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As more and more people invest to save for college educations and their own retirements, research shows that aggressive trading in these accounts can lead to large losses. Professor Brad Barber has published “Just How Much Do Individual Investors Lose by Trading?” in The Society for Financial Studies, 2009, in collaboration with Y-Tsung Lee of National Chengchi University, Y-Jane Liu of the Guanghua School, Peking University and National Chenggchi University, and Terrance Odean of the Haas School of Business at the University of California, Berkeley. Using a complete trading history from 1995 to 1999 of all investors in Taiwan’s stock market, the world’s 12th largest, Barber et al examined the gains and losses from trades made by individuals and by institutions, which fall into one of four categories: corporations, dealers, foreigners or mutual funds. They found that, on average, individuals lose, while institutional investors gain from trading. The authors show that trading leads to economically large losses for individual investors and virtually all of the losses of individual investors can be traced to their aggressive rather than passive orders. The authors estimate a 3.8 percentage point annual reduction in the return on the aggregate portfolio of individual investors. These losses can be broken down into four categories: trading losses (27%), commissions (32%), transaction taxes (34%), and market-timing losses (7%). Meanwhile, the trading and market-timing losses of individual investors represent gains for institutional investors. The institutional gains are eroded, but not eliminated by the commissions and transaction taxes that they pay. Barber et al estimate the aggregate portfolio of institutional investors enjoys annual abnormal returns of 1.5 percentage points after commissions and transaction taxes, but before any fees the institutions might charge their retail customers. They warn that this level of loss by individual investors is significant and potentially expensive for nation states. Rather than trying to time the market or actively trading individual stocks, Barber and his co-authors strongly recommend that individuals invest in well-diversified, low-cost index funds that are designed to deliver the market rate of return.
In April, Barber was named the first recipient of the Maurice J. and Marcia G. Gallagher Endowed Chair of Finance. His selection was based on his years of exceptional teaching, insightful and influential research, and his service to the academic and business communities.
In the midst of the financial crisis and taxpayer-funded bailouts of the likes of AIG, public outrage and government scrutiny over the pay packages of executives at companies receiving federal aid has reached new heights. Largely missing from the debate over executive compensation is the unintended consequence that accounting rules have on rewards in the form of stock buybacks.
Professor Griffin and
Assistant Professor Ning Zhu recently teamed up to investigate the relation between open market stock repurchases and stock option compensation for executives. In their paper, “Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence,” Griffin and Zhu examined four specific issues: the choice to repurchase shares versus pay additional dividends; the determinants of the dollar amount of shares repurchased (buyback outlay); the timing of the link between buybacks and stock option exercise; and testing for factors that explain investor reaction to a buyback announcement. Their research shows that company executives with stock options have strong incentives to monetize and top-up the value of their options using share buybacks Griffin and Zhu conclude that this form of stealth compensation for executives continues to grow unabated. Complex and opaque accounting rules for stock options and buybacks only make matters worse, creating a kind of regulatory arbitrage, which imposes significant agency costs on outside shareholders. “The evidence on the option compensation motivation for buybacks in partnership with accounting rules seems more persuasive than ever,” Griffin and Zhu wrote.
In March, Griffin presented this research at the School of Business at the University of Otago in New Zealand. He participated in three days of lectures and seminars and presented to a group of academics, graduate students, and professionals. Griffin’s paper also has been accepted for presentation at the National Meetings of the American Accounting Association in New York in August.
“Professor Andrew Hargadon believes energy efficiency can be sexy -- and he's winning fans at Chevron, Samsung, and Wal-Mart, and in Silicon Valley.” – Fast Company, May 2009
Hargadon, the founding director of the UC Davis Energy Efficiency Center (EEC), was featured in the May issue of Fast Company in an article titled “UC Davis’s Energy Efficiency Center Makes Conservation Sexy.” The article recognized Hargadon’s leadership at the forefront of the energy efficiency wave by fostering networks linking entrepreneurs, scientists, venture capitalists and business students. Building these connections is at the core of Hargadon’s work to help push innovations out of the lab and into the market. “In the course of an afternoon . . .," Hargadon told Fast Company, "we've been able to introduce entrepreneurs and their VCs to three different utilities and immediately begin talking about pilot programs." Fast Company spotlighted recent EEC fellows and their innovations, including Siva Gunda, a UC Davis Ph.D. candidate in mechanical engineering who teamed with MBA students on two start-ups that were also finalists in last year’s Big Bang! Business Plan Competition: CEDR, a low-cost demand-response system for electric grids; and WicKool a retrofit device that improves the performance of rooftop air conditioners by recycling condensation. The story also described how Hargadon is plugging venture capitalists into the network to fund promising energy efficiency technologies. Hargadon introduced Raju Pandey, a computer-science professor at UC Davis, to Barbara Grant, managing director of American River Ventures, a Sacramento-area venture capital firm focused on efficiency. Grant agreed to invest in Pandey’s wireless monitoring technology that cuts cooling costs by targeting air conditioning and fans at server racks rather than blast-chilling an entire data center. Pandey’s company, SynapSense, has since attracted $20 million in venture capital. "Andy [Hargadon] is absolutely the linchpin of why this works," Grant told Fast Company. "It's not only vital and vibrant, it's almost viral."
Hargadon, who also serves as faculty director of the UC Davis Center for Entrepreneurship, will be promoted to full professor on July 1.
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Why are products or producers that span multiple categories penalized in competitive markets? A recent study by Assistant Professor Greta Hsu and colleagues Professor Michael T. Hannan of the Stanford Graduate School of Business, and Assistant Professor of Management Özgecan Koçak of Sabanci University in Istanbul, Turkey, examines the effects of market specialization in the U.S. feature-film industry and eBay. Their paper, “Multiple Category Memberships in Markets: An Integrative Theory and Two Empirical Tests,” was published in the February issue of the American Sociological Review. Using advanced statistical techniques, the researchers found that when a film spans many genres—for example, it could be classified as a Western/comedy/adventure—its audience appeal and box-office revenue shrinks. Similarly, if a seller on eBay specializes in a single category, the likelihood the auction will end successfully with a sale increases. If a seller operates in multiple categories, the likelihood of success decreases. Hsu and her colleagues identify two distinct processes that contribute to these dynamics. First, consumers who perceive that a product belongs in multiple categories tend to find those products less appealing than products identified with a specific category. Second, the producers whose products span multiple categories often fail to develop the capabilities to excel in any one category. Hsu’s findings shed light on the benefits of producing and marketing products to specific market niches.
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Professor Prasad Naik was one of the top-five finalists for the prestigious 2008 William F. O’Dell Award, for his pioneering research on the role of synergy in integrating marketing communications. The American Marketing Association awards the honor for articles published in the Journal of Marketing Research over the last five years. The articles are judged by the Editorial Board as the “most significant, long-term contribution to marketing theory, methodology, and/or practice.” Naik and his co-author, Professor Kalyan Raman from the Northwestern University, were nominated for their article, “Understanding the Impact of Synergy in Multimedia Communication.” In their research, Naik and Raman developed a new method that enables marketing managers to quantify the magnitude of synergy using readily available market data. The authors also established new marketing principles: first, in the presence of synergy, managers should increase the total marketing budget and allocate a larger portion of the incremental budget to the less effective marketing activity; second, because synergies induce catalytic effects, managers should spend even on ineffective marketing activities that exhibit synergies with other effective activities.
Naik has presented these novel findings to senior managers from major multinational companies at the Marketing Science Institute’s Metrics Conference in Boston, Mass., and at the New Media Landscape Conference in Barcelona, Spain.
Creating Value from “Design Thinking”At a time when manufacturing and services are being outsourced, margins narrowed and the threat of commoditization a concern, organizations and their management need to foster what Assistant Professor Siobhán O´Mahony calls “design thinking” among their rank and file to maintain a competitive advantage. This spring, O’Mahony taught a new elective course, “Design and Business,” that explored the ways in which companies can create and articulate aesthetic value and apply design principles to create sustainable competitive advantage, address technical and customer challenges, produce enjoyable experiences and enhance customer loyalty. Cases and class examples included companies well known for their ability to create aesthetic value such as: Alessi, Starbucks, Apple, OXO Kitchen Tools, Porsche, Herman Miller, Target and Nike. Working in teams, the students considered design innovations for a product or service that has a negative environmental impact or one that could address the needs of 90% of the developing world. Using prototyping tools and researching customer needs, the students’ new product concepts included a solar toolbox, a solar stove, a composting service and even a solar cremation service. Guest speakers also shared how their companies apply design thinking concepts. Alumna Sungene Ryang ’04, who works in the Consumer Experience Design at IDEO, discussed how design thinking is embedded in the firm’s organizational culture. Strachan Forgan and Richard Tepp of Sasaki & Associates, the architectural firm that designed the School’s new building, Gallagher Hall, demonstrated their client-focused and multi-disciplinary approach to visualizing design and concepts for what is expected to be the first LEED®-certified Gold building at UC Davis. According to O´Mahony, managers don’t have to be trained as designers to practice design thinking. Her students learned to reframe problems by thinking deeply about the latent needs of consumers and by applying design concepts holistically to products and services with an eye toward business, aesthetic and environmental concerns.
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Not long after the Dow Jones slid to a six-year low, Assistant Professor Anna Scherbina presented her research about stock price volatility at Tulane University’s Freeman School of Business in March. Scherbina’s study, “Unusual News Events and the Cross-Section of Stock Returns,” co-authored by Turan G. Bali of Baruch College’s Zicklin School of Business and Yi Tang of Fordham University’s School of Business, identified a pattern in which stocks that experience a sudden increase in volatility earn higher returns for a month, only to drop and underperform during subsequent months. Scherbina’s findings indicate that volatility jumps can be traced to unusual press release activity by the company that lead to an increase in investor disagreement regarding the value of the stock. This high volatility in conjunction with investor disagreement regarding the value of the stock creates a situation where short selling is too risky and costly. These results lead to a split between pessimistic buyers who won’t purchase the stock and at the same time cannot sell short due to short-selling constraints, and the more optimistic investors who continue bidding the stock upward. Scherbina and her co-authors conclude that the jumps in stocks’ volatility that accompany these events make short-selling costly and prices rise to reflect the more optimistic views. In the subsequent months, as investors start to come to an agreement on the implications of the news, prices converge down, erasing roughly half of the initial price run-up. Scherbina’s work reveals market patterns that are useful for arbitrageurs and investors who are navigating and making data-based decisions in markets.
Most recently, Scherbina presented another paper, “Mispricing and Costly Arbitrage,” at the spring 2009 Journal of Investment Management’s Conference on Leverage and Liquidity in San Francisco.
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The U.S. GDP will begin to rise and the credit freeze will begin to thaw by the end of this year, according to Professor Robert Smiley, who was invited to present his analysis of the recession to more than 150 wine industry professionals and business owners at the Second Annual Napa Valley Grape Growers Association meeting in March. Smiley explained how the financial crisis began in the U.S. housing market and spread like wildfire through the global economy. He described Clinton and Bush administrations policies that strongly encouraged homeownership during the late 1990s and into 2005, primarily by reducing credit standards through Fannie Mae and Freddie Mac. Smiley said this easing of credit boosted homeownership from 60% to 70%, but the 10% increase was comprised primarily of people who had poor credit or did not have the means to make their loan payments. In short, according to Smiley, the banks were encouraged to grant higher risk, subprime mortgage loans to people who could not afford them. Smiley then described how subprime mortgages were bundled with other mortgages and sold on the market as collateralized mortgage obligations or mortgage backed securities. The bundles received investment grade ratings from Standard and Poor’s, Moody’s or Fitch Group that encouraged hedge funds, banks and pension funds to buy them. According to Smiley, these inflated ratings were created because the companies that put together the bundles hired the rating firms to assess the value of those bundles—an obvious conflict of interest. Then these mortgage bundles were allowed to be insured by companies like AIG, which, according to Smiley, did not keep a sufficient reserve in the event the bundles would fail. When the mortgage bundles did fail, AIG could not cover the losses, leading to the federal bailout. Smiley concluded that the economy will begin to recover by the end of 2009 and into 2010 as banks are reporting increased profits, stock prices are rising and manufacturers have sold off most of their surplus inventory. However, his enthusiasm was guarded. He contends that this economic meltdown is unique compared to past recessions.
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Consumers in the United States make billions of transactions each year using cash, checks, debit cards and credit cards. How much does this cost them? The median U.S. household pays $43 a month in banking and credit card fees and interest, while about 25% of households pay more than $100 a month and 10% pay more than $250 a month. According to a study by Assistant Professor Victor Stango and his co-author, Professor Jonathan Zinman of the Department of Economics at Dartmouth College, the typical customer could avoid more than half of those monthly costs by using different cards, by using available checking account balances to pay down credit card balances or by shifting high-rate debt to lower-rate cards. Stango and Zinman’s study, “What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs,” was published in the May American Economic Review: Papers & Proceedings. Stango and Zinman collected data on the daily online banking and credit card transaction for more than 900 American households. They found that 85% of the households pay explicit credit card charges—the largest cost being credit card interest—while 32 percent pay overdraft fees on their checking accounts. They found that median household could avoid 60% of all credit card interest charges, overdraft fees, and over-limit penalties and late fees with minor changes in behavior: reallocating from high- to low-rate cards, repaying debt using available checking balances, or using a much cheaper credit card with available credit.
In January Stango presented his work to an audience of academicians and practitioners at the American Economic Association meeting in San Francisco.
