Research Seminar
Seminar: Operational Disruptions and The Value of Credible Control Systems
| Abstract: | Operational disruptions can impact a firm's risk, which manifests in a host of operational issues, including a higher holding cost for inventory, a higher financing cost for capacity expansion, and a higher perception of the firm's risk among its supply chain partners. While disruptions have been studied extensively in the operations management literature, the emphasis has been on mitigating the deleterious impact on the firm's production potential rather than its risk. We empirically examine whether firms can meaningfully reduce the impact on their risk by credibly attesting to having robust internal control systems. Using a natural experiment in our data, we show that firms with such credible control systems experience a materially smaller increase in their risk and a smaller decrease in their market value in the aftermath of an operational disruption compared to firms without such systems. The beneficial impact on the firm's risk can persist for two years after the disruption. We provide evidence that such benefits are associated with a lower level of information asymmetry between the firm and its investors. Our analysis is in the context of stock market reactions to disruptions because stock markets provide rich archival data for analyzing decisions and risk under information asymmetry. We argue, however, that our insights apply more generally to other firm constituents in the presence of information asymmetry, including suppliers, employees, partners, customers and regulators. |
| Date: | Apr 27 (Fri), 2018 11:00 am - 12:30 pm |
| Time: | 11:00AM - 12:30PM |
| Speaker: |
Prof. William Schmidt Cornell University |
| Venue: | Room 7-208, 7/F, Lau Ming Wai Academic Building |
+852 3442-8989
+852 3442-0151
