Faculty Guest Post: Beauty is in the Eye of the Beholder

The last two decades have witnessed steady increases in tax avoidance activities in corporate America. A recent report in The Economist indicates that estimates of money stashed away using tax havens are around $20 trillion. Accordingly, corporate tax avoidance has received considerable attention from both academics and policy makers.

Why do some firms actively engage in tax avoidance activities while others do not (which is called the “under-sheltering puzzle”)? Traditional theory views tax avoidance as a value-added activity that transfers wealth from the government to shareholders. However, more recent studies find that tax avoidance practices incur significant direct costs (e.g., costs involving tax planning, litigation, and IRS penalties) and indirect costs (e.g., agency and reputational costs).

Do all stakeholders benefit from corporate tax avoidance? In one of my recent research works (forthcoming in the Journal of Financial Economics), I explore how debt holders perceive corporate tax avoidance. Unlike shareholders, debt holders have asymmetric payoffs. They generally receive fixed future income and face substantial downside risk. Although tax savings might accrue to shareholders, they do not necessarily benefit debt holders who are fixed claimants. For debt holders, the specter of risk exposure associated with tax avoidance could be more salient than the concomitant reward such as tax savings.

My study finds that there is a positive relation between tax avoidance and bank loan spread. In addition, banks impose more stringent collateral and covenant requirements in loans issued to firms exhibiting greater tax avoidance. Furthermore, firms with greater tax avoidance incur higher yield spreads when issuing public bonds. My study provides fresh evidence that add to a further understanding of the economic consequences of corporate tax avoidance.

Qiang Wu is an assistant professor at the Rensselaer Lally School of Management.


Faculty Guest Post: The Action Research Model of Organizational Change and J.C. Penney

As a customer, I was sad to see the local J.C. Penney store in Latham Circle Mall close in January 2014. In my opinion, the mall itself was partly the cause, but the closing also reflected J.C. Penney’s unsuccessful organizational change efforts in the last few years.

J.C. Penney hired Ron Johnson, then a senior vice president of retail operations at Apple in 2011, as the CEO to turn around its declining sales. Johnson initiated a series of bold changes, such as systematic layoffs, a reshuffle of the top management team, drastic modifications of the in-store design, eliminating coupons, and a three-tiered pricing policy.

I was impressed by the increased lighting and upscale feel of the store.  I remained skeptical because most of the company’s changes were so costly and radical that employees and customers may have been resistant. My worries turned out to be true. The retail sales of J.C. Penney fell 25 percent and the stock price fell by half during Johnson’s tenure. Not surprisingly, Johnson was fired in 2013.

We can weigh these events against the action research model of organizational change.  This model has three stages: planning, change, and refreezing. Apparently, Johnson ignored the first stage.  His overconfidence was evidenced when he said, “We will teach [the customers] how to shop.”  

Well, that reminded me of Steve Jobs, but selling clothes is very different from selling smartphones.  Sometimes you have to respect and listen to your customers better and take your time when you attempt to transform an organization.   

Hao Zhao is an associate professor at the Rensselaer Lally School of Management.


The Invention of the Microprocessor

During our recent MBA class visit to Silicon Valley, Ted Hoff, class of 1958, the inventor of the microprocessor, attended a reception to share his long experience in the computer industry.  He chronicled his migration to Stanford in the late 1950s before there was a Silicon Valley, when the area was still populated by fruit orchards and alfalfa farms.

As Intel’s twelfth employee, he set off the silicon revolution when he pioneered the development of a “computer on a chip.”  He worked with icons of the Valley, Robert Noyce, who founded Intel, Gordon Moore, of Moore’s Law fame, and other “graduates” of Fairchild Semiconductor whose spawning of numerous companies laid the foundation for the semiconductor industry and with it the Silicon Valley we know today.

Ted’s recollections were one of the week’s highlights for me because we were there to examine the entrepreneurial dynamic that characterizes Valley culture.  He knew Royce, Moore, and colleagues as struggling founders of start-up businesses that experienced all the trials and tribulations of any current new venture.

For example, Fairchild Semiconductor’s eight founders had to rely on $3,500 from their own meager savings to launch the company.  Unable to afford to scale-up their business, they accepted an infusion of cash from Fairchild Camera and Instrument Corporation.  Ted and fellow researchers had no idea the microprocessor would prove so valuable.  He formulated the idea while trying to solve a technical issue for a Japanese company, but the company engineers rejected it!

Dr. Thomas Begley, dean of the Lally School of Management at Rensselaer Polytechnic Institute.

Silicon Valley Entrepreneurs

We took our MBA class to Silicon Valley recently.  Where better to study the program’s technology and innovation management theme than at its epicenter? We were not disappointed.

Rensselaer has a number of alums working in the Valley who were very helpful in arranging company visits, spending time with our students, and attending receptions to relay their experiences and offer advice in an informal setting.  They were especially encouraging toward students with an entrepreneurial bent.

Entrepreneurs are Silicon Valley’s archetypal heroes.  Failure is not a stigma but rather a badge of honor.  The Valley has many serial entrepreneurs, who leave a previous start-up because it failed, stalled, or was acquired by a larger company.  The area has an image bursting with highly successful founders who hit it big, but most new ventures do not necessarily lead to large pay-outs. 

As elsewhere, start-up funding is an issue.  Despite the attention venture capital receives, initial financing still comes mainly from personal savings and loans from family and friends.  One alumnus told me he is asset-rich but cash poor because he puts everything he earns back into his company – and everything he earned in his previous companies went into funding the current one.  Another, who co-founded a very successful start-up and now does angel funding, said the fund supports one out of every 500 proposals it reviews. 

Dr. Thomas Begley, dean of the Lally School of Management at Rensselaer Polytechnic Institute.

Staff Guest Post: Stop Working on Your Resume

Each day I help students highlight their best experiences, skills, and education on their resumes.  Resumes should be customized for each position you apply so an employer sees your most appropriate candidacy. It should also be error-free and consistently formatted. 

Here’s the problem.  The best use of your career search time should not be spent fine-tuning your resume beyond reason.  Past a certain point, working on your resume gives diminishing returns.  Consider investing any extra time on endeavors that advance your career prospects.

My suggestion: Stop fussing over your resume and instead seek out an informational interview. 

Find someone who is in a job you think you might like and ask to have a conversation with them.  Ask them what they like and don’t like about their job as well as the work environment. Also, do your homework and ask intelligent questions about the company itself and how that position fits in with the organization’s goals.

Gather as much information as you can so you can better answer the question, “Can I see myself doing this job and being happy and satisfied?” 

There are other benefits to performing an informational interview:

  1. You can grow and maintain your network; an integral part of career success.
  2. You get an opportunity to impress someone who is in a field of value to you.
  3. You conduct research and gain knowledge of a specific industry.
  4. You can practice your interpersonal skills in a business setting.
  5. You can gain access to job leads and job recommendations in the future.

Informational interviews can lead to job applications and offers.  So can a resume, but everybody has a resume.  Be different.  Distinguish your job search by making more contact in person rather than just on paper.

Michael T. Breslin, is the assistant director of the MBA/M.S. Career Resources, at the Rensselaer Lally School of Management


Faculty Guest Post: It Matters to Have Right Peers

People are influenced by their peers. The quality of peers can have a significant impact on a person’s performance. Parents know this fact very well for their children. Educators know this as well for their students. Yet, it remains unclear whether this peer effect is true for one of the most sophisticated professionals in the world: CEOs of large companies.  

In one of my research studies with my colleague Bill Francis, Iftekhar Hasan, and my Ph.D. student Suresh Mani, we hand-collected the actual peers for each S&P 1500 member firms over the period of 2006-2010 and empirically investigated whether the relative quality of a firm’s peers can affect its performance.

We found strong results showing that firms with (relatively) high quality peers tend to earn superior risk-adjusted stock returns and experience higher profitability growth. These results hold for both peers included in the pay-setting process (compensation peers) and peers used exclusively for relative performance evaluation (performance peers).  In other words, even for CEOs, they will tend to work harder or smarter when they find that their peers are better, no different from kids or students.

Nowadays, more and more firms are adopting peer-based incentive contracts to reward and motivate corporate executives. Yet, studies found that many CEOs seem to manipulate the peer selection process toward their own favor, such as choosing the high-paid peers to justify their own excess pay.

Our findings can help design more effective incentive contracts in two ways. First, by stressing the relative quality of peers, we can limit a powerful CEO’s ability to choose weak peers. Second, in doing so, we also introduce the competitive forces into the peer-based contract.

Pengfei Ye is an assistant professor at the Lally School of Management at Rensselaer Polytechnic Institute.


Entrepreneurship and Motivation

In a previous blog post, I argued that entrepreneurship can be taught and provided an example to illustrate.  However, I am not arguing that anyone can become an entrepreneur.  The tools and techniques can be taught; the motivation and determination to start a business cannot.

Great ideas for new products and processes are of great value, but they are not sufficient.  The incipient entrepreneur needs drive and determination to succeed as well as commitment and the willingness to persevere when times get tough.  Successful entrepreneurs talk about the more than 80 hours a week they spent in the early stages of starting their business.  They talk about rejections by potential customers and the hard work of networking.  They talk about having to take out second mortgages and borrow from relatives and friends to raise money.  They talk about not seeing their partners and children for days at a time; some talk about the resulting divorces and estrangements. 

Along with my good friend and research partner David Boyd, some years ago I conducted a study in which we asked a group of entrepreneurs to complete a survey indicating how high they scored in Type A behavior, which measured how driven respondents were and how hurried, harried, and pressured they felt.  Our entrepreneurs recorded the highest scores of any group that had been tested, and by a wide margin.  If work-life balance is one of your main goals, look for a different line of work than entrepreneurship to achieve it.

Dr. Thomas Begley, dean of the Lally School of Management at Rensselaer Polytechnic Institute.

Faculty Guest Blog: Innovation as an Emerging Profession

Large, mature companies like AT&T/Bell Labs, DuPont, Bayer Material Sciences, 3M, Corning, Dow Chemical, Air Products, and many, many others invest millions of dollars in research and development every year. However, they struggle to leverage those investments into new business platforms.  Companies like General Motors, Kodak, Polaroid, and Intel have struggled to rejuvenate themselves as technologies change and new business models are required.

Even established companies not saddled with heavy investments in physical assets, like Yahoo or The New York Times, struggle to change their ways.  Why is the average lifespan of a company shorter than that of a human being? Why do many companies that fail own valuable patents that they never commercialize?

Many theories exist that address these well-recognized problems.  Some say the reward systems and processes that these companies implement focus only on rewarding increases in stock prices.  Others say senior leaders are short-sighted, or that organizational cultures are tamped down with bureaucracy…and on and on and on.   

How Do You Manage For Game-Changing Innovation?

Companies do not know how to manage for game-changing, step out innovations that create new lines of business.   While technical career ladders for R&D experts have been added to the organization chart, there are no parallel paths for those with the expertise in building businesses on the basis of those exciting inventions.  This is the next frontier of developing a sophisticated body of knowledge for business expertise. 

Companies today rely on champions to push breakthrough innovation even if it means breaking company norms and rules.  Hopefully such champions have a strong senior leader protecting them because, if not, they typically are demoted or sidelined in their careers as their projects take the typical unexpected twists and turns that innovation requires. 

Companies can do better than this. In fact, we’re learning a tremendous amount about how companies can design management systems, roles, and career paths to build capabilities for managing far-future innovation.  It’s a very exciting time to be a business school professor in the field of technology and innovation management. There’s so much to discuss.

Gina O’Connor is professor and associate dean for academic affairs at the Rensselaer Lally School of Management.


Faculty Guest Post: Collaborations with China

Most Chinese students at Rensselaer Polytechnic Institute are familiar with the first Chinese students who came to study at this institution in 1878. One of these students was, Mr. Luo Guorui, who trained in civil engineering at Rensselaer and went on to make remarkable contributions to railway developments in China.  

Today the Chinese students that study at the Rensselaer Lally School of Management come with the same enthusiasm, drive, and dream of making a difference, no matter whether they plan to return to China or look for professional engagements in the United States after graduation.  I have had the pleasure of teaching and interacting with many of these students in the past decade and a half at Rensselaer.

Building on that experience, I embarked on my first visit to China during this past winter break. My travel started in Beijing, where I attended the World Banking and Finance Symposium, however, the highlight was meeting recent Master of Science in Financial Engineering and Risk Analytics graduates and other Rensselaer alums. Next, I made a short trip to the ancient city of Tianjin for collaboration discussions at Tianjin University. Finally, my last stop was at Wuhan, the capital city of Hubei province located on the Yangtze River, which was equally rewarding in meeting Rensselaer alums and students at Wuhan University.

At my university visits, the students I met were most remarkable. Their pride in their country, hometown, and universities were striking, and it was interesting to learn their perspectives of the many faces of China. Everything I had heard about China came to life in this visit for me, hopefully making future trips equally exciting and creating new venues for exploring educational collaborations.

Aparna Gupta is an associate professor and co-director of the Center for Financial Studies at the Lally School of Management at Rensselaer Polytechnic Institute.

Faculty Guest Post: Integrating Operations and Marketing Decisions to Get the Biggest Bang for the Buck

Quality-based segmentation is a common practice in many industries including airline, automobile, consumer electronics, hospitality, and clothing industries. Firms offer multiple products with different quality levels within the same product line.

For example, airlines offer differentiated products such as economy, business, and first-class seats inside the same aircraft. Different consumers with different willingness to pay for quality would buy these differentiated products at different prices. In the end, consumers self-select based on their preferences and firms enjoy improved profits.

Due to traditional organizational structure, firms often determine such product-line decisions without taking resource capacity into account, even though the ability to produce/serve depends on it critically. For example, the airline industry is a well-known example where capacity constraints are a part of the product-mix decisions “as an error term at best.”

However, recent research shows that managers need to better understand the substantial inefficiencies caused as a result of this omission. Compared to a traditional firm that makes marketing (e.g., product-mix) and operations (e.g., resource capacity) decisions sequentially, it is shown that a firm that integrates such decisions can have better profits.

Firms should allocate their limited resources to products that generate the best bang for the buck, recognizing that selling one additional unit of a product leaves less resource capacity for other products. Moreover, the level of competition also complicates the decision, where more intense competition may result in a product-line policy change when the resource capacity is limited or additional investments are costly.

Muge Yayla-Kullu is an assistant professor at the Rensselaer Lally School of Management.