Observable and Verifiable

A look back at Facebook

noreply@blogger.com (Jeffrey Huang) — Sun, 12 Feb 2012 13:56:00 +0000

Overoptimistic company disclosures increase litigation risks

noreply@blogger.com (Jeffrey Huang) — Fri, 10 Feb 2012 01:34:00 +0000

Firms always choose rosy terms in their disclosure to please the shareholders or at least make them believe that the company is right on track, but could that optimitism go too far? A recent paper from The Accounting Review (here - subscription needed or here - working paper version) found evidence that firms that use unusually optimistic language in their disclosures to shareholders are more likely to be sued than similarly performing peer companies. Specifically, overly positive statements in earnings announcements - whether in press releases, conference calls, media interviews, or meetings with investors - are most often cited in plaintiffs’ complaints.

The authors found that in 91 percent of the earnings announcements that were analyzed, the portion quoted by plaintiffs was much more optimistic than the non-quoted portion, which, according to the authors, is the first concrete evidence for the intuition that plaintiffs target optimistic language when bringing actions against [a] firm. Since every firm is likely to make some optimistic statements, the authors have to further determine whether unusually optimistic tones lead to a higher risk of litigation, controlling for industry, size and performance-related effects. They did the comparison and found that sued firms used substantially more optimistic language in their announcements. They also found that, more specifically, a change of just one standard deviation in the “optimism score” given to each earnings announcement translated into a 75.9 percent increase in the likelihood of being sued.

HT: strategy+business.

Self deceit, self conceit in Chinese SOEs

noreply@blogger.com (Jeffrey Huang) — Thu, 29 Dec 2011 02:59:00 +0000

For the first time in my professional career, I attended a Chinese state-owned public company's annual meeting last week. During that meeting, the chief executive briefed the audience (the senior management team and highest-ranked divisional managers across the country and overseas) on the overall performance of the company in the past year, described its challenges as well as opportunities ahead, and laid out its specific goals and targets for the coming year.

It's not surprising to hear both praises and criticism from the speech, but upon hearing one of the praises, I couldn't help myself drifting a bit far away because I really found that praise a little over the top and even somewhat disturbing. It went like this, "...our financing department has made marvelous achievement in the past year, having successfully secured large loans from major banks during the time of an extreme credit tightening". Interesting, huh? Is this really a marvelous achievement?! Or is it just something they are born with, something they are entitled to, or something they can easily do but others can't? Everyone knows that major SOEs in China could easily get cheap credit from big banks which, by the way, are also state owned. Sometimes the banks are even begging them to borrow money from them!

I know there could be some variation among SOEs themselves too in terms of the capacity to get cheap loans - scale, region, industry - all those things matter, but comparing to millions of small and medium sized firms in the private sector, that label, SOE, alone is like a golden pass to seemingly endless funding. Now this unfair ability somehow became a "marvelous achievement"?!

It's safe to say that this kind of image burnishing is not merely confined to this particular company. I certainly didn't see this as an achievement of Chinese SOEs at all, what I see from this specific case is management delusion, self deceit, self conceit, and maybe most important of all, a need to change.

11 Groundbreaking Inventions of 2011

noreply@blogger.com (Jeffrey Huang) — Sat, 24 Dec 2011 01:29:00 +0000

See the list from BusinessInsider. Siri, Kinect 2, and the Medical Mirror have made onto this list.

Paper on China's institution

noreply@blogger.com (Jeffrey Huang) — Fri, 23 Dec 2011 03:49:00 +0000

The University of Hong Kong professor Xu Chenggang has written a paper about the fundamental institutions of China's economic reform and development. This over-70-page article provides one of the latest and most comprehensive analysis of the institutional account for China's miraculous economic development in the past three decades. He argued that it is China's regionally decentralized authoritarian system - a combination of political centralization and economic regional decentralization - that can explain the "China puzzle", i.e., why a seemingly ill-suited institution could achieve such spectacular growth and poverty reduction. In addition, he pointed out that grave social problems are also determined by this governance structure.

Here is the abstract:

China's economic reforms have resulted in spectacular growth and poverty reduction. However, China's institutions look ill-suited to achieve such a result, and they indeed suffer from serious shortcomings. To solve the "China puzzle," this paper analyzes China's institution—a regionally decentralized authoritarian system. The central government has control over personnel, whereas subnational governments run the bulk of the economy; and they initiate, negotiate, implement, divert, and resist reforms, policies, rules, and laws. China's reform trajectories have been shaped by regional decentralization. Spectacular performance on the one hand and grave problems on the other hand are all determined by this governance structure.

Full text can be found here (log in needed) and here.

World democracy index 2011

noreply@blogger.com (Jeffrey Huang) — Fri, 23 Dec 2011 03:27:00 +0000

25 nations are placed under "full democracies", most of which are in Europe. The U.S. ranks only 19th, falling from 17th last year. Hong Kong and Singapore are 80th and 81st, respectively, after Malaysia (71st), The Philippines (75th) and even Ghana (78th).

Among BRIC nations, India ranks highest, at 39th. Followed by Brazil (45th) and Russia (117th). China fell from last year's 136th place to 141st this year. North Korea is bottom.

See the full ranking here by the Economist Intelligence Unit.

Return on Luck

noreply@blogger.com (Jeffrey Huang) — Mon, 19 Dec 2011 06:50:00 +0000

Jim Collins, the author of business megasellers Built to Last and Good to Great, wrote a new book recently with Prof. Morten Hansen of UC Berkeley and INSEAD, entitled Great by Choice, part of which tackles the long intriguing problem in business strategy - Why do some people and their businesses thrive in uncertainty, even chaos and others don't? And what is the role luck plays in this context?

Luck is an abstract and elusive concept which is hard to quantify. However, Collins and Hansen tried to study it more systematically by defining luck as an event which satisfies some three basic criteria. Then they counted the number of "luck events" - good luck, bad luck, the timing of luck, and so on - for each subject across the window of the study. They found out that for enterprises that were eventually built into companies which outperformed their industries by a factor of 10, or 10Xers, as the authors dubbed, they weren't generally "luckier" than the rest. Then the question is, what on earth differentiates 10Xers from the comparison cases?

Their answer is that, luck - whether good or bad - is not the determining factor for a business to thrive in any circumstance, what really matters is how you manage luck and make choices in order to create a huge return on it, i.e., Return on Luck (ROL). To illustrate this, real world examples of how people choose differently when facing "luck events" are adopted, such as Bill Gates, Progressive insurance, Southwest Airlines among others, which are palatable and of course make their stories more compelling. But since choices are always made by people, does this mean different outcomes are in the end driven by different people? If so, unless clear links between the difference in people and difference in ROL are made explicit, it may still be hard to really opertionalize the notion of ROL.

Another interesting and somewhat counterintuitive point the authors have raised is that people or companies that follow a disciplined approach in turbulent times often outperform those who constantly adjust to adapt to the environment. The metaphor is built around the story of two explorers who set out separately to reach the South Pole in 1911. The one who set ambitious goals for each day but never overshoot on good days or undershoots on bad ones eventually won the race. So are companies like Progressive Insurance, Intel and Southwest Airlines. But from a theoretical point of view, why and when does discipline trump adjustment and adaptation? Is it a result of some optimization process and how? Is discipline working more effectively as environment becomes more turbulent and chaotic? In industries that are less affected by disruptive and chaotic change, would companies with strict disciplines still outperform those without?

Here are some reviews and interviews from WSJ, FT, Forbes, Knowledge@Wharton (part 1, 2) and INSEAD Knowledge.

The dismal and evil science

noreply@blogger.com (Jeffrey Huang) — Mon, 19 Dec 2011 02:26:00 +0000

See the first NYTimes column from the Standup economist.

Well, it's not a more rigorous proof of how trade can make the society worse-off (some may have already seen his "constructive proof"), it's his empirical "proof" of how economics can make the society worse-off. In a nutshell, he basically summarized some key findings from his recent JEBO paper:

1. Econ majors donate less than non-econ majors; (well documented, though)
2. Selfishness is not nurtured via taking econ classes among econ majors - taking econ classes did not have a significant negative effect on later giving by these students; (the "selfish gene" may have guide them to choose econ as their major in the first place)
3. Selfishness can be nurtured via taking econ classes among non-econ majors - taking econ classes did have a significant negative effect on later giving by these students. (negative externality)

Conclusion. For the society as a whole, taking economics classes makes it more selfish. So is economics a dismal science? Yes indeed, but moreover, it's kind of evil too.

Papers to watch

noreply@blogger.com (Jeffrey Huang) — Fri, 09 Dec 2011 13:06:00 +0000

2012 AEA Annual meeting is less than a month away. For organizational economists and strategy researchers, these following papers may merit your attention:

New Developments in the Organization of Firms

Scale, Scope, and Performance

RENATA KOSOVA (Cornell University)

FRANCINE LAFONTAINE (University of Michigan)

BO ZHAO (University of Michigan)

Organization and Information: Firms' Governance Choices in Rational-Expectations Equilibrium

ROBERT GIBBONS (Massachusetts Institute of Technology)

RICHARD HOLDEN (University of Chicago)

MICHAEL POWELL (Massachusetts Institute of Technology)

Organize to Compete

RICARDO ALONSO (University of Southern California)

WOUTER DESSEIN (Columbia University)

NIKO MATOUSCHEK (Northwestern University)

A Dynamic Approach to Span of Control: Theory and Evidence

VALERIE SMEETS (Aarhus University)

FREDERIC WARZYNSKI (Aarhus University)

MICHAEL WALDMAN (Cornell University)

Experiments in Firms

Once and Done: Leveraging Behavioral Economics to Increase the Bottom Line of Non-Profits

AMEE KAMDAR (University of Chicago)

STEVEN LEVITT (University of Chicago)

JOHN LIST (University of Chicago)

CHAD SYVERSON (University of Chicago)

Working from Home or Shirking from Home? Evidence from a Chinese Field Experiment

NICK BLOOM (Stanford University)

JAMES LIANG (CTrip)

JOHN ROBERTS (Stanford University)

JENNY YING (Stanford University)

Management, Capital and Firm Organization among Small-Scale Enterprises in Ghana

DEAN KARLAN (Yale University)

CHRIS UDRY (Yale University)

Ex Post (in)efficient Negotiation and Breakdown of Trade

ANTOINETTE SCHOAR (Massachusetts Institute of Technology)

RAJKAMAL IYER (Massachusetts Institute of Technology)

Contracts and Institutions

The Role of Contractual Publicity in Impersonal Trade

BENITO ARRUÑADA (Universitat Pompeu Fabra)

Relational Renegotiation: Theory and Evidence from the Movie Industry

ROBERT GIBBONS (Massachusetts Institute of Technology)

DANIEL BARRON (Massachusetts Institute of Technology)

RICARD GIL (Johns Hopkins University)

KEVIN J. MURPHY (University of Southern California)

Fixed versus Open Prices: A Choice between Countering Opportunism and Creating Value

GIORGIO ZANARONE (CUNEF)

DESMOND LO (Santa Clara University)

Business Associations and Private Ordering

JENS PRÜFER (Tilburg University)

Legal and Economic Foundations of Organization

What is Law? A Coordination Model of the Characteristics of Legal Order

GILLIAN K. HADFIELD (University of Southern California)

BARRY R. WEINGAST (Stanford University)

On the Evolution of Collective Enforcement Institutions: Communities and Courts

SCOTT E. MASTEN (University of Michigan)

JENS PRUFER (Tilburg University)

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Focal Transactions and Theories of Firm and Market Organization

STEVEN TADELIS (University of California-Berkeley)

OLIVER E. WILLIAMSON (University of California-Berkeley)

Capital Structure and Firm Organization

Innovation, Capital Structure, and the Boundaries of the Firm

DIRK HACKBARTH (University of Illinois-Urbana-Champaign)

RICHMOND D. MATHEWS (Duke University)

DAVID T. ROBINSON (Duke University)

Becker and Posner on Occupy Wall Street

noreply@blogger.com (Jeffrey Huang) — Mon, 21 Nov 2011 02:42:00 +0000

See here and here.

Holdup Problem, Airline Version

noreply@blogger.com (Jeffrey Huang) — Mon, 21 Nov 2011 02:38:00 +0000

It happened half way - in Vienna - through a flight from India to England. An airline took advantage of both time- and location-specificity to force its passengers to agree to pay $200 more for the service.

See here and here.

Now, for the ugly?

noreply@blogger.com (Jeffrey Huang) — Tue, 15 Nov 2011 14:07:00 +0000

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Price of being ugly: $230,000 over life time.

FT/Goldman Sachs Award

noreply@blogger.com (Jeffrey Huang) — Fri, 04 Nov 2011 16:57:00 +0000

This annual best business book award goes to Abhijit Banerjee and Esther Duflo's book "Poor Economics" which describes radical new and sometimes ingenious ways of tackling global poverty. While previous research on ending poverty has debated heavily on whether foreign aid does more good than harm to poor nations (a la Jeffrey Sachs) or the other way around (a la William Easterly), the authors of this book - two MIT economists - by having conducted various randomized controlled trials on all kinds of aid programs all over the world (fighting AIDS, malaria, malnutrition, etc.), have offered a closer and more granular look at this problem, and find that whether these programs are effective really depends on how things are done. The reason behind this is that poor people often face very complicated situations that aid providers haven't fully considered but otherwise may completely alter their incentives to act "properly". If these constraints as well as many other important factors such as the local culture were taken into great consideration, things may well be moving in the right direction, and sometimes even in more cost efficient ways.

Five other shortlisted books are: Exorbitant Privilege by Berkeley economist Barry Eichengreen; Good Strategy/Bad Strategy by UCLA strategy guru Richard Rumelt; The Quest by energy expert Daniel Yergin; Triumph of the City by Harvard economist Edward Glaeser; and Wilful Blindess by Margaret Heffernan.

See some extracts from these books here.

A new book on Deng Xiaoping

noreply@blogger.com (Jeffrey Huang) — Tue, 25 Oct 2011 05:33:00 +0000

Harvard professor Ezra Vogel has written a new book on Deng Xiaoping, the former Party leader and the chief architect of China's opening-up policy, entitled "Deng Xiaoping and the Transformation of China". According to former US National Security Advisor Zbigniew Brzezinski, this book is "not just a definitive biography of a world-class leader, but also the most authoritative and riveting account of the secretly contrived U.S.-Chinese strategic accommodation of 1978 and of how that in turn facilitated China's domestic transformation."

Here are three book reviews from The Wall Street Journal, The New York Times and The Economist.

Joking about bankers? Not really.

noreply@blogger.com (Jeffrey Huang) — Tue, 25 Oct 2011 04:55:00 +0000

Blackstone co-founder Stephen Schwarzman joked about Brian Moynihan, CEO of Bank of America, by drawing a parallel between Mr. Moynihan and his brother, Patrick:

"Patrick runs a Catholic boarding school in Haiti,...,so their parents must be so proud to see two of their boys each running an underfunded, nonprofit, organization."

Of course, it's not just one banker - Brian Moynihan alone - who is facing tough times, they all are, apparently.

China currency debate

noreply@blogger.com (Jeffrey Huang) — Sat, 15 Oct 2011 15:44:00 +0000

Two voices on China's currency issue appeared in Wednesday's US republican presidential debate.

Jon Huntsman - "I don't subscribe to the Donald Trump school or the Mitt Romney school of international trade. I don't want to find ourselves in a trade war. With respect to China, if you start slapping penalties on them, based on countervailing duties, you are going to get the same thing in return because they are going to say 'because of Quantitative Easing part I and part II, you are doing a similar thing to your currency'. And you are going to find yourselves in a trade war very very quickly."

Mitt Romney - "I am afraid that people who've looked at this [China's currency issue] in the past have been played like a fiddle by the Chinese. And the Chinese are smiling all the way to the bank, taking our currency and taking our jobs and taking a lot of our future...You people say, well, we might have a trade war with China, and think about that, we buy this much stuff from China, they buy that much stuff from us. You think they want to have a trade war?...I mean, this is a time when we are being hollowed out by China, that is artificially holding down their prices, and that's having a MASSIVE impact on jobs here."

Romney's view is clearly not shared by Economists Nouriel Roubini and Richard McGregor.

Tribute? Anger?

noreply@blogger.com (Jeffrey Huang) — Thu, 13 Oct 2011 02:29:00 +0000

Usually, those two don't mingle. But,

A tribute to Steve Jobs

noreply@blogger.com (Jeffrey Huang) — Thu, 13 Oct 2011 02:07:00 +0000

Charlie Rose gave a tribute to Steve Jobs last week with Google chairman Eric Schmidt, Netscape co-founder Marc Andreessen, WSJ columnist Walter Mossberg, writer Walter Isaacson, CEOs Lawrence Ellison and Bob Iger, Apple co-founder Steve Wozniak and journalists Ken Auletta and David Carr.

iFans, you can watch the entire program here.

Be it resolved...

noreply@blogger.com (Jeffrey Huang) — Thu, 13 Oct 2011 01:39:00 +0000

...North America faces a Japan-style era of economic stagnation.

This is an upcoming event from the Munk Debate. The pro side of the debate: Paul Krugman and David Rosenberg. The con side: Larry Summers and Ian Bremmer.

Previous debates on the Munk Debate include topics like whether the 21st century belongs to China, is foreign aid to the developing countries doing more harm than good, whether the climate change is mankind's defining crisis, and more.

Battle against yuan

noreply@blogger.com (Jeffrey Huang) — Wed, 12 Oct 2011 01:53:00 +0000

US Senate just passed a bill that would lead to trade sanctions against countries whose currencies are manipulated. One currency on the legislators' minds is, of course, the yuan. The past two weeks has witnessed China's currency moving in exact the opposite directions in the onshore and offshore markets. During such a bumpy ride, we already saw that Beijing has sent its goodwill to the US to avoid future diplomatic and trade conflicts, but the passing of such a bill could only make things worse - for both countries. The question here is that, is yuan being manipulated?

The chart in today's The Economist speaks far louder than politics does. It suggests, "the recent relationship between China's currency and America's trade deficit with China is not what China hawks in the Senate think it is. Rather than a cheap yuan leading to a flood of Chinese imports, the yuan has actually strengthened as the deficit has widened. There are many things American companies dislike about the way business is done in China: intellectual-property theft, the impossibility of winning government contracts, baffling rules on corporate ownership and so on. However the place for fixing these things is the World Trade Organisation, not Congress."

Will this bill alter anything in a significant way? No, says Wall Street Journal columnist Tom Orlik. He further suggests that neither US politics nor China's "narrower self interest" could derail the fundamental strategy on the yuan.

The Nobel goes to...

noreply@blogger.com (Jeffrey Huang) — Mon, 10 Oct 2011 11:41:00 +0000

Thomas Sargent and Christopher Sims for "their empirical research on cause and effect in the macroeconomy".

I have only very limited knowledge on them, but surely Sargent is the most renowned scholar in the "rational expectation school" after Robert Lucas, and Sims has developed and promoted some important and widely used empirical methods in modern macroeconometrics, such as VAR (vector autoregression).

For those on the promising list but didn't get a phone call from Adam Smith or someone with a typical Swedish accent, nevermind, your chance is getting bigger.

update: Robert Lucas discusses both of the laureates here. He says while Sargent has put a lot of emphasis on policy analysis and the economics to build models, Sims is focusing exclusively on using econometric methods to do "economic forecasting without much economics".

Few can...

noreply@blogger.com (Jeffrey Huang) — Thu, 06 Oct 2011 15:55:00 +0000

...be remembered like this:

a "visionary leader", an "iconic legend", a "creative genius", "an original", the "most innovative entrepreneur", "a historical figure on the scale of a Thomas Edison or Henry Ford", "the greatest computer innovator in history", and simply, a "hero".

RIP, Steve Jobs (1955-2011).

A talk on democracy and economic growth

noreply@blogger.com (Jeffrey Huang) — Mon, 19 Sep 2011 15:37:00 +0000

A nice talk of the subject from MIT Sloan professor Yasheng Huang. In it, he mainly argues that 1) better infrastructure and stronger government are not necessary for higher economic growth; 2) human capital (literacy rate, life expectancy, gender equality, etc.) is way more important in explaining China's economic miracle; and 3) it is the change/improvement in democracy that explains economic growth, not the mere dichotomy of a totalitarian or a democratic nation.

In the comments section, many have pointed out that Prof. Huang is in fact defending the Chinese authoritarian regime by using biased data and pictures (like showing pics of Shanghai's skyscrapers and Mumbai's slums at the same time). Not at all. On the contrary, he has questioned the contribution of infrastructure to economic growth in the first place. By doing so, he actually challenged the view that a strong government is a necessary condition for high economic growth. Later, he tries to establish his own argument that human capital is a more important factor in explaining China's economic miracle. In the end, he again became clear that it is the change/improvement in democracy that explains economic growth, not the mere dichotomy of a totalitarian or a democratic nation. He believes India will eventually benefit from its democratic momentum, and for China, he is hoping for a faster and more radical political reform because that's the "right direction".

Of course, he may have done these arguments in much greater detail instead of some two-country one-way comparisons, but given that talk's limited time frame, I think he has done a fairly good job in explaining himself.

Cash for clunkers architect named CEA Chairman

noreply@blogger.com (Jeffrey Huang) — Wed, 31 Aug 2011 09:47:00 +0000

Princeton labor economist Alan Krueger was named as the new Chairman of the Council of Economic Advisors for President Obama. But some of his empirical studies don't quite go along with Mr. Obama's economic plans, particularly with respect to jobless benefits. It seems that Mr. Krueger is more of a "regular economist" in thinking about labor policies, but the real problem for him now is how to reconcile the difference.

Would stimulus work?

noreply@blogger.com (Jeffrey Huang) — Thu, 25 Aug 2011 15:16:00 +0000

Since the publication of the General Theory by John Maynard Keynes, modern macroeconomics has long been criticized for a lack of strong micro-foundations. Chicago and Austrian school economists, for instance, claimed that there is too much aggregation in the Keynesian perspective which unfortunately ignores the basic drivers behind all economic activities, i.e., human incentives. Without a clear understanding of incentives behind human action and how these incentives interact and properly "aggregate", economic facts could be misinterpreted and wrongly theorized, and policy based on its prescription could be dangerous and disastrous.

In his WSJ op-ed today, Harvard economist Robert Barro revisits this decades-old topic. He firmly supports the view of what he calls "regular economics", where incentives play a central role in shaping overall economic activities.

Professor Barro, once a follower of Keynes, argues in this short essay that Keynesian stimulus transfer programs, such as food stamps, will not lead to an expansion of the overall economy - that one could get back more than one puts in - as Keynesian economists have long believed. The reason why stimulus transfer won't work is two folds. One, these transfers to the people with earnings below designated levels would motivate less work effort by reducing their reward from working; and two, more taxes are needed to finance these transfers. And these added tax burdens may not only reduce the work effort of taxpayers, but also lower overall investment levels since returns after taxes could be diminished. The consequence? The overall GDP pie would be reduced, rather than enlarged.

Although little empirical evidence exists in favor of either school, some scattered evidence could well support the view of "regular economics": an increase in unemployment insurance eligibility to 99 weeks in 2009 would have an adverse effects on unemployment - the fraction of the long-term unemployed (more than 26 weeks) has jumped since 2009 - to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. However, as Barro suggests, more empirical evidence of this type is needed to get more reliable conclusions.

Debate could heat up, again (see here).