Columbia Business School Research

The current research investigates whether observers blame leaders for organizational accidents even when these managers are known to be causally uninvolved. Past research finds that the public blames managers for organizational harm if the managers are perceived to have personally played a causal role. The present research argues that East Asian perceivers, who are culturally oriented to focus on the causal influence of groups [Menon, T., Morris, M. W., Chiu, C., & Hong, Y. (1999). Culture and the construal of agency: Attribution to individual versus group dispositions.

Although agency theory suggests that firms should index executive compensation to remove market-wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004, Journal of Finance 59, 1619–1649) posits that an absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities vary with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent, as proxied by the CEO's financial press visibility and his firm's industry-adjusted ROA.

This paper compares methods for computing the distribution of loss from defaults in a credit portfolio. The methods are applied in the Gaussian copula framework for credit risk and take advantage of the conditional independence of defaults in this framework. As a benchmark we use vanilla Monte Carlo simulation to estimate the tail probabilities of the total losses of the credit portfolio. The first method to be compared is a recursive algorithm to obtain the exact distribution of the total loss of the portfolio, conditional on observed values for the systematic risk factors.

To understand why developing countries do not automatically benefit from financial globalization, both the need for a minimum institutional quality (the threshold hypothesis) and the possibility of varying volatility of different types of capital flows (the composition hypothesis) have been suggested. This paper contends that the two hypotheses are intimately linked, and provides supportive empirical evidence.

This paper analyzes a call center model with m customer classes and r agent pools. The model is one with doubly stochastic arrivals, which means that the m-vector λ of instantaneous arrival rates is allowed to vary both temporally and stochastically. Two levels of call center management are considered: staffing the r pools of agents, and dynamically routing calls to agents. The system manager's objective is to minimize the sum of personnel costs and abandonment penalties.

Expanding upon Simon's (1955) seminal theory, this investigation compared the choice-making strategies of maximizers and satisficers, finding that maximizing tendencies, although positively correlated with objectively better decision outcomes, are also associated with more negative subjective evaluations of these decision outcomes. Specifically in the fall of their final year in school, students were administered a scale that measured maximizing tendencies and were than followed over the course of the year as they searched for jobs.

The provision of choice is one of the most common vehicles through which managers empower employees in organizations. Although past psychological and organizational research persuasively suggests that choice confers personal agency, and is thus intrinsically motivating, emerging research indicates that there could be potential pitfalls. In this chapter, we examine the various factors that could influence the effects of choice. Specifically, we examine individual-level factors such as the chooser's socioeconomic status and cultural background.

Multidivisional firms frequently rely on external market prices in order to value internal transactions across profit centers. This paper examines the transfer pricing problem in a setting in which an upstream division has monopoly power in selling a proprietary component both to a downstream division within the same firm and to external customers. When internal transfers are valued at the prevailing market price, the resulting transactions are distorted by double marginalization.

This 2005 roundtable addressed stock market valuation and its implications for a number of important corporate financial management functions, including internal performance evaluation and capital budgeting. Panelists included Tom Copeland of MIT, Bennett Stewart of Stern Stewart, Trevor Harris of Morgan Stanley, Stephen O'Byrne of Shareholder Value Advisors, Justin Pettit of UBS, David Wessels of University of Pennsylvania, and Don Chew of Morgan Stanley. John Martin of Baylor University and Sheridan Titman of University of Texas at Austin moderated.

This 2005 roundtable aimed to present corporate managers and academics with a more accurate picture of how influential and sophisticated investors really think and make decisions. Panelists included Andrew Alford of Goldman Sachs Asset Management, Michael Corasaniti of Pequot Capital, Steve Galbraith of Maverick Capital, Mitch Julis of Canyon Capital, Andrew Lacey of Lazard Asset Management, Michael Mauboussin of Legg Mason, Henry McVey of Morgan Stanley, and Stephen Penman of Columbia University. Trevor Harris of Morgan Stanley moderated the discussion.

The psychological research is clear: bad events affect us much more powerfully than good events. So it stands to reason that burdens weigh more heavily upon our decision processes than do benefits. Negotiations that center around burdens can pose psychological hazards for negotiators — contentiousness, clouded judgment, suspicion, and a diminished understanding of their own interests. The result? A smaller pie of resources, for one thing. Here is a guide to help you avert the dangers.

Friedman's contribution to the consumption literature goes well beyond the seminal permanent-income hypothesis. He conjectured that the marginal propensity to consume out of financial wealth shall be larger than out of "human wealth," the present discounted value of future labor income. I present an explicitly solved model to deliver this widely-noted consumption property by specifying that the conditional variance of changes in income increases with its level.

Valuation models are useful tools, but they need to be handled with care. When taking the form of mathematical formulas, they can easily be made to convey a false sense of precision. In particular, selective choice of long-term growth rates and discount rates can be used to justify almost any desired valuation.

The authors argue that high self-monitors may be more sensitive to the status implications of social exchange and more effective in managing their exchange relations to elicit conferrals of status than low self-monitors. In a series of studies, they found that high self-monitors were more accurate in perceiving the status dynamics involved both in a set of fictitious exchange relations and in real relationships involving other members of their social group.

Sooner or later, every negotiator faces threats at the bargaining table. How should you respond when the other side threatens to walk away, file a lawsuit, or damage your reputation?

Idea generation (ideation) is critical to the design and marketing of new products, to marketing strategy, and to the creation of effective advertising copy. However, there has been relatively little formal research on the underlying incentives with which to encourage participants to focus their energies on relevant and novel ideas. Several problems have been identified with traditional ideation methods. For example, participants often free ride on other participants' efforts because rewards are typically based on the group-level output of ideation sessions.

The 1993 Japanese financial system reform allowed banks to enter the underwriting market for corporate bonds through bank-owned security subsidiaries. This paper examines empirically whether underwriting commissions and yield spreads on corporate straight bonds issued domestically fell as a result of this bank entry. The empirical results show that bank entry significantly lowers both underwriting commissions and yield spreads. Commissions charged by banks are significantly lower than those charged by investment houses.

We propose a novel economic mechanism that generates stock return predictability in both the time series and the cross-section. Investors' income has two sources, wages and dividends that grow stochastically over time. As a consequence the fraction of total income produced by wages fluctuates depending on economic conditions. We show that the risk premium that investors require to hold stocks varies with these fluctuations. A regression of stock returns on lagged values of the labor income to consumption ratio produces statistically significant coefficients and large adjusted R 2s.

We consider the problem of decomposing the credit risk in a portfolio into a sum of risk contributions associated with individual obligors or transactions. For some standard measures of risk — including value-at-risk and expected shortfall — the total risk can be usefully decomposed into a sum of marginal risk contributions from individual obligors. Each marginal risk contribution is the conditional expected loss from that obligor, conditional on a large loss for the full portfolio. We develop methods for calculating or approximating these conditional expectations.

The role of private equity in global capital markets appears to be expanding at an extraordinary rate. Morgan Stanley estimates that there are now some 2,700 private equity funds that either have raised, or are in the process of raising, a total of $500 billion. With this abundance of available equity capital, the willingness of private equity firms to participate in "club" deals, and the leverage that can be put on top of the equity, private equity buyers now appear able and willing to pay higher prices for assets than ever before.

According to most negotiation experts, thorough preparation is the key to successful bargaining. Identifying your interests, alternatives, walkaway point, and ideal outcome — not to mention your opponent's interests, alternatives, and so on — can help you perform at your best once talks begin. The more you know about yourself and your counterpart, the more control you'll have during the negotiation process.

Vertical integration is often proposed as a way to resolve hold-up problems, ignoring the empirical fact that division managers tend to maximize divisional (not firmwide) profit when investing. This paper develops a model with asymmetric information at the bargaining stage and investment returns taking the form of cash and "empire benefits." Owners of a vertically integrated firm then will provide division managers with low-powered incentives so as to induce them to bargain "more cooperatively," resulting in higher investments and overall profit as compared with non-integration.

The article presents information on the role of power in negotiation. Power could generate competition or conflict in negotiations, however, effective channelization of power helps in bringing the win-win situation to both the parties. Social psychologists have described power as lack of dependence on others. Individuals possessing power tend to have the approach related to the behavior that includes positive mood or searching for rewards in their environment. On the other hand, powerless individuals show a great deal of self-inhibition and fear towards potential threats.

Five studies investigated the hypotheses that the sense of power increases optimism in perceiving risks and leads to more risky behavior. In Studies 1 and 2, individuals with a higher generalized sense of power and those primed with a high-power mind-set were more optimistic in their perceptions of risk. Study 3 primed the concept of power nonconsciously and found that both power and gain/loss frame had independent effects on risk preferences. In Study 4, those primed with a high-power mind-set were more likely to act in a risk-seeking fashion (i.e., engage in unprotected sex).

Many corporate executives view private equity as a last resort, as expensive capital that should be tapped only by companies that don't have access to presumably cheaper public equity. The reality of private equity, however, is more complex, and potentially quite rewarding, for both shareholders and management. This paper surveys some of the academic work on the costs and benefits of public vs. private equity, contrasting the private equity investment process with its public counterpart and exploring how such a process may add value.

Motivated by the recent adoption of tactical pricing strategies in manufacturing settings, this paper studies a problem of dynamic pricing for a multiproduct make-to-order system. Specifically, for a multiclass M_n/M/1 queue with controllable arrival rates, general demand curves, and linear holding costs, we study the problem of maximizing the expected revenues minus holding costs by selecting a pair of dynamic pricing and sequencing policies.

We develop semiparametric Bayesian Thurstonian models for analyzing repeated choice decisions involving multinomial, multivariate binary or multivariate ordinal data. Our modeling framework has multiple components that together yield considerable flexibility in modeling preference utilities, cross-sectional heterogeneity and parameter-driven dynamics. Each component of our model is specified semiparametrically using Dirichlet process (DP) priors.

This paper examines optimal advertised quality, actual quality, and price for a firm entering a market. It develops a two-period model where advertised quality influences expectations, and hence trial and the gap between actual quality and expectations determines satisfaction, which in turn impacts second-period sales. In such situations a company makes a choice between advertising high quality and getting trial, but little repeat; and advertising low quality and getting low trial, but high repeat.

We analyze the relationship between conglomerates' internal capital markets and the efficiency of economy-wide capital allocation, and we identify a novel cost of conglomeration that arises from an equilibrium framework. Because of financial market imperfections engendered by imperfect investor protection, conglomerates that engage in winner-picking (Stein, 1997 [Internal capital markets and the competition for corporate resources.

The consumer electronics industry has been flat for several years. Hopes are now being pinned on the emergence of home networks. The theory goes that if consumers were able to "internetwork": that is, connect all their gadgets—from televisions to personal computers to digital video players to phones and anything in between—they would rush out to buy new toys and devices.