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Accounting & Management

Andrew Jing Liu

Abstract:
Accuracy, Timeliness, and Managerial Discretion of Fair Value Pricing: Evidence from the US Banking Industry
This paper investigates how recent institutional developments impact the potential channels, and thus available discretion, by which managers can manipulate reported fair values. First, I use extensive field research to document the mechanisms used by banks to procure and report fair values—particularly incorporating the impact of the 2011 FINRA’s Trade Reporting and Compliance Engine (TRACE), and concurrent increase in independent third-party vendors. Key insights include that (i) banks predominately apply third-party vendors’ feeds to generate financial statements (with nearly 100% of vendors’ feeds passing automatically to reported financial statements, with only rare adjustments); and (ii) external auditors predominantly relying on different vendors’ prices to verify and challenge banks’ inputs. Second, I employ three proprietary datasets of daily financial-instrument level pricing—capturing both TRACE and third-party vendors—to document the following insights. I find that vendors’ evaluated prices dominate historical costs in all performance metrics, confirming they provide a more accurate, objective, and reliable proxy for fair value than historical cost. I also find that vendors’ fair values are value-relevant and account for 90% of the trade-to-trade price variance, creating an upper bound on managerial discretion (of only 15% of the original level). Finally, I find that bank managers respond to these newly imposed constraints by alternatively engaging in more spoofing-transaction based fair value manipulations: suggesting this is a likely (even primary) channel by which manipulation can be attained. Overall, the evidence suggests that fair values, particularly after the above institutional developments, appear less subjective, less costly to implement, and more convenient for auditors to verify and challenge, than the literature has previously reported.
Faculty Advisor(s): D. Campbell (Chair), A. Sunderam, and E. Riedl
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Jee Eun Shin

Abstract:
Relational Disruptions as a Control Mechanism
This study examines the effect of changes in relationships (i.e. relational disruptions) on performance. On-going relationships facilitate the development of synergies in productivity such that relational disruptions could hamper subsequent performance. However, increasing familiarity in on-going relationships may inhibit monitoring incentives such that relational disruptions may improve subsequent performance due to fresh-look benefits. This study investigates this debate empirically using data from a roadside assistance company that outsources its towing services to a nationwide vendor network. My findings show that performance subsequent to relational disruptions is affected differently depending on the nature of the change in the relationship. Specifically, I proxy for disruptions in manager-vendor relationships using vendor network manager changes, and examine vendor performance subsequent to such relational disruptions. Employee-initiated manager changes decrease subsequent vendor performance which is suggestive of adjustment costs to manager changes that are not intended by the organization. Company-initiated manager changes reverse declined vendor performance suggesting that network manager changes are used as a control mechanism to sustain vendor performance. My findings highlight the importance of relationship dynamics in incentive contracting.
Faculty Advisor(s): D. Campbell (Chair), S. Datar, B. Hall, P. Healy, and C. Wang
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Aaron Yoon

Abstract:
Private and Public Disclosures in Countries with Weak Institutional Environments: Evidence from Shanghai-Hong Kong Connect
I study whether voluntary disclosure can be credible when the enforcement institutions that deter managers from engaging in cheap-talk are weak. Using China, a classic example of such a market, I examine the effect of a market liberalization pilot program, which increased foreign investors’ future ability to invest in select Shanghai stocks, on affected firms’ disclosure policies. I find that affected firms increased private disclosure (corporate access and private dial-ins) in anticipation of the program’s implementation, but find no changes in public disclosure (press releases and management forecasts). Firms that increased private disclosure experienced an increase in foreign institutional holdings after the implementation and exhibited lower volatility and higher stock returns and foreign holdings, during a subsequent market crash. Overall, the results suggest that voluntary disclosure supports investor confidence even in markets without strong enforcement institutions, albeit through private (instead of public) channels.
Faculty Advisor(s): P. Healy (Co-Chair), K. Palepu (Co-Chair), G. Serafeim, and R.Verdi
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Business Economics

David Choi

Abstract:
Perceptions of Competence: Monetary Policy and the Reputational Accelerator
Central banks are often concerned about their reputation for competence. This paper addresses why, developing a new macroeconomic model in which perceptions of a central bank's competence affect monetary policy's ability to stabilize aggregate outcomes. The central bank receives imperfect signals on the state of the economy, with the precision of its signals private information to the central bank. A reputation for competence is formed rationally by agents in equilibrium through the observation of aggregate outcomes. High reputation improves equilibrium outcomes for the central bank, through a coordination and confidence channel that alleviates informational externalities generated by the dispersion of information in the economy. The endogenous formation of perceptions amplifies the effects of monetary errors; favorable monetary outcomes endogenously lead to more favorable outcomes in the future, and vice-versa, an effect I call the reputational accelerator. The model also exhibits excess output volatility, and endogenously generates large downside tail events, particularly after long periods of stability. Such central bank `Minsky moments' arise from the decoupling of equilibrium responses to signals from their true informative content. Breaking this sharp link also generates a time-varying inefficiency wedge between the equilibrium and efficient responses to public signals, adding to the theory of dispersed information. Using individual level private forecasts, I find empirical support for the model, showing that FOMC announcements act as focal points for expectations, with this effect stronger when public forecasts by the FOMC were more accurate in the recent past.
Faculty Advisor(s): N. Gregory Mankiw (Chair), Emmanuel Farhi, Ben Friedman, and X. Gabaix
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Anastassia Fedyk

Abstract:
Front Page News: The Effect of News Positioning on Financial Markets
This paper estimates the effect of presentation of information on financial markets, using quasi-random variation in prominent "front page" positioning of news on the Bloomberg terminal. The front page and non-front page articles are indistinguishable by either algorithmic analysis or by the target audience of active finance professionals. Front page positioning induces 280% higher trading volumes and 180% larger price changes within the first ten minutes after publication. Front page articles also see a stronger price drift from these initial reactions for the next 30-45 minutes. Subsequently, non-front page information begins to catch up, but the incorporation of non-front page information is substantially more gradual. As a result, the initial effects of positioning persist for days after the news. The effects induced by positioning are even stronger than the differences between articles of varying editorial importance.
Faculty Advisor(s): D.Laibson (Co-chair), A.Shleifer (Co-chair), J.Campbell, and C. Malloy
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Seunghyup Lee

Abstract:
Employment Protection, Financial Uncertainty, and Corporate Investment in Innovation
This paper provides evidence of operating leverage channel through which employment protection changes corporate investment in innovation. Using the adoption of wrongful-discharge protections by the state courts across the U.S. states as an exogenous variation in downside labor adjustment cost, we show that corporate operating leverage, defined as sensitivity of operating profit to sales, increases after the adoption. Furthermore, we document that the court decision reduces R&D investment among the firms who are more subject to frictions in the financial market, and that R&D investment procyclicality becomes stronger. In contrast, the impact of the adoption on capital investment is insignificant regardless of the level of financial constraints. To establish a causal relationship between operating leverage and investment decisions, we construct an industry layoff elasticity measure as a proxy for the exposure to the shock, and compare the investment responses of the firms with different levels of exposure. Firms that are highly R&D intensive also actively change their capital structure by hoarding more liquidity and issuing more equities. A simple firm investment model with costly external finance and R&D liquidity constraint can generate predictions that are consistent with our empirical findings.
Faculty Advisor(s): J.Campbell, R. Greenwood, and J. Lerner
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Patrick Luo

Abstract:
The Other Gender Gap: Female Entrepreneurship after World War II
I exploit exogenous variation in the marriage market across the US caused by World War II casualties to provide causal evidence on how opportunity cost influences women’s entrepreneurship decisions. I show that marriage is an important form of opportunity cost hindering women from starting new businesses. World War II casualties affected the local marriage market for single women and access to capital for war widows. Using novel business registration and individual-level census data, I find that single women are more active in starting new businesses when they face worse prospects in the marriage market. As a result, US counties with heavier casualties had a higher female share of entrepreneurs. This difference persists to this day. Evidence in favor of the marriage-market channel suggests that reducing opportunity cost is more effective in encouraging female entrepreneurship than merely providing financial subsidies.
Faculty Advisor(s): L. Cohen (Chair), C. Malloy, and J. Lerner
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Yueran Ma

Abstract:
Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions (with Chen Lian and Carmen Wang)
How do low interest rates affect investor behavior? We document that individuals “reach for yield,” that is, have a greater appetite for risk taking when interest rates are low. Using a randomized investment experiment holding fixed risk premia and risks, we show that low interest rates lead to significantly higher allocations to risky assets, among MTurk subjects and HBS MBAs. This effect also displays non-linearity, and becomes increasingly pronounced as interest rates decrease below historical norms. Such behavior cannot be easily explained by conventional portfolio choice theory or by institutional frictions. We then propose and test explanations related to investor psychology, including reference dependence and salience. We also present complementary evidence using historical data on household investment decisions.
Faculty Advisor(s): A. Shleifer, E. Glaeser, S. Hanson, and  A. Simsek
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Neil Thakral

Abstract:
Daily Labor Supply and Adaptive Reference Points (with Linh T. Tô)
We document evidence of high-frequency reference-point adjustment in the field. Analyzing a dataset of all New York City cab fares in 2013 using non-parametric methods, we find reductions in cabdriver labor supply in response to higher accumulated daily earnings and stronger effects for more recent earnings. The income effect is inconsistent with the neoclassical model and the non-fungibility of daily income rejects models invoking daily income targets. To explain the evidence, we incorporate adaptive reference points into models of loss aversion and salience. While loss aversion tends to overstate the main quantitative features of the data, both models capture the qualitative features.
Faculty Advisor(s): L. Katz, S. Kominers, M. Rabin, and A. Shleifer
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Health Policy (Management)

Michaela Kerrissey

Abstract:
Punctuated Teaming: Meso-level Processes in Interorganizational Work
Cross-boundary collaboration is often highlighted as a critical means by which organizations can generate value in interconnected and dynamic environments. This paper analyzes the meso-level processes that boundary-spanning actors engage in together as they pursue interorganizational collaboration through interactions that are punctuated – that is, brief, infrequent and with shifting members. Study 1 qualitatively identifies meso-level processes that create temporal ties between medical care providers and community-based organizations for chronic disease services. Two processes emerged: one focused on joint problem solving related to task-specific problems, while the other focused on establishing trusting relationships. Study 2 quantitatively measures these processes and finds that joint problem solving is associated with interorganizational task performance, while trust is not, and that learning mediates the relationship between joint problem solving and performance. This research has implications for theory on collaboration in dynamic environments and for practitioners who span organizational boundaries.
Faculty Advisor(s): A. Edmondson (Chair), S.Singer, T. Neeley, and J.Clark
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Scott Lee

Abstract:
Intrinsic Incentives: A Field Experiment on Leveraging Intrinsic Motivation in Public Service Delivery
Although extrinsic and intrinsic motivation likely jointly explain the effort of many agents engaged in public service delivery, incentives typically only appeal to the former. In the context of a rural health worker program in India, I develop and test a novel mobile phone app designed to increase agents' intrinsic returns to effort. At one year of follow-up, the self-tracking app leads to a 24% increase in performance as measured by the main job task (home visits). Moreover, the app is most effective when it leverages pre-existing intrinsic motivation: it produces a 41% increase in performance in the top tercile of intrinsically motivated workers, but no improvement in the bottom tercile. This treatment effect persists over time for the most intrinsically motivated workers, whereas early improvements decay among the most extrinsically motivated workers. Supplementary evidence suggests that the treatment effect on performance is mediated primarily by making effort more intrinsically rewarding, and not by other mechanisms such as the provision of implicit extrinsic incentives. Despite these effects on worker performance, I find no effect on health outcomes.
Faculty Advisor(s): N. Ashraf, M. Kremer, and P. Farmer
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Management

Johnathan Cromwell

Abstract:
Collaborative Problem Solving for Breakthrough Innovation: The Case of a Social Robot
Breakthrough innovations deliver significant benefits to organizations and society, but they are particularly difficult to create because people must collaborate with each other while working on open (i.e., vague and undefined) problems. Under these conditions, people must spend much of their time defining and changing problems—in addition to solving them. Prior research has developed extensive theory for individuals working on open problems and for collaborators working on closed (i.e., clear and defined) problems, which both show that constraints are fundamental to problem solving, but there is sparse theoretical or empirical work explaining how people collaborate with each other when working on open problems. To address this gap, I conducted a two-year ethnographic field study in an organization that was building one of the world’s first social robots for the home. In chapter one, I develop a theoretical framework that guides my empirical research in chapters two and three. In it, I explain when and why constraints can have a positive, negative, or curvilinear effect on creative problem solving. In chapter two, I build directly off this theoretical framework, exploring how people collaborate with each other as they experience a dynamically changing set of external constraints (i.e., external to the task) over time. In chapter three, I elaborate on this theme by exploring how people collaborate with each other when dealing with a dynamically changing set of internal constraints (i.e., internal to the task) over time. Together, my dissertation advances a nascent theory of collaborative problem solving, which includes collaboration processes for both open and closed problems.
Faculty Advisor(s): T. Amabile (Co-Chair), H.Gardner (Co-Chair), M. Tushman, and S. Harrison
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Paul Green

Abstract:
Shopping for Confirmation: How Disconfirming Feedback Shapes Social Networks
To improve and advance in their careers, employees must be able to identify their own deficiencies. But humans are notoriously self-deceptive in their self-appraisals, consistently ignoring their flaws in an attempt to maintain a positive self-concept. Aware of this fact, organizations commonly gather various forms of developmental feedback from others in the belief that it will be more honest than self-assessments and motivate self-improvement. We propose that these feedback processes are, in fact, often ineffective because they represent threats to recipients’ positive self-concept. Analyzing four years of peer feedback and social network data from a company in the agribusiness industry, we find that employees, in the face of feedback that is more negative than their own self-assessment in a given domain (i.e., disconfirming feedback), reshape their social network in ways designed to attenuate the threat brought about by the feedback, and that this behavior is detrimental to their performance. In a follow-up laboratory study, we replicate these findings conceptually, showing that disconfirming feedback has such effects on one’s relationships and performance because it is perceived as threatening to one’s self-concept.
Faculty Advisor(s): F. Gino, B.Staats, A. Edmondson, and K. McGinn
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Organizational Behavior

Ting Zhang

Abstract:
Back to the beginning: When rediscovering inexperience helps experts give advice
Although experts have more knowledge, skills, and experience relative to novices, they suffer from imperfect memory of their past experiences, making it difficult for them to remember the experience of being a novice. Across a series of studies, this paper investigates how rediscovering the experience of inexperience influences experts’ ability to advise novices. One series of studies found that relative to upperclassmen who merely recalled their past summer internship experiences, upperclassmen who read their own past accounts of being a summer intern gave advice that younger internship seekers rated as higher in quality. Beyond rediscovering documentation of past experiences, experts can also rediscover the feeling of being a novice by making a mastered skill feel new. For example, expert guitarists who rediscovered the feeling of being inexperienced (e.g., playing their instrument with their non-dominant hand) gave advice that novices rated as more encouraging and helpful in content, relative to experts who played traditionally. These findings demonstrate that rediscovering inexperience influences experts’ perception of novices and their ability to give advice.
Faculty Advisor(s): F. Gino (Chair), M. Bazerman, M. Norton, and J. Margolis
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Strategy

Jasmina Chauvin

Abstract:
When Distances Shrink: Unpacking the Paradox of Higher Performance and Lower Survival when Firms Agglomerate
What are the performance implications of co-locating with firms in one’s industry? The existing empirical evidence is mixed. In this paper, I argue that proximity between firms affects their performance differently depending on whether they compete locally or in broader national markets. I capture changes in co-location using a new approach, where road infrastructure investments provide an exogenous shock to the proximity between incumbent firms. Combining detailed data on the location of all manufacturing firms with changes in minimum travel times between them in the context of Brazil, I find that in locally traded industries greater proximity breeds competition. It leads to exit of the smallest firms and improved survival prospects of the largest. As proximity increases, firms react strategically, by switching products and relocating to lower exposure to competitors. The effects differ in nationally traded industries. Here proximity increases the survival rate and results in fewer relocations, consistent with increased agglomeration spillovers. The results shed light on contradictory findings in the literature and show how changes in the actual costs of mobility intensify both competition and agglomeration forces.
Faculty Advisor(s): J. Alcacer (Chair), L. Alfaro, and W. Kerr
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Cheng Gao

Abstract:
Strategy in Nascent Industries: How New Ventures Navigate Regulatory Uncertainty
In nascent industries―whose new technologies are often poorly understood by regulators― effectively navigating and shaping regulatory policies can be crucial for firm survival. Prior research on nonmarket strategy largely focuses on established firms in mature industries, though such strategies are apt to be even more important for young firms in nascent industries. The process may unfold very differently in such markets as nascent market institutions are typically underdeveloped and malleable, and young firms have limited resources and market power. How do new ventures in a nascent industry contend with this regulatory uncertainty? To explore this question, I conduct an inductive, multi-case research study in the personal genomics industry. Drawing on 85 interviews and extensive archival and qualitative data, I develop a theoretical framework that elucidates how new ventures navigate uncertain markets―specifying the range, content, and sequence of actions that ventures can utilize to manage regulatory uncertainty. This framework is organized around the three sequential processes of anticipating, reacting to, and shaping regulations, and highlights a novel logic of interaction with regulators—co-creation—that new ventures can employ to shape emerging regulations. Taken together, these findings challenge existing perspectives on entrepreneurial and nonmarket strategy, and shed new light on how new ventures and regulators interact in the emergence of new technology industries.
Faculty Advisor(s): R. McDonald (Chair), J. Rivkin, and M. Tushman
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Christopher Poliquin

Abstract:
The Effect of the Internet on Wages
Who benefits from the adoption of technology in the workplace? To explore, I combine worker-level wage data with information on broadband adoption by Brazilian firms to estimate the effects of broadband on wages. Overall, wages increase 2.3 percent following broadband adoption. Consistent with the theory of biased technological change, wages increase the most for workers engaged in non-routine cognitive tasks and returns are negative for routine cognitive tasks. There is no effect of broadband adoption on wages for either routine or non-routine manual tasks. Additionally, I estimate the effect of broadband on selected quantiles of the within-firm wage distribution and find evidence that within-firm wage inequality increases following broadband adoption. Both new hires and the firm's existing employees benefit from broadband adoption, which indicates that broadband's effects are not driven only by better recruitment of new employees.
Faculty Advisor(s): S. Greenstein (Chair), M. Luca, and R. Sadun
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Mike Teodorescu

Abstract:
The Need for Speed: Effects of Uncertainty Reduction in Patenting
Patents are essential in commerce to establish property rights for ideas and to give equal protection to firms that develop new technologies. Young firms especially depend on the protection of intellectual property to bring a product from concept to market. However, the market for technology ideas has been recognized as an inefficient market in the management and economics literatures. While information asymmetry and expropriation risks have been studied extensively, the question of the effects of pre-patent grant uncertainty on firm outcomes remains open. This paper introduces a novel analysis based on internal US Patent and Trademark Office databases, exploiting an exogenous shock to startup firms from a previously unstudied executive action involving reduction of patent pendency (time from application to patent decision) for green technology patents. The aim of the paper is to determine whether reduced patent pendency improves firm outcomes for startups and to explore its implications. The findings are that treated startups (with accelerated patenting) have increased sales (by 30%), greatly increased venture funding (50%) and increased employment (over 25%). The paper also introduces a novel method for constructing a control group using a classification algorithm rooted in natural language processing, which can be used in conjunction with traditional econometric approaches such as difference-in-differences analysis beyond the topic of this paper.
Faculty Advisor(s): T. Khanna (Co-Chair), S. Greenstein (Co-Chair), W. Kerr, and N.Thompson
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Technology & Operations Management

Karthik Balasubramanian

Abstract:
Inventory Management for Mobile Money Agents in the Developing World
Mobile money systems, platforms built and managed by mobile network operators to allow money to be stored as digital currency, have burgeoned in the developing world as a mechanism to transfer money electronically. Mobile money agents exchange cash for electronic value and vice versa, forming the backbone of an emerging electronic currency ecosystem that has potential to connect millions of poor and “unbanked” people to the formal financial system. Unfortunately, low service levels due to agent inventory management are a major impediment to the further development of these ecosystems. This paper describes models for the agent’s inventory problem, unique in that sales of electronic value (cash) correspond to an equivalent increase in inventory of cash (electronic value). This paper presents a base inventory model and an analytical heuristic that are used to determine optimal stocking levels for cash and electronic value given an agent’s historical demand. When tested with a large sample of transaction-level data provided by an East African mobile operator, both the base model and the heuristic improved agent profitability by reducing inventory costs (defined here as the sum of stockout losses and cost of capital associated with holding inventory). The heuristic increased estimated agent profits by 15% relative to profits realized through agents actual decisions, while also offering substantial computational advantages relative to the base model.
Faculty Advisor(s):
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Maria Ibanez

Abstract:
Task Scheduling Under Worker Discretion
My research examines job scheduling when workers have some degree of discretion over the allocation and/or completion of tasks. Scheduling research investigates the optimal allocation of scarce resources (e.g., a machine or a worker) to tasks’ completion over time, typically overlooking the role of worker discretion. In practice, workers are often involved in these processes, influencing and being affected by job schedules. I investigate how workers use discretion to structure their work and how these decisions affect productivity and quality.
Faculty Advisor(s): A. Raman (Chair), M. Toffel, R. Huckman, and B. Staats
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“Working with spectacular doctoral students is a real joy, and I take great pride in seeing my former students thrive as professors at the best management schools in the world.”
Max Bazerman
Professor