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Just as the “lost city of Atlantis,” the CAPM is empirically invisible most of the time. Yet, recent evidence shows that a strong CAPM relation holds on macroeconomic announcement days. We show that these findings coexist in an economy with asymmetric information. In this context the CAPM relation holds relative to the market consensus—the average beliefs across investors—but fails for the econometrician who does not observe investors’ information nor the market portfolio. On announcement days, when investors learn about macroeconomic factors to which stocks are exposed, fundamental risk better explains variations in asset returns, clearing the “shoal of mud” that stands in the way of the CAPM.
Research summary: Entrepreneurial start-ups suffer high rates of business failure. Previous research on entrepreneurial failure has focused on two kinds of explanations: statistical and psychological. Statistical explanations attribute excess entry to random errors made by boundedly rational entrepreneurs attempting to estimate business opportunities in risky markets. Psychological explanations focus on entrepreneurial overconfidence and competition neglect.These explanations emerged independently and have not been tested or compared in the same study. In this experimental study, we distinguish entrepreneurial markets from other types of markets and test statistical and psychological hypotheses for all market types. We find that excess entry is significantly greater in small, risky markets than in other market types, and that confidence levels account for excess entry, over and above the effects of unbiased statistical errors.
Managerial summary: How can we explain the fact that most entrepreneurial ventures fail within five years? Market risk, inadequate capital and inexperienced management certainly play a role. However, from an economic point of view, it seems odd that inexperienced, under-funded people continue to engage in risky behavior that is widely known to fail. We conducted experiments that tested two explanations of entrepreneurial failure. The first explanation – the statistical hypothesis – argues that entrepreneurship involves high uncertainty, so random errors are inevitable and can produce excess entry (or under-entry). The second explanation – the psychological hypothesis – says that entrepreneurs’ mistakes are not random but skewed heavily toward excess entry; hence, their decisions are distorted by psychological factors such as overconfidence. Our experiments found support for both of these explanations. Random errors under uncertainty explained 60% of the excess entry in our experiments.However, the overconfidence hypothesis correctly predicted that excess entry exceeds under-entry, and our psychological measures of overconfidence found support in the data. We also found that the markets that most often attract entrepreneurial investment – emerging markets with high uncertainty – were the markets most conducive to excess entry, due to a combination of psychological and market factors. Hence, we conclude that potential entrepreneurs should pay less attention to their own abilities and aspirations, and more attention to the external realities of competition in the marketplace.
Indigenous firms in developing countries with large domestic markets have unique advantages: the low-end provides “natural” protection from foreign competition, while higher-end segments provide incentives for foreign firms to localize activities and develop channels for future capability-building. Paradoxically, in their eagerness to support development efforts of local firms, states often nullify these advantages and limit the opportunities and capabilities that local firms can leverage in the upgrading
process. Using the case studies of three large industrial sectors in China that faced similar prospects but had widely different outcome, this paper develops a framework for understanding how policy shapes the growth and segmentation of markets, and thus the opportunity for industrial upgrading of indigenous firms. The cases show how restrictive demand- and the supply-side policies often inadvertently limited the opportunities for upgrading through their effect on the availability of know-how, inputs and resources required for industrial upgrading (the supply-side), and through their effect on the incentives for upgrading (the demand-side). Given that each segment is a crucial rung on the development ladder, industrial upgrading efforts stall when state policy inadvertently knocked out rungs on the development ladder.
Seeded marketing campaigns (SMCs) involve firms sending product samples to selected customers and encouraging them to spread word of mouth (WOM). Prior research has examined certain aspects of this increasingly popular form of marketing communication, such as seeding strategies and their immediate efficacy. Building on prior research, this study investigates the effects of SMCs that extend beyond the generation of WOM for a campaign’s focal product by considering how seeding can affect WOM spillover effects at the brand and category levels. The authors introduce a framework of SMC-related spillover effects, and then empirically estimate these with a unique dataset covering 390 SMCs for products from 192 different cosmetics brands. Multiple spillover effects are found, suggesting that while SMCs can indeed be used primarily to stimulate WOM for a focal product, marketers must also account for brand- and category-level WOM spillover effects. Specifically, product seeding increases conversations about that product among non-seed consumers, and, interestingly, decreases WOM about other products from the same brand and about competitors’ products in the same category as the focal product. These findings indicate that marketers can use SMCs to focus online WOM on a particular product by drawing consumers away from talking about other related, but off-topic, products.
This note is a response to the consultation on the corporate interest expense, published by HM Treasury on October 22, 2015. It reflects the views of the named authors, rather than the Oxford University Centre for Business Taxation, which has no corporate views. Our aim is to address the big picture regarding the nature of relief for the cost of finance. We do not offer answers to most of the questions raised in the consultation document, other than perhaps the first, on whether a general interest restriction should be introduced in the UK.
This paper examines the challenge of entrepreneurial companies to go beyond the start-up phase and grow into large successful companies. We examine the long-term financing of these so-called scale-up companies, focusing on the US, Europe and Canada. The paper first provides a conceptual framework for understanding the challenges of financing scale-ups. It then shows some data about the various aspects of financing scale-ups in the US, Europe and Canada. Finally the paper raises the question of long-term public policies for supporting the creation of a better scale-up environment.
More than 65 years ago Friedrich Hayek parenthetically remarked that while ‘man has learned to use [the market] ... he is still very far from having learned to make the best use of it’ (1945: 528). The ensuing years have seen significant innovation in the structure and use of markets, including the infusion of market mechanisms into organizations (Zenger and Hesterly, 1997). However, the focus in extant theory of the firm scholarship has largely been on the market’s high-powered incentives. But markets – as we argue in this essay – have additional features, such as information aggregation and matching. These novel features of markets have recently begun to receive managerial attention as organizations experiment with market-like practices such as crowdsourcing, information and prediction markets and open innovation. While we are descriptively learning much about these market-like practices and forms, nonetheless the theoretical foundations behind them, their implications for comparative governance (market vs hierarchy), their possible forms (market–hierarchy hybrids) and implications for strategy and competitive advantage have yet to be fully vetted in the organizational literature. The purpose of this essay, then, is to step back and theoretically discuss the common threads that unite innovative practices such as prediction markets and crowdsourcing, and more importantly, to discuss their comparative implications for markets and organizations, as well as market–hierarchy hybrids. We specifically focus on two, relatively neglected features of markets as a governance form – features that give markets an advantage over firms and hierarchy: information aggregation and matching. We provide a contrast of the informational and matching-related assumptions associated with coordinating economic activity via the market’s price mechanism versus hierarchy and organization, and highlight the potential gains from infusing the information aggregation and matching-related features of markets into organizations. While organizational scholars have certainly focused on the importance of information in organizations (Stinchcombe, 1990), and economists have highlighted the role that information So!apbox editorial essay Downloaded from soq.sagepub.com at Oxford University Libraries on October 16, 2015 164 Strategic Organization 9(2) plays in markets (e.g. signaling, information asymmetry; Spence, 1973; Stigler, 1961), nonetheless the market’s capacity for information aggregation and matching has not been well integrated into our theories of the firm – specifically, questions of comparative governance and radical market–hierarchy hybrid forms of organization. Based on our discussion, and in the spirit of the So!apbox forum, we also speculate on possible areas of future research for the field of strategic organization.
Given that Olympic Games held over the past decade each have cost USD 8.9 billion on average, the size and financial risks of the Games warrant study. The objectives of the Oxford Olympics study are to (1) establish the actual out turn costs of previous Olympic Games in a manner where cost can consistently be compared across Games; (2) establish cost overruns for previous Games, i.e., the degree to which final out turn costs reflect projected budgets at the bid stage, again in a way that allows comparison across Games; (3) test whether the Olympic Games Knowledge Management Program has reduced cost risk for the Games, and, finally, (4) benchmark cost and cost overrun for the Rio 2016 Olympics against previous Games. The main contribution of the Oxford study is to establish a phenomenology of cost and cost overrun at the Olympics, which allows consistent and systematic comparison across Games. This has not been done before.
Main findings of the study are, first, that average actual out turn cost for Summer Games is USD 5.2 billion (2015 level), and USD 3.1 billion for Winter Games. The most costly Summer Games to date are London 2012 at USD 15 billion; the most costly Winter Games Sochi 2014 at USD 21.9 billion. The numbers cover the period 1960-2016 and include only sports-related costs, i.e., wider capital costs for general infrastructure, which are often larger than sports-related costs, have been excluded.
Second, at 156 percent in real terms, the Olympics have the highest average cost overrun of any type of mega-project. Moreover, cost overrun is found in all Games, without exception; for no other type of mega-project is this the case. 47 percent of Games have cost overruns above 100 percent. The largest cost overrun for Summer Games was found for Montreal 1976 at 720 percent, followed by Barcelona 1992 at 266 percent. For Winter Games the largest cost overrun was 324 percent for Lake Placid 1980, followed by Sochi 2014 at 289 percent.
Third, the Olympic Games Knowledge Management Program appears to be successful in reducing cost risk for the Games. The difference in cost overrun before (166 percent) and after (51 percent) the program began is statistically significant.
Fourth, and finally, the Rio 2016 Games, at a cost of USD 4.6 billion, appear to be on track to reverse the high expenditures of London 2012 and Sochi 2014 and deliver a Summer Games at the median cost for such Games. The cost overrun for Rio – at 51 percent in real terms, or USD 1.6 billion – is the same as the median cost overrun for other Games since 1999.
Given the above results, for a city and nation to decide to stage the Olympic Games is to decide to take on one of the most costly and financially most risky type of mega-project that exists, something that many cities and nations have learned to their peril.
At a conference on “Tax risk management: new approaches to tax compliance” on 15th May 2014 the Oxford University Centre for Business Taxation presented selected results from a survey on the relationship between HMRC and business.
The report, written by researchers Judith Freedman, Francis Ng and John Vella, details the responses to a 2013 survey on the relationship between HMRC and businesses sent to around 1,800 companies with 30 follow up face-to-face interviews. The survey follows on from a previous survey conducted by two of the three researchers in 2008. The 2013 survey covered co-operative compliance issues including the risk rating process and relationships with HMRC staff as well as dealings with tax disputes and the Litigation and Settlements Strategy.
A green paper discussion document.
This paper evaluates the effect of R&D tax incentives in a quasi-experimental setting. I identify the impact by exploiting a reform in UK policy which increased the SME threshold from 250 to 500 employees. First, I provide evidence that tax incentives help to increase R&D spending at the company level, and the effect translates to a user cost elasticity of -1.18. Second, R&D generated through the reform may be attributable to an increase in the number of R&D employees. I use R&D survey data for which the companies do not have an incentive to re-label their ordinary spending as R&D
Responding to increasing practitioner and academic interest in Open Strategy, this article builds on recent theoretical and empirical studies in order to advance research in the following ways. We begin by developing a definition of Open Strategy that emphasizes variation along the two dimensions of transparency and inclusion, as well as the dilemmas and dynamics inherent in its practices. We identify five dilemmas in particular: those of process, commitment, disclosure, empowerment and escalation. We continue by exploring key dynamics in Open Strategy, including both movements along the dimensions of transparency and inclusion, and movements between the two dimensions. Respecting the acute dilemmas of Open Strategy, we allow in each case for movement away from greater openness. The article concludes by proposing an agenda for future research on Open Strategy.
This paper investigates the information in corporate credit ratings. If ratings are to be informative indicators of credit risk they must reflect what a risk-averse investor cares about: both raw default probability and systematic risk. We find that ratings are relatively inaccurate measures of raw default probability - they are dominated as predictors of failure by a simple model based on publicly available financial information. However, ratings do contain relevant information since they are related to a measure of exposure to common (and undiversifiable) variation in default probability ('failure beta'). Systematic risk is shown to be related to joint default probabilities in the context of the Merton (1974) model. Empirically, it is related to CDS spreads and risk premia. Given the multidimensional nature of credit risk, it is not possible for one measure to capture all the relevant information.
The report was commissioned by the NAIGT Steering Group to provide an empirical basis of the UK’s competitive status and the key challenges the industry faces. More specifically, the remit of this report was to inform the work of the NAIGT with regards to (a), the contribution of the UK automotive industry to the national economy, (b), the industry’s competitiveness on several key indicators in relation to other countries in Western Europe, CEE and BRICii countries, in order to, (c), identify the key strengths and weaknesses of the UK motor industry.
Growing the UK auto supply chain is seen as an issue of the highest priority by the Automotive Council. This ‘sourcing roadmap’ provides an overview of current and prospective sourcing patterns in the UK automotive industry. It serves as the empirical grounding for determining and prioritizing activities by the Automotive Council to retain and build supply chain capabilities in the UK automotive industry.
This paper studies the impact of trading profits and losses on bank counterparty borrowing costs using data from a derivatives trade depositary. We use the network of credit default swap (CDS) transactions between banks to identify bank CDS returns attributable to counterparty losses. Any bank’s exposure to corporate default increases whenever counterparties from whom it has purchased default protection themselves experience losses. In line with this statement, we document an increase in the own CDS spread of such a bank. We find no such effect from losses of non-counterparties, nor from counterparties who have bought protection from, rather than sold protection to, the bank. We also find that the effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank’s CDS returns from its own trading losses.
Using a large representative sample of Indian retail equity investors, many of them new to the stock market, we show that both years of investment experience and feedback from investment returns have significant effects on investor behavior, favored stock styles, and performance. We identify two channels of feedback: performance relative to the market, and the directly-experienced returns to behavior and styles of stock. Both of these vary across investors at a point in time because investors are imperfectly diversified and receive idiosyncratic returns. We find that experienced investors generally behave in a manner more consistent with the recommendations of finance theory, although this tendency is weakened by strong investment performance. High trading profits increase turnover, while high returns to equity styles have a short-term negative and a longer-term positive effect on investors' style demands, possibly reflecting the offsetting effects of disposition bias and style chasing. We document high returns on a portfolio of stocks held by experienced investors, and on individual Indian stocks with an experienced and low-turnover investor base.
The Automotive Council last year published a ‘sourcing roadmap’ (http://www.automotivecouncil.co.uk) to provide an overview of current and prospective sourcing patterns in the UK automotive industry. The aim was to serve as the empirical basis for determining and prioritising activities by the Automotive Council with the results revealing a significant opportunity to build, repatriate and retain supply chain capabilities in the UK automotive sector.
Following the 2011 report, automotive businesses have been pursuing these opportunities on a commercial basis with many making public statements about increasing local content. However the results also indicated a strategic opportunity to look beyond individual company demand to look at the aggregated purchasing power of the UK as a means to attract further investment. In order to take this forward the Automotive Council commissioned an update to the original report to take account of the significant recent investments by the sector and increased UK output.The basis of this new survey was to establish a robust list of critical parts -components and assemblies - which UK-based vehicle manufacturers were actively seeking to source from the UK.
This study analyses whether multinational companies (MNCs) that are able to reduce their tax burden on capital by shifting profits to low tax jurisdictions invest more than domestic firms. To study the relationship, I exploit a massive corporate tax rate cut of 10%-points in Germany 2008 as a quasi-natural experiment. This reform reduced substantially the incentive of MNC to engage in profit shifting. Using a difference in differences matching strategy (DiD), the results suggest that MNCs decreased their fraction of internal borrowing and their capital stock compared to purely domestic firms. Taking the evidence together, the findings suggest that if MNCs shift profits abroad, their capital accumulation is less depressed by the national tax rate and, therefore, benefits less from a tax rate reduction. The DiD results are confirmed by a more structural approach, which exploits variation in the tax incentive to shift profits to the headquarters for identification. Further, the results suggest that only internal debt financing but not transfer pricing fosters capital accumulation.
A variety of Impact of International Financial Reporting Standards (IFRS) was analysed in 140 pages
This research tests the hypothesis that being busy increases motivation and reduces the time it takes to complete tasks for which people miss a deadline. This effect occurs because busy people tend to perceive that they are using their time effectively, which mitigates the sense of failure people have when they miss a task deadline. Studies 1 and 2 show that when people are busy, they are more motivated to complete a task after missing a deadline than those who are not busy, and that the perception that one is using time effectively mediates this effect. Studies 3 and 4 show that this process makes busy people more likely to complete real tasks than people who are not busy. Study 5 uses data from over half a million tasks submitted by thousands of users of a task management software application to show that busy people take less time to complete a task after they miss a deadline for completing it. The findings delineate the conditions under which being busy can mitigate the negative effects of missing a deadline and reduce the time it takes to complete tasks.