Imagine borrowing from someone else’s stockpile of corporate stocks, then selling shares, later buying them back and returning them, keeping any profit. That’s what short sellers do on a regular basis, and they tend to out-perform the analysts.

The practice is called short selling, and research by two Texas A&M University business professors and a former PhD student shows that ordinary investors can profit by trading with the short sellers.

Lynn Rees

Their research investigated whether short sellers and analysts differ in how they use information that predicts future returns. It appears short interest significantly anticipates the expected direction, while analysts tend to positively recommend stocks with high growth, high accruals, and low book-to-market ratios, despite these variables having a negative association with future returns.

“Investors frequently observe and use recommendations from analysts on whether to buy or sell a stock,” says accounting Professor Lynn Rees. “But, our research suggests that analysts do not always use accounting information, such as accounting accruals and cash flows, in forming their recommendations; whereas, short sellers appear to do much better in using these signals.”

Co-authors are Edward P. Swanson, holder of the Durst Chair in Accounting; and Mays doctoral graduate Michael Drake of BYU. The researchers have presented the paper to professionals, as well as academic audiences, and a NYC capital management company that uses short interest as an input in an investment model.

Edward Swanson

A low percentage of investors do short selling, but a very high percentage of investors would be interested in what they are doing, Rees says, because the short sellers tend to do better than the market. “Our evidence suggests that using the level of short interest combined with analysts’ forecasts allows investors to make more profitable investment decisions,” he says.

For more information about this research, contact Rees at, or Swanson at

“Trading against the prophets: Using short interest to profit from analyst recommendations,” by Michael Drake, Lynn Rees and Edward P. Swanson, was published in The Accounting Review.

Categories: Research Notes

Businesses competing with larger companies — particularly those that enter a market by acquiring an established business — will fare better if they differentiate themselves from the “behemoths” rather than imitate them or take them head-on, suggests research on the topic.

The researchers found that competitors who imitated the large newcomer had poorer performance, which was counter to prior research.

Alina Sorescu

The phenomenon of acquiring a company to enter a marketplace — common in banking, pharmaceuticals and technology — hasn’t been studied as thoroughly as the path companies take to enter a market through other means, such as introducing a new product, says Alina Sorescu, an associate professor of marketing and Mays Research Fellow.

She and several other researchers tackled the topic in the paper “Behemoths at the Gate: How Incumbents Take On Acquisitive Entrants (And Why Some Do Better Than Others),” which has been accepted for publication in Journal of Marketing.

The research was centered on the banking industry because firms and the actions they take in this industry are well documented, Sorescu says. The researchers looked at 1995-2003 bank data from the FDIC, such as deposit summaries, and interviewed banking officials. The data covers 839 acquisitions in 583 Metropolitan Statistical Areas in the U.S. banking industry. The research specifically focuses on how banks modify their product mix when a large bank enters their market through an acquisition. In this context, the product mix of banks includes various types of loans such as, for instance, commercial and industrial loans and loans secured by real estate. Changes in product mix were assessed at the two-year and three-year marks after the acquisitions.

Results indicate that incumbents are more likely to align their product mix strategy with that of the behemoth if: (1) the incumbent is large; (2) the behemoth’s past performance has been strong; and (3) the market served by the incumbent is small. The size of the market tends to set the tone of the competition, Sorescu says. “The smaller the market, the more likely the incumbent is to imitate the acquirer,” she observes. “It’s like a big fish in a small pond making a big splash — they compete with the same small base of customers.”

Sorescu concludes it’s a bad idea to go head-on with the acquirer.

“It’s best to try to diverge from the acquiring company, even though it is a threatening presence and it is tempting to try to mimic what it is doing,” she says. “You assume the larger corporations have identified a strong path and an advisable product mix, but you must differentiate yourself from it in order to survive. The small firms that imitate the large firms may not be able to offer the same products and services as efficiently as large firms do, and they could suffer more harm than if they focused on what they already do well.”

For more information, contact Sorescu at

The research paper, “Behemoths at the Gate: How Incumbents Take On Acquisitive Entrants (And Why Some Do Better Than Others),” was in press in late 2011 at Journal of Marketing.

It is a collaboration among Alina Sorescu, Prokriti Mukherji, Jaideep Prabhu and Rajesh Chandy. Prokriti Mukherji is senior research associate at the Carlson School of Management, University of Minnesota. Jaideep Prabhu is Jawaharlal Nehru Professor of Indian Business at Judge Business School, University of Cambridge. Rajesh Chandy is Professor of Marketing and Tony and Maureen Wheeler Chair in Entrepreneurship at London Business School.

Categories: Research Notes

Bootlegged concert recordings, undocumented immigrants building houses in the U.S., New York City street vendors selling designer knock-offs—these are examples of a largely unexamined economic activity, the informal economy. These economic activities are considered illegal yet still viewed as socially acceptable or legitimate by some substantial segment of society.

Because nearly nine percent of the GDP of the United States (and perhaps more than 60 percent in some African and South American countries) is involved in the informal economy, it is a topic worth exploring, says Duane Ireland, Distinguished Professor of Management and Conn Chair in New Ventures Leadership. He and two Mays colleagues (David Sirmon and Laszlo Tihanyi) and Justin Webb (a recent graduate of the Mays Ph.D. program who is now at Oklahoma State University) have examined how the informal economy works and the reasons some ventures thrive, despite barriers of legality and legitimacy.

The illegality of bootleg DVDs in most countries has not prevented them from becoming a significant source of income for many entrepreneurs willing to take the risk of operating in an informal economy.
The illegality of bootleg DVDs in most countries has not prevented them from becoming a significant source of income for many entrepreneurs willing to take the risk of operating in an informal economy.

The cornerstone of their research is a matrix for categorizing entrepreneurial activities based upon legality and legitimacy. While some entrepreneurial activities in the informal economy are considered illegal yet legitimate (e.g., the sale of counterfeit products or use of undocumented workers as labor to build a home), other entrepreneurial activities fit different classifications of legality and legitimacy. For example, tobacco-based and adult-oriented products in the United States are legal yet considered illegitimate by large societal groups.

In contrast, illegal drugs and human trafficking are considered illegitimate by the overarching society. Distinguishing among different classifications of legality and legitimacy is important to understanding the mechanisms through which these entrepreneurial activities are able to exist, grow, and be sustained even while occurring outside of the law.

Ireland says one aspect that he finds fascinating is how a business can move between categories over time, due to the intentional actions of the business or due to shifts in the definitions of legality and legitimacy. Take for instance, alcohol sales in the United States in the 1920s during prohibition. Though it was illegal, speakeasies and bootlegged liquor became quite commonplace and legitimate. Then in 1933, the industry once again was legalized. This is a great example of the fluid nature of the boundaries in this area.

In a similar vein, the production of marijuana is an example of the porous nature of the matrix, as it is moving from illegal and illegitimate in the United States to illegal but legitimate, or legal but illegitimate, depending on some groups’ norms, values, and beliefs and various state and local laws.

Another example is Napster ten years ago and during its initial operations. It was alleged that Napster allowed users to violate copyright laws by sharing audio files freely. The online service was hugely successful from 1999 to 2001 when it was shut down due to issues of legality. At least initially, similar allegations suggest that Youtube violated copyright laws by not removing items from its site that were posted by individuals who did not have permission from the owners of the postings. However, for some large groups and with an increasing expectation of free content on the Internet, Youtube is still seen as legitimate, despite the fact that some postings may not be legal with respect to copyright laws.

The paper “You say illegal, I say legitimate: entrepreneurship in the informal economy,” appeared in Academy of Management Review in 2009 and was a finalist for best paper that year.

Categories: Research Notes

Toward the end of their relationship, Enron was paying nearly $50 million each year to Arthur Andersen for services, including both internal and external audit functions. Did the risk of losing such a large client lead to the ethical compromises that Andersen was willing to make in colluding in the enormous fraud scandal that eventually brought down both firms?

Nathan Sharp

Yes, said analysts, who recommended internal and external audit functions in public companies be split between firms to prevent economic bonding and cooperation in fraud. Created soon after, the Sarbanes-Oxley Act prohibited external audit firms of public companies from having any involvement in the internal audit function. However, research from Nathan Sharp, assistant professor of accounting, suggests this move may have been a mistake.

Sharp and colleagues investigated companies in the pre-SOX era to determine if companies that outsourced or co-sourced internal audit work to their external auditor had a higher risk of misleading or fraudulent external financial reporting. The result? This relationship actually lowered accounting risk.

The reason is simple. When a single firm is involved in both audits, it’s harder for fraud to go undetected, as there is greater communication between both audit teams. Knowledge spillover occurs because the internal audit team provides insights into the company that an external audit team might miss. This information sharing is less likely to happen when the teams are from competing firms or when the internal audit function is kept entirely in-house.

There is much debate about this topic says Sharp, and he and his colleagues are not suggesting SOX be changed. However, if you talk to public accounting firms, the opinions are clear: It’s good sense to make it easier to share information between internal and external audit teams to create the most complete financial snapshot of a company.

Sharp’s article, “Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get It Wrong?” coauthored with Doug Prawitt and David Wood, is currently under review at Contemporary Accounting Review.

Categories: Research Notes

When you hear of corporate scandals, you might assume that the perpetrators of the crime were acting out of self-interest—that they cooked the books or covered up information to get rich or move up the corporate ladder. But what if there was another motivation that has nothing to do with personal gain?

A recent study from Elizabeth Umphress, associate professor of management and Mays research fellow, looks at motivations for unethical behavior that benefits the corporation (called “unethical pro-organizational behavior,” or UPB) and how it may be tied to the degree of organizational identification the individual feels.

The researchers define UPB as activity that is not specified by formal job descriptions; is either illegal or morally unacceptable to the larger community; and includes acts of commission (e.g. cooking numbers to boost analyst projections and stock values) and omission (e.g., withholding information about the hazards of a pharmaceutical product).

In three studies Umphress and colleagues conducted, the results were consistent: there was not a direct relationship between organizational identification and UPB. However, there was a relationship between the two if a third element, positive reciprocity, was involved.

Findings indicate that if an individual feels a need to reciprocate when something has been done for them, and also strongly identifies with the organization, then they are more likely to commit UPB. Employees who strongly identify with their organization feel obligated to protect and maintain their membership in the organization.

They also find that people can be primed to commit UPBs—when they showed a test group a video that enhanced their feeling of organizational identification, they were more likely to agree to UPBs (if they scored highly on measures of positive reciprocity) than those who had seen an unrelated video.

Both organizational identification and positive reciprocity are good traits for an employee to possess, says Umphress. They can make an employee more diligent, productive and loyal. Managers need to be aware, however, that they can interact in this negative way. Umphress stressed that hiring decisions need not be made on this criteria, but that managers should be aware of the degree of these traits in their employees and understand that in the right circumstance “the employee might feel compelled or feel that it’s their duty to do something unethical…to help protect the organization.”

In previous literature, researchers have focused predominately not on unethical behavior that boosted the organization, but rather behavior that harms it, such as stealing or sabotage. This study is one of the first to examine this unique relationship.

Umphress’s article, “Unethical behavior in the name of the company: the moderating effect of organizational identification and positive reciprocity beliefs on unethical pro-organizational behavior,” written with coauthors Marie Mitchell and John Bingham, appeared in Journal of Applied Psychology in 2010.

Categories: Faculty, Research Notes

Employee wellness programs have often been viewed as a nice extra, not a strategic imperative. But the data demonstrate otherwise, according to a team of researchers led by Leonard L. Berry of Mays Business School at Texas A&M University, Ann M. Mirabito of Baylor University and William B. Baun of the University of Texas MD Anderson Cancer Center.

Their research shows that the return on investment on comprehensive, well-run employee wellness programs is impressive — sometimes as high as six to one.

Leonard Berry

The findings are compiled in a comprehensive piece in the December issue of Harvard Business Review titled “What’s the Hard Return on Employee Wellness Programs?” The subhead reads, “The ROI data will surprise you, and the softer evidence may inspire you.”

To achieve those kinds of results, employers cannot merely offer workers a few passes to a fitness center and nutrition information in the cafeteria, the team reports. The most successful wellness programs are supported by six essential pillars: engaged leadership at multiple levels; strategic alignment with the company’s identity and aspirations; a design that is broad in scope and high in relevance and quality; broad accessibility; internal and external partnerships; and effective communications, Berry says.

The team studied 10 organizations that have financially sound workplace wellness programs. They conducted interviews with senior executives, managers of health-related functions and focus groups of middle managers and employees — in all, about 300 people. The team found companies in a variety of industries — including Johnson & Johnson, Lowe’s, H-E-B and Healthwise — have built their employee wellness programs on all six pillars and have reaped big rewards in the form of lower costs, greater productivity and higher morale. Those benefits are not easy to achieve, and verifiable paybacks are never a certainty, but the track record inspires emulation, especially when the numbers are studied, the report states.

Behind the research are Berry, the Presidential Professor for Teaching Excellence who also holds the rank of Distinguished Professor of Marketing as well as the M.B. Zale Chair in Retailing and Marketing Leadership at Mays Business School at Texas A&M ; Mirabito, an assistant professor of marketing at the Hankamer School of Business at Baylor; and Baun, manager of the wellness program at the MD Anderson Cancer Center, a director of the National Wellness Institute and a director of the International Association for Worksite Health Promotion.

Berry has spent more than 30 years studying corporate service quality, and conducted an in-depth service study of the Mayo Clinic to uncover fresh and innovative approaches to serving  patients. He also serves as a Professor of Humanities in Medicine in the College of Medicine at The Texas A&M University System Health Science Center.

Categories: Research Notes

Two things can dramatically decrease the level of pollution likely to be created by a firm, says new research. No, it’s not complicated machinery for carbon sequestration, or more government regulation. It’s much simpler: family ownership and financial rewards.

Luis Gomez-Mejia

New research suggests that firms where a single family owns at least five percent of the voting stock, pollution levels are much lower. Also, firms pollute less when the CEO is given long-term financial incentives for pollution control.

To come to these results, researchers analyzed toxic emission reports from the Environmental Protection Agency, examining the structure and actions of hundreds of companies.

When it comes to family ownership, researchers hypothesize that when a family’s image and reputation are at stake, there is a greater drive to be ecologically sound. Institutional investors can tend to have a more short-term view of the business, while family owners are more concerned with its overall quality and longevity, says Luis Gomez-Mejia, the Benton Cocanougher Chair in Business and Mays management professor, who has co-authored two studies on the topic of corporate pollution reduction.

Other research on family-owned firms and “socio-emotional wealth” dovetails with Gomez-Mejia’s: leaders of family-owned companies are more likely to derive a sense of identity from the firm, desire to be seen as generous and pro-social within a community, and strive to maintain group integrity within a community.

These factors create a non-economic incentive for environmental efficacy, particularly if the family and the business are concentrated in one location as the family usually cannot escape being the face of the business.

When firms are not family owned, Gomez-Mejia says corporate pollution reduction is still a matter of incentives; however this time, the incentive is financial rather than socio-emotional. “To the extent that the CEO is rewarded for investing in pollution control and also pollution prevention, the more likely it is that the firm will engage in those efforts,” he says.

Furthermore, the structure of the incentives matter: stock and option incentives are more effective than cash in pollution reduction. This is due to the long-term nature of both meaningful environmental policies and the interest-bearing securities. That is, continued pollution control leads to continued corporate wellbeing, which leads to continued growth of securities held by the CEO.

Gomez-Mejia admits there is one limitation to the research: the EPA only requires emission reports for American companies and many of the corporations involved in the study are multinational. “A remaining question is to what extent…the CEOs may have an incentive to move or shift the pollution elsewhere,” he says. He is planning a follow-up study to investigate this question, but notes that data collection is difficult, as pollution reporting in many developing countries is not accurate.

“Socio-economic wealth and corporate responses to institutional pressures: Do family-controlled firms pollute less?” is a collaboration between Pascual Berrone, Cristina Cruz, Gomez-Mejia, and Martin Larraza-Kintana, published in Administrative Science Quarterly in 2010.

“Environmental performance and executive compensation: an integrated agency-institutional perspective,” is a collaboration between Pascual Berrone and Gomez-Mejia, published in the Academy of Management Journal in 2009.

Categories: Research Notes

Even during a time of recession and cutbacks, manufacturing firms must continue to invest in marketing and R&D if they want to remain successful, says a new study from Texas A&M University.

Researchers examined manufacturing firms on the Fortune 500 list for a period of 25 years, weighing a variety of firm and industry specific factors to arrive at their conclusion. They found that investing capital in both marketing and research and development have a direct positive effect on a manufacturing firm’s survival as a member of the elite Fortune 500 list—the firms that account for nearly three-fourths of the U.S. GDP.

 Rajan Varadarajan

Venkatesh Shankar

In fact, they found that if a Fortune 500 manufacturing firm were to incrementally spend one percent of its average sales revenues on marketing and another one percent on R&D for five years, that investment would reduce the firm’s risk of leaving the list by 27.8 percent.

This is significant, says researcher Venkatesh Shankar, Coleman Chair in Marketing at Mays, as “the firms that stay on the Fortune 500 list enjoy a lot of benefits,” such as lower cost of capital and increased reputation and brand equity. Fortune 500 firms also see increases in their share prices specifically associated with their entry into this list.

Alternately, a fall from the list can be a precursor to negative events, like bankruptcy and hostile takeover.

Using this investment strategy can “significantly decrease the hazard of exiting the Fortune 500,” says Shankar. This strategy would also apply to companies that aspire to be on the list.

“These firms pour billions of dollars into R&D and marketing, yet no study has examined this important issue in depth,” say researchers. “The findings are important not just for marketers, but for senior executives in manufacturing, operations, innovation management, and top management as well.”

Not all firms benefit equally by the two areas of investment, however. Firms that are in high growth industries, such as technology, see a greater impact from marketing investment. Firms in slow growing or mature industries, such as cosmetics or packaged food, see greater returns from investment in R&D. Similarly, in any industry during periods of high growth, investing marketing capital is more effective and in times of low growth, investing R&D capital is more effective.

Gautham Gopal Vadakkepatt '02
Vadakkepatt ’02

Shankar says that these findings broadcast an important message for managers: view marketing and R&D as expenses, but rather long-term investments that need to be employed strategically in industries and periods of high and low growth. Many firms are cutting back in these areas to boost short-term profitability during a rocky economic period, he says. “And that can be very dangerous, because while…they may see immediate results, over the long run it could be detrimental.”

The research was conducted by Shankar and colleagues Gautham Gopal Vadakkepatt ’02, a recent graduate of the Mays PhD program, and Rajan Varadarajan, department head, Distinguished Professor of Marketing, and Ford Chair in Marketing & E-Commerce. The Marketing Science Institute has accepted their paper, “A study of the factors affecting the survival of manufacturing firms in Fortune 500: The asymmetric roles of marketing capital and R&D capital,” for publication.

Categories: Research Notes

When it comes to disclosure of financial misstatements in a corporate press release, companies do better to keep things quiet. The less prominent the news of the error, the fewer class-action lawsuits will result. Furthermore, the greater the prominence of the news, the greater the decline in market value for the company.

Edward Swanson

Edward Swanson, professor and Nelson D. Durst Chair in Accounting, and Senyo Tse, KPMG Professor of Accounting, along with Rebecca Files, formerly a PhD candidate at Mays, now an assistant professor at the University of Texas at Dallas, looked at how 919 firms announced misstatements between 1997 and 2002.

They separated announcements into three levels of prominence: high (headline of a press release), medium (body of a press release, but no mention in headline); and low (footnote of a press release, a.k.a. “stealth disclosure”).

They found that that firms providing less prominent press release disclosure of a restatement are rewarded with a less negative return at the announcement. Also, companies providing less disclosure are less likely to be sued for securities fraud.

Senyo Tse

The research indicates that lowering the prominence of disclosure by one level reduces the likelihood of a lawsuit by about half. The researchers controlled for other factors to isolate the effect of the placement of the announcement. They also controlled also for the severity of the misstatement. No differentiation was made about whether the restatement was due to aggressive reporting versus unintentional accounting errors.

Though it seems obvious that not trumpeting the company’s errors would be the safest policy, the researchers note that there are several reasons why managers continue to prominently announce financial errors. One possibility is that restatements occur infrequently, so managers have little experience that would allow them to anticipate how investors and litigators will react. Another possibility is that companies that value forthright communication may assume that placing the announcement anywhere other than the headline would be seen as deceptive.

As press releases are the primary timely disclosure medium for most companies, the findings of this study should be of interest to investor relations executives and other corporate managers with responsibility for disclosure communication. The researchers also suggest that regulators, especially the SEC, may want to issue guidelines to standardize press release disclosures so firms will not be rewarded for providing less prominent disclosure of accounting restatements. However, the researchers warn that such guidelines should not simply require headline disclosure for all restatements, since this could increase the number of frivolous lawsuits.

For more information

For further information, contact Swanson at or Tse at

The article “Stealth disclosure of accounting restatements” appeared in The Accounting Review in 2009.

Categories: Research Notes

Good news for retailers: a new study indicates that you can increase sales without dropping prices too much or too often and cutting into your profit margins. How? By placing items frequently purchased in tandem closer together or inducing the purchase of one item by displaying related items closer.

Venkatesh Shankar

Retailers have long been aware that the sales of one item can impact sales of another item, but until recently, not much was known about the degree of this relationship. A team of researchers, including Coleman Chair Professor in Marketing Venkatesh Shankar, looked at sales data for chips and cola (two items often consumed together) in a chain of grocery stores. To examine the effect of proximity on sales, they analyzed data on different placements of the items in 180 stores over 2.5 years.

When they moved chips one aisle closer to colas, sales of both items increased an average of 0.7 percent. When they moved the items one aisle further apart, sales decreased an average of 1.4 percent. When the items were arranged facing each other in the same aisle, sales of both increased 9.2 percent.

Simply changing the placement of these items led to a lift in sales that would be equivalent to running a price-cut promotion, without any loss in profit, says Shankar.

The significance of this study is that it can enable retailers to better manage their profits. Retailers frequently manage categories within a store separately, when their sales could be improved by a more holistic approach across categories. Sometimes selling less in one category means selling more in another category, thus increasing net profits. Retailers must consider these cross-category effects to maximize sales, says Shankar.

While the study examined food items, Shankar says the model he and colleagues created to predict how placement will affect sales could be employed in any retail setting, from electronics to clothing.

This research has value for manufacturers as well as retailers, as in the packaged consumer goods market, manufacturers often partner with retailers in promoting their items. By understanding cross-category sales effects, retailers and manufacturers can work together to plan more effective merchandising and promotions. This is especially relevant to manufacturers that own products in multiple categories, such as PepsiCo, which owns Pepsi (beverages) and Frito-Lay (snacks). Integrated marketing of these items leads to higher sales than independent promotion.

The lift in sales of these items from the aisle and display placements of these two items was not equal, though, notes Shankar. Moving the chips and colas closer together did impact sales of each—but it impacted sales of colas more. Why? Consumer behavior. Shankar theorizes that consumers don’t often eat chips without a drink; however they do drink cola without needing an accompanying snack.

Another finding of the study was that not all brands were impacted equally by the change in aisle placement: when the items were moved closer together, stronger brands (Coke and Pepsi) experienced a greater sales lift than weaker brands (RC Cola and the store brand cola). Shankar expects that the reason for this may be that the second purchase is more of an impulse item. As the decision to buy the second item is made rapidly, shoppers tend to buy the more well known brand.

This information can be useful to consumers as well as retailers, says Shankar. Smart shoppers need to know what tactics are being employed by retailers to entice them to buy more than they had planned so that they can avoid overspending.

For more information

For further information, contact Shankar at

The article, “Cross-category effects of aisle and display placements: a spatial modeling approach and insights,” appeared in Journal of Marketing in May 2009.

Categories: Research Notes