Rice University research finds market outliers at risk of misreporting

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Research shows that some corporate executives skew earnings to influence the market and inflate share price. Photo via Pexels

Say a company called CoolConsumerGoodsCo has just released its quarterly earnings report, revealing significantly higher profits than its consumer goods industry counterparts.

That result might spur analysts to slap a buy rating on the stock and investors to snap up shares. In an ideal world, the market wouldn't have to consider the possibility that the numbers aren't legit — but then again, it's not an ideal world. (Enron, anyone?)

Rice Business professors Brian R. Rountree and Shiva Sivaramakrishnan, along with Andrew B. Jackson at UNSW in Australia, studied what makes business leaders more likely to engage in fraudulent earnings reporting. Specifically, they focused on the relationship between this kind of misrepresentation and the degree to which a company's earnings are in line with the rest of its industry — a variable the researchers term "co-movements."

Many people are familiar with a similar variable, calculated using stock returns often referred to as a company's beta. The authors adapted the stock return beta to corporate earnings to see how a company's earnings move with earnings at the industry level.

The researchers hypothesized that the less in sync a company's earnings are with its industry, the higher the chance a company's leaders will manipulate earnings reports. They started with the well-accepted premise that corporations try to skew earnings reports to influence the market. The primary motive is typically to raise the company's stock price, as when an executive tries to "choose a level of bias" that balances potential fallout of getting caught against the benefits of a higher stock price.

To test their prediction, the professors analyzed a sample of enforcement actions taken by the U.S. Securities and Exchange Commission against companies for problematic financial reporting from 1970 to 2011 — although they noted that given the SEC's limited resources, the number of enforcement actions probably underestimates the actual amount of earnings manipulation in the market.

Their analysis revealed that firms with low earnings co-movements (meaning their earnings were out of sync with industry peers) were more likely to be accused by the SEC of reporting misdeeds. They concluded that the degree of earnings co-movement determines the probability of earnings manipulation. Put another way, earnings co-movements are a "causal factor" in the chances of earnings manipulations — and to a significant degree. The researchers found that firms who don't co-move with the market are more than 50 percent more likely to face an SEC enforcement action, compared with firms who are perfectly aligned with the market.

The researchers drilled deeper into the data to study whether the odds changed depending on the industry, since past research has indicated that the amount of competition in an industry works to constrain misreporting. That premise seems to hold true, the researchers concluded. In industries with more competitive markets, the impact of low co-movement on earnings manipulation is moderated.

They also studied whether the age of a firm played a part in the likelihood of earnings manipulation. Newer firms often rely more on stock compensation, which could be a motive for manipulating earnings reporting to drive up share price. Indeed, younger firms were more susceptible to misreporting when their earnings were out of whack with the rest of the marketplace.

Every firm faces some risk of misreporting, however. Even for public companies under analyst scrutiny, low co-movement proved to be a driver of earnings manipulation. But companies known for conservative reporting tend to be less likely to exaggerate their earnings, in general; these firms typically recognize losses in a more timely manner, the professors found.

These findings suggest a number of future lines of research. For example: When do executives underreport earnings? And can analyzing patterns related to cash flow reporting help better isolate earnings manipulation?

In the meantime, if you come across a company like CoolConsumerGoodsCo with an earnings report that's widely out of sync with the rest of its industry, you might think twice before rushing to buy in.

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This article originally ran on Rice Business Wisdom and is based on research from Brian R. Rountree, an associate professor of accounting at the Jones Graduate School of Business at Rice University, and Shiva Sivaramakrishnan is the Henry Gardiner Symonds Professor of Accounting at Rice Business.

In a recent study, a Rice Business professor found that board members actually need incentives — both short- and long-term — to act in stakeholders' best interests. Getty Images

Rice University research finds executive board members are driven by incentives

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If you're a stockholder, you may envision your investment helmed by a benevolent, all-knowing board of directors, sitting around a long finely-grained wooden table, drinking coffee, their heads buried in PowerPoint charts as they labor to plot the best course for the company. Too often, however, you can't take for granted that a company's board will steer it wisely.

Companies choose directors because they offer rich and varied experience in the business world. Many who serve on boards, moreover, are CEOs of other corporations, or have headed big companies in the past. As of October 2018, for example, six of the 11 directors on Walmart's board and eight of 13 on AT&T's board hold CEO or CFO positions in other firms. So it's easy to assume that board members will act in the best interests of stockholders.

But in a recent study, Rice Business professor Shiva Sivaramakrishnan found that board members actually need incentives — both short- and long-term — to act in stakeholders' best interests.

Corporations usually compensate board members with stock options, grants, equity stakes, meeting fees, and cash retainers. How important is such compensation, and what sort of incentives do board members need to perform in the very best interests of a company? Sivaramakrishnan joined co-author George Drymiotes to trace how compensation impacts various aspects of board performance.

Recent literature in corporate governance has already stressed the need to give boards of directors explicit incentives in order to safeguard shareholder welfare. Some observers have even proposed requiring outside board members to hold substantial equity interests. The National Association of Corporate Directors, for example, recommended that boards pay their directors solely with cash or stock, with equity representing a substantial portion of the total, up to 100 percent.

To the extent that directors hold stock in a company, their actions are likely influenced by a variety of long-and short-term incentives. And while the literature has focused mainly on the useful long-term impact of equity awards, the consequences of short-term incentives haven't been as clear. Moreover, according to surveys, most directors view advising as their primary role. But this role also has received little attention.

To scrutinize these issues, the scholars used a simple model, which assumes the board of directors perform three roles: contracting, monitoring and consulting. The board contracts with management to provide productive input that improves a firm's performance. By monitoring management, the board improves the quality of the information conveyed to managers. By serving in a consulting role, the board makes managers more productive, which, in turn, means higher expected firm output.

This model allowed the scholars to better understand the relationship between the board of directors and the company's managers, as well as with shareholders. The former was particularly important to take into account, because conflict between a board and managers is typically unobservable and can be costly.

The results were surprising. Without short-term incentives, the researchers found, boards did not effectively fulfill their multiple roles. Long-term inducements could make a difference, they found, but only in some aspects of board performance.

While board members were better advisors when given long-term motivations, short-term incentives were better motivators for performing well in their other corporate governance roles, according to the research, which tied specific aspects of board compensation to particular board functions.

Restricted equity awards provided the necessary long-term incentives to improve the efficacy of the board's advisory role, the scholars found, but only the short-term incentives, awarding an unrestricted share or a bonus based on short-term performance, motivated conscientious monitoring.

The scholars also examined managerial misconduct. Board monitoring, they concluded, lowered the cost of preventing such wrongdoing — but only if the board had strong short-term incentives in place.

Even at the highest rungs of the corporate ladder, in other words, short-term self-interest is the greatest motivator. Maybe it's not surprising. In the corporate world, acting for one's own benefit is a given — so stockholders need to look more closely at those at the very top. Like everyone else, board directors need occasional brass rings within easy reach to do their best.

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This story originally ran on Rice Business Wisdom.

Shiva Sivaramakrishnan is the Henry Gardiner Symonds Professor in Accounting at the Jesse H. Jones Graduate School of Business at Rice University.

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Houston-based creator economy platform goes live nationally

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An app that originally launched on Houston college campuses has announced it's now live nationwide.

Clutch founders Madison Long and Simone May set out to make it easier for the younger generation to earn money with their skill sets. After launching a beta at local universities last fall, Clutch's digital marketplace is now live for others to join in.

The platform connects brands to its network of creators for reliable and authentic work — everything from social media management, video creation, video editing, content creation, graphic design projects, and more. With weekly payments to creators and an inclusive platform for users on both sides of the equation, Clutch aims to make digital collaboration easier and more reliable for everyone.

“We’re thrilled to bring our product to market to make sustainable, authentic lifestyles available to everyone through the creator economy," says May, CTO and co-founder of Clutch. "We’re honored to be part of the thriving innovation community here in Houston and get to bring more on-your-own-terms work opportunities to all creators and businesses through our platform.”

In its beta, Clutch facilitated collaborations for over 200 student creators and 50 brands — such as DIGITS and nama. The company is founded with a mission of "democratizing access to information and technology and elevating the next generation for all people," according to a news release from Clutch. In the beta, 75 percent of the creators were people of color and around half of the businesses were owned by women and people of color.

“As a Clutch Creator, I set my own pricing, schedule and services when collaborating on projects for brands,” says Cathy Syfert, a creator through Clutch. “Clutch Creators embrace the benefits of being a brand ambassador as we create content about the products we love, but do it on behalf of the brands to help the brands grow authentically."

The newly launched product has the following features:

  • Creator profile, where users can share their services, pricing, and skills and review inquiries from brands.
  • Curated matching from the Clutch admin team.
  • Collab initiation, where users can accept or reject incoming collab requests with brands.
  • Collab management — communication, timing, review cycles — all within the platform.
  • In-app payments with a weekly amount selected by the creators themselves.
  • Seamless cancellation for both brands and creators.
Clutch raised $1.2 million in seed funding from Precursor Ventures, Capital Factory, HearstLab, and more. Clutch was originally founded as Campus Concierge in 2021 and has gone through the DivInc Houston program at the Ion.

Madison Long, left, and Simone May co-founded Clutch. Photo courtesy of Clutch

2 Houston suburbs roll onto top-15 spots on U-Haul’s list of growing cities

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More movers hauled their belongings to Texas than any other state last year. And those headed to the Greater Houston area were mostly pointed toward Missouri City and Conroe, according to a new study.

In its recently released annual growth report, U-Haul ranks Missouri City and Conroe at No. 13 and No. 19, respectively among U.S. cities with the most inbound moves via U-Haul trucks in 2022. Richardson was the only other Texas cities to make the list coming in at No. 15.

Texas ranks No. 1 overall as the state with the most in-bound moves using U-Haul trucks. This is the second year in a row and the fifth year since 2016 that Texas has earned the distinction.

“The 2022 trends in migration followed very similar patterns to 2021 with Texas, Florida, the Carolinas and the Southwest continuing to see solid growth,” U-Haul international president John Taylor says in a news release. “We still have areas with strong demand for one-way rentals. While overall migration in 2021 was record-breaking, we continue to experience significant customer demand to move out of some geographic areas to destinations at the top of our growth list.”

U-Haul determines the top 25 cities by analyzing more than 2 million one-way U-Haul transactions over the calendar year. Then the company calculated the net gain of one-way U-Haul trucks entering a specific area versus departing from that area. The top U-Haul growth states are determined the same way.

The studies note that U-Haul migration trends do not directly correlate to population or economic growth — but they are an “effective gauge” of how well cities and states are attracting and maintaining residents.

Missouri City is known for its convenient location only minutes from downtown Houston. The city’s proximity to major freeways, rail lines, the Port of Houston, and Bush and Hobby Airports links its businesses with customers “around the nation and the world,” per its website.

The No. 19-ranked city of Conroe is “the perfect blend of starry nights and city lights,” according to the Visit Conroe website. Conroe offers plenty of outdoor activities, as it is bordered by Lake Conroe, Sam Houston National Forest and W. Goodrich Jones State Forest. But it also has a busy downtown area with breweries, theaters, shopping and live music.

To view U-Haul’s full growth cities report, click here.

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This article originally ran on CultureMap.

Houston expert: Space tourism is the future — do we have the workforce to run it?

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Throughout history, humans have always been fascinated in exploring and traveling around the world, taking them to many exotic places far and away. On the same token, ever since the dimension of space travel has been inaugurated with multiple private companies launching rockets into space, it has become an agenda to make space travel public and accessible to all. We believe that space travel is the next frontier for tourism just like for our forefathers world travel to faraway places was the next frontier, for recreational and adventure purposes.

In a world racing on technology, we can picture flying cars, invisible doors, and international cuisine in space. With this rapid expansion of the land, the idea of space tourism has stirred the space industry to think about running businesses, start trade, and set up universalization beyond the ring of the earth. It is no longer science fiction but our immediate future. However, the true question remains. Who will be responsible for all of it? Are we training the right workforce that is needed to build and run all of this?

Space tourism is an exciting idea in theory, traveling to extra-terrestrial destinations, exploring new planets, all by being in an anti-gravitational environment. Through these diminishing borders and rapid advancements soon we'll be living the space life, all the virtual, metaverse gigs coming to reality. But before that let's explore space tourism and how the solar system will welcome humans.

What is Space tourism?

Ever since 1967, Apollo opened the getaway of space travel and the technological intervention spun to rise. Just like nomad tourism, space tourism is human space travel for commercializing interstellar for leisure or pleasurable adventures of the unknown. Space has different levels of horizons, according to research, orbital space has high speeds of 17,400 mph to allow the rocket to orbit around the Earth without falling onto the land. While lunar space tourism goes into subcortical flights and brings people back at a slower speed.

Studies have shown that in the upcoming years, commercial space exploration will hike up the economical database, by generating more than expected revenue. On these grounds, space tourism won't be limited to suborbital flights but rather take onto orbital flights, this revolutionary expenditure will change the future.

Everything aligns when the right team works together endlessly to reach the stars. The space exploration will only take place with enthusiastic and empowered individuals catering towards their roles.

Astronomers, space scientists, meteorologists, plasma physicists, aerospace engineers, avionics technicians, technical writers, space producers, and more will work in the field to make this space dream come true.

The attraction of Space exploration

Curiosity is the gateway to the seven wonders of the world. Humans are born with novelty-seeking, the drive to explore the unknown and push boundaries. This exploration has benefited society in a million ways, from making bulbs to jets.

The attraction towards exploring the space stems from the same desire for novelty seeking. We want to answer the most difficult questions about the universe, is there only darkness beyond that sky? Can we live on another planet if ours die? To address the challenges of space and the world, we have created new technologies, industries, and a union worldwide. This shows how vital space exploration is to humans. Many astronauts dwell on the idea of seeing the iconic thin blue outline of our planet, the quintessential experience makes the astronaut go back and back. However, are we entering this dimension with the right skills? Is our future workforce ready to take need the best

Who will lead the path?

The main question that still goes unanswered is who will run space tourism. When it comes to the future, there are infinite options. One decision and you will fly into an endless sky.

This expenditure has opened multiple career opportunities for the future workforce to take on for diversification and exploration of space. Currently, we cannot predict how people will find meaning and improve their lives through space tourism, but it will be a soul-awakening experience. According to experts, travelers would prefer a livelihood in space for which companies are working day and night to figure out accommodation and properties. The ideas include having space hotels, offices, research labs, and tents for operations.

Lastly, space tourism is just a start, we are moving into a dimensional field of physics and astronomy to create new opportunities and ground-breaking inventions to explore the untouchable. The new era of more refined and thoroughly accessed careers are on the rise, let's see how the world evolves in the next 10 years.

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Ghazal Qureshi is the founder and CEO of UpBrainery, a Houston-based immersive educational technology platform that taps into neuroscience research-based programs to provide adaptive learning and individualized pathways for students at home or in the classroom.

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