Advertisement

Economic Policy, Complex Adaptive Systems, Human-Computer-Interaction and Managerial Psychology: Popular-Index Ecosystems

  • Michael I. C. Nwogugu
Chapter

Abstract

During 1990–2017 there was substantial debate about the nature and extent of earnings management by companies included in popular stock indices (such as S&P-500, Nikkei-225, MSCI-1500 and DAX-100 companies). These popular indices have created “Popular-Index Ecosystems,” which are a critical economic policy issue because they increase systemic risk and financial instability, and they affect managerial psychology and group decisions in large and medium-sized companies. This article contributes to the literature by (i) providing evidence of, and surveys in, endemic earnings management, asset quality management and tax evasion by “Popular-Index companies”; (ii) characterizing “Popular-Index Ecosystems” and the effects of such systems on the business climate in general; (iii) introducing new theories of corporate governance, managerial psychology, networks and risk.

Keywords

Economic policy Popular-Index Ecosystems” Managerial psychology Human-computer interaction Corporate governance Risk effects 

Bibliography

  1. Anderson, K., Brooks, C., & Katsaris, A. (2010). Speculative bubbles in the S&P 500: Was the tech bubble confined to the tech sector? Journal of Empirical Finance, 17(3), 345–361.Google Scholar
  2. Andersson, T., Haslam, C., Lee, E., & Tsitisianis, N. (2007). Financialized accounts: Share buy-backs, mark to market and holding the financial line in the S&P 500. Accounting Forum, 31(2), 165–178.Google Scholar
  3. Andersson, T., Haslam, C., Lee, E., Katechos, G., & Tsitsianis, N. (2010). Corporate strategy financialized: Conjuncture, arbitrage and earnings capacity in the S&P500. Accounting Forum, 34, 211–221.Google Scholar
  4. Apple, Inc.’s annual/quarterly financial statements for 2010–2015.Google Scholar
  5. Bargeron, L., Lehn, M., & Zutter, C. (2010). Sarbanes-Oxley and corporate risk taking. Journal of Accounting and Economics, 49, 34–52.Google Scholar
  6. Bernard, L. (1926a). Primary and derivative groups. In An introduction to social psychology (Chapter 26, pp. 411–425). New York: Henry Holt and Co. http://www.brocku.ca/MeadProject/Bernard/1926/1926_26.html
  7. Bernard, L. (1926b). Primary and derivative attitudes and ideals. In An introduction to social psychology (Chapter 27, pp. 425–437). New York: Henry Holt and Co. Available at: https://www.brocku.ca/MeadProject/Bernard/1926/1926_27.html
  8. Bernard, L. (1936). The conflict between primary group attitudes and derivative group ideals in modern society. American Journal of Sociology, 41(5), 611–623.Google Scholar
  9. Beuselinck, C., Deloof, M., & Vanstraelen, A. (2010). Earnings management contagion in multinational corporations (Working paper).Google Scholar
  10. Biondi, B. J. (2009). Dangerous liaisons: Collective scienter in SEC enforcement actions. New York University Journal of Law & Business, 6(1), 1–4. http://centerforfinancialstability.org/research/bondi/090109_BondiNYUJournal.pdf
  11. Blackrock. (2014, December). Dealing with divergence – 2015 investment outlook. Available at: https://www.blackrock.com/corporate/en-us/literature/whitepaper/bii-2015-investment-outlook-us.pdf
  12. Bloomberg. (2014, October 10). S&P 500 companies spend almost all profits on buybacks. http://www.bloomberg.com/news/articles/2014-10-06/s-p-500-companies-spend-almost-all-profits-on-buybacks-payouts
  13. Bouwman, C. (2011). Corporate governance propagation through overlapping directors. Review Financial Studies, 24(7), 2358–2394.Google Scholar
  14. Brisker, E., Çolak, G., & Peterson, D. (2013). Changes in cash holdings around the S&P 500 additions. Journal of Banking & Finance, 37(5), 1787–1807.Google Scholar
  15. Carlson, R., & Vogel, T. (2006). Restricted stock versus stock options: The case of Jones Apparel Group, Inc. Issues in Accounting Education, 21(4), 449–459.Google Scholar
  16. Carow, K., Heron, R., Lie, E., & Neal, R. (2009, August 12). Option grant backdating investigations and capital market discipline. Journal of Corporate Finance.Google Scholar
  17. Chakrabarti, E., Huang, W., et al. (2005). Price and volume effects of changes in MSCI indices – Nature and causes. Journal of Banking & Finance, 29(5), 1237–1264.Google Scholar
  18. Chan, H. W. H., & Howard, P. F. (2002). Additions to and deletions from an open-ended market index: Evidence from the Australian all ordinaries. Australian Journal of Management, 27, 45–74.Google Scholar
  19. Chan, J., Ngai, P., & Selden, M. (2013a). The politics of global production: Apple, Foxconn and China’s new working class. New Technology, Work and Employment, 28(2), 104–105.Google Scholar
  20. Chan, K., Kot, H., & Tang, G. (2013b). A comprehensive long-term analysis of S&P 500 index additions and deletions. Journal of Banking & Finance, 37(12), 4920–4930.Google Scholar
  21. Chen, H. G., & Singal, N. V. (2006). Index changes and unexpected losses to investors in S&P 500 and Russell 2000 index funds. Financial Analysts Journal, 62(4), 31–47.Google Scholar
  22. Chen, A., Cheng, L., & Cheng, K. (2009). Intrinsic bubbles and Granger causality in the S&P 500: Evidence from long-term data. Journal of Banking & Finance, 33(12), 2275–2281.Google Scholar
  23. Chiu, P., Teoh, S., & Tian, F. (2013). Board interlocks and earnings management contagion. The Accounting Review, 88(3), 915–944.Google Scholar
  24. Christoffersen, J., Plenborg, T., & Robson, M. (2014). Measures of strategic alliance performance, classified and assessed. International Business Review, 23(3), 479–489.Google Scholar
  25. Cichello, M., & Kieschnick, R. (2005). Product market competition, regulation, and financial contracts. The Quarterly Review of Economics and Finance, 45(1), 1–17.Google Scholar
  26. Claudiu, B. (2013). Formal representation of corporate governance principles and codes. Procedia – Social and Behavioral Sciences, 73, 744–750.Google Scholar
  27. Dash, S. (2002). Price changes associated with S&P 500 deletions: Time variation and effect of size and share prices. New York: Standard & Poor’s.Google Scholar
  28. Dash, S., & Blitzer, D. (2004). Index effect revisited: What happened to the post-addition price pop? New York: Standard & Poor’s.Google Scholar
  29. Deck, C., & Schlesinger, H. (2014). Consistency of higher order risk preferences. Econometrica, 82(5), 1913–1943.Google Scholar
  30. Denis, D., McConnell, J., Ovtchinnikov, A., & Yu, Y. (2003). S&P 500 index additions and earnings expectations. Journal of Finance, 58, 1821–1840.Google Scholar
  31. Dey, A. (2010). The chilling effect of Sarbanes-Oxley: A discussion of Sarbanes-Oxley and corporate risk taking. Journal of Accounting and Economics, 49, 53–57.Google Scholar
  32. Elfenbein, D., & Lerner, J. (2012). Exclusivity, contingent control rights, and the design of internet portal alliances. Journal of Law, Economics, and Organization, 28, 45–67.Google Scholar
  33. Ernst & Young. (2014). Share-based payment (Revised July 2014).Google Scholar
  34. Erwin, R., & Miller, J. (1998). The intra-industry effects of open market share repurchase: Contagion or competitive? Journal of Financial Research, 21, 389–406.Google Scholar
  35. Franzen, L., Spizman, J., & Suh, J. (2014, September). Added pressure to perform: The effect of S&P 500 index inclusion on earnings management. http://cba.lmu.edu/media/lmucollegeofbusinessadministration/cbaugprograms/Added%20Pressure%20to%20Perform.pdf
  36. Fried, J. (2011). Share repurchases, equity issuances, and the optimal design of executive pay. Texas Law Review, 89, 1112–1120.Google Scholar
  37. García-Pérez, A., Yanes-Estévez, V., & Oreja-Rodríguez, J. (2014). Strategic reference points, risk and strategic choices in small and medium-sized enterprises. Journal of Business Economics and Management, 21(3), 431–449.Google Scholar
  38. Gawer, A., & Henderson, R. (2007). Platform owner entry and innovation in complementary markets: Evidence from Intel. Journal of Economics & Management Strategy, 16(1), 1–34.Google Scholar
  39. Geppert, J., Ivanov, S., & Karels, G. (2010). Analysis of the probability of deletion of S&P 500 companies: Survival analysis and neural networks approach. The Quarterly Review of Economics and Finance, 50(2), 191–201.Google Scholar
  40. Grechuk, B., & Zabarankin, M. (2014). Risk averse decision making under catastrophic risk. European Journal of Operational Research, 239(1), 166–176.Google Scholar
  41. Haeussler, C., & Higgins, M. (2014). Strategic alliances: Trading ownership for capabilities. Journal of Economics & Management Strategy, 23(1), 178–203.Google Scholar
  42. Hagedoorn, J., & Hesen, G. (2009). Contractual complexity and the cognitive load of R&D alliance contracts. Journal of Empirical Legal Studies, 6, 818–847.Google Scholar
  43. He, J., & Tian, X. (2013). The dark side of analyst coverage: The case of innovation. Journal of Financial Economics, 109(3), 856–878.Google Scholar
  44. Hines, J. R. (1999). Three sides of Harberger triangles. Journal of Economic Perspectives, 13(2), 167–188.Google Scholar
  45. Jahmani, Y., Niranjan, S., & Toney, S. (2014). Earnings management in recession and recovery periods (Working paper). Available at: http://www.aabri.com/SC2015Manuscripts/SC15056.pdf
  46. Jia, Z. (2014). Essays on dividend equivalent rights and CEO compensation (PhD thesis). Submitted to the Graduate Faculty of the Louisiana State University Agricultural and Mechanical College, Louisiana. http://etd.lsu.edu/docs/available/etd-06032014-164025/unrestricted/Jia_Diss.pdf
  47. Kappou, K., Brooks, C., & Ward, C. (2008). A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500’s ‘gold seal’. Research in International Business and Finance, 22(3), 325–350.Google Scholar
  48. Karamychev, V., & van Reeven, P. (2009). Retail sprawl and multi-store firms: An analysis of location choice by retail chains. Regional Science and Urban Economics, 39(3), 277–286.Google Scholar
  49. Karpoff, J. M., Lee, D. S., & Martin, G. (2008a). The cost to firms of cooking the books. Journal of Financial and Quantitative Analysis, 43, 581–612.Google Scholar
  50. Karpoff, J. M., Lee, D. S., & Martin, G. (2008b). The consequences to managers for cooking the books. Journal of Financial Economics, 88, 193–215.Google Scholar
  51. Kim, J. B., & Zhang, L. (2014). Financial reporting opacity and expected crash risk: Evidence from implied volatility smirks. Contemporary Accounting Research, 31(3), 851–875.Google Scholar
  52. Kim, J. B., & Zhang, L. (2016). Accounting conservatism and stock price crash risk: Firm-level evidence. Contemporary Accounting Research, 33(1), 412–441.Google Scholar
  53. Kim, S., Park, J., & Wertz, E. (2010). Expectation gaps between stakeholders and web-based corporate public relations efforts: Focusing on Fortune 500 corporate web sites. Public Relations Review, 36(3), 215–221.Google Scholar
  54. Kim, J. B., Li, Y., & Zhang, L. (2011a). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics, 100, 639–662.Google Scholar
  55. Kim, J. B., Li, Y., & Zhang, L. (2011b). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics, 101, 713–730.Google Scholar
  56. Kloyer, M. (2011). Effective control rights in vertical R&D collaboration. Managerial and Decision Economics, 32, 457–468.Google Scholar
  57. Lazonick, W. (2014, October 16). Numbers show apple shareholders have already gotten plenty. Harvard Business Review. Available at: https://hbr.org/2014/10/numbers-show-apple-shareholders-have-already-gotten-plenty
  58. Lazonick, W., Mazzucato, M., & Tulum, O. (2013). Apple’s changing business model: What should the world’s richest company do with all those profits? Accounting Forum, 37(4), 249–267.Google Scholar
  59. Lehman, G., & Haslam, C. (2013). Accounting for the Apple Inc. business model: Corporate value capture and dysfunctional economic and social consequences. Accounting Forum, 37(4), 245–248.Google Scholar
  60. Levin, C., & McCain, J. (May 2013). Memorandum: Offshore profit shifting and the U.S. tax code – Part 2. Apple Inc. (Memorandum of the Permanent Subcommittee on Investigations). Available at: http://levin.senate.gov/download/exhibit1a_profitshiftingmemo_apple
  61. Lin, C., & Chang, C. (2015). The effect of technological diversification on organizational performance: An empirical study of S&P 500 manufacturing firms. Technological Forecasting and Social Change, 90(B), 575–586.Google Scholar
  62. Lind, H., & Granqvist, R. (2010). A note on the concept of excess burden. Economic Analysis and Policy, 40, 63–73.Google Scholar
  63. Marques, A. (2010). Disclosure strategies among S&P 500 firms: Evidence on the disclosure of non-GAAP financial measures and financial statements in earnings press releases. The British Accounting Review, 42(2), 119–131.Google Scholar
  64. Martin, G., Thomas, W., & Wieland, M. (2013). S&P 500 membership and managers’ supply of conservative financial reports (Working paper). Indiana University.Google Scholar
  65. Maslo, P. (2010). The case for semi-strong-form corporate scienter in securities fraud actions. Michigan Law Review, 108, 95–105. Available at: http://repository.law.umich.edu/mlr_fi/vol108/iss1/1
  66. McCarter, M., Rockmann, K., & Northcraft, G. (2010). Is it even worth it? The effect of loss prospects in the outcome distribution of a public goods dilemma. Organizational Behavior and Human Decision Processes, 111(1), 1–12.Google Scholar
  67. McLaughlin, T. (2008). Eyes wide shut: Exchange traded funds, index arbitrage and the need for change. Review of Banking & Financial Law, 27, 597–610.Google Scholar
  68. Melendy, S., & Hueffner, R. (2011). Monitoring legal compliance: The growth of compliance committees. Accounting Perspectives, 10(4), 241–263.Google Scholar
  69. Narayanan, M. P., Schipani, C., & Seyhun, H. (2007). The economic impact of backdating of executive stock options. University of Michigan Law Review, 105, 1597–1642.Google Scholar
  70. Noussair, C. N., Trautmann, S., & Kuilen, G. (2013). Higher order risk attitudes, demographics and saving. Review of Economic Studies, 81(1), 325–355.Google Scholar
  71. Nwogugu, M. (2004). Legal, economic and behavioral issues in accounting for stock options. Managerial Auditing Journal, 19(9), 1078–1118.Google Scholar
  72. Nwogugu, M. (2006). Site selection decisions in the US retailing industry. Applied Mathematics and Computation, 182(2), 1725–1734.Google Scholar
  73. Nwogugu, M. (2008a). Equity-based incentives, wealth transfers and disruption costs and new models. Corporate Ownership & Control, 5(1), 292–304.Google Scholar
  74. Nwogugu, M. (2008b). The efficiency of Sarbanes-Oxley Act: Willingness to comply and agency problems. Corporate Ownership & Control, 5(1), 449–454.Google Scholar
  75. Nwogugu, M. (2009). Franchise royalty rates, franchise fees and incentive effects. International Journal of Mathematics, Game Theory & Algebra, 17(5/6), 303–316.Google Scholar
  76. Nwogugu, M. (2012). Risk in global real estate market. Hoboken: John Wiley.Google Scholar
  77. Nwogugu, M. (2014a). The board-of-directors as strategic alliances or joint ventures: A critique and some risk implications of board-governance models in various countries, and the british/commonwealth corporations-model. Available at: www.ssrn.com
  78. Nwogugu, M. (2014b). Anti-compliance cooperative cartels among nigerian financial services companies. Available at: www.ssrn.com
  79. Nwogugu, M. (2014c). A critique of LIBOR/EURIBOR/SHIBOR rate-setting processes; and new recommendations. Journal of International Banking Law & Regulation, 29(4), 208–222.Google Scholar
  80. Nwogugu, M. (2015a). Goodwill/intangibles rules and earnings management. European Journal of Law Reform, 17(1), 1–10.Google Scholar
  81. Nwogugu, M. (2015b). Failure of the Dodd-Frank Act. Journal of Financial Crime, 22(4), 520–572.Google Scholar
  82. Nwogugu, M. (2015c). Un-constitutionality of the Dodd-Frank Act. European Journal of Law Reform, 17, 185–190.Google Scholar
  83. Nwogugu, M. (2015d). Real options, enforcement of and goodwill/intangibles rules and associated behavioral issues. Journal of Money Laundering Control, 18(3), 330–351.Google Scholar
  84. Nwogugu, M. (2015e). Alternative risk premia, complexity and bankruptcy prediction: Behavioral and asset-pricing anomalies in DERs and ASRs. Available at SSRN: https://ssrn.com/abstract=2691119 or https://dx.doi.org/10.2139/ssrn.2691119
  85. Nwogugu, M. (Revised 2015f). Decision-making and biases in the VIX Index, CDS Indices, options-based indices and traditional stock/bond index calculation methods in incomplete markets with un-aggregated preferences. Available at: www.ssrn.com
  86. Nwogugu, M. (Revised 2015g). Biases, evolutionary processes and homomorphisms in options-based indices and traditional stock/bond index calculation methods in incomplete markets with un-aggregated preferences and NT-utilities. Available at: www.ssrn.com
  87. Nwogugu, M. (Revised 2015h). Problems inherent in the compensation and business models of credit rating agencies. Available at: www.ssrn.com
  88. Nwogugu, M. (Revised 2015i). Complex systems, international capital flows and new ‘learning’ business models for the credit rating agency industry. Available at: www.SSRN.comhttps://ssrn.com/abstract=2373373 or https://doi.org/10.2139/ssrn.2373373
  89. Nwogugu, M. (Revised 2015j). A turning-point approach and dynamic-programming applied to “parity anomalies”, alternative risk premia and effects of foreign investors (Working paper). Available at: www.ssrn.com
  90. Nwogugu, M. (Revised 2015k). Complexity and some numerical turning-point problems inherent in excessive outstanding shares and international portfolio selection (Working paper). Available at: http://www.ssrn.com. To be published as book chapter in Nwogugu, M. (2019), Complex systems, multi-sided incentives and risk perception in companies (Palgrave Macmillan).
  91. Nwogugu, M. (Revised 2015l). The case of Apple, Inc., and Fintech: Managerial psychology, corporate governance and business processes. Available at: www.SSRN.com – https://ssrn.com/abstract=2622286 or  https://doi.org/10.2139/ssrn.2622286
  92. Nwogugu, M. (Revised 2015m). The ‘popular-index ecosystems’: Managerial psychology, corporate governance and risk. (2016). Available at: www.SSRN.comhttps://ssrn.com/abstract=2937335 or  https://doi.org/10.2139/ssrn.2937335
  93. Önüt, S., Efendigil, T., & Kara, S. (2010). A combined fuzzy MCDM approach for selecting shopping center site: An example from Istanbul, Turkey. Expert Systems with Applications, 37(3), 1973–1980.Google Scholar
  94. Owen, S. A. (2015). R&D intensity, cross-border strategic alliances, and valuation effects. Journal of International Financial Markets, Institutions and Money, 35(C), 1–17.Google Scholar
  95. Owen, S. A., & Yawson, A. (2013). Information asymmetry and international strategic alliances. Journal of Banking & Finance, 37(10), 3890–3903.Google Scholar
  96. Papaikonomou, V. (2010). Credit rating agencies and global financial crisis: Need for a paradigm shift in financial market regulation. Studies in Economics & Finance, 27, 161–174.Google Scholar
  97. Pathak, R., Joshi, S., & Ludhiyani, A. (2010). Strategic decision-making and game theoretic approach for the commercialization of nanotechnology. Intellectual Economics, 2, 47–56.Google Scholar
  98. Prokopczuk, M. (2010). Intra-industry contagion effects of earnings surprises in the banking sector. Applied Financial Economics, 20(20), 1601–1613.Google Scholar
  99. Qiu, L. (2010). Cross-border mergers and strategic alliances. European Economic Review, 818–831.Google Scholar
  100. Ray, S. (2013). Strategic alliance in India under globalized economic scenario. Advances in Asian Social Science, 4(2), 824–835.Google Scholar
  101. Robinson, D. T. (2008). Strategic alliances and the boundaries of the firm. Review of Financial Studies, 21, 649–681.Google Scholar
  102. Sawler, J. (2005). Horizontal alliances and the merger paradox. Managerial and Decision Economics, 26, 243–248.Google Scholar
  103. Seale, D., Arend, R., & Phelan, S. (2006). Modeling alliance activity: Opportunity cost effects and manipulations in an iterated prisoner’s dilemma with exit option. Organizational Behavior and Human Decision Processes, 100(1), 60–75.Google Scholar
  104. Skadden Arps. (2013, February). Corporate finance alert: Share repurchases. Available at: http://www.skadden.com/newsletters/Corporate_Finance_Alert_Share_Repurchases.pdf
  105. Stockman, D. (2015, January 14). It’s earnings season – So here come the crooks, led by Alcoa. Available at: http://davidstockmanscontracorner.com/its-earnings-season-so-here-come-the-crooks-ledby-alcoa/
  106. Uotila, J., Maula, M., Keil, T., & Zahra, S. (2009). Exploration, exploitation and financial performance: Analysis of S&P 500 corporations. Strategic Management Journal, 30, 221–231.Google Scholar
  107. Wai, J., & Rindermann, H. (2015). The path and performance of a company leader: A historical examination of the education and cognitive ability of Fortune 500 CEOs. Intelligence, 53, 102–107.Google Scholar
  108. Weil, J. (2001, August 21). Companies pollute earnings reports, leaving P/E ratios hard to calculate. The Wall Street Journal. http://www.wsj.com/articles/SB998339424717089333
  109. Yin, X., & Shanley, M. (2008). Industry determinants of the “merger versus alliance” decision. Academy of Management Journal, 33, 473–491.Google Scholar
  110. Young, R. (2013, February 21). Federal Communications Commission regulations impose $142 billion in compliance costs; More on the way (Regulatory report card, #1). Competitive Enterprise Institute. https://cei.org/sites/default/files/Ryan%20Young%20-%20FCC%20Regulatory%20Report%20Card.pdf
  111. Zang, A. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703.Google Scholar
  112. Zanglein, J. E. (1991). Pensions, proxies and power: Recent developments in the use of proxy voting to influence corporate governance. Labor Lawyer, 7, 771–779.Google Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Michael I. C. Nwogugu
    • 1
  1. 1.EnuguNigeria

Personalised recommendations