Driving a More Prosperous Future
The Changing Nature of Firm Innovation: Short-Termism and Influential Innovation in U.S. Public Firms
Management Science
We examine the link between short-term pressures and technologically significant innovation in U.S. public firms in 1997–2015. Using a market-based measure of short-term pressure, we estimate its relationship with influential and novel patents. We find that firms facing more intense short-term pressures are less likely to patent highly influential or novel innovations. To evaluate whether this relationship is causal, we use changes in ownership styles following financial institution mergers as instruments. Our analysis suggests that changing short-term pressures from investors had a causal impact on firm innovative outcomes; this finding is robust to a wide variety of empirical specifications. While public firms as a whole retained a constant share of highly influential patents, this activity has become more concentrated in fewer firms. This shift does not appear to be fully compensated by an increase in technologically significant patents by nonpublic firms such as venture-capital (VC)-backed start-ups. These findings raise questions about capital markets’ impact on firm R&D strategy and the nature of innovative activities in public firms
Yuan Shi (Cornell University), Rachelle Sampson (University of Maryland), Brent Goldfarb (University of Maryland), Rafael Corredoira (Newcastle University)
Biodiversity Entrepreneurship
Review of Finance
We study an emerging class of start-up organizations focused on biodiversity conservation and the challenges they face in financing these ventures. Using a novel machine learning method, we identify 630 biodiversity-linked start-ups in PitchBook and compare their financing dynamics to other ventures. Biodiversity start-ups raise less capital but attract a broader coalition of investors, including not only venture capitalists (“value investors”) but also mission-aligned impact funds and public institutions (“values investors”). Values investors provide incremental capital rather than substituting value investors, but funding gaps persist. We show biodiversity-linked start-ups use social media activity to help connect with value investors. Our findings can inform policy and practice for mobilizing private capital toward biodiversity preservation, emphasizing hybrid financing models and strategic communication.
Sean Cao, Robert H. Smith School of Business, University of Maryland
The Influential Solo Consumer: When Engaging in Activities Alone (vs. Accompanied) Increases the Impact of Recommendations
Journal of Marketing Research
Information about the social context of consumption is often seen on review websites or social media when consumers sharing word-of-mouth about an experience indicate whether they engaged in the activity solo or with companions. Across a secondary dataset scraped from Tripadvisor.com, five main experiments, and one supplemental experiment, the current research finds that individuals who engage in consumption activities alone can be a more influential source of recommendations than people who engage in these same activities with others. The results support an attribution-based process, such that people are more likely to attribute a solo (vs. accompanied) review to the quality of the activity itself, leading the solo (vs. accompanied) person’s review to be particularly influential. Further, the studies test the theorizing that perceived interest on the part of the solo (vs. accompanied) consumer leads to the stronger attribution to quality, and therefore that additional cues to intrinsic interest (e.g., presence of a cue to intrinsic or extrinsic motivation) attenuate the influence of solo (vs. accompanied) word-of-mouth. This work has theoretical and managerial relevance for those who seek to understand how the social context of consumption influences other consumers.
Rebecca Ratner, Dean's Professor of Marketing, Robert H. Smith School of Business; Yuechen Wu, assistant professor, Spears School of Business, Oklahoma State
EPA Scrutiny and Voluntary Environmental Disclosures
Review of Accounting Studies
Market participants have called on the SEC to address the lack of disclosures about firms’ environmental impacts, investments, and exposures. However, the frictions that obstruct the flow of environmental information are not well understood. I shed light on these frictions by examining whether scrutiny by the Environmental Protection Agency (EPA) restricts the firm’s voluntary environmental disclosures in earnings conference calls. Consistent with the notion that EPA scrutiny gives rise to disclosure frictions, I find a negative relation between EPA scrutiny and the environmental disclosures of scrutinized firms. This negative relation is concentrated among firms without environmental expert directors, suggesting that environmental governance mitigates the chilling effect of EPA scrutiny. In terms of disclosure quality, I show that environmental disclosures include fewer quantitative details under EPA scrutiny. Collectively, these findings provide insights into the frictions that restrict the flow of environmental information to market participants, an important issue given the SEC’s efforts to improve current disclosure practices.
Mark Zakota, Assistant Professor, Robert H. Smith School of Business, University of Maryland
Identifying Competitors in Geographical Markets Using the CSIS Method
Journal of Marketing Research
Businesses with physical footprints – hotels, retailers, and restaurants – must identify the competitors that matter most. Traditional approaches using brand tier or proximity often fail in dynamic or asymmetric markets. We introduce the Conditional Sure Independence Screening (CSIS) method to marketing to identify true competitors based on their pricing influence on a focal firm’s demand. CSIS is computationally efficient, robust to spatial mis-specifications, and effective for identifying, asymmetric, even non-local, and segment-specific competition. It is also an effective variable selection technique.
In applying CSIS to U.S. hotel data our analysis shows that competition intensity varies not only by location or market segments, but that asymmetry is common – many hotels influence others without being influenced in return. Our methodology enables smarter, data-driven pricing and benchmarking and helps tailor strategy to segment and seasonality. In addition, it is scalable across industries such as retail, services, and hospitality.
Xian Gu, Assistant Professor, Kelley School of Business, Indiana University; P.K. Kannan, Dean's Chair in Marketing Science, Smith School of Business, University of Maryland
CFO Narcissism and the Power of Persuasion Over Analysts: A Mixed-Methods Approach
Review of Accounting Studies
We study the role of CFO narcissism in the intent and ability to positively influence sell-side analysts’ perceptions of the firm. Consistent with narcissists casting favorable impressions on others, we find CFO narcissism is associated with overly optimistic analyst valuations. We then study public persuasion attempts by analyzing conference call transcripts and private persuasion attempts through a laboratory study. In the conference call setting, we provide evidence that narcissistic CFOs use more persuasive language and are more inclined to call on bearish analysts, both of which we link to higher price targets. In the lab study, we simulate a one-on-one conversation and find that narcissists are especially more likely to use coercive methods to induce higher valuations (e.g., threatening to remove private lines of communication). Collectively, we provide evidence that narcissistic CFOs exercise persuasion tactics to favorably influence analysts’ perceptions of firm value.
Chad Ham and Mark Piorkowski - Indiana University; Nick Seybert - University of Maryland; Sean Wang - Southern Methodist University
Do Credit Rating Agencies Learn from the Options Market?
Management Science, November 2024
Do credit rating agencies (CRAs) learn from the options market? We examine this question by exploring the relation between options trading activity and credit rating accuracy. We find that as options trading volume increases, credit ratings become more responsive to expected credit risk and exhibit greater ability to predict future defaults. We also find that CRAs rely more on the options market as a source of ratings-related information when firm default risk is higher, options trading is more informative, manager-provided information is of lower quality, and firm uncertainty is higher. Our results are robust to a number of sensitivity tests, including alternative measures of options trading and credit rating accuracy. We reach similar inferences using various approaches to address endogeneity issues, including difference-in-difference analyses and an instrumental variables approach. Overall, our findings are consistent with the view that CRAs incorporate unique information from the options market into their rating decisions which, in turn, improves credit rating accuracy.
Musa Subasi, University of Maryland-College Park
Paul Brockman, Lehigh University
Jeff Wang, San Diego State University
Eliza Zhang, University of Washington-Tacoma
The Theory-Based View and Strategic Pivots: The Effects of Theorization and Experimentation on the Type and Nature of Pivots
Strategy Science
We examine how formalization in cognitive processes (theorization) and evidence evaluation (experimentation) influence the type (frequency and radicalness) and nature (impetus, clarity, and coherence) of entrepreneurial pivots. We use a mixed-method research design to analyze rich data from over 1,600 interviews with 261 entrepreneurs within a randomized control trial in London. A quantitative analysis that complements human-coded and machine learning-coded measures reveals that conditional on pivoting, theorization and experimentation are complementary in their association with making single radical pivots. The extensive qualitative-case comparison further elucidates interactions between theorization and experimentation that generate differences in the nature of pivots that range from purposeful (clear and coherent rationale deriving from articulated theory and experimentation), postulatory (informed by articulated theory but not incorporating nuances or surprises generated from experimentation), and remedial (stemming from adjustments to preformed theories that drew on prior experiences) to reactive (driven by environmental stimuli absent a clear theory of value). These insights contribute to the theory-driven strategic decision-making literature and offer practical insights for entrepreneurs, incubators, and policymakers on the benefits of a scientific approach to entrepreneurship.
Valentine, Jacob (Doctoral Candidate, University of Maryland); Novelli, Elena (Professor, Bayes Business School); Agarwal, Rajshree (Lamone Professor of Strategy and Entrepreneurship, University of Maryland)
How to Talk When a Machine Is Listening: Corporate Disclosure in the Age of AI
The Review of Financial Studies, March 2023
Growing AI readership (proxied for by machine downloads and ownership by AI-equipped investors) motivates firms to prepare filings friendlier to machine processing and to mitigate linguistic tones that are unfavorably perceived by algorithms. Loughran and McDonald (2011) and BERT available since 2018 serve as event studies supporting attribution of the decrease in the measured negative sentiment to increased machine readership. This relationship is stronger among firms with higher benefits to (e.g., external financing needs) or lower cost (e.g., litigation risk) of sentiment management. This is the first study exploring the feedback effect on corporate disclosure in response to technology.
Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America
Site Visits and Corporate Investment Efficiency
April 2024
Site visits allow visitors to physically inspect productive resources and interact with on-site employees and executives face to face. We posit that, by allowing visitors to acquire investment-related information and monitor the management team, site visits offer disciplinary benefits for corporate investments. Using mandatory disclosures of site visits in China, we find that corporate investments become more responsive to growth opportunities as the intensity of site visits increases, consistent with the notion that site visits yield disciplinary benefits. We also find that the positive association between site visits and investment efficiency is more pronounced when visitors can glean more investment-related information and when they have stronger incentives and greater power to monitor managers. This positive association is also stronger among firms with more severe agency problems and higher asset tangibility. The overall evidence supports the notion that site visits serve as a unique venue for institutional investors and financial analysts to acquire valuable information and serve a monitoring function, which generates disciplinary benefits for corporate investments.
Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America