Management Insights
Authors: Gorman Michael F. 
Published: August 2012

Martin Knaup, Wolf Wagner Could the credit crisis of 2007–2009 have been predicted? The authors propose a new method for measuring the quality of banks' credit portfolios called a credit risk indicator (CRI). Their method makes use of information embedded in bank share prices by exploiting differences in their sensitivity to credit default swap spreads of borrowers of varying quality. The indicator represents the perceived share of high-risk exposures in a bank's portfolio and can be used as a risk weight for computing regulatory capital requirements. The authors estimate CRIs for the 150 largest U.S. bank holding companies. They find that the CRIs are able to forecast bank failures and share price performances during the crisis of 2007–2009. The insight for management: Credit risk can be evaluated with available information, reducing risk through analytics and information.

Carmit Segal What makes you tick now, and what will make you tick in the future? The author provides evidence that scores on simple, low-stakes tests are associated with future economic success because the scores also reflect the test takers' personality traits associated with their level of intrinsic motivation. Based on an empirical test that was administered to youths without performance incentives, the author shows that speed scores are correlated with future earnings of participants, giving evidence that scores relate to intrinsic motivation. The author shows that the scores of a highly motivated, though less educated, group of potential recruits to the U.S. military are higher than the other participants' scores. The insight for management: Intrinsic motivation and personality traits are important components of performance.

Marcelo Olivares, Gabriel Y. Weintraub, Rafael Epstein, Daniel Yung How should combinatorial auctions be structured to assure sufficient competition and efficiency of the outcome? The authors evaluate a combinatorial auction for the one half billion dollar Chilean school meal services. They explore which packages bidders should be allowed to bid on and how to diversify the supplier base to promote competition. Their results indicate that package bidding that allows firms to express their cost synergies due to economies of scale and density seems appropriate, but they also found evidence that firms can take advantage of this flexibility by discounting package bids for strategic reasons and not driven by cost synergies. The authors suggest that, because this behavior can lead to inefficiencies, it may be worth evaluating whether to prohibit certain combinations in the bidding process. Their results also suggest that market share restrictions and running sequential auctions seem to promote competition in the long run, without significantly increasing the short-run cost for the government due to unrealized cost synergies. The insight for management: Simultaneous consideration of the firms' operational cost structure and their strategic behavior is key to the successful design of a combinatorial auction.

Jaideep Shenoy Vertical takeovers: Are they good or bad? The author investigates the efficiency argument versus the foreclosure and collusion rationales for vertical integration based on a large sample of vertically related takeovers. The efficiency rationale posits that vertical integration mitigates contractual inefficiencies between suppliers and customers and provides incentives to undertake relationship-specific investments. In contrast, the foreclosure and collusion rationales suggest that vertical integration is anticompetitive in nature. Specifically, the foreclosure argument suggests that vertical integration is used to raise costs of rival firms, and the collusion argument suggests that vertical integration facilitates coordination between the integrated firm and its rivals. To distinguish among the three hypotheses, the author examines (1) the announcement period wealth effects to the merging firms, rival firms, and customer firms; and (2) the operating performance changes to the merging firms in vertical takeovers. The insight for management: Firms that expand their vertical boundaries seemed to be acting in a manner consistent with an efficiency-enhancing rationale.

Michael S. O'Doherty Do stocks with high probabilities of bankruptcy or default earn anomalously low returns? The author shows that financially distressed stocks have relatively low exposure to market risk during bad economic times. The author proposes a construct called conditional CAPM, which successfully explains the distress anomaly because conditional betas for distressed stocks are negatively correlated with the market risk premium and positively correlated with market volatility. The insight for management: A theoretical model has been developed to explain an anomaly in which a levered firm's equity beta is negatively related to uncertainty about the unobserved value of its underlying assets.

Bruce McWilliams Do money-back guarantees help retailers of low quality? Traditionally, money-back guarantees (MBGs) are utilized by high-quality firms that feature a low likelihood of product return to signal their high quality to consumers. However, MBGs are becoming ubiquitous among major retailers, even when the likelihood of product return varies greatly among them. The author explores a competitive environment between high- and low-quality retailers. The author suggests that, if MBGs are profitable, then it is rational for both retailers to offer MBGs, but, interestingly, the low-quality retailer gains while the high-quality retailer loses relative to when MBGs are not offered. In contrast, if demand is lumpy, retailers can act monopolistically over their respective market segments, allowing both retailers to gain from MBGs, although the low-quality retailer still gains more. The insight for management: Surprisingly, lower-quality retailers might benefit more from money-back guarantees than high-quality retailers.

Boğaçhan Çelen, Kyle Hyndman How does interaction between individuals affect the dissemination of information? The authors explore social learning through information acquisition of participants in an experiment where a group faces a decision problem under uncertainty. Each person is given private information about the fundamentals of the problem and makes decisions sequentially while observing others make their decisions. The authors show that social welfare can be enhanced by incurring the small cost of collecting information on previous decisions. However, the authors note that there are important deviations from rationality such as a tendency to conform. They conclude that, given such biases, ironically, subjects would often have been better off not forming any links in the problem-solving process. The insight for management: Despite the potential for information sharing in the problem-solving process, natural human tendencies for irrationality can lead to suboptimal solutions in group decision making.

Chris Forman, Nicolas van Zeebroeck How did the diffusion of the Internet influence research collaborations within firms? The authors examine the relationship between business use of basic Internet technology and the size and geographic composition of industrial research teams between 1992 and 1998. They find robust evidence that basic Internet adoption is associated with an increased likelihood of collaborative patents from geographically dispersed teams. On the contrary, they find no evidence of such a link between Internet adoption and within-location collaborative patents, nor do they find any evidence of a relationship between basic Internet and single-inventor patents. They interpret these results as evidence that adoption of basic Internet significantly reduces the coordination costs of research teams, but they find little evidence that a drop in the costs of shared resource access significantly improved research productivity. The insight for management: The Internet seems to build better teamwork among geographically disperse teams, but it does not necessarily improve research productivity overall.

Hsiao-Hui Lee, Edieal J. Pinker, Robert A. Shumsky In a call center, there are often two or more skill levels and cost levels: a first level “gatekeeper,” for simpler calls, and a second “expert” level support. What is the best structure for such an outsourced operation when trying to balance cost and service considerations? The client seeks to find a combination of internally provided and outsourced service to minimize staffing costs, customer waiting costs, and mistreatment costs due to unsuccessful attempts by a gatekeeper to solve the customer's problem. Efficient contracts can result when the client outsources only gatekeepers or experts. However, when the client outsources the entire system as a two-level process, an optimal contract may not exist unless a challengingly high level of coordination is maintained. If the vendor is allowed to choose the structure of the support system, more efficient contracts can be constructed. The insight for management: The outsourcing client should allow the contractor some latitude in determining the structure of service provision.

Martin G. Kocher, Marc V. Lenz, Matthias Sutter In a soccer shootout, is it better to go first or second? Going first can put the pressure on, or take the pressure off, the other team, who might be affected psychologically by the information. More broadly, psychological pressure could produce a first-mover advantage, even though each team is equally skilled. Previous research finds a large advantage for first movers; these authors do not find such an advantage—at least for soccer shootouts. The insight for management: Contrary to prior findings, the psychological advantage of being a first mover seems to be moot; going first or second in soccer shootouts seems to make little difference to outcomes.