New study delves deeper to find why consumers feel better if algorithms, instead of humans, offer the best rate

Have you ever booked a hotel room or a flight ticket at what you thought was the cheapest price, only to find a lower one the next day? It is not uncommon for prices of hotel rooms or flight tickets to fluctuate due to various reasons such as demand, availability, and promotions.

Nonetheless, comparing prices from different sources is always a good idea. Many industries, including hospitality and tourism, apply algorithms to determine and utilise price discrimination strategies to optimise revenue and occupancy rates.

Price discrimination is a sales tactic that charges consumers different prices for the same product or service, depending on what the sellers believe the consumer is willing to pay. While it is an effective strategy for maximising revenue, studies have shown that its positive impact will be short-lived if consumers perceive it as unethical and unjust.

Unfortunately, consumers generally view price discrimination as unfair, and their perception of price fairness affects their willingness to pay and overall attitudes towards the brand.

Consumers favour algorithms being applied to objective tasks and utilitarian consumption because they perceive them as unbiased and not intentionally trying to take advantage of them.

Prof. Choi Sungwoo

Given consumer feedback greatly impacts business success, a group of scholars, including Choi Sungwoo, Assistant Professor of the School of Hotel and Tourism Management at The Chinese University of Hong Kong (CUHK) Business School, conducted a study to examine how hospitality and tourism firms can reduce such negative views.

The study titled Let Your Algorithm Shine: The Impact of Algorithmic Cues on Consumer Perceptions of Price Discrimination was conducted by Prof. Choi, in collaboration with Prof. Song Myungkeun and Dr. Jing Luo from Dong-A University in South Korea. The researchers proposed that when consumers are presented with an algorithmic cue, where they learn that an algorithm determines the price, their negative response to price discrimination is expected to diminish.

To test this hypothesis, Prof. Choi and his collaborators conducted a tweet analysis and four experiments. They first analysed nearly 900 tweets and found that, in general, when hospitality and tourism companies employ algorithm-driven dynamic pricing strategies, consumers tend to view these practices in a more positive light.

“Consumers favour algorithms being applied to objective tasks and utilitarian consumption because they perceive them as unbiased and not intentionally trying to take advantage of them,” says Prof. Choi.

Does Algorithmic Cue Work?

The researchers then examined how perceived price fairness mediated the effect of an algorithmic pricing cue by randomly assigning adult U.S. consumers to a few scenarios.

The hospitality and tourism industry applies algorithms to optimise revenue and occupancy rates.

The first experiment asked a group of participants to read news about the use of pricing algorithms in the airline industry, while other participants in the control group read similar-length news regarding the industry’s post-pandemic recovery. The result showed that participants reacted less negatively to price discrimination after learning that algorithms were used.

The next experiment used the same flight ticket purchase scenario on a website, and the respondents were presented with a sentence explicitly stating that the price was decided by an algorithm. At the same time, this information was not presented in the control group. Similar to the previous results, participants had fewer negative reactions when the algorithmic cue was presented.

The team then investigated whether the algorithmic cue effects still existed when participants did not directly experience price discrimination. In the third experiment, one group of participants read a news article stating that a fictitious hospitality firm used algorithms to determine its optimal prices, while other participants in the control group read an article stating that the company’s revenue management team was the one deciding the prices.

As expected, the participants perceived the price discrimination as fairer when they knew the price was determined by algorithms rather than humans, even when they were not in a purchase scenario.

Humanoid Features Are Not Always Beneficial

The debate on whether the utilisation of algorithms is good or bad is ongoing. However, the findings of this study challenge the common assumption that consumers are reluctant towards algorithms. The study found that, contrary to popular belief, objective algorithms have an advantage when consumers encounter negative information, such as a post-purchase price reduction.

Prof. Choi notes that the results can be explained through intentionality theory, in which algorithms are considered lacking in mind, meaning they have a lower level of agency compared to humans in terms of thinking, reasoning, and fulfilling intentions.


How ‘Human’ Should Robots Be?

The researchers further investigated how consumers’ reactions changed based on how human-like the price algorithm appeared. In the fourth experiment, different groups of participants used the live chat to book a hotel room with the assistance of three entities: a guest service algorithm depicted as a robot, a guest service algorithm depicted as a woman named Sam, and a guest service manager named Sam. The participants were then informed that the hotel offered a lower rate for the same room after completing the booking.

The results showed that participants had fewer negative reactions when the less human-like algorithm decided the price. Additionally, their reactions were similar toward the human agent and the human-like algorithm.

Apply Algorithmic Cues Wisely

To achieve the desired result of the price discrimination strategy, researchers suggest the company minimise consumers’ negative perceptions. However, hospitality and tourism managers are unaware of the potential benefit of leveraging algorithms in their pricing practices. In a field analysis of 14 international hotel chains, the team found that none of the hotels presented algorithmic cues to the customers, even though they all used pricing algorithms in their systems.

The study finds that consumers have fewer negative reactions when the less human-like algorithm decides the price.

There were various reasons why hotel managers did so. About 72 percent of the managers predicted a negative or no effect of an algorithmic cue on consumer satisfaction in terms of price discrimination. However, Prof. Choi notes that the study repeatedly found that presenting an algorithmic cue can help reduce perceptions of unfairness regarding price discrimination and improve consumer responses.

“We encourage firms to consider presenting algorithmic cues through various channels, such as a website, news article, or even a live chat, to let more consumers be aware of the use of algorithms,” he says. “This can improve not only revenue management performance but also customer satisfaction.”

But there is a caveat, as Prof. Choi highlights that the algorithmic cues should be applied with caution. “If the algorithm looks and talks more like a human, consumers may perceive it as having a certain level of intention or purpose behind its actions.”

The findings provide insights into how pricing algorithms can be used to improve customer perceptions of price fairness. However, Prof. Choi notes that the actual effects in practice need to be examined as the present study used online experiments to test the impact of algorithmic cues.

“If we want to ensure the robustness of the algorithmic cue effects, external factors such as booking lead time and trust toward algorithms should be examined,” he adds.

New study finds that a CEO’s emotional profile has a notable impact on their company’s uptake of corporate social responsibility initiatives

When Larry Fink, founder and CEO of BlackRock, the world’s largest asset manager, announced that the company would place environmental sustainability at the centre of its investment strategy, it sent shockwaves through corporate America. Radical measures pledged in his annual letter to CEOs included exiting from investments in coal production and requiring all client companies to publish reports on their environmental sustainability standards by the end of the year.

In a subsequent interview, Fink said: “It is the hardest letter I have ever written. And I do believe I became more emotional as I wrote about what we need to do – and more importantly the reflection on my 40-odd years of being in finance.”

CEOs are key players in the adoption of corporate social responsibility (CSR) measures by companies large and small. The decision-making processes that spur them to launch CSR initiatives have been analysed by business schools for many years.

When CEOs make decisions for CSR, they need to be aware of the fact that their emotions may play a role in their decisions.

Prof. Lin Ya

To date, such studies have largely focused on the rational, deliberative aspects of making decisions, but many leading psychologists today favour a dual-process approach to decision-making, which involves both emotional and deliberative mechanisms operating in parallel.

For this reason, a group of researchers at The Chinese University of Hong Kong (CUHK) and partner institutions set out to investigate the impact of CEOs’ emotional characteristics on their companies’ readiness to engage in CSR. Could it be that CEOs who are emotionally engaged in a positive way are more likely to launch CSR initiatives than those with more negative moods and emotions?

The study, Does CEO Emotion Matter? CEO Affectivity And Corporate Social Responsibility, was conducted by Lin Ya, Assistant Professor at CUHK Business School’s Department of Management, and Professor Yang Haibin, of the same department, along with Profs. Zhao Huazhong of City University of Hong Kong, Wang Linlin of Nankai University, and Jiang Wan of Tianjin University.

The researchers defined CEO affectivity as CEOs’ relatively stable and underlying tendency to experience positive and negative emotions, and categorised it into two opposite dimensions: positive affectivity and negative affectivity.

CEOs with positive affectivity are more likely to engage in CSR.

“Our study shows that CEOs with positive affectivity are more likely to engage in CSR, while CEOs with negative affectivity are less likely to do so,” says Prof. Lin.

“When CEOs make decisions for CSR, they need to be aware of the fact that their emotions may play a role in their decisions,” she adds. “In other words, they may minimise the subjective influence of their emotions on their firms’ CSR decisions, and rather take a more objective view towards CSR.”

Transformative Power of Positive Emotions

The study draws on the broaden-and-build theory that was developed in the late 1990s by psychologist Barbara Fredrickson. The theory, which forms part of the positive psychology oeuvre, posits that positive affectivity expands attention to increase receptivity and openness and thereby fuels more flexible problem-solving actions, while negative affectivity narrows and constricts attention.

“Our study is one of the first to unearth the intriguing relationship between CEO affectivity and corporate social responsibility,” says Prof. Lin. “It is also among the first to draw on the ‘broaden-and-build theory’ to examine company performance, thereby contributing to the micro-foundations of CSR research.”

CEOs with high positive affectivity are more interested in observing the behaviour of others. This equips them with a clearer perception of the existence and demands of the multiple stakeholders in their environment and allows them to cater to the needs of such stakeholders.

“They also tend to embrace more inclusive social categories and use a more expansive definition of in-group members, so they are likely to implement more CSR because they include more stakeholders in their social circles,” she adds.

By contrast, the broaden-and-build theory proposes that negative affectivity will narrow people’s thought-action repertoire. The researchers predict that high negative affectivity CEOs are more likely to withdraw into a self-protective stance, care only about the organisation’s private goals, and attend less to the interests of stakeholders. They therefore posit a negative relationship between negative affectivity and the firm’s CSR engagement.

The study examined CSR data from S&P 500 firms from 2001 to 2013 and compared it with indicators of CEO affectivity from a range of executive, corporate and financial databases, including Mergent Online, ExecuComp and BoardEx. The final sample comprised 2,934 CEO-year observations.

CEO social capital amplifies positive effect of positive affectivity on CSR.

CEOs’ positive and negative affectivities were measured through analysis of letters to shareholders, written annually by CEOs and typically included in companies’ annual reports. The letters were analysed using Linguistic Inquiry and Word Count software to determine the percentage of positive and negative words that each one contained.

The researchers also used data from an investment research and management firm Kinder, Lydenberg, Domini & Co, or KLD, on firms’ CSR activities in six dimensions, including community, diversity, employee relations, environment, human rights, and product quality ratings. Each of the dimensions has different categories of CSR strengths and concerns (weaknesses).

“Since we are focusing on firms’ CSR contributions, we created a weighted measure of CSR based on the ‘strengths’ category,” says Prof. Lin. “For each firm-year, we divided the score of strengths across all six CSR dimensions by the sum of the maximum possible strengths score across these six dimensions. We then summed the scaled strengths to obtain CSR engagement.”

The study found that CEO positive affectivity was positively associated with CSR, and CEO negative affectivity was negatively associated with CSR. At a practical level, going from a low level of CEO positive affectivity to a high level would result in a 7.4 percent increase in the amount of CSR taking place. Conversely, going from a low level of CEO negative affectivity to a high level, would reduce CSR activity by 7.8 percent.

Impact of Social Capital

The study also investigated whether the amount of social capital that CEOs possess has an impact on the relationship between their affectivity and the amount of CSR that their companies undertake, either strengthening or weakening it. Social capital was defined as the number of social connections gained in areas such as education, employment, professional associations and social clubs that a CEO has, as obtained through the BoardEx, which holds in-depth profiles of more than one million of the world’s business leaders.

“We propose that CEO social capital can provide critical social resources that sustain an upward spiral of the broadening effect that is elicited by CEO positive affectivity and that they help to direct expansive CEO social capital towards diverse stakeholder needs,” says Prof. Lin. “In a similar vein, we also propose that CEO social capital countervails the narrowed attention arising from CEO negative affectivity towards stakeholder needs.”

CEO social capital was found to moderate the impact of CEO affectivity on CSR. There was a strong positive relationship between CEO positive affectivity and CSR when social capital was high, but a negligible effect when social capital was low. Conversely, the effect of CEO negative affectivity on CSR was negligible when social capital was high, but there was a strong negative relationship between negative affectivity and CSR when social capital was low.

The results were shown to be robust against a battery of experimental control measures.

“In addition, our findings show that CEO social capital can boost the impact of CEO positive affectivity on CSR, as well as weakening the impact of negative affectivity,” she adds. “In this way, it has uncovered important boundary conditions for understanding how broaden-and-build theory operates in relation to CEO affectivity and CSR.”


When Corporate Philanthropy Keeps Staff Happy

Prof. Lin says the study has important practical implications for CEOs. Further, if stakeholders or the board emphasise the importance of CSR, they may look for CEOs with more positive affectivity as these CEOs are more inclined to conduct such activities. Also, CEOs with better social connections are able to reach out to different stakeholders and address the needs of their stakeholders via CSR.

“To summarise, CEOs with positive affectivity, coupled with strong social capital, are better prepared for CSR activities.”

Striking the right balance between data regulation and consumer benefits is crucial for trust and successful data sharing, a new study finds

Data protection is everything in a world that is run on and by the internet. The enactment of the EU’s General Data Protection Regulation (GDPR) in 2018 heralded a new era of personal data privacy. Its comprehensive framework for protecting individuals’ personal data and ensuring their privacy rights has inspired countries to adopt similar regulations in recent years.

There is a tightrope to walk when it comes to protecting consumers. Data can indicate many things about a person’s information, habits, and activities, which could be misused if they fall into the wrong hands, leading to identity theft, fraud, or other damaging consequences. On the other hand, consumers do enjoy the benefits of data sharing, such as better services and prices.

In the digital realm, where data is currency, the answer beckons. How does GDPR impact the personal data markets? Are there any situations where both companies and consumers can benefit?

With the data, firms can provide better personalisation or product recommendation, which will better cater to consumers’ preferences.

Prof. Tony Ke

“GDPR consists of two key components, including endowing consumers with privacy rights – the rights to control their data – and imposing data security mandates on companies,” says Tony Ke, Associate Professor at the Department of Marketing at The Chinese University of Hong Kong (CUHK) Business School.

A new paper by Prof. Ke and Prof. K. Sudhir at Yale School of Management titled Privacy Rights and Data Security: GDPR and Personal Data Markets represents a fascinating dive into this subject of vital importance. The team employed a game theoretic analysis to examine the long-term impact of the GDPR on personal data markets, consumer well-being, and firm profitability.

“We found that the first component [privacy rights] mostly decreases data availability in the market because consumers now have the option of opting out of data collection and some of them will exercise this right,” says Prof. Ke. “On the other hand, the second component [data security mandates] increases data availability in the market because it enables trust between consumers and companies or data collectors.”

Conundrum of Equilibrium

While GDPR is recognised as the gold standard on personal data protection, its long-term impact on personal data markets, consumer well-being, and firm profitability is unclear. The likes of British Airways, Google and Marriott have already been hit with massive fines for data breaches. Critics say innovation and consumer welfare are taking a huge hit, while smaller firms are unable to compete, and venture capital funding to tech firms may also be suffering.

Some observers believe that the GDPR hurts digital marketing, and reduces the ability of marketers to effectively work. Other studies show that this has not been the case, suggesting that the legislation and opt-in increased at a European telecommunications firm.

Data can reveal personal information, habits, and activities, risking misuse or enabling identity theft, while also benefiting consumers with improved services and prices.

An argument could be made that consumers are being deprived as they are not being effectively targeted, and the personalisation of products and services is lessened. There is a fine balance at play: consumers want it all – personalisation can bring a world of advantages, but privacy lessens the ability by limiting access to purchase, data opt-in, erasure, and transfer decisions.

“Game theory is a useful tool to capture agents’ strategic incentives, be it a consumer or a firm, along with different agents’ interactions in the long run,” says Prof. Ke. “As privacy concerns become more prominent, consumers may be more careful and thoughtful in managing their privacy rights.”

“The firms’ reactions and changes in their decisions will further influence the consumers’ choices over privacy control. This feedback loop will eventually converge to an equilibrium, as predicted by the Nash equilibrium, a general concept in game theory.”

The team’s analysis implies that GDPR effectively reduces consumer opt-in and data availability, which in turn lessens the firm’s ability to personalise product recommendations or services to cater to consumers’ personal interests, and has the additional effect of raising prices for consumers due to higher security mandates.

In terms of the firm profit, the study found that privacy rights and data security mandates have differing effects.

“Privacy rights will increase firm profitability when consumers face high data breach costs or have low trust in data collection. In this case, privacy rights help separate goods transactions with data transfer so it ensures trade and benefits the firm,” he adds.

However, when consumers face low data breach costs or have high trust in data collection, privacy rights will decrease firm profit. This is because in the case without privacy rights, the firm cannot help but offer a low-price basic product to those who haven’t bought anything yet as the firm can only easily identify and keep those who have already made a purchase. This makes people less likely to buy something in the beginning, which hurts the firm profits.

The study found GDPR reduces privacy breach risk, benefiting consumers and firm profitability, increasing security, consumer and firm surplus, and data transparency.

People often share data when the benefits outweigh the risks, and there is confidence in data security protection. When this trust is gone, consumers will quickly cancel their relationships with firms. The onus is thus on companies to create an environment where people do trust them, and hence privacy rights and data sharing can be increased in a win-win situation – consumers willingly share data to get benefits, and companies offer the highest standards of protection.

Win-Win Situation

Overall, the research found that GDPR can reduce consumers’ privacy breach risk, benefiting consumers and giving a boost to firm profitability. When firms increase their security capabilities, the result can be an increase in both consumer and firm surplus. Additionally, consumer surplus is increased by data transparency and reduced price discrimination.

While GDPR has a complex impact on consumers, the study showed that it can be beneficial in the right circumstances, protecting consumers and offering the best services and prices. However, the impact on firms is dependent on market conditions and mitigation of breach costs.

“The GDPR works better in competitive markets because in competitive markets, consumers in general benefit from privacy regulations. By contrast, consumers could get hurt from privacy regulations in monopolistic markets,” says Prof Ke.

“This is because the society can benefit from the availability of consumer data,” he adds. “With the data, firms can provide better personalisation or product recommendation, which will better cater to consumers’ preferences. GDPR decreases data availability and thus could hurt both consumers and firms when consumers face relatively low data breach costs.”


Should Online Platforms Share Market Data with Sellers?

Furthermore, Prof. Ke sees the need for more studies on similar regulations being implemented in different regions. For instance, Hong Kong’s Personal Data (Privacy) Ordinance (PDPO), one of Asia’s longest-standing comprehensive data protection laws passed in 1995, share a number of common features with GDPR as it was drafted in reference to the Organisation for Economic Co-operation and Development’s Privacy Guidelines 1980 and the EU Directive.

“Given that the GDPR constitutes significant developments from EU directive, there are also important differences between PDPO and GDPR,” says Prof. Ke. “For example, GDPR is built on the ‘privacy by design’ principle that gives data subjects more specific control of their data, and also imposes wider responsibilities in data protection on data controllers [compared to PDPO].”

Business leaders from different industries share their insights on how innovation, sustainability, and talents are shaping the future business world at CUHK Business School’s alumni forum

Human life and business are at a crossroads as the new era of AI technology and rapid climate change brought existential questions to the forefront.

The explosive use of the new AI tool ChatGPT since late 2022 has raised such questions as whether it will benefit our work and life or become a threat to us. Additionally, people around the world are experiencing more frequent extreme weather events this year, such as wildfires in North America and Europe, as well as rainstorms and floods in China and Africa. In the face of these climate challenges, sustainability is an issue that needs to be addressed more urgently than ever.

In light of these trends and transformations, business talents are facing both opportunities and challenges. They need to decide where to invest their time and energy to sustain their professional growth in the coming years. To shed light on this topic, four business leaders shared their observations and thoughts on innovation, talents, and sustainability in the present and future business world at a panel discussion. The panel discussion was moderated by Kalok Chan, Wei Lun Professor of Finance and Chairman of the Department of Finance at The Chinese University of Hong Kong (CUHK) Business School, and was held as part of the School’s Global Alumni Forum 2023.

Adapting to a Changing World

To kick off the event, Prof. Chan invited panel speakers to share the latest business trends in their sectors.

Dr. Paul Sin (MBA 2002), Director of Technology & Transformation of New World Development Company Limited, discussed the influence of AI on the workforce.

Dr. Paul Sin (MBA 2002), Director of Technology & Transformation of New World Development Company Limited, discussed the influence of AI on the workforce. While acknowledging the concerns about AI technology replacing workers, Dr. Sin believes that more talents will be needed even with technological advancements. He compared the AI revolution to the digital era ushered in by computers, in which the demand for talents actually increased.

Dr. Sin raised the hot issue that businesses are increasingly concerned about: data privacy and tightened regulations. These trends have made people more cautious about adopting new technologies. In addition, he said, companies are finding it difficult to secure innovation funding due to the sluggish economy. This has put pressure on them to demonstrate solid returns on investment in innovations that are highly relevant to people’s needs.

“The world has changed significantly due to innovation and sustainability [issues], and we need to adapt to it,” said Ms. Loretta Fong (PACC 1993), President of Hong Kong Institute of Certified Public Accountants.

Ms. Fong highlighted the significant impacts of innovations, such as the Metaverse and blockchain, on accounting and auditing professionals, urging them to consider how to navigate these emerging challenges. She mentioned a new principle called “double materiality,” which requires companies to disclose information that not only affects their financial value but also encompasses their environmental and social impacts. This increased scope of responsibility has called for talents with different skill sets.

“We need every type of talent today in our sector, including IT professionals and environmentalists,” she said.

Ms. Susanna Wong (IBBA 1992), a seasoned retail industry executive and the former CEO of Yata Limited, shared her opinion on innovation in retail industry.

Growing Awareness of Sustainability

Ms. Susanna Wong (IBBA 1992), a seasoned retail industry executive and the former CEO of Yata Limited, said innovation is not a new concept in the labour-intensive retail industry. Over the years, new technologies were adopted to reduce reliance on manpower and enhance consumer insights. However, she noted that the term “sustainability” had gained significant traction in the retail industry in recent years.

Ms. Wong acknowledged that some may criticise retailers for promoting unnecessary consumption and wasteful spending. Yet, retailers are increasingly aware of the importance of sustainability, and are making a concerted effort to contribute in their own way.

“One of the challenges faced by senior management in this industry is ensuring that the staff understands the importance of sustainability,” she said.

As more and more people have realised the importance of a low-carbon economy, Environmental, Social, and Governance (ESG) investment is becoming increasingly popular. Mr. Frank Tsui, Managing Director and Head of ESG Investment of Value Partners Group, shared his observations in this field.

“There is a high level of advancement in terms of sophistications in all aspects of ESG in the last few years,” he said, adding that advanced AI technology and algorithms have been applied to assess a company’s ESG data.

When it comes to the selection criteria for ESG companies, Mr. Tsui explained that there is a standardised list to evaluate a company’s performance in ESG. However, he emphasised that engaging with companies is still the most valuable approach to measuring performance. Direct engagement allows investors to validate whether a company’s actions genuinely align with the information they disclose.

Mr. Frank Tsui, Managing Director and Head of ESG Investment of Value Partners Group, shared his observations in sustainability.

In terms of sustainability and ESG development in Hong Kong, Mr. Tsui noted that the city is still in its initial stage, but there would be significant growth in the future “because we are starting from scratch.”

Mr. Tsui observed a substantial increase in the quality of talents compared with previous years. He highlighted how much more specific job candidates are when addressing ESG topics at interviews. They would engage in comprehensive discussions of biodiversity and materiality impacts in financial analysis, rather than just touching on environmental topics in a vague way.

At the same time, Mr. Tsui said, sustainability practices within the asset management field have advanced significantly. Both asset owners and managers now prioritise detailed ESG criteria in their investments.

The Irreplaceability of Human Judgement

The impact of AI on talent acquisition and the overall job market is a question that business leaders must consider. In the next part of the panel discussion, Prof. Chan invited speakers to share their ideas about how AI technology affects their business and how talents can better prepare for the future business world.

“I am pretty sure that many individuals ought to be concerned about the future,” says Ms. Fong. She cited a recent study stating that AI could replace 95 percent of accountants. Undoubtedly, new technology introduced in the accounting and auditing process could improve efficiency and free people from tedious work such as vouching. “But, after all, AI cannot replace judgement,” she said. “I still believe that this is the most valuable [quality of] auditors.”

Ms. Loretta Fong (PACC 1993), President of Hong Kong Institute of Certified Public Accountants, emphasised the importance of human judgement.

While many business graduates are contemplating the idea of acquiring programming or coding skills to alleviate their anxiety in a highly digitalised world, Dr. Sin suggested that it is more important for business students to focus on understanding what new technologies can actually do rather than making speculations based on media coverage.

“You need to combine [innovative technologies with] your business knowledge. [It’s important to] understand the limitations of such innovations,” said Dr. Sin. “[Only] then can you create value.”

Continuing on the subject of innovation, Ms. Wong offered a fresh perspective, suggesting that innovation should not be limited to technological advancements. “Don’t look at innovation as technology innovation only; innovation [can be] any ideas or improvements in your process to make things better,” she said.

The widespread use of AI technology, the urgency of addressing climate challenges, and the importance of sustainability are rapidly transforming the business landscape. Business talents must navigate these changes, invest in the right areas, and adapt to ever-evolving circumstances to grow professionally and contribute to a more sustainable future of our planet.

Social entrepreneurs face the unique challenge of having to establish an extremely high level of credibility and legitimacy to survive in a rapidly changing business environment. Researchers have found a specific personality trait they can leverage to secure valuable external resources and support to rise above this challenge

Social enterprises’ chief mission is focused on the social good. Their objectives can be in the form of intangible or tangible benefits to society at large, local communities, or specific groups of underprivileged people. The means toward this goal are commercial activities through sales of products and/or services.

In contrast to traditional for-profit businesses and non-profit organisations, these hybrid enterprises face the challenges of serving both commercial and charitable constituents. They therefore face the challenge of having to meet higher expectations from multiple stakeholders than the former does. Such a challenge is especially acute in a rapidly changing business and social environment.

Organisations typically need to comply with stakeholder demands to build legitimacy and secure support and resources. How do social enterprises ensure they have the optimal leadership to meet the multitude of stakeholder expectations?

Agreeableness can help to evoke empathy and promote harmony. Being agreeable allows a social entrepreneur to facilitate and maintain positive interpersonal relationships, not only within the organisation but also beyond.

Prof. David Ahlstrom

This quest has led to much interest in research about the ways in which social entrepreneurs legitimise their organisation’s decisions and operations through establishing trust with their stakeholders.

A team of researchers led by David Ahlstrom, Emeritus Professor at the Department of Management at The Chinese University of Hong Kong (CUHK) Business School found that social entrepreneurs’ personality traits play a crucial role in establishing their organisations’ credibility among stakeholders. The research team included Dr. Xiao Yingzhao and Prof. Bai Yanzhuang from Tianjin University, and Prof. Liu Zhen from Shandong University.

Their study, entitled Entrepreneurs’ Personality Traits and Social Enterprise: A Legitimation Perspective,  examined the impact of social entrepreneurs’ personality traits on organisational legitimacy.

The researchers found that social entrepreneurs with prosocial personality traits and behaviour are often able to acquire valuable resources and support beyond their organisational boundaries. This in turn can help the enterprises garner approval from stakeholders, enhancing their credibility and their social standing. In other words, their prosocial personality traits can be used as a valuable leverage to achieve their goals.

Benefits of Agreeableness

The focus of the study was on the personality trait of agreeableness. It involved empirical analysis of a survey of 400 social enterprises in China. The survey yielded 230 responses.

The research identified agreeableness as a key trait that can significantly influence a social enterprise’s credibility and legitimacy. Agreeableness, defined as the willingness to cooperate, be trusting, and maintain positive relationships, is considered the trait most likely to generate prosocial inclinations.

The research identified agreeableness as a key trait that can significantly influence a social enterprise’s credibility and legitimacy.

Social entrepreneurs high in agreeableness are more likely to exhibit prosocial behaviours such as inter-group cooperation, fairness, patience, and a greater sense of communal responsibility. These behaviours enable them to connect with stakeholders, including employees, customers, and business partners, in a manner that builds trust and understanding.

Building and sustaining relationships with various stakeholders is crucial for social enterprises to garner support and resources. The authors wrote in the research paper: “Agreeableness can help to evoke empathy and promote harmony. Being agreeable allows a social entrepreneur to facilitate and maintain positive interpersonal relationships, not only within the organisation but also beyond.”

“So having leaders who are agreeable goes a long way in securing support and useful resources both within and outside the enterprise,” Prof. Ahlstrom adds.

In addition, Prof. Ahlstrom says agreeableness helps foster social consensus. “When there is consensus and mutual understanding, it’s much easier for the entrepreneur to make decisions and run the business more smoothly.”

Building Legitimacy through Networks

The legitimation perspective in business suggests that organisations must comply with stakeholder demands to gain legitimacy. Consequently, agreeableness in social entrepreneurs plays a vital role in facilitating the establishment of trustworthy relationships with customers, leading to repeat business opportunities.

Furthermore, agreeableness allows social entrepreneurs to gain access to diverse societal resources and broad social capabilities through trust and mutual understanding. This access enhances a social enterprise’s social position, contributing to its legitimacy within the organisational field.

The study also shed light on the role of network centrality as an effective mechanism to establish organisational legitimacy.

Network centrality refers to an organisation’s central position in its relational network, providing access to tangible and intangible resources such as knowledge, information, and emotional support.

This study discussed the impact of social entrepreneurs’ personality traits on organisational legitimacy.

Agreeable entrepreneurs are attractive partners in team friendship cliques and networks. This not only enhances social enterprises’ ability to build connections with diverse stakeholders, but to maintain their central network position.

The study hypothesised that a high level of network centrality is beneficial for a social enterprise’s organisational legitimacy. By connecting and reconnecting with different network participants, a social enterprise gains a more profound understanding of the network’s diverse nature, leading to improved interactions with different stakeholders. As a result, these interactions enhance the enterprises’ legitimacy-seeking activities and contribute to overall organisational legitimacy.

Enterprise Developmental Stage

Having investigated the significance of agreeableness in enhancing a social enterprise’s legitimacy, the researchers highlighted the importance of considering the developmental stage of a social enterprise as a moderating factor.

“As social enterprises mature, the direct effect of social entrepreneurs’ agreeableness on organisational legitimacy weakens,” Prof.Ahlstrom says. “When interactions and transactions with stakeholders become more formalised, the reliance on building and sustaining social relationships lessens. Having a charismatic and agreeable business partner is thus less important when the enterprise enters a mature stage of development.”


The Power of Being Nice: How Prosocial Motivation Can Benefit Your Career

In conclusion, social entrepreneurs’ personality traits, particularly agreeableness, play a crucial role in enhancing organisational legitimacy. Their prosocial behaviours and the establishment of social relationships are essential for accessing resources and garnering support. The integration of agreeableness and network centrality can act as an effective mechanism for connecting social entrepreneurs’ personality traits with organisational legitimacy and social acceptance.

To maximise the impact of agreeableness, social entrepreneurs must strategically align their personal characteristics with their venture’s developmental stage. By doing so, they can optimise the effectiveness of leveraging personality traits in building and sustaining organisational credibility in the challenging landscape of social entrepreneurship.

Ultimately, understanding the relationship between social entrepreneurs’ personality traits and organisational legitimacy is vital in fostering the growth and impact of social enterprises in addressing pressing social challenges.

A new study reveals that U.S. households spend more on products from firms that prioritise corporate workplace equality, especially after major social events

Which would you choose: a bag produced by a firm known for its equal treatment of all staff or a bag produced by a company currently embroiled in a discrimination scandal? Conscious consumers, who prioritise ethical, social, and environmentally friendly products when making purchasing decisions, would likely choose the former.

A report indicates that 79 percent of respondents believe sustainability is either “somewhat important” or “very important” when making purchasing decisions. Additionally, 68 percent express a willingness to pay more for environmentally sustainable and socially responsible products.

Our research delves deeper than merely looking at diversity and equality at the executive level. It gauges workplace equality practices for the broader workforce.

Prof. Cen Ling

Given the rise of conscious consumers in recent years, companies should look beyond product quality and consider ESG (Environmental, Social, and Governance) or CSR (Corporate Social Responsibility) factors. While previous research has shown that strong ESG or CSR practices can decrease a firm’s risk exposure, the direct cash flow implications of such practices are still unclear.

Researchers from The Chinese University of Hong Kong (CUHK) recently aimed to understand how the purchasing decisions of conscious consumers who value ESG and CSR can directly impact a company’s cash flow.

The study, The Rise of Conscious Consumers: The Impact of Corporate Workplace Equality on Household Spending, was conducted by Cen Ling, Associate Professor of Finance, and Wu Jing, Associate Professor of Decisions, Operations, and Technology, both at CUHK Business School. They were joined by Prof. Han Yanru from Stevens Institute of Technology, and Liu Chang, a PhD candidate from City University of Hong Kong.

The market harshly punishes discrepancies between a firm’s declared commitment to and actual practices of workplace equality.

Prof. Wu Jing

“There’s a significant uptrend in ESG investment. Do investors like firms with good ESG practices purely based on their preferences? Or, a company’s ESG strategy truly benefit investors in generating higher returns? If so, does ESG contribute to higher returns by affecting the risk component or the cash-flow component, or both?” asks Prof. Cen. He expressed interest in exploring potential long-term economic incentives for companies to adopt ESG strategies.

Existing studies offer varied insights on the influence of ESG strategy on corporate operating performance. This research hones in on corporate workplace equality to gauge its effect on consumers’ buying habits. “This approach demystifies how specific ESG strategies can impact a company’s bottom line. Cash flow is a direct barometer of a company’s financial health,” notes Prof. Wu.

Measures to Evaluate Workplace Equality

To address these inquiries, the researchers developed a measure of corporate workplace equality, known as the EEO Score. This metric is based on the textual analysis of Equal Employment Opportunity statements found in millions of U.S. online job listings.

The research is based on the textual analysis of Equal Employment Opportunity statements found in millions of U.S. online job listings.

“Our EEO Score delves deeper than merely looking at diversity and equality at the executive level. It gauges workplace equality practices for the broader workforce,” Prof. Cen states, emphasising the public’s greater concern for the rights of everyday employees over board members.

Prof. Wu adds, “Our EEO Score zeroes in on workplace equality for the average worker, filling a gap left by prior studies that centered on upper-tier corporate roles.”

The researchers highlight that their algorithm assigns higher EEO Scores to companies that make detailed, genuine, and enthusiastic EEO pledges in their job listings. While skeptics might dismiss online job listings as mere corporate rhetoric, the researchers have undertaken multiple validation steps to alleviate such concerns.

They underscored the EEO Score’s accuracy by demonstrating its foresight in predicting future discrimination-related litigation and headlines. They also pointed out the inherent costs that discourage companies with low equality standings from merely parroting those with higher commitments.

“The market harshly punishes discrepancies between a firm’s declared commitment to and actual practices of workplace equality,” Prof. Wu observes, emphasising the gravity of making an EEO commitment.

Consumers Favour Companies that Champion Equality

The next phase involved correlating household buying decisions with the EEO Scores of product manufacturers. They tapped into Nielsen Consumer Panel data that capture consumer behaviour of individual household.

“Instead of crafting a simulated consumer behaviour test in laboratories, we turned to genuine data, revealing the authentic spending habits of Americans,” Prof. Cen explains.

Given the rise of conscious consumers in recent years, companies should look beyond product quality and consider ESG (Environmental, Social, and Governance) or CSR (Corporate Social Responsibility) factors.

Findings were consistent with their hypothesis: U.S. households tend to spend more on products from companies that score high on workplace equality. However, Professor Cen highlights the presence of potential confounding factors in the positive correlation between household purchase decisions and EEO Scores, such as product quality. In other words, consumers might choose products from companies with high EEO scores solely because firms with better workplace equality practices also offer better product quality.

He adds, “To mitigate the endogeneity in this positive correlation between corporate workplace equality and household consumption, we looked at whether minority consumers displayed a heightened sensitivity in their spending patterns toward producers that championed workplace equality.”

As hypothesised, the pro-equality spending trend was more pronounced among racial or gender minority consumers.

Prof. Wu posits, “If product attributes unrelated to workplace equality were driving the correlation between spending and EEO Scores, it’d be challenging to explain the heightened sensitivity exhibited by minority consumers.”


Unintended Benefits: How Employment Protection Increases Households’ Stock Market Participation

To further solidify their findings, the researchers employed two methods based on exogenous social events. First, they observed a spending boost on products from California-based firms post the 2018 enactment of the California Gender Board Diversity Law. Next, they noticed that the linkage between household expenditure and a producer’s EEO Score generally strengthened post-societal events that heightened equality awareness, like the #MeToo movement in 2017 and the Black Lives Matter movement in 2020.

In summary, the research underscores the tangible cash flow benefits of corporate workplace equality. Prof. Cen admits that the current buying surge, led by racial and gender minority consumers, doesn’t ensure a direct short-term boost in spending as a result of improved workplace equality. However, he believes that as consumer consciousness around equality becomes more widespread, firms will invariably see the financial advantages of ESG strategy adoption.

New study finds “green consumerism” is alive and well in China, with consumers willing to pay more for sustainable food

The 17 Sustainable Development Goals (SDG), which form the United Nations’ Post-2015 Development Agenda, are designed to provide a blueprint for achieving global peace and prosperity by 2030. Central to the agenda is the second SDG, which aims to “end hunger, achieve food security and improved nutrition, and promote sustainable agriculture.”

Meeting such policy objectives is critical to the prospects of many developing countries, as well as emerging economic powerhouses such as China, but they also pose a formidable challenge. Global food production is predicted to more than double by 2050, to meet growing demand that comes mainly from developing countries, as the world’s population, which reached eight billion in 2022, expands by around 0.8 percent per year.

The government should work together with other agencies to boost consumers’ trust in sustainable food by ensuring that the information provided is scientifically-based, accurate, comprehensive and communicated effectively.

Prof. Francisco Cisternas

Not only does the speed of population growth make the goal of food security hard to achieve, but demand for carbon-intensive meat products in developing countries tends to increase as they become richer. This trend, which is accelerating in China, following decades of rapid economic growth, can result in significant environmental damage, thereby frustrating the goal of making agriculture more sustainable.

A Growing Demand of Animal Protein

As populations switch to a Western-style diet, there is also a growing demand from consumers for beef and dairy products instead of other forms of animal protein. However, previous research shows that cattle farming results in eight times more greenhouse gas emissions per 100g of protein than the production of chicken or fish.

Previous research found that cattle farming results in higher greenhouse gas emissions than the production of chicken or fish.

So how can food production be made more environmentally sustainable and resilient, while also feeding more people more effectively? A novel approach to cracking this conundrum that has emerged over recent years is focused on changing consumption patterns away from carbon-intensive foods such as meat and dairy products and towards sustainable foodstuffs. But can consumers actually be motivated to change their behaviour?

A timely new study from the Chinese University of Hong Kong (CUHK) has addressed this question by investigating the factors that motivate consumers in China to purchase food which is produced in a way that protects the environment, conserves natural resources such as air, energy and water, and uses less energy.

Entitled The future of sustainable food production in China, the study was conducted by Francisco Cisternas, Assistant Professor in the Department of Marketing at CUHK Business School; in partnership with five other CUHK academics. They are Prof. Lam Hon Ming and Dr. Carolina Andrea Contador Sariego of School of Life Sciences; Prof. Shelly Lap-Ah Tse, Dr. Shuyuan Yang and Dr. Zhiguang Liu of the Jockey Club School of Public Health and Primary Care; Scholars from other universities in China, Canada and the UK also took part.

Attitudes and Social Norms Affect Consumer’s Choice

The researchers theorised that consumers’ willingness to purchase environmentally friendly food is determined by their intentions, which in turn are affected by their attitude towards such purchasing behaviour; the social norms to which they are exposed; the degree of perceived control over their ability to make such purchases; and their perceptions of the food’s quality.

The study finds that “green consumerism” is alive and well in China.

To test out the theory, they conducted a face-to-face survey of 2,422 Chinese consumers in rural and urban districts across five provinces, spanning northern and southern China, who formed a representative sample of the whole population. The five cities involved – Beijing, Nanchang, Xi’an, Taiyuan, and Shenyang – were chosen to reflect different income levels across China.

Respondents’ behavioural attitudes were measured in terms of their degree of concern about deforestation, drying lakes and rivers, and other damage caused by the use of land and water resources for agricultural production; while social norms were assessed by examining the extent to which participants were influenced to buy sustainable food by pressure from government bodies, the media, experts, international agencies, and social media commentators.

Perceived behavioural control was measured in terms of the cost and convenience of making purchases and participants’ views on certification systems and purchase conditions. The perceived quality of sustainable food was assessed by examining their views on the ingredients, nutritional values and health benefits of the food, plus their degree of trust in certification schemes.  Certification agencies involved in the study included international agencies, the Chinese central government, and local universities and scientific institutions.

Consumers Prioritise Environment in Food Purchases

The results confirm that Chinese consumers are inclined to purchase sustainable food.

“The results confirm that Chinese consumers are inclined to purchase sustainable food,” says Prof. Cisternas. “Among the four factors, behavioural attitude contributed most to people’s willingness to buy sustainable food.

“These consumers are highly concerned about the impact of their food consumption on the environment, rather than simply considering personal benefits such as food safety. They limit their demand for non-sustainable food and replace their needs with sustainable alternatives.”

Prof. Cisternas says this willingness to spend more for sustainable food may be a form of the sort of “green consumerism” that prompts people to buy fair trade products, which cost more without necessarily offering better quality, yet still provide consumer satisfaction.

The second biggest impact on people’s willingness to purchase sustainable food was from social norms, with government promotions, and information in the media and on social media from experts, academics and commentators all influencing their readiness to pay more for environmentally friendly food, the study found.


Leaning on Innovation to Combat Plastic Pollution in Oceans

Perceived quality also played a part, with nutritional values, and health and nutritional benefits having more impact than the simple ingredients of the food, while lower levels of perceived behavioural control – partly measured by the distance between a participant’s home and markets stocking sustainable food – had the expected negative impact.

Enhancing Food Certifications Builds Trust in Sustainable Consumption

“The result showed that greater difficulty in accessing sustainable food reduced participants’ willingness to purchase such food,” says Prof. Cisternas. “This indicates that making it more convenient to purchase sustainable food would boost consumers’ intention to buy these items.”

Consumers” willingness to buy sustainable food is affected by the type of its certification scheme.

The study also found that participants’ willingness to buy sustainable food was affected by the type of certification scheme it was covered by, with consumers placing most trust in certification by the Chinese central government. However, compared to consumers in other countries, Chinese consumers had a lower level of trust in food certification schemes overall.

Prof. Cisternas says the findings, which can be generalised to the whole population of China – and similar countries and regions – due to the representative nature of the survey, have implications for food policy.

“Information disseminated through the media and social media by government bodies, experts, international agencies, and commentators is more likely to influence consumers, when the organisations concerned are considered trustworthy,” he says.

“The government should work together with other agencies to boost consumers’ trust in sustainable food by ensuring that the information provided is scientifically-based, accurate, comprehensive and communicated effectively. Further improvements to certification schemes and better regulation and compliance monitoring may also help to build trust.”

Early action by managers and educators can build awareness of excessive risk and its consequences among financial professionals and help to protect them from moral hazard, new study finds

More than $2 trillion was wiped from the world’s economy in the Global Financial Crisis during the pre-recession peak in the second quarter of 2008 and the low hit in the first quarter of 2009, which triggered the worst economic downturn since the Great Depression of 1929. Excessive risk-taking by global financial institutions is widely regarded as a key factor in the crisis and much attention has been paid to the role of corporate reward schemes, bonuses and other incentives in promoting a culture of risk-taking among financial professionals. While researchers have found that such schemes can contribute to excessive risk-taking, the wider social and psychological mechanisms by which such behavior is spread and amplified in a professional context have remained largely unexplored.

However, a new study by Chinese University of Hong Kong (CUHK) has revealed that the risk preferences of aspiring financial market professionals can be strongly influenced by an authority figure who pressurises them to behave in a particular way (obedience pressure) or to socially conform with their peers (conformity pressure).

Excessive risk-taking by global financial institutions is widely regarded as a key factor in the crisis.

The study, entitled Social influence pressures and the risk preferences of aspiring financial market professionals, was conducted by Desmond Tsang, Associate Professor and Acting Director of School of Hotel and Tourism Management at CUHK Business School, and Co-Director of its Centre for Hospitality and Real Estate Research, in partnership with researchers in Canada and France.

The co-authors are Prof. Jorien Louise Pruijssers at TBS Education in France, Prof. Zvi Singer at HEC Montreal in Canada, and Gallia Singer, an independent researcher in Canada. The researchers noted that obedience and conformity pressures are prevalent in financial markets and that investigating how these pressures operate among prospective financial market professionals – accountancy and finance students – could provide valuable insights in how to prevent fraud and other malpractice.

Safe Grading VS. Risky Grading

“Prior research has shown that obedience pressure can lead to dysfunctional and unethical actions on the part of professionals,” says Prof. Tsang. “This effect is demonstrated in recent accounting scandals involving Wells Fargo and Toshiba, in which senior managers required subordinates to engage in fraudulent financial reporting.

“People may be willing to obey authority, even contrary to their own preferences, in order to secure their jobs and further their careers. An authority figure can shape the framing of the risk inherent in a situation and can thus influence risk perception. People will then justify a shift in their own risky decisions based on the superior’s framing.”

An authority figure can shape the framing of the risk inherent in a situation and can thus influence risk perception. People will then justify a shift in their own risky decisions based on the superior’s framing.

Prof. Desmond Tsang

The researchers examined the impact of obedience and conformity pressure by conducting an experiment involving 131 undergraduate business students taking an Introduction to Financial Accounting course at a leading university in North America. The students were divided into three groups, who were each given three multiple-choice tests, which they were told would together form 15 percent of their final grade for the course – or five percent for each test. The tests each contained 20 questions.

In all three tests, students were invited to choose between a “safe” grading option, in which they were awarded five points for each correct answer, with a maximum score of 100 and a minimum score of 30, and a “risky” grading option, in which they gained six points for each correct answer, but had 1.5 points deducted for each one they got wrong or left blank. The risky option had a maximum score of 120 and a lowest score of 0. Students’ grading choices were used as an indicator of their risk preferences.

For all groups, the first test did not involve any social influence manipulation and served as a baseline against which to measure the results of subsequent tests. And across all tests, the first group of students served as a control group, who were not subject to such manipulations.

Obedience Pressure Leads to Safer Choices

In the second test, obedience pressure was built into the arrangements for the second group, while social conformity pressure was introduced into the set-up for the third group, before the students chose their grading options. An authority figure – one of the course instructors – read out a statement to students in the second group that read: “As you may know, financial markets have been hurt by people taking too much risk. I would expect students to be more conservative in their choices in choosing the grading option.”

During the experiment, students were invited to choose between a “safe” grading option and a “risky” grading option.

For the third group, a graduate student read out the students’ grading option choices from the first test, in which an average of 81.9 percent of students chose the risky option. In line with previous studies, the researchers theorised that conformity pressure could lead to more students choosing the risky option in the second test.

The results showed that the proportion of students in group two who took the risky grading option fell from 85.4 percent in the first test to 47.5 percent in the second test, demonstrating obedience pressure at a statistically significant level. Risk-taking among students in the second group was also notably lower than among the control group, 65.8 percent of whom took the risky option in the second test.

“We saw that students under obedience pressure made safer choices than students not under such pressure,” says Prof. Tsang. “The results indicate that obedience pressure from the authority figure had a significant influence on students’ choices, causing them to switch from the risky to the safe option at a higher rate than students in the control group.”

Conformity Pressure Works Under Certain Circumstances

However, the results for students in group three were contrary to the expected outcome, with a significant reduction in the number choosing the risky option, not an increase, showing that social conformity pressure did not affect their choices.

“This effect was opposite to the peer pressure information they received, possibly due to post-decision regret,” says Prof. Tsang. “We believe that our student participants might have been disappointed with the results of test one, as the overall average score of 65.4 percent was at the low end of the grading range, and subsequent conformity pressure may have displeased them even more.”

The third test was designed to check whether the results of test two were due to the statements presented or who delivered them. Students in group two were given the test under the social conformity arrangement but, in this case, the choices made by their peers in test one were read out by the instructor – an authority figure. Students in group three were given the test under the obedience set-up, but here the statement was read out by a graduate student – not an authority figure.

The study shows that social conformity pressure works when it is delivered by an authority figure.

When the peer choice information was read out by the instructor, the proportion of students choosing the risky option jumped from 47.5 percent to 62.5 percent, a statistically significant increase, showing that social conformity pressure worked, when it was delivered by an authority figure.

However, when the obedience pressure was delivered by the graduate student, the percentage of students choosing the risky option did not fall – instead it increased slightly from 57.5 percent to 65.1 percent. This indicated that obedience pressure was ineffective unless it was delivered by an authority figure.

Educator’s Role in Reducing Excessive Risk-taking Behaviour

“Our study reveals that aspiring financial market professionals are more responsive to obedience pressure than to conformity pressure,” says Prof. Tsang, adding that the results imply that obedience pressure might also alter the risk perceptions of practicing financial market professionals – and hence reduce actual risk-taking in financial markets.

“Managers in financial firms can use their power responsibly to discourage excessive risk-taking behaviour,” he says. “The practical implications of this finding are further strengthened by the realistic aspect or our research design.”


Unintended Benefits: How Employment Protection Increases Households’ Stock Market Participation

The findings also have important implications for the education of accountancy and finance students, given the effectiveness of obedience pressure from an accountancy professor in reducing risk-taking behaviour among students, says Prof. Tsang.

“Attempts to inculcate risk perspectives should be conducted by educators throughout academic programmes and integrated into the curriculum,” he says. “We believe that simply teaching ethical codes is insufficient. Instead, educators should use case studies and simulations to improve students’ ability to recognise social issues rooted in the complex realities of professionals’ working environments.”

In mainland China, non-local CEOs attract higher salaries than local executives but do not bring about greater economic growth for their firms, a new study shows

A higher salary plus a generous relocation package is a time-honoured way of inducing talented executives to move home for a new position at the head of a company.

For chief executive officers (CEOs), it provides a clear incentive for facing the costs and disruption involved in moving to a new location, while the firm stands to benefit from the knowledge, skills and experience of a top candidate drawn from a larger talent pool.

In classical economic theory, the practice is regarded as an example of efficient contracting within a rational market mechanism, in which the new CEO is predicted to bring higher growth to the company and create shareholder value by an amount that is no less than the marginal cost of the salary increase.

But does paying more to non-local CEOs always bring such results? A new study by researcher from the Chinese University of Hong Kong (CUHK) examined the impact of geography on CEO pay and company performance in the context of mainland China, where a strong sense of hometown identity has been deeply rooted in the culture since ancient times.

They should consider the characteristics of candidate CEOs and the needs of the company in a comprehensive manner, rather than blindly offering higher salaries to non-local CEOs.

Prof. Zhuang Zili

“China provides a rich tapestry of geographical variations and hometown effects are widespread, making it a great place to study the role of geography in executive pay,” says Zhuang Zili, Associate Professor of the School of Accountancy at CUHK Business School.

The study, Visiting monks: Are nonlocal CEOs paid more? was conducted by Prof. Zhuang, in collaboration with Ms. Lian Guo, Prof. Diefeng Peng and Prof. Yulei Rao, all from Central South University.

“We studied this issue in China because the country’s weak legal institutions and investor protections raise the intriguing question of whether the impact of geographic factors on executive compensation reflects efficient CEO contracting – as it does in the U.S. – or is a pretext for rent extraction, which would have a negative effect on corporate governance,” says Prof. Zhuang.

Visiting Monks Chant Scriptures Better?

The study first examined the relationship between CEO geography and CEO compensation and then looked at the impact of CEO geography on the operating performance and value of companies. The alternative hypotheses of efficient contracting and rent extraction were tested against the results.

A higher salary plus a generous relocation package is a time-honoured way of inducing talented executives to move home for a new position at the head of a company.

The researchers theorised that non-local CEOs may be more likely to engage in rent extraction because they have no hometown identity or attachment to their firm’s location that would serve as an emotional barrier to extracting rent from the company.

In addition, a widespread traditional view that non-locals possess superior traits, which is embodied in the Chinese proverb “visiting monks chant scriptures better,” could give the non-local CEO a convenient pretext for demanding higher pay, regardless of their performance.

“If firms hire non-local CEOs for their superior talent and offer higher pay for such talent as well as for being away from home, then firms with non-local CEOs should have better performance and be valued more highly,” says Prof. Zhuang. “This would be consistent with the efficient contracting explanation of non-local CEO pay.

“In contrast, if rent extraction drives the non-local CEO pay premium, then we should observe that firms with non-local CEOs have poorer performance and that their value is lower. Therefore, we also examine the effect of CEO geography on operating performance and firm value.”

Non-local CEOs Earn More

The study examined a sample of 5,963 CEOs at 2,709 companies that were listed on the Shanghai and Shenzhen stock exchanges between 2005 and 2016, together with information on cash compensation for CEOs and factors such as their age, tenure and overseas experience drawn from the China Stock Market & Accounting Research Database (CSMAR).

It found that non-local CEOs earn about 7.9% more than their local counterparts after controlling for other variables, while both the performance and value of the companies that they lead is lower than for local CEOs.

The study finds that the pay premiums for non-local CEOs are prevalent across mainland China.

The researchers subjected the results to a range of rigorous tests to check that the findings were not due to other factors. For example, they looked at fixed effects for firms and for annual performance at industry and province level, and at companies where a local CEO was replaced by a non-local CEO and vice versa, but found that the results held in all such cases.

The tests were conducted both across a sub-sample consisting of China’s four mega-cities – Beijing, Shanghai, Guangzhou and Shenzhen – and one comprising all other regions in the country; between family-owned firms and those with other ownership patterns; and between CEOs that were hired internally and those hired on the open market.

Further analysis showed that pay premiums for non-local CEOs are prevalent across mainland China, and do not vary with regional marketisation levels, although they are lower in regions that have a greater supply of local CEOs.

However, non-local CEO pay premiums are notably higher in state-owned companies and firms with poor external governance. Companies with non-local CEOs also exhibit lower sensitivity to performance in pay levels, and offer higher managerial perks.

Causes of the Overpricing

While recent research has found that geography is part of efficient contracting in CEO hiring and compensation in other countries such as the U.S., the study suggests that this is not the case in China, Prof. Zhuang says.


Overconfidence Takes a Positive Turn in Crisis Times

“Our study shows that firms exhibit a degree of non-local bias when paying CEOs who come from other parts of the country,” he says. “It suggests that weak institutions; information asymmetry that is exacerbated by geography; and perhaps the biased belief that non-locals possess superior skills; all contribute to the overpricing of non-local CEOs in mainland China.

“Geography plays a different role when the institutional environment differs and the U.S. and China have very different institutional environments. One cannot blindly generalise findings from one country to another, as they may not hold when the legal, economic and governmental institutions are different.”

Achieve a Dynamic Balance in Employment Markets

For businesses and provincial governments in China, the practical implications of the study’s findings are simple.

The study suggests that firms should give equal consideration to local and non-local CEO candidates.

“When recruiting executives, companies should overcome the bias implied by the proverb ‘visiting monks chant scriptures better’,” says Prof. Zhuang. “They should consider the characteristics of candidate CEOs and the needs of the company in a comprehensive manner, rather than blindly offering higher salaries to non-local CEOs.”

He advises companies that are selecting a new CEO to collect information from multiple channels and perspectives; hire the most suitable candidate; and formulate reasonable and effective compensation contracts.

“Meanwhile, provincial and local governments should optimise their policies for attracting the best talent, and fully leverage the advantages offered by local candidates,” Prof. Zhuang says. “They should encourage firms to give equal consideration to local and non-local candidates; and foster the influx of capital and talent from other regions to supplement the employment market in a beneficial way.

“Such policies will help to achieve a dynamic balance in regional employment markets between effectively redeploying talented and committed local executives and attracting the brightest and best non-local candidates to take up jobs in the area.”

Using the World Cup as a proxy, a study shows that lack of sleep from staying up at night and being distracted during trading hours leads to considerably negative stock returns

Have you ever waited until midnight just for a World Cup game? As a highly anticipated global event held every four years, the grand tournament captures the attention of millions worldwide. In addition to the competition itself, the volatility of stock prices during the game has also been the focus of numerous investors and economists.

Previous research indicates that the outcome of the World Cup and trading activity changes in response to different stages of the game can significantly influence the stock market. However, given that the games take place at different times around the world, will global investors watching it be affected by lack of sleep or distractions during working hours? Are these effects positive or negative? Ko Chiu-yu, Associate Professor of the Department of Decisions, Operations, and Technology at The Chinese University of Hong Kong (CUHK) Business School, sought to find the answers in his latest study.

A better understanding of how sleeplessness and distraction affect the stock market can provide insights into explaining and even predicting market trends, helping people make more informed investment or trading decisions.

Prof. Ko Chiu-yu

The study titled Sleeplessness, distraction, and stock market performance: Evidence from the World Cup was conducted by Prof. Ko, in collaboration with Prof. Jinghan Cai from the University of Scranton and Dr. Manyi Fan from Singapore University of Social Sciences.

World Cup Provides an Ideal Setting

Existing literature shows that the impacts of sleeplessness on the financial market yield mixed results, and uncertainty remains as to whether or not distraction leads to higher or lower stock returns. Prof. Ko points out that one major challenge is finding events with sufficiently long periods of distraction or large enough external shocks on sleeping patterns that may have a potential impact on the stock market.

The World Cup is a highly anticipated global event, which captures the attention of millions worldwide.

A World Cup game lasts about two hours, sometimes even longer if there is extra time and penalties. Therefore, watching the games overnight will likely result in substantial sleep deprivation. Similarly, some fans might be distracted for an extended period by matches aired during trading hours. “The World Cup is a suitable setting to explore the influences of sleeplessness and distraction on the stock market,” says Prof. Ko.

Prof. Ko also stresses that using World Cup games to study distraction is significant because this factor is completely unrelated to the stock market, allowing the researchers to separate the impact of one factor from other factors.

The study used the time zone differences between the locations of the fans and the World Cup games to assess the impact of sleeplessness and distraction on the stock market. Prof. Ko and his collaborators collected data on market index returns for 16 countries from January 1, 1982, to December 31, 2018. These countries include winners, runners-up, and third- or fourth-place finishers in the World Cup tournaments during the sample period. They are considered countries with rich soccer traditions and stock markets known to be influenced by the games.

After analysing the data, the researchers found that both sleeplessness and distraction negatively influence stock markets. More specifically, the sample markets experienced a −26 basis-point daily return for a day of sleeplessness and a −22 basis-point return because of distraction.

Individual Investors Are More Affected

Researchers then further examined more details of these negative effects. They first found that individual investors are more affected by sleeplessness and distraction than institutional investors.

“Because of their training and focused work environment, professional investors are less susceptible to distractions and better able to get adequate sleep during events like the World Cup,” Prof. Ko explains.

The researchers found that both sleeplessness and distraction negatively influence stock markets.

He and his team then examined whether the impact of sleep deprivation varied depending on the degree of deprivation. The results indicated that compared to watching games overnight, watching evening games that disturb sleep schedules has a significantly lesser impact.

They also found that important games did not amplify the effects of sleeplessness and distraction on investors, indicating that game-induced emotions are unlikely to be the cause. Additionally, the hangover effect was also ruled out as an explanation for the observed sleeplessness and distraction effects.

Sleeplessness is a prevalent problem in the financial industry, where many practitioners frequently experience work-related stress and extended work hours, particularly in professions such as international trading. Additionally, distractions, such as breaking news and rumours, further compete for investors’ limited attention.

Prof. Ko notes that understanding how sleeplessness and distraction affect the stock market is crucial because it can provide insights into the influences of external factors and human behaviour on financial markets. “A better understanding of these effects can provide insights into explaining and even predicting market trends, helping people make more informed investment or trading decisions,” he says.

Recognise Risks, Make Wise Adjustments

The study suggests that investors should avoid making decisions when tired.

“Overall, the consequences of these negative impacts on the stock market can be far-reaching, affecting not only investment strategies but also managerial decisions in various business settings,” Prof. Ko says. He suggests that investors and managers should recognise these risks and take steps to minimise them.

“Investors, therefore, should avoid making decisions when tired. Additionally, investors anticipating being tired or distracted may choose to delegate the execution of actual trades to a broker or use an algorithm to make decisions,” says Prof. Ko.

He also adds that their research indicates that distractions affect sellers more than buyers. Investors should, therefore, be more open to buying, and resist the urge to sell when tired.


Are Credit Expansions to Blame for Stock Market Exuberance?

Addressing the companies’ perspective, Prof. Ko suggests that they should consider implementing policies that minimise the impact of sleeplessness and distraction on employee decision-making, such as flexible work arrangements or limiting communication at night.

While exploring information and staying busy have become the norm of modern life, people may not be aware of the influences of sleep deprivation and distractions. Prof. Ko emphasises that these influences should not be ignored. “It is crucial to remind ourselves that external factors can greatly impact our decision-making abilities, and we must be cautious when we find ourselves in such situations.”

Want even more insights?

Enjoy the best and most relevant articles monthly with a subscription to CBK's digest.