Research
WINTER 2005: IN THIS ISSUE
@Smith
Human Resources
Accounting
The Global Economy
Understanding the process of
Highly reputable firms set the standard
Foreign portfolio investment gives
mid-life career transition may help
for voluntary disclosure; many other
a big boost to small businesses,
employers keep their employees
firms just follow the crowd
both at home and abroad
RESEARCH BY
RESEARCH BY
RESEARCH BY
Holly Slay
Nerissa Brown
April Knill
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Research
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Volume 6, Number 1
Herd Behavior in Voluntary Disclosure of Capital Expenditure Forecasts
continued from page 1
DEAN
Howard Frank
DIRECTOR OF RESEARCH
Research@Smith is published three times a year by the
Robert H. Smith School of Business, University of Maryland;
3570 Van Munching Hall, College Park, Maryland 20742.
www.rhsmith.umd.edu
Michael Ball
EDITOR
Brown, managerial desire to increase or maintain a company’s reputation is a
Rebecca Winner
major contributing factor in the decision to herd in capital expenditure disclosures.
CONTRIBUTING WRITER
Kenneth Ng
Brown also noticed a tendency toward “informational herding,” where firms
use the content of their peers’ disclosures to decide not just when to release information, but what information to release. When peer firms release information
We’d like to put Research@Smith directly into the hands of
those who are interested in learning about the latest research
conducted by Smith School faculty. To request a copy of this
publication or make an address correction, contact Rebecca
Winner via e-mail, editor@rhsmith.umd.edu, or phone,
(301) 405-9465.
DESIGN
Cynthia Mitchel
Visit the Smith Research Network:
www.rhsmith.umd.edu/smithresearch/.
indicating that capital expenditures will be lower this year in comparison to last
year, there is a corresponding increase in the number of firms which issue a forecast in the current period. Firms are also less likely to disclose information if the
information released by their peers is imprecise.
Herding is a rational behavior, but it can lead to poor decisions if a firm infers
the wrong information or follows the bad choices made by others. This may
induce managers to disclose even when private signals indicate that disclosure is
not in the best interest of the firm, or it can lead managers to withhold informa-
KNOWLEDGE SHARING
tion even when private signals suggest that disclosure is beneficial.
Herding can also have a detrimental affect on the economy. If managers dis-
New books by the Robert H. Smith School of Business faculty
close their information only when others have released similar information, the
amount of relevant information available to stakeholders is lower. In extreme
cases, the release of information by firms in a rapid wave-like manner can lead to
increased stock market volatility.
With the recent push for higher levels of reporting transparency, Brown’s work
may act as a cautionary tale to firms, which tend to follow the crowd in voluntary
disclosures. “I hope my work encourages companies to put in place mechanisms
such as corporate governance structures which induce managers to disclose relevant information when it is deemed beneficial to do so and less in response to the
disclosure decisions of other firms,” says Brown.
Brown continues to explore the interactions of voluntary disclosure behavior
G. Anandalingam and H. Lucas,
Beware the Winner's Curse: Victories
that Can Sink You and Your Company,
New York: Oxford University Press,
2004.
S. I. Gass and A. A. Assad, An
Annotated Timeline of Operations
Research: An Informal History,
Springer + Business Media, New
York, 2005.
For further information, contact nbrown@rhsmith.umd.edu
S. E. Loeb and Paul J. Miranti, Jr.,
The Institute of Accounts: NineteenthCentury Origins of Accounting
Professionalism in the United States,
London: Routledge, 2004.
L. Gordon and M. Loeb, Managing
Cybersecurity Resources: A Cost-Benefit
Analysis, McGraw-Hill, 2004.
H. Lucas, Information Technology:
Strategic Decision Making for
Management, New York, John Wiley,
2004.
C. Grimm and K. Smith, Strategy as
Action: Competitive Dynamics and
Competitive Advantage, Oxford
Publishing, 2005.
R. Lusch and S. Vargo, Toward a
Service-Dominant Logic of Marketing:
Continuing the Dialog, Armonk, NY:
M.E. Sharpe, 2005.
across multiple firms, the dynamics of disclosure behavior across time, and the
impact of corporate governance mechanisms on patterns of herding in disclosures.
K. Smith and M. Hitt, The Oxford
Handbook of Management Theory:
The Process of Theory Development,
Oxford Publishing, 2005.
@
Smith
Research
W I N T E R 2 0 0 5 : Volume 6, Number 1
Herd Behavior in
Voluntary Disclosure of
Capital Expenditure
Forecasts
Firms are required to disclose information to shareholders, regulatory agencies
and the general public through mandated financial reports and other regulated
filings. But firms can also selectively disclose information through news releases,
shareholder meetings, analyst presentations, and conference calls. Nerissa Brown,
a PhD candidate in the accounting and information assurance department at the
Robert H. Smith School of Business, examines the disclosure patterns of firms’
capital expenditure plans in her paper “Herd Behavior in Voluntary Disclosure of
Capital Expenditure Forecasts.”
Brown is believed to be the first to examine how firms in the same industry
tend to herd in their timing of capital expenditure forecasts. Information on
future capital expenditures can be highly proprietary, and disclosure of such information may affect a firm negatively if competitors use that information to their
advantage. Disclosure of asset/capacity expansions, for example, may signal to
Research by
Nerissa Brown
rival or potential market entrants a firm’s growth strategies. In response to this
signal, rivals may undertake similar capacity expansions, which could then hinder
the firm’s growth plans or even reduce its performance. Because of these disclosure costs, Brown expected that herding would be more prevalent in proprietary
capital expenditure forecasts as opposed to earnings and revenues forecasts.
Brown used 742 forecasts by 354 firms across 26 industries between the fourth
quarter of 1999 to the third quarter of 2001 to examine the association of a firm’s
WITHIN
A TWO - DAY PERIOD IN JULY 2001, UAL CORP., AMR
CORP., AND NORTHWEST AIRLINES ALL RELEASED THEIR CAPITAL
EXPENDITURE PLANS .
IN
OCTOBER OF 2000, SBC COMMUNICA -
TIONS , VERIZON COMMUNICATIONS AND TIME WARNER TELECOM
RELEASED THEIR CAPITAL EXPENDITURE PLANS IN THE SAME
WEEK .
THIS
KNOWN AS
WAVE - LIKE PATTERN OF VOLUNTARY DISCLOSURE ,
“HERDING,”
CAN ALSO BE SEEN IN COMPANIES ’
forecast release decision with the past disclosure decisions of firms in the same
industry.
Brown observed that a firm’s decision to release capital budgeting information
is strongly associated with the proportion of firms within its industry that have
already disclosed such information. As more firms choose to voluntarily release
information, the more pressure there is on other firms in the same industry to follow suit. “This trend is especially apparent for high-technology firms, which
exhibit a greater tendency to follow the prior disclosure decisions of same-industry firms,” Brown says. “Because the nature of their business is based on innovation, they have particularly high proprietary disclosure costs.”
A company’s reputation seems to affect the degree to which it chooses to fol-
DISCLOSURES OF THEIR REVENUE WARNINGS AND ACCOUNTING
low the crowd rather than set the standard. Using a number or reputation indica-
MISSTATEMENTS .
tors such as the Fortune Reputation Index, Brown distinguished firms that were
highly reputable and those that were less reputable. She found that less reputable
firms are more likely to herd on other firms’ disclosure decisions. According to
continued on page 4
Mid-life Transition
Decision Processes and
Career Successes
her patients because of the structure of her HMO, then she may experience an
The Role of Identity, Network and Shocks
decisions for mid-life and mid-career individuals. Career shocks can be negative
identity discrepancy. She says ‘that’s just not who I am’,” says Slay. At that point,
says Slay, the physician may consider a career transition: either an objective, measurable transition, such as leaving her position and pursuing another career, or a
subjective transition, changing her expectations to relieve the perceived identity
discrepancy.
Career shocks, defined as events that generate judgments and force decisionmaking about an individual’s career, play an important role in career transition
events, such as an unexpected layoff or industry downturn, as well as positive
“Employers who understand the thoughts and process that
Research by
Holly Slay
lead up to a career transition decision may be able to help
their employees find a way to deal with identity discrepancy
TODAY
ALMOST HALF OF EMPLOYED PERSONS ARE BETWEEN THE
AGES OF
35
AND
54,
rather than lose the employee.”
AND REPRESENT THE FASTEST GROWING SEG -
MENT OF THE WORKFORCE .
WITH
SO MANY INDIVIDUALS AT THE
events, such as a promotion or new opportunity.
In Slay’s model of mid-career and mid-life career transition, a career shock
POINT OF BOTH MID - LIFE AND MID - CAREER , AND WITH TRENDS FOR
serves as feedback in the individual’s development of his career identity. The indi-
THIS GROUP SHOWING THAT MID - CAREER TRANSITIONS ARE BECOM -
vidual then reflects on the discrepancy between his ideal and actual career identity
ING MORE COMMON , UNDERSTANDING THE CAREER DECISIONS OF
and as a result begins to consider career transitions.
THIS GROUP BECOMES CRUCIAL .
decision whether to make a career transition. If a person’s social network confirms
It is at this point that social networks play a significant role in an individual’s
his career identity, affirming that the individual’s career uses his strengths, then
the individual is more likely to remain in his career. If a person’s social network
confirms his identity discrepancy, however, it reinforces a person’s belief that he is
Mid-life, a time of personal questioning and evaluation for many people, is
no longer suited to the job at hand, or that the job is no longer suited to his per-
becoming a common time for career transition. Often these individuals are at mid-
sonal identity, and he is more liable to seek out a transition. Slay posits that the
career, established in their occupations, with experience and knowledge that are
more diverse a person’s social network is in terms of participants’ jobs and
very valuable to their employers.
employment types, as well as employers, the greater the range of career options
The idea of mid-life crisis has been talked about to the point of cliché, yet little
theoretical or empirical research exists to describe the process through which mid-
that an individual may consider (i.e., from physician to chef).
Slay suggests that individuals either make changes in identity or affirm their
life career transitions are made. Holly Slay, a Smith School PhD candidate in the
current career identity as a result of information acquired from observing or listen-
department of management and organization, studies the way in which people at
ing to their social networks as well as from the information provided by career
both mid-life and mid-career make career transitions. Slay proposes a process
shock. Career identity is shaped by others in a gradual process, while career shock
model of transition decision-making that is explained by the interactions of social
results in a more discrete change process.
networks, personal and career identity and career shocks in her paper, “Mid-Life
“This area of research will be important to employers because Baby Boomers
Transition Decision Processes and Career Success: The Role of Identity, Network
represent 39 percent of the work population, and many of them are at that mid-
and Shocks,” with co-authors Ian Williamson, assistant professor of management
career point. Employers who understand the thoughts and processes that lead up
and organization at the Smith School, and Susan Taylor, professor of management
to a career transition decision may be able to help their employees find a way to
at the Smith School.
deal with identity discrepancy rather than lose the employee,” says Slay.
A person’s sense of identity is made up of a his or her values, beliefs and social
Slay’s paper was presented as part of a symposium titled “Boundaryless and
roles such as gender or race. Career identity reflects not just the view of oneself
Protean Careers: Networks, Identity and Career Transitions” which won the 2004
but also an individual’s career goals and role as a working person.
Best Symposium Award, Careers Division of the Academy of Management.
“A physician may have a self-identity based on society’s perception of what a
physician should be: compassionate, concerned, able to help others. If that physi-
For more information about the Slay’s research or about the research presented in the
cian is an in HMO situation and feels that she isn’t able to provide good care to
symposium, please contact hslay@rhsmith.umd.edu.
A WORD FROM DEAN FRANK
This issue of Research@Smith focuses
on the award-winning research of
three Smith PhD candidates, but there
are many other Smith PhD
students with equally impressive
accomplishments.
Debora Viana Thompson,
PhDcandidate in the marketing department, was one of three winners of the
Marketing Science Institute’s Alden G.
Clayton Doctoral Dissertation Proposal
Competition, perhaps the most prestigious honor a marketing student can
achieve. Thompson explores the phenomenon of feature fatigue, when
consumers purchase products that are
overly complex because they tend to
value the product’s capability more
than its usability. Subjects used virtual
products in Smith's Netcentric
Behavioral Laboratory to investigate
how consumers balance their desires
for capability and usability when they
evaluate products.
Sophia Marinova, a PhD candidate in
the management and organization
department, received a Best Paper
Award for her work on the way high
investment human resource manage-
ment affects the corporate climate and
individual employees’ organizational
citizenship behaviors.
Jason Kuruzovich, a PhD candidate in
the decision and information technologies department, received a second
place Best Paper award for his work on
the role of technology in telecommuting success.
These achievements are a testament to
the quality of our students, who after
graduation go on to teach at major
research universities around the world.
In this newsletter we are able to include
only a sampling of the research being
done by our PhD students and their
faculty collaborators. For a broader
view of Smith’s current research,
including other award-winning papers
by Smith’s PhD students and complete
copies of the research papers précised
here, visit
www.rhsmith.umd.edu/research.
Howard Frank
Dean
Robert H. Smith School of Business
The Smith School offers
congratulations to:
Best Paper Presentation Award
Nerissa Brown, Accounting and
Information Assurance
“Herd Behavior in the Voluntary
Disclosure of Capital Expenditure
Forecasts,” Center for Corporate
Reporting and Governance Conference,
Costa Mesa, CA, September 2004
Best Dissertation in International
Finance Award
April Knill, Finance
“Can Foreign Portfolio Investment
Bridge the Smaller Firm Financing Gap
Around the World?” Co-sponsored by
Indiana University and the Financial
Management Association (FMA), FMA
Convention, New Orleans, LA,
October 2004
Best Paper Award, Second Place
Jason Kuruzovich, Decision and
Information Technologies
“Satisfied and Productive or Isolated
and Unmotivated? The Role of Technology in Telecommuting Success,” based
on work with V. Venkatesh. Global
Technology and Management Consortium (GTMC), 2004 Doctoral Consortium, Seoul, South Korea, June 2004
Best Paper Award
Sophia Marinova, Management and
Organization (Organizational
Behavior)
“Justice climate as a missing link for the
relationship between high Investment
HRM systems and OCBs.” With R.
Takeuchi, D. Lepak, & H. Moon.
Academy of Management (AMA)
Meeting, New Orleans, LA, August
2004
2004 Best Symposium, Careers Division
Award; Best Reviewer, Careers Division
Award
Holly Slay, Management and
Organization (Organizational
Behavior)
“Pursuing Protean and Boundaryless
Careers: Identity, Networks and Career
Transitions,” Academy of Management
(AMA) Meeting, New Orleans, LA,
August 2004
Winner, Marketing Science Institute’s
Alden G. Clayton Doctoral Dissertation
Proposal Competition
Debora Viana Thompson, Marketing
“Feature Fatigue: When Product
Capabilities Become Too Much of a
Good Thing.” With R. Hamilton and R.
Rust. Marketing Science Institute, 2004
Foreign Investment:
A Big Boost for
Small Business
The information collected from Reuters was key to off-setting the larger firm
bias present in most existing international databases. The Smith School is the
largest academic user of Reuters 3000Xtra software; a Reuters certification course is
offered as part of the finance department coursework.
Knill found that foreign portfolio investment does help small firms by easing
their financial constraints. Firms benefit from this infusion of capital directly
through investments or indirectly, through bank lending. Knill believes that this
indirect effect is due to several factors. If there is more money in the system, then
banks can lend more. Even more important for small firms, due to increased liquidity in their balance sheets, banks can afford to lend to smaller firms, which
carry a higher level of risk than their larger counterparts.
Research by
April M. Knill
Developed nations are the biggest providers of foreign portfolio investment, a
trend that Knill expects will continue. “There is more of a trend toward foreign
portfolio investment. As individual investors become savvier, they’re less frightened to invest overseas,” says Knill.
GIANT
MULTINATIONAL CORPORATIONS GET MOST OF THE ATTEN -
TION , BUT SMALL FIRMS HAVE TREMENDOUS ECONOMIC IMPOR TANCE .
SENT
A
99
PRESIDENTIAL REPORT FINDS THAT SMALL FIRMS REPRE -
PERCENT OF ALL BUSINESSES , EMPLOY HALF OF THOSE
AMERICANS
WHO HAVE JOBS AND CREATE TWO - THIRDS OF THE JOB
OPENINGS IN THE
UNITED STATES,
AND THE STATISTICS ARE SIMILAR
Foreign portfolio investment can ease the financial constraints of smaller firms
by increasing the capital available to them. The form of the capital appears to be
debt for smaller firms, and a mix of debt and equity for larger firms.
Although small businesses have a difficult time accessing equity capital in general, Knill found that foreign portfolio investment increases the probability that
these firms in more developed nations may be able to access this form of capital.
This is, of course, an advantage over small firms in less developed nations, who
are generally unable to access equity capital. Knill found that foreign investors
favor larger firms in less developed countries, regarding them as less risky than
ACROSS THE GLOBE .
their smaller counterparts.
Smaller firms in both more- and less-developed nations also benefited marginally from increased bank liquidity resulting from foreign portfolio investment.
Although there is modest evidence of this indirect route, Knill found that the
route of foreign portfolio investment taken is primarily direct, through the capital
Small firms are an important driving factor for the global economy, but they
experience some significant roadblocks: lack of liquidity, an excessive sensitivity to
markets.
Improvements in a country’s foreign investment environment in less-devel-
government regulation, difficulty in obtaining equity capital, and size-bias from
oped nations can help alleviate financial constraints of both large and smaller
potential investors. New research at Smith shows that foreign investment can
firms. Knill believes that easing foreign investment portfolio restrictions on cash
make a big difference for small businesses.
flows, stabilizing these investment cash flows and improving the treatment of for-
Smith School PhD candidate April M. Knill, in her paper “Can Foreign Portfolio
Investment Bridge the Smaller Firm Financing Gap Around the World,” finds that
eign companies and investors could have a significant, positive influence on the
lifetime of smaller firms.
foreign portfolio investment provides a valuable source of capital and credit for
As more countries consider reforming investment policy to include foreign
smaller firms, both in more- and less-developed countries. Knill posits that there
investors, Knill hopes that her research may help resolve the debate on the merit
are two ways in which foreign portfolio investment reaches the smaller firm: the
of foreign portfolio investment as a vehicle to growth.
direct route, through the capital markets, and the indirect route, through bank
lending.
Knill is continuing to use this dataset to explore what works in security laws
for small firms with Nela Thomas Richardson, a PhD candidate in economics at
Because no existing dataset listed the smaller firms that Knill wished to study,
the University of Maryland.
her first task was the creation of a database from which to work, a process that
took almost six months of painstaking labor.
Knill began with data from the SDC Global New Issues database from January
Knill is a Smith PhD candidate in the finance department and a consultant for The
World Bank. She can be contacted at aknill@rhsmith.umd.edu.
1996 to March 2003. She then hand-collected firm-year financial information
from both Reuters and Worldscope. Upon completion, more than 187,000 firmyear observations from 24,000 firms in 53 countries were compiled in Knill’s
dataset. She ranked firms by size annually, divided the ranked list into thirds, and
focused her study on the smallest size tercile in each country.
P H D P R O G R A M AT A G L A N C E
KUDOS
Roland Rust, holder of the David Bruce
Smith Chair in Marketing, chair of the
marketing department and director of
the Center for e-Service, was named the
next editor of the Journal of Marketing,
ranked number one in two of the last
three surveys of major marketing journals. It is the oldest and most frequently
cited journal in the field and enjoys
unique impact and visibility. His term
will run from 2005-2008.
Michael Ball, Orkand Professor of
Management Science and director of
research, and Bruce Golden, FranceMerrick Professor of Management
Science, were named INFORMS Fellows,
the highest honor of the Institute for
Operations Research and Management
Science.
Lemma Senbet, holder of the William E.
Mayer Chair in Finance and chair of the
finance department, has been elected to
the Steering Committee of the Financial
Economists Roundtable (FER), a governing body comprised of distinguished
financial economists who have made
significant contributions to the finance
literature and seek to apply their knowledge to current policy debates.
Ritu Agarwal, professor of decision and
information technologies, was appointed
the Robert H. Smith School of Business
Dean’s Chair in Information Systems.
She is also program co-chair for the
International Conference on Information
Systems held in December 2004 in
Washington D.C. Agarwal, G.
Anandalingam and Joe Bailey were part
of the program committee for the
Conference on Information Systems and
Technology.
Anil Gupta, Ralph J. Tyser Professor of
Strategy & Organization, chair of the
management and organization department and research director for the
Dingman Center for Entrepreneurship,
was elected to the Board of Directors of
TiE (The Innovation Ecosystem), the premier organization of CEOs and entrepreneurs devoted to fostering entrepreneurship in the Mid-Atlantic region.
Louiqa Raschid, professor of information systems, together with colleagues at
Rockefeller University and Arizona State
University, received a $2 million grant
from the National Science Foundation to
study data management challenges in
the area of bioinformatics.
Lawrence A. Gordon, Ernst & Young Alumni Professor of Managerial
Accounting and director of the Ph.D. program at the Robert H.
Smith School of Business, gives an overview of the Smith School’s
Ph.D. program.
“We have a global and very diverse
group of PhD students. Right now
there are 113 students who represent 22 countries; about 58 percent
are international and about 53 percent are women. The doctoral program is competitive with the
world’s top business schools. We
attract excellent students in every
discipline and are averaging
approximately 35 applications for
every student admitted.
“The academic program is extremely rigorous, particularly because of
the quantitative nature of the
research that underlies most disciplines here at Smith.
“One of the benefits of our program is the tremendous amount of
interaction students have with faculty. It is an informal environment;
students spend a lot of time working with faculty one-on-one, and
there is a significant amount of
joint research going on. We also
encourage and support cross-functional research—Nerissa Brown’s
dissertation, for example, is cochaired by me and Russ Wermers,
an associate professor in the finance
department.
“Graduates of the doctoral program
are first-class researchers, but they
also have a keen understanding for
and appreciation of the importance
of teaching. They understand that
their role is to both expand the
knowledge base and communicate
that knowledge to future business
leaders.
“Over the past five years, roughly
99 percent of Smith’s PhD students
have been successfully placed
directly after they graduate—about
80 percent as tenure track assistant
professors at an accredited university, and the rest as researchers in
either private or government
organizations.”