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EMBA Open House this Thursday

Goizueta Newsroom — Wed, 14 Sep 2011 12:54:48 +0000

Goizueta Business School’s Executive MBA Program will host an open house Sept. 15.

Those interested in the program are encouraged to attend to gather information on the admissions process and get a feel for the structure of both the weekend and modular formats.

Sign-in for the Open House program begins at 6:30 p.m. Sept. 15 at Goizueta Business School (map). Those planning to attend are asked to RSVP, here.

LIVE WEBCAST (7:00 p.m.)

Representatives of the Executive MBA Program are schedule to speak as are members of the admissions department, alumni and current students of both EMBA programs. Associate Professor of Decision & Information Analysis Steve Stuk is also scheduled to speak.

Professor Stuk has had a long history of managing teams in applying diverse techniques to the analysis of a wide range of business and technical situations. His early work at the Georgia Tech Research Institute involved innovative application of evolving technology with state of the art spectral analysis of extensive data for use in pattern detection. This led to the work in his Ph.D. dissertation on man-in-the-loop decision support systems.

He directed all aspects of technical support, world wide, for Gould’s mini-super computer line, NPL. This included management of the field analysts, home office performance/benchmark analysts, proposal development team, computer center, and trade show support. Since leaving Gould he has merged teaching, consulting and research while at Georgia Tech and Emory.

Stuk’s research interests are focused around the application of innovative modeling techniques to real world problems. Recent activity has been application of Synthetic Neural Network to predict consumer behavior. In particular the application of Kohonen or self-organizing maps to Internet preference behavior has been developed.

Dr. Stuk’s background in military modeling and analysis and research has provided him with a unique experience and reservoir of techniques to combine for optimal results.

Business Saw Lasting Change Post-9/11

Goizueta Newsroom — Tue, 13 Sep 2011 11:00:05 +0000

Airport security and the security industry in general saw marked increases after 9/11. PHOTO: Inha Leex Hale/Flickr.com

The attacks against America that shook the nation on Sept. 11, 2001 caused immeasurable human suffering, and also had a significant impact on business practices, according to faculty at Emory University’s Goizueta Business School.

Some of the effects, like the temporary shutdown of air travel that disrupted vacation and other plans, had a relatively short-term effect on companies. But others, like the focus on enhanced security procedures, had a far-ranging impact on multiple industries — from accounting to technology firms — that continues to this day.

“Some industries, like travel-related businesses, saw an immediate drop off in activity post-9/11,” says Peter Topping, an associate professor in the practice of organization and management. “I worked with the hospitality industry and companies saw a significant drop in business until the mid-2000s.”

The downturn in the hospitality industry occurred against a broader economic pullback in the wake of the terror attacks, according to federal data.

For example, a Bureau of Labor Statistics survey indicated that during the 10-week period between mid-September and mid-November 2001, 350 mass layoffs involving a total of 101,781 employees were reported to be directly or indirectly attributable to the attacks. Among the workers laid off, 42 percent (43,735 workers) had been employed in the air transportation industry. Another 29 percent (30,399 workers) had been employed in hotels or motels, according to the BLS.

But as Topping noted, the hospitality industry did rebound. In 2010, domestic and international visitors accounted for a total of $1.8 trillion of economic activity in the United States, according to the U.S. Travel Association, an organization that represents the travel industry.

“The world of management consulting also took a significant hit in the 2001-2003 timeframe,” Topping says. “But the growth businesses would be those around homeland security, military [and] defense contracting and government consulting. I would guess that security will continue to grow as a concern at all levels — from “homeland” to personal home — and it will also become increasingly technologically driven.”

But the long-term tie between September 11 and the expansion or contraction of some industries may be tenuous, suggests Kevin M. Crowley, an adjunct finance lecturer at Goizueta.

“You could argue that the 9/11 attacks and the recession that engulfed the country at that time played a major role in the subsequent actions of the Federal Reserve to pursue loose monetary policies,” he says. “The low interest rate environment that ensued helped to spur the housing boom, construction industry, expansion of bank balance sheets and the rise in the overall financial markets. Now we are still living with the painful adjustments that come from that period of excess in 2004-2007. Although it is hard to make a direct linkage because many forces are at work in the economy, clearly certain industries were affected by the boom and bust that followed 9/11.”

If there’s a single thread that connects all of the industries that did see growth in the wake of 9/11, it would likely be technology, according to Ashish Sood, an assistant professor of marketing at Goizueta.

“Following the September 11 attacks, government spending on technology went up dramatically,” he says. “Federal, state and local organizations wanted to enhance their ability to connect more quickly between agencies and other people to speed their coordination through a faster and more accurate flow of information. Technology was one way to do it.”

In fact, despite calls for cutbacks in the overall federal budget, federal spending related to information technology contractors is scheduled to grow 1.5 percent from FY 2011, according to INPUT Inc., a Reston, Va.-based consulting company that provides information and analysis to companies about government markets.

“This is in part due to the shifting of IT dollars from low priority to high priority projects, even across agency lines,” according to INPUT. “IT priorities include shifting $20 billion from traditional IT spending to cloud computing systems by 2015 and proposed improvements in cyber security and systems consolidation.”

“The September 11 events resulted in a heightened sense of fear and vulnerability,” Sood adds. “This created opportunities for new and existing companies that provide security related products and services.”

Some of the business opportunities were expected, like the increased demand for scanner technology. Others, like the increased use of radio frequency identification, or RFID chips to help speed products through airport and seaport security, may not have been as obvious at the outset.

But some of the growth areas were in industries that would not normally be considered security related.

“One of the responses to the 9/11 attacks was a renewed emphasis on disrupting the flow of funds to terrorists,” observes Sood. “Legislation was enacted to more closely scrutinize cash transfers and other financial activities that moved funds between banks and between nations.”

Perhaps the most famous, and somewhat controversial, legislation was the Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept and Obstruct Terrorism Act of 2001, also known as the USA PATRIOT Act.

It criminalized the financing of terrorism and augmented existing Band Secrecy Act laws by strengthening customer identification procedures, prohibiting financial institutions from engaging in business with foreign shell banks, and also required financial institutions to have due diligence procedures, and enhanced due diligence procedures for foreign correspondent and private banking accounts.

The Patriot Act and other 9/11-related legislation did create a demand for accounting and other professionals with knowledge and experience in banking, technology and compliance, according to some industry experts.

Signed by President George W. Bush on Oct. 26, 2001, the USA PATRIOT Act has “elevated compliance to a top-level issue for boards of directors,” Sandy Jaffee, the former CEO of anti-money laundering consulting firm Fortent, previously announced. “Banks are recruiting experts attuned to regulatory expectations, even hiring former policy-makers and examiners as key members of their compliance staff. But organizations have found such people in short supply leading to stiff competition for those workers.”

The government’s response to September 11 also had another unintended consequence, according to Sood: It indirectly helped to propel the social media movement.

“Government’s push was for faster and expanded connectivity largely related to security concerns,” says Sood. “The industry responded with creative solutions driven by technological advances. The mobile computing devices developed by the private sector, using the Internet as a backbone, emerged as a viable solution.”

“Equally important was an increased public demand for faster access to information,” he adds. “During a crisis, either manmade or natural, the unofficial, free flow of information becomes a valuable resource, supplementing or even supplanting the official sources of information.”

The advent of technological advances like Twitter and Facebook reduced people’s dependence on slow and inefficient communication channels and essentially gave consumers the power of communication that was formerly limited to government agencies, Sood notes.

“Consumers became more interested and aware of events and developments around the world, and also willing to share more than ever before,” he says. “As more companies move into the social media space, we will continue to see this decentralization gain ground, resulting in even more opportunities for businesses. For example, my research suggests that firms are increasingly using social media to engage consumers, build informal networks, foster communication and improve innovation.”

Ten years after the attacks, the aftershocks of Sept. 11, 2001 are still with us, Sood notes.

But instead of being frozen into paralysis, individuals and companies alike have stepped up to the plate and continue to make technological advances that may start out as security-related products or services but are eventually integrated into broader societal behavior patterns, he explains.

“Human beings are very adaptable,” he says. “We may be thrown off stride for a while by unexpected and shocking events, but eventually we emerge from the trauma much stronger, build responses to challenges into our daily routines and move on. It’s the way that civilizations advance.”

- Marty Daks

U.S. News Ranks Goizueta BBA Program

Goizueta Newsroom — Tue, 13 Sep 2011 10:55:37 +0000

Emory University is listed among the top 25 national universities for the 20^th consecutive year in U.S. News & World Report‘s annual “Best Colleges” rankings published Sept. 13. Emory’s Goizueta Business School is 12^th in the rankings of undergraduate business programs.

In 2010, the BBA program ranked 13th in the nation.

Emory was listed as 20^th among national universities, and 19^th among schools offering the “best value” to students.

“Emory students benefit from our remarkable community that encompasses a rigorous undergraduate program, top notch graduate programs, outstanding professional schools, a world-renowned library, a superior healthcare system, distinguished affiliations including The Carter Center and Centers for Disease Control and Prevention, and the advantage of an Atlanta location,” says Emory Provost Earl Lewis. “Our unique combination of people, place and resources defines Emory as one of the world’s leading centers of discovery and learning.”

In addition to U.S. News, other well-known media outlets have recognized Emory (http://bit.ly/emory-rankings), among them: The Princeton Review (top 50 “2011 Best Value Colleges” among private universities), Forbes.com (ninth among 20 religiously affiliated schools, 2010), and Bloomberg BusinessWeek (BBA program ranked third, 2011).

“These and other accolades speak to the excellence in the colleges, schools and centers that are Emory, and that account collectively for the success of the entire university enterprise,” says Lewis.

The rankings appear today at www.usnews.com.

About Emory University’s Goizueta Business School
Emory University’s Goizueta Business School is home to an Undergraduate degree program, a Two-Year Full-Time MBA, a One-Year MBA, an Evening MBA, an Executive MBA (Weekend and Modular formats), a Doctoral degree and a portfolio of non-degree Emory Executive Education courses.

Lasting Economic Impacts of 9/11

J. Michael Moore — Fri, 09 Sep 2011 13:00:59 +0000

The lasting economic impact from the 9/11 attacks will be in defense spending, says Goizueta's Jeff Rosensweig. PHOTO: Yutaka Tsutano/Flickr.com

Terrorist attacks of Sept. 11, 2001 undoubtedly left a lasting impact on America and the world. Lives were altered forever and the way the world operates fundamentally changed.

Jeff Rosensweig, associate professor of finance at Goizueta Business School, spoke with communications staff at Emory University as part of a series describing the lasting effects of 9/11.

Sunday marks the 10th anniversary of the attacks.

“Surprisingly to many, 9/11 had a much weaker lasting effect than many would have thought,” Rosensweig said when asked about economic impacts of the attacks.

Rosensweig acknowledges a deepening recession following 9/11 but, in reality, the U.S. economy was shrinking six months before the attacks as a result of the “.com” bust.

Ultimately, according to Rosensweig, the Federal Reserve’s fears of a deepening economic decline post-9/11 led to a reduction in interest rates and a sustained recovery.

Another lasting impact, says Rosensweig, was an increase in military spending.

“Perhaps in ordinatry times that wouldn’t matter as much but, if we look at our current economic picture — where there is so much worry about [federal government deficit]… here’s a source of spending that’s much greater and will remain much greater as a direct concequence of 9/11.”

For more videos with Emory University experts, click here.

ABOUT THE EXPERT

Jeff Rosensweig is an associate professor of International Business and Finance. He is also Director of the Global Perspectives Program. Rosensweig specializes in global strategy, global economics and international finance. Prior to joining Emory in January 1988, he was Senior International Economist at the Federal Reserve Bank of Atlanta. Jeff has also taught at M.I.T. and in the economics department and the School of Management at Yale University. He also writes a regular column for the Atlanta Journal-Constitution.

Smith on Georgia Jobs, Unemployment

J. Michael Moore — Thu, 08 Sep 2011 14:46:32 +0000

Job numbers are of increasing concern in Metro Atlanta and Georgia with the official unemployment rate hovering above 9 percent.

Speaking with WABE’s Denis O’Hayer late last week, Goizueta economist Tom Smith said the economy is showing mixed numbers. Still, Georgia’s unemployment rate is above the national average; it’s numbers on job creation are low.

“Our manufacturing is pretty solid,” Smith told WABE. “We have lots of things going on in that sector. But we’re slowing down in terms of construction, we’re slowing down in new homes [and] we’re slowing down in terms of government projects.”

CLICK HERE FOR THE INTERVIEW

Smith is hopeful for positive momentum into the Fall.

“I’ve never seen an economy so anxious to fall into another recession,” he said, noting firms may be reluctant to hire because of additional costs, gloomy forecasts and a newfound ability to “run lean.”

Smith said growth could come in the IT and green technology sectors but it won’t come without more spending by consumers.

“When you think about an economy that’s either growing or shrinking, a big portion of that has to do with consumer confidence,” he said. “How confident are consumers that have money? As they become confident and spend money, firms that benefit from consumers spending money are going to turn around and spend money.”

ABOUT THE EXPERT

Smith (bio) joined Goizueta in 2008. He has held faculty positions at the University of Illinois–Chicago, National-Louis University, Loyola University, and North Central College. Smith received a PhD in labor and demography/cultural economics and policy from the University of Illinois at Chicago in 1998 and holds a BA from Illinois Wesleyan University. He has also served as a consultant for the arts, music and entertainment industry. His expertise is in cultural economics — including sports, arts and religion – real estate economics and labor economics.

The Topography of Drug Innovation

Goizueta Newsroom — Wed, 07 Sep 2011 11:00:18 +0000

The successful patenting of drugs depends in part on cultural considerations and the competitive advantages of location. PHOTO: RambergMediaImages/Flickr.com

Drug innovation does not occur in a scientific vacuum, and the successful patenting of drugs depends in part on cultural considerations and the competitive advantages of location, according to L.G. Thomas, professor of organization and management at Emory University’s Goizueta Business School, and colleague Kira Fabrizio of Duke University. Their forthcoming paper, “The Impact of Local Demand on Innovation,” examines the global pharmaceutical industry and finds that superior knowledge of demand—which includes tacitly understood knowledge not easily transferred across continents—can explain why certain countries tend to dominate innovation in specific pharmaceutical categories.

When it comes to business innovation in the United States, the landscape is uneven. From computer companies clustered near Silicon Valley to car manufacturers parked side-by-side in Detroit, firms in many industries tend to gravitate towards distinct regions of the country. The economies of agglomeration explain the phenomenon, since competitors located near one another can see lower production costs while boosting specialization. That’s why most hip and knee replacement devices in the United States, for example, are manufactured by firms in Warsaw, Indiana, and most heart pacemakers companies have operations in the Twin Cities. There’s even a geographic aspect to the office furniture business, since the three largest manufacturers of cubicles, chairs, and desks in the United States all are based near the western Michigan town of Zeeland.

This clustering phenomenon spans the globe, with certain nations generating a disproportionate share of particular innovations, says L.G. Thomas, professor of organization and management at Emory University’s Goizueta Business School. In complex industries, technical know-how isn’t easily transferred across great distances, so geographic proximity enables the transfer of tacit knowledge — those things that are implied or inferred, but not openly expressed. While this transfer is usually described in terms of technical knowledge, Thomas argues that it also is important when assessing product demand. In a forthcoming paper titled “The Impact of Local Demand on Innovation,” Thomas and coauthor Kira Fabrizio of Duke University examine the global pharmaceutical industry and find that superior knowledge of demand can explain why certain countries tend to dominate innovation in different categories of medicines. Pharmaceutical companies are better able to understand a market opportunity, the researchers say, when the prospect squares with the social culture underlying their own national healthcare system.

“We tend to think these days that the world is flat, or that there aren’t distinctions across countries anymore,” Thomas says. “But there are distinctions, and they are especially important in complex industries that are highly shaped by the topography of the mind—the tacit understandings about what’s important and what’s not important.”

Demand for pharmaceuticals is based on many factors, from individuals who consume drugs and doctors who prescribe them to regulators who police safety and insurers who negotiate prices and reimbursements. Each of these components of demand is complex, and their interactions even more so, Thomas says. The average lag between patenting a new molecule and selling a new drug product spans more than nine years. So drug innovators must forecast demand out almost a decade to discover a successful product.

These factors help explain not only why demand for pharmaceuticals is tacit but also the sorts of industries where gaining an understanding of demand characteristics is similarly complicated. Information about demand is more likely to be tacit, Thomas says, when innovators must understand not just individual components but how the system functions as a whole. Another characteristic is the speed with which demand changes. When understanding demand requires future forecasts and knowledge of the past sales trajectory, knowledge is more likely to be tacit.

“Knowledge about demand conditions may be differently distributed across firms or countries, and knowledge flows about demand may be ‘sticky’ and difficult to transfer across regions,” the researchers write. “In fact, knowledge about market size and valued product characteristics can be tacit in much the same way that technical knowledge can be tacit. The result is a competitive advantage associated with location that is separable from the benefits associated with geographically mediated technology spillovers.”

To test the hypothesis, researchers looked at innovation patterns by 56 large pharmaceutical companies in nine major markets, including firms such as Pfizer, Bayer, and Takeda. They focused on 262 patented new molecules that the companies launched as products between 1980 and 2001. To assess market demand by country, the researchers compiled sales data from 1992 to 2001 for the various therapeutic classes in the eight most innovative countries plus Belgium. To assess technological expertise of the firms, the researchers counted patents filed by the companies.

The results showed clear a geographic pattern. Japanese firms were dominant in developing drugs in a category known as “fibrinolytics”—medicines that restrict the production of a blood product called fibrin, which promotes the formation of blood clots. Continental European firms played a large role in developing high blood pressure drugs known as beta-blockers. British and American firms dominated the market for anti-migraine medicines.

The variation couldn’t be explained by differences in the rate at which residents of the different countries suffered from various diseases, the researchers found. What’s more, firms from countries that failed to develop products in certain categories didn’t lack the technical expertise. While Japanese, German, and French firms failed to develop anti-migraine products during the study period, for example, they collectively filed 175 patents for molecules in the therapeutic category. For fibrinolytics, Japanese firms achieved 64 percent of the innovations but they filed only 14 percent of the patents. For beta-blockers, continental European firms registered 73 percent of the innovations but only 21 percent of the assigned patents.

Thomas and Fabrizio conclude that what ultimately shaped whether a firm succeeded in bringing a drug to market was demand for the product in its home market. Technical skill is merely a first step for innovators of important new drugs; what’s also important, they say, is the downstream knowledge needed to convert patents into successful innovations.

The clearest example comes in the case of anti-migraine medications, which generated $3.1 billion in worldwide sales during 2010, according to IMS Health, a healthcare information company. Between 1980 and 2001, six new anti-migraine drugs were introduced, with five developed by British or U.S. firms. It’s no accident, Thomas says, that none of the products came from Japanese manufacturers. Pain is difficult to observe and almost entirely self-reported, he points out, so patients in individualistic cultures are more likely to view their suffering as important and therefore worthy of treatment. Doctors in those cultures also are more likely to respond to patient complaints about migraines and insurers are more likely to set high prices for products treating personal suffering. It’s a different story in hierarchical societies that are “gender-distinctive,” the researchers say. Patients in hierarchical, collectivist societies tend to suffer in silence. Also, migraines tend to afflict more women than men everywhere, and Japan is notorious for its accepted differential treatment of women, Thomas says. Japanese sufferers of migraine headaches “are more likely to tolerate as somehow appropriate and deserved and decline to allocate economic resources to treat them,” the researchers write. Only 12 percent of migraine sufferers in Japan are even aware that the headache is a migraine, Thomas says, citing several epidemiological studies. Per-capita consumption of anti-migraine drugs in Japan is only 25 cents, he adds, compared with $4.50 in Sweden and $5.50 in the United States. The social norms of hierarchy, collectivism, and gender inequality not only underpin the various components of the Japanese healthcare system, they shape the views of Japanese scientists who develop new drugs.

“Japanese firms had the patents; they just didn’t make it through the process,” Thomas says. “As a manufacturer, you’ve got to combine the technical knowledge with the sense that a given product is so important that the company must really push on this . . . It’s a question of, how do you synthesize technical knowledge of chemistry and biology with the downstream knowledge of demand—the understanding that people are willing to pay a lot of money to the company that develops a product with particular characteristics.”

The migraine example shows why the pharmaceutical industry might not live up to its reputation as a global industry. Drug companies from highly individualistic countries such as the United States, Britain, Denmark, and Sweden have a much better track record developing products such as anti-epilepsy drugs, medications to fight HIV, and drugs to help premature babies. But those companies usually aren’t as good, Thomas says, at developing drugs that emphasize public health (mortality and morbidity) over private health (convenience and comfort). An example of drugs that rank low on private health is antibiotics that must be injected or infused.

“Americans don’t like that sort of thing,” Thomas says. “Drugs that are inconvenient or have heavy side effects; injection antibiotics or things that require IV administration—Japanese are very tolerant of that. Those medicines are used in the U.S., but not as frequently as in Japan. Doctors there prescribe them more frequently, consumers do what they are told, and pricing regulators give them better relative prices.”

The results show the importance for drug companies in having operations spread across many geographies, Thomas says, so that firms have a better chance of accurately sizing up the different levels of demand for products. That’s especially true, he adds, for companies not based in the United States, which is the largest market for medications. But even this strategy has its limits, since the key is not simply having personnel in foreign markets but also listening to what the expatriates have to say.

German drug companies in the 1980s were among the largest in the world, Thomas points out, and took steps to operate in foreign markets like the United States. But the German drug industry over time largely disappeared through mergers and acquisitions. The problem wasn’t a lack of technical knowledge, but a failure to seize opportunities in the burgeoning U.S. market of the 1990s. Per capita demand for drugs was roughly equal between the United States and Germany in 1990. A decade later, U.S. per capita demand for new drugs was over 5 times larger than that of Germany. Drug firms that failed to understand and innovate for the surging U.S. market were simply left behind.

“The suggestion was that German innovators embedded in a very different social culture were not seeing certain opportunities for innovation,” Thomas says. “It was the ‘dead hand of old chemists’ making decisions on innovation, whereas in the United States that authority would have shifted to MBAs and people with expertise in marketing new medicines.”

In contrast, British firms invested extensively to build separate, more autonomous research labs in the United States. Not only were the British firms better able to understand and forecast U.S. medical demand, they could draw from innovations by U.S. scientists in their overseas labs. Thomas argues that the success of British firms in the US offers a strong caution to multinational drug firms seeking to thrive in emerging markets such as India and China.

“Medicine and healthcare fundamentally differ across countries,” he says. “Firms seeking to innovate new drugs for large emerging markets must have a deep, comprehensive understanding of how medicine will be practiced in these countries a decade from now. The most effective tactic to accomplish this understanding is significant foreign direct investment for drug innovation.”
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Analysts Might Herd, But Don’t Trample

Goizueta Newsroom — Tue, 06 Sep 2011 14:50:20 +0000

Stock analysts—especially those at large brokerage firms—are known for their herding tendencies. PHOTO: brian glanz/Flickr.com

Stock analysts — especially those at large brokerage firms — are known for their herding tendencies, but stock buyers need not be overly concerned at the possible destabilizing effects on stock prices, argue Narasimhan Jegadeesh, Dean’s Distinguished Chair of Finance at Emory University’s Goizueta Business School, and colleague Woojin Kim of Korea University. Their research, presented in a paper titled “Do Analysts Herd? An Analysis of Recommendations and Market Reactions,” shows that the market anticipates analysts’ herding proclivities and “responds appropriately.” Analyzing data from over two decades of stock price movements and analyst recommendations, the researchers found that investors seem to pay more attention to recommendations that go against the grain, compensating in part for any herding that pushes investors away from a true valuation of a stock based on company fundamentals. Their research suggests that market commentators should be wary of overstating the importance of herding as a major cause of market ills.

When the “dot.com” bubble started to burst in March 2000, those who’d been disbelievers in the high-flying sector pounced. In his widely watched annual letter in April 2001, Warren Buffett wrote that “it was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the value of stocks in certain sectors became decoupled from the values of the businesses that underlay them.” In the bubble’s post-mortem, some suggested that what Buffett described as a virus might better be explained in terms of “herding”—the tendency for different agents making individual decisions to nonetheless take similar actions at roughly the same time. The theory was that many stock analysts had talked up dot.com stocks to keep pace with their peers, thereby stoking demand that ultimately resulted in excess volatility when the bubble burst.

But in a paper recently published in the Review of Financial Studies, Narasimhan Jegadeesh at Emory University’s Goizueta Business School argues that any ill effect from herding by analysts is usually blunted because investors are well aware of the tendency. In a paper titled “Do Analysts Herd? An Analysis of Recommendations and Market Reactions,” Jegadeesh and colleague Woojin Kim of Korea University analyzed stock price movements and analyst recommendations for some 5,714 firms between 1993 and 2005. They found that investors seem to pay much more attention to analyst recommendations that go against the grain. That contrasts with changes that move toward the consensus viewpoint, which don’t drive as much action by investors. Stock buyers, in other words, are careful not to get trampled by the herd.

“The market is smart enough not to blindly follow analysts,” says Jegadeesh, who is the Dean’s Distinguished Chair of Finance at Goizueta. “The market seems to understand that analysts have some incentives to herd, and the market responds appropriately.”

There are two broad reasons that individuals might herd, Jegadeesh says. The first stems from information. An earnings announcement with positive news about a company’s revenue or net income might prompt many analysts to up their earnings estimates for the firm at around the same time. Analysts who rationally incorporate the latest financial results from the same information source will come to similar conclusions about the company’s direction. But a second reason for herding is not so benign. Individuals might herd because they are responding to incentives that encourage imitation. Previous research, for example, has suggested that analysts with low abilities often issue earnings forecasts that mimic those of superior analysts, all in hopes of winning more compensation.

“If agents act similarly only because of common information, then their actions result from rational and optimal use of information, and they are not influenced by extraneous incentives or biases,” the researchers write. “On the other hand, if agents herd for any other reason, then their actions differ from the action that one would take if he or she uses available information rationally without any influence of extraneous incentives or biases . . . Non-information-driven herding could introduce noise in prices, and contribute to excess volatility that many view as undesirable.”

Analysts typically rate stocks as “strong buy,” “buy,” “hold,” “sell,” or “strong sell.” To investigate whether analysts herd when they make changes among these five recommendation levels, the researchers tracked 71,555 upgrades and downgrades issued by analysts on the stocks of 5,714 firms between 1993 and 2005. The sample included all firms that had at least two active recommendations from analysts during the time period, including at least one revision. The 6,588 analysts in the sample came from a variety of brokerages ranging from one-analyst shops to large players like Merrill Lynch and Morgan Stanley. The researchers looked companies’ “abnormal returns,” meaning the change in the stocks’ value relative to changes in the value of the broader index, around recommendation changes.

Overall, the researchers found that analyst upgrades corresponded with a 1.97 percent abnormal returns on the day of the upgrade. Analyst downgrades corresponded with a 3.22 percent decline in abnormal returns on the day of the downgrade. The impact was significantly different when recommendation changes moved toward the consensus view relative to when they moved away from the consensus view. In the case of upgrades, the average abnormal returns was 1.75 percent when recommendations moved toward the consensus and 2.15 percent when the upgrade moved away from the consensus. The effect was more dramatic with downgrades. The average abnormal returns were –2.4 percent when the downgrade moved toward the consensus and –4 percent when the downgrade moved against the consensus.

The study also offers information about which analysts are more likely to herd, and when they are more likely to do so. There is no difference, for example, in the herding tendencies of all-star analysts, lead analysts, and other analysts, the researchers found. Analysts who make frequent revisions to their recommendations, however, were less likely to herd. And analysts were less likely to herd when evaluating stocks where there was a broad range of recommendations. Analysts from large, reputable brokerages were more likely to herd, the study suggests.

Regulation also had an influence. In the fourth quarter of 2002, ten major brokerages struck a global settlement with state and federal officials that erected barriers between the investment banking activities of brokerages and their stock research departments. In the time following the settlement, analysts were less likely to herd. This suggests that currying favor with potential investment banking clients might have contributed to herding incentives prior to 2002, the researchers write. Even so, the primary take-away as to the deleterious influence of herding on market prices is that the practice isn’t that worrisome. The study found that a large part of the stock price response to recommendation revisions occurred on the day of the change, and market prices continued to reflect information in the revisions for up to six months into the future. If the revisions had been driven by an impulse to herd that pushed investors away from a true valuation of the stock based on the fundamentals of the company, the study results would have found corrections in market prices at some point following the changes, Jegadeesh says.

“Media accounts and some academic papers have suggested that analysts’ herding tendencies could introduce noise into prices because the market could potentially overweight the common mistakes of the herd,” the study authors write. “However, our results indicate that the market anticipates analysts’ tendencies to herd, and the market price reaction on the revision date accounts for such herding tendencies. Therefore, we doubt that herding by analysts when they make recommendations would have any destabilizing effect on prices.”

The study suggests that downgrades that go against the consensus amount to higher-profile acts that are more likely to significantly move the stock price. In general, analysts seem to be more reluctant to stand out from the crowd when they convey negative information, although it depends on who they work for, the research suggests. Analysts from less prestigious firms might be more willing to offer such recommendations because they are “underdog” players who want to attract attention in the market, Jegadeesh says. Such downgrades might be less common from large brokerage houses where analysts seem more risk averse and are more cautious about offering recommendation changes that could possibly make them look bad. But whatever the motives of analysts, the study suggests that commentators should not overstate the importance of herding when looking for the cause of market ills.

“It’s not what analysts were saying that drove the tech bubble,” Jegadeesh says. The study didn’t set out to explain what caused the dot.com bubble, but Jegadeesh points out that “it could be that investors were looking at their neighbors who were buying those stocks and saying ‘I want to do this’ . . . sometimes things turn out better than we expect, sometimes things turn out worse.”

Creating “Living Standards” in Uncertain Climate

Goizueta Newsroom — Mon, 05 Sep 2011 17:00:19 +0000

Standards help frame our world, from organizing labor pools, to fostering trade relations, to opening up communication channels. Blind allegiance to standards, however, can compromise collaboration, cripple innovation, and cause business leaders to temporarily forget why they adopted the protocol in the first place.

In a recent Q&A, Dominic Thomas, adjunct assistant professor of information systems and operations management at Emory University’s Goizueta Business School, discusses the breakdown of the organizational status quo in uncertain environments, prompting companies to craft and use standards that enable agile coordination. Thomas recently moderated a panel discussion, “Crossing Barriers: Coordination and Standards,” as part of the Knowledge Futures: The Agility Imperative symposium held at Goizueta. Joining him in the talk were senior decision makers from the government and private sectors, including the Federal Aviation Administration, CARE, and The World Bank.

Newsroom: The process of leveraging collective intelligence to respond to crisis situations can be tremendously inefficient but also tremendously effective. Can too much consensus building lead to inaction, and if so, what can an organization do to counterbalance this?

Thomas: Yes. People need to only block a consensus process when there is a legitimate “blocking concern,” yet many fail to recognize the distinction between blocking concerns and any concern. I serve on a board that uses a formal consensus process, and I have seen the impact of making individuals commit to explicitly naming their blocking concerns. I believe the process works efficiently as a result. That said, I have not seen the process carried out in this manner anywhere else. As technologies and norms for using them evolve, we have new opportunities to identify patterns through collective intelligence, with less energy required during crisis situations. Businesses can implement such ideas internally, too, and they are beginning to do so. As they do, they will benefit from identifying methods to collaborate and cooperate in a timely manner.

Newsroom: What steps should an organization take to draft standards that are more responsive and relevant to changing environments?

Thomas: During our discussion, we heard several good suggestions about creating living standards. First of all, allow for multiple drafts of a standard from the start, so that people expect it to evolve, as in the PDF standard used for portable, digital documents. Second, govern standards in an open format with the participation of those impacted. Third, make the context of the standard explicit and provide a process for overriding the standard. Finally, as a standard evolves, be careful to distinguish compatible and incompatible versions of that standard. In organizational cooperation memoranda, these distinctions are rarely identified. As a result, I suspect we see a proliferation of policies not clearly linked to any history or organizational need.

To view the video of the “Crossing Barriers: Coordination and Standards” panel discussion, click here.

What Does the Future Hold for Gas Prices?

Goizueta Newsroom — Mon, 29 Aug 2011 11:00:34 +0000

Goizueta experts check in with causes of gas price peaks and valleys. PHOTO: futureatlas.com/Flickr.com

Gasoline prices in the U.S. and elsewhere reached record highs earlier this year, prompted to a degree by unrest in the Middle East. But some faculty at Emory University’s Goizueta Business School say that even after things calm among oil producing nations, gas prices are likely to stay high.

“Events in the Middle east have exaggerated the price rises,” says Goizueta chaired marketing professor Jagdish Sheth. “But they’re not responsible for the longer term rise.”

The major cause is the comeback in manufacturing, he notes, citing the most recent Institute of Supply Management Report on Business, which indicates that “economic activity in the manufacturing sector expanded in June for the 23rd consecutive month, and the overall economy grew for the 25th consecutive month,” in the U.S. through June.

“Manufacturing is also growing in Germany, India, and especially in China where ambitious public works projects are driving an intensive need for energy,” Sheth adds, while rising worldwide demand for consumer electronics, pharmaceutical and chemical products are also spurring a rise in energy costs.

“Pharmaceutical and chemical products are heavily petroleum-based, while many plastic and other components in PCs and smart phones also draw on petroleum products,” he reports. “Oil is the ultimate raw material— everything else from agricultural to fragrance products all represents value added activity.”

U.S. energy conservation activity is likely to have a limited impact on oil usage since the demand is global, Sheth notes. Despite that, the U.S. may be able to exert some downward pressure on pricing.

“America is still a leader in strategic assets like oil exploration and processing technology,” he explains. “If the federal government treated this competitive advantage the way it governs arms shipments, we could offer long-term contracts to oil producers in exchange for long-term price and delivery contracts for oil.”

The U.S. is also a leader when it comes to building refineries, and “it can insert itself as a nation downstream, offering its knowhow in exchange for long-term contracts at fixed prices,” according to Sheth. “We can also offer military technology against insurgents who attack oil pipelines and other assets. Finally, as a quick, but limited solution, the U.S. can build up its strategic reserves and release them as needed, much as the Federal Reserve tweaks the money supply by releasing or withdrawing funds in response to specific situations. Of course, it’s a lot easier to print money than it is to get oil.”

Goizueta assistant finance professor Ray Hill says the current price spikes stem from concern about the turmoil in Libya and other countries, rather than any significant changes in world oil supply.

“Some Libyan shipments have been disrupted, he says, but they amount to less than one percent of world daily consumption,” he observes. “Fear of more significant disruption in Libya and unrest spreading to other big producers like Iran has certainly led to speculative pressure on oil prices.”

“If political events in the Middle East do not lead to any cuts in production, (an important ‘if’) then the speculative price increase will be temporary,” according to Hill. “Unlike gold, oil is dirty and bulky so it is difficult to store. Speculation cannot drive oil prices for very long. Notwithstanding all the talk of financial speculators ‘driving’ the market, spot market demand and supply for physical oil must clear the market every day.”

He says tapping the U.S. strategic oil reserve, as President Obama has done, is a bad idea.

“Why should we make ourselves more vulnerable to a truly strategic interruption in oil supply (as we had in 1973) by using the reserve to counteract a temporary increase in price?” Hill asks. “And if events in the Middle East result in persistent cuts in production, rising prices may mean some unpleasant shocks to the economy in the short run, but long-term they’re likely to spur searches for new, more effective methods of extraction and usage, not to mention efforts aimed at establishing alternative energy sources. Releasing oil from the strategic reserve blunts this important price signal to the market.”

If the U.S. wanted to put downward pressure on oil prices, it could ease its restrictions on drilling in its off-shore waters like the Gulf of Mexico, he suggests.

“However, the effect of easing these restrictions would probably not show up in oil supply for some time so it would not be an immediate antidote,” he adds. “And, of course, there are environmental concerns which must be taken into account as well.”

Apart from the recent spike in prices driven by political events, the global economic recovery will drive demand higher and continue to exert so pressure on price increases over the longer run.

“Energy prices have tended to rise in the long run, but we’ve seen a lot of bounces down as well as up during the past 30 to 40 years,” he observes. “The fact is that people are bad at forecasting this trend, and no one can say exactly where prices will be ‘X’ years from now.”

MBA Students Add a “Keystone”

J. Michael Moore — Fri, 26 Aug 2011 11:00:29 +0000

MBA students in the Class of 2012 returned to campus for the first "Keystone" week, building on first-year experiences and setting goals for their final year and beyond. PHOTO: Tony Brenner

The Roman Arch was one of the most important architectural innovations of the ancient world.

Renowned for strength and style, the structure remains practical today thanks to the “Keystone” — a centerpiece that strengthens the arch by allowing the two sides to work together.

In similar fashion, the Full-Time MBA Program at Emory’s Goizueta Business School developed “Keystone Week” — an innovative program designed to marry the learning in a student’s first year and internship with long-term goals and application formed in the second, and last, year of study.

During Keystone (Twitter), students socialize, participate in community service and complete structured exercises designed to encourage strategic thinking about their final year in the program and the careers that follow. The week-long program, in its first year, began Sunday evening and concludes Friday with an alumni speaker challenging the class of 2012 to begin thinking about their legacy. One objective of Keystone is to formally merge returning second-year students with their classmates from the one-year MBA program preparing to enter the Fall semester.

A Keystone improv show was key in team-building activities that bring the one-year and two-year MBA classes together. PHOTO: Tony Brenner

Brian Mitchell, Associate Dean of the Full-Time MBA Program, said Keystone acts as the critical link between the first and second year of study and brings together the full Class of 2012 (two-year and one-year students). He also encourages community service and coordinated with Volunteer Emory to offer 11 sites around Atlanta for MBA students to do volunteer work Monday morning.

Keystone objectives also include personal growth goal setting by students. The newly introduced “Keystone Lecture” was delivered by renowned faculty member Ray Hill and focused on the current economic landscape and career advice for the soon-to-be MBA grads. Professor Hill was recently recognized by Businessweek as one of the “Most Popular Professors at Top Business Schools.”

“I don’t want Goizueta students thinking of their MBA experience as a linear journey,” Mitchell said. “When the first part is complete, you shouldn’t put it behind you and simply move on to the next thing. The pieces should work together, giving the entire experience more power and more meaning. That’s why the Keystone is so important.”

The Dean said Keystone creates the opportunity for students to “take the time to be strategic” about their next moves.

In a larger sense, it’s about legacy.

MBA students close Keystone week by hand-writing personal, five-year goals and sealing them in an envelope. Envelopes will be saved and displayed in the Goizueta building — not to be opened until the students return for their five-year class reunion.

“How are you going to apply what you’ve just experienced?” Mitchell says, referring to the knowledge gained by many MBAs in a fast-paced first year. ”We’re taking the time to work through how they’ve been impacted, what they’ve learned and how they will implement those lessons at Goizueta and in their post-MBA careers.

“It’s sharpening the saw at a very important point in their journey.”

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