Hot off the presses! Apr 01 Manage Sci

The Apr 01 issue of the Manage Sci is now up on Pubget (About Manage Sci): if you're at a subscribing institution, just click the link in the latest link at the home page. (Note you'll only be able to get all the PDFs in the issue if your institution subscribes to Pubget.)

Latest Articles Include:

• Management Insights
  - Manage Sci 55(4):iv (2009)
  No abstract available.
• What Fraction of Stock Option Grants to Top Executives Have Been Backdated or Manipulated?
  - Manage Sci 55(4):513-525 (2009)
  We estimate that 13.6% of all option grants to top executives during the period 1996-2005 were backdated or otherwise manipulated. Our study primarily focuses on grants that were unscheduled and at-the-money, of which we estimate that 18.9% were manipulated. The fraction is 23.0% before the new two-day filing requirement took effect on August 29, 2002, and 10.0% afterward. For the minority of grants that are not filed within the required two-day window, the fraction of manipulated grants remains as high as 19.9%. We further find a higher frequency of manipulation among tech firms, small firms, and firms with high stock price volatility. In addition, firms that use smaller (non-big-five) auditing firms are more likely to file their grants late. Finally, at the firm level, we estimate that 29.2% of firms manipulated grants to top executives at some point between 1996 and 2005.
• Optimal Market Intelligence Strategy When Management Attention Is Scarce
  - Manage Sci 55(4):526-538 (2009)
  This paper extends the theoretical literature on firms' optimal information strategies to the situation when a firm's management attention capacity to process available data is scarce. In this case, a firm's optimal market intelligence strategy must trade off learning a little about a broad range of markets (a broad strategy) with gaining a very deep understanding of one or a few markets (a focused strategy). This trade-off is not present when data are scarce, an assumption made in most of the existing literature on optimal information search strategies. However, in data-rich environments, which are of increasing relevance given technology changes, we show a focused market intelligence strategy is always best when managers need to process a substantial amount of data before beginning to gain insights; i.e., there are increasing returns to attention. Interestingly, this focused strategy can also be best with decreasing returns to attention when (a) managers are sufficie! ntly efficient in processing the available data and (b) managers have sufficiently strong initial priors on the unknown market parameters. We show a broad market intelligence strategy is only optimal when new data points are sufficiently redundant, i.e., when the learning rate is sufficiently decreasing with the allocation of more attention. Our results also indicate that advances in information technology can account for the pressure on firms to become more focused and that competition increases the likelihood of a focused strategy. Competition can lead to asymmetric outcomes where firms focus on different markets. Finally, we note that a focused market intelligence strategy, and thus an asymmetric allocation of attention, does not require a priori differences between firms, markets, or market-specific core capabilities. Consequently, a focused market intelligence strategy can result in market-specific core competencies and produce firm differences from equivalent starting! conditions.
• R&D in the Pharmaceutical Industry: A World of Small Innovations
  - Manage Sci 55(4):539-551 (2009)
  It is commonly argued that in recent years pharmaceutical companies have targeted their research and development (R&D) at small improvements of existing compounds instead of riskier drastic innovations. In this paper, we show that the bias in the pharmaceutical industry toward small innovations might be driven by the low sensitivity of the demand. In particular, small innovations get a proportionally larger reward because pharmaceutical firms target them at the inelastic segments of the demand. As a consequence, firms find it relatively more profitable to invest in small innovations. We also study the effect on R&D incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure.
• Dynamic Cost Reduction Through Process Improvement in Assembly Networks
  - Manage Sci 55(4):552-567 (2009)
  We consider a decentralized assembly system in which a buyer purchases components from several first-tier suppliers. We examine the dynamics of suppliers' investments in cost-reduction initiatives over the life cycle of a product under different procurement approaches. We model the suppliers' investment decisions under cost-contingent contracts, with wholesale prices determined on the basis of the prevailing component costs, as a dynamic game in closed-loop strategies. We show that there always exists an equilibrium in which the suppliers' investments are synchronized, that is, in each period either all suppliers invest in process improvement or no supplier does. We also consider target-price contracts, under which the assembler announces the rate of component cost reduction to be achieved over the product's life cycle at the beginning of the contractual relationship. We show that target-price contracts lead to higher investment levels and profits if the rates are prop! erly specified. In general, the equilibrium investments of the suppliers are lower than those under centralized control. The buyer can eliminate this inefficiency by subsidizing a certain fraction of the costs of investments. We extend the model to a setting with two competing assemblers and knowledge spillover at the suppliers. We find that the level of inefficiency under decentralized control decreases with increased competition and spillover rate.
• Information Exchange in Group Decision Making: The Hidden Profile Problem Reconsidered
  - Manage Sci 55(4):568-581 (2009)
  Group decision making provides a mechanism for channeling individual members' knowledge into productive organizational outcomes. However, in hidden profile experiments in which group members have common information favoring an inferior choice, with private information favoring a superior choice, groups typically choose an inferior alternative. We report a hidden profile experiment where we induce homogenous preferences over choice characteristics and provide financial incentives so that the common purpose assumptions of the model hold more completely than in past experiments. Nevertheless, groups continue to choose an inferior alternative most of the time. These failures primarily result from mistakes in recalling information. Mistakes in recalling common information (which favors an inferior candidate) are typically corrected, whereas mistakes in recalling the private information needed to uncover the hidden profile cannot be corrected. Therefore, the dismal performa! nce of groups in pooling the information needed to identify the superior option primarily result from the structure of the problem rather than deficiencies in how groups share and process information. The discussions necessary to resolve mistakes in recalling common information also help to explain the often noted fact that groups spend a disproportionate amount of time discussing common information.
• Sensitivity to Distance and Baseline Distributions in Forecast Evaluation
  - Manage Sci 55(4):582-590 (2009)
  Scoring rules can provide incentives for truthful reporting of probabilities and evaluation measures for the probabilities after the events of interest are observed. Often the space of events is ordered and an evaluation relative to some baseline distribution is desired. Scoring rules typically studied in the literature and used in practice do not take account of any ordering of events, and they evaluate probabilities relative to a default baseline distribution. In this paper, we construct rich families of scoring rules that are strictly proper (thereby encouraging truthful reporting), are sensitive to distance (thereby taking into account ordering of events), and incorporate a baseline distribution relative to which the value of a forecast is measured. In particular, we extend the power and pseudospherical families of scoring rules to allow for sensitivity to distance, with or without a specified baseline distribution.
• Trading as Entertainment?
  - Manage Sci 55(4):591-603 (2009)
  Among 1,000 German brokerage clients for whom both survey responses and actual trading records are available, investors who report enjoying investing or gambling turn over their portfolio at twice the rate of their peers. Including entertainment attributes as additional explanatory variables in cross-sectional regressions of portfolio turnover on objective investor attributes more than doubles the fraction of the total variation of portfolio turnover that can be explained. The results are robust to controlling for gender and proxies for overconfidence constructed from survey responses. Nonpecuniary benefits of trading thus appear to offer a straightforward explanation of the "excessive trading puzzle."
• Transition to Entrepreneurship from the Public Sector: Predispositional and Contextual Effects
  - Manage Sci 55(4):604-618 (2009)
  Studies of career dynamics implicitly claim that government employees are not entrepreneurial. Utilizing longitudinal data from the U.S. Panel Study for Income Dynamics, we investigate the reasons for the low rate of entrepreneurship from the public sector. We conjecture that it is due to labor market matching processes and the bureaucratic nature of public organizations and bureaucratization of individuals. Our life-course analysis identifies labor market matching as a major determinant: nonentrepreneurial types choose public sector employment. We also uncover tenure and context effects, which decrease and increase the hazard rate of entrepreneurial exit, respectively. Whereas the former effect points toward adaptation and internal labor market sorting, the latter draws attention to exits due to frustration.
• Competition in Service Industries with Segmented Markets
  - Manage Sci 55(4):619-634 (2009)
  We develop a model for the competitive interactions in service industries where firms cater to multiple customer classes or market segments with the help of shared service facilities or processes so as to exploit pooling benefits. Different customer classes typically have distinct sensitivities to the price of service as well as the delays encountered. In such settings firms need to determine (i) the prices charged to all customer classes; (ii) the waiting time standards, i.e., expected steady state waiting time promised to all classes; (iii) the capacity level; and (iv) a priority discipline enabling the firm to meet the promised waiting time standards under the chosen capacity level, all in an integrated planning model that accounts for the impact of the strategic choices of all competing firms. We distinguish between three types of competition: depending on whether firms compete on the basis of their prices only, waiting time standards only, or on the basis of price! s and waiting time standards. We establish in each of the three competition models that a Nash equilibrium exists under minor conditions regarding the demand volumes. We systematically compare the equilibria with those achieved when the firms service each market segment with a dedicated service process.
• Alliance Structure and the Scope of Knowledge Transfer: Evidence from U.S.-Japan Agreements
  - Manage Sci 55(4):635-649 (2009)
  Prior research suggests that equity joint ventures (JVs) are particularly effective vehicles for accessing complex technology. Different schools of thought have emphasized different reasons why joint ventures might support greater knowledge transfer than "bare" license agreements: incentive alignment, organizational embeddedness, and enhanced administrative controls. We probe and refine these theoretical perspectives, drawing out implications of the different theories for the extent and speed of alliance-related knowledge transfer, as well as for knowledge "leakage" in areas not directly related to alliance activities. Using a proprietary data set derived from regulatory filings with the Japanese government we test these implications in our empirical analysis of U.S.-Japan agreements. The picture that emerges from the analysis is one of particularly intense but contained knowledge transfer in equity joint ventures, relative to bare license agreements: knowledge transfe! rs directly related to the alliance activity are enhanced in the JV, and the speed of integration into the Japanese firm's subsequent innovations also increases. In marked contrast, leakage of unrelated technology is significantly reduced. These findings suggest that administrative structures that reduce technology leakage are a key feature of the equity joint venture, a result that is inconsistent with a "pure" knowledge-based perspective on alliances.
• Priority Shifting and the Dynamics of Managing Eradicable Infectious Diseases
  - Manage Sci 55(4):650-663 (2009)
  Public health budget constraints force policy makers to prioritize resources toward those interventions that yield the highest perceived benefits. Intuitively, it appears optimal to focus resources on affordable interventions against prevalent diseases. However, due to the dynamics of infectious disease eradication, policies focusing on a static perception of priorities may lead to economically suboptimal outcomes. Using a hypothetical two-disease dynamic transmission model, we explore several different decision rules with respect to vaccination policy for eradicable diseases. The simulations show that cost-effectiveness decreases as the extent of priority shifting increases. This model suggests the need for a longer-term dynamic perspective to appropriately recognize costs and benefits of different policies for eradicable diseases.
• Active Feature-Value Acquisition
  - Manage Sci 55(4):664-684 (2009)
  Most induction algorithms for building predictive models take as input training data in the form of feature vectors. Acquiring the values of features may be costly, and simply acquiring all values may be wasteful or prohibitively expensive. Active feature-value acquisition (AFA) selects features incrementally in an attempt to improve the predictive model most cost-effectively. This paper presents a framework for AFA based on estimating information value. Although straightforward in principle, estimations and approximations must be made to apply the framework in practice. We present an acquisition policy, sampled expected utility (SEU), that employs particular estimations to enable effective ranking of potential acquisitions in settings where relatively little information is available about the underlying domain. We then present experimental results showing that, compared with the policy of using representative sampling for feature acquisition, SEU reduces the cost of p! roducing a model of a desired accuracy and exhibits consistent performance across domains. We also extend the framework to a more general modeling setting in which feature values as well as class labels are missing and are costly to acquire.
• Coordination Mechanisms in Decentralized Serial Inventory Systems with Batch Ordering
  - Manage Sci 55(4):685-695 (2009)
  This paper studies a periodic-review, serial supply chain in which materials are ordered and shipped according to (R,nQ) policies. Three information scenarios are considered, depending on the level of information available: echelon, local, and quasilocal. In the echelon scenario, each stage can access the inventory and cost information within its echelon (comprising the stage itself and all downstream stages); in the local scenario, each stage only accesses its own local information. Finally, in the quasilocal scenario, each stage knows its local information, plus the actual customer demands. We propose coordination schemes that regulate the stages to achieve the supply chain's optimal cost under each information setting. All these coordination schemes fit comfortably within an emerging practice called supply chain finance, which includes the organization and technology needed to implement them.