This paper shows that corporate social responsibility (CSR) and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures. For firms with low customer awareness, the relation is either negative or insignificant. In addition, we find that the effect of awareness on the CSR-value relation is reversed for firms with a poor prior reputation as corporate citizens. This evidence is consistent with the view that CSR activities can add value to the firm but only under certain conditions. This paper was accepted by Bruno Cassiman, business strategy.
Policy makers have embraced financial education as a necessary antidote to the increasing complexity of consumers' financial decisions over the last generation. We conduct a meta-analysis of the relationship of financial literacy and of financial education to financial behaviors in 168 papers covering 201 prior studies. We find that interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples. Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention. Correlational studies that measure financial literacy find stronger associations with financial behaviors. We conduct three empirical studies, and we find that the partial effects of financial literacy diminish dramatically when one controls for psychological traits that have been omitted in prior research or when one uses an instrument for financial literacy to control for omitted variables. Financial education as studied to date has serious limitations that have been masked by the apparently larger effects in correlational studies. We envisage a reduced role for financial education that is not elaborated or acted upon soon afterward. We suggest a real but narrower role for "just-in-time" financial education tied to specific behaviors it intends to help. We conclude with a discussion of the characteristics of behaviors that might affect the policy maker's mix of financial education, choice architecture, and regulation as tools to help consumer financial behavior.
We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of 180 U.S. companies, we find that corporations that voluntarily adopted sustainability policies by 1993—termed as high sustainability companies—exhibit by 2009 distinct organizational processes compared to a matched sample of companies that adopted almost none of these policies—termed as low sustainability companies. The boards of directors of high sustainability companies are more likely to be formally responsible for sustainability, and top executive compensation incentives are more likely to be a function of sustainability metrics. High sustainability companies are more likely to have established processes for stakeholder engagement, to be more long-term oriented, and to exhibit higher measurement and disclosure of nonfinancial information. Finally, high sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance. This paper was accepted by Bruno Cassiman, business strategy.
Consumer reviews are now part of everyday decision making. Yet the credibility of these reviews is fundamentally undermined when businesses commit review fraud, creating fake reviews for themselves or their competitors. We investigate the economic incentives to commit review fraud on the popular review platform Yelp, using two complementary approaches and data sets. We begin by analyzing restaurant reviews that are identified by Yelp’s filtering algorithm as suspicious, or fake—and treat these as a proxy for review fraud (an assumption we provide evidence for). We present four main findings. First, roughly 16% of restaurant reviews on Yelp are filtered. These reviews tend to be more extreme (favorable or unfavorable) than other reviews, and the prevalence of suspicious reviews has grown significantly over time. Second, a restaurant is more likely to commit review fraud when its reputation is weak, i.e., when it has few reviews or it has recently received bad reviews. Third, chain restaurants—which benefit less from Yelp—are also less likely to commit review fraud. Fourth, when restaurants face increased competition, they become more likely to receive unfavorable fake reviews. Using a separate data set, we analyze businesses that were caught soliciting fake reviews through a sting conducted by Yelp. These data support our main results and shed further light on the economic incentives behind a business’s decision to leave fake reviews. This paper was accepted by Lorin Hitt, information systems .
Several organizations have developed ongoing crowdsourcing communities that repeatedly collect ideas for new products and services from a large, dispersed "crowd" of nonexperts (consumers) over time. Despite its promises, little is known about the nature of an individual's ideation efforts in such an online community. Studying Dell's IdeaStorm community, serial ideators are found to be more likely than consumers with only one idea to generate an idea the organization finds valuable enough to implement, but they are unlikely to repeat their early success once their ideas are implemented. As ideators with past success attempt to again come up with ideas that will excite the organization, they instead end up proposing ideas similar to their ideas that were already implemented (i.e., they generate less diverse ideas). The negative effects of past success are somewhat mitigated for ideators with diverse commenting activity on others' ideas. These findings highlight some of the challenges in maintaining an ongoing supply of quality ideas from the crowd over time. This paper was accepted by Kamalini Ramdas, entrepreneurship and innovation.
This study examines the effect of shareholder proposals related to corporate social responsibility (CSR) on financial performance. Specifically, I focus on CSR proposals that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of CSR to companies and hence provides a quasi-experiment to study the effect of CSR on performance. I find that the adoption of close call CSR proposals leads to positive announcement returns and superior accounting performance, implying that these proposals are value enhancing. When I examine the channels through which companies benefit from CSR, I find that labor productivity and sales growth increase after the vote. Finally, I document that close call CSR proposals differ from non-close proposals along several dimensions. Accordingly, although my results imply that adopting close call CSR proposals is beneficial to companies, they do not necessarily imply that CSR proposals are beneficial in general. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2038 . This paper was accepted by Wei Jiang, finance .
We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets. This paper was accepted by Sandra Slaughter, information systems.
We examine how firms can create word-of-mouth peer influence and social contagion by designing viral features into their products and marketing campaigns. To econometrically identify the effectiveness of different viral features in creating social contagion, we designed and conducted a randomized field experiment involving the 1.4 million friends of 9,687 experimental users on Facebook.com. We find that viral features generate econometrically identifiable peer influence and social contagion effects. More surprisingly, we find that passive-broadcast viral features generate a 246% increase in peer influence and social contagion, whereas adding active-personalized viral features generate only an additional 98% increase. Although active-personalized viral messages are more effective in encouraging adoption per message and are correlated with more user engagement and sustained product use, passive-broadcast messaging is used more often, generating more total peer adoption in the network. Our work provides a model for how randomized trials can identify peer influence in social networks. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors.
Increasingly, user-generated product reviews serve as a valuable source of information for customers making product choices online. The existing literature typically incorporates the impact of product reviews on sales based on numeric variables representing the valence and volume of reviews. In this paper, we posit that the information embedded in product reviews cannot be captured by a single scalar value. Rather, we argue that product reviews are multifaceted, and hence the textual content of product reviews is an important determinant of consumers' choices, over and above the valence and volume of reviews. To demonstrate this, we use text mining to incorporate review text in a consumer choice model by decomposing textual reviews into segments describing different product features. We estimate our model based on a unique data set from Amazon containing sales data and consumer review data for two different groups of products (digital cameras and camcorders) over a 15-month period. We alleviate the problems of data sparsity and of omitted variables by providing two experimental techniques: clustering rare textual opinions based on pointwise mutual information and using externally imposed review semantics. This paper demonstrates how textual data can be used to learn consumers' relative preferences for different product features and also how text can be used for predictive modeling of future changes in sales. This paper was accepted by Ramayya Krishnan, information systems.
Contests are a historically important and increasingly popular mechanism for encouraging innovation. A central concern in designing innovation contests is how many competitors to admit. Using a unique data set of 9,661 software contests, we provide evidence of two coexisting and opposing forces that operate when the number of competitors increases. Greater rivalry reduces the incentives of all competitors in a contest to exert effort and make investments. At the same time, adding competitors increases the likelihood that at least one competitor will find an extreme-value solution. We show that the effort-reducing effect of greater rivalry dominates for less uncertain problems, whereas the effect on the extreme value prevails for more uncertain problems. Adding competitors thus systematically increases overall contest performance for high-uncertainty problems. We also find that higher uncertainty reduces the negative effect of added competitors on incentives. Thus, uncertainty and the nature of the problem should be explicitly considered in the design of innovation tournaments. We explore the implications of our findings for the theory and practice of innovation contests. This paper was accepted by Christian Terwiesch, operations management.
In fields as diverse as technology entrepreneurship and the arts, crowds of interested stakeholders are increasingly responsible for deciding which innovations to fund, a privilege that was previously reserved for a few experts, such as venture capitalists and grant-making bodies. Little is known about the degree to which the crowd differs from experts in judging which ideas to fund, and, indeed, whether the crowd is even rational in making funding decisions. Drawing on a panel of national experts and comprehensive data from the largest crowdfunding site, we examine funding decisions for proposed theater projects, a category where expert and crowd preferences might be expected to differ greatly. We instead find significant agreement between the funding decisions of crowds and experts. Where crowds and experts disagree, it is far more likely to be a case where the crowd is willing to fund projects that experts may not. Examining the outcomes of these projects, we find no quantitative or qualitative differences between projects funded by the crowd alone and those that were selected by both the crowd and experts. Our findings suggest that crowdfunding can play an important role in complementing expert decisions, particularly in sectors where the crowds are end users, by allowing projects the option to receive multiple evaluations and thereby lowering the incidence of “false negatives.” This paper was accepted by Lee Fleming, entrepreneurship and innovation .
Academic research relies extensively on macroeconomic variables to forecast the U.S. equity risk premium, with relatively little attention paid to the technical indicators widely employed by practitioners. Our paper fills this gap by comparing the predictive ability of technical indicators with that of macroeconomic variables. Technical indicators display statistically and economically significant in-sample and out-of-sample predictive power, matching or exceeding that of macroeconomic variables. Furthermore, technical indicators and macroeconomic variables provide complementary information over the business cycle: technical indicators better detect the typical decline in the equity risk premium near business-cycle peaks, whereas macroeconomic variables more readily pick up the typical rise in the equity risk premium near cyclical troughs. Consistent with this behavior, we show that combining information from both technical indicators and macroeconomic variables significantly improves equity risk premium forecasts versus using either type of information alone. Overall, the substantial countercyclical fluctuations in the equity risk premium appear well captured by the combined information in technical indicators and macroeconomic variables.
Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel data set that tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders. Well-funded borrower listings tend to attract more funding after we control for unobserved listing heterogeneity and payoff externalities. Moreover, instead of passively mimicking their peers (irrational herding), lenders engage in active observational learning (rational herding); they infer the creditworthiness of borrowers by observing peer lending decisions and use publicly observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Similarly, favorable borrower characteristics (e.g., friend endorsements) weaken the herding effect, as lenders attribute herding to these observable merits. Follow-up analysis shows that rational herding beats irrational herding in predicting loan performance. This paper was accepted by Pradeep Chintagunta, marketing.
Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ (2013) Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns. An increase of one standard deviation in EPU is associated with a 1.5% increase in forecasted three-month abnormal returns (6.1% annualized). Furthermore, innovations in EPU earn a significant negative risk premium in the Fama–French 25 size–momentum portfolios. Among the Fama–French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities. This paper was accepted by Wei Jiang, finance.
In this paper we distinguish between two types of white lies: those that help others at the expense of the person telling the lie, which we term altruistic white lies, and those that help both others and the liar, which we term Pareto white lies. We find that a large fraction of participants are reluctant to tell even a Pareto white lie, demonstrating a pure lie aversion independent of any social preferences for outcomes. In contrast, a nonnegligible fraction of participants are willing to tell an altruistic white lie that hurts them a bit but significantly helps others. Comparing white lies to those where lying increases the liar's payoff at the expense of another reveals important insights into the interaction of incentives, lying aversion, and preferences for payoff distributions. Finally, in line with previous findings, women are less likely to lie when it is costly to the other side. Interestingly though, we find that women are more likely to tell an altruistic lie.
We propose a measure of managerial ability, based on managers' efficiency in generating revenues, which is available for a large sample of firms and outperforms existing ability measures. We find that our measure is strongly associated with manager fixed effects and that the stock price reactions to chief executive officer (CEO) turnovers are positive (negative) when we assess the outgoing CEO as low (high) ability. We also find that replacing CEOs with more (less) able CEOs is associated with improvements (declines) in subsequent firm performance. We conclude with a demonstration of the potential of the measure. We find that the negative relation between equity financing and future abnormal returns documented in prior research is mitigated by managerial ability. Specifically, more able managers appear to utilize equity issuance proceeds more effectively, illustrating that our more precise measure of managerial ability will allow researchers to pursue studies that were previously difficult to conduct. This paper was accepted by Mary E. Barth, accounting.
This paper examines the informational role of product ratings. We build a theoretical model in which ratings can help consumers figure out how much they would enjoy the product. In our model, a high average rating indicates a high product quality, whereas a high variance of ratings is associated with a niche product, one that some consumers love and others hate. Based on its informational role, a higher variance would correspond to a higher subsequent demand if and only if the average rating is low. We find empirical evidence that is consistent with the theoretical predictions with book data from Amazon.com and BN.com. A higher standard deviation of ratings on Amazon improves a book's relative sales rank when the average rating is lower than 4.1 stars, which is true for 35% of all the books in our sample. This paper was accepted by Pradeep Chintagunta, marketing.
Many markets have historically been dominated by a small number of best-selling products. The Pareto principle, also known as the 80/20 rule, describes this common pattern of sales concentration. However, information technology in general and Internet markets in particular have the potential to substantially increase the collective share of niche products, thereby creating a longer tail in the distribution of sales. This paper investigates the Internet's "long tail" phenomenon. By analyzing data collected from a multichannel retailer, it provides empirical evidence that the Internet channel exhibits a significantly less concentrated sales distribution when compared with traditional channels. Previous explanations for this result have focused on differences in product availability between channels. However, we demonstrate that the result survives even when the Internet and traditional channels share exactly the same product availability and prices. Instead, we find that consumers' usage of Internet search and discovery tools, such as recommendation engines, are associated with an increase the share of niche products. We conclude that the Internet's long tail is not solely due to the increase in product selection but may also partly reflect lower search costs on the Internet. If the relationships we uncover persist, the underlying trends in technology portend an ongoing shift in the distribution of product sales. This paper was accepted by Ramayya Krishnan, information systems.
We provide evidence from field experiments with three different banks that reminder messages increase commitment attainment for clients who recently opened commitment savings accounts. Messages that mention both savings goals and financial incentives are particularly effective, whereas other content variations such as gain versus loss framing do not have significantly different effects. Nor do we find evidence that receiving additional late reminders has an additive effect. These empirical results do not map neatly into existing models, so we provide a simple model where limited attention to exceptional expenses can generate undersaving that is in turn mitigated by reminders. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2296 . This paper was accepted by Teck-Hua Ho, behavioral economics .
Electric vehicles (EVs) have been proposed as a key technology to help cut down the massive greenhouse gas emissions from the transportation sector. Unfortunately, because of the limited capacity of batteries, typical EVs can only travel for about 100 miles on a single charge and require hours to be recharged. The industry has proposed a novel solution centered around the use of "swapping stations," at which depleted batteries can be exchanged for recharged ones in the middle of long trips. The possible success of this solution hinges on the ability of the charging service provider to deploy a cost-effective infrastructure network, given only limited information regarding adoption rates. We develop robust optimization models that aid the planning process for deploying battery-swapping infrastructure. Using these models, we study the potential impacts of battery standardization and technology advancements on the optimal infrastructure deployment strategy. This paper was accepted by Dimitris Bertsimas, optimization.