Naveen Jindal School of Management

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A Mean-Variance Approach to Capital Investment Optimization
(Society for Industrial and Applied Mathematics Publications) Bensoussan, Alain; Hoe, S.; Yan, Z.; 0000-0003-0743-498X (Bensoussan, A); Bensoussan, Alain
We develop an improved model of capital investment under uncertainty that incorporates the variance of the capital stock in the payoff functional to manage risk. Our model results in a mean field type control problem that cannot be solved by classical stochastic control methods. We solve our problem using techniques presented in Bensoussan, Frehse, and Yam [Mean Field Games and Mean Field Type Control Theory, Springer, New York, 2013]. The explicit solution is a feedback depending on the initial condition. Moreover, our model can be reduced to Abel's [Amer. Econ. Rev., 73 (1983), pp. 228-233]. Numerical results suggest that the risk reduction optimally exceeds the cost incurred. Following Björk, Khapko, and Murgoci [Finance Stoch., 21 (2017), pp. 331-360], we solve for a time-consistent solution, i.e., the best possible feedback independent of the initial condition. The time-consistent policy discards our risk specification, with the resultant loss of value to the firm. © 2019 Society for Industrial and Applied Mathematics
A Paradox in Time-Consistency in the Mean-Variance Problem?
(Springer Heidelberg, 2018-12-19) Bensoussan, Alain; Wong, Kwok Chuen; Yam, Sheung Chi Phillip; 0000-0003-0743-498X (Bensoussan, A); Bensoussan, Alain
We establish new conditions under which a constrained (no short-selling) time-consistent equilibrium strategy, starting at a certain time, will beat the unconstrained counterpart, as measured by the magnitude of their corresponding equilibrium mean-variance value functions. We further show that the pure strategy of solely investing in a risk-free bond can sometimes simultaneously dominate both constrained and unconstrained equilibrium strategies. With numerical experiments, we also illustrate that the constrained strategy can dominate the unconstrained one for most of the commencement dates (even more than 90%) of a prescribed planning horizon. Under a precommitment approach, the value function of an investor increases with the size of the admissible sets of strategies. However, this may fail to be true under the game-theoretic paradigm, as the constraint of time-consistency itself affects the value function differently when short-selling is and is not prohibited.
A Project-Level Analysis of Value Creation in Firms
(John Wiley & Sons Inc.) Cohn, J. B.; Gurun, Umit G.; Moussawi, R.; Gurun, Umit G.
This paper analyzes value creation in firms at the project level. We present evidence that managers facing short-termist incentives set a lower threshold for accepting projects. Using novel data on new client and product announcements in both the U.S. and international markets, we find that the market responds less positively to a new project announcement when the firm's managers have incentives to focus on short-term stock price performance. Furthermore, textual analysis of project announcements shows that firms with short-termist chief executive officers use vaguer and generically positive language when introducing new projects to the marketplace. ©2018 Financial Management Association International
A Shortest-Path Algorithm for the Departure Time and Speed Optimization Problem
(INFORMS: Institute for Operations Research and the Management Sciences) Franceschetti, A.; Honhon, Dorothée; Laporte, G.; Van Woensel, T.; 0000-0002-4538-3936 (Honhon, D); Honhon, Dorothée
We present a shortest-path algorithm for the departure time and speed optimization problem under traffic congestion. The objective of the problem is to determine an optimal schedule for a vehicle visiting a fixed sequence of customer locations to minimize a total cost function encompassing emissions cost and labor cost. We account for the presence of traffic congestion, which limits the vehicle speed during peak hours. We show how to cast this problem as a shortest-path problem by exploiting some structural results of the optimal solution. We illustrate the solution method and discuss some properties of the problem.
ACHE-North Texas case study report
(2012-03-23) Marston, Carson; Shah, Raj; Singh, Richa; Subhash, Archana
Evaluation of the ABC health system’s proposed facilities for expansion was conducted on the basis of selected factors. Detailed analyses were done using available financial and volume statistics. A weighted matrix was structured based on the evaluating factors like projected population growth, relative market share, operating margin, net revenue and cost of project. Additionally relevant market forces were also taken into consideration to finally rank these projects for investment. Since a major reason for expansion has been lack of open beds and capacity constraints, we have also included evaluation on the basis of inpatient volume as an important factor. The entire expansion project of ABC is directed towards increasing quality of care and access while maintaining costs. The recommendation in our ranking accounts for all these factors and helps to build ABC health system’s position strategically and financially. Discussions involve transitioning ABC’s expansion strategy from an asset management view to an operational strategy that would be effective in the long run.
Adaptive CU Mode Selection in HEVC Intra Prediction: A Deep Learning Approach
(Birkhauser Boston) Kuanar, S.; Rao, K. R.; Bilas, Monalisa; Bredow, J.; Bilas, Monalisa
The computational time of HEVC encoder is increased mainly because of the hierarchical quad-tree-based structure, recursive coding units, and the exhaustive prediction search up to 35 modes. These advances improve the coding efficiency, but result in a very high computational complexity. Furthermore, selecting the optimal modes among all prediction modes is necessary for subsequent rate-distortion optimization process. Therefore, we propose a convolution neural network-based algorithm which learns the region-wise image features and performs a classification job. These classification results are later used in the encoder downstream systems for finding the optimal coding units in each of the tree blocks, and subsequently reduce the number of prediction modes. The experimental results show that our proposed learning-based algorithm reduces the encoder time saving up to 66.89% with a minimal Bjøntegaard delta bit rate (BD-BR) loss of 1.31% over the state-of-the-art machine learning approaches. Furthermore, our method also reduces the mode selection by 45.83% with respect to the HEVC baseline. ©2019, Springer Science + Business Media, LLC, part of Springer Nature.
Advance Selling in the Presence of Market Power and Risk-Averse Consumers
(Wiley, 2018-07-18) Ma, Shanshan; Li, Guo; Sethi, Suresh P.; Zhao, Xuan; 0000-0001-9590-5627 (Sethi, SP); Sethi, Suresh P.
We consider a manufacturer who procures raw material through a long-term contract as well as in a spot market to produce goods for selling to consumers, a fraction of whom are risk averse. We assume that the manufacturer has the market power to influence the spot market price of raw material. To increase consumer demand and obtain demand information, the manufacturer may implement an advance selling program that depends on his market power and consumer risk aversion. We investigate whether the manufacturer should offer the advance selling program and how his decision and performance are influenced by the program. We find that the advance selling program should be offered when consumer risk aversion is low, or when it is high, and the manufacturer has high and low market power. By contrast, the advance selling program should not be offered when consumer risk aversion is high and the market power is medium. Our results also reveal that even with no promotion cost of the advance selling program, the manufacturer may not always offer it. Finally, the manufacturer benefits more from advance selling when consumers are myopic and/or risk neutral.
Advertising Competition with Market Expansion for Finite Horizon Firms
Bass, Frank M.; Krishnamoorthy, A.; Prasad, Ashutosh; Sethi, Suresh P.
Firms that want to increase the sales of their brands through advertising have the choice of capturing market share from their competitors through brand advertising, or increasing primary demand for the category through generic advertising. In this paper, differential game theory is used to analyze the effects of the two types of advertising decisions made by firms offering a product in a dynamic duopoly. Each firm's sales depend not only on its own and its competitor's brand advertising strategies, but also on the generic advertising expenditures of the two firms. Closed-loop Nash equilibrium solutions are obtained for symmetric and asymmetric competitors in a finite-horizon setting. The analysis for the symmetric case results in explicit solutions, and numerical techniques are employed to solve the problem for asymmetric firms.
Advertising Strategies in Electronic Retailing: A Differential Games Approach
Liu, Dengpan; Kumar, Subodha; Mookerjee, Vijay S.; 90649574‏ (Mookerjee, VS)
We consider advertising problems under an information technology (IT) capacity constraint encountered by electronic retailers in a duopolistic setting. There is a considerable amount of literature on advertising games between firms, yet introducing an IT capacity constraint fundamentally changes this problem. In the presence of information processing constraints, although advertising may still cause a customer to switch, it may not result in a sale, i.e., the customer may be lost by both firms. This situation could occur when customers have a limited tolerance for processing delays and leave the website of a firm because of slow response. In such situations, attracting more traffic to a firm's site (by increasing advertising expenditure) may not generate enough additional revenue to warrant this expenditure. We use a differential game formulation to obtain closed-form solutions for the advertising effort over time in the presence of IT capacity constraints. Based on these solutions, we present several useful managerial insights.
Analysis of Product Rollover Strategies in the Presence of Strategic Customers
(INFORMS) Liang, Chao; Çakanyildirim, Metin; Sethi, Suresh P.
Frequent product introductions emphasize the importance of product rollover strategies. With single rollover, when a new product is introduced, the old product is phased out from the market. With dual rollover, the old product remains in the market along with the new product. Anticipating the introduction of the new product and the potential markdown of the old product, strategic customers may delay their purchases. We study the interaction between product rollover strategies and strategic customer purchasing behavior and find that single rollover is more valuable when the new product's innovation is low and the number of strategic customers is high. Interestingly and counter to intuition, the firm may have to charge a lower price for the old product as well as receive a lower profit with a higher value disposal (outside) option for the old product under single rollover. Facing a market composed of both strategic and myopic customers, the firm does not necessarily reduce the stocking level as more myopic customers become strategic.
Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices
Brown, N. C.; Wei, Kelsey D.; Wermers, R.; 0000 0000 1760 8443 (Wei, KD); 77421245 (Wei, KD)
This paper documents that mutual funds "herd" (trade together) into stocks with consensus sell-side analyst upgrades, and herd out of stocks with consensus downgrades. This influence of analyst recommendation changes on fund herding is stronger for downgrades, and among managers with greater career concerns. These findings indicate that career-concerned managers are incentivized to follow analyst information, and that managers have a greater tendency to herd on negative stock information, given the greater reputational and litigation risk of holding losing stocks. Furthermore, starting in the mid-1990s (when aggregate mutual fund equity ownership is significantly higher), stocks traded by career-concerned herds of fund managers in response to analyst recommendation changes experience a significant same-quarter price impact, followed by a sharp subsequent price reversal. Our evidence suggests that analyst recommendation revisions induce herding by career-concerned fund managers, and that this type of trading has become price destabilizing with the increasing level of mutual fund ownership of stocks.
Are New IT-Enabled Investment Opportunities Diminishing for Firms?
Dos Santos, B. L.; Zheng, Zhiqiang (Eric); Mookerjee, Vijay S.; Chen, Hongyu; 90649574‏ (Mookerjee, VS)
Today, few firms could survive for very long without their computer systems. IT has permeated every corner of firms. Firms have reached the current state in their use of IT because IT has provided myriad opportunities for firms to improve performance and, firms have availed themselves of these opportunities. Some have argued, however, that the opportunities for firms to improve their performance through new uses of IT have been declining. Are the opportunities to use IT to improve firm performance diminishing? We sought to answer this question. In this study, we develop a theory and explain the logic behind our empirical analysis; an analysis that employs a different type of event study. Using the volatility of firms' stock prices to news signaling a change in economic conditions, we compare the stock price behavior of firms in the IT industry to firms in the utility and transportation and freight industries. Our analysis of the IT industry as a whole indicates that the opportunities for firms to use IT to improve their performance are not diminishing. However, there are sectors within the IT industry that no longer provide value-enhancing opportunities for firms. We also find that IT products that provided opportunities for firms to create value at one point in time, later become necessities for staying in business. Our results support the key assumption in our work. © 2012 INFORMS.
Aspirations and Corporate Lobbying in the Product Market
(Sage Publications Ltd, 2019-04-26) Eun, Jihyun; Lee, Seung-Hyun; 0000-0002-1552-7863 (Eun, J); 295606728 (Lee, S-H); Eun, Jihyun; Lee, Seung-Hyun
Given corporate lobbying’s double-edged nature, previous research has been interested in what motivates firms to engage in lobbying. In this study, we build on previous works to analyze how two types of aspiration, historical aspiration, which represents the level of performance firms aim to achieve given past self-performance, and social aspiration, which represents the level of performance firms aim to achieve given competitors’ achievements, shape corporate lobbying decisions. Our premise is that when a firm’s product market performance is below historical aspirations, then the firm is motivated to engage in lobbying because the benefits of lobbying outweigh the potential costs. However, when a firm’s product market performance is below social aspirations, then decision-makers perceive that the potential challenges of lobbying outweigh the benefits and decide not to engage in lobbying. By examining automotive firms in the U.S. light vehicle market from 1998 to 2013, we find significant empirical support for our general premise. Using Tobit regression analysis, we find that automotive firms present diverging motivations for lobbying depending on whether they attend to historical or social aspirations for sales performance. © The Author(s) 2019.
Bending the Rules or Changing Them? MNE Responses to Institutional Challenges in Transition Economies
(Sage Publications Ltd, 2019-04-16) Yu, J.; Lee, Seung-Hyun; Lee, Seung-Hyun
We investigate what determines a multinational enterprise’s (MNE) propensity to engage in lobbying and bribing in host countries where the overall institutional development for market exchanges is insufficient, and thus, their governance systems are relatively weak. We extend the current literature on institutional strategies by theorizing and showing the persistent and significant impacts of home country institutions on an MNE’s choice of influencing activities to address institutional constraints overseas. More specifically, our results demonstrate that the MNEs from a home country with a stronger governance system are less involved in bribery, but have a higher tendency to lobby in transition economy countries, which have been characterized by relatively weaker institutional development, particularly in the area of governance. This tendency still holds even when these MNEs rely more on the local market for sales. We draw theoretical and practical implications from these observations. © The Author(s) 2019.
Business Value of Information Technology: Testing the Interaction Effect of IT and R&D on Tobin's Q
Bardhan, Indranil R.; Krishnan, V.; Lin, S.; 214385899 (Bardhan, IR)
The business case for investing in information technology (IT) has received increasing scrutiny in recent years. We propose that IT investments create additional business value through interactions with other business processes. In this paper, we formalize the interaction effect of IT by focusing on one core function, namely, research and development (R&D). We hypothesize that investments in IT can interact with and complement a firm's R&D investments, enhancing the firm's shareholder value creation potential. We test this by hypothesis by estimating the interaction impact of IT and R&D investments on Tobin's q, a forward-looking measure of firm performance using a recent multiyear, firm-level, archival data set. Our results suggest that the interaction effect of R&D and IT on Tobin's q is positive and significant after controlling for other firm- and industryspecific effects. Our findings provide rigorous empirical support for recent anecdotal evidence in the managerial literature with respect to the manner in which IT is enabling R&D-intensive innovation processes. Our analysis underscores the need for coordinated investments in IT and R&D, and permeating IT capabilities throughout other business processes such as R&D.
Can Viagra Advertising Make More Babies? Direct-to-Consumer Advertising on Public Health Outcomes
(SAGE Publications, 2020-04-28) Kim, Tongil "TI"; Diwas, KC; 0000-0003-3277-4337 (Kim, TT); Kim, Tongil "TI"
Although product advertising has been widely studied and understood in relation to the consumer’s purchase decision, advertising may also have unintended but important societal and economic consequences. In this article, the authors examine a public health outcome—birth rate—associated with advertisements for erectile dysfunction (ED) drugs. Since the United States loosened regulations on direct-to-consumer television advertising for prescription drugs in 1997, ED drug makers have consistently been top spenders. By comparing advertising data with multiple birth data sets (patient-level hospital data from Massachusetts between 2001 and 2010 and micro birth certificate data from the United States between 2000 and 2004), the authors demonstrate that increased ED drug television advertising leads to a higher birth rate. Their results, which are robust with respect to different functional forms and falsification tests, show that a 1% increase in ED drug advertising contributes to an increase of .04%–.08% of total births. Their findings suggest that beyond the customer purchase decision, advertising can have important public health outcomes, with resulting implications for managerial decision making and policy formulation.
The Choice Between Joint Ventures and Acquisitions: Insights from Signaling Theory
Reuer, Jeffrey J.; Ragozzino, Roberto
This paper extends information economics in corporate strategy and organizational governance research by using signaling theory to explain firms' market entry modes. We exploit features of the initial public offering (IPO) context to investigate how signals on newly public firms shape other companies' governance choices to form joint ventures with them versus acquiring them. We also develop theoretical arguments on how the value of these signals will vary across exchange partners. The results reveal that companies are more apt to acquire, versus partner with, IPO firms taken public by reputable investment banks compared with IPO firms associated with less prominent underwriters. Venture capitalist backing also appears to be a valuable signal for prospective acquirers, particularly when the acquirer and target reside in different industries and possess dissimilar knowledge bases. We also present evidence that signals affect target selection and the emergence of market segmentation for joint venture partners and acquisition candidates.
Clawback Provision of SOX, Financial Misstatements, and CEO Compensation Contracts
(Sage Publications Inc, 2017-01-23) Natarajan, Ramachandran; Zheng, Kenneth; Natarajan, Ramachandran
Section 304 of the Sarbanes-Oxley Act (hereafter, SOX), commonly known as the clawback provision, entitles the Securities and Exchange Commission (SEC) to sue the CEO and CFO in an attempt to recover their incentive compensation based on misstated financial reports. Although a stream of literature investigates the effects of voluntary firm-initiated clawback provisions, this study explores the effects of the mandatory SOX clawback provision on the likelihood of financial misstatements and CEO compensation. We find a significant decrease in the association between CEO in-the-money option value and the likelihood of a financial misstatement surrounding SOX, suggesting the SOX clawback provision has been effective in reducing financial misstatements arising from CEO in-the-money stock options. To examine the effects of the SOX clawback provision on CEO compensation, we identify a set of misstatement firms with a high restatement likelihood where the CEOs are most likely concerned with the impact of the SOX clawback provision on their compensation. We find that compared with control firms, these misstatement firms with a high restatement likelihood where the CEO is the chair of the board exhibit an increase in CEO salaries between the pre- and post-SOX periods, suggesting that in the post-SOX period, powerful CEOs are able to receive higher salaries which are not subject to the SOX clawback provision.
Competition in consumer shopping experience
(INFORMS) Iyer, Ganesh; Kuksov, Dmitri
This paper analyzes the competitive role of retail shopping experience in markets with consumer search costs. We examine how a retailer's advantage in providing consumer shopping experience affects its equilibrium pricing and price advertising strategies. We find that if the consumer valuation of a shopping experience is sufficiently low, its effect on retailer strategy is similar to that of quality, and the retailer with the advantage in shopping experience then deploys higher levels of price advertising. On the other hand, when the shopping experience is valuable enough for consumers, it acts akin to price advertising in that it makes it optimal for the retailer with the advantage in shopping experience to eschew price advertising. The optimal competitive investments in consumer shopping experience can be higher than that of a monopoly. The profit impact of shopping experience for a retailer depends on the level of shopping experience: for low levels, the profit impact depends on the difference in the levels between the retailers, but for high enough levels, it depends only on whether the retailer's shopping experience level is higher than that of its competitor. In this case, even small differences in shopping experience levels can result in large differences in equilibrium profits. © 2012 INFORMS.
Competitive Strategies for Brick-and-Mortar Stores to Counter "Showrooming"
(INFORMS) Mehra, Amit; Kumar, S.; Raju, J. S.; 0000-0002-3822-9543 (Mehra, A); 56292095 (Mehra, A); Mehra, Amit
Customers often evaluate products at brick-and-mortar stores to identify their "best-fit" product but buy it for a lower price at a competing online retailer. This freeriding behavior by customers is referred to as "showrooming," and we show that this is detrimental to the profits of the brick-and-mortar stores. We first analyze price matching as a short-term strategy to counter showrooming. Price matching allows customers to purchase a product from the store for less than the store's posted price, so one would expect the price matching strategy to be less effective as the fraction of customers who seek the matching increases. However, our results show that with an increase in the fraction of customers who seek price matching, the store's profits initially decrease and then increase. While price matching could be used even when customers do not exhibit showrooming behavior, we find that it is more effective when customers do showrooming. We then study exclusivity of product assortments as a long-term strategy to counter showrooming. This strategy can be implemented in two different ways: (1) by arranging for exclusivity of known brands (e.g., Macy's has such an arrangement with Tommy Hilfiger) or (2) through the creation of store brands at the brick-and-mortar store (T. J. Maxx sells a large number of store brands). Our analysis suggests that implementing exclusivity through store brands is better than exclusivity through known brands when the product category has few digital attributes. However, when customers do not showroom, the known-brand strategy dominates the store-brand strategy.

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