Financing Capacity Investment Under Demand Uncertainty: An Optimal Contracting Approach


Manufacturing & Service Operations Management

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Capacity, Optimal Contracts, Financial Constraints, Newsvendor Model

We study the capacity choice problem of a firm whose access to capital is hampered by financial frictions in the form of moral hazard. The firm must therefore optimize not only its capacity investment under demand uncertainty, but also its sourcing of funds. Ours is the first study of this problem to follow an optimal contracting approach, where feasible source of funds are derived endogenously from fundamentals and include standard financial claims (debt, equity, convertible debt, call and put warrants, etc.) and combinations thereof. We characterize the optimal capacity level. First, we find conditions under which a feasible financial contract exists that achieves first-best. When no such contract exists, we find that under optimal financing, the choice of capacity sometimes exceeds strictly the efficient level. This runs counter to the literature on financing capacity investment in funds and the intuition that by raising the cost of external capital and hence the unit capacity cost, financial market frictions lower the optimal capacity level. We trace the value of increasing capacity beyond the efficient level to a bonus effect and a demand differentiation effect. In contrast to most of the literature on financing capacity, our results are robust to a change of financial contract

Financing Investment: The Choice between Bonds and Bank Loans


Management Science

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Départements : Finance

Mots clés : Debt structure, Capital structure, Investment, Credit supply, Competition,

We build a model of investment and financing decisions to study the choice between bonds and bank loans in a firm's marginal financing decision and its effects on corporate investment. We show that firms with more growth options, higher bargaining power in default, operating in more competitive product markets, and facing lower credit supply are more likely to issue bonds. We also demonstrate that, by changing the cost of financing, these characteristics affect the timing of investment. We test these predictions using a sample of U.S. firms and present new evidence that supports our theory

Herding and Social Media Word-of-Mouth: Evidence from Groupon

X. LI, L. WU

MIS Quarterly

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Départements : Information Systems and Operations Management, GREGHEC (CNRS)

Mots clés : Herding, word-of-mouth, social media, interaction effect, complementarity

Modern online retailing practices provide consumers with new types of real-time information that can potentially increase demand. In particular, showing past product sales information can reduce uncertainty about product quality, inducing consumers to herd. This effect could be particularly salient for experience goods due to their inherent high uncertainty about product quality. Social media word-of-mouth (WOM) can increase product awareness as product information spreads via social media, increasing demand directly and also amplifying existing quality signals such as past sales. This study examines the mechanisms behind the strategy of facilitating herding and the strategy of integrating social media platforms to understand the potential complementarities between the two strategies. We conduct empirical analysis using data from which sells goods in a fast cycle format of “daily deals”. We find that facilitating herding and integrating social media platforms are complements in generating sales, supporting that it is beneficial to combine the two strategies on social media-driven platforms. Furthermore, we find that herding is more salient for experience goods, consistent with our hypothesized mechanisms, while the effect of social media WOM does not differ between experience goods and search goods

How Do Firm Political Connections Impact Foreign Acquisitions? The Effects of Decision Makers’ Political and Firm Embeddedness


Global Strategy Journal

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Départements : Stratégie et Politique d’Entreprise, GREGHEC (CNRS)

Mots clés : political connections, non-market strategies, foreign acquisitions, French firms, mental models

Research summary: We examine how firm political connections established through the political embeddedness of senior decision makers affect firms’ foreign acquisition strategy. We argue that such political embeddedness affects the mental models of decision makers and, in turn, influences their preferences for particular strategies. We propose that political embeddedness leads to the formation of mental models that favor foreign acquisition strategies. We further argue that the firm embeddedness of politically-embedded decision makers alters their mental models, thereby mitigating their inclination for such strategies. We find evidence consistent with our mental models explanation using a sample of foreign acquisitions made by French publicly-traded firms during the 2009-2014 period. Overall, this study contributes to a better understanding of the mechanisms through which political connections impact global strategy. Managerial summary: We investigate how firm political connections affect firms’ foreign acquisition strategies. We argue that when firms have top decision makers with close connections to the government, they will make more foreign acquisitions. We further argue that this inclination towards foreign acquisitions is primarily driven by non-executive board members, with politically-connected executives appearing to be more reluctant to engage in such strategies. We find evidence consistent with these ideas when examining foreign acquisitions made by French publicly-traded firms managed by graduates of the prestigious ENA government school, which trains many government and senior civil servants in France

How Much Do Means Tested Benefits Reduce the Demand for Annuities?


Journal of Pension Economics and Finance

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Means-Tested Benefits, Occupational Pension, Annuity

We analyze the effect of means-tested benefits on annuitization decisions using an administrative dataset of pension wealth cash-out choices. Availability of means-tested payments creates an incentive to cash out pension wealth for low and middle income earners, instead of taking the annuity. Agents trade off the advantages from annuitization, receiving longevity risk insurance, to the disadvantages, giving up “free” wealth in the form of means-tested supplemental income. Our life-cycle model demonstrates that the availability of means-tested benefits substantially reduces the desire to annuitize especially for low and intermediate levels of pension wealth. In our empirical analysis we show that the model’s predicted fraction of retirees choosing the annuity is able to match the annuitization pattern of occupational pension wealth observed in Switzerland

Impact of Average Rating on Social Media Endorsement: The Moderating Role of Rating Dispersion and Discount Threshold


Information Systems Research

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Départements : Information Systems and Operations Management, GREGHEC (CNRS)

Incentive programs for reducing readmissions when patient care is co-produced


Production and Operations Management

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Départements : GREGHEC (CNRS)

Mots clés : co-productive services, hospital readmissions, pay-for-performance, bundled payment

To reduce preventable readmissions, many healthcare systems are transitioning from Fee-for-Service (FFS) to other reimbursement schemes such as Pay-for-Performance (P4P) or Bundled Payment (BP) so that the funder of a healthcare system can transfer to the hospital some of the financial risks associated with patient re-hospitalizations. To examine the effectiveness of different schemes (FFS, P4P, and BP), we develop a "health co-production" model in which the patient's readmissions can be "jointly controlled" by the efforts exerted by both the hospital and the patient. Our analysis of the equilibrium outcomes reveals that FFS cannot entice the hospital and the patient to exert readmission-reduction efforts. Relative to BP, we find that P4P is more "robust" in the sense that it can induce readmission-reduction efforts under milder conditions. However, BP can induce greater efforts compared to P4P. More importantly, we characterize the conditions under which BP (or P4P) is the dominant scheme from the funder's perspective. Finally, we find that patient cost-sharing can generate two benefits: (a) it provides incentive for patients to exert efforts; and (b) if not excessive, it can reduce the readmission rate

Introduction to Global Law, Legal Indicators and Legal Pragmatism


Journal of Legal Pluralism and Unofficial Law

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Départements : Droit et fiscalité

Inventory allocation models for a two-stage, twoproduct, capacitated supplier and retailer problem with random demand


International Journal of Production Economics

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Départements : Information Systems and Operations Management, GREGHEC (CNRS)

Mots clés : supply chain management, inventory management, capacity allocation, heuristic methods

The objective of this research is to develop an optimal inventory allocation methodology for a supply chain consisting of a capacitated retailer with limited shelf space, and two unreliable capacitated suppliers in an uncertain environment. We develop conceptual and analytical models that provide allocation preferences between shelf-space and warehouse in both deterministic and stochastic demand cases, and develop managerial insights based on them. For each case, we provide both a closed-form solution and a heuristic method, and illustrate the bounds on the optimal solution. Further, we show that the cost function is L-convex in some cases. Finally, we prove that the expected profit decreases as the variance of demand increases

Leadership and the Logic of Absurdity


Academy of Management Review

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Départements : Management et Ressources Humaines

Leaders are often thought to be instrumental to the performance of the organizations they lead. However, considerable research suggests that their influence over organizational performance might actually be minimal. These claims of leader irrelevance pose a puzzle: If leaders are relatively insignificant, why would someone commit to leading? Applying decision-making theory, this paper first considers justifying the decision to lead according to the Logics of Consequence and Appropriateness—the two principal decision-making logics underlying previous work on the motivation to lead. The paper then presents the Logic of Absurdity, a decision-making logic in which decision-makers knowingly choose to dedicate themselves to an irrational course of action. In terms of the decision to lead, a decision-maker employing the Logic of Absurdity acknowledges the likely futility of leading but decides to commit to leading, nonetheless. The paper concludes by considering when leaders are most likely to decide to lead according to the Logic of Absurdity and why doing so may result in leadership of exceptional originality, foolishness, intelligence, and madness