Bauer, Kevin and Andrej Gill. "Mirror, Mirror on the Wall: Algorithmic Assessments, Transparency, and Self-fulfilling Prophecies"

forthcoming Information Systems Research

There are growing efforts of data privacy advocates and regulators to provide individuals with a right to explanation about the nature and use of algorithmic assessments that concern them. While desirable from an accountability, contestability, and bias safeguarding point of view, psychological and economic theories suggest that unintended behavioral side effects may occur. This paper puts these theories to the test. We use a series of controlled, incentivized investment games that vary investors’ and recipients’ access to an algorithmic assessment recipients’ likelihood to pay back an investment. Our results show that for erroneous algorithmic assessments, transparency can trigger self-fulfilling prophecies, causally changing assessed individuals’ behavior. Privately learning about being incorrectly categorized by an algorithm steers recipients’ behavior in the direction of the assessment. Becoming aware that an investor has disregarded an incorrect no-repayment assessment additionally reduces repayment. The results demonstrate that the introduction of algorithmic transparency creates a novel, unintended channel through which the use of (inaccurate) algorithms may have important side effects. Specifically, we provide evidence that algorithmic transparency enables algorithms to alter concerned individuals’ beliefs about what kind of person they are and what others expect of them.

Gill, Andrej, Heinz, Matthias, Schumacher, Heiner and Matthias Sutter. "Social Preferences of Young Professionals and the Financial Industry", 

Management Science, Volume 69, Issue 7, 2023

Trust is an important element of many financial transactions. Yet, the financial industry has been struggling with public mistrust. One explanation for this could be the selection of individuals who wish to work in and get job offers from the financial industry. In this paper, we examine the selection into the financial industry based on social preferences. We identify the social preferences of business and economics students, and, for more than six years, follow up on their early career choices as well as on their job placement after graduation. Students eager to work in the financial industry behave in a substantially less trustworthy manner and show less willingness to cooperate than those with other career plans. The job market does not alleviate this selection. Those subjects who find their first permanent job in finance behave in significantly less trustworthy manner in a trust game than those working in other industries. 

Eufinger, Christian and Andrej Gill. "Incentive-Based Capital Requirements"

Management Science, Volume 63, Issue 12, 2017

This paper proposes a new regulatory approach that implements capital requirements contingent on executive incentive schemes. We argue that excessive risk-taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea behind the proposed regulatory approach is thus that the more the compensation structure decouples bank managers' interests from those of shareholders by curbing risk-taking incentives, the higher the leverage the bank is permitted to take on. Consequently, the risk-shifting incentives caused by government guarantees and the risk-mitigating incentives created by the compensation structure offset each other, such that the manager chooses the socially efficient investment policy.

Gill, Andrej and Uwe Walz. "Are VC-backed IPOs delayed Trade Sales?"

Journal of Corporate Finance, Volume 37, April 2016

We investigate the role of venture-backing at the time of the initial public offering for the decision to subsequently be taken over and leave the exchange. We show, controlling for firm characteristics as well as the endogeneity of the involvement of VC, that VC-backed firms are significantly more likely to leave the exchange in the course of a take over. Our analysis sheds new light on decisions to go private, and even more so on the process of going public for VC-backed firms. Our findings suggest that, in a significant number of cases, VC-backed IPOs can be interpreted as delayed trade sales.

Gill, Andrej and Nikolai Visnjic. "Performance Benefits of Tight Control"

Journal of Private Equity (2015), Volume 18, Number 3

This study investigates the transition from being a listed company with a dispersed ownership structure to being a privately held company with a concentrated ownership structure. We consider a sample of private equity backed portfolio companies to evaluate the consequences of the corporate governance changes on operational performance. Our analysis shows significant positive abnormal growth in several performance ratios for the private period of our sample companies relative to comparable public companies. These performance differences come from the increase in ownership concentration after the leveraged buyout transaction.

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Current Projects

Current Research Projects


Gill, Andrej and David Heller. "Leveraging the (Un)Known: The Value of Patent Portfolios", R&R Journal of Banking and Finance

We provide new evidence on the relevance of patents for attracting external debt financing. For a representative, multi-country sample, we  find large positive effects of valuable patent portfolios on firms' debt capacity. To study this, we develop a novel patent portfolio value measure using granular information on patent fee payments. For identification, we investigate exogenous variation in patent strength arising from the staggered implementation of the 2004 EU Enforcement Directive. Results are strongest for financially constrained firms, which emphasizes the strategic potential of patents. Moreover, our  findings highlight the importance of a harmonized, reliable legal framework to spur these effects.

Gill, Andrej, Hett, Florian and Johannes Tischer. "Time-Inconsistency and Households' Financial Mistakes: Evidence from Bank Transaction and Behavioral Measurement Data", R&R Journal of Finance

Households regularly fail to make optimal financial decisions. But what are the underlying reasons for this? Using two conceptually distinct measures of individual time inconsistency, one based on bank account transaction data and one based on behavioral measurement experiments, we show that the excessive use of bank account overdrafts is linked to time inconsistency. By contrast, there is no correlation between a survey-based measure of financial literacy and overdraft usage. Our results indicate that consumer education and information may not substantially improve households' financial decision-making. Rather, behaviorally motivated interventions targeting specific biases in decision-making might qualify as effective policy tools.

Eufinger, Christian, Gill, Andrej and Florian Hett. "Central Bank Policy and Firm Behavior: Evidence from the Swiss Franc Shock", 2nd round R&R Journal of International Business Studies

How does central bank policy affect international firm activity? We analyze the Swiss Franc shock of 2015, where the Swiss National Bank (SNB) removed the EUR/CHF exchange rate floor and simultaneously reduced interest rates to negative levels. We show that the interest rate cut led to a higher investment rate and employment growth, giving Swiss firms an advantage vis-à-vis European firms: Swiss firms' net investment rate is between 8.4pp and 9.7pp higher and their employment growth is between 6.7pp and 9.8pp larger post-shock than those of comparable European firms. This stimulating effect of the interest rate cut mitigated the negative impact of the Swiss Franc shock for exporters.

Gill, Andrej, Heller, David and Nina Michel "Enabling or Accelerating? The Timing of Innovation and The Different Roles of Venture Capitalists", R&R Research Policy

Venture capitalists (VCs) shape the innovative activities of nascent firms, moving beyond the mere role of providing financial resources. This paper investigates the timing of patenting of young firms around their initial VC funding round to elicit two pivotal roles of how VCs affect their targets' innovative activities. To do so, we differentiate among firms with and without patenting activities prior to the initial funding round, allowing us to distinguish enabling and accelerating effects of VCs on firms' patenting activities. As we show, differences in the timing of patent filings are critical for eliciting these different roles. We find a positive enabling effect of VCs on the quantity and quality of patenting, unfolding directly after the VC steps in. This immediate effect suggests that VCs push their targets for rapid commercialization. Further, our results show no additional (i.e., accelerating) effect of the average VC on targets that already own patents before their first VC round. However, highly involved and experienced investors trigger such effects. We deploy a variety of estimations techniques on a matched sample of startups, and assess selection effects. To establish these results, we explore novel data that combines European firm-, patent-, and investment-level information on first-round targets between 1995 and 2015. The findings improve our understanding of the role of key intermediaries in startups' innovation processes.

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