Research Paper Series


Departments: Marketing, GREGHEC (CNRS)

Advertising often aims at creating and reinforcing brand differentiation, which should translate into reduced price competition. Currently unknown are the boundary conditions for long-term advertising benefits, the route through which advertising effects materialize, and the role of competitive advertising in the category. The authors develop a Hierarchical Dynamic Linear Model that links own and others’ advertising in the category to brand price elasticity directly and indirectly through their impact on own and competitive mindset metrics. The model accommodates dynamic dependencies in mindset metrics, controls for endogeneity in marketing, captures competitive reactions and performance feedback in marketing, and explains cross-sectional variation as a function of brand and category characteristics. Model estimation on seven years of data for 350 brands in 39 categories shows that both own and all competitive advertising in the category lower price sensitivity for the average brand, both directly and through advertising awareness. The attenuation of price sensitivity is more pronounced for niche brands in complex and more expensive categories, with higher concentration and purchase frequency. A financial simulation based on the estimates shows that while the price elasticity effect is positive and substantial for high-price brands, it hurts the advertising returns for low-price brands.

Keywords: advertising, price elasticity, mindset metrics, long-term effects, dynamic linear models, and empirical generalization

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Departments: Accounting & Management Control, GREGHEC (CNRS)

In this paper, we re-examine the notion that socially-responsible behavior by firms will lead to increased financial performance. By identifying the underlying processes, institutional settings and actors involved, we present a framework that is more attentive to the multiplicity and conditionality of the mechanisms operating in the often-tenuous connection between firms’ social behavior and financial performance. Building and expanding upon existing analyses of the CSP-CFP linkage, our model helps explain the mixed results from a wide range of empirical studies which examine this link. It also provides a novel theoretical account to help guide future research that is more attentive to conditionalities and contextual contingencies.

Keywords: Business Ethics, Corporate Social Performance, Corporate Financial Performance, Corporate Social Responsibility, Mechanisms


Departments: Strategy & Business Policy, GREGHEC (CNRS)

We advance research on corporate diversification by joining insights from the demand-side and relational views in strategy to offer a novel theory of client-led diversification. We propose that client-led diversification results from a combination of the customer-driven opportunities emphasized in the demand-side view and the creation of added value through relational assets that is a central tenet of the relational view. Furthermore, we hypothesize that suppliers’ client-specific knowledge, clients’ relational commitment to suppliers, and growth opportunities in clients’ markets (relative to the suppliers’ own markets) will magnify the client-led diversification effect. We test our hypotheses using a longitudinal dataset on patent law firms and their diversification into new domains of patent prosecution work for their corporate clients.


Departments: Marketing, GREGHEC (CNRS)

This paper studies the impact of consumer resistance, which is triggered by deviations from a psychological reference point, on optimal pricing and cost communication. Assuming that consumers evaluate purchases not only in the material domain, we show that consumer resistance reduces the pricing power and profit. We also show that consumer resistance provides an incentive to engage in cost communication when consumers underestimate cost. While cheap communication does not affect behavior, persuasive communication may increase sales and profit. Finally, we show that a firm can benefit from engaging in operational transparency by revealing information about features of the production process.

Keywords: Price Fairness, Cost Communication, Operational Transparency


Departments: Finance, GREGHEC (CNRS)

We estimate international factor models with time-varying factor exposures and risk premia at the individual stock level using a large unbalanced panel of 58,674 stocks in 46 countries over the 1985-2017 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. The country market in excess of the world or regional market is required in addition to world or regional factors to capture the factor structure for both developed and emerging markets. We do not reject mixed CAPM models with regional and excess country market factors for 76% of the countries. We do not reject mixed multi-factor models in 80% to 94% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.

Keywords: large panel, approximate factor model, risk premium, international asset pricing, market integration


Departments: Strategy & Business Policy, GREGHEC (CNRS)

Organizational adaptation is a concept that describes both congruence within organizations, with respect to the strategies and structures deployed, and across organizations, with respect to the degrees to which organizations meet the expectations of their environments. A wide array of research traditions have explored the concept of adaptation, albeit with many different labels. This annotated bibliography tracks the foundations of organizational adaptation, its digressions, and its challenges. Such a review provides important resources for scholars interested in conducting research in organizational adaptation by identifying the multitude of perspectives that encompass adaptation.

Keywords: Adaptation, Organizational Change, Strategic Choice


Departments: Economics & Decision Sciences

This paper analyzes, empirically and theoretically, the link between capital inflows and the quality of economic institutions. Starting with the example of Southern European countries (Spain, Portugal, Italy and Greece), we show that they experienced a significant decline in the quality of their institutions in the run-up to the euro currency, a period of cheap external funding and large capital inflows. We confirm this joint pattern of capital flows and institutional decline in a large panel of countries since the mid-1990s. We then develop an open-economy model of the "soft budget constraint" syndrome wherein persistently cheap funding from abroad (i) raises the prevalence of extractive projects and (ii) expands their support by the (benevolent) government ex post. While the government may in principle limit the prevalence of extractive projects ex ante, we show that the incentives to do so is limited when foreign borrowing is cheap.

Keywords: Institutions, current account


Departments: Economics & Decision Sciences

This paper shows that bailouts of private agents can optimally take the form of the purchase of a defaulting asset, even if this also means paying off external asset holders. When anticipated, this form of bailouts leads to an endogenous implicit guarantee, where even an intrinsically worthless asset may be traded at a positive price. In the presence of borrowing constraints and imperfectly observable private liquidity needs, direct transfers are imperfect so that, when more constrained agents are also more exposed to a given asset, the compensation through asset purchases becomes optimal. I then show that this possibility of implicit guarantee is amplified by other frictions as risk-shifting and ultimately leads to a coordination problem for selecting stores of liquidity. Finally, I derive policy implications for financial regulation and international capital flows.

Keywords: Implicit guarantees, bailouts, intrinsically worthless assets


Departments: Economics & Decision Sciences, GREGHEC (CNRS)

We revisit well-known models of learning in which a sequence of agents make a binary decision on the basis of a private signal and additional information. We introduce efficiency measures, aimed at capturing the speed of learning in such contexts. Whatever the distribution of private signals, we show that the learning efficiency is the same, whether each agent observes the entire sequence of earlier decisions, or only the previous decision. We provide a simple necessary and sufficient condition on the signal distributions under which learning is efficient. This condition fails to hold in many prominent cases of interest. Extensions are discussed.


Departments: Economics & Decision Sciences, GREGHEC (CNRS), Finance

Equity crowdfunding has recently become available and is quickly expanding. Concerns have been raised that investors ('backers') may be following the crowd 'too much' and making investments ('pledges') based on past investments rather than private information. We construct a model of equilibrium rational herding where uninformed investors follow signals generated by in formed investors with private information and a public belief generated by all past pledges. We show that large investments provide positive public information about the project's quality, whereas periods of absence of investment provide negative information. An information cascade is shown to occur only if not enough positive signals are generated. We then empirically analyse a large number of pledges from a leading European equity crowdfunding platform. We show that a pledge is strongly affected by both the size of the most recent pledge, and the time elapsed since the most recent pledge. For pledges that are not adjacent in the order of arrivals, the correlation between their sizes is still positive, but after being separated by two or more intervening pledges the correlation is no longer statistically significant. The effects are strongest for less-informed investors, and in some specifications the effects are strongest at the early stage of a campaign. We find similar results in IV analysis. Results are consistent with our model and inconsistent with some alternative models

Keywords: Equity Crowdfunding, Herding


Departments: Economics & Decision Sciences, GREGHEC (CNRS)

We consider a Bayesian persuasion problem where the persuader and the decision maker communicate through an imperfect channel which has a fixed and limited number of messages and is subject to exogenous noise. Imperfect communication entails a loss of payoff for the persuader. We establish an upper bound on the payoffs the persuader can secure by communicating through the channel. We also show that the bound is tight: if the persuasion problem consists of a large number of independent copies of the same base problem, then the persuader can achieve this bound arbitrarily closely by using strategies which tie all the problems together. We characterize this optimal payoff as a function of the information-theoretic capacity of the communication channel


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