Wharton Research Scholars Journal

Controversy and Conversation

Tiffany Yu — Mon, 23 Jul 2012 08:07:56 PDT

In this research study, we examined the relationship between the degree of controversy (referred to as controversiality henceforth) of subject matter and the amount of conversation generated by the subject matter. In the first step of the research project, we analyzed online conversations. Our data set included data on the attributes of 207 news articles linked to Topix.com. Our analysis of these articles indicated that on average, articles of medium controversy generated the largest volume of conversation when using the number of comments as the metric. These findings led us to create a survey to determine if these results would be replicated in a laboratory study. In the survey, the likelihood of sharing the article was designated as the metric for the volume of conversation. Survey results showed that people were more likely to share articles of high controversy, which is contrary to conclusions drawn from our analysis of data from Topix.com. The findings are applicable to any writers who disseminate information and opinions.

A Tale of Two Clinics

Olivia Jung — Mon, 23 Jul 2012 06:15:20 PDT

By definition, free clinics exist to provide medical care without consideration of the patient’s ability to pay. Given this broad definition, this study aims to contrast two models of free clinics: federally qualified health center (FQHC) and student-run clinic (SRC). To my knowledge, there has not been a study that juxtaposes operations of different free clinics solely for the purpose of describing their similarities and differences

SFAS 157 & the Market’s Assessment of Fair Valued Assets: An Examination of Fair Valued Assets Held by Financial Firms During and Following the Financial Crisis

Dan Short — Thu, 19 Jul 2012 06:47:01 PDT

Introduced in late-2007, SFAS 157 redefined existing accounting standards concerning fair value accounting and significantly impacted financial reporting for financial institutions. Prior studies, using larger samples of financial firms, have concluded that Level 3 fair values (the most opaque and subjective fair values) were heavily discounted by the market. Consistent with prior studies,
this analysis, which examined only the largest and most systemically important financial institutions during the crisis and post-crisis periods, shows that the market did indeed ascribed a discount to Level 3 fair values, both during the financial crisis and following the financial crisis. Adding to the literature, this paper also observes that Level 2 fair values were discounted by the market during both the crisis and post-crisis periods, although the discount was significantly greater during the crisis, a feature not observed for Level 1 or Level 3 fair values or examined in prior studies.

Exploring the Cost of Milk Production & Potential Economies of Scale in a Dairy Cooperative

Parth Shah — Thu, 19 Jul 2012 06:37:23 PDT

Agricultural cooperatives have been a unique way of addressing the concerns of the producers and consumers regarding pricing, storage, marketing, and other such activities of bringing the commodity to the market. One of such sectors is the dairy, where there are cooperatives in both the developed and developing countries. Amul Dairy, a milk cooperative in India is, synonymous with quality of its milk and milk products as well as fair prices to both the consumer and producer. In this study, we will examine the effectiveness of Amul by comparing the procurement prices offered by the dairy cooperative to the cost of producing milk. In addition, we will measure whether there are economies of scale in milk production.

Optimizing Pairs Trading of US Equities in a High Frequency Setting

Vayu Kishore — Wed, 18 Jul 2012 10:13:10 PDT

In this paper, we examine how to the performance of high-frequency pairs trading strategies are impacted by the allocation within the pair, opening and closing thresholds, restriction to daily trading, and transaction costs. We generate portfolios by applying high-frequency pairs trading strategies to the pair consisting of Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) during the year 2005. We find the following results. First, we find that a dynamic model for estimating the spread of a pair is more suitable for high-frequency trading when compared to a static model. Second, we find that allocating investment within the pair based on the ratio of their CAPM β, compared to a 1:1 dollar allocation, and allocation based on the cointegration coefficient, yields the most attractive portfolios. Third, we find that setting the opening threshold to 1.5σ and the closing threshold to 1.0σ, respectively generate portfolios with the highest Sharpe ratios when compared to portfolios constructed using the same strategy, but different threshold values. Finally we find that restricting trading to once-a-day and imposing transaction costs significantly worsens the performance of the strategy.

Pricing of Contingent Convertibles

HyeYoon Jung — Wed, 18 Jul 2012 09:10:35 PDT

This paper discusses the pricing of Contingent Convertible bonds (CoCos) with
stock price triggers. CoCos are a new kind of hybrid securities that aim to provide a capital bu er for banks in times of nancial distress. They are debt securities during periods of economic stability, but automatically convert into equity when a predetermined trigger is breached. Therefore, CoCos are attractive from a regulatory perspective, and several regulators have already shown an interest in using them to manage nancial crisis. The fair values of CoCos are driven by their structures, and the goal of this paper is to price CoCos with stock price triggers that have varying structures in terms of the trigger level, conversion ratios, and their maturity.

This paper presents rst the general form of the price and credit spread of CoCos without modeling stock price dynamics. Then, assuming the Black-Scholes model, we provide two explicit pricing formulas for CoCos. Because CoCos combine debt-like and equity-like features, they are priced using the credit derivatives (reduced form) and equity derivatives approaches. In addition to the analytical formulas presented herein, pricing by Monte Carlo simulation is also shown. In order to examine the suitability of the Black-Scholes assumptions, the formulas used in this study are applied to the CoCos issued by Credit Suisse. Because the market trigger, implied by the formulas, is associated with a constant accounting trigger, it is expected to be constant over time.

The comparative statics of the formulas show that the mathematical structures
of the formulas explain the economic structure of CoCos. However, we nd that the formula in the equity derivatives approach is more accurate than that in the credit derivatives approach because of its more realistic treatment of cash
ow. Its accuracy is con rmed by Monte Carlo simulation, as the estimated con dence interval includes the price evaluated using the equity derivatives approach. If the interest rate is equal to the dividend yield, we nd that the two analytical formulas provide the same price. The empirical analysis of the CoCos of Credit Suisse demonstrates that the Black-Scholes assumptions are empirically unreasonable for pricing CoCos, because the implied market trigger is volatile over time. Given that the constant volatility assumption of the Black-Scholes model is empirically unreasonable, this paper suggests the stochastic volatility model (Heston model) to be a suitable alternative for modeling stock price dynamics, because it produces a more realistic fat-tail distribution of stock returns. Thus, the pricing under the Heston model is expected to show a constant implied trigger over time.

Leadership Succession in a Merger of Equals

Faye Cheng — Wed, 30 May 2012 07:55:04 PDT

The consistently high rate of merger failure is a concern given the increasing number and magnitude of mergers that shape today’s industries. Cultural integration has been cited as a main but oftenThe consistently high rate of merger failure is a concern given the increasing number and magnitude of mergers that shape today’s industries. Cultural integration has been cited as a main but often neglected reason for the prevalence of these failures, and the choice in leadership succession is a particularly high profile component of such cultural integration. This paper seeks to examine the relationship beween leadership succession and long-term financial success specifically in mergers of equals. Building upon previous studies of mergers of equals and employing public information and reported financial data in multivariate statistical analyses, this study examines what characteristics of leadership succession, if any, are significantly correlated with long-term financial success of the merged company and in what way. Examining the implications of leadership succession in an extreme form of mergers, a merger of equals, can yield important findings to better understand what allows some mergers to succeed while others fail. neglected reason for the prevalence of these failures, and the choice in leadership succession is a particularly high profile component of such cultural integration. This paper seeks to examine the relationship beween leadership succession and long-term financial success specifically in mergers of equals. Building upon previous studies of mergers of equals and employing public information and reported financial data in multivariate statistical analyses, this study examines what characteristics of leadership succession, if any, are significantly correlated with long-term financial success of the merged company and in what way. Examining the implications of leadership succession in an extreme form of mergers, a merger of equals, can yield important findings to better understand what allows some mergers to succeed while others fail.

Service Retention Forecasting in the Wireless Telecom Industry Using Limited Information

Matthew Martos — Wed, 30 May 2012 07:07:53 PDT

Understanding which timing models best forecast customer survival rates is of paramount importance across a range of marketing-related activities. The author analyzes the postpaid subscriber bases of U.S. wireless providers in order to determine which forecasting models best capture the underlying cohort dynamics across carriers. In doing so, he examines the degree of heterogeneity, duration dependence, seasonality, contractual expirations, and cross-cohort differences in these subscriber bases. The author compares the accuracy of these models both in-sample and out-of-sample. The in-sample parameters are calculated through ordinary least squares, given that—as an external constituency—the author must utilize limited information data structures.

The results appear to be more conclusive for certain carriers than others; that is, the best in-sample timing models are not always the best out-of-sample, and often times appear to considerably “overfit” the data. The meager historical data available to test these models is most likely to blame. However, the models developed do provide general framework through which to apply these methods to contractual settings as more data becomes available.

Genetic Algorithms and Investment Strategy Development

Michael Dworkis et al. — Tue, 29 Nov 2011 08:02:00 PST

The aim of this paper is to investigate the use of genetic algorithms in investment strategy development. This work follows and supports Franklin Allen and Risto Karljalainen’s previous work1 in the field, as well adding new insight into further applications of the methodology. The paper first examines the capabilities of the algorithm designed in Allen and Karjalainen’s work by using human‐developed (rather than market‐historical) datasets to determine whether the algorithm can detect simple signals; the results show that the algorithm is quite capable of such basic tasks. Next, the S&P 500 test performed in Allen and Karjalainen’s original work was confirmed. Then, experiments were conducted in emerging equity markets, as well as commodities markets with a range of fundamental as well as technical indicators. The results generally show no significant positive excess returns above a buy‐and‐hold strategy; speculations for possible reasons are discussed. In addition, suggestions for future research endeavors are presented

The Impact of Technology, Demography, and Market Structure on Broadband Service Delivery

Robert Eldridge — Tue, 29 Nov 2011 08:01:58 PST

Increasing broadband network diffusion to reach all American homes at higher speeds than currently offered has become a national priority. The National Broadband Plan represents a response to the growing sentiment among policy makers that the United States’ lag behind other peer OECD countries is a source of embarrassment. With the highest FCC estimates for the Plan reaching close to $350 billion, it is clear that now more than ever policy makers need specific recommendations supported by actionable research. Current academic literature is largely descriptive in exploring areas of under-provision within certain demographic groups, the so-called ‘digital divide,’ and has not yet provided a satisfactory casual answer to the problem of broadband under-provision. We attempt to fill in this void by answering the question “What roles do technology, demography, and market structure play in levels of broadband service provision?” Employing multivariate statistical analyses, this paper examines census tract-level data recently released as part of the National Broadband Map. Ultimately, these analyses provide recommendations for how the US government can direct its efforts to attempt to increase broadband service provision across the country.

Risk Disclosure in SEC Corporate Filings

Yatin Mirakur — Tue, 29 Nov 2011 08:01:55 PST

Beginning in 2005, the SEC required firms to include qualitative disclosures of risk factors in item 1A in their annual 10-K forms. In this paper, we examine the textual content of this section and determine whether it reflects the firm’s performance. We first categorized each risk disclosure that a firm presented into one of 29 categories and then examined these categorizations. Our investigation yields three main results. First, we find that several risk factor categories, such as government and competitive risks, are common across our sample of firms. Second, we find that a firm’s industry classification (as given by its SIC code) is not a differentiating factor in the disclosures that a firm makes. Third, we find that risk factor disclosures are generally not predictive of a firm’s financial performance in the form of leverage, capital structure, cash, and acquisitions. Our analysis expands on previous work by considering the content of the disclosures in more detail rather than focusing on more quantitative characteristics of disclosures.

Contempt and Self-Esteem: The Effect of the Contempt Expression on Self-Enhancing Behaviors

Yixue Tiffany Zhou — Wed, 16 Nov 2011 11:51:59 PST

The Practice of Private Wealth Management in Singapore

Junxu (Jx) Lye — Wed, 16 Nov 2011 10:43:17 PST

Singapore is currently one of the wealthiest countries in the world in terms of GDP per capita. According to Forbes magazine, the combined net worth of the top forty wealthiest Singaporeans in 2010 was S$60 billion1, up from S$51 billion in 2009, and common sources of wealth for these individuals included Financial Services (OCBC, OUB) and Real Estate (Far East Organization, Pontiac Land). As such, there is no doubt that there are a substantial number of wealthy Singaporeans who reside in Singapore. However, the combined amount of assets that these Singaporeans hold pales in comparison to the over S$1.3 trillion2 worth of assets currently managed by Singapore‟s asset management industry - a statistic that bears witness to Singapore‟s growing popularity as a wealth management hub among wealthy individuals from around the Asia Pacific region. Given this, this paper notes a distinction between the wealth that is flowing into the country through wealthy individuals, which includes both Singaporeans and non-Singaporeans, and the wealth generated by Singaporeans. This paper seeks to gain a deeper understanding of the former group, which mostly includes Asian investors, through a small-scale research study.

Customer-base analysis in an online search setting

Arjun Mohan — Wed, 16 Nov 2011 10:27:00 PST

Consider a major online travel site that presents users with a wide selection of search results when a user enters a query into their system. From October 1^st through October 15^th 2009, the behavior of all users searching for hotels in four major destinations were collected and compiled. This information included details including the links users were presented, the order in which they were shown, the number of links users were shown, and most importantly, which links users actually clicked. Given this data, management would like to know more about their users to determine how best to display the search results.

The Impact of Culture on Non-life Insurance Consumption

Aranee Treerattanapun — Wed, 16 Nov 2011 10:12:02 PST

This study investigates the impact of culture on non‐life insurance consumption. Various economic institutional, and cultural variables regarding 82 countries across a 10‐year period are considered when building up the best and most parsimonious regression model. Employing blocking and bootstrapping techniques, we find that nations with a low degree of Power Distance, a high level of Individualism, and a high degree of Uncertainty Avoidance tend to have a high level of non‐life insurance consumption. The
empirical results suggest that consumers may respond to insurance solicitations according to their cultural belief, not only economic rationality.

Macroeconomic Factors in Private Bank Debt Renegotiation

Peter Maa — Thu, 18 Aug 2011 14:32:43 PDT

Despite the importance of renegotiation in affecting loan terms of bank debt, little work has been done investigating factors influencing renegotiation of privately placed debt. We find that renegotiation is more likely to occur in good economic times as measured by lower unemployment, lower public credit spreads, and outside of economic recessions. Moreover, renegotiated loan
terms are more favorable for the borrower in business cycle upswings. Changes to debt covenants are very weakly correlated with the broader economy, suggesting that covenant amendments may be more driven by discovery of firm-specific information. Finally, we find that a healthier commercial banking sector not only significantly increases the probability of renegotiation, but also leads to more favorable terms for the borrower.

Corporate Acquisitions Around Time Periods of Loan Covenant Violations

Allen Liu — Thu, 18 Aug 2011 14:32:41 PDT

We present empirical evidence on acquirer firms that have violated or are about to violate a loan covenant within four quarters of undergoing an acquisition. We find that firms that violate a covenant within the four quarters before the acquisition announcement have the highest announcement period abnormal returns, while firms that violate a covenant within the four quarters after the acquisition announcement but not within the four quarters before it have the sharpest decline in abnormal returns after the acquisition announcement. Also, firms that violate or are about to violate a loan covenant within four quarters have a significantly lower mean target firm deal size than those that have not violated covenants within those time periods. Such results indicate that when firms violate or are about to violate a loan covenant, corporate governance shifts in power cause creditors to enforce stricter rules on management’s actions, making sure that the acquisitions that management pursues adds to firm value.

Determinants of the Music Piracy Divide

Valentina Assenova — Thu, 21 Oct 2010 12:05:38 PDT

Why has physical piracy of music grown globally in recent years despite international efforts to reduce the problem? This research employs cross-country time series data analysis to examine physical music piracy rates across developed and developing economies. We provide 1999-2004 cross-country evidence from 70 countries that mean global music piracy rates grew over this period, and observe different mean rates for OECD and non-OECD countries. We examine the effect of per capita income, legal enforcement and technology on piracy rates in the developed and developing economies and choose a fixed-effects model. Our model indicates that variations in piracy of CDs and digital music on CD-Rs among all countries are largely due to growing Internet subscriptions. For non-OECD countries, the model suggests that the increase in Internet use coupled with poor copyrights enforcement has worsened piracy. For OECD countries, however, the growth in Internet subscriptions has not had a significant effect on piracy rates.

Individual Privacy and Online Services

Minh Chau et al. — Fri, 10 Sep 2010 10:32:27 PDT

We explore consumer trade-offs between better performance through tailoring of online services to their individual needs and greater privacy as a result of reduced disclosure of personal information. We show that individuals have different willingness to accept loss of privacy that is a function of (1) the individual and his/her preferences, because the variation in demands for privacy is not uniform across individuals, (2) the service Domain, because individuals demand more privacy in some Domains than they do in others and (3) these differences themselves differ among consumers as well.

Complex Organizational Structure and Chinese Firm Value

Xiaochan Jia — Thu, 02 Sep 2010 06:48:33 PDT

The rapid economic development in recent years inspired Chinese firms to entertain global ambitions, and growing domestic competition as a result of the government’s liberalization policies has rendered internationalization a necessity. In addition to the State-owned enterprises that already had complex structures from government-mandated privatization, many large private companies developed complex organizational structures as well to fulfill the demands of the changing operating environment. Some reincorporated outside of the country and registered new subsidiaries in China to gain legal and tax advantages. Some formed joint ventures with foreign firms to learn the most advanced technologies. Some established branches overseas. These efforts seemed to have paid off. In 2009, 37 companies made it to the Fortune Global 500 list of the largest companies in the world by revenue compared to 16 in 2005. But along with the expansion, the more pertinent question for shareholders is whether there has been commensurate growth in their holdings, specifically, how does the new complex firm structure affect firm value?