Key Areas of Research
Liability of Foreignness in Immersive Technologies: Evidence from Extended Reality Innovations
Journal of International Business Studies
This study investigates the persistence of the Liability of Foreignness (LOF) in the realm of immersive technologies like Extended Reality (XR), which includes Augmented Reality (AR) and Virtual Reality (VR). Challenging the assumption that digitalization eliminates traditional barriers for foreign firms, we argue that LOF in XR stems from foreign companies' difficulties in providing a "mentally fluent" experience to consumers in foreign markets. Cultural mismatches can disrupt smooth information processing and diminish the effectiveness of XR innovations. Our research identifies specific XR technological features—realism, interactivity, and vividness—and brand-related factors like brand newness and platform orientation that can either exacerbate or mitigate LOF. Confirming the existence of LOF in XR innovations, we find that foreign brands in the South Korean beauty market are at a disadvantage in generating positive brand engagement through XR compared to local brands. XR innovations that are less realistic, more interactive, and highly vivid tend to amplify LOF due to the need for deeper cultural understanding. Conversely, higher realism in XR experiences helps reduce LOF by offering universally relatable content. Newer foreign brands and those using communication-centered platforms experience less LOF, as consumers may overlook cultural mismatches to resolve information uncertainty and develop attitudinal loyalty.
Hyoryung Nam, Assistant Professor, Martin J. Whitman School of Management at Syracuse University (Ph.d. from Smith – Marketing Department) Yiling Li, Doctoral Student, Yonsei Business School, Yonsei University, Seoul, Korea P.K. Kannan, Dean’s Chair in Marketing Science, Robert H. Smith School of Business, University of Maryland Jeonghye Choi, Professor of Marketing, Yonsei Business School, Yonsei University, Seoul, Korea
Distributed Ledgers and Secure Multi-Party Computation for Financial Reporting and Auditing
August 2024
To understand the disruption and implications of distributed ledger technologies for financial reporting and auditing, we analyze firm misreporting, auditor monitoring and competition, and regulatory policy in a unified model. A federated blockchain for financial reporting and auditing can improve verification efficiency not only for transactions in private databases but also for cross-chain verifications through privacy-preserving computation protocols. Despite the potential benefit of blockchains, private incentives for firms and first-mover advantages for auditors can create inefficient under-adoption or partial adoption that favors larger auditors. Although a regulator can help coordinate the adoption of technology, endogenous choice of transaction partners by firms can still lead to adoption failure. Our model also provides an initial framework for further studies of the costs and implications of the use of distributed ledgers and secure multiparty computation in financial reporting, including the positive spillover to discretionary auditing and who should bear the cost of adoption.
Author: Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America
Holding Horizon: A New Measure of Active Investment Management
June 2024
This article introduces a new holding horizon measure of active management and examines its relation to future risk-adjusted fund performance (alpha). Our measure reveals a wide cross-sectional dispersion in mutual fund investment horizons, and shows that long-horizon funds exhibit positive future long-term alphas by holding stocks with superior long-term fundamentals. Further, stocks largely held by long-horizon funds outperform stocks largely held by short-horizon funds by more than 3% annually, adjusted for risk, over the following 5-year period. We also find a clientele effect: to reduce liquidity costs, long-horizon funds attract more long-term investors through share classes that carry load fees.
Authors: Fabio Moneta, Associate Professor, University of Ottawa; Chunhua Lan, Assistant Professor of Finance, University of New Brunswick; Russ Wermers, University of Maryland
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.
Author: Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America
Applied AI for finance and accounting: Alternative data and opportunities
February 2024
Big data and artificial intelligence (AI) have transformed the finance industry by altering the way data and information are generated, processed, and incorporated into decision-making processes. Data and information have emerged as a new class of assets, facilitating efficient contracting and risk-sharing among corporate stakeholders. Researchers have also increasingly embraced machine learning and AI analytics tools, which enable them to exploit empirical evidence to an extent that far surpasses traditional methodologies. In this review article, prepared for a special issue on Artificial Intelligence (AI) and Finance in the Pacific-Basin Finance Journal, we aim to provide a summary of the evolving landscape of AI applications in finance and accounting research and project future avenues of exploration. Given the burgeoning mass of literature in this field, it would be unproductive to attempt an exhaustive catalogue of these studies. Instead, our goal is to offer a structured framework for categorizing current research and guiding future studies. We stress the importance of blending financial domain expertise with state-of-the-art data analytics skills. This fusion is essential for researchers and professionals to harness the opportunities offered by data and analytical tools to better comprehend and influence our financial system.
Author: Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America
"Lying and Cheating the Company: The Positive and Negative Effects of Corporate Activism on Unethical Consumer Behavior,” published in Journal of Business Ethics
Companies engage in corporate activism, defined as taking a stance on a controversial socio-political issue, such as gun control and banning transgender athletes. We show that taking such a stance can make consumers cheat the company more or less, depending on their political ideology. When the company's stance is incongruent with the consumer's values (compared to no stance information), consumers are more likely to lie to or cheat the company. When the company's stance is congruent, however, cheating decreases. This is relevant to companies, given the increase in consumers' unethical behavior (e.g., writing fake reviews; lying to gain discounts; insurance fraud; shoplifting; and wardrobing).
In Hye Kang, California Polytech-Pomona (Smith School PhD); Amna Kirmani, Smith School
“Does passion matter for team Innovation? The conditional indirect effects of team harmonious versus obsessive passion via team reflexivity,” published in Personnel Psychology.
Our latest research, now published in the Summer Issue of Personnel Psychology, examines the intriguing dynamics of team passion and innovation. In a nutshell, our study delves into how the type of passion team members have for innovation—whether it's harmonious or obsessive—affects the team’s ability to reflect, adapt, and ultimately, innovate. Through two field studies involving over 280 teams, we discovered that harmonious passion leads to a more collaborative and innovative team environment, while obsessive passion, if not balanced properly, can pose challenges.
Here are some key takeaways for anyone leading or working in teams:
1. Reflect to Innovate: Innovation in teams requires team members to regularly pause to review and adjust their strategies together. This collective process, known as team reflexivity, helps teams reflect on their goals and methods and make necessary changes, leading to greater innovation.
2. Harness Harmonious Passion (HP): This type of passion comes from freely embracing innovation as a part of one's identity and balancing it with other life activities. It allows team members to be fully absorbed in their work while maintaining the flexibility to decide when to engage in it. This balanced passion fosters a positive, flexible, and innovative team environment.
3. Manage Obsessive Passion (OP): This passion is driven by an uncontrollable urge to engage in an activity, often due to internal pressures or self-esteem issues. While OP can lead to extreme dedication, it can also make team members rigid and less open to new ideas. A mix of high and low obsessive passion among team members can help maintain a healthy, reflective, and adaptable team environment.
4. Leadership Matters: As a team leader, encourage your team to take a step back now and then to reassess and adapt. Additionally, actions like encouraging everyone to contribute ideas and actively listening to team members can significantly boost team reflexivity.
Xin Wei (Renmin University of China), Hui Liao (University of Maryland), Zhi-Xue Zhang (Peking University), Yuntao Dong (Peking University), Ning Li (University of Texas at Dallas).
“From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses,” forthcoming in Journal of Financial Economics*
An AI analyst trained to digest corporate disclosures, industry trends, and macroeconomic indicators surpasses most analysts in stock return predictions. Nevertheless, humans win ‘‘Man vs. Machine’’ when institutional knowledge is crucial, e.g., involving intangible assets and financial distress. AI wins when information is transparent but voluminous. Humans provide significant incremental value in ‘‘Man + Machine’’, which also substantially reduces extreme errors. Analysts catch up with machines after ‘‘alternative data’’ become available if their employers build AI capabilities. Documented synergies between humans and machines inform how humans can leverage their advantage for better adaptation to the growing AI prowess.
*American Association of Individual Investors (AAII) Best paper award winner, 2022 Midwest Finance Association Best Paper Award Winner, 2022 Global AI Finance Conference Best Paper Award Winner, 2022 CFRC Conference, PBC School of Finance, Tsinghua University Best Paper Award Winner, 2022 Annual Conference in Digital Economics, ACDE Best Paper Award Winner in Asset Pricing, 2022 SFS Cavalcade Asia-Pacific Conference
Sean Cao (Robert H. Smith School of Business, University of Maryland)
“Auditor Skill Demands and Audit Quality: Evidence from Job Postings,” forthcoming in Management Science
In the paper, we exploit a novel dataset of online job postings to examine the skills that accounting firms are demanding from their auditors, and whether these skills relate to audit quality. We document substantial variation in the demand for auditors’ cognitive and social skills both across and within accounting firms, suggesting that audit offices are not homogeneous in their demand for such skills. We find that the demand for auditors’ cognitive and social skills increased over our sample period of 2010-2019 and is positively associated with audit quality. This association is stronger for audit engagements that are more complex or require greater coordination, suggesting that cognitive and social skills are particularly important in engagements where effective communication and knowledge transfer, as well as sound professional judgment and skepticism, are needed. The association is also stronger for audit offices with greater investments in new technology, consistent with the complementary relation between cognitive and social skills and the use of technology.
*This research was featured in Smith Brain Trust: Will Robots Replace Accounting Jobs?
Chad Ham (Smith PhD grad now at Kelley School of Business, Indiana University); Rebecca N. Hann (Robert H. Smith School of Business, University of Maryland); MaryJane Rabier (Smith PhD grad now at Olin Business School, Washington University in St. Louis); Wenfeng Wang (Smith PhD grad now at Southern University of Science and Technology)
“Garnering support for social justice: When and why is "yes" likelier for "allies" versus "disadvantaged group advocates"?” published in Organizational Behavior and Human Decision Processes.
Organizations' members (e.g., employees and managers) as well as stakeholders (e.g., prospective and existing customers) typically care about issues of social justice, such as the fairness with which employees (representing different genders, races, and work-locations such as working onsite versus remotely) are treated. To ensure and/or maintain social justice for diverse employee-groups in organizations typically requires advocating for this-- and doing this persuasively. Should a man (or a woman) advocate for greater social justice for women? Should a White person (or Black person) advocate for greater social justice for people of color? Should onsite employees (or those working remotely) advocate for greater inclusivity for employees working from home? Existing literature lacks a clear answer to these questions. Via three studies (two experiment-based and one critical incident-based) we test when and why a social justice appeal garners more support when delivered by a disadvantaged group advocate (DGA) versus by an ally-- that is, by someone who does versus does not belong to the marginalized group named in the appeal, respectively. As hypothesized, significantly more support was shown for a social justice appeal by a DGA (rather than ally) when receivers identified strongly with the disadvantaged group; and this pattern reversed when this identification was weak. Also as predicted, this interaction-effect was mediated by receivers' perceptions of their similarity with the advocate, the appeal's credibility, and by their feelings of empathy. Our findings point to the need: (1) to broaden theorizing beyond demographic influences on the persuasiveness of a DGA versus an ally; and, relatedly, (2) to consider appeal-receivers' identification when choosing an advocate.
Deshani B. Ganegoda (associate professor at the Melbourne Business School at the University of Melbourne); Jigyashu Shukla (assistant professor at the Willie A. Deese College of Business and Economics at North Carolina A&T State University); and Debra L. Shapiro (Dean's Chair in Organizational Behavior and Clarice Smith Professor at the Robert H. Smith School of Business at University of Maryland)