Are Investors Naive About Incentives?

Traditional economic analysis of markets with asymmetric information assumes that uninformed agents account for the incentives of informed agents to distort information. We analyze whether investors in the stock market internalize such incentives. Stock recommendations of security analysts are likely to be biased upwards, particularly if the issuing analyst is affiliated with the underwriter of the recommended stock. Using the NYSE Trades and Quotations database, we find that large (institutional) traders account for the upward bias and exert no abnormal trade reaction to buy recommendations, and significant selling pressure in response to hold recommendations. Small (individual) traders do not account for the upward shift and exert significantly positive pressure for buys and zero pressure for hold recommendations. Moreover, large traders discount positive recommendations from affiliated analysts more than from unaffiliated analysts, while small traders do not distinguish between them. The naive trading behavior of small investors induces negative abnormal portfolio returns.

Dynamic Inventory Control with Satisfaction-Dependent Demand

In this paper, we consider the discrete multiperiod newsvendor dynamic inventory control problem where customers follow a simple satisfaction-based demand process, where their probability of demand depends on whether their demand was satised the last time they demanded a product, and observe the differences between optimal policies and myopic policies which do not directly consider how inventory policies can affect future demand. We conrm the intuitive result that inventory managers should tend to order more than the myopic policy when satised customers are more likely to demand product, and less than the myopic policy when satised customers are less likely to demand. Moreover, we and that, when choosing a fixed order policy, even an empirically myopic solution with perfect demand distribution information will move away from the optimum towards a suboptimal solution.

The preservation of likelihood ratio ordering under convolution

AbstractUnlike stochastic ordering (⩾st), which is preserved under convolution (i.e., summation of independent random variables), so far it is only known that likelihood ratio ordering (⩾lr) is preserved under convolution of log-concave (PF2) random variables. In this paper we define a stronger version of likelihood ratio ordering, termed shifted likelihood ratio ordering (⩾lr↑) and show that it is preserved, under convolution. An application of this closure property to closed queueing network is given. Other properties of shifted likelihood ratio ordering are also discussed

Broker Trading Volume: A Conflict of Interest?

Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However forecast accuracy is also significantly associated with higher volume. When analysts change brokerage firms, they bring trading volume with them, influencing trading volume at the new brokerage house. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy

A new lower bound approach for single-machine multicriteria scheduling

The concept of maximum potential improvement has played an important role in computing lower bounds for single-machine scheduling problems with composite objective functions that are linear in the job completion times. We introduce a new method for lower bound computation; objective splitting. We show that it dominates the maximum potential improvement method in terms of speed and quality

The Stock Selection and Performance of Buy-Side Analysts

Prior research on equity analysts focuses almost exclusively on those employed by sell-side investment banks and brokerage houses. Yet investment firms undertake their own buy-side research, and their analysts face different stock selection and recommendation incentives than their sell-side peers. We examine the selection and performance of stocks recommended by analysts at a large investment firm relative to those of sell-side analysts from mid-1997 to 2004. We find that the buy-side firm's analysts issue less optimistic recommendations for stocks with larger market capitalizations and lower return volatility than their sell-side peers, consistent with their facing fewer conflicts of interest and having a preference for liquid stocks. Tests with no controls for these effects indicate that annualized buy-side Strong Buy/Buy recommendations underperform those for sell-side peers by 5.9% using market-adjusted returns and by 3.8% using four-factor model abnormal returns. However, these findings are driven by differences in the stocks recommended and their market capitalization. After controlling for these selection effects, we find no difference in the performance of the buy- and sell-side analysts' Strong Buy/Buy recommendations

The effects of subsidies on increasing consumption through for-profit and not-for-profit newsvendors

Subsidy programs are widely offered in both developing and developed countries to encourage consumption of products that generate positive social, health, and environmental externalities. We study the effect of subsidies on product consumption under uncertain market demand. To reach a target consumer population, the program sponsor may subsidize a for-profit or a not-for-profit firm on each unit of the product purchased by the firm or on each unit of the sale generated by the firm. We show that subsidy programs provide stronger incentives to a not-for-profit firm than to its for-profit counterpart in inducing a large consumption whenever the sponsor is having a very limited budget or a very generous budget. When subsidizing a not-for-profit firm, the sponsor should always choose the purchase subsidy over the sales subsidy because the former can induce a larger consumption than the latter with the same subsidy spending. However, this is not always true when the subsidy program is administered through a for-profit firm, unless the firm is a price taker in the market or the sponsor has a limited budget. Our analysis leads to new theoretical development of price-setting newsvendor problem for both the for-profit and not-for-profit operations under subsidy.National Natural Science Foundation of China. Grant Numbers: 71471107, 7143100

Reducing work-in-process inventory in certain classes of flexible manufacturing systems

In this paper, we establish that maintaining a balanced workload on each machine over time stochastically minimizes the work-in-process inventory in certain types of flexible manufacturing systems (FMSs) with finite or infinite common input buffer storage and an ample buffer et each machine. The results obtained here complement those obtained by [Stecke and Morin, 1985], in which it is established that balancing workloads maximizes expected production, again for the. same, particular types of FMSs. [Stecke and Morin, 1985] treats a static FMS loading problem, while this paper addresses a dynamic problem which considers three strategies to control the release of parts into the system.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/26086/1/0000162.pd