Index Tracking Using Data-Mining Techniques and Mixed-Binary Linear Programming

Index tracking has become one of the most common strategies in asset management. The index-tracking problem consists of constructing a portfolio that replicates the future performance of an index by including only a subset of the index constituents in the portfolio. Finding the most representative subset is challenging when the number of stocks in the index is large. We introduce a new three-stage approach that at first identifies promising subsets by employing data-mining techniques, then determines the stock weights in the subsets using mixed-binary linear programming, and finally evaluates the subsets based on cross validation. The best subset is returned as the tracking portfolio. Our approach outperforms state-of-the-art methods in terms of out-of-sample performance and running times.

Socialism and intrafirm asset allocation

We rely on a survey of Swiss firms to document deviation from first-best for reasons of internal 'fairness' when allicating resources. This 'socialist' practice is more widespread in smaller than in larger firms. It ignores the reputation and past performance of the managers who apply for dunding, but takes into account their hierarchical position and their past use of resources. Socialism is only partially explained by concerns about empire building and managerial optimism, and it is not meant to benefit shareholders.

Impacts of out-migration on land management in mountain areas

INTRODUCTION Out-migration from mountain areas is leaving behind half families and elderly to deal with managing the land alongside daily life challenges. A potential reduction of labour force as well as expertise on cropping practices, maintenance of terraces and irrigation canals, slope stabilization, grazing, forest and other land management practices are further challenged by changing climate conditions and increased environmental threats. An understanding of the resilience of managed land resources in order to enhance adaptation to environmental and socio-economic variability, and evidence of the impact of Sustainable Land Management (SLM) on the mitigation of environmental threats have so far not sufficiently been tackled. The study presented here aims to find out how land management in mountains is being affected by migration in the context of natural hazards and climate change in two study sites, namely Quillacollo District of Bolivia and Panchase area of Western Nepal, and which measures are needed to increase resilience of livelihoods and land management practices. The presentation includes draft results from first field work periods in both sites. A context of high vulnerability According to UNISDR, vulnerability is defined as “the characteristics and circumstances of a community, system or asset that make it susceptible to the damaging effects of a hazard”.Hazards are another threat affecting people’s livelihood in mountainous area. They can be either natural or human induced. Landslides, debris flow and flood are affecting peopleGood land management can significantly reduce occurrence of hazards. In the opposite bad land management or land abandonment can lead to negative consequences on the land, and thus again increase vulnerability of people’s livelihoods. METHODS The study integrates bio-physical and socio-economic data through a case study as well as a mapping approach. From the social sciences, well-tested participatory qualitative methodologies, typically used in Vulnerability and Capacity Analyses, such as semi-structured interviews with so-called ‘key informants’, transect walks, participatory risk and social resource mapping are applied. The bio-physical analysis of the current environmental conditions determining hazards and structural vulnerability are obtained from remote sensing analysis, field work studies, and GIS analysis The assessment of the consequences of migration in the area of origin is linked with a mapping and appraisal of land management practices (www.wocat.net, Schwilch et al., 2011). The WOCAT mapping tool (WOCAT/LADA/DESIRE 2008) allows capturing the major land management practices / technologies, their spread, effectiveness and impact within a selected area. Data drawn from a variety of sources are compiled and harmonised by a team of experts, consisting of land degradation and conservation specialists working in consultation with land users from various backgrounds. The specialists’ and land users’ knowledge is combined with existing datasets and documents (maps, GIS layers, high-resolution satellite images, etc.) in workshops that are designed to build consensus regarding the variables used to assess land degradation and SLM. This process is also referred to as participatory expert assessment or consensus mapping. The WOCAT mapping and SLM documentation methodologies are used together with participatory mapping and other socio-economic data collection (interviews, questionnaires, focus group discussions, expert consultation) to combine information about migration types and land management issues. GIS and other spatial visualization tools (e.g. Google maps) will help to represent and understand these links. FIRST RESULTS Nepal In Nepal, migration is a common strategy to improve the livelihoods. Migrants are mostly men and they migrate to other Asian countries, first to India and then to the Gulf countries. Only a few women are migrating abroad. Women migrate essentially to main Nepali cities when they can afford it. Remittances are used primarily for food and education; however they are hardly used for agricultural purposes. Besides traditional agriculture being maintained, only few new practices are emerging, such as vegetable farming or agroforestry. The land abandonment is a growing consequence of outmigration, resulting in the spreading of invasive species. However, most impacts of migration on land management are not yet clear. Moreover, education is a major concern for the respondents; they want their children having a better education and get better opportunities. Linked to this, unemployment is another major concern of the respondents, which in turn is “solved” through outmigration. Bolivia Migration is a common livelihood strategy in Bolivia. In the area of study, whole families are migrating downward to the cities of the valleys or to other departments of Bolivia, especially to Chapare (tropics) for the coca production and to Santa Cruz. Some young people are migrating abroad, mostly to Argentina. There are few remittances and if those are sent to the families in the mountain areas, then they are mainly used for agriculture purpose. The impacts of migration on land management practices are not clear although there are some important aspects to be underlined. The people who move downward are still using their land and coming back during part of the week to work on it. As a consequence of this multi-residency, there is a tendency to reduce land management work or to change the way the land is used. As in Nepal, education is a very important issue in this area. There is no secondary school, and only one community has a primary school. After the 6th grade students have therefore to go down into the valley towns to study. The lack of basic education is pushing more and more people to move down and to leave the mountains. CONCLUSIONS This study is on-going, more data have to be collected to clearly assess the impacts of out-migration on land management in mountain areas. The first results of the study allow us to present a few interesting findings. The two case studies are very different, however in both areas, young people are not staying anymore in the mountains and leave behind half families and elderly to manage the land. Additionally in both cases education is a major reason for moving out, even though the causes are not always the same. More specifically, in the case of Nepal, the use of remittances underlines the fact that investment in agriculture is not the first choice of a family. In the case of Bolivia, some interesting findings showed that people continue to work on their lands even if they move downward. The further steps of the study will help to explore these interesting issues in more detail. REFERENCES Schwilch G., Bestelmeyer B., Bunning S., Critchley W., Herrick J., Kellner K., Liniger H.P., Nachtergaele F., Ritsema C.J., Schuster B., Tabo R., van Lynden G., Winslow M. 2011. Experiences in Monitoring and Assessment of Sustainable Land Management. Land Degradation & Development 22 (2), 214-225. Doi 10.1002/ldr.1040 WOCAT/LADA/DESIRE 2008. A Questionnaire for Mapping Land Degradation and Sustainable Land Management. Liniger H.P., van Lynden G., Nachtergaele F., Schwilch G. (eds), Centre for Development and Environment, Institute of Geography, University of Berne, Berne

Essays on behavioral aspects of the design and disclosure of compensation contracts

This thesis consists of four essays on the design and disclosure of compensation contracts. Essays 1, 2 and 3 focus on behavioral aspects of mandatory compensation disclosure rules and of contract negotiations in agency relationships. The three experimental studies develop psychology- based theory and present results that deviate from standard economic predictions. Furthermore, the results of Essay 1 and 2 also have implications for firms’ discretion in how to communicate their top management’s incentives to the capital market. Essay 4 analyzes the role of fairness perceptions for the evaluation of executive compensation. For this purpose, two surveys targeting representative eligible voters as well as investment professionals were conducted. Essay 1 investigates the role of the detailed ‘Compensation Discussion and Analysis’, which is part of the Security and Exchange Commission’s 2006 regulation, on investors’ evaluations of executive performance. Compensation disclosure complying with this regulation clarifies the relationship between realized reported compensation and the underlying performance measures and their target achievement levels. The experimental findings suggest that the salient presentation of executives’ incentives inherent in the ‘Compensation Discussion and Analysis’ makes investors’ performance evaluations less outcome dependent. Therefore, investors’ judgment and investment decisions might be less affected by noisy environmental factors that drive financial performance. The results also suggest that fairness perceptions of compensation contracts are essential for investors’ performance evaluations in that more transparent disclosure increases the perceived fairness of compensation and the performance evaluation of managers who are not responsible for a bad financial performance. These results have important practical implications as firms might choose to communicate their top management’s incentive compensation more transparently in order to benefit from less volatile expectations about their future performance. Similar to the first experiment, the experiment described in Essay 2 addresses the question of more transparent compensation disclosure. However, other than the first experiment, the second experiment does not analyze the effect of a more salient presentation of contract information but the informational effect of contract information itself. For this purpose, the experiment tests two conditions in which the assessment of the compensation contracts’ incentive compatibility, which determines executive effort, is either possible or not. On the one hand, the results suggest that the quality of investors’ expectations about executive effort is improved, but on the other hand investors might over-adjust their prior expectations about executive effort if being confronted with an unexpected financial performance and under-adjust if the financial performance confirms their prior expectations. Therefore, in the experiment, more transparent compensation disclosure does not lead to more correct overall judgments of executive effort and to even lower processing quality of outcome information. These results add to the literature on disclosure which predominantly advocates more transparency. The findings of the experiment however, identify decreased information processing quality as a relevant disclosure cost category. Firms might therefore carefully evaluate the additional costs and benefits of more transparent compensation disclosure. Together with the results from the experiment in Essay 1, the two experiments on compensation disclosure imply that firms should rather focus on their discretion how to present their compensation disclosure to benefit from investors’ improved fairness perceptions and their spill-over on performance evaluation. Essay 3 studies the behavioral effects of contextual factors in recruitment processes that do not affect the employer’s or the applicant’s bargaining power from a standard economic perspective. In particular, the experiment studies two common characteristics of recruitment processes: Pre-contractual competition among job applicants and job applicants’ non-binding effort announcements as they might be made during job interviews. Despite the standard economic irrelevance of these factors, the experiment develops theory regarding the behavioral effects on employees’ subsequent effort provision and the employers’ contract design choices. The experimental findings largely support the predictions. More specifically, the results suggest that firms can benefit from increased effort and, therefore, may generate higher profits. Further, firms may seize a larger share of the employment relationship’s profit by highlighting the competitive aspects of the recruitment process and by requiring applicants to make announcements about their future effort. Finally, Essay 4 studies the role of fairness perceptions for the public evaluation of executive compensation. Although economic criteria for the design of incentive compensation generally do not make restrictive recommendations with regard to the amount of compensation, fairness perceptions might be relevant from the perspective of firms and standard setters. This is because behavioral theory has identified fairness as an important determinant of individuals’ judgment and decisions. However, although fairness concerns about executive compensation are often stated in the popular media and even in the literature, evidence on the meaning of fairness in the context of executive compensation is scarce and ambiguous. In order to inform practitioners and standard setters whether fairness concerns are exclusive to non-professionals or relevant for investment professionals as well, the two surveys presented in Essay 4 aim to find commonalities in the opinions of representative eligible voters and investments professionals. The results suggest that fairness is an important criterion for both groups. Especially, exposure to risk in the form of the variable compensation share is an important criterion shared by both groups. The higher the assumed variable share, the higher is the compensation amount to be perceived as fair. However, to a large extent, opinions on executive compensation depend on personality characteristics, and to some extent, investment professionals’ perceptions deviate systematically from those of non-professionals. The findings imply that firms might benefit from emphasizing the riskiness of their managers’ variable pay components and, therefore, the findings are also in line with those of Essay 1.

Inseparable, incapable, or invisible: Why public organizations award no-bid contracts

No-bid contracting is a highly prevalent practice in public procurement of technology services. Alt-hough no-bid contracting is a substantial problem since it reduces competition and welfare, the litera-ture lacks theoretical explanations and empirical tests for why public organizations award no-bid con-tracts. In this paper, we propose three theoretical explanations for no-bid contracting, drawing on transaction cost economics, organizational learning, and institutional theory. We also present how we test these explanations using a comprehensive sample of public procurement transactions. We expect to contribute theoretical explanations for no-bid contracting and practical implications for policy-makers.

The Impact of Human Asset Specificity on the Sourcing of Application Services

The question concerning the circumstances under which it is advantageous for a company to outsource certain information systems functions has been a controversial issue for the last decade. While opponents emphasize the risks of outsourcing based on the loss of strategic potentials and increased transaction costs, proponents emphasize the strategic benefits of outsourcing and high potentials of cost-savings. This paper brings together both views by examining the conditions under which both the strategic potentials as well as savings in production and transaction costs of developing and maintaining software applications can better be achieved in-house as opposed to by an external vendor. We develop a theoretical framework from three complementary theories and test it empirically based on a mail survey of 139 German companies. The results show that insourcing is more cost efficient and advantageous in creating strategic benefits through IS if the provision of application services requires a high amount of firm specific human assets. These relationships, however, are partially moderated by differences in the trustworthiness and intrinsic motivation of internal versus external IS professionals. Moreover, capital shares with an external vendor can lower the risk of high transaction costs as well the risk of loosing the strategic opportunities of an IS.