Research
Some Hedge Funds Fudge the Numbers
May/June 2013
In their examination of hedge fund data from 2000 to 2010, four researchers have discovered that some hedge fund managers may manipulate the prices of stocks they hold in order to have better returns to report to investors. These researchers include Itzhak Ben-David of Ohio State University's Fisher College of Business in the U.S., Francesco Franzoni of the University of Lugano and the Swiss Institute in Switzerland, Augustine Landier of the Toulouse School of Economics in France, and Rabih Moussawi of the Wharton School of the University of Pennsylvania in the U.S.
The researchers found an increase in trading activity among some hedge funds on the last day of the month and quarter, which artificially inflates their returns. Specifically, stocks most often held by hedge funds see an average abnormal return of 0.30 percent on the last day of trading. About half of that increase comes in the last 20 minutes of trading. Those returns disappear in the first ten minutes of trading the next day, but only after the hedge funds can report them to investors.
The practice is called "portfolio pumping," says Ben-David. Not all hedge funds pumped their portfolios, but the researchers found evidence that hedge funds that did so in one quarter were more likely to do it the next—especially if it meant the difference between showing a slightly negative and a slightly positive return. Hedge funds could make an impact on a stock with as little as US$500,000 in trades.
Portfolio pumping was common before 2001, when the Securities and Exchange Commission began indicting hedge fund managers who engaged in the practice. But this study suggests that the practice isn't completely extinct. "This is a legal gray area," says Ben-David. "If a hedge fund were to be seen doing this systematically, the SEC would be interested in investigating."
Even so, it's important for investors to be aware of the practice and interpret such end-of-period trading accordingly. "Investors always hear most about the top ten funds, so fund managers all want to appear in that list. That gives a strong incentive to hedge funds to manipulate when they are near the top," says Ben-David.
"Do Hedge Funds Manipulate Stock Prices?" is forthcoming in the Journal of Finance and is available for preview at ssrn.com/abstract=1763225.
Rethinking Moore's Law
May/June 2013
Ever since the first computer was developed in the mid-20th-century, scientists have tracked the rate of innovation according to Moore's Law, which holds that the memory capacity of a personal computer doubles every 18 months. Companies often apply Moore's Law more broadly to all technological innovation as a way to guide their technological and research and development investments. However, several researchers argue that Moore's Law actually does not apply to most industries—they have defined a new way to measure the speed of technological progress.
The researchers include Gareth James and Gerard Tellis of the University of Southern California's Marshall School of Business in Los Angeles; Ashish Sood of Emory University's Goizueta Business School in Atlanta, Georgia; and Ji Zhu from the department of statistics at the University of Michigan in Ann Arbor.
The researchers studied 26 technologies in six markets, ranging from the lighting industry to automobile manufacture. They say that their model, Step and Wait (SAW), predicted the path of innovation more reliably in the six markets than Moore's Law or other metrics. SAW predicts that technological progress occurs not in a smooth upward trajectory, but in large steps or jumps in growth. Those steps are followed by periods when technologies stay relatively stable.
That rate of growth is different for different technologies, say the authors. Of the components of a laptop, tablet, or smartphone—such as the memory and screen—some could be on a "long-wait-short-step" cycle. Others may be on a "short-wait-long-step" cycle.
The authors note that managers could use the SAW method to better assess threats from competing technology. They point to the lithium battery, developed in the early 2000s. In 2006, when Tesla released its car powered by a lithium-ion battery, GE was still pouring billions of dollars into developing hydrogen fuel cell technology. GE didn't change course to develop a car with a lithium-ion battery until 2010.
"Many firms were taken by surprise by the sudden dominance of lithium-ion," the authors write. "Managers could possibly have presaged the improvements in lithium-ion technology before 2006 by using our model," saving billions of dollars in the process.
"Predicting the Path of Technological Innovation: SAW vs. Moore, Bass, Gompertz, and Kryder" appeared in the November/December 2012 issue of Marketing Science.
Why Women Seek European MBAs
May/June 2013
As of November 2012, 141 North American women were enrolled in five prominent European MBA programs, including London Business School in the U.K., HEC Paris and INSEAD in France, IE Business School in Spain, and SDA Bocconi in Italy. But what influenced their decisions to study in Europe? The Forté Foundation interviewed a selection of these women and also conducted an online survey for a study commissioned by the London Business School.
Of the 141 women, 65 participated in the online survey. For 91 percent, the main factor was the diversity of their classmates. For 80 percent, the primary reason they enrolled in a European MBA program was to build stronger international networks. The survey also found that each woman fell into one of three distinct categories: Dual Background (40 percent), Traveler (35 percent), or Candid American (25 percent).
Dual Background women were born outside of North America, immigrated to the U.S. or Canada as children, speak a first language other than English, often have science or engineering degrees, and seek MBAs to advance their careers. Many choose to study in Europe because they have family living there, but plan to return to North America after graduation.
Travelers were born in North America but have an interest in global cultures. They have studied topics such as economics and international relations, and often have studied or worked abroad. They want to earn their MBAs to move up in the corporate sector, and most will consider positions in Europe, Asia, or North America after graduation.
Finally, Candid Americans have lived and worked their entire lives in North America, earned degrees in areas such as finance, and had successful careers with finance or professional services companies. This group considered MBA programs in the U.S., but decided to take a risk and enroll in a European school. They are earning their MBAs to change careers—and possibly countries—or even start their own businesses.
This project aimed to better understand women's motivations for studying business, not just studying overseas, says Elissa Ellis Sangster, executive director of the Forté Foundation. "It's an important step in building the pipeline of women business leaders and reaching them as early as possible with solid information about business education."
The Stress of Healthy Eating
May/June 2013
It may not seem that a simple box of cereal could induce stress in consumers. But according to researchers from the department of marketing at Copenhagen Business School in Denmark, trying to decide whether or not a food is good for them can instill anxiety in buyers.
Torben Hansen, Thyra Uth Thomsen, and Suzanne Beckmann surveyed 504 consumers to measure a type of stress the trio calls "post-purchase health-related dissonance." Such obviously healthy foods as fruit and vegetables do not cause anxiety, but the more complex the food item—a frozen dinner, boxed cereal, or beverage, for example—the more likely healthconscious consumers are to feel stress. The more stress they feel after a purchase, the more likely they are to choose a different product in the future.
The researchers suggest that marketers can lessen consumers' post-purchase health-related dissonance by simplifying product information on packaging and highlighting health benefits. They also refer to a second approach supported by the Danish Institute for Informative Labeling, which advocates teaching consumers to read product labeling more confidently.
"Antecedents and Consequences of Consumers' Response to Health Information Complexity" was published in the January issue of the Journal of Food Products Marketing.
