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Research Notes



Executives use stock buybacks to manage performance results
Corporate executives have incentives to use stock buybacks to manage the short-term performance results of their firms, according to researchers at the Business School.

Share repurchases can help companies increase earnings-per-share growth, mask earnings shortfalls and relieve selling pressure on stock prices when insiders are unloading large blocks of their own holdings, Business School researchers say. (University Record stock photo)

Share repurchases can help companies increase earnings-per-share growth, mask earnings shortfalls and relieve selling pressure on stock prices when insiders are unloading large blocks of their own holdings, they say. However, these short-term benefits may not always be in the best interests of a company and its shareholders in the long run.

Using cash to repurchase shares may force a firm to increase its borrowing or reduce its investment in good projects, both of which damp future earnings growth, the researchers say. Moreover, stock buybacks can obscure transfers of shareholder wealth to managers and enrich executives whose incentive pay is based on earnings-per-share growth.

In a study forthcoming in the Journal of Accounting and Economics, Douglas Skinner and Venky Nagar of the Business School, along with Daniel Bens and M.H. Franco Wong of the University of Chicago, investigate whether corporate executives' stock-repurchase decisions are affected by their incentives to manage performance results, specifically, diluted earnings per share (EPS).

"Corporate executives manage diluted EPS for the same reasons they manage reported earnings more generally," says Skinner, professor of accounting at the Business School and a Neubauer Faculty Fellow and visiting professor of accounting at the University of Chicago Graduate School of Business.

"Investors reward firms that report consistent earnings growth, consistently meet analysts' earnings forecasts and avoid earnings disappointments. Since earnings are usually reported on a per-share basis, and now most typically on a diluted per-share basis, these results are likely to apply to management of diluted EPS."

Advertising images: Less is more

When it comes to the size of pictures in print ads, bigger isn't necessarily better, according to a Business School study.

Contrary to advertisers' popular belief, increasing the size of the visual element does not increase consumers' total attention to an advertisement, the study shows. To attract maximum attention, advertisers are better off devoting more space to the text portion and increasing the headline size than using large photos or illustrations.

"Marketers cannot persuade consumers unless they have their attention first, and attention is progressively the bottleneck—in fact, it has been called the 'scarcest resource' in business," says U-M marketing professor Michel Wedel. "When print ads fail to attract consumers' attention, the financial implications are huge."

In a forthcoming study in the Journal of Marketing, Wedel and colleague Rik Pieters of Tilburg University in The Netherlands used infrared eye-tracking technology to document how consumers' attention is captured and transferred by the three key elements of print advertisements—brand, pictorial and text.

They observed the reactions of more than 3,600 consumers to 1,363 full-page print ads in 65 consumer magazines published in the Dutch market, collaborating with The Netherlands-based research company Verify International. The magazines contained 812 national and international brand names in 71 product categories, including airlines, alcoholic beverages, cars, cleansing products, clothing, coffee, pet foods, restaurants and retail stores.

"Devoting more space in the ad to text prompts reading, which has an overall positive effect in gaze duration—in other words, how much attention consumers devote to the ad in its entirety," Wedel says. "Advertisers would be ill-advised to increase the size of the pictorial in an effort to maximize attention to the advertisement as a whole."

Inexpensive four-drug combo saves heart patients' lives

An inexpensive cocktail of four tiny pills can make a big difference in heart patients' death risk, a U-M study finds. And the life-saving effect of the four-drug regimen is bigger than the sum of its parts.
Cardiovascular Center researchers report that heart attack and unstable angina patients who were prescribed four types of proven medications had a 90 percent lower risk of dying in the six months after they left the hospital than those who received none of the drugs. (Photo illustration by Todd Mckinney)

In the paper, Cardiovascular Center (CVC) researchers report that heart attack and unstable angina patients who were prescribed all four types of proven medications had a 90 percent lower risk of dying in the six months after they left the hospital than those who received none of the drugs. Even patients who got only two or three of the drugs had a much lower death risk than those who got none.

The research is published in the journal Circulation, and an accompanying editorial notes the clinical importance of the findings.

The four classes of medications are: anti-platelets (aspirin and other drugs that keep blood clots from forming); statins (cholesterol-lowering drugs); ACE inhibitors (blood pressure-lowering drugs that have other beneficial effects); and beta blockers (adrenaline-blocking drugs that ease the burden on the heart).

The study is the first to show the power of the four types of drugs together. The results surprised the researchers.

"We knew that each of these kinds of drugs works pretty well alone, but we never expected that together they would be this powerful at improving survival," says lead author and cardiologist Dr. Debabrata Mukherjee. "These results clearly show that the effect of combination therapy is synergistic, not just additive: the drugs work together to create a bigger benefit for the patient."

CVC clinical director Dr. Kim Eagle was the senior author. The other authors were Drs. Jianming Fang, Stanley Chetcuti and Mauro Moscucci, and registered nurse Eva Kline-Rogers, all of the CVC.

Patterns in complicated networks

The world is full of complicated networks that scientists would like to understand better—human social systems, for example, or food webs in nature. But discerning patterns of organization in such vast, complex systems is no easy task.

"The structure of those networks can tell you quite a lot about how the systems work, but they're far too big to analyze by just putting dots on a piece of paper and drawing lines to connect them," says Mark Newman, assistant professor of physics and complex systems.

One challenge in making sense of a large network is finding clumps—or communities—of members that have something in common, such as Web pages that all are about the same topic, people who socialize together or animals that eat the same kind of food. Newman and collaborator Michelle Girvan, a postdoctoral fellow at the Santa Fe Institute in New Mexico, have developed a new method for finding communities that reveals a lot about the structure of large, complex networks. Newman discussed the method and its applications last month at the annual meeting of the American Association for the Advancement of Science in Seattle.

"The way most people have approached the problem is to look for the clumps themselves—to look for things that are joined together strongly," Newman says. "We decided to approach it from the other end," by searching out and then eliminating the links that join clumps together. "When we remove those from the network, what we're left with is the clumps."

The researchers tested their method on several networks for which the structure was already known—college football conferences, for example. They and other researchers who have learned about their work have gone on to apply the technique to systems where the structure is not as well understood, looking at everything from networks of Spanish language Web logs to communities of early jazz musicians to a food web of marine organisms living in Chesapeake Bay.

Detroit's digital divide due to income, not race

The digital divide in the Detroit area—one of the most racially segregated regions in the country—is based not on race but disparities in income, U-M researchers say.

"African Americans are not significantly less likely than others to use a computer," says Wayne Baker, professor of management and organizations at the Business School and faculty associate at the Institute for Social Research (ISR). "Moreover, race does not predict either the number of computers used at home or the frequency of computer use. While some analysts of the digital divide might expect otherwise, race appears not to be the crucial variable in structuring Detroit's digital divide."
U-M researchers say the digital divide in the Detroit area is based not on race but disparities in income. (University Record stock photo)

Using data from the 2003 Detroit Area Study, Baker and colleague Kenneth Coleman, an ISR faculty associate in the Center for Political Studies, found that 75 percent of residents in Wayne, Macomb and Oakland counties use a computer and 68 percent use the Internet.

The researchers found that computer and Internet usage has a positive impact on social interaction. For example, users of e-mail are nearly three times as likely to visit the home of someone from a different neighborhood and 1.5 times as likely to socialize with someone of a different race.

According to the study, 67 percent of African Americans (compared with 78 percent of whites and other groups) use a computer and 53 percent use the Internet (compared with 73 percent of whites and other groups). Both of the percentages for computer and Internet use are above the national averages of 56 percent and 40 percent, respectively, for African Americans.

Among people earning less than $20,000, roughly 35 percent use a computer and 23 percent use the Internet, while among those making at least $50,000, more than 80 percent use a computer and the Internet, the study shows.

Eating disorders caused by more than body image

Women with eating disorders often suffered abuse or trauma as children, and that interferes with them developing strong identities as independent women, says Karen Stein, associate professor at the School of Nursing. Vulnerable in this way, they fixate on body image as a socially valued way to define themselves.

Patients who suffer from eating disorders typically have distorted body images, thinking of themselves as fat even as they starve themselves. But Stein does not simply want to help these people change their eating habits or body image; she wants to know why they developed a poor body image in the first place, and help them overcome those root causes.

Stein specializes in psychiatric and mental health nursing, and her research focuses on personal reflections as motivators and regulators of behavior.

She is in the middle of a $1.75 million, five-year National Institute of Nursing Research Grant/ National Institutes of Health-funded clinical trial of new ways to treat patients with anorexia nervosa and bulimia. Participants are 18- to 35-year-old women.

In the Possibilities Project, Stein's approach is to work with the patients on the whole range of identities that make up a person's self image, such as daughter, athlete or artist, and to focus on building these new positive identities.

The project's theory is that eating disorders stem from problems women experience in their thoughts and beliefs about themselves. Some women do not build a strong identity early in life, and that leaves them feeling uncertain, confused or dissatisfied about who they are.

Stein plans to present preliminary results of her clinical trials at the annual meeting of the International Academy of Eating Disorders in April. The project still is accepting participants. To learn more, visit http://www.umich.edu/~possibil/index.htm.

Rectal cancer treatment gaps persist, especially for African Americans

Colorectal cancer may be getting a lot of attention in the public eye, but many rectal cancer patients still aren't getting the best care—especially those who are African American.

Those findings are drawn from a study published in February in the journal Archives of Surgery by a U-M Health System (UMHS) surgeon and her colleagues. The study adds to the long list of racial disparities already known to exist in colorectal cancer incidence, screening and treatment. It also confirms that many patients of any race still aren't receiving appropriate post-surgery radiation therapy.

The study finds that African Americans with rectal cancer were diagnosed at a younger age than whites, and were more likely to have reached an advanced stage of disease progression before their cancer was caught.

The study showed that a higher percentage of whites than Blacks had a kind of sphincter-sparing surgery, while Blacks were 42 percent more likely than whites to have sphincter-ablating procedures called abdominoperineal resection. Having surgery that removes the bowel sphincter means they would have to wear a waste-collecting colostomy bag for the rest of their lives.

In addition, African-Americans were less likely than whites to get radiation before or after surgery. But in fact, only half of patients received such radiation, no matter what their race—despite the fact that radiation after surgery has been proven to help survival.

Dr. Arden Morris, a colorectal surgeon in the Division of General Surgery and the Comprehensive Cancer Center, began the study while she was a Robert Wood Johnson scholar at the University of Washington, using the Surveillance Epidemiology and End Results cancer database. The research team also included doctors from the University of Minnesota and the University of Washington. It was partially supported by the Robert Wood Johnson Foundation.

For more information on colorectal cancer treatment and surgery at the Comprehensive Cancer Center, visit http://www.cancer.med.umich.edu or call the Cancer AnswerLine at (800) 865-1125.

Evolution caught in the act

An experiment that forced E. coli bacteria to adapt or perish showed that, in a pinch, they were capable of improvising a novel molecular tool to save their skins.

"The bacteria reached for a tool that they had, and made it do something it doesn't normally do," says James Bardwell, associate professor of molecular, cellular and developmental biology. "We caught evolution in the act of making a big step."

This also turns out to be a new way of making molecular bolts called disulfide bonds, which are of particular interest to the biotechnology industry. Disulfide bonds are stiffening struts in proteins that also help the proteins fold into their proper, functional, three-dimensional shapes.

In a paper published Feb. 20 in the journal Science, a joint research team at U-M and the University of Texas describes how a resourceful bacterium was able to develop an entirely new way to make disulfide bonds. This restarted its motor and enabled it to move toward food before it starved to death.

The laboratory of George Georgiou, professor of chemical and biomedical engineering at UT Austin, used a strain of mutant bacteria developed by Bardwell that had lost the ability to make disulfide bonds. These disulfides are critical for the ability of the bacteria's propeller-like swimming motor, the flagellum, to work. The researchers then put these non-swimming bugs to the test by placing them on a dish of food where, once they had exhausted the food they could reach, they either had to repair that broken motor or starve to death on the spot.

The bacteria used in the experiment were forced to use a protein called thioredoxin—which normally destroys disulfide bonds—to make the bonds instead. The altered thioredoxin was able to carry out disulfide bond formation in numerous other bacterial proteins by itself, without relying on any of the components of the natural disulfide bond pathway. The mutant bug managed to solve the problem in time, and swim away from starvation and multiply

Diabetes patients skip medications to save money

In a nationwide survey, U-M Health System (UMHS) researchers found diabetes patients' prescription drug costs—frequently more than $100 a month—created a financial burden that led to increasing credit card debt, borrowing money from family or friends, and even cutting back on basic needs such as food or heat.

Nearly one in five older adults with diabetes in the survey reported cutting back on prescription medication in the prior year because of costs, and 15 percent used less of their medication at least once per month because of the cost.

By not taking their medications as prescribed, patients had poorer diabetes control, more symptoms, and worse physical and mental functioning, researchers found.

"We're really just beginning to appreciate how common it is that people with chronic illnesses are cutting back on prescription medication use because of the cost. We have not yet fully estimated the impact that these costs have on other aspects of patients' lives. We may already be seeing the fallout in terms of poorer health status. While prescription drug coverage may seem expensive, a good plan may save Medicare and other health insurance companies in the long run by preventing serious health problems," says John Piette, a career scientist at the Ann Arbor VA Healthcare System and associate professor of general medicine at the Medical School.

The findings were reported in two separate studies published last month, with Piette as the lead author. One study, published in the February issue of Diabetes Care, found that as people reported using more drugs each month it was more likely that they skipped doses to save money. In the second study, published in the February issue of Medical Care, patients who reported using less diabetes medication because of cost had higher blood glucose levels than those who took their medication as prescribed.

In addition to Piette, researchers included those from outside U-M and, on the Diabetes Care study, Dr. Michele Heisler, attending physician with the Department of Internal Medicine at UMHS. Both studies were supported by grants from the Department of Veterans Affairs, and the Medical Care study also was supported by the Agency for Healthcare Research and Quality.



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