Columbia Business School Research

The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic uncertainty are subject to rare jumps. The arrival of a jump triggers the updating of agents' beliefs about the likelihood of future jumps, which produces a market crash and a permanent shift in option prices.

This article explores the connection between three important threads of economic research offering different approaches to studying the dynamics of an industry with heterogeneous firms. Finite models of the form pioneered by Ericson and Pakes (1995) capture the dynamics of a finite number of heterogeneous firms as they compete in an industry, and are typically analyzed using the concept of Markov perfect equilibrium (MPE).

A growing literature suggests that even in the absence of any ability to predict returns, holding options on the benchmarks or trading frequently can generate positive alpha. The ratio of alpha to its tracking error appraises a fund's performance. This paper derives the performance-maximizing strategy, which turns out to be a variant of a buy-write strategy, and the least upper bound on such performance enhancement. If common equity indices are used as benchmarks, the potential alpha generated from trading frequently can be substantial in magnitude, but it carries considerable risk.

Firms are increasingly seeking to harness the potential of social networks for marketing purposes. Therefore, marketers are interested in understanding the antecedents and consequences of relationship formation within networks and in predicting interactivity among users. The authors develop an integrated statistical framework for simultaneously modeling the connectivity structure of multiple relationships of different types on a common set of actors.

Power and choice represent two fundamental forces that govern human behavior. Scholars have largely treated power as an interpersonal construct involving control over other individuals, whereas choice has largely been treated as an intrapersonal construct that concerns the ability to select a preferred course of action. Although these constructs have historically been studied separately, we propose that they share a common foundation — that both are rooted in an individual's sense of personal control.

This paper analyzes longitudinal state-level data during the period 1995–2004 to investigate whether use of newer prescription drugs has reduced the ratio of the number of workers receiving Social Security Disability Insurance benefits to the working-age population (the “DI recipiency rate”).  

Nursing care is arguably the single biggest factor in both the cost of hospital care and patient satisfaction. Inadequate inpatient nursing levels have also been cited as a significant factor in medical errors and emergency room overcrowding. Yet, there is widespread dissatisfaction with the current methods of determining nurse staffing levels, including the most common one of using minimum nurse-to-patient ratios. In this paper, we represent the nursing system as a variable finite-source queuing model.

The ability of humans to display bodily expressions that contradict mental states is an important developmental adaptation. The authors propose that mind-body dissonance, which occurs when bodily displayed expressions contradict mentally experienced states, signals that the environment is unusual and that boundaries of cognitive categories should be expanded to embrace atypical exemplars. Four experiments found that mind-body dissonance increases a sense of incoherence and leads to category expansion.

One of the most dramatic economic transformations of the past century has been the entry of women into the labor force. While many theories explain why this change took place, we investigate the process of transition itself. We argue that local information transmission generates changes in participation that are geographically heterogeneous, locally correlated, and smooth in the aggregate, just like those observed in our data. In our model, women learn about the effects of maternal employment on children by observing nearby employed women.

Over the years, the level of analytical rigor has risen in articles published in marketing academic journals. While, ceteris paribus, rigor is desirable, there is a growing sense that rigor has become a, if not the, goal for research in marketing. Consequently, other desirable characteristics, such as relevance, communicability, and simplicity, have been downplayed, to the detriment of the field of marketing.

Theories of visionary leadership propose that groups bestow leadership on exceptional group members. In contrast, social identity perspectives claim that leadership arises, in part, from a person's ability to be seen as representative of the group. Integrating these perspectives, the authors propose that effective leaders often share group members' perspectives concerning the present, yet offer a unique and compelling vision for the group's future.

We develop and test a theory of entrepreneurial endurance, or the likelihood that an entrepreneur will continue an entrepreneurial venture from one period to the next. Conceptualizing entrepreneurial endurance as a function of the entrepreneur's competence in and commitment to the entrepreneurial role, we argue that both factors should be shaped by the entrepreneur's prior employment. We focus on the effects of employer size on the prospective entrepreneur, and argue that employer size has a negative effect on both entrepreneurial competence and commitment.

We analyze the computational problem of estimating financial risk in a nested simulation. In this approach, an outer simulation is used to generate financial scenarios and an inner simulation is used to estimate future portfolio values in each scenario. We focus on one risk measure, the probability of a large loss, and we propose a new algorithm to estimate this risk. Our algorithm sequentially allocates computational effort in the inner simulation based on marginal changes in the risk estimator in each scenario.

Extant research recognizes that firms exploit regulatory variations to their advantage but depicts such regulatory arbitrage as a dyadic process between firms and regulators. We extend this account by including the political rivals of a firm and suggest that firms view regulatory differences as part of a corporate political opportunity structure, and exploit regulatory variations to disadvantage their rivals. Empirically, we focus on variations in right-to-work (RTW) laws which signal the pro-business climate in a state and exist in twenty-two of the 50 American states.

While the high savings rate in China has global impact, existing explanations are incomplete. This paper proposes a competitive saving motive as a new explanation: as the country experiences a rising sex ratio imbalance, the increased competition in the marriage market has induced the Chinese, especially parents with a son, to postpone consumption in favor of wealth accumulation. The pressure on savings spills over to other households through higher costs of house purchases. Both cross-regional and household-level evidence supports this hypothesis.

This paper explores how the dimensions of new products, specifically, the originality and usefulness of the products, influence word-of-mouth (WOM). In four studies, using lab and field setups, we find that originality and usefulness have different effects on WOM. We show that consumers spread more WOM about original products, but the valence of what they say depends on the usefulness of the product.

Scarcity has long been known to impact consumers' choices. Yet, the impact of shelf-based scarcity in retail environments, created by stocking level depletion, has received almost no attention in the literature. Indeed, little research to date has even examined if consumers will attend to shelf-based scarcity in retail environments, much less how this cue can impact choice. A priori, given the inherently noisy and cue-filled nature of retail environments, it is quite reasonable to expect that shelf-based scarcity would play little to no role in consumers' choices.

Past research recognizes that firms exploit regulatory variations to their advantage but depicts such regulatory arbitrage as a dyadic process between firms and regulators. We extend this account by including a firm’s non-market rivals and suggest that firms view regulatory differences as part of a corporate political opportunity structure and exploit regulatory variations to disadvantage their rivals. Empirically, we focus on variations in right-to-work (RTW) laws that signal the pro-business climate in a state; these laws exist in 22 U.S. states.

This paper tests whether stock market investors appropriately distinguish new and old information about firms. I define the staleness of a news story as its textual similarity to the previous ten stories about the same firm. I find that firms' stock returns respond less to stale news. Even so, a firm's return on the day of stale news negatively predicts its return in the following week. Individual investors trade more aggressively on news when news is stale. The subsequent return reversal is significantly larger in stocks with above-average individual investor trading activity.

Research examining both the organizing and activating effects of testosterone in one-shot bargaining contexts has been vexed by inconsistencies. Some research finds that high-testosterone men are more likely to reject unfair offers in an ultimatum game and exogenous administration of testosterone to men leads to less generous offers. In contrast, other research finds that higher prenatal exposure to testosterone predicts more generous dictator game offers and administering testosterone to women leads to more generous ultimatum game offers.

The etiology of generalized anxiety disorder (GAD), including its high degree of comorbidity with major depressive disorder (MDD), remains a conceptual and clinical challenge. In this article, we discuss the relevance of regulatory focus theory (Higgins, 1997), an increasingly influential theory of self-regulation, for generating and testing hypotheses regarding vulnerability to GAD as well as to GAD/MDD comorbidity. The theory postulates two cognitive/motivational systems for pursuing desired end states: the promotion and prevention systems.

We characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income, costly foreclosure, and a risky borrower who requires incentives to repay his debt. We show that many features of subprime loans can be consistent with properties of the optimal contract and that, when house prices decline, mortgage modification can create value for borrowers and lenders.

Historical studies reveal how organizational markets supplied artifacts that became fashionable because they met not only consumers' cultural tastes, but also their technological preferences. This article calls such artifacts cultural-technological fusions. The digital mode of production tends to generate more types of fashionable fusions, which replace each other at a growing rate, and travel increasingly swiftly across consumers globally.

Although people have been shown to rely on feelings to make judgments, the conditions that moderate this reliance have not been systematically reviewed and conceptually integrated. This article addresses this gap by jointly reviewing moderators of the reliance on both subtle affective feelings and cognitive feelings of ease-of-retrieval.

A great deal of research in consumer decision-making and social-cognition has explored consumers’ attempts to simplify choices by bolstering their tentative choice candidate and/or denigrating the other alternatives. The present research investigates a diametrically opposed process, whereby consumers complicate their decisions.

This paper examines whether firms in noncompetitive industries benefit more from good governance than do firms in competitive industries. We find that weak governance firms have lower equity returns, worse operating performance, and lower firm value, but only in noncompetitive industries. When exploring the causes of the inefficiency, we find that weak governance firms have lower labor productivity and higher input costs, and make more value-destroying acquisitions, but, again, only in noncompetitive industries.

A long-standing controversy is whether leveraged buyouts (LBOs) relieve managers from short-term pressures from public shareholders, or whether LBO funds themselves sacrifice long-term growth to boost short-term performance. We examine one form of long-run activity, namely, investments in innovation as measured by patenting activity. Based on 472 LBO transactions, we find no evidence that LBOs sacrifice long-term investments.

This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that made lenders' negative private assessments about their borrowers public. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of the reaction by other lenders to the same firm.

Cancer drugs have become more expensive over the past few years, leading many people to question whether the treatments are really worth their high costs. But despite the sticker shock, cancer medicines have provided good value for money.

We consider a sequential adaptive allocation problem which is formulated as a traditional two armed bandit problem but with one important modification: at each time step t, before selecting which arm to pull, the decision maker has access to a random variable X_t which provides information on the reward in each arm. Performance is measured as the fraction of time an inferior arm (generating lower mean reward) is pulled.