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State ownership and corporate leverage around the world
No full textDoes state ownership hinder or help firms access credit? We use data on almost 4 million firms in 89 countries to study the relationship between state ownership and corporate leverage. Controlling for country-sector-year fixed effects and conventional firm-level determinants of leverage, we show that state ownership is robustly and negatively related to corporate leverage. This relationship holds across most of the firm-size distribution – with the important exception of the largest companies – and is stronger in countries with weak political and legal institutions. A panel data analysis of privatized firms and a comparison of privatized with matched control firms yield similar qualitative and quantitative effects of state ownership on leverage
Measuring Investor Attention Using Google Search
Full text linkAlthough investor attention is fundamental to the efficient functioning of capital markets, it is also an elusive construct that researchers struggle to measure. In recent years, the search volume index (SVI) of ticker searches on Google has become a ubiquitous measure of investor attention, but the amount and effects of measurement error in ticker SVI are unknown. We investigate measurement error in ticker SVI using a data set of 2.7 billion website visits following Standard and Poor’s 500 firms’ ticker searches. We find that 69% of searches are unrelated to investing, that this measurement error is highly correlated with firm characteristics, and that this measurement error can easily generate false-positive or false-negative results in common settings. We go on to show that a modified version of SVI using both a firm’s ticker and the word “stock” (e.g., searches for “CAT stock,” which we label “ticker-stock SVI”) not only better captures the search terms that investors typically use, but also has considerably less measurement error that is largely uncorrelated with observable firm characteristics. Ticker-stock SVI produces better specified tests, and although researchers must still carefully consider the effects of measurement error, we recommend that ticker-stock SVI is used in place of ticker SVI in most settings. We provide a data set of ticker-stock SVI to facilitate future work
The Customer Journey as a Source of Information
Full text linkWe introduce a probabilistic machine learning model that fuses customer click-stream data and purchase data within and across journeys. This approach addresses the critical business need for leveraging first-party data (1PD), particularly in environments with infrequent purchases, which are characterized by minimal or no prior purchase history. Combining data across journeys poses a challenge because customers’ needs might vary across different purchase occasions. Our model accounts for this “context heterogeneity” using a Bayesian nonparametric Pitman-Yor process. By drawing from within-journey, past journeys, and cross-customer behaviors, our model offers a solution to the “cold start problem,” enabling firms to predict customer preferences even without prior interactions. Notably, the model continuously updates the inferred preferences as customers interact with the firm. We apply this model to data from an online travel platform, revealing significant benefits from consolidating 1PD from both current and previous customer journeys. This integration enhances managers’ understanding of customer needs, allowing for more effective personalization of marketing tactics, such as retargeting efforts and product recommendations, to better align with customers’ dynamic preferences
Physical Climate Change Exposure and Firms’ Adaptation Strategy
Full text linkResearch Summary: This paper examines whether and how firms adapt to physical exposures to climate change. I build a novel dataset that compiles information on the adaptation strategies of publicly traded companies around the globe and merge it with climate science data. I find that firms are sensitive to the nature and level of forecasted climate change exposures, and that they adapt more often and more completely to those most salient to their business. Increased physical climate exposure heightens the perceived impact of climate change, leading to a higher degree of adaptation. Furthermore, the positive relationship between firms’ climate change exposure and their adaptation is stronger for firms with greater environmental, social, and corporate governance capabilities and those with longer time horizons. Managerial Summary: Companies are increasingly exposed to the physical impacts of climate change, yet little is known about how they adapt to these long-term, systemic, and uncertain changes. This study investigates corporate adaptation strategies in response to climate change. By analyzing climate science data and climate change disclosure information from publicly traded companies worldwide, I find that most firms do not adapt to different physical climate change exposures. They adapt more often and more completely when facing higher forecasted climate exposures. Furthermore, firms’ environmental, social, and corporate governance capabilities and their time horizons influence their adaptation to greater climate exposures. These findings suggest that targeted interventions may be necessary to improve corporate adaptation to climate change
Human-AI Ensembles: When Can They Work?
Full text linkAn “ensemble” approach to decision-making involves aggregating the results from different decision makers solving the same problem (i.e., a division of labor without specialization). We draw on the literatures on machine learning-based Artificial Intelligence (AI) as well as on human decision-making to propose conditions under which human-AI ensembles can be useful. We argue that human and AI-based algorithmic decision-making can be usefully ensembled even when neither has a clear advantage over the other in terms of predictive accuracy, and even if neither alone can attain satisfactory accuracy in absolute terms. Many managerial decisions have these attributes, and collaboration between humans and AI is usually ruled out in such contexts because the conditions for specialization are not met. However, we propose that human-AI collaboration through ensembling is still a possibility under the conditions we identify
How Do Multinational Companies Respond to Destination-based Consumption Taxes?
No full textTaxing companies’ goods or services where they are consumed, rather than where companies operate, limits tax avoidance and improves efficiency. However, such destination-based systems remain hard to enforce. Therefore, in the European Union, value-added taxes on digital business-to-consumer (B2C) sales were historically based on the seller’s location or origin, allowing multinational companies (MNCs) to route sales through low-VAT countries. We study the impact of a 2015 reform that required MNCs to pay VAT where their consumers are. Difference-in-differences results suggest that MNCs reported disproportionately high digital business-to-consumer (B2C) services sales in low-VAT countries under the previous origin-based system. The introduction of the destination-based system effectively curbed this tax planning behavior. While this baseline finding is consistent with expectations, we also provide novel evidence on potentially unintended or unexpected effects of system changes toward destination-based taxation. Specifically, we find that MNCs also decreased employment in low-VAT countries and increased income tax-motivated profit shifting post-reform. In sum, our findings indicate that destination-based taxes curb corporate tax planning for mobile tax bases, but tax system changes have real effects and incentivize tax avoidance for other tax bases taxed at origin
Incentives, Burnout, and Turnover: Dynamic Compensation Design with Effort Cost Spillover
No full textEmployee burnout has long plagued firms. The prevalence of burnout shows that work-related effort is not only costly in the present but has carryover effects into the future. We incorporate this ‘effort cost spillover’ into a dynamic, two-period principal-agent model, where the worker’s effort cost in the second period increases in both their second-period and first-period efforts. We use this model to explore optimal compensation design and the connection between incentives, burnout, and turnover. Naturally, turnover may occur if it is easy to replace workers, or if firms fail to account for burnout when designing contracts. However, we show that even when turnover is very costly, and firms and workers properly understand effort cost spillover, the firm’s equilibrium strategy may be to offer high-powered incentives that induce workers to work so hard that they exit (i.e. reject any contract that the firm would offer) in the next period. Workplace measures that reduce spillover, such as flexible work arrangements, can limit turnover and improve profits dramatically. Committing to contracts for both periods in advance can also limit turnover (at the cost of reduced flexibility)
Crypto-assets and decentralised finance: report on stablecoins, crypto investment products and multifunction groups
No full textDiversification in the World of Data and AI
No full textThe datafication of digital reality and the diffusion of increasingly powerful AI systems have transformed the context within which diversification takes place, resulting in new realities for firms and necessitating new organizational capabilities. Building on their own field research and the existing literature on digitalization and diversification, the authors show how external technological and market changes influence the extent and type of diversification that firms can undertake. They argue that to succeed with digital diversification, new capabilities are needed and that these capabilities are not distributed evenly across firms. Only firms that possess these capabilities will undertake more diversification, with all other firms remaining focused. The authors finally argue that the necessary structures and the appropriate management of business units will differ from those used in the past because the digital context has brought to the fore new problems and risks for diversified firms. These are explored in this Element
Judgement at Work: Making Better Choices
No full textGood judgement is crucial for successful managers and business leaders. It governs major decisions such as recruitment and project strategy, but also shapes company culture. But how do we know whom to trust? How much risk should we take, and how far should we rely on our intuition