Breaking the Cycle: How the News and Markets Created a Negative Feedback Loop in COVID-19
New research from CBS Professor Harry Mamaysky reveals how negativity in the news and markets can escalate a financial crisis.
New research from CBS Professor Harry Mamaysky reveals how negativity in the news and markets can escalate a financial crisis.
Adapted from “Global Value Chains in Developing Countries: A Relational Perspective from Coffee and Garments,” by Laura Boudreau of Columbia Business School, Julia Cajal Grossi of the Geneva Graduate Institute, and Rocco Macchiavello of the London School of Economics.
Adapted from “Online Advertising as Passive Search,” by Raluca M. Ursu of New York University Stern School of Business, Andrey Simonov of Columbia Business School, and Eunkyung An of New York University Stern School of Business.
This paper from Columbia Business School, “Meaning of Manual Labor Impedes Consumer Adoption of Autonomous Products,” explores marketing solutions to some consumers’ resistance towards autonomous products. The study was co-authored by Emanuel de Bellis of the University of St. Gallen, Gita Johar of Columbia Business School, and Nicola Poletti of Cada.
Co-authored by John B. Donaldson of Columbia Business School, “The Macroeconomics of Stakeholder Equilibria,” proposes a model for a purely private, mutually beneficial financial agreement between worker and firm that keeps decision-making in the hands of stockholders while improving the employment contract for employees.
At Columbia Business School, our faculty members are at the forefront of research in their respective fields, offering innovative ideas that directly impact the practice of business today. A quick glance at our publication on faculty research, CBS Insights, will give you a sense of the breadth and immediacy of the insight our professors provide.
As a student at the School, this will greatly enrich your education. In Columbia classrooms, you are at the cutting-edge of industry, studying the practices that others will later adopt and teach. As any business leader will tell you, in a competitive environment, being first puts you at a distinct advantage over your peers. Learn economic development from Ray Fisman, the Lambert Family Professor of Social Enterprise and a rising star in the field, or real estate from Chris Mayer, the Paul Milstein Professor of Real Estate, a renowned expert and frequent commentator on complex housing issues. This way, when you complete your degree, you'll be set up to succeed.
Columbia Business School in conjunction with the Office of the Dean provides its faculty, PhD students, and other research staff with resources and cutting edge tools and technology to help push the boundaries of business research.
Specifically, our goal is to seamlessly help faculty set up and execute their research programs. This includes, but is not limited to:
All these activities help to facilitate and streamline faculty research, and that of the doctoral students working with them.
We examine whether executive stock options (ESOs) provide managers with incentives to invest in risky projects. For a sample of oil and gas producers, we examine whether the coefficient of variation of future cash flows from exploration activity (our proxy for exploration risk) increases with the sensitivity of the value of the CEO's options to stock return volatility (ESO risk incentives). Both ESO risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach.
Articles in the financial press suggest that institutional investors are overly focused on current profitability, which suggests that as institutional ownership increases, stock prices reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors and sophisticated investors should be better able to use current-period information to predict future earnings compared with other owners.
This paper studies how to assign monitors to productive agents in order to generate signals about the agents' performance that are most useful from a contracting perspective. We show that if signals generated by the same monitor are negatively (positively) correlated, then the optimal monitoring assignment will be focused (dispersed). This holds because dispersed monitoring allows the firm to better utilize relative performance evaluation.
This paper studies how to assign monitors to productive agents in order to generate signals about the agents' performance that are most useful from a contracting perspective. We show that if signals generated by the same monitor are negatively (positively) correlated, then the optimal monitoring assignment will be focused (dispersed). This holds because dispersed monitoring allows the firm to better utilize relative performance evaluation.
This research investigates whether oil and gas producing firms use abnormal accruals and hedging with derivatives as substitutes to manage earnings volatility. Firms engaged in oil exploration and drilling are exposed to two kinds of risks that can cause earnings volatility: oil price risk and exploration risk. Firms can use abnormal accrual choices and/or derivatives to reduce earnings volatility caused by oil price risk, but cannot directly hedge the operational risk of unsuccessful drilling.
We investigate the relation between dividend changes and future profitability, measured in terms of either future earnings or future abnormal earnings. Supporting "the information content of dividends hypothesis," we find that dividend changes provide information about the level of profitability in subsequent years, incremental to market and accounting data. We also document that dividend changes are positively related to earnings changes in each of the two years after the dividend change.
We investigate the relation between dividend changes and future profitability, measured in terms of either future earnings or future abnormal earnings. Supporting "the information content of dividends hypothesis," we find that dividend changes provide information about the level of profitability in subsequent years, incremental to market and accounting data. We also document that dividend changes are positively related to earnings changes in each of the two years after the dividend change.
Did analysts contribute to perpetuating the stock market bubble of 2000? In my view, a considerable analysis during the bubble was suspect. I lay out here what I see as the mistakes, as a matter of historical record. My aim, however, is not just to document the poor thinking during the bubble, but to convey what good, orderly thinking about fundamental value involves—to avoid mistakes in the future.
We examine the hypothesis that dividend taxes are capitalized into share prices by focusing on investors? implicit valuations of retained earnings versus paid-in equity. Retained earnings are distributable as taxable dividends, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the United States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tax rates across U.S.
Financial statement analysis has traditionally been seen as part of the fundamental analysis required for equity valuation. But the analysis has typically been ad hoc. Drawing on recent research on accounting-based valuation, this paper outlines a financial statement analysis for use in equity valuation. Standard profitability analysis is incorporated, and extended, and is complemented with an analysis of growth. An analysis of operating activities is distinguished from the analysis of financing activities. The perspective is one of forecasting payoffs to equities.
Financial statement analysis has traditionally been seen as part of the fundamental analysis required for equity valuation. But the analysis has typically been ad hoc. Drawing on recent research on accounting-based valuation, this paper outlines a financial statement analysis for use in equity valuation. Standard profitability analysis is incorporated, and extended, and is complemented with an analysis of growth. An analysis of operating activities is distinguished from the analysis of financing activities. The perspective is one of forecasting payoffs to equities.
We examine the hypothesis that dividend taxes are capitalized into share prices by focusing on investors' implicit valuations of retained earnings versus paid-in equity. Retained earnings are distributable as taxable dividends, whereas paid-in equity is distributable as a tax-free return of capital. Consistent with dividend tax capitalization, firm-level results for the United States indicate that accumulated retained earnings are valued less per unit than contributed capital. In addition, differences in dividend tax rates across U.S.
In this paper I use a principal-agnet framework to explore the relation between the hierarchical structure of firms and the accounting information technologies available to them. My analysis is related to that in Melumad, Mookherjee, and Reichelstein [1992] and Ziv [1993]. In this paper, I take an approach that allows the principal to choose the number of layers in the firm, the number of agents in each layer, and the quantity and quality of information in the firm (subject to the available information technology).
When consumers' willingness-to-pay increases by a uniform amount, the change in the resulting monopoly price is generally indeterminate. Our analysis identifies sufficient conditions on the underlying demand curve which predict both the sign and the magnitude of the resulting price change.
This paper studies implementation in a principal-agent model of adverse selection. We explore ways in which the additional structure of principal-agent models (compared to general implementation models) simplifies the implementation problem. We develop a connection between the single crossing property and monotonicity conditions which are necessary for Nash and Bayesian Nash implementation. We also construct simple implementing mechanisms that rely on the single crossing property and on assumptions about the outcome set frequently made in the principal-agent literature.
This paper compares the performance of standard-cost with negotiated transfer pricing under asymmetric information. Negotiated transfer pricing generally achieves higher expected contribution margins, as this method tends to be more efficient in aggregating private information into a single transfer price. Standard-cost transfer pricing confers more bargaining power to the supplier and therefore generates better incentives for this division to undertake specific investments. The opposite holds for buyer investments.
We study the economic consequences of alternative hedge accounting rules in terms of managerial hedging decisions and wealth effects for shareholders. The rules we consider include the "fair-value" and "cash-flow" hedge accounting methods prescribed by the recent SFAS No. 133. We illustrate that the accounting method used influences the manager's hedge decision. We show that under no-hedge accounting, the hedge choice is different from the optimal economic hedge the firm would make under symmetric and public information.
In this paper we develop a residual-income model showing how taxes on dividends affect the relative valuation of retained earnings versus contributed equity, as well as the value of expected future earnings. Tests of predictions from our model for a sample of Compustat firms from 1975-94 suggest that overall firm value, and the relative valuation weights investors assign to retained earnings, contributed equity, and current earnings, all critically depend on dividend taxes.
The paper provides early evidence on the informativeness of commodity price risk measures required by the Securities and Exchange Commission's new market risk disclosure rules (SEC 1997). I use existing disclosures of oil and gas producers (O&G) to obtain proxies for the tabular and sensitivity analysis disclosures required by the new SEC rules. I find that proxies for the tabular and the sensitivity analysis format are significantly associated with O&G firms' stock return sensitivities to oil and gas price movements.
This paper studies an incomplete contracting model to compare the effectiveness of alternative transfer pricing mechanisms. Transfer pricing serves the dual purpose of guiding intracompany transfers and providing incentives for upfront investments at the divisional level. When transfer prices are determined through negotiation, divisional managers will have insufficient investment incentives due to "hold-up" problems. While cost-based transfer pricing can avoid such "hold-ups", it does suffer from distortions in intracompany transfers.
This paper lays out alternative equity valuation models that involve forecasting for finite periods and shows how they are related to each other. It contrasts dividend discounting models, discounted cash flow models, and "residual income" models based on accrual accounting. It shows that some models that are apparently different yield the same valuation. It gives the general form of the terminal value calculation in these models and shows how this calculation serves to correct errors in the model.
It is common to apply multipliers to both earnings and book value to calculate approximate equity values. However, applying a price-earnings multiplier or a price-to-book multiplier typically produces two valuations and the analyst is left with the question of how to combine them into one valuation. This paper calculates weights that combine the valuations and shows that these weights vary over the difference between earnings and book value, doing so systematically over time.
It is common to apply multipliers to both earnings and book value to calculate approximate equity values. However, applying a price-earnings multiplier or a price-to-book multiplier typically produces two valuations and the analyst is left with the question of how to combine them into one valuation. This paper calculates weights that combine the valuations and shows that these weights vary over the difference between earnings and book value, doing so systematically over time.
Arya, Glover, and Sunder (AGS) contribute to the earnings management literature along two dimenstion. First, they classify existing explanations for earnings manipulation, based on the assumption of the revelation principle that is violated. Second, they introduce a model where allowing a manager to manipulate earnings serves as a commitment device. They show that both the owners and the manager can benefit from earnings management (a Pareto improvement). My discussion first deals with the general phenomenon of earnings management and then with the specifics of the AGS model.
Studies the responsiveness of manager clients to opinions made by auditors based on their qualifications through an equilibrium model. Discussion on the two-period equilibrium model; Propositions on high report of auditors; Related studies on audit opinions and market opinion.
The article develops a theoretical framework that explains firms' reactions to accounting standards developed by the U.S. Financial Accounting Standards Board under its extended adoption policy. The proposed theory highlights the differences between recognized and disclosed accounting information and provides a link between a firm's choice of whether to recognize or disclose information under new accounting standards, and stock price behavior around the adoption announcement.
This study investigates the timing and method of adoption of Statement of Financial Accounting Standards(SFAS) No. 106: Employers' Accounting for Post-Retirement Benefits Other Than Pensions (FASB [1990]). Our study is motivated by the Financial Accounting Standard Board's (FASB) policy of extending the adoption period of new accounting standards beyond one fiscal year. Specifically, during 1991 and 1992, firms could adopt SFAS No. 106, disclose the expected impact of adoption, or delay adoption/disclosure until fiscal 1993.
The paper demonstrates empirically that GAAP earnings have properties to serve as a substitute for dividends in equity valuation analysis. Dividends reduce subsequent GAAP earnings, and "intrinsic" equity prices calculated by forecasting earnings are thus reduced by current dividends. This is in accordance with the Miller and Modigliani principle—the displacement property—which states that the payment of dividends reduces prices, dollar for dollar.
This paper studies information system design in a model of double moral hazard in which there is both a decision problem and a control problem. If either problem is considered in isolation, an information system that provides more public information is preferred. However, an information system that provides less public information can, in fact, be desirable because of an interaction between the two problems. The benefit of choosing an information system that provides less information is that it serves as a substitute for commitment for the principal.
In this paper, we critically examine the recommended practice of matching currency footprints. We argue that while matching currency footprints reduces profit variability, this practice can also cause reductions in expected profitability, a point that appears to have been overlooked in current literature. The expected profit effects of matching depend on the trade-off between possible expected cost savings of sourcing abroad verses the loss of what we refer to as "strategic flexibility" in responding to competitors' pricing and quantity decisions.
A study was conducted to interpret the price-earnings ratio (P/E) and the market-to-book ratio (P/B) and describe their articulation. It also aimed to explain the role of book rate-of-return on equity in determining the ratios and the relation between them. The P/E ratio signifies future growth in earnings positively related to expected future return on equity and negatively related to current return on equity. On the other hand, the P/B ratio indicates only expected future return on equity.
We examine associations between accounting measures of earnings and stock returns in Japan over varying window lengths and compare them to those for the United States. Our results are consistent with the view that Japanese investors utilize less accounting information in their pricing of equities than do their U.S. counterparts. This was particularly evident in the 'boom' period of the mid to late 1980s when the fundamental values conveyed by accounting measures appear to have been largely ignored.
This note considers a principal–multi-agent model of a firm subject to adverse selection. With just the usual optimal (incentive-constrained) contracts being offered, there exist multiple (Bayes–Nash) equilibria in the agents' subgame. Moreover, from the agents' perspective, there exists an equilibrium that Pareto-dominates the equilibrium desired by the principal. By exploiting the structure of the model, this note develops a new approach for eliminating unwanted equilibria (while retaining the desired equilibrium).
This article examines the tax-compliance game between taxpayers, a tax-collecting agency, and third-party tax-return prepares. In our model, taxpayers are uncertain about their taxable income and may hire tax practitioners to reduce tax uncertainty. We examine the viability of tax practitioners as a signaling device (taking into account the effects on the behavior of the tax-collecting agency) and investigate the desirability of encouraging (or discouraging) the use of tax practitioners via the use of alternative tax-crediting rules.
In this study we compare the value relevance of accounting measures for U.S. and German firms matched on industry and firm size, and evaluate the incremental informativeness of earnings adjusted on the basis of a formula proposed by analysts.
Firms registered outside the United States and listed on a primary U.S. exchange may provide their U.S. shareholders with financial statements prepared under their domestic (non-U.S.) generally accepted accounting principles (GAAP). The Securities and Exchange Commission requires such firms to reconcile their reported earnings and shareholders' equity to U.S. GAAP as part of a Form 20-F filing. These reconciliations provide a set of precise measures of the differences created by alternative accounting practices.
This paper documents the revaluation practice over a ten-year period from 1981 of a large sample of Australian firms and examines the association between these revaluations and stock market prices and returns. The analysis uses several different approaches in order to obtain a thorough understanding of the reevaluation process in Australia. We include a description of hand-collected data from published financial statements, follow-up interviews with chief financial officers of the sample firms, and association tests between hand-collected accounting data and stock market measures.
While under some circumstances information sharing in oligopoly may be beneficial, the literature ignores the possibility of strategic information sharing by assuming verifiability of data. I endogenize the incentives for truthful information sharing and prove that if firms have the ability to send misleading information, they will always do so. To overcome this problem I introduce a (costly) mechanism through which the firm will, in its own best interest, reveal the true value of its private information, even though outside verification is impossible.
In this article, I explore the following issue: Can differences in the way firms are organized be explained in terms of the underlying information structures? Alternatively stated, what are the consequences of changes in the nature and precision of performance measures for the optimal firm structure, that is, the optimal number of workers and the resulting workers' contributions to the production process?
Price deviations from basic valuation models based on accounting earnings and book value of owners' equity are used to test the intrinsic value explanation of the price-earnings and price-book value anomalies. Relative price deviations from the implied benchmark prices are used to assign years into high and low deviation groups. Traditional zero investment hedge portfolios are formed in each year, and the returns are compared across high and low deviation years.
Research was conducted to investigate the value implications of the changes in annual earnings. It was assumed that a relationship exists between the persistence of earnings and the changes in stock prices associated with reported earnings innovations. The study yielded three major findings. Results showed that other data contained in annual financial statements can be used to evaluate pricing multipliers. Findings also revealed the variability of the persistence of earnings and the pricing multipliers indicated by financial statements.
This note shows that in environments without externalities or aggregate feasibility constraints, extremely simple mechanisms can be used to approximately ("virtually") implement social choice functions in iteratively strictly undominated strategies.
The paper analyzes the contemporaneous association between market returns and earnings for long return intervals. The research design exploits two fundamental accounting attributes: (i) earnings aggregate over periods, and (ii) expanding the interval over which earnings are determined, is likely to reduce "measurement errors" in (aggregate) earnings. These concepts lead to the level of (aggregate) earnings as a natural earnings variable for explaining security returns.
This article explores the differential measurement problems related to the earnings components by invoking the standard errors-in-variables perspective on estimated coefficients. A more traditional way of looking at accounting recognizes the process as one of measurements. That is, the analysis of transactions leads to line items in the financial statements, which in turn aggregate into the bottom line numbers: earnings and book value. The disclosures of the line items clearly suggest that the accountant is aware of the insufficiency of earnings and book values as determinants of values.
This article outlines research developments that reconcile both fundamental analysis and accounting measurement to the modern theory of valuation. Three features of accounting suggest it may play a role. First, it has the nominal attributes of a value measurement system. The financial accounting process is focused on tracking the book value of equity or net worth. The final entry in the periodic accounting cycle is the close to book values.
This article evaluates the role of rate of return (ROE) in assessing cross-sectional differences in prices and price changes of ROE. Accounting ROE is traditionally regarded as the major summary number in financial statement analysis. Findings of the study indicate that ROE is best interpreted as a profitability measure and not as a risk measure and observed ROE indicates future profitability and thus distinguishes market-to-book ratios. The comparison of earnings to book values in the ROE calculation provides information about how earnings project to future earnings.
Japan's capital markets have played a crucial role in the recent increase in the globalization of international capital markets. As a result it has become important to understand the similarities and differences in the way Japanese markets operate in comparison to the more familiar Anglo-American environment. One of the major differences that has attracted a great deal of attention is the relatively high average price/earnings [PE] ratio (Viner [1988]) for the stocks listed on the Tokyo Stock Exchange.
In this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings/returns associations. The primary model motivating this research relies on the idea that book value (owners' equity) and market value are both "stock" variables indicating the wealth of the firm's equity holders. The related "flow" variables (after adjusting for dividends) are, respectively, earnings divided by price at the beginning of the return period (A/P-1) and market returns.