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WVU Study Discovers CEO Innovation Linked to Compensation Structures and Analyst Advice

Research from West Virginia University suggests that the dynamics of the stock market significantly influence the innovative commitments of chief executive officers through mechanisms such as CEO compensation packages and input from financial analysts.

Associate Professor of Marketing at WVU’s John Chambers College of Business and Economics, Xinchun Wang, notes that financial analysts’ feedback, like earnings forecasts, is often perceived as a barrier to innovation due to the pressure it exerts on CEOs. However, Wang clarifies that not all types of feedback hinder innovation. In contrast, stock recommendations encourage exploration and investment in areas such as research and development, which, although risky, may yield positive long-term returns.

In their study published in the Journal of the Academy of Marketing Science, Wang and a colleague explored how feedback from financial analysts affects CEOs’ strategic decisions. They discovered that analysts’ stock recommendations have a two-fold influence on management decisions: indirectly by affecting investor sentiment and stock prices and directly during meetings where analysts interact with management, posing questions or seeking clarifications on company strategies.

Wang highlights the attention management pays to stock recommendations, using the example of Goldman Sachs analysts advising the sale of Imax stock, which has prompted Imax’s CEO to focus on transforming the company’s business model to improve its rating. This emphasis on innovation over traditional models highlights the importance of feedback from financial analysts, who act as intermediaries between firms and investors, providing critical insights into current performance and potential future returns.

Unlike earnings forecasts focusing on short-term financial outcomes, stock recommendations are based on analysts’ long-term evaluations of a firm’s potential future cash flows, necessitating strategic rather than superficial, short-term CEO responses. Wang stresses that such long-term investment in innovation is crucial for a company’s success, exemplified by Adobe under CEO Shantanu Narayen. Despite initial revenue declines following its shift from license sales to a subscription-based model in 2013, Adobe’s revenues had soared by almost 500% by 2022, affirming the value of steadfast commitment to long-term strategic goals.

However, not all CEOs adhere to such long-term perspectives, often influenced by compensation structures that incentivise returns. In another study published in the Journal of Product Innovation Management, Wang examined the link between CEOs’ strategic myopia and their compensation methods, finding that CEOs nearing the exercise of stock options might reduce spending on innovation to boost stock prices temporarily and maximise gains—a practice Wang terms as myopic.

Wang also notes that CEOs who hold significant power, such as board positions, face less pressure to innovate and are more likely to engage in opportunistic strategies to serve their agendas. He cites a survey where a vast majority of corporate executives admitted they would slash spending on research and development, advertising, and maintenance to meet earnings targets, highlighting the adverse effects of compensation plans that reward short-term achievements and excessive executive power.

Nevertheless, Wang believes that a firm’s historical commitment to innovation and its cultural ethos can place its demands on a CEO’s strategies. He argues that boards of directors must alleviate performance pressures by reinforcing the importance of long-term innovative investments to their CEOs. Furthermore, stakeholders should vigilantly monitor a CEO’s actions, especially as they approach the period for stock options exercises, advocating for clear guidelines on the timing and methods of such exercises to curb myopic behaviour. This comprehensive oversight is essential to ensure that CEOs do not sacrifice the future sustainability of their companies for immediate financial gains.

More information: Xinchun Wang et al, The impact of analyst stock recommendations on firms’ relative exploration orientation, Journal of the Academy of Marketing Science. DOI: 10.1007/s11747-024-01070-5

Journal information: Journal of the Academy of Marketing Science Provided by West Virginia University

Study Reveals Positive Impact of Employing Disabled Individuals on Hotel Guest Perceptions

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The recent study conducted by the University of Surrey has brought to light the advantages that hiring people with disabilities (PWD) offers to the hospitality industry, particularly in enhancing guest perceptions and fostering repeat business. This pivotal research, published in the International Journal of Hospitality Management, delves into the direct correlation between the employment of disabled individuals in hotels and the increase in guest recommendations and return visits. The study significantly challenges the entrenched misconceptions surrounding the employment of PWD within the hospitality sector, highlighting that embracing inclusivity not only upholds social responsibility but also bolsters business outcomes.

Dr Bora Kim, the lead researcher and a Senior Lecturer in Hospitality Management at the University of Surrey, emphasised the strategic benefits of inclusive hiring practices. According to Dr. Kim, employing disabled individuals goes beyond ethical employment practices; it represents a progressive business strategy that can catalyse broader corporate success. The research outlined the “positive ripple effects” of inclusivity, with guests more inclined to support and promote hotels committed to diverse hiring practices. This drives business growth and enhances the hotel’s reputation as a socially responsible entity.

The study’s methodology involved two meticulously designed experiments with 1,443 participants across the UK. These participants were split into two groups; one evaluated a hotel employing PWD, while the other reviewed a hotel that did not. The findings revealed that hotels practising inclusive hiring were perceived as more socially responsible, significantly influencing guest behaviour. Guests were not only more likely to recommend these hotels but were also more inclined to revisit them. This increased loyalty stems from recognising the hotel’s ethical practices and the moral obligation guests feel to support such businesses.

Moreover, the research demonstrated that guests’ ethical decision-making significantly mediates the relationship between PWD employment and consumer behavioural intentions. As guests recognise the moral implications of their choices, they feel a heightened responsibility to endorse businesses that support inclusivity, which translates into increased recommendations and repeat visits. Notably, the study found that the positive impact of employing PWD is consistent across various hotel types and star ratings, indicating that the perceived value of inclusive hiring transcends different brands and levels of service.

Dr Erin Chao Ling, a co-author of the study and a Lecturer in Artificial Intelligence and the Future of Work, highlighted the broader implications of their findings. The positive influence of employing disabled individuals on consumer perceptions extends beyond the hospitality industry, urging businesses across all sectors to reconsider their hiring strategies. By fostering a more inclusive workforce, companies can cultivate a loyal customer base that values and supports social responsibility.

The study’s alignment with the United Nations’ Sustainable Development Goals, especially Goal 8, which advocates for inclusive and sustainable economic growth, underscores the importance of inclusive employment practices. Dr. Kim further argued that in the face of ongoing challenges in attracting and retaining talent, integrating disabled individuals into the workforce addresses immediate employment needs and promotes significant economic growth and community impact.

In conclusion, this research not only illuminates the beneficial business impacts of employing people with disabilities in the hospitality industry but also serves as a call to action for all sectors to embrace diversity and inclusivity in their employment practices. This not only ensures a fairer work environment but also enhances business outcomes by aligning company practices with the values of social responsibility and ethical conduct.

More information: Bora Kim et al, Effects of disability employment on guest perceptions and behavioral intentions in the hotel sector, International Journal of Hospitality Management. DOI: 10.1016/j.ijhm.2024.103993

Journal information: International Journal of Hospitality Management Provided by University of Surrey

Recent Research Unveils the Reasons Behind Organisations’ Hesitance to Embrace Blockchain Technology

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According to recent research from the University of Surrey, the slow uptake of blockchain technology can be attributed to overly enthusiastic promises that often cloud the real and multifaceted challenges it presents regarding technology, organisation, and the environment.

Blockchain functions as a secure digital ledger, documenting and confirming transactions across numerous computers in a manner that is difficult to alter. This system operates like a digital notebook accessible to all, displaying all entries openly while ensuring that it cannot be modified once data is recorded. Initially, blockchain was highly celebrated for its potential to facilitate secure, transparent transactions without the need for intermediaries such as banks. Beyond its foundational role in cryptocurrencies like Bitcoin, its application possibilities in finance, healthcare, and supply chains are being actively explored.

The study, spearheaded by PhD candidate Ying Zhang in collaboration with scholars from Surrey Business School and Cardiff Business School, exhaustively analysed 880 factors influencing the adoption of blockchain by organisations in diverse industries.

Dr Mahdi Tavalaei, a Senior Lecturer in Strategy and Digital Transformation at the University of Surrey and co-author of the study, commented on the findings, noting the cautious approach of many organisations. He explained that despite the revolutionary potential attributed to the blockchain, its actual adoption had been stalled by promises that exceed delivery, the lack of tangible business value, and the intricate interplay between the drivers and barriers to adoption.

The research did highlight some positive aspects, identifying blockchain’s unique features, such as improved transparency, security, and operational efficiency, as strong incentives for its adoption. Nevertheless, these driving factors are frequently overshadowed by significant barriers, complicating the adoption process. The study highlighted that regulatory uncertainties and scalability challenges are more pronounced and definitive. In contrast, the advantages of adopting blockchain are conditional and likely to only manifest in the long term. This creates a discrepancy that hampers quick decision-making within organisations regarding adopting this technology.

The study further suggests that more than the technological benefits of blockchain alone are needed for many organisations to justify its adoption. These benefits are intricately linked to internal and external organisational factors, including the beliefs of top management regarding technology, cross-organisational collaboration, and the existing regulatory frameworks. Dr Tavalaei elaborated on these points, stressing that while blockchain holds significant potential, there is a need for a more grounded narrative surrounding its adoption. He pointed out that the interaction between the various drivers and barriers across technological, organisational, and environmental dimensions illustrates the complex and sometimes conflicting dynamics organisations need to navigate. According to him, organisations are not merely reluctant; they make deliberate decisions based on the existing limitations and the often overstated blockchain promises. Through this research, Dr Tavalaei and his team aim to steer the discussion towards setting more realistic and attainable objectives for blockchain technology.

More information: Ying Zhang et al, Evolution or involution? A systematic literature review of organisations’ blockchain adoption factors, Technological Forecasting and Social Change. DOI: 10.1016/j.techfore.2024.123710

Journal information: Technological Forecasting and Social Change Provided by University of Surrey

Presenting a Gift: It’s Better to Be Late Than Never, Research Suggests

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If you’ve ever felt guilty about giving a gift late for Christmas or a birthday, a new study offers some reassuring insights. Researchers have discovered that gift recipients are not as troubled by the delay as the givers often fear. Cory Haltman, the study’s principal investigator and a doctoral candidate in marketing at The Ohio State University’s Fisher College of Business, suggests that sending a belated gift should not be a significant concern as most people are more forgiving than givers anticipate. This revelation was part of a comprehensive study involving six experiments recently published in the Journal of Consumer Psychology, exploring the discrepancies between givers’ and recipients’ perspectives on the punctuality of gift-giving.

The anxiety associated with delivering gifts late is widespread—a survey highlighted that 65% of Americans believe that gifts for specific occasions should be timely. However, Rebecca Reczek, a co-author of the study and professor of marketing at Fisher College, points out that the issue is more nuanced than it appears. In one of the experiments, college students were asked to rate the impact of receiving or giving a birthday gift (a pint of ice cream) either on time or two weeks late on their relationships. Results showed that those imagining themselves as givers felt that late gifts were more likely to harm the relationship than the recipients’ views. This highlights a significant divide in perceptions between givers and receivers, with givers placing more importance on meeting conventional expectations of timeliness.

Another aspect of the study examined the implications of gift content and the effort involved. Participants felt that a personally assembled gift basket could mitigate the negative effects of its lateness compared to a pre-made one. Personal effort in gift preparation can be crucial in perceiving a late gift. Yet, the study also delved into how late it is for a gift to be acceptable. Scenarios ranged from a gift being two days late to two months late. While both givers and recipients agreed that longer delays were more harmful, recipients consistently viewed the delays less critically than givers did.

The research further explored the consequences of not giving a gift at all, which both parties believed would be more detrimental to the relationship than any delay. Haltman emphasizes, “Late is definitely better than never when it comes to giving a gift,” indicating that giving, regardless of timing, holds substantial value in maintaining relationships. This insight challenges the common belief that punctuality in gift-giving is paramount, revealing that the perceived severity of not adhering to this norm is often greater among givers than recipients.

Reczek advises givers who are late with a gift to consider how they would feel receiving a gift late themselves. Based on their findings, adopting the recipient’s perspective might reduce anxiety about the potential damage caused by the lateness of a gift. This empathetic approach could help alleviate undue stress and refocus on the intention behind the gift, which is to express care and maintain relationships.

Overall, the study underscores a fundamental message: the importance of giving a gift transcends its timeliness. While timely gift-giving is ideal, the researchers highlight that givers often overestimate the negative impact of a delay. As such, the key takeaway from their research is to ensure that the gift is given, regardless of timing, reinforcing the idea that giving itself truly matters in nurturing personal connections.

More information: Cory Haltman et al, Better late than never? Gift givers overestimate the relationship harm from giving late gifts, Journal of Consumer Psychology. DOI: 10.1002/jcpy.1446

Journal information: Journal of Consumer Psychology Provided by Ohio State University

Entrepreneurs Funded by Family and Friends Tend to Opt for Less Risky Growth Strategies

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Entrepreneurs often lack the resources and funding to kick-start their ventures, leading them to contact family and friends for initial support. However, this raises a crucial question: Is it beneficial for a startup to be backed by individuals close to the founder, offering them a chance to be part of something potentially groundbreaking?

Recent research by three professors from the Indiana University Kelley School of Business suggests that such close financial ties can influence founders to adopt more cautious growth strategies and be reluctant to take risks. This study explored how accepting funds from personal connections affects an entrepreneur’s inclination towards risk.

Donald F. Kuratko, who holds the Jack M. Gill Chair of Entrepreneurship and serves as the executive and academic director of the Johnson Center for Entrepreneurship and Innovation, stated that the study was designed to assess how these financial contributions impact an entrepreneur’s approach to risk. He highlighted that when the relationship between an entrepreneur and an investor deepens, as it often does with family and friends, the entrepreneur might feel a stronger guilt over business decisions that could lead to failure.

Greg Fisher, a professor of entrepreneurship, added that this sense of guilt could prompt founders to make more conservative decisions regarding their venture’s growth, which might contradict the fundamental entrepreneurial spirit of innovation and risk-taking.

“family and friends” financing is a predominant method of raising initial startup funds. This informal funding route is not only more accessible compared to other forms of investment but also typically comes with more lenient terms. However, there are drawbacks, notably the potential strain on personal relationships if the business fails to meet growth and success expectations. This risk of damaging close personal ties can lead entrepreneurs to opt for safer growth strategies.

The study, titled “Funding-source-induced Bias: How social ties influence entrepreneurs’ anticipated guilt and risk-taking preferences,” is set to be published in the Journal of Business Venturing. It includes contributions from Regan Stevenson, an associate professor of entrepreneurship and management; Emily Neubert, an assistant professor at Texas Christian University; and a Kelley Ph.D. alumna, who spearheaded the project.

By examining a sample of 193 entrepreneurs active in various incubator and accelerator programs, the researchers developed a model to test how the strength of an entrepreneur’s relationship with their investors—mainly when these investors are family or friends—affects their anticipated guilt in making strategic decisions. This guilt, in turn, correlates with a tendency to make less risky growth choices.

The research introduces the term “funding-source-induced bias,” describing a bias in entrepreneurial decision-making that stems from the entrepreneur’s relationship with their investor. This bias leads to guilt when considering risky options. Thus, entrepreneurs who secure funding from close family and friends are more likely to pursue less risky growth strategies to avoid this guilt.

This study highlights the potential downsides of family and friend funding and provides insights into how these financial relationships impact entrepreneurial decision-making. By shedding light on this aspect of the investor-entrepreneur relationship, the research aids entrepreneurs, mentors, and educators understand how investment sources can shape business strategies and decision-making processes.

Emily Neubert commented on the significance of this research, expressing hope that it would inspire further investigations into how different funding sources influence entrepreneurs’ decisions and actions. Exploring the less discussed aspects of the investor-entrepreneur dynamic is crucial for fostering a deeper understanding of the complexities involved in startup financing and its effects on business strategy.

More information: Emily Neubert et al, Funding-source-induced bias: How social ties influence entrepreneurs’ anticipated guilt and risk-taking preferences, Journal of Business Venturing. DOI: 10.1016/j.jbusvent.2024.106453

Journal information: Journal of Business Venturing Provided by Indiana University

Study Uncovers Gender Disparities in Views on Economic Security and Social Safeguards Globally

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Gender disparities in social and economic outcomes are recognized across many nations; however, less is known about the differential perceptions of financial security and social benefits between genders. This gap in understanding forms the crux of a new research initiative published in the prestigious International Social Security Review. The research probes deeper into the nuanced perceptions of women and men regarding their economic stability and the efficacy of social programs designed to provide societal safety nets.

The study gathered survey data from participants in 27 Organisation for Economic Co-operation and Development (OECD) member countries. This organization, an intergovernmental entity founded in 1961, has a long-standing mission to stimulate economic progress and world trade, providing a rich backdrop for such a comprehensive investigation. The OECD’s broad member base offers a diverse spectrum of economic policies and social protection frameworks, making it an ideal setting for examining gender-based perceptions on a global scale.

According to the research findings, women are more concerned about their economic security than their male counterparts. Women consistently needed more confidence in their national social protection systems’ ability to support them adequately. Notably, about half of the female respondents indicated that they found it challenging to access public benefits when needed, a sentiment only shared by 43% of male respondents. This significant difference highlights the gender gap in perceived economic security and the accessibility of social support mechanisms.

The survey suggests that these perceptions of inaccessibility reflect broader issues, such as the complexities and bureaucratic hurdles often encountered in social program applications. Moreover, women typically have lower social security contributions, which could influence their views on the adequacy and accessibility of social protections. This contribution disparity is often linked to broader economic factors, such as wage gaps and employment patterns, which disadvantage women in the workforce.

Dr. Valerie Frey, PhD, MPhil, a senior economist at the OECD based in France and the study’s corresponding author, provided further insights into the findings. “Women were generally less satisfied with the accessibility and adequacy of social programs compared to men,” she explained. “While some of this dissatisfaction can certainly be attributed to the gender gaps in social security contributions, it is also crucial to consider the structural inadequacies of certain social programs. Although these programs are ostensibly designed to foster gender equality, they often inadvertently disadvantage women.”

Dr. Frey emphasized the potential implications of these findings for policy-making. “This study illuminates the critical need for social ministries to apply a gender lens more rigorously in their program design and reform processes,” she stated. “By doing so, we can address these disparities and work towards a more equitable distribution of economic security and social benefits across genders.”

The call to action is clear: to bridge the gender gaps in economic security and social program satisfaction, a more nuanced and gender-aware approach in policy design and implementation is essential. This research not only contributes to the academic discourse on gender disparities but also serves as a vital resource for policymakers seeking to enhance the effectiveness and equity of social protection systems globally.

More information: Valerie Frey et al, Gender gaps in perceptions of social protection: Insights from the OECD Risks that Matter Survey, International Social Security Review. DOI: 10.1111/issr.12374

Journal information: International Social Security Review Provided by Wiley

Worries About Possible Risks of Tests Marketed Directly to Consumers

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Experts argue in The BMJ today that improved information and regulation are crucial to shielding consumers from the potential dangers of tests marketed directly to them. Emma Gram from the University of Copenhagen, alongside her colleagues, raises concerns that consumers may purchase more harmful than beneficial products. They emphasise the necessity for high-quality information and effective communication to guard against unbalanced and misleading marketing strategies.

The rapid progress in diagnostic technology and digital health has expanded the array and volume of direct-to-consumer (DTC) tests. These range from self-test kits and multi-cancer detection tests to testosterone and food sensitivity tests. Sales of these tests in the United States have escalated dramatically, from $15 million in 2010 to $1.15 billion in 2022. However, there needs to be a dedicated regulatory framework to oversee the appropriate use of these burgeoning products.

The authors highlight specific tests, such as those indicating menopause or fertility chances, which may deliver incorrect or misleading information to women about their fertility or symptoms. They note that while the availability of self-testing kits could encourage communities that are typically underserved, such as those at high risk of sexually transmitted infections, to access testing more readily, the inaccuracies in these tests could lead to mismanagement. False positive results might prompt unnecessary follow-up consultations and further testing, while false negatives could delay necessary treatment by offering false reassurance.

Furthermore, the instructions, packaging, and advertising accompanying these tests sometimes require accurate completion, leading consumers to make uninformed decisions regarding their health. Tests marketed for assessing “wellness,” such as hormone levels, may also present significant risks. Abnormal results, which may not be clinically important, could cause distress, lead to excessive testing, or result in the use of unproven supplements and treatments, posing serious health risks, including issues with fertility and cardiovascular conditions.

The marketing strategies often target healthy individuals, who are the least likely to benefit from these tests. The potential harms of multi-cancer detection tests are particularly significant. Currently marketed and sold in the US, these tests claim to detect over 50 types of cancer before symptoms appear. However, Gram and her team argue that they are more likely to detect cancers at a late stage, potentially causing considerable harm without providing tangible benefits.

While acknowledging that DTC tests could benefit certain situations, the authors note that studies have yet to prove their use improves health outcomes. Professional organisations advocate for tests to offer clear interpretations and results in response to these potential consumer harms. They also call for patients to be well-informed about when self-testing is advisable and when it is not. Nevertheless, with formal policy directives and regulations of commercial suppliers operating outside the traditional healthcare system, progress in implementing these changes could be more active.

The authors conclude that current regulatory frameworks are insufficient to address the novel ways DTC tests are sold and used. They insist that commercial suppliers must demonstrate the benefits of their products, including clearly defining the appropriate targeted populations for the tests to avoid harmful misinterpretations. Additionally, they urge industry and regulatory bodies to consider broader concepts of harm, including financial, psychological, and physical harm, as well as the risks of overdiagnosis and ineffective diagnosis associated with DTC testing.

More information: Emma Grundtvig Gram et al, Direct-to-consumer tests: emerging trends are cause for concern, The BMJ. DOI: 10.1136/bmj-2024-080460

Journal information: The BMJ Provided by BMJ Group

Study Reveals Cost-of-Living Crisis Affects Health Among Black Communities

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A pioneering study has unveiled the profound effects of the cost-of-living crisis on both discrimination and health outcomes within the Black community in the UK, highlighting a correlation between escalating interest rates and bank rates and the worsening of general and mental health, alongside an increase in experiences of discrimination.

Published in the “Ethnic and Racial Studies” journal during Black History Month, this research marks the first of its kind to investigate the repercussions of fluctuating interest rates and bank rates amid a cost-of-living crisis on the health of Black individuals.

Conducted by a team from Anglia Ruskin University (ARU), the study utilised participant forms distributed at social events in London commemorating Black History Month in 2021. Subsequently, an electronic questionnaire was sent to participants from October to December of the same year, with follow-up data gathering extending into 2022 and 2023. The research encompassed 722 responses, with 264 participants in 2021, 235 in 2022, and 223 in 2023.

Findings from the study during the 2022/2023 period of the cost-of-living crisis indicated a 3.75% rise in discrimination against Black individuals, a 4.45% decline in general health, and a 5.62% fall in mental health. Notably, episodes of discrimination were linked to a 26.4% decrease in general health and a 27.1% decline in mental health.

The period also saw significant economic shifts, with inflation escalating from 2.49% in 2021 to 7.9% in 2022 before slightly decreasing to 6.83% in 2023. Concurrently, the Bank of England’s base interest rate surged from 0.11% in 2021 to 1.58% in 2022 and further to 4.81% in 2023. Analysis from the study suggests that inflation was associated with a 2.9% rise in discrimination towards Black people, while the increased bank rate correlated with a 1.1% uptick in such discrimination.

Moreover, the study revealed that rising inflation was connected to a 2.3% deterioration in general health and a 2.5% worsening in mental health. In comparison, an uptick in the Bank Rate was linked to a 1.9% decline in general health and a 2.3% decrease in mental health.

Additionally, the research highlighted that minority subgroups within the Black community, including gay men and lesbian women, encountered higher levels of discrimination and poorer health outcomes when compared to other groups.

Professor Nick Drydakis, the lead author and a Professor of Economics at ARU, provided valuable insights into the dynamics at play. He noted that the study illuminates the intricate relationships between discrimination and health outcomes within the Black community amidst the economic strife of the cost-of-living crisis. This era, defined by significant uncertainty for most UK residents, disproportionately impacted minority groups.

Professor Drydakis elaborated on the socio-economic tensions exacerbated by such crises, which often heighten when dominant groups perceive their access to resources as threatened, leading to increased prejudice and discrimination. He underscored the critical need for societal efforts towards equality and enhanced well-being for all, especially those most vulnerable, reflecting on the broader implications of the study’s findings.

More information: Nick Drydakis, Discrimination and health outcomes in England’s black communities amid the cost-of-living crisis: evaluating the role of inflation and Bank Rates, Ethnic and Racial Studies. DOI: 10.1080/01419870.2024.2410900

Journal information: Ethnic and Racial Studies Provided by Anglia Ruskin University

Analyst Exposes Supply Chain Vulnerabilities as Significant Threat to Financial Security

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When Europe’s largest car manufacturer faces significant challenges, the repercussions ripple beyond the automotive sector, potentially threatening the broader financial system. This sentiment was underpinned by Volkswagen’s recent announcement of job cuts, which was echoed by similar warnings from Germany’s auto parts supplier Bosch, as well as Brawe and Adient in Czechia. These developments spotlight the escalating risks within the industry.

As Volkswagen grapples with deepening crises, the present economic instability could be exacerbated. The situation prompted Moody’s to revise its creditworthiness outlook following the shutdown of Volkswagen’s factories. Furthermore, in its recent Financial Stability Report, the German Central Bank projected an increase in corporate defaults nationwide by 2025.

“This scenario highlights the extent to which supply chain disruptions can amplify financial risks,” remarked CSH scientist Zlata Tabachová, who, along with her research team, developed an innovative model that delineates the pivotal role of supply chain disruptions in magnifying financial risks, thereby reshaping credit risk assessment and financial stability paradigms.

The researchers’ model illustrates that interruptions in supply chains can precipitate financial losses that substantially exceed those anticipated by traditional credit risk assessments. In scenarios of supply chain shocks, banks’ financial losses could quintuple compared to the losses foreseen by conventional credit risk models, which typically do not consider the ramifications of supply chain contagion.

“Our findings suggest that traditional credit risk models, which predominantly rely on the financial performance of corporate clients, tend to underestimate the genuine financial exposure of banks to supply chain disturbances,” Tabachová assessed.

For this groundbreaking model, the research team utilised an expansive dataset encompassing over 240,000 Hungarian companies and 27 banks, with more than 1.1 million supply chain connections and over 25,000 bank-firm loans. “This multi-layer network model marks a significant advancement in the accurate assessment of true credit risk,” Tabachová explained. “Traditionally, banks assess risk primarily based on client information and their immediate suppliers and buyers. However, these firms are intricately interconnected through more extensive supply chains, and disruptions at any point can trigger a cascade of effects across the entire network.”

Moreover, Tabachová and her colleagues disclosed in the Journal of Financial Stability that the risk posed by individual firms is considerably higher than previously assumed. A mere fraction of firms, especially those most integrated within the supply chain or those supplying critical production inputs, could instigate defaults leading to up to 22% of the total equity loss in the banking sector. Notably, these losses are predominantly indirect, stemming from defaults provoked by supply chain disruptions rather than the initial failures.

“We discovered that many of the systemically important firms are crucial for production within the country,” Tabachová noted.

The study posits that financial regulators must revisit their systemic risk monitoring approaches. While firms with large loan portfolios are usually considered pivotal for economic stability, the researchers advocate for more attention to those firms that could trigger widespread defaults due to their central roles in supply chains. “These types of firms would be overlooked if supply chain contagion is not considered. Regulators could enhance their capabilities to monitor risks generated and amplified through supply chains,” the researchers cautioned.

To validate the relevance of their model, Tabachová and her team conducted simulations of a real-world economic crisis inspired by the COVID-19 pandemic. Their simulations showed that, without intervention, bank equity losses could soar to as high as 6%. However, a modest liquidity injection, amounting to merely 0.5% of total bank equity, could mitigate losses by over 80%, thereby offering targeted support to illiquid yet solvent firms, per the study.

“Our findings from the Covid-19 inspired contagion scenario validate the common practice of providing liquidity support to firms during crises. By acquiring detailed insights into the supply chain network and the contagion-induced losses of individual firms, financial support can be tailored more effectively, mitigating the adverse impacts of the crisis while maintaining inflation control,” the researchers concluded.

“Volkswagen is undeniably a systemically important firm with a significant influence that extends well beyond Germany’s borders. A thorough understanding of its upstream and downstream supply chains is crucial for policymakers and regulators to ensure a smooth and cost-effective transition in line with climate policy objectives without jeopardising financial stability,” added Tabachová.

More information: Zlata Tabachová et al, Estimating the impact of supply chain network contagion on financial stability, Journal of Financial Stability. DOI: 10.1016/j.jfs.2024.101336

Journal information: Journal of Financial Stability Provided by Complexity Science Hub

Sports Wagering and Financial Market Trends Reveal Common Misinterpretations of Fresh Information

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Suppose it’s a home match for the Golden State Warriors, and Steph Curry demonstrates his prowess early on, sinking consecutive three-pointers within minutes of the first quarter starting. The fans at the Chase Center are impressed, and the impact is immediately noticeable in the betting markets as the odds shift to favour the Warriors.

However, the game is far from over. The opposing team mounts a comeback, and with only 10 seconds remaining, the Warriors find themselves trailing by two points after missing a crucial shot. Logic dictates that the betting odds should now favour the away team, considering their advantageous position. Yet, the odds remain unexpectedly stable.

Eben Lazarus, an assistant professor of finance at UC Berkeley’s Haas School of Business, explains that according to historical NBA game data, a team in possession of the ball with a two-point lead and only 10 seconds left on the clock has over 90% chance of winning. Nevertheless, betting markets seem to overly emphasise early-game events, such as initial baskets, while downplaying significant late-game developments.

This phenomenon of misinterpreting new information isn’t confined to sports betting — it’s prevalent across financial markets, too, as revealed in a study published in the Quarterly Journal of Economics. Lazarus, along with Ned Augenblick from UC Berkeley Haas and Michael Thaler of University College London, conducted three experimental studies and analysed millions of betting transactions and options contract prices. Their findings consistently showed that people overreact to relatively insignificant information and underreact to more crucial data.

Lazarus comments on the standard difficulty in gauging the true significance of new information, regardless of whether its impact is positive or negative. This pattern of skewed reactions to information has been observed universally, much to the researchers’ surprise, given the high stakes in both betting and financial market environments.

Their research builds upon decades of behavioural psychology and economics studies, exploring how people update their beliefs in response to new information. This includes seminal works such as a 1966 paper suggesting people are overly conservative in revising their beliefs and a 1992 study by Dale Griffin and Amos Tversky that indicated a tendency to focus excessively on dramatic information while neglecting its reliability.

Recent studies further show that people often err systematically due to miscalculations in probability and a propensity to choose a middle-ground option when unsure. The paper also ties into broader observations of financial markets occasionally overreacting or underreacting to news.

“We believe our framework simplifies the analysis of numerous scenarios in financial markets and real-world settings,” Lazarus asserts. He explains that while we constantly absorb new information—from election polls favouring a particular candidate to feedback from a superior—accurately assessing its significance often eludes us, leading to default middle-ground responses.

In one innovative experiment involving 500 NBA fans, the research team simulated parts of basketball games, asking participants to estimate win probabilities after each sequence of events. Despite recognising the greater importance of late-game events, participants significantly overvalued early baskets and undervalued those nearer the end of the game.

Further tests using real-world sports betting data from Betfair and option price quotes from the Chicago Board Options Exchange confirmed the same pattern: early events in a game disproportionately affect betting odds despite their limited actual predictive value, while crucial late-game events fail to sway the market as much as they should.

Lazarus cautions that recognising these market patterns only partially eliminates risk. He advises considering how much weight to give different pieces of information, especially in ambiguous situations. He concludes with a personal anecdote about overreacting to a negative interaction with a boss, suggesting that people often benefit from taking a step back to evaluate the real significance of such events.

More information: Eben Lazarus et al, Overinference from Weak Signals and Underinference from Strong Signals, The Quarterly Journal of Economics. DOI: 10.1093/qje/qjae032

Journal information: The Quarterly Journal of Economics Provided by University of California – Berkeley Haas School of Business

A Single Policy Is Insufficient for Effective Corporate Climate Action

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Investors with a climate consciousness should opt to back companies that adopt a comprehensive suite of climate policies instead of selecting those that implement only specific, isolated measures. This advice emerges from a study published on November 13, 2024, in the open-access journal PLOS Climate by Lena Klaaßen of ETH Zurich, Switzerland, and her team.

Policymakers regard the private sector as a pivotal force in driving climate initiatives. As investors become increasingly focused on robust climate strategies, they are likely to channel their investments towards companies that demonstrate a proactive stance on climate issues. With an uptick in companies openly sharing their climate strategies, there has been a corresponding interest in analysing how these policies translate into actual reductions in corporate greenhouse gas emissions.

In their research, Klaaßen and her team analysed data concerning policy and emissions obtained from the CDP dataset, which encompasses over 1,700 companies that disclosed their climate policies from 2010 to 2022. The findings revealed that companies endorsing only a singular climate policy did not consistently demonstrate significant emissions reductions. However, those with diverse policies, including emission targets, financial incentives, and monitoring standards, showed a notable average reduction in emissions of more than 20% across the years evaluated.

These findings underline that standalone corporate climate policies might hold limited utility for policymakers and investors aiming to foster substantive climate action. The study advocates for a shift in policy decisions and disclosure requirements towards embracing a collection of complementary policies. The researchers highlighted the need for additional studies to evaluate further the impact of corporate policies relative to local government regulations and the dependability of corporate emissions reporting.

Ms Klaaßen noted, “Our study indicates that while individual corporate climate policies might provide limited insights into a company’s actual climate performance, a broad spectrum of policies is more strongly correlated with significant reductions in absolute emissions. This revelation underscores the importance of comprehensive climate disclosures in aiding investors to pinpoint companies with genuine emission reduction commitments. However, it also cautions against an overreliance on disclosures as the sole mechanism for redirecting capital effectively towards sustainable ventures.”

More information: Lena Klaaßen et al, Assessing corporate climate action: Corporate climate policies and company-level emission reductions, PLOS Climate. DOI: 10.1371/journal.pclm.0000458

Journal information: PLOS Climate Provided by PLOS

Money Reigns Supreme: Unexpected Insights into Expenditure Patterns in a Digital Economy

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Physical cash does not merely influence our spending habits but engenders a profound sense of psychological ownership that digital payments fail to replicate. Research from the University of Surrey illuminates this phenomenon.

A paper in Qualitative Market Research discusses how the gradual disappearance of cash from our wallets correlates with diminished spending awareness. This trend encourages more impulsive and unnecessary purchases. The findings highlight the importance of retaining a tangible element in our payment systems to foster responsible spending behaviours.

Dr Jashim Khan, Associate Professor of Marketing and Director of International Business Management at the University of Surrey and the study’s lead author emphasised the tangible aspects of cash, which create a unique emotional bond that digital payments lack. He noted, “The visceral attributes of cash — its distinct smell, texture, and the very act of counting it — forge an emotional link absent in digital transactions. Handling cash is not merely a financial transaction; it feels like parting with a piece of oneself.”

The research team conducted their study across two culturally diverse contexts and markedly different times—New Zealand in 2013 and China in 2023. They employed focus groups and open-ended questionnaires to obtain detailed insights into consumer experiences with cash and cashless payment methods. Participants described their feelings and behaviours associated with various payment modes, revealing that cash usage promotes a heightened awareness of expenditure. Conversely, using cards and apps often results in a disconnect from the actual money spent.

A diminished sense of financial ownership was commonly reported in China, where app-based payments account for 50% of transactions. One participant observed, “Digital money doesn’t truly feel like spending one’s own money; it lacks a tangible concept of money. However, with cash, there is always a palpable sense that your funds are depleting.”

This sentiment was consistent across both studies, underscoring the emotional impact of cash compared to digital alternatives. Furthermore, the research revealed that while digital payments are associated with feelings of happiness and security, they sometimes lead to a sense of loss when cash is used. The emotional reactions to cash transactions—such as sadness and guilt—reflect a more profound psychological connection to physical money. In contrast, the convenience of digital payments often results in mindless expenditure as the tangible aspect of cash is substituted with mere numbers on a screen.

Dr Khan added, “Our findings demonstrate that cash is more than just money; it is a reminder of the value of what we spend. Holding cash makes its worth more perceptible, a reminder that is easily forgotten with digital payments. Recalling the lessons cash teaches us about prudent spending is crucial as we gravitate towards more cashless options.

We’re not suggesting that cash is becoming obsolete. Instead, we are re-evaluating our relationship with money in the face of evolving financial landscapes. Transitioning to a cashless society necessitates a deeper understanding of how different payment methods impact us financially and emotionally. Such awareness can guide us to make wiser financial decisions in a world where money often seems invisible.”

More information: Jashim Khan et al, Money you could touch: cash and psychological ownership, Qualitative Market Research An International Journal. DOI: 10.1108/qmr-04-2023-0049

Journal information: Qualitative Market Research An International Journal Provided by University of Surrey