Research Wire

RETHINKING SOCIAL SECURITY

Some experts argue that privatizing the social security system would be cheaper and more efficient. A new study of social security systems in 49 countries by Wharton’s Olivia Mitchell cautions that a privately managed system in the U.S. would likely be more expensive than the current publicly managed program. However, the higher costs of a private program are likely to generate better and more diverse services including the opportunity to self-direct pension asset investments and possibly invest in higher-return assets, the likelihood of more frequent reporting to participants and greater overall satisfaction. Mitchell found that total administrative expenses for the U.S. social security program are under 1 percent of annual expenditures, placing the U.S. at mid-range for developed nations, and nearly 10 times below averages for developing countries. She also analyzed expenses associated with other financial institutions that deliver retirement income, including public and private pension, and 401(k) plans, mutual funds and insurance programs. The lowest-cost, privately managed plans have annual expenses of 1 percent of assets or less.

Olivia Mitchell; Administrative Costs in Public and Private Retirement Systems

IN-STORE COUPONS VS. BONUS BUYS

While some brands are eliminating coupons altogether, in-store coupons and straight off-the-shelf discounts (bonus buys) are still among the most effective methods for generating incremental sales and fatter profit margins. But which is more effective? According to a study led by Marketing Professor Stephen J. Hoch, in-store coupons, on average, lead to a 35 percent greater increase in sales and, more importantly, a 108 percent greater increase in retailer profits for the promoted item than do bonus buys offering the same level of discount. Profits are greater with coupons because of an average redemption rate of 55 percent.

Hoch suggests that the rates are low because there three kinds of shopper: coupon-clipping experts who always redeem their coupons; passive shoppers who are oblivious to promotions and would buy anyway; and a large group of price-sensitive novices, only a fraction of whom remember to redeem coupons at checkout. The findings, based on five field tests in an 86-outlet supermarket chain, reinforce a basic tenet of economic theory, says Hoch — profits will always be greater if the seller can charge different prices to consumers depending on their willingness to pay.

Stephen J. Hoch and Sanjay K. Dhar; Price Discrimination Using In-store Merchandising

DO CEOS USE ENOUGH DEBT?

CEOs relatively unfettered by corporate governance mechanisms, (e.g. monitoring by the board of directors, performance-based incentives, or the threat of dismissal or takeover) tend not to use as much debt as shareholders would like, according to research by Wharton’s Philip Berger and colleagues. Firm leverage usually remains below the level that is optimal for shareholders unless external shocks to the CEO’s security occur. The researchers find that negative shocks to CEO security — an attempt to acquire the firm, the involuntary departure of the prior CEO, or the arrival of a major stockholder/director — increases the ratio of debt to assets from 25 percent to 35 percent, on average.

Philip G. Berger, Eli Ofek and David L. Yermack; Managerial Entrenchment and Capital Structure Decisions

ANALYSTS’ REPORTS AND OVERPRICED STOCKS

Why do firms issuing stock experience unusually low returns over the first years following issuance? According to research by Wharton’s Richard Sloan and Patricia Dechow, and Harvard’s Amy Sweeney, the stock is simply overpriced to begin with. By examining long-run earnings forecasts issued by sell-side equity analysts on firms making equity offerings, the researchers found that these forecasts were systematically over-optimistic. They also found that the over-optimistic earnings forecasts appear to be incorporated in stock prices. In addition, analysts issue particularly over-optimistic long-term earnings forecasts when they are employed by the lead underwriter of the firm’s equity offering. Investment banks typically argue that they set up ‘Chinese walls’ between their underwriting and investment advisory businesses to prevent conflicts of interest. The researchers say, however, that the study’s results are consistent with investment banks using their sell-side analysts to help promote their underwriting clients.

Patricia M. Dechow, Richard G. Sloan and Amy P. Sweeney; The Role of Affiliated Analysts’ Long-term Earnings Forecasts in the Overpricing of Equity Offerings.

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