London Business School

About: London Business School is a education organization based out in London, England, United Kingdom. It is known for research contribution in the topics: Portfolio & Equity (finance). The organization has 1138 authors who have published 5118 publications receiving 437980 citations. The organization is also known as: LBS.

Inflation Illusion and Post-Earnings-Announcement Drift

Abstract: This paper examines the cross-sectional implications of the inflation illusion hypothesis for the post-earnings-announcement drift. The inflation illusion hypothesis suggests that stock market investors fail to incorporate inflation in forecasting future earnings growth rates, and this causes firms whose earnings growths are positively (negatively) related to inflation to be undervalued (overvalued). We argue and show that the sensitivity of earnings growth to inflation varies monotonically across stocks sorted on standardized unexpected earnings (SUE) and, consistent with the inflation illusion hypothesis, show that lagged inflation predicts future earnings growth, abnormal returns, and earnings announcement returns of SUE-sorted stocks. Interestingly, controlling for the return predictive ability of inflation weakens the ability of lagged SUE to predict future returns of SUE-sorted stocks.

How hardwired is human behavior

Abstract: Time and time again managers have tried to eliminate hierarchies, politics, and interorganizational rivalry--but to no avail. Why? Evolutionary psychologists would say that they are working against nature--emotional and behavioral "hardwiring" that is the legacy of our Stone Age ancestors. In this evolutionary psychology primer for executives, Nigel Nicholson explores many of the Science's central tenets. Of course, evolutionary psychology is still an emerging discipline, and its strong connection with the theory of natural selection has sparked significant controversy. But, as Nicholson suggests, evolutionary psychology is now well established enough that its insights into human instinct will prove illuminating to anyone seeking to understand why people act the way they do in organizational settings. Take gossip. According to evolutionary psychology, our Stone Age ancestors needed this skill to survive the socially unpredictable conditions of the Savannah Plain. Thus, over time, the propensity to gossip became part of our mental programming. Executives trying to eradicate gossip at work might as well try to change their employees' musical tastes. Better to put one's energy into making sure the "rumor mill" avoids dishonesty or unkindness as much as possible. Evolutionary psychology also explores the dynamics of the human group. Clans on the Savannah Plain, for example, appear to have had no more than 150 members. The message for managers? People will likely be most effective in small organizational units. As every executive knows, it pays to be an insightful student of human nature. Evolutionary psychology adds another important chapter to consider.

When Winning Is Everything

Abstract: In the heat of competition, executives can easily become obsessed with beating their rivals. This adrenaline-fueled emotional state, which the authors call competitive arousal, often leads to bad decisions. Managers can minimize the potential for competitive arousal and the harm it can inflict by avoiding certain types of interaction and targeting the causes of a win-at-all-costs approach to decision making. Through an examination of companies such as Boston Scientific and Paramount, and through research on auctions, the authors identified three principal drivers of competitive arousal: intense rivalry, especially in the form of one-on-one competitions; time pressure, found in auctions and other bidding situations, for example; and being in the spotlight--that is, working in the presence of an audience. Individually, these factors can seriously impair managerial decision making; together, their consequences can be dire, as evidenced by many high-profile business disasters. It's not possible to avoid destructive competitions and bidding wars completely. But managers can help prevent competitive arousal by anticipating potentially harmful competitive dynamics and then restructuring the deal-making process. They can also stop irrational competitive behavior from escalating by addressing the causes of competitive arousal. When rivalry is intense, for instance, managers can limit the roles of those who feel it most. They can reduce time pressure by extending or eliminating arbitrary deadlines. And they can deflect the spotlight by spreading the responsibility for critical competitive decisions among team members. Decision makers will be most successful when they focus on winning contests in which they have a real advantage--and take a step back from those in which winning exacts too high a cost.

Entrepreneurial Optimism in the Market for Technological Inventions

Abstract: How do potentially optimistic entrepreneurs attract prospective investors? We investigate an entrepreneur's decision to pursue either disclosure - where investors inspect the invention - or a contingent payment scheme (CPS) offer (e.g., salary deferral, royalty-based license) - where an invention's value is inferred from the entrepreneur's willingness to make her pay contingent on the invention’s success. Using a parsimonious model, we highlight the role of optimism and demonstrate that it only affects CPS ex-post. As a result, a novel trade-off unfolds ex-ante: In choosing an action that maximizes the valuation of the invention, a moderately wealthy entrepreneur weighs optimism discount (affecting CPS) versus imitation discount (affecting disclosure). More broadly, the paper advances a view of entrepreneurs as optimists, thus departing from the prevailing approach, which characterizes entrepreneurs as opportunistic individuals who consciously pursue self-serving goals.