Thursday, February 9, 2012
Overoptimistic company disclosures increase litigation risks
Firms always choose rosy terms in their disclosure to please the shareholders or at least make them believe that the company is right on track, but could that optimitism go too far? A recent paper from The Accounting Review (here - subscription needed or here - working paper version) found evidence that firms that use unusually optimistic language in their disclosures to shareholders are more likely to be sued than similarly performing peer companies. Specifically, overly positive statements in earnings announcements - whether in press releases, conference calls, media interviews, or meetings with investors - are most often cited in plaintiffs’ complaints.
The authors found that in 91 percent of the earnings announcements that were analyzed, the portion quoted by plaintiffs was much more optimistic than the non-quoted portion, which, according to the authors, is the first concrete evidence for the intuition that plaintiffs target optimistic language when bringing actions against [a] firm. Since every firm is likely to make some optimistic statements, the authors have to further determine whether unusually optimistic tones lead to a higher risk of litigation, controlling for industry, size and performance-related effects. They did the comparison and found that sued firms used substantially more optimistic language in their announcements. They also found that, more specifically, a change of just one standard deviation in the “optimism score” given to each earnings announcement translated into a 75.9 percent increase in the likelihood of being sued.
HT: strategy+business.
Wednesday, December 28, 2011
Self deceit, self conceit in Chinese SOEs
For the first time in my professional career, I attended a Chinese state-owned public company's annual meeting last week. During that meeting, the chief executive briefed the audience (the senior management team and highest-ranked divisional managers across the country and overseas) on the overall performance of the company in the past year, described its challenges as well as opportunities ahead, and laid out its specific goals and targets for the coming year.
It's not surprising to hear both praises and criticism from the speech, but upon hearing one of the praises, I couldn't help myself drifting a bit far away because I really found that praise a little over the top and even somewhat disturbing. It went like this, "...our financing department has made marvelous achievement in the past year, having successfully secured large loans from major banks during the time of an extreme credit tightening". Interesting, huh? Is this really a marvelous achievement?! Or is it just something they are born with, something they are entitled to, or something they can easily do but others can't? Everyone knows that major SOEs in China could easily get cheap credit from big banks which, by the way, are also state owned. Sometimes the banks are even begging them to borrow money from them!
I know there could be some variation among SOEs themselves too in terms of the capacity to get cheap loans - scale, region, industry - all those things matter, but comparing to millions of small and medium sized firms in the private sector, that label, SOE, alone is like a golden pass to seemingly endless funding. Now this unfair ability somehow became a "marvelous achievement"?!
It's safe to say that this kind of image burnishing is not merely confined to this particular company. I certainly didn't see this as an achievement of Chinese SOEs at all, what I see from this specific case is management delusion, self deceit, self conceit, and maybe most important of all, a need to change.
Friday, December 23, 2011
11 Groundbreaking Inventions of 2011
See the list from BusinessInsider. Siri, Kinect 2, and the Medical Mirror have made onto this list.
Thursday, December 22, 2011
Paper on China's institution
The University of Hong Kong professor Xu Chenggang has written a paper about the fundamental institutions of China's economic reform and development. This over-70-page article provides one of the latest and most comprehensive analysis of the institutional account for China's miraculous economic development in the past three decades. He argued that it is China's regionally decentralized authoritarian system - a combination of political centralization and economic regional decentralization - that can explain the "China puzzle", i.e., why a seemingly ill-suited institution could achieve such spectacular growth and poverty reduction. In addition, he pointed out that grave social problems are also determined by this governance structure.
Here is the abstract:
Here is the abstract:
China's economic reforms have resulted in spectacular growth and poverty reduction. However, China's institutions look ill-suited to achieve such a result, and they indeed suffer from serious shortcomings. To solve the "China puzzle," this paper analyzes China's institution—a regionally decentralized authoritarian system. The central government has control over personnel, whereas subnational governments run the bulk of the economy; and they initiate, negotiate, implement, divert, and resist reforms, policies, rules, and laws. China's reform trajectories have been shaped by regional decentralization. Spectacular performance on the one hand and grave problems on the other hand are all determined by this governance structure.Full text can be found here (log in needed) and here.
World democracy index 2011
25 nations are placed under "full democracies", most of which are in Europe. The U.S. ranks only 19th, falling from 17th last year. Hong Kong and Singapore are 80th and 81st, respectively, after Malaysia (71st), The Philippines (75th) and even Ghana (78th).
Among BRIC nations, India ranks highest, at 39th. Followed by Brazil (45th) and Russia (117th). China fell from last year's 136th place to 141st this year. North Korea is bottom.
See the full ranking here by the Economist Intelligence Unit.
Among BRIC nations, India ranks highest, at 39th. Followed by Brazil (45th) and Russia (117th). China fell from last year's 136th place to 141st this year. North Korea is bottom.
See the full ranking here by the Economist Intelligence Unit.
Monday, December 19, 2011
Return on Luck
Jim Collins, the author of business megasellers Built to Last and Good to Great, wrote a new book recently with Prof. Morten Hansen of UC Berkeley and INSEAD, entitled Great by Choice, part of which tackles the long intriguing problem in business strategy - Why do some people and their businesses thrive in uncertainty, even chaos and others don't? And what is the role luck plays in this context?
Luck is an abstract and elusive concept which is hard to quantify. However, Collins and Hansen tried to study it more systematically by defining luck as an event which satisfies some three basic criteria. Then they counted the number of "luck events" - good luck, bad luck, the timing of luck, and so on - for each subject across the window of the study. They found out that for enterprises that were eventually built into companies which outperformed their industries by a factor of 10, or 10Xers, as the authors dubbed, they weren't generally "luckier" than the rest. Then the question is, what on earth differentiates 10Xers from the comparison cases?
Their answer is that, luck - whether good or bad - is not the determining factor for a business to thrive in any circumstance, what really matters is how you manage luck and make choices in order to create a huge return on it, i.e., Return on Luck (ROL). To illustrate this, real world examples of how people choose differently when facing "luck events" are adopted, such as Bill Gates, Progressive insurance, Southwest Airlines among others, which are palatable and of course make their stories more compelling. But since choices are always made by people, does this mean different outcomes are in the end driven by different people? If so, unless clear links between the difference in people and difference in ROL are made explicit, it may still be hard to really opertionalize the notion of ROL.
Another interesting and somewhat counterintuitive point the authors have raised is that people or companies that follow a disciplined approach in turbulent times often outperform those who constantly adjust to adapt to the environment. The metaphor is built around the story of two explorers who set out separately to reach the South Pole in 1911. The one who set ambitious goals for each day but never overshoot on good days or undershoots on bad ones eventually won the race. So are companies like Progressive Insurance, Intel and Southwest Airlines. But from a theoretical point of view, why and when does discipline trump adjustment and adaptation? Is it a result of some optimization process and how? Is discipline working more effectively as environment becomes more turbulent and chaotic? In industries that are less affected by disruptive and chaotic change, would companies with strict disciplines still outperform those without?
Here are some reviews and interviews from WSJ, FT, Forbes, Knowledge@Wharton (part 1, 2) and INSEAD Knowledge.
Sunday, December 18, 2011
The dismal and evil science
See the first NYTimes column from the Standup economist.
Well, it's not a more rigorous proof of how trade can make the society worse-off (some may have already seen his "constructive proof"), it's his empirical "proof" of how economics can make the society worse-off. In a nutshell, he basically summarized some key findings from his recent JEBO paper:
1. Econ majors donate less than non-econ majors; (well documented, though)
2. Selfishness is not nurtured via taking econ classes among econ majors - taking econ classes did not have a significant negative effect on later giving by these students; (the "selfish gene" may have guide them to choose econ as their major in the first place)
3. Selfishness can be nurtured via taking econ classes among non-econ majors - taking econ classes did have a significant negative effect on later giving by these students. (negative externality)
Conclusion. For the society as a whole, taking economics classes makes it more selfish. So is economics a dismal science? Yes indeed, but moreover, it's kind of evil too.
Well, it's not a more rigorous proof of how trade can make the society worse-off (some may have already seen his "constructive proof"), it's his empirical "proof" of how economics can make the society worse-off. In a nutshell, he basically summarized some key findings from his recent JEBO paper:
1. Econ majors donate less than non-econ majors; (well documented, though)
2. Selfishness is not nurtured via taking econ classes among econ majors - taking econ classes did not have a significant negative effect on later giving by these students; (the "selfish gene" may have guide them to choose econ as their major in the first place)
3. Selfishness can be nurtured via taking econ classes among non-econ majors - taking econ classes did have a significant negative effect on later giving by these students. (negative externality)
Conclusion. For the society as a whole, taking economics classes makes it more selfish. So is economics a dismal science? Yes indeed, but moreover, it's kind of evil too.
Friday, December 9, 2011
Papers to watch
2012 AEA Annual meeting is less than a month away. For organizational economists and strategy researchers, these following papers may merit your attention:
Sunday, November 20, 2011
Holdup Problem, Airline Version
Tuesday, November 15, 2011
Friday, November 4, 2011
FT/Goldman Sachs Award
This annual best business book award goes to Abhijit Banerjee and Esther Duflo's book "Poor Economics" which describes radical new and sometimes ingenious ways of tackling global poverty. While previous research on ending poverty has debated heavily on whether foreign aid does more good than harm to poor nations (a la Jeffrey Sachs) or the other way around (a la William Easterly), the authors of this book - two MIT economists - by having conducted various randomized controlled trials on all kinds of aid programs all over the world (fighting AIDS, malaria, malnutrition, etc.), have offered a closer and more granular look at this problem, and find that whether these programs are effective really depends on how things are done. The reason behind this is that poor people often face very complicated situations that aid providers haven't fully considered but otherwise may completely alter their incentives to act "properly". If these constraints as well as many other important factors such as the local culture were taken into great consideration, things may well be moving in the right direction, and sometimes even in more cost efficient ways.
Five other shortlisted books are: Exorbitant Privilege by Berkeley economist Barry Eichengreen; Good Strategy/Bad Strategy by UCLA strategy guru Richard Rumelt; The Quest by energy expert Daniel Yergin; Triumph of the City by Harvard economist Edward Glaeser; and Wilful Blindess by Margaret Heffernan.
See some extracts from these books here.
Five other shortlisted books are: Exorbitant Privilege by Berkeley economist Barry Eichengreen; Good Strategy/Bad Strategy by UCLA strategy guru Richard Rumelt; The Quest by energy expert Daniel Yergin; Triumph of the City by Harvard economist Edward Glaeser; and Wilful Blindess by Margaret Heffernan.
See some extracts from these books here.
Tuesday, October 25, 2011
A new book on Deng Xiaoping
Harvard professor Ezra Vogel has written a new book on Deng Xiaoping, the former Party leader and the chief architect of China's opening-up policy, entitled "Deng Xiaoping and the Transformation of China". According to former US National Security Advisor Zbigniew Brzezinski, this book is "not just a definitive biography of a world-class leader, but also the most authoritative and riveting account of the secretly contrived U.S.-Chinese strategic accommodation of 1978 and of how that in turn facilitated China's domestic transformation."
Here are three book reviews from The Wall Street Journal, The New York Times and The Economist.
Here are three book reviews from The Wall Street Journal, The New York Times and The Economist.
Monday, October 24, 2011
Joking about bankers? Not really.
Blackstone co-founder Stephen Schwarzman joked about Brian Moynihan, CEO of Bank of America, by drawing a parallel between Mr. Moynihan and his brother, Patrick:
"Patrick runs a Catholic boarding school in Haiti,...,so their parents must be so proud to see two of their boys each running an underfunded, nonprofit, organization."
Of course, it's not just one banker - Brian Moynihan alone - who is facing tough times, they all are, apparently.
Saturday, October 15, 2011
China currency debate
Two voices on China's currency issue appeared in Wednesday's US republican presidential debate.
Jon Huntsman - "I don't subscribe to the Donald Trump school or the Mitt Romney school of international trade. I don't want to find ourselves in a trade war. With respect to China, if you start slapping penalties on them, based on countervailing duties, you are going to get the same thing in return because they are going to say 'because of Quantitative Easing part I and part II, you are doing a similar thing to your currency'. And you are going to find yourselves in a trade war very very quickly."
Mitt Romney - "I am afraid that people who've looked at this [China's currency issue] in the past have been played like a fiddle by the Chinese. And the Chinese are smiling all the way to the bank, taking our currency and taking our jobs and taking a lot of our future...You people say, well, we might have a trade war with China, and think about that, we buy this much stuff from China, they buy that much stuff from us. You think they want to have a trade war?...I mean, this is a time when we are being hollowed out by China, that is artificially holding down their prices, and that's having a MASSIVE impact on jobs here."
Romney's view is clearly not shared by Economists Nouriel Roubini and Richard McGregor.
Jon Huntsman - "I don't subscribe to the Donald Trump school or the Mitt Romney school of international trade. I don't want to find ourselves in a trade war. With respect to China, if you start slapping penalties on them, based on countervailing duties, you are going to get the same thing in return because they are going to say 'because of Quantitative Easing part I and part II, you are doing a similar thing to your currency'. And you are going to find yourselves in a trade war very very quickly."
Mitt Romney - "I am afraid that people who've looked at this [China's currency issue] in the past have been played like a fiddle by the Chinese. And the Chinese are smiling all the way to the bank, taking our currency and taking our jobs and taking a lot of our future...You people say, well, we might have a trade war with China, and think about that, we buy this much stuff from China, they buy that much stuff from us. You think they want to have a trade war?...I mean, this is a time when we are being hollowed out by China, that is artificially holding down their prices, and that's having a MASSIVE impact on jobs here."
Romney's view is clearly not shared by Economists Nouriel Roubini and Richard McGregor.
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