson, Vincent Conitzer, M.J. Crockett, Jim A.C. Everett, Theodoros Evgeniou, Alison Gopnik, Julian C. Jamison, Tae Wan Kim, S. Matthew Liao, Michelle N.Meyer, John Mikhail, Kweku Opoku-Agyemang, Jana Schaich Borg, Juliana Schroeder, Walter Sinnott-Armstrong, Marija Slavkovik, Josh B. Tenenbaum.
A Mechanism to Allocate Seats in Courses to Students Efficiently and Fairly
Alexey Kushnir, Associate Professor of Economics
Every academic term, thousands of U.S. post-secondary institutions assign course schedules to millions of students. In a new article, researchers propose a mechanism to allocate seats in courses to students; the mechanism is based on ideas of competitive markets with fake currency. The new mechanism ensures that course seats are allocated efficiently and fairly subject to course priority constraints based on factors such as students’ seniority and majors. Also, students have limited ability to manipulate the system.
Using simulations and theoretical analysis, the researchers show how university registrars who use the mechanism can improve course allocation compared to the state-of-the-art approaches. The mechanism also provides registrars with valuable information on student demand, making it easier to adjust class sizes, timing, and sections to boost students’ satisfaction. The article, Undergraduate Course Allocation Through Competitive Markets, appears as a preprint on the SSRN website and is authored by Kornbluth, D (Carnegie Mellon University), and Kushnir, A (Carnegie Mellon University). Copyright 2022. All rights reserved.
Shifting Determinants of Homeownership
Robert A. Miller, Richard M. Cyert and Morris DeGroot Professor of Economics and Statistics; Professor of Economics and Strategy
Homeownership has declined in the last 50 years as a result of individuals postponing the purchase of their first home. This delay has coincided with postponements of marriage and fertility, and with increases in women’s participation in the labor force. Researchers developed a dynamic model of female labor supply, fertility (i.e., timing of births), and transition from renting to owning a first home, to create a unifying framework that integrates these joint decisions.
Data came from the Panel Study of Income Dynamics (1968 to 1993), a longitudinal survey of U.S.families that measures economic, social, and health factors over multiple generations. Higher house prices and increased wage rates for women caused many households to postpone their purchase of a first home because leisure and fertility complement homeownership. Education and women’s participation in the workforce reinforce and raise the value of owning a home. The researchers’ estimates suggest that the effects of rising house prices and wage rates more than offset the effects of higher levels of education and workforce participation.
The article, American Dream Delayed: Shifting Determinants of Homeownership, appears in International Economic Review and is authored by Khorunzhina, N (Copenhagen Business School), and Miller, RA (Carnegie Mellon University). Copyright 2021 the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Examining the Effect of the Sarbanes-Oxley Act on CEOs’ Compensation and Incentives
Robert A. Miller, Richard M. Cyert and Morris DeGroot Professor of Economics and Statistics; Professor of Economics and Strategy
The Sarbanes-Oxley Act was passed in 2002 to mandate practices in U.S. public companies’ financial record keeping and reporting. The law was passed in response to several accounting scandals that resulted in the dismissal of CEOs and, in some cases, prosecution for fraud, conviction, and imprisonment. In a new study, researchers used data from S&P1500 firms to examine the effect of the law on CEOs’ compensation plans and incentives. The authors use four measures to quantify the impact onthe inherent conflict of interest between shareholders and their CEO, and the cost of resolving that conflict through incentives embedded with the CEO compensation package.
The study found that the law 1) reduced the conflict of interest between shareholders and their CEOs, mainly by reducing shareholders’ loss as a result of CEOs deviating from their goal of expected value maximization; 2) increased the cost of agency, or the risk premium CEOs are paid to align their interests with those of their shareholders;3) raised administrative costs in the primary sector (including utilities and energy) but in the other sectors studied (services and consumer goods), the effect was more nuanced, and 4) had no effect on CEOs’ attitudes toward risk.
The article, Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation, appears in the Journal of Accounting Research and is authored by Gayle, G-L (Washington University in St. Louis and Federal Reserve Bank of St. Louis), Li, C(New York University-Shanghai), and Miller, RA(Carnegie MellonUniversity). Copyright 2022The Chookaszian Accounting Research Center at the University of Chicago Booth School of Business. All rights reserved.
Markets With Within-Type Adverse Selection
Anh Nguyen, Assistant Professor of Economics
In economics, adverse selection generally refers to a situation in which sellers possess information about the quality of a product that buyers do not, or vice versa. This imbalance—called asymmetric information—can occur in a variety of transactions, including sales of used cars or insurance, and can contribute to market failures.
In a new study, researchers examined bilateral trades in which a seller owns multiple units of a product, and each unit is of potentially different quality and indistinguishable by the buyer before the transaction. The study explains why a bulk purchase contract is often used in markets with these features. More generally, the study found that every optimal allocation that takes into account the buyer’s incentive to sell bad quality products first must involve a trade that has threshold property: If the seller has more than some threshold unit of the product, the entire endowment is traded, but if the seller has less than that threshold, they trade all but the high-quality units of the property.
The article, Markets With Within-Type Adverse Selection, appears in The American Economic Journal: Macroeconomics and is authored by Nguyen, A (Carnegie Mellon University), and Tan, TY (University of Nebraska-Lincoln).Copyright 2022.All rights reserved.
Quadratic Hedging of Risk Neutral Values
Risk-neutral valuation is a method that yields no arbitrage values for the cash flows of financial or real assets, including ones that depend on the price risk for energy and other commodities. It is always uniquely associated with a hedging strategy if markets are complete, which is the exception in theory and never the case in practice. A new study applied quadratic hedging, which is conceptually simple and partially analytically tractable, in a nonstandard fashion to approximately offset the change in the value of an asset obtained from using any chosen risk-neutral measure when markets are incomplete. Procedures that rely on a complete market assumption are compatible with the proposed approach and examples suggest that they can perform near optimally. The method applies to fully risk-neutral valuation of assets with cash flows that depend on both market and private risks, reducing to quadratic hedging if markets are partially complete, which provides a novel justification for this valuation strategy.
The article, Quadratic Hedging of Risk Neutral Values, is published in Energy Economics and is authored by Secomandi, N (Carnegie Mellon University).
The Empirical Saddlepoint Estimator
Fallaw Sowell, Associate Professor of Economics
The saddlepoint approximation was developed to approximate distributions and because of its accuracy, is used in fields such as numerical analysis and actuarial sciences. In statistics and econometrics, the saddlepoint approximation and its empirical version—the empirical saddlepoint (ESP) approximation—have been used to approximate finite-sample distributions.
In a new study, researchers defined a moment-based estimator that maximizes the ESP approximation of the distribution of solutions to empirical moment conditions, which they call the ESP estimator. In the study, they proved its existence, consistency, and asymptotic normality, and proposed new test statistics. They also demonstrated a previously unknown connection between the saddlepoint approximation and moment-based estimation. This approximation can be utilized to address data problems and analyze data when smaller samples are all that are available. Various settings in which saddlepoint approximation can be used include adverse reactions to vaccines, vehicle malfunctions, etc.
The article, The Empirical Saddlepoint Estimator, appears in Electronic Journal of Statistics and is authored by Holcblat, B (University of Luxembourg), and Sowell, F (Carnegie Mellon University). Copyright 2022. All rights reserved.
Creating Controversy in Proxy Voting Advice
Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance
Proxy advisory firms have become major players in corporate governance, making recommendations on how to cast votes, providing reports for subscribing shareholders, and significantly affecting voting outcomes. Thus, the quality of proxy advisors’ recommendations is important for policymakers and those who work in industry.
In a new working paper, researchers created a model to analyze the design of recommendations (typically available to all market participants) and research reports (available only to subscribers) by a proxy advisor, whose objective is to maximize its profits from selling information to shareholders. The authors show that even if all shareholders’ interests are aligned and aim at maximizing firm value, the proxy advisor benefits from biasing its recommendations against the a priori more likely alternative. Such recommendations create controversy about the vote, increasing the probability of a close outcome and raising each shareholder's willingness to pay for advice. In contrast, it serves the proxy advisor’s interest to make private research reports unbiased and precise.
These results help rationalize the one-size-fits-all approach to recommendations, which proxy advisors are typically criticized for. Moreover, they highlight that proxy advisors' recommendations may not be a suitable benchmark for evaluating the votes of asset managers. Hence, the paper offers a reinterpretation of the empirical evidence that large institutional investors, such as BlackRock and Vanguard, often deviate from negative proxy advisory recommendations and support management. Such voting could be a way to correct for the anti-management controversy bias in proxy advisors’ recommendations, rather than reflect a shareholder’s passivity or bias towards management.
The working paper, Creating Controversy in Proxy Voting Advice (National Bureau of Economic Research (NBER) working paper No. w29036) is authored by Malenko, A. (University of Michigan and CEPR), Malenko, N. (University of Michigan, CEPR, and ECGI), and Spatt, C. (Carnegie Mellon University and NBER). Copyright 2022 the Authors. All rights reserved.
Technical and Intellectual Forces That Have Generated the “Standardization Trap” in Macroeconomics
Stephen Spear, Professor of Economics
In macroeconomic analysis, two competing dynamic, stochastic, general equilibrium models have evolved as workhorse models. They are used in monetary economics, business cycle theory, economic growth, public finance/optimal taxation, and fiscal policy analysis. In a new book, ‘Overlapping Generations: Methods, Models, and Morphology’, authors Stephen Spear and Warren Young explain the technical and intellectual forces that have generated the current situation in which macroeconomics seems to be caught in a “standardization trap” based on a problematic choice of models.
The first model, the Infinite Lived Agent Model (ILA), was developed in 1928 as a way to model economic growth; the second, the Overlapping Generations Model (OLG), first appeared in 1947 and contained features that contradicted the first. The specific differences come from the way the two models view families. In the ILA, families are treated as dynasties that last forever. In the OLG, families live finite lives and make only accidental bequests to their offspring. Both models have been refined over the years since then, and both have been the subject of numerous articles and other writing, with the ILA model pulling more weight than the OLG. In their book, the researchers look at key papers in the literature on the development of the two models and show how and why the OLG model became less popular over time, while the ILA framework grew in popularity, even though the hypothesis that parents optimally plan out their children’s economic lives has been thoroughly refuted by the data.
The book, Overlapping Generations: Methods, Models, and Morphology, by Stephen Spear, (Carnegie Mellon University), and Warren Young, (Bar Ilan University). Copyright 2022. All rights reserved. The book will be published by Emerald Press as monograph in the International Symposia In Economic Theory and Econometrics, William A. Barnett, ed.
Make Your Business Quantum-Ready Today
Sridhar Tayur, Ford Distinguished Research Chair; University Professor of Operations Management
Quantum computing is a rapidly emerging way to compute that merges quantum mechanics with computer science and information theory, with a large enough payoff for business managers to feel compelled to invest. But there is uncertainty over when—if at all—quantum computing will become widely available for mainstream business applications. Thus, managers find themselves torn between waiting for the technology to mature while risking competitors taking the lead and investing now but with no sight of returns on this investment.
A new article explains in three steps how managers can take a low-risk approach to investing today in quantum-inspired computing, which emulates quantum computing on existing digital computers. When quantum computing becomes widely accessible, managers can reuse the algorithms and applications they developed, placing them ahead of the competition.
Find more information about Quantum Computing initiatives at the Tepper School.
The article, Make Your Business Quantum-Ready Today, is published in Management and Business Review and is authored by Sodhi, MS (University of London), and Tayur, SR (Carnegie Mellon University).