“Settlement amounts are not trivial to firms, so it’s important to know the determinants of litigation risk. That’s what financial literature tries to do,” says Han, who earned a master’s degree in statistics at Yale University before coming to Binghamton’s School of Management as a doctoral candidate.

Previous research on the relationship between insider stock sales and the risk of litigation has been inconclusive, Han says. She thinks that’s because previous studies covered too small a sample period and looked too broadly at insider trading.

In her work, Han narrowed the focus by breaking out insider trading by high-level managers, namely, chief executive officers and chief financial officers, and whether these trades were based on a normal trading pattern. Her research covers more than 90,000 insider trades and 1,700 lawsuits during a 15-year period.

“What we’ve found out is that only ‘opportunistic’ trades by high-level managers increase litigation risks when the stock price drops,” Han says.

Han’s research is important because she has found that plaintiffs seriously evaluate the potential for opportunistic trading and don’t blindly link insider sales before a crash in stock value with fraud, says Murali Jagannathan, an associate professor of finance and Han’s dissertation adviser.

This conclusion calls into question contentions that lawsuits are mostly frivolous and, as such, has policy implications for lawmakers who may be looking at regulations to make it more difficult to file shareholder lawsuits, he says.

Han’s methodical approach is a great strength in her research, Jagannathan says. “A lot of people are very interested in finding out what happens, but to actually do the work, with the detail needed, is kind of boring,” he says. “She does a good job in terms of being exact and always thinking about not making mistakes.”

Han became interested in the world of finance and an academic career after taking business courses while studying journalism at Ewha Women’s University in South Korea. She’s driven by her desire to do empirical research.

“Without numbers you can’t show anything. You just have to guess,” she says. “But you can convince others with numbers.”

The use of personality tests in hiring is both common and controversial. Such tests consistently predict later job performance, though not with sufficient accuracy. Binghamton’s Seth Spain, an industrial psychologist, says employers should look beyond the characteristics these tests focus on — and consider the power of the dark side.

Q: What traits do employers usually want to learn about before making a hiring decision?

A: Most personality tests used by hiring managers measure a set of traits that have come to be known as the Big Five: neuroticism, extroversion, agreeableness, conscientiousness and openness to experience.

If I could choose between knowing whether somebody I was going to hire is really smart or really conscientious, I would take smart. It predicts a lot. But if I could find out about both, it would tell me something that just knowing someone’s smart cannot tell me.

Testing for what we call “dark-side” traits is far less common, in part because they’re so stigmatized.

Q: What traits do you put into that category? 

A: We’re talking about traits like psychopathy, narcissism and Machiavellianism. They lie in a middle ground between normal personality traits such as the Big Five and the clinical traits used to diagnose psychological pathologies. In my latest research, we’re extending the “dark side” to traits such as excitable, skeptical, mischievous and even dutiful.

These subclinical traits are far more powerful in measuring someone’s job success than the Big Five, at least twice as useful in predicting performance. They’re doing a lot of heavy lifting. Taken together with the normal traits, we can make predictions that are about three times more accurate. The Big Five paradigm doesn’t cover a lot of our social reality.

Q: What are some findings that have surprised you?

A: Narcissists seem to develop faster as leaders, at least based on one sample we studied.

Also, there’s something called the corresponsive principle. The best way I can sum it up is to say that people tend to change in the direction of who they are. If you’re highly extroverted, you’re more likely to seek leadership roles — and then you’re likely to become even more extroverted.

Q: How do you hope to see your research applied?

A: My dad’s a mechanic and my mom was originally a hairstylist, so I come to this from a labor background. I’d like to use this work to help individual employees, to fight dysfunction by understanding it.

Q: So your goal isn’t to build a better, more comprehensive test for use by hiring managers?

A: No, I’d be reluctant to use these tests in hiring, given that personality changes over time. Organizations are going to hire people with dark traits, and some industries are going to be dealing with that more than others. We can develop programs and interventions that can help employees.

I use a personnel-selection paradigm in my work, and the workplace is a really great laboratory for studying human behavior. It’s a more controlled environment than the world in general. But what I would really like to do is help people understand themselves and perhaps improve and develop in their current jobs or when they change jobs. Some of what we’re learning about personality, and especially personality change, can also help the long-term unemployed.

Q: You have worked with the U.S. Army as well as police departments. What motivates those collaborations?

A: As a soldier, one of your biggest risk factors for being shot is the risk-taking behavior of the person in charge. Leadership has nontrivial consequences. This is true in the military, with cops and firefighters and in other places, like hospitals. Pretty simple leadership interventions can affect how many patients die in a hospital, for instance. That’s just by running a tighter, better functioning, slightly more communicative ship. They’re not huge effects, but we’re talking about life and death. I try to work in domains where I can see the consequences.

Binghamton University researcher Ali Yayla looks at companies’ announcements regarding IT security breaches and how these announcements affect their stock price. “In the past, these announcements used to have a more negative effect,” says Yayla, an assistant professor in the School of Management. “Now, the public is getting used to these security breaches. It’s just another normal part of business. Organizations lose data.”

Still, such attacks are far more widespread than customers generally believe, Yayla says. For one thing, companies themselves sometimes don’t know they’ve been attacked. Others are aware of a security breach but choose not to announce it, although this trend is changing slowly for two reasons: First, consider how tough it would be to keep an attack a secret if it results in a bank issuing new account numbers to a million customers. Second, while there isn’t any rule that says they must announce every attack, new regulations mandate that companies disclose any breach of confidential data to affected parties.

There are, of course, different kinds of breaches: A hacker may gain access to customer information, steal proprietary information or attack a website. The worst, Yayla has found, is a so-called “denial of service” attack, in which a website is shut down and customers are unable to access to the website for some period of time. They’re far more public and disruptive than other attacks. If the company doesn’t do a lot of business online, a denial of service attack may not be a huge problem. For e-commerce firms such as Amazon or eBay, however, even a short amount of downtime is a significant problem.

Calculating the costs of these attacks is difficult, when you consider the potential for damaged reputations and loss of customer loyalty. That’s why Yayla’s research has focused on changes in market value. As investors become less sensitive to such attacks, however, he’s looking for new ways to quantify the impact of information security issues.

In Yayla’s latest work, he tries to establish whether companies that experience security breaches are less successful than those that do not. Instinctively, it would seem that having secure IT is a competitive advantage, he says.

Yayla, who’s from Istanbul, Turkey, earned his doctorate in management information systems from Florida Atlantic University and received a master’s degree from Duquesne University. He did his undergraduate work at Istanbul Technical University. In addition to information security, his research interests include strategic use of IT in companies, mostly focusing on the alignment of IT strategy with business strategy, as well as designing appropriate compensation for chief information officers.

The next few years will see new types of IT security breaches, Yayla says, citing concerns about mobile banking and “social engineering” attacks in which someone is manipulated into disclosing sensitive information.

“Basically, the more information we store, the more we have to lose,” he says. “With smart phones, we are even more open to attacks. Mobile applications are not as secure. In the near future, we’ll be paying for products and services with our phones. What happens when we lose a smart phone that has direct access to our bank?”

“Ranging from colorful buttons and pointers to touch screens and gestural feedback systems like the Wii, these user interfaces inform the way consumers learn and even ‘talk’ to a product,” she says.

Too many companies, she says, have marginalized product design. When it comes to marketing, most firms focus on form and function and may emphasize brand and price. But the consumer forms all kinds of perceptions about a product’s usability even before she ever picks it up. “User interface design is one of the key drivers of consumers’ purchase intentions and willingness to pay,” Ibrahim says. “I would like companies to build bridges between the marketing and design teams.”

Apple, creator of the iPhone, is an example of a company that understands the connection between user interface design and marketability, she notes. The cell phone industry at large, however, has a huge challenge when it comes to UID: Many phones are returned after purchase, and the majority of cases involve usability problems. The situation, called the “no fault found” phenomenon, offers a classic example of the way UID affects consumers and companies alike. “When a product is returned, it becomes a marketing problem,” she says.

Ibrahim studied electronics and communications as an undergraduate in India and completed an MBA in international marketing. She worked for an engineering design services firm for eight years before returning to school for a doctorate. Now she uses specialized software to make 3D models of product concepts for use in her experiments. She’d eventually like to expand her research to include automotive UID and also take a look at the way user interfaces influence the way people interact through social networks.

Manoj Agarwal, professor of marketing at Binghamton, says Ibrahim is exceptionally self-directed. “I can talk to her at a high conceptual level,” he says. “She also pushes me a lot, which is good. She’s full of ideas.”

Agarwal says Ibrahim has been able to integrate ideas from numerous disciplines in her work, including engineering, marketing and even organizational behavior and leadership. He believes that understanding UID will be increasingly vital in the next few years, as information and entertainment move to cloud-based systems and touch screens become more prevalent.

Ibrahim, who hopes to pursue an academic career after she earns her doctorate, says her work is driven by what she sees in the marketplace. “This is something you can see and feel in your daily life,” she says. “It’s important that these ideas should reach consumers as well as researchers.”

New research from Binghamton University suggests that strengthening parts of the law, enacted in the wake of the Enron meltdown and other corporate scandals, would improve corporate performance and shareholder value.

Yan Zhang, an associate professor of accounting, has found:

• Companies with greater accounting transparency have greater cash value and less wasted spending.

• The independent and expert audit committees required by Sarbanes-Oxley — or SOX — are only as effective as a firm’s chief executive is weak: The stronger the CEO, the less effective the audit committee.

• Measures meant to improve financial reporting quality have unintended costs.

“SOX is good, but it doesn’t solve the problem entirely,” Zhang says.

Before the passage of Sarbanes-Oxley, big accounting firms such as Arthur Anderson (Enron’s auditor) lacked independence. A key provision of SOX is removing conflicts of interest for these firms. In fact, it’s now unlawful for auditors to perform various non-audit services for their audit clients. The Public Company Accounting Oversight Board has been seeking public comment on how to further improve the independence of the outside auditing firms retained to examine companies.

“Every now and then, inspectors can trace an audit failure to a competence issue, such as in the design of the audit methodology or in its execution,” says James R. Doty, chair of the oversight board. “But on the whole, these firms are highly competent. And yet the failures continue to occur, in spite of firms’ remediation efforts. I am left with the inescapable question whether the root of the problem is auditor skepticism, coming to ground in the bedrock of independence. The loss of independence destroys skepticism.”

The impact of CEO power

Zhang’s research suggests that the board should consider limits to the influence a chief executive can have on the audit committee, in addition to the outside audit firms.

In the post-SOX era, stock exchanges prohibit CEOs from being directly involved with selecting members of the audit committee, but that doesn’t guarantee the committee will be free of a CEO’s informal influence. Zhang and her colleagues set up a metric to gauge how powerful a chief executive is, measuring prestige, expertise, corporate ownership and structural power.

The data showed that CEO power weakens the effectiveness of audit committee financial expertise in reducing earnings restatements — an indication that a supposedly independent and expert audit committee could still be influenced, even if informally, by a chief executive. A chief executive could refuse to provide necessary information or obfuscate details the audit committee requires. And a strong CEO can get away with it.

“The purely independent nominating committee doesn’t solve the problem,” Zhang says. “It merely mitigates the problem.”

Says oversight board spokesman Brian Goodnough: “Anything pertaining to CEO and CFO power over the company is an area we’ve particularly gotten into.”

Zhang’s study didn’t consider the potential effects of limiting audit firm tenure, but her first suggestion in countering the effect of a powerful CEO is more direct: Rebalance the power other directors have to counter the chief executive, regulation that would require action by the Securities and Exchange Commission.

More transparency, less waste

Doty and other members of the oversight board are concerned about transparency, but were under pressure in late 2011 to ease disclosure regulations, even though Securities and Exchange Commission Chairman Mary Schapiro has called for increased transparency in the capital markets to protect investors. Zhang’s research suggests they should stay the course, or even force increased transparency.

Zhang and a colleague examined the cash on hand of a number of companies and found that opaque (less transparent) companies had a perceived discount for their cash levels: Investors valued cash on hand as low as 45 cents per $1. Transparent firms saw that value around $1.05 per $1.

“Taken together, our findings suggest that managers in firms with fewer disclosure activities are less subject to scrutiny of capital markets and thus are more likely to expropriate cash assets,” they write. And that can lead to empire building.

The logic is this: A CEO is looking to expand the company, because a larger company brings greater compensation. With little transparency and a large amount of excess cash, a CEO may be tempted to squander cash on weak acquisitions. “A lot of firms are sitting on too much cash right now,” Zhang says.

“The empire-building motive is particularly severe when managers control cash levels in excess of those needed for operations and investment,” she writes. “Lending further credence to the monitoring effect of disclosure activity, we find evidence that the negative effect of major expansion on shareholder value is reversed when the firm has sufficient disclosure activities.”

SOX and insider trading

One section of Sarbanes-Oxley requires audit committees to include financial experts. Originally, SOX 407 narrowly defined a financial expert as an accountant. Later the SEC broadened this definition by allowing others with financial expertise, such as a chief executive, investment banker or venture capitalist, to serve in this capacity as well.

Zhang’s research shows that the current broad definition comes at a price. She first found that audit committee financial experts outperform nonfinancial experts on audit committees in their trades of a firm’s stocks. She further divided audit committee members into two groups, accountants and non-accountant financial experts, and found that these “expertise rents” are driven by the nonaccounting financial experts. Accountants, she says, made fewer trades and gained less value than the nonaccountants, and the nonaccountants were more likely to have abnormal returns.

That suggests one of the following options:

• Accountants and CPAs, governed by professional ethics that require them to place their fiduciary duty ahead of their own gain, forgo opportunities to earn expertise rents.

• Nonaccountant committee members — venture capitalists, CEOs and others — may be more experienced in investing in the capital market and thus trade more aggressively than accounting financial experts.

• The nonaccountant financial experts may be more likely to engage in inappropriate insider trading. (Zhang’s research has not delved into this possibility.)

“This is the first study, to our knowledge, that demonstrates a negative aspect of mandating a financial expert on the audit committee,” Zhang says.

Her solution? Require all financial experts on the audit committee to be accountants, supporting the law’s original approach. “Overall,” she says, “our findings suggest that by restricting financial expertise on the audit committee to accounting financial experts, expertise rents earned by audit committee financial experts will be significantly reduced.”

With SOX up for debate, Zhang’s work suggests ways that additional reforms can rebuild investors’ faith in the market. Her findings are forthcoming in top-tier publications, including the Accounting Review.

“Is the reform good enough? Is it working?” she asks. “We do see financial improvements and an improvement in earnings quality, but regulators need to do more.”