Showing papers in "Social Science Research Network in 2006"

How to do Xtabond2: An Introduction to Difference and System GMM in Stata

Abstract: This working paper by CGD research fellow David Roodman provides an introduction to a particular class of econometric techniques, dynamic panel estimators. The techniques and their implementation in Stata, a statistical software package widely used in the research community, are an important input to the careful applied research CGD advocates. The techniques discussed are specifically designed to extract causal lessons from data on a large number of individuals (whether countries, firms or people) each of which is observed only a few times, such as annually over five or ten years. These techniques were developed in the 1990s by authors such as Manuel Arellano, Richard Blundell and Olympia Bover, and have been widely applied to estimate everything from the impact of foreign aid to the importance of financial sector development to the effects of AIDS deaths on households. The present paper contributes to this literature pedagogically, by providing an original synthesis and exposition of the literature on these dynamic panel estimators, and practically, by presenting the first implementation of some of these techniques in Stata. Stata is designed to encourage users to develop new commands for it, which other users can then use or even modify. In this paper Roodman introduces abar and xtabond2, which is now one of the most frequently downloaded user-written Stata commands in the world. Stata's partially open-source architecture has encouraged the growth of a vibrant world-wide community of researchers, which benefits not only from improvements made to Stata by the parent corporation, but also from the voluntary contributions of other users. Stata is arguably one of the best examples of a combination of private for-profit incentives and voluntary open-source incentives in the joint creation of a global public good.

Risk as Feelings

Abstract: Virtually all current theories of choice under risk or uncertainty are cognitive and consequentialist. They assume that people assess the desirability and likelihood of possible outcomes of choice alternatives and integrate this information through some type of expectation-based calculus to arrive at decision. The authors propose an alternative theoretical perspective, the risk-as-feelings hypothesis, that highlights the role of affect experienced at the moment of decision making. Drawing on research from clinical, physiological, and other subfield of psychology, they show that emotional reactions to risky situations often drive behavior. The risk-as-feelings hypothesis is shown to explain a wide range of phenomena that have resisted interpretation in cognitive-consequentialist terms.

Governance matters VII : aggregate and individual governance indicators 1996-2007

Abstract: This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. The authors also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. They find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time. The aggregate indicators, together with the disaggregated underlying indicators, are available at www.govindicators.org.

All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors

Abstract: We test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one day returns. Attention-driven buying results from the difficulty that investors have searching the thousands of stocks they can potentially buy. Individual investors don't face the same search problem when selling because they tend to sell only stocks they already own. We hypothesize that many investors only consider purchasing stocks that have first caught their attention. Thus, preferences determine choices after attention has determined the choice set.

Risk As Analysis and Risk As Feelings: Some Thoughts About Affect, Reason, Risk, and Rationality

Abstract: Modern theories in cognitive psychology and neuroscience indicate that there are two fundamental ways in which human beings comprehend risk. The analytic system uses algorithms and normative rules, such as probability calculus, formal logic, and risk assessment. It is relatively slow, effortful, and requires conscious control. The experiential system is intuitive, fast, mostly automatic, and not very accessible to conscious awareness. The experiential system enabled human beings to survive during their long period of evolution and remains today the most natural and most common way to respond to risk. It relies on images and associations, linked by experience to emotion and affect (a feeling that something is good or bad). This system represents risk as a feeling that tells us whether it's safe to walk down this dark street or drink this strange-smelling water. Proponents of formal risk analysis tend to view affective responses to risk as irrational. Current wisdom disputes this view. The rational and the experiential systems operate in parallel and each seems to depend on the other for guidance. Studies have demonstrated that analytic reasoning cannot be effective unless it is guided by emotion and affect. Rational decision making requires proper integration of both modes of thought. Both systems have their advantages, biases, and limitations. Now that we are beginning to understand the complex interplay between emotion and reason that is essential to rational behavior, the challenge before us is to think creatively about what this means for managing risk. On the one hand, how do we apply reason to temper the strong emotions engendered by some risk events? On the other hand, how do we infuse needed "doses of feeling" into circumstances where lack of experience may otherwise leave us too "coldly rational"? This article addresses these important questions.

Not All Oil Price Shocks are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market

Abstract: Using a newly developed measure of global real economic activity, a structural decomposition of the real price of crude oil in four components is proposed: oil supply shocks driven by political events in OPEC countries; other oil supply shocks; aggregate shocks to the demand for industrial commodities; and demand shocks that are specific to the crude oil market. The latter shock is designed to capture shifts in the price of oil driven by higher precautionary demand associated with concerns about the availability of future oil supplies. The paper quantifies the magnitude and timing of these shocks, their dynamic effects on the real price of oil and their relative importance in determining the real price of oil during 1975-2005. The analysis also sheds light on the origins of the major oil price shocks since 1979. Distinguishing between the sources of higher oil prices is shown to be crucial for assessing the effect of higher oil prices on U.S. real GDP and CPI inflation. It is shown that policies aimed at dealing with higher oil prices must take careful account of the origins of higher oil prices. The paper also quantifies the extent to which the macroeconomic performance of the U.S. since the mid-1970s has been determined by the external economic shocks driving the real price of oil as opposed to domestic economic factors and policies.

Whiteness as Property

Abstract: Issues regarding race and racial identity as well as questions pertaining to property rights and ownership have been prominent in much public discourse in the United States. In this article, Professor Harris contributes to this discussion by positing that racial identity and property are deeply interrelated concepts. Professor Harris examines how whiteness, initially constructed as a form of racial identity, evolved into a form of property, historically and presently acknowledged and protected in American law. Professor Harris traces the origins of whiteness as property in the parallel systems of domination of Black and Native American peoples out of which were created racially contingent forms of property and property rights. Following the period of slavery and conquest, whiteness became the basis of racialized privilege - a type of status in which white racial identity provided the basis for allocating societal benefits both private and public in character. These arrangements were ratified and legitimated in law as a type of status property. Even as legal segregation was overturned, whiteness as property continued to serve as a barrier to effective change as the system of racial classification operated to protect entrenched power. Next, Professor Harris examines how the concept of whiteness as property persists in current perceptions of racial identity, in the law's misperception of group identity and in the Court's reasoning and decisions in the arena of affirmative action. Professor Harris concludes by arguing that distortions in affirmative action doctrine can only be addressed by confronting and exposing the property interest in whiteness and by acknowledging the distributive justification and function of affirmative action as central to that task.

The External Wealth of Nations Mark Ii: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004

Abstract: We construct estimates of external assets and liabilities for 145 countries for the period 1970-2004. We describe our estimation methods and present key features of the data at the country and the global level. We focus on trends in net and gross external positions, and the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, official reserves, and external debt. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories that account for this discrepancy.

Factors Influencing the Effectiveness of Relationship Marketing: A Meta-Analysis

Abstract: Relationship marketing (RM) has emerged as one of the dominant mantras in business strategy circles, though RM investigations often yield mixed results. To help managers and researchers improve the effectiveness of their efforts, the authors synthesize RM empirical research in a meta-analytic framework. Although the fundamental premise that RM positively affects performance is well supported, many of the authors' findings have significant implications for research and practice. Relationship investment has a large direct effect on seller objective performance, which implies that additional meditated pathways may explain the impact of RM on performance. Objective performance is influenced most by relationship quality (a composite measure of relationship strength) and least by commitment. The results suggest also that RM is more effective when relationships are more critical to customers (e.g., service offerings, channel exchanges, business markets) and built with an individual person rather than a selling firm (which partially explains the mixed effects between RM and performance reported in previous studies).

Corporate Social Responsibility, Customer Satisfaction, and Market Value

Abstract: Although prior research has addressed the influence of corporate social responsibility (CSR) on perceived customer responses, it is not clear whether CSR affects market value of the firm. This study develops and tests a conceptual framework, which predicts that (1) customer satisfaction partially mediates the relationship between CSR and firm market value (i.e., Tobin’s q and stock return), (2) corporate abilities (innovativeness capability and product quality) moderate the financial returns to CSR, and (3) these moderated relationships are mediated by customer satisfaction. Based on a large-scale secondary data set, the results show support for this framework. Notably, the authors find that in firms with low innovativeness capability, CSR actually reduces customer satisfaction levels and, through the lowered satisfaction, harms market value. The uncovered mediated and asymmetrically moderated results offer important implications for marketing theory and practice.

Towards A Positive Theory of the Determination of Accounting Standards

Abstract: This article provides the beginning of a positive theory of accounting by exploring those factors influencing management's attitudes on accounting standards that are likely to affect a firm's cashflows and in turn are affected by accounting standards. These factors are taxes, regulation, management compensation plans, bookkeeping costs and political costs, and they are combined into a model that predicts that large firms that experience reduced earnings due to changed accounting standards favor the change. All other firms oppose the change if the additional bookkeeping costs justify the cost of lobbying. This prediction was tested using the corporate submissions to the FASB's Discussion Memorandum on General Price Level Adjustments. The empirical results are consistent with the theory.

Understanding and Predicting Electronic Commerce Adoption: An Extension of the Theory of Planned Behavior

Abstract: This paper extends Ajzen’s (1991) theory of planned behavior (TPB) to explain and predict the process of e-commerce adoption by consumers. The process is captured through two online consumer behaviors: (1) getting information and (2) purchasing a product from a Web vendor. First, we simultaneously model the association between these two contingent online behaviors and their respective intentions by appealing to consumer behavior theories and the theory of implementation intentions, respectively. Second, following TPB, we derive for each behavior its intention, attitude, subjective norm, and perceived behavioral control (PBC). Third, we elicit and test a comprehensive set of salient beliefs for each behavior. A longitudinal study with online consumers supports the proposed e-commerce adoption model, validating the predictive power of TPB and the proposed conceptualization of PBC as a higher-order factor formed by self-efficacy and controllability. Our findings stress the importance of trust and technology adoption variables (perceived usefulness and ease of use) as salient beliefs for predicting ecommerce adoption, justifying the integration of trust and technology adoption variables within the TPB framework. In addition, technological characteristics (download delay, Website navigability, and information protection), consumer skills, time and monetary resources, and product characteristics (product diagnosticity and product value) add to the explanatory and predictive power of our model. Implications for Information Systems, e-commerce, TPB, and the study of trust are discussed.

Institutions and Institutional Work

Abstract: Providing a retrospective and prospective overview of organization studies, the Handbook continues to challenge and inspire readers with its synthesis of knowledge and literature. As ever, contributions have been selected to reflect the diversity of the field. New chapters cover areas such as organizational change; knowledge management; and organizational networks. Part One reflects on the relationship between theory, research and practice in organization studies. Part Two address a number of the most significant issues to affect organization studies such as leadership, diversity and globalization. Comprehensive and far-reaching, this important resource will set new standards for the understanding of organizational studies. It will be invaluable to researchers, teachers and advanced students alike.

Revisiting the Relation Between Environmental Performance and Environmental Disclosure: An Empirical Analysis

Abstract: Previous empirical evidence provided mixed results on the relationship between corporate environmental performance and environmental disclosures. We revisit this relation by testing economics based theories of voluntary disclosure using a more rigorous research design. In particular, we improve on the prior literature by focusing on purely voluntary environmental disclosures and by developing two reliable environmental performance measures using actual toxic emissions and waste management data. We also develop a content analysis index based on the Global Reporting Initiative sustainability reporting guidelines to assess the extent of discretionary disclosures in environmental and social responsibility reports. This index better captures firm disclosures related to its commitment to protect the environment than the indices employed by prior studies. Using a sample of 191 firms from the five most polluting industries in the U.S., we find a positive association between environmental performance and the extent of discretionary environmental disclosures. The result is consistent with the predictions of the economics based voluntary disclosure theory.

Positive Accounting Theory: A Ten Year Perspective

Abstract: This paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in that debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions.

Word-of-Mouth for Movies: Its Dynamics and Impact on Box Office Revenue

Abstract: This paper uses actual WOM information to examine the dynamic patterns of WOM and how it helps explain box office revenue. The WOM data was collected from the website of Yahoo! Movies. The results show that WOM activities are the most active during pre-release and the opening week, and that movie audiences tend to hold relatively high expectation before release, but become more critical in the opening week. More importantly, WOM information offers significant explanatory power for both aggregate and weekly box office revenue, especially in the early weeks after opening. However, most of this explanatory power comes from the volume of WOM, not its valence as measured by the percentages of positive and negative messages.

Earnings Management Through Real Activities Manipulation

Abstract: I find evidence consistent with managers manipulating real activities to avoid reporting annual losses: price discounts to temporarily increase sales, overproduction to report lower cost of goods sold, and reduction of discretionary expenditures to improve reported margins among firms reporting small annual profits. Cross-sectional analysis reveals that these activities are less prevalent in the presence of sophisticated investors, suggesting that the activities do not contribute to long-run value. Other factors that influence the extent of real activities manipulation include industry membership, the stock of inventories and receivables, and finally, incentives to meet zero earnings, including the presence of debt and growth opportunities. There is also some, though less robust, evidence of real activities manipulation to meet annual analyst forecasts.

Correlations in Price Changes and Volatility Across International Stock Markets

Abstract: The short-run interdependence of prices and price volatility across three major international stock markets is studied. Daily opening and closing prices of major stock indexes for the Tokyo, London, and New York stock markets are examined. The analysis utilizes the autoregressive conditionally heteroskedastic (ARCH family of statistical models to explore these pricing relationships. Evidence of price volatility spillovers from New York to Tokyo, London to Tokyo, and New, York to London is observed but no price volatility spillover effects in other directions are found for the pre-October 1987 period.

What are Ecosystem Services? The Need for Standardized Environmental Accounting Units

Abstract: This paper advocates consistently defined units of account to measure the contributions of nature to human welfare. We argue that such units have to date not been defined by environmental accounting advocates and that the term "ecosystem services" is too ad hoc to be of practical use in welfare accounting. We propose a definition, rooted in economic principles, of ecosystem service units. A goal of these units is comparability with the definition of conventional goods and services found in GDP and the other national accounts. We illustrate our definition of ecological units of account with concrete examples. We also argue that these same units of account provide an architecture for environmental performance measurement by governments, conservancies, and environmental markets.

Accounting Information, Disclosure, and the Cost of Capital

Abstract: In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed covariances with other firms' cash flows, which is non-diversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline the cost of capital.

Annual Report Readability, Current Earnings, and Earnings Persistence

Abstract: This paper examines the relationship between annual report readability and firm performance and earnings persistence. This is motivated by the Securities and Exchange Commission's plain English disclosure regulations that attempt to make corporate disclosures easier to read for ordinary investors. I measure the readability of public company annual reports using both the Fog Index from computational linguistics and the length of the document. I find that the annual reports of firms with lower earnings are harder to read (i.e., they have higher Fog and are longer). Moreover, the positive earnings of firms with annual reports that are easier to read are more persistent. This suggests that managers may be opportunistically choosing the readability of annual reports to hide adverse information from investors.

The Economic Lives of the Poor

Abstract: This paper uses survey data from 13 countries to document the economic lives of the poor (those living on less than $2 dollar per day per capita at purchasing power parity) or the extremely poor (those living on less than $1 dollar per day). We describe their patterns of consumption and income generation as well as their access to markets and publicly provided infrastructure. The paper concludes with a discussion of some apparent anomalous choices.

Human Development Report 2006 - Beyond Scarcity: Power, Poverty and the Global Water Crisis

Abstract: Throughout history water has confronted humanity with some of its greatest challenges. Water is a source of life and a natural resource that sustains our environments and supports livelihoods – but it is also a source of risk and vulnerability. In the early 21st Century, prospects for human development are threatened by a deepening global water crisis. Debunking the myth that the crisis is the result of scarcity, this report argues poverty, power and inequality are at the heart of the problem.In a world of unprecedented wealth, almost 2 million children die each year for want of a glass of clean water and adequate sanitation. Millions of women and young girls are forced to spend hours collecting and carrying water, restricting their opportunities and their choices. And water-borne infectious diseases are holding back poverty reduction and economic growth in some of the world’s poorest countries.Beyond the household, competition for water as a productive resource is intensifying. Symptoms of that competition include the collapse of water-based ecological systems, declining river flows and large-scale groundwater depletion. Conflicts over water are intensifying within countries, with the rural poor losing out. The potential for tensions between countries is also growing, though there are large potential human development gains from increased cooperation.

The Determinants of Corporate Board Size and Composition: An Empirical Analysis

Abstract: Many theories have been proposed to explain how corporate boards are structured. This paper groups these theories into three hypotheses and tests them empirically. We utilize a unique panel dataset that tracks corporate board development from the time of a firm's IPO through 10 years later. The data indicate that: (i) board size and independence increase as firms grow in size and diversify over time; (ii) board size - but not board independence - reflects a trade-off between the firm-specific benefits of monitoring and the costs of such monitoring; and (iii) board independence is negatively related to the manager's influence and positively related to constraints on such influence. These results are consistent with the view that economic considerations - in particular, the specific nature of the firm's competitive environment and managerial team - help explain cross-sectional variation in corporate board size and composition. Nonetheless, much of the variation in board structures remains unexplained even when all three hypotheses are combined, suggesting that idiosyncratic factors affect many individual boards' characteristics.

Examining the Relationship Between Reviews and Sales: The Role of Reviewer Identity Disclosure in Electronic Markets

Abstract: Consumer-generated product reviews have proliferated online, driven by the notion that consumers' decision to purchase or not purchase a product is based on the positive or negative information about that product they obtain from fellow consumers. Using research on information processing (Chaiken 1980) as a foundation, we suggest that in the context of an online community, reviewer disclosure of identity-descriptive information is used by consumers to supplement or replace product information when making purchase decisions and evaluating the helpfulness of online reviews. Using a unique dataset based on both chronologically compiled ratings as well as reviewer characteristics for a given set of products and geographical location-based purchasing behavior from Amazon, we provide evidence that community norms are an antecedent to reviewer disclosure of identity-descriptive information. Amazon members rate reviews containing identity-descriptive information more positively, and the prevalence of reviewer disclosure of identity information is associated with increases in subsequent online product sales. In addition, we show that when reviewers are from a particular geographic location, subsequent product sales are higher in that region, thus highlighting the important role of geography in electronic commerce. Taken together, our results suggest that identity-relevant information about reviewers shapes community members' judgment of products and reviews. Implications for research on the relationship between online reviews and sales, peer recognition systems, and conformity to online community norms are discussed.

Best Practices or Best Guesses? Assessing the Efficacy of Corporate Affirmative Action and Diversity Policies

Abstract: Employers have experimented with three broad approaches to promoting diversity. Some programs are designed to establish organizational responsibility for diversity, others to moderate managerial bias through training and feedback, and others to reduce the social isolation of women and minority workers. These approaches find support in academic theories of how organizations achieve goals, how stereotyping shapes hiring and promotion, and how networks influence careers. This is the first systematic analysis of their efficacy. The analyses rely on federal data on the workforces of 708 private-sector establishments from 1971 to 2002, coupled with survey data on their employment practices. Efforts to moderate managerial bias through diversity training and diversity evaluations are least effective at increasing white women, black women, and black men in management. Efforts to attack social isolation through mentoring and networking show modest effects. Efforts to establish responsibility for diversity lead to the broadest increases in managerial diversity. Moreover, organizations that establish responsibility see better effects from diversity training and evaluations, networking and mentoring. Employers subject to federal affirmative action edicts also see stronger effects from some programs. This work lays the foundation for an institutional theory of the remediation of workplace inequality, focused on organizational structures allocating responsibility for reducing segregation.

Monitoring: Which Institutions Matter?

Abstract: Within a cost-benefit framework, we hypothesize that independent institutions with long-term investments will specialize in monitoring and influencing efforts rather than trading. Other institutions will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by independent long-term institutions are related to post-merger performance. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. We conclude that independent long-term institutions actively monitor and benefit from their efforts. This benefit has both private and shared components. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.

Over-Investment of Free Cash Flow

Abstract: This paper examines the extent of firm level over-investment of free cash flow. Using an accounting based framework to measure over-investment and free cash flow, I find evidence that, consistent with agency cost explanations, over-investment is concentrated in firms with the highest levels of free cash flow. Further tests examine whether firms' governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the presence of activist shareholders, appear to mitigate over-investment.

Toward a Political Conception of Corporate Responsibility - Business and Society Seen from a Habermasian Perspective

Abstract: We review two important schools within business and society research, which we label positivist and post-positivist corporate social responsibility (CSR). The former is criticized because of its instrumentalism and normative vacuity, and the latter because of its relativism, foundationalism, and utopianism. We propose a new approach, based on J?rgen Habermas's theory of democracy, and define the new role of the business firm as a political actor in a globalizing society.

The Role of Corporate Social Responsibility in Strengthening Multiple Stakeholder Relationships: A Field Experiment

Abstract: This research relied on afield experiment involving a real world instance of corporate philanthropy to shed light on both the scope and limitations of the strategic returns to corporate social responsibility (CSR). In particular, the authors demonstrate that the impact of CSR in the real world is not only less pervasive than has been previously acknowledged but also more multifaceted than has been previously conceptualized. The findings indicated that contingent on CSR awareness, which was rather low, stakeholders did react positively to the focal company not only in the consumption domain but in the employment and investment domains as well. Stakeholder attributions regarding the genuineness of the company's motives moderated these effects.