By Putro Harnowo, Senior Content Manager, China Business Knowledge @ CUHK

There are many avenues for insurance companies or insurers to invest and generate profits while fulfilling their financial obligations. Among various options, bonds are particularly appealing due to their relatively stable returns and low risk. As a matter of fact, bonds play a crucial role in the overall investment strategy of insurers.

The US National Association of Insurance Commissioners (NAIC) points out in its Year-end 2023 capital markets update that the US insurance industry has a total investment of around US$2.85 trillion in corporate bonds, which accounts for 35 per cent of the industry’s total cash and assets. The European Central Bank also reported in September last year that US insurers hold nearly 40 per cent of US corporate bonds.

In many countries, insurers are highly regulated and mandated to report the value of their investment in financial statements to regulators and investors. Considering its significant portion, an estimated value or “fair value” of invested bonds would affect the insurers’ balance sheet and overall financial health. While insurers can value their own bond investments, many outsource this task to third parties to enhance transparency and comply with regulatory requirements.

However, a new study found that insurers strategically switch between external sources to seek out favourable fair value estimates of their bond investments. This practice is called fair value opinion shopping, which involves selecting sources that provide higher estimates and potentially inflate the real value of bond investments.

“There is a very common way of valuation where insurers switch the pricing sources, called third-party source switching behaviour,” says Koo Minjae, an Assistant Professor of Accounting at the Chinese University of Hong Kong (CUHK) Business School.

“There might be some opportunism going on when switching the pricing sources to get a more favourable estimate that is more consistent with what the insurers want: boosting their assets. After looking at certain instances where different sources generate conflicting estimates, we found that the opinion shopping motive dominates.”

Opinion shopping could impair financial reporting transparency and lead to mistrust among investors and policyholders. Policyholders may also misallocate and make inefficient investment decisions if the financial statements are misstated or inflated.

Opinion shopping vs. objective valuation

In the research paper titled Third-party source switches: Objective valuation or fair value opinion shopping? Professor Koo, along with Konduru Sivaramakrishnan of Rice University and Zhao Yuping of the University of Houston, analysed documents submitted to the NAIC by US insurers on their investments in bonds and other securities. The researchers obtained a sample comprised of 662,528 security-insurer-year observations from 1,852 unique insurer-years from 2014 to 2017.

The result confirmed that insurers strategically switch between third-party sources to either provide objective valuations or inflate fair value estimates by opinion shopping. While both motives exist, opinion shopping tends to be prevalent. The study highlights that opinion shopping is more widespread among financially weaker insurers with lower risk-based capital ratios. Opinion shopping is also more common among illiquid bonds or securities that are not traded frequently.

Furthermore, the researchers found that insurers engage in block-switching behaviour, where they strategically switch the price source for groups of securities rather than individual ones to make it less obvious to the regulators or the auditors. This can result in changes in fair value estimates for multiple securities within a block.

“We found evidence of opportunistic opinion shopping among insurers, even when they are regulated to disclose the source and pricing vendors at the security level.”

Professor Koo Minjae

As US insurers are regulated at the state level, with each state having its own regulations, Professor Koo and the team further interviewed several regulators. Many admitted that some insurers may opportunistically inflate their value estimates.

“What the regulators typically do is compare the same securities owned by an insurer with those of other insurers,” says Professor Koo. “If they think that the price is deviating quite a lot from other insurance companies, the regulators would advise or recommend the relevant insurers to readjust their financial statements.”

This comparison method is quite normal for valuing level-two assets that have no regular market pricing, such as bonds that are traded in not very active markets. Companies usually infer bonds at this level with other bonds that have similar interest rates or maturities.

Meanwhile, level-one assets are the easiest to value for their readily observable and transparent prices, such as listed stocks. On the other side of the spectrum, level-three assets have no observable market prices and can only be valued based on internal models or “guesstimates”.

Indicative signs of opinion shopping

In an additional analysis of 280 unique price sources, Professor Koo and her team found that the “Big Five” external price sources accounted for 63.2 per cent of the market share during the sample period, dominated by Intercontinental Exchange and followed by Bloomberg, Thomson Reuters, S&P, and Markit. These top players have more capital and the ability to better estimate the value of the securities.

Surprisingly, after re-estimating the effect of switches to Big Five and non-Big Five sources, the researchers found that switches to non-Big Five are associated with a greater deterioration in fair value estimate quality than switches to Big Five price sources. This result is consistent with opinion shopping.

“If we see some cases where the securities had been measured by Big Five but not anymore, there is a likelihood of manipulation ongoing,” says Professor Koo. “In such cases, the insurers might have switched to a vendor that can give them more favourable estimates.”

Enhancing fair value estimates

There is much literature on a fair valuation, and according to Professor Koo, the general view is that companies manipulate or engage in opportunistic inflation of the fair valuation to boost their assets. For example, opinion shopping can also be found among hedge funds, which are not mandated to disclose their security holdings, giving them incentives to inflate their value estimates.

Although insurers need to maintain their risk-based capital in a highly regulated industry, this does not apply to the less-regulated mutual fund industry.

“We found evidence of opportunistic opinion shopping among insurers, even when they are regulated to disclose the source and pricing vendors at the security level,” says Professor Koo. “Public companies are not mandated to disclose at the security level, so in that case, we are suggesting that there can be more opportunistic opinion shopping going on.”

To enhance the fair value estimates, Professor Koo recommends using multiple pricing sources for the same securities, instead of relying on only a single source. Regulators could also help by carrying out cross-validation and verification. For instance, state regulators can observe in real-time how the same security is valued by different states or different insurers in different states.

“The disclosure itself should be more transparent, in the sense that there may be something going on when insurance companies switch from a certain source to another,” she says. “Therefore, there should be more mandatory disclosure on why insurers are switching to another source.”

Lastly, more frequent external auditory reviews and regulatory reviews may be necessary. Currently, regulators only review an insurance company once every three to five years. “This frequency should be increased to verify and cross-validate the insurers’ estimates,” Professor Koo adds.

The post How insurers inflate bond values to mask underperformance first appeared on China Business Knowledge.

The post How insurers inflate bond values to mask underperformance appeared first on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

“A wealth of information creates a poverty of attention,” writes Herbert Simon, an American Nobel Laureate who proposed the concept of attention economy. In a world of information inundation, it is vital for businesses to master the art of attracting and monetising consumers’ attention.

Platforms like YouTube, Instagram, and TikTok have given birth to many content creators or “influencers”, many of whom have become global celebrities. The influencer marketing industry has seen exponential growth, expanding from US$1.7 billion in 2016 to US$24 billion by the end of this year, according to The state of influencer marketing 2024: Benchmark report by a social media research firm, Influencer Marketing Hub.

“The attention monetisation via e-commerce (AMveC) model allows businesses to focus on garnering consumer attention, which becomes the core strategic resource for businesses.”

Professor Tony Ke

In China, live stream selling has become a common norm among top influencers, with Crazy Little Yang Brother or Crazy Xiaoyangge, who also hosts e-commerce live streams, outperforming his peers with an annual net income of 3.21 billion Chinese yuan (US$451 million). This is no surprise as a new report by KPMG, Navigating the future of seamless commerce in Asia Pacific, found that Gen Z ranked social commerce and live streaming commerce as important parts of their shopping experience.

“The business strategy to monetise attention through e-commerce is economically feasible both in the short term and for the long haul,” says Tony Ke, Associate Professor of the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School.

E-commerce platforms are not the only ones that leverage content to captivate consumers and monetise their attention through direct product sales. The New York Times has introduced a digital store that not only offers books but also a diverse range of apparel and accessories, while Vogue went further by opening an online shop showcasing products curated by its editorial team.

However, there is much to understand about how attention monetisation works in a competitive market and how it helps smaller companies or individual content creators compete against the giants. Professor Ke and Mandy Hu, Associate Professor of the same department, along with their PhD student Wee Chaimanowong, as well as Cao Jingcun of the University of Hong Kong, delve into the model of attention monetisation via e-commerce (AMveC) in their latest research titled Attention Monetisation via e-commerce: Why do people buy groceries on an education app?

Differences from traditional business models

Unlike conventional business models like product merchandising and attention monetisation via advertisement, the AMveC model boasts its distinctive characteristics. Businesses adopting AMveC invest in content creation to allure consumer attention before monetising it by selling products from third parties and relying on e-commerce platforms to sell and deliver their products, instead of engaging in manufacturing.

“This model allows businesses to focus on garnering consumer attention, which becomes the core strategic resource for businesses,” Professor Ke explains, adding that the AMveC model also allows businesses to control over product assortment and price directly.

To formulate this model, the researchers conducted a large-scale randomised field experiment with a private online education service provider in China to scrutinise the viability of the AMveC model.

Various and updated product choices win

The researchers created a new in-app store and randomly assigned 100,000 users to one of their four stores that differ in product assortment (educational vs. non-educational) and prices (regular vs. high). The study revealed insights into consumer behaviour and purchasing trends over a 32-day period.

The findings indicated that the non-educational store with regular pricing tends to attract the most buyers and generate the highest sales, revenue, profit, and repeat purchases. Although fewer people shop in education stores due to the less popular product assortment, those who shop are more willing to spend more money. However, Professor Ke notes that the sales declined quickly over the experiment period for all the stores.

“This suggests that even though some customers indeed make repeated purchases, the stores still need to change the assortment of products frequently to boost sales,” he says.

Building competitive advantages for small firms

Given consumers’ limited attention, Professor Ke and his collaborators also explore how smaller companies can compete with industry leaders.

Compared to the leading firms with a wide range of products, small companies or fringe firms usually provide limited product selections. “The fringe firms may have limited resources to develop the necessary technologies, and therefore, even if they have access to a large selection of product assortment, it may not be optimal for them to offer all of them,” Professor Ke says.

Therefore, smaller firms can harness the AMevC model to compete against the dominant seller. Professor Ke highlights that in this model, the core strategy for small firms is to create appealing content that can capture consumers’ attention, and third-party products are just a means to monetise the attention. “Consumers visit the fringe firms for the content, instead of product consumption.”

On the other hand, the researchers also found that a discounted rate works best for businesses adopting the AMevC model. “A lower price compensates the business’ disadvantage in product assortment and also discourages consumers from continuing to search,” Professor Ke adds. “Fringe firms can secure consumers’ first visit via attention-grabbing content and retain consumers by charging a lower price.”

Managerial insights for companies

With the unstoppable rise of e-commerce platforms, more businesses are now leveraging the AMveC model, selling unrelated products to monetise the attention of a larger consumer base.

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The management team of the education platform Professor Ke collaborated with did not expect non-educational products to sell better than educational ones. After implementing an in-app store showcasing a mix of educational and non-educational products, as learned from the experiment, the platform saw a substantial 45 per cent revenue increase.

“Our research not only demonstrates AMveC as an economically viable business strategy, but also offers managerial insights on product assortment and pricing decisions,” says Professor Ke.

He emphasises that by focusing on engaging content creation, strategic product offering, and competitive pricing, small businesses can foster growth and co-exist in a frictional market with the leading seller.  “Sales are old and inaccurate, while eyeballs (attention) are new and informative.”

The post Attention is the new gold, but how to mine it first appeared on China Business Knowledge.

The post Attention is the new gold, but how to mine it appeared first on China Business Knowledge.

By Aaron Woolner

Amazon’s three-decade journey from a Seattle garage to a US$1.8 trillion market cap demonstrates the almost limitless potential of two-sided marketplaces in the internet age. It’s a simple concept; match buyers and sellers using their smartphones and then take a cut from the resulting trades.

Two-sided marketplaces, also known as consumer-to-consumer (C2C) platforms, lack inventory and have low staff costs, which powered the concept into sectors as diverse as freelancing, holiday rentals and second-hand clothes. They also permanently changed global shopping habits with China alone recording US$3.3 trillion worth of sales in 2023.

The success of Amazon and its Chinese peer Taobao demonstrates the other major advantage of this business model – scalability. But achieving scale costs money, lots of it. Amazon’s first profit in 2001 came off the back of losses close to US$150 million in the previous year, and other big names have plunged even further into the red as they pursued growth.

Uber burned through US$25 billion of cash over 13 years before recording its first quarterly profit in 2022, vacation home platform Airbnb lost US$1.2 billion in the year ahead of its 2020 IPO, and Walmart-backed Indian e-commerce outfit Flipkart burnt US$3.7 billion of investor’s cash in 2022.

“We have probably all seen many business cases where companies burn cash to grow their marketplaces in the early stage,” says Kevin Chen Hongfan, Assistant Professor of the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School.

While matching buyers and sellers and taking a cut is a simple idea, the interplay between the diverse groups active on these platforms is complex. With the established business model of C2C platforms typically being to subsidise the early stages of growth and then make profits over the long term, discovering the most efficient way to incentivise participation has major cost implications.

“What should the growth strategy be for a two-sided market that has many supply and consumer types? How is the growth strategy related to the most basic economic intuition that scarcity creates value?” Professor Chen asks.

In a paper titled The optimal growth of a two-sided platform with heterogeneous agents, Professor Chen uses an analytical model without a true dataset to answer the above questions. Co-authored by his colleagues from the same department, Professor Sean Zhou and Associate Professor Philip Zhang Renyu, as well as doctoral student Zhu Yixin, the paper delves into how growth potential and network structure influence the optimal commission approach for platforms during the growth and maturity phases.

“We have probably all seen many business cases where companies burn cash to grow their marketplaces in the early stage.”

Professor Kevin Chen Hongfan

Finding the scarcest agents in the marketplace

The number of variables involved in C2C platforms is vast, but Professor Chen says three key components exist for designing commissions in the platform’s growth strategy. “Firstly, scarcity creates value,” he says. “Targeting the scarcest type of market participants is a good growth strategy.”

The scarcest agents refer to either buyers or sellers that are currently underrepresented or have the lowest population ratio compared to a benchmark in the long run. For example, if the platform finds the benchmark to be optimal to serve 20 sellers and 100 customers on the platform, while currently there are two sellers and only five buyers, the buyers are the scarcest agents because they are in lower numbers relative to the platform’s targeted state.

Secondly, while the above example illustrates how to identify the scarcest resources in the marketplace, the platform needs to identify the state of the size of market participants, under which it can maintain and maximise long-term profit. Here, the scarcest agent refers to the user segment that has the lowest population ratio compared with this state.

“Such a benchmark can provide good guidance for the platform’s commissions,” he says. By focusing on the scarcest agents, the platform can implement strategies to attract more of them, such as offering incentives, lowering fees, or enhancing marketing efforts to bring in more buyers or sellers, depending on which group is lacking.

“The scarcest type could change over time, but the platform should always focus on the growth of the market’s scarcest resources – this could be either sellers or buyers. Combined with the network effects in a two-sided market, this could support strong long-term revenue growth.”

“Thirdly, the platform could target the quality of service from both sides as the metric in the design of its commissions, and these should be structured to achieve the fraction of market participants to participate in trades out of the potential market size,” Professor Chen adds.

Different strokes for different folks

C2C marketplaces vary widely. The needs and spending power of a corporate client looking to hire a web developer for a long-term project over Upwork are markedly different from those of a teenage Taylor Swift fan scouring Etsy for a new friendship bracelet.

Take Amazon, the most visited e-commerce platform globally. Its network effects can power supersized growth in C2C marketplaces, which can result in a winner-takes-all competitive landscape. However, this is not true for all businesses and every location.

Consumers are willing to use multiple food delivery services, and ride-hailing apps such as Uber and Lyft have been unable to repeat their US success in numerous Asian markets when faced with competition from local players like Grab and Gojek.

“Every platform is different and the competitive landscape of the platform determines how urgent the platform needs to take the market.  However, growing the scarcest agent type relative to the long-run benchmark could create value in the long term,” he says.

The post Sustainable ways to grow cash-burning marketplaces first appeared on China Business Knowledge.

The post Sustainable ways to grow cash-burning marketplaces appeared first on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

The adage “you are what you wear” often leads many to buy branded products. People normally buy luxury brands for their extraordinary appeal and the confidence they can inspire. For some professionals like lawyers, accountants, investment bankers, and the like, wearing a Rolex watch or a Louis Vuitton handbag could help them catch elite clients.

The consumer’s thirst for high-end products is no secret in China, where the luxury market is expected to reach 816 billion Chinese yuan (US$112 billion) in 2025, accounting for about 25 per cent of the global luxury market share, according to PwC’s 2023 report. However, luxury consumption can lead to negative judgments.

“Luxury consumers are conferred higher status and receive preferential treatment from others, but such benefits come with a hefty social price.”

Professor Jung SungJin

Adam Smith, a pioneer in modern economics, classified goods into necessities, basic goods, affluence goods, and luxuries. Since then, scholars have viewed luxury products as exclusive and expensive items only accessible to the wealthy.

However, recent economic uncertainties have led Chinese consumers to avoid flaunting their wealth in favour of more discreet fashion due to “luxury shame”, similar to what happened in the US during the 2007-2008 financial crisis, according to a June report published by Bain consultancy.

“These are the social costs of luxury consumption,” says Jung SungJin, Assistant Professor in the Department of Marketing at The Chinese University of Hong Kong (CUHK) Business School.

Many luxury consumers worry that their choices may be judged negatively by others, leading them to appear pretentious, wasteful, and snobbish. These concerns can deter individuals from fully enjoying their luxury items as they grapple with potential backlash.

“Luxury consumers are conferred higher status and receive preferential treatment from others, but such benefits come with a hefty social price,” he adds. “They are often viewed as striving for status and managing impressions, and therefore judged as inauthentic.”

Express your true emotions

In a series of experiments, Professor Jung found that many individuals actually enjoy and love luxury products, yet a significant portion of them choose to keep this fervour hidden from others, especially from co-workers and social media followers. “This is because they worry about receiving negative judgments,” Professor Jung explains, citing an example of one individual who indicated wanting to avoid being thought of as a snob.

So, how can luxury consumers alleviate those negative social consequences? Professor Jung, in collaboration with Charlene Chen of Nanyang Technological University and Andy Yap of INSEAD, sought to answer this question in their latest research titled Expressing passion for luxury enhances perceived authenticity. The researchers proposed that openly sharing one’s passion for luxury can lead others to perceive them as more authentic. “Authenticity here refers to acting in accordance with one’s true self,” says Professor Jung.

The team carried out multiple studies to examine their hypotheses. The first experiment examined the consequences of expressing passion for luxury sneakers. The results show that demonstrating one’s passion for luxury helps alleviate the negative impressions associated with luxury consumption.

“We found that the luxury consumer was perceived as less warm than the non-luxury consumer,” says Professor Jung, “However, more importantly, expressing passion for luxury helped mitigate these social costs, making the luxury consumer appear more authentic and, therefore, warmer.”

Positive interpersonal outcomes

In the following experiment, Professor Jung and his co-authors aimed to investigate the reasons why luxury passion expression can enhance one’s perceived authenticity. “This occurs because luxury passion expression makes the luxury consumption appear more intrinsically motivated,” Professor Jung says.

Existing literature indicates that observers often attribute luxury consumption to external motives. In other words, they assume that consumers engage in luxury consumption to gain external benefits like status, social approval, and favourable impressions.

However, expressing passion shifts this inference. “A consumer who expresses passion for luxury will be seen as pursuing the enjoyment and stimulation inherent in the usage of luxury products, such as the pleasure derived from craftsmanship,” Professor Jung explains.

Publicly expressing one’s passion for luxury can make individuals appear more authentic, leading to several positive interpersonal outcomes. Firstly, increased perceptions of authenticity tend to make individuals seem warmer and more trustworthy. “People often associate warmth with genuine intentions, and feel less defensive toward authentic individuals and regard them as more trustworthy,” Professor Jung explains.

Another positive behavioural outcome of enhanced perceived authenticity is people’s increased interest in learning more about luxury consumers. “Disclosing a genuine, unvarnished self and not having a hidden motive is highly valued in interpersonal relationships,” says Professor Jung, adding that these positive effects can coexist with the status benefits of luxury consumption.

Unlike luxury consumption, non-luxury consumption is generally not linked to underlying motivations such as status enhancement or impression management. Thus, the researchers found that the benefits of passion expression are attenuated under the scenario of non-luxury consumption.

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A win-win scenario

While the luxury market continues to grow, this research offers practical insights for both luxury brands and their consumers.

On the one hand, the findings inform consumers that there is no need to hide their passion for luxury goods. On the other hand, Professor Jung suggests that companies can encourage consumers to showcase their passion explicitly. For example, they could nudge consumers to talk about the craftsmanship of the brand, or share and engage with specific social media content.

While expressing passion for luxury is generally viewed positively, Professor Jung underscores that the impact of passion expression on social evaluations might differ depending on what people are passionate about. “One avenue worth investigating is whether passion expression generates similar benefits when applied to other types of impression management behaviours, such as humblebragging about one’s professional achievement.”

The post The art of wearing luxury products first appeared on China Business Knowledge.

The post The art of wearing luxury products appeared first on China Business Knowledge.

By Ellis Ng

In the past few decades, people across China have grown more and more interested in owning homes and in growing their savings by buying and selling shares in real estate developers. Real estate development is a major pillar of the economy of Mainland China, accounting for more than a quarter of its gross domestic product.

However, the growth of this sector has long been fuelled by debt, with media referring to it as the “grey rhino” of outstanding loans worth 47.8 trillion Chinese yuan (US$7.41 trillion) in the first quarter of 2020. As much as 46 per cent of the US$139 billion in US$ bonds trading at distressed prices around the world at the time were issued by Chinese real estate developers, with China’s Evergrande Group notably being the most indebted firm before eventually defaulting on its debt in 2021.

Following a Hong Kong court order for its liquidation in January 2024, Evergrande’s shares on the city’s bourse fell from a peak above HK$25 in 2020 to just a few cents now. Other major developers like Country Garden, Kaisa Group, Fantasia Holdings and Sunac Holdings have had to deal with similar liquidity crunches and crashes, although perhaps not as devastating.

“The three red lines policy has effectively lowered the risk borne by real estate firms as these firms are more cautious in managing debts, resulting in a lower likelihood of firms suffering from share price crashes.”

Professor Desmond Tsang

A recent paper titled Firm leverage and stock price crash risk: The Chinese real estate market and three-red-lines policy finds that real estate firms that rely heavily on debt financing face substantially higher risks of abrupt and severe stock price crashes. Co-authored by Desmond Tsang, Associate Professor of Real Estate at the School of Hotel and Tourism Management at the Chinese University of Hong Kong (CUHK) Business School, Chu Xiaoling of the University of Macau and Deng Yongheng of the University of Wisconsin-Madison, the study offers a new way to look at China’s struggling real estate developers and explores how the “three red lines” have helped lower the risk of stock price crashes.

The study found that leverage exerts a positive and significant influence on the risk of crashes in share prices. The more leverage that firms have (i.e., the more reliant they are on debt to finance operations and growth), the greater the likelihood of their shares crashing.

From theory to reality

“Crash risk is a precursor of default, and hence, even as our paper focuses on crash risk, it has implications for the total risk borne by real estate investors in general,” says Professor Tsang.

The dangers of such huge levels of debt were not lost on the Chinese government, which in 2020 moved to deleverage the sector with its three red lines rule to regulate how developers take on debt. The rules require developers to keep a debt-to-asset ratio (excluding advance receipts) of less than 70 per cent, a net debt ratio of less than 100 per cent of equity, and a cash-to-short-term debt ratio of more than 100 per cent.

The three red lines sought to tighten credit and halt speculation, reducing the risk of share price crashes not just for real estate developers but for any high-leverage sector, Professor Desmond and his co-authors wrote. The rules have led to firms deleveraging and introduced more stability and sustainability over the long run as a net positive effect.

Chinese real estate firms have traditionally relied more heavily on debt financing than firms elsewhere and use more borrowed money to fund operations and growth, the study showed. Investors worried about overly indebted firms defaulting on their debts and were quick to abandon their shares, leading to crashes in share prices.

“Prior research has shown that weak institutional protection is conducive to managers making more aggressive actions,” says Professor Tsang. “Our findings consistently indicate that in regions with weaker institutional environments, the impact of leverage on crash risk is greater, meaning that managers’ actions bear more significant consequences when the institutional environment is weaker.”

As Beijing loosens restrictions and pumps in new funding to revitalise the sector, Professor Tsang hopes that firms will be more judicious with their debt. “We foresee after the lesson, real estate firms hopefully will be more prudent in managing their debt policies, such that crises like these would happen less in the future for the Chinese real estate market,” he says.

Reducing crash likelihood

The researchers used a difference-in-differences analysis to compare Chinese real estate firms with a debt-to-asset ratio above the 70 per cent red line threshold to less-leveraged firms. The analysis found that the policy has decreased the risk of sudden share crashes, more so for these high-leveraged firms.

An even stronger correlation was visible when all three red line measures – debt ratios, cash-to-short-term debt ratios and interest coverage ratios – were considered together. The combined measures were more strongly and significantly correlated with crash risk magnitude and probability. “In short, the three red lines policy has effectively lowered the risk borne by real estate firms as these firms are more cautious in managing debts, resulting in a lower likelihood of firms suffering from share price crashes,” says Professor Tsang.

While the three red lines rule has at least partially contributed to Evergrande’s defaults by limiting its borrowing capacity and forcing it into a downward leverage-induced spiral, the new policy has mitigated the likelihood of future share price crashes, the paper argues.

Lower trust, more volatility

The researchers also found that the most significant negative effects of leverage on share price crash risk were concentrated in regions with lower social trust, fewer market-oriented reforms and slower economic growth.

Investors in provinces with lower levels of enterprise trust are more sceptical of company reports and financial statements and, in turn, quicker to sell shares at the first sign of trouble, leading to greater share price volatility. Similarly, in provinces with slower economic growth, concerns about default risk were more prominent.

Professor Tsang is hopeful that crises like the one Evergrande experienced will become less common going forward. “As the institutional environment improves, investor confidence will grow and firms will have more opportunities,” Professor Tsang adds.

The post Debt overreliance poses crash risks for property developers first appeared on China Business Knowledge.

The post Debt overreliance poses crash risks for property developers appeared first on China Business Knowledge.

By Putro Harnowo, Senior Content Manager, China Business Knowledge @ CUHK

There is a tendency for stocks that have performed well in the past to continue performing well in the short term and vice versa. This pattern is called price momentum, which reflects the idea that past performance can influence future stock movements. In the US stock markets, this price momentum presents in the medium-term range of one to 12 months before it reverses in the long-term range of two to five years.

However, such medium momentum and long-term price reversal are absent in Chinese bourses, despite being the world’s second-largest with more than 4,700 listed stocks. Instead, their stock prices exhibit strong momentum at the daily level, indicating daily price momentum.

“In daily price momentum, stocks in Chinese markets exhibiting strong performance today are likely to maintain this outperformance tomorrow,” says Jiang Wenxi, Associate Professor in the Department of Finance at the Chinese University of Hong Kong (CUHK) Business School. “This momentum persists for one to two days before exhibiting a reversal within a week.”

“The Chinese stock market is predominantly occupied by retail investors and is characterised by frequent influxes of new investors, a common trait among emerging markets.”

Professor Jiang Wenxi

In a research paper titled Daily momentum and new investors in an emerging stock market, Professor Jiang and an Associate Professor in the same department, Gao Zhenyu, along with Xiong Wei A of Shenzhen Stock Exchange and Xiong Wei of Princeton University, tried to cast light on this phenomenon.

“The Chinese stock market is predominantly occupied by retail investors and is characterised by frequent influxes of new investors, a common trait among emerging markets,” says Professor Jiang. “These new investors, possessing limited investment experience, are prone to cognitive biases and susceptible to the emotional impacts of market fluctuations.”

The main voice behind the noise

Professor Jiang and the team analysed daily, weekly, and monthly stock return data from the China Stock Market and Accounting Research database. The sample covers stocks from two major bourses, the Shanghai Stock Exchange and the Shenzhen Stock Exchange, from 2005 to 2019.

A distinct feature in Chinese stock exchanges is the ability to track all trading activities of individual investors across various brokerage firms using national identity documents. The researchers then categorise new investors as those who opened accounts within the past three months and have traded at least one stock.

Those with less and more than three million Chinese yuan investments are grouped as experienced retail investors and large retail investors, respectively. The researchers also track the transactions of mutual funds and other institutional investors with large capital, such as pension funds and insurance companies.

New investors are found to take up only 2 per cent of the market share, yet the most active, with daily turnover rate of 18 per cent, referring to the percentage of total shares that are bought and sold daily. Unfortunately, the monthly net buying by newbies tends to negatively predict stock returns in the following months.

Experienced retail investors share the same fate. The difference is the large number, as these investors hold the most significant part of the trading volume with 65 per cent. “The high trading intensity and poor stock selection make the two groups of new investors and experienced retail investors noise traders in the Chinese stock market,” says Professor Jiang.

After looking at the previous day’s stock performance, the team found that new investors’ trading behaviour has a direct impact on short-term price changes and leads to a decrease in the stock price in the following days. Meanwhile, based on the previous day’s performance, experienced investors’ trading behaviour showed a positive effect on today’s price but a negative effect in the following week and month. In short, both groups are proven to influence daily price momentum and the subsequent price drop.

“It is plausible that some experienced investors barely meet the threshold of possessing three months of trading experience and consequently, exhibit trading patterns akin to those of new investors,” says Professor Jiang.

Numerous news reports have detailed how investors spend excessive time monitoring, deliberating, and trading stocks. However, there is not enough data on how much attention Chinese retail investors are paying to the stock market related to daily price momentum.

The existing literature on investor attention shows that retail investors tend to focus more on the market when stock prices are going up. A further analysis confirmed this and found that new investors are more likely to follow daily price trends when the market is doing well. Their trading activities also have a bigger impact on daily price momentum during times when the market is performing strongly.

Strong investors as the gatekeepers

While new and experienced retail investors make the noise, large retail investors, mutual funds, and other institutional investors demonstrate lower turnover rates and superior stock selection skills. These groups’ monthly net buying tends to serve as a positive predictor of stock returns in the following months.

Large investors’ daily net buying activities are linked to a drop in stock returns on the previous day. When large investors buy stocks based on the previous day’s stock return, it links to a decrease in the stock return on the current day but increases the stock return in the following weeks.

A deeper analysis reveals that mutual funds normally buy stocks that perform well the day before, indicating a momentum trading pattern. Mutual funds that buy stock on the current day based on the performance on the previous day usually lead the stock price to drop on the current day but are linked with the rise of stock return in the following week and month. This shows that, although at first it might seem otherwise, mutual funds balance out the price momentum.

“Taken together, we find that new investors and experienced retail investors significantly contribute to daily price momentum and subsequent price reversal, while large investors, mutual funds, and other institutions counterbalance these price effects,” says Professor Jiang.

Similar trends worldwide

Professor Jiang and the team further explore whether daily momentum is also visible across stock markets worldwide by looking into international stock return data from 1980 to 2023 in DataStream, which covers more than 100,000 stocks from nearly 200 countries.

The team narrowed down its observation to emerging markets like Brazil, Chile, Mainland China, the Czech Republic, Egypt, Greece, India, Indonesia, Israel, Malaysia, Mexico, Pakistan, the Philippines, Poland, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey, and Vietnam. They also examined developed markets like Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK, and the US.

The result found that 14 emerging markets, including Chile, Mainland China, the Czech Republic, Egypt, Greece, Israel, Mexico, Pakistan, Saudi Arabia, South Africa, South Korea, Taiwan, Turkey, and Vietnam, show strong daily momentum patterns. Surprisingly, daily momentum was also found in three developed markets, namely Austria, the Netherlands, and the UK. Many of the above markets show daily momentum patterns during bullish and bearish times, similar to the trend in Mainland China.

“The significant occurrence of daily price momentum in these emerging markets lends weight to the notion of new investors exerting a meaningful influence,” says Professor Jiang. “It’s plausible that the intensified trading activity of these new investors during bullish periods amplifies the observed asymmetric patterns in those emerging markets that display daily momentum effects.”

The post Interpreting price momentums in Chinese stock markets first appeared on China Business Knowledge.

The post Interpreting price momentums in Chinese stock markets appeared first on China Business Knowledge.

By Putro Harnowo, Senior Content Manager, China Business Knowledge @ CUHK

Asian economies are grappling with an ageing society. Amid increasing life expectancy and low fertility rates, a fast-growing elderly population can be seen in Japan, South Korea, Singapore, and China. As the number of seniors increases and retirement savings dwindle, the issue of financial security becomes a harsh reality for many.

According to the World Health Organisation, China is expected to have 28 per cent of its population hit retirement age by 2040. To tackle potential demographic problems, the world’s second-largest economy plans to roll out a private pension mechanism nationwide this year to complement the current pension system, allowing insurance companies to offer individual retirement products. The mechanism has been trialled since late 2022 in 36 cities with mixed results.

“After retirement, the elderly will rely almost entirely on their accumulated wealth for a living, but how to spread this accumulative wealth over the rest of their lives?” says Johnny Li, Tan Bingzhao Professor of Actuarial Science at the Chinese University of Hong Kong (CUHK) Business School. “In the banking and insurance industry, there exist mechanisms that allow them to achieve this objective called retirement income products.”

Insurers and banks have been longing to tap into China’s private pension business, which is projected to grow to 4 trillion Chinese yuan (US$550 billion) by 2030, according to a 2023 report by Asia Securities Industry and Financial Markets Association titled China pensions reforms. These financial institutions offer rather complicated products with different objectives.

In an Inaugural Lecture of the Tan Bingzhao Professorship in Actuarial Science titled Landing safely in retirement: An actuarial researcher’s perspective in July, Professor Li shed light on several financial products designed specifically to solve the problem of length-of-life uncertainty. These products are meant to enable the elderly to turn their hard-earned savings into a more secure future.

Lifetime income from life annuity

Imagine a 60-year-old male with US$1 million in savings wanting to use his fund for the rest of his life. Assuming the investment performance is fixed at a five per cent annualised return, he may take three strategies below.

Firstly, he can consume the income from the interest rate of the principal investment and generate US$50,000 per year or five per cent of the fund. Secondly, he can purchase a portfolio that generates an annual fixed amount of cash for 50 years, and after calculating the present value of the cash flows from the portfolio using an interest rate, he may receive an annual basis of around US$55,500.

Thirdly, he can purchase a product called a life annuity from an insurance company. Assuming that the insurer does not take any profit and does not give additional features to the product, he can receive a higher annual income of US$70,500.

“This is because the provider sells multiple annuities to many individuals or annuitants, which come together to form a risk pool and financial resources to support those who are lucky enough to reach advanced ages,” says Professor Li.

For instance, less than 50 per cent of 60-year-old Hong Kong men can reach the age of 86. Among them, those who have purchased life annuities joined together to support the products by pooling their resources. They only need to pay half of the total cost to receive income beyond the age of 86.

“This arrangement significantly lowers the cost, while allowing individuals to receive a full annual income from their investments,” says Professor Li.

Market-linked payouts with variable annuity

For the elderly wanting to chase the opportunity to invest and grow their money, there is also a type of annuity called a variable annuity, which consists of the accumulation phase and the payout phase.

In the accumulation phase, the individual investment will be allocated to a fund, either a mutual fund or an equity fund, and the investment will grow according to market performance. At the same time, the product provider will benefit by collecting fees and management charges.

“In the end, this investment should grow to a certain value,” says Professor Li. “The accumulation phase is typically scheduled to end at a retirement age.”

“After retirement, the elderly will rely almost entirely on their accumulated wealth for a living, but how to spread this accumulative wealth over the rest of their lives?”

Professor Johnny Li

The payout phase starts upon the end of the accumulation phase, where the annuity holder is typically given two options. Option one is taking the accumulated amount as a lump sum maturity benefit, subject to a minimum guarantee.

“This guarantee gives protection in case of poor investment performance in the accumulation phase that results in the accumulated fund being less than the original amount at the end of the phase,” Professor Li explains. “If this happens, the product provider may give the original amount of investment back to the individual, depending on how the guarantee is specified”

In option two, the accumulated fund is converted to a “benefit base”. The product provider will provide a guaranteed lifetime income as a percentage of the base and charge fees periodically from the account. When death occurs, the remainder will be given to the beneficiary.

“There may be a case where the investment account is depleted before the individual dies, but due to the guarantee, the individual can still receive the income until the last moment,” says Professor Li. “Collectively, these investment guarantees form an important part of the variable annuity.”

Turning home equity into retirement fund

Another product that allows an individual to tap into the equity of their property is called a reverse mortgage, which allows elderly homeowners to receive lifetime income using their home equity. As the name implies, the individual must have a home loan frame from a reverse mortgage provider in lump sum cash, a life annuity, or both.

As the loan accumulates interest, its balance grows over time. The property ownership remains with the borrower and the borrower is not required to make any regular payments to the lender. Most importantly, the borrower can live in the property for the rest of their life.

“The essence of a reverse mortgage lies in the moment when the loan is repaid,” says Professor Li. “When the borrower dies, the property will be sold and then the sale proceeds will be used to repay the loan.”

When the property market is doing well and the property value grows bigger than the loan balance on the due date, the proceeds will pay off the loan and the remainder will go to the legal heirs. However, when the market is bleak and the sale proceeds is not sufficient to pay off the loan, the legal heirs are not liable for the loss, thanks to a non-recourse provision that comes with the reverse mortgages.

“Reverse mortgage has characteristics associated with financial products and is also related to insurance,” he explains. “There is no clear distinction.”

Market-linked payouts with variable annuity

Offering retirement products involves various risks to be managed. “From the provider’s viewpoint, offering an investment guarantee in a variable annuity is equivalent to writing the annuity holder a put option.”

A put option is a financial contract that gives the holder the right but not the obligation to sell the underlying asset on the maturity date for the strike price. Take an example of a put option written on stock A with a maturity day of 90 days, a current stock price of US$100 and a strike price of US$85. If the stock price in 90 days falls to US$70, the option holder can get an immediate profit by purchasing stock from the market and selling it using the put option for US$85. However, if the stock price rises to US$120, the option holder may not exercise the option as buying high and selling low would not make a profit.

“Put option is good for individuals as it protects them from downside investment risk, but not for the product providers as an option exposes them to significant systematic risk. In the context of variable annuities, providers typically sell multiple variable annuity contracts, where each of them includes some guarantees. In case of a global recession or market crash, most of these guarantees will demand a pay-off and create a significant financial strain if proper risk management is not in place,” says Professor Li.

Although investment guarantees behave like put options, they are more complicated than that of in stock markets for various reasons. For example, there is no uncertainty about maturity time and whether the individual can survive to the end of the accumulation phase.

Using a similar logic for investment guarantees, offering a non-recourse provision in a reverse mortgage is equivalent to writing the borrower a put option. “This is because the non-recourse provision says that if the property value goes below the loan balance, the product provider has to take the loss and shortfall,” says Professor Li.

Managing risk pools takes a lot of resources, and hedging risks associated with put options is quite costly. This justifies the fee the product providers charge towards the borrower. “Therefore, when considering these products, individuals should first know and understand their needs,” Professor Li adds.

The post How to transform savings into lifelong security first appeared on China Business Knowledge.

The post How to transform savings into lifelong security appeared first on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

In the wake of escalating environmental concerns and the urgent need for sustainable practices, the global business landscape is witnessing a significant shift towards the adoption of renewable energy sources. Prominent industry players like Amazon has achieved its goal that all of the electricity consumed by its operations was matched with 100 per cent renewable in 2023.

Utility suppliers are investing in new green sources and developing approaches to meet their energy goals. However, such increasing adoptions are not without flaws. The variability in energy demand throughout the day and across seasons has been a big hurdle. Moreover, the intermittent nature of green sources, such as wind and solar, poses additional complexities.

“The variability of the energy intermittency usually does not align with the fluctuations in demand, which poses a significant challenge for suppliers,” says Wang Shixin, Assistant Professor of the Department of Decisions, Operations and Technology at The Chinese University of Hong Kong (CUHK) Business School.

To add fuel to the flames, the transition to renewable energy often requires significant upfront investments in technologies and infrastructures. For utility companies operating under tight budgets or regulatory constraints, finding an effective way to manage the cost is imperative.

How should utility suppliers decide where to invest among various renewable energy sources? How should they design optimal approaches? Professor Wang and Professor Jayashankar Swaminathan of the University of North Carolina–Chapel Hill (Kenan-Flagler) Business School sought to tackle these problems in their study titled Renewable Energy Investments for Utilities Facing Supply Targets and Intermittency.

A two-stage framework

Professor Wang and Professor Swaminathan proposed a comprehensive framework to help suppliers achieve their renewable energy targets and service level requirements while minimising costs. After combining theoretical modelling with practical simulations and case studies, the researchers came up with a two-stage stochastic programme. In the first stage, utility suppliers shall decide to invest in various energy sources based on expected needs. Next stage, the suppliers adjust the plan according to actual supply and demand.

“This framework includes dispatching existing resources and purchasing additional conventional resources from the market at a price higher than using on-hand sources,” Professor Wang says.

“In practice, utility suppliers trade off lower costs against higher output stability in resources.”

Professor Wang Shixin

Several variables play a role in influencing investment outcomes. On the supplier’s side, the features of renewable sources impact the overall costs as the fluctuations in energy sources directly impact the operations. As such, renewable sources with less variability and more stability would make supply more predictable and eventually help to lower overall costs.

On the consumer’s end, the relationship between demands and renewable energy goals influences power outcomes. When consumer demands are negatively correlated, it helps to save costs compared to when the demands are independent or positively correlated. For instance, the demand for heating goes up in winter while air conditioning demand decreases and conversely in summer, residential energy demand peaks in the evening while commercial energy demand drops and vice versa.

This trade-off can help utility companies manage their supply more efficiently, as they are less likely to face simultaneous high demand from consumers. When demands are negatively correlated, utility companies can optimise their resource allocation by investing in fewer resources by focusing on the resources that will be needed most based on the expected demand patterns or relying less on expensive power sources, leading to lower overall costs.

Diversifying energy sources

Based on their findings, Professor Wang and her collaborator propose three strategies to realise optimal resource allocation. Firstly, they advocate for diversifying renewable energy sources. Professor Wang notes that the integration of multiple renewable sources can significantly reduce the total investment costs compared to those associated with a single renewable source.

Although a diversified renewable energy portfolio may pose challenges like substantial initial investment costs, Professor Wang highlights the opportunities for suppliers. For example, the government often offers subsidies or other incentives for companies to incorporate different types of renewable energy.

“Such diversification not only lowers the overall costs but also enhances the system’s ability to adapt to fluctuations in energy generation from various sources, thus providing a more resilient and reliable energy supply,” she says.

Perfection is not always the best

As customers demand more renewable energy, the extra cost of reaching higher targets would also increase faster. Meanwhile, increasing the renewable energy target becomes more expensive if the current target is already high. The team thus suggests their second strategy: decreasing renewable energy targets from one hundred percent.

The analysis showed that marginally reducing renewable energy targets can result in substantial cost savings, particularly when the power generators face intermittency issues.

However, while reducing the targets may seem advantageous, she also highlights that such benefits diminish as the target is further lowered. “It would be more cost-effective to lower a renewable energy target slightly below 100 per cent, like 99 per cent,” Professor Wang suggests.

Thirdly, the team found that resource pooling, where multiple consumers share renewable energy systems and collectively manage their energy needs, would be beneficial in making renewable energy more accessible and affordable. “Resource pooling results in lower investment costs as it mitigates the variability effect of total demand,” she says. “However, it becomes less advantageous in the presence of high intermittency when demand is high and generation is low.”

The trade-off between costs and stability

In shifting towards renewable energy sources, most utility companies still use the traditional coal-fired generator to its stability. The researchers then applied their theoretical framework to the real-world scenario, where power companies mix non-renewable sources and the two most widely used renewable sources, wind and solar, and analysed how these sources vary in availability and cost.

The result shows that when the energy target is low, investing in renewable resources with lower costs, like solar, would be better. As the target gets higher, it would be more cost-effective to put more investment into renewable sources with stable output, such as wind. When the renewable target approaches 100 per cent, using a mix of different renewable sources would contribute to meeting the goal.

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The researchers observed that when there are higher goals for renewable energy and when energy availability aligns closely with demand fluctuations, suppliers tend to opt for more costly but stable energy sources. “In practice, utility suppliers trade off lower costs against higher output stability in resources,” Professor Wang adds.

The transition to renewable energy sources is a complex yet imperative journey as the world faces increasing challenges posed by climate change. “To the best of our knowledge, our research work is the first to provide near-optimal capacity investment and allocation policies for meeting renewable energy targets under supply intermittency,” says Professor Wang, adding that they hope this framework could offer a structured approach for energy suppliers navigate the challenges of renewable energy investment wisely.

The post How to effectively invest in renewable energy first appeared on China Business Knowledge.

The post How to effectively invest in renewable energy appeared first on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

“Men are from Mars, women are from Venus” was coined by American author John Gray for his titular book and has become a common belief to explain why both genders are fundamentally different. However, as there are also so many planets in the solar system, people’s preferences may not always be binary.

American carmaker Dodge once aimed to expand its consumer base by introducing the first car ever exclusively designed for women, La Femme, featuring pink and cute elements. Sadly, the product was a flop, resulting in fewer than 1,500 units sold in 1955. More recently, there was a TikTok trend of men seeking out women’s clothing due to better design and cheaper price in the US supermarket Target.

“People know their own preferences, but rely more on the lay belief about gender difference in the form or function preference when making decisions for others.”

Professor Dai Xianchi

Given that consumers often face tradeoffs between appearance and functionality when making purchasing decisions, Dai Xianchi, Associate Professor of the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School, is interested in exploring how people’s common belief about gender differences in product preference affects their choices.

Professor Dai conducted the research titled Appearance for females, functionality for males? The false lay belief about gender differences in product preference, in collaboration with his PhD student Lin Yu, along with Liang Jianping of Sun Yat-sen University and Yang Chen of South China University of Technology.

In this research, the team referred to the abovementioned common belief as lay belief, representing how ordinary people understand and explain the events and people in their environment. “Lay beliefs can affect consumers’ decision-making, such as their food choices, products, and medical services,” says Professor Dai.

Appearance for females, functionality for males?

The researchers note that lay belief about gender differences in product form and function preference can stem from various reasons. Traditional notions tend to link women to emotions and men to rationality. Existing literature shows that emotions are influential when evaluating appearances, while functionality is guided by logic.

Moreover, gender role theory suggests that individuals are socialised to conform to specific social roles, resulting in gender stereotypes. For instance, advertisements often portray females as more concerned with physical attractiveness.

The lay belief that females have a stronger preference than males for product form over function may be true in product categories related to physical attractiveness. However, it may not hold in some gender-neutral product categories.

“We argue that people overgeneralise this gender difference to product categories unrelated to beauty or appearance enhancement,” Professor Dai says. “There is a prevalent discrepancy between people’s form-function choices for others and for themselves as well.”

Personal choice differs from choices for others

The team recruited participants from countries including the US and China for a series of mixed-method studies to test their hypothesis. Firstly, they demonstrated the existence of the lay belief of gender difference in form-function preference and then examined the discrepancy between consumers’ choices for others and for themselves.

Participants in this scenario were presented with two similar flash disks, except for their appearance and functionality, and then asked to choose which one to give to others. The aesthetically pleasing flash disk features exquisite patterns and has a capacity of 256MB, while the functionally superior flash disk appears ordinary but boasts a larger capacity of 512MB. Consistent with the prediction, participants preferred to choose the aesthetically pleasing one for females than for males.

Surprisingly, in another study, the team found that marketing practitioners with more experience in understanding consumer preferences also performed the same. Specifically, marketers and product designers expected that female consumers would generally prefer products prioritising appearance over function, compared to male consumers. However, the researchers found that the gender difference did not emerge when participants were asked to make choices for themselves.

“Even experienced marketing practitioners who supposedly have better knowledge of consumer preferences can also mistakenly predict gender differences in what consumers actually choose,” Professor Dai says.

The researchers argue that when people buy a gift for others, the main goal is to satisfy the recipient’s preferences, and it would be easier if people knew the recipient’s preferences well. Otherwise, people need to infer the recipient’s preference based on their assumed preferences of social groups the recipient belongs.

“People know their own preferences, but rely more on the lay belief about gender difference in the form or function preference when making decisions for others,” Professor Dai explains.

Less knowledge, stronger lay belief

In the next step, Professor Dai and his collaborators examined the moderating role of belief strength. The results showed that people with a stronger belief in gender difference tend to choose products with an appealing appearance for female others. Regarding choices for themselves, among participants with stronger beliefs, females were more likely to select products focusing on appearance rather than functionality.

“People’s choices will be more in line with their lay belief when they hold a stronger belief, and those with strong beliefs about gender differences will perceive relevant gender-based norms and tend to behave in accordance with these norms,” says Professor Dai.

People generally feel they have less knowledge about distant people than those close to them, and this perception can influence individuals’ decisions on behalf of others. Therefore, the team conducted another study to examine the impact of relationship closeness on consumers’ choices for others. The findings suggested that people have a stronger tendency to select products with an appealing appearance for females who are not closely connected to them.

Look before your leap

Considering the prevalence of this lay belief and its negative influences on decision-making, it is crucial to investigate if this belief can be corrected. Nevertheless, the team found that the lay belief in gender difference remains strong even when incentives are involved.

In their final study, the researchers implemented five interventions to make them aware of the gender stereotype, such as informing participants directly about the bias, instructing them to consider opposite scenarios, and emphasising accountability. However, participants in all interventions still preferred to choose visually appealing products for females.

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It is common practice for marketing practitioners to promote or design products for women by emphasising appearance and focusing on functionality for men. However, this research proved that the lay belief does not always align with consumers’ actual preferences, which could lead to negative consequences like reduced sales and misused resources.

“Marketers should be mindful of the discrepancy between gender-based lay beliefs and actual preferences,” Professor Dai adds. “They should think twice before making the decisions, and it would be better to conduct market research thoroughly rather than relying on lay beliefs.”

The research may also encourage individual consumers to pay more attention to gender bias when choosing gifts for others. “Our research can benefit consumers by helping them avoid a common error that can lead to interpersonal inefficiency, as people normally give gifts to strengthen interpersonal relationships.”

The post Beyond gender: Rethinking consumer preferences for appearance or functionality first appeared on China Business Knowledge.

The post Beyond gender: Rethinking consumer preferences for appearance or functionality appeared first on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

Have you ever felt that irresistible pull when exploring tourist spots, only to be drawn to something more? Imagine strolling through the Notting Hill district in London or Montmartre in Paris to take Instagrammable photos at a bookshop or cafe, but despite your intentions, you ultimately leave with a tote bag or souvenirs.

Well, you are not alone. Many travellers find themselves making these subconscious purchases due to the vibes rather than part of their itineraries. Tourists frequently engage in impulsive buying, making unplanned or spontaneous purchases without carefully considering the necessity.

The good part is this impulsive act offers an opportunity for tourism businesses to make profits and enhance the travel experience. Understanding the factors that contribute to such excursion can provide valuable insights into consumer behaviour and engagement.

“Impulsive buying is a manifestation of individuals’ personal control over themselves, and a low sense of personal control could induce impulsive behaviour.”

Professor Lisa Wan

Previous research has identified factors such as emotions, travel experience, and time pressure as drivers of impulsive buying. In a recent study, a group of researchers proposed a novel driver they call “romance-themed storytelling in a tourist attraction.”

“Romantic stimuli have been proven to elicit unplanned behaviour,” says Lisa Wan, Associate Professor of the School of Hotel and Tourism Management and Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School.

While researchers found that storytelling in tourism could stimulate purchase intentions, little is known about how specific themes, such as romance, can actually impact tourists’ spending behaviour. “We focus on examining the effect of romantic themes, which are commonly used in destination storytelling and marketing,” she says.

Professor Wan, together with Luo Xiaoyan of Sun Yat-Sen University and Liu Xing of University of Macau, explored the effect of exposure to romance-themed attractions on tourists’ impulsive buying in their latest research titled Harnessing romance: The effect of exposure to romance-themed attractions on tourists’ impulsive buying.

The team also delved deeper into the underlying mechanisms behind such behaviours: Why can romance-themed storytelling lead to impulsive buying? Drawing on recent studies, they assumed that travellers have an internalised belief that “romance is uncontrollable.”

The role of personal control

To test their hypothesis, Professor Wan and the team conducted three studies involving 820 participants recruited from a crowdsourcing platform, Amazon Mechanical Turk. The first study aims to examine the impact of exposure to romance-themed storytelling on impulsive buying, in which 210 participants were randomly assigned to one of the two conditions.

In the romantic condition, participants were shown pictures of a medieval bridge with a lifelong love story. On the contrary, participants in the non-romantic condition were told a story about friendship related to the bridge. As expected, the results revealed that participants exposed to romance-themed attractions were more likely to make impulsive purchases compared to those under the non-romantic condition.

In study 2, the team recruited 270 participants to test whether the perception of personal control would affect impulsive buying behaviour. “Impulsive buying is a manifestation of individuals’ personal control over themselves, and a low sense of personal control could induce impulsive behaviour,” says Professor Wan.

Similar to study 1, participants were invited to watch either a romance-themed or non-romance-themed video. The researchers explored participants’ tendency towards impulsive buying and measured their perceptions of personal control using a series of crafted questions. The findings showed that participants under the romantic condition felt more “uncontrollable”.

“Tourists’ exposure to romance-themed storytelling influenced their propensity for impulsive buying through their perception of personal control,” Professor concludes.

Then why do tourists experience a lower sense of personal control when exposed to romance-themed storytelling? Professor Wan attributed it to the lay belief, which refers to a mental shortcut to simplify the rational decision-making process, to the notion that “romance is uncontrollable.” As the idea of romance is uncontrollable has long been embedded in our daily language, literature and deeply ingrained in modern culture, it naturally emerges when travellers visit a romance-themed tourist attraction.

Colours elicit diverse consumer responses

Colour plays a vital role in designing and promoting tourist attractions as it can trigger emotional and behavioural reactions. In study 3, Professor Wan and the team explored how red and blue colours are associated with tourists’ purchase behaviours, as widely studied in tourism literature.

Previous research suggest that blue often encourages approach behaviour, while red evokes avoidance motivation. For example, tourists prefer staying in a blue-painted hotel room over a red one because blue evokes positive feelings.

Consistent with such findings, Professor Wan and her team found that participants in the romantic condition showed a higher tendency to engage in impulsive buying when the story was presented in blue compared to red. She explains that red is often linked with risks and mistakes, while blue is associated with openness and peace.

However, the team didn’t find significant differences when comparing both colours in non-romantic settings.

“The background colour can moderate the relationship between romance-themed storytelling and the tendency to impulsive buying,” Professor Wan says. “When the romantic story was presented on a red background, the positive effect of the romantic theme exposure on the propensity for impulsive buying was mitigated.”

Mitigate unwanted impulsive behaviours

The findings of this research provide valuable insights for industrial practitioners by illustrating the impact of romance-themed storytelling on tourists’ responses. Professor Wan emphasises the importance of themes in presenting the setting of a specific attraction.

“We encourage attractions and destinations to use romance-themed storytelling, as our empirical findings reveal that the mere presence of a romantic theme is strong enough to intuitively activate a lay belief, along with the consequences of that belief for impulsive buying,” she says.

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However, Professor Wan also warns that impulsive tendencies may lead to adverse consequences. For example, travellers with an impulsive mood at a romantic attraction may become careless or prone to accidents.

“We offer findings of practical interest for those who wish to guide tourists in tempting situations,” says Professor Wan. “Romance-themed bars, museums, and heritage destinations could increase their use of red signs to prevent visitors from engaging in impulsive and dysfunctional behaviours.”

Finally, Professor Wan notes that their participants were mostly European American, and the research is primarily based on Western literature. “As culture shapes consumer mindsets and behaviours, future research should explore whether our findings would hold for Asians.”

The post Love is in the air, so are your credit cards first appeared on China Business Knowledge.

The post Love is in the air, so are your credit cards appeared first on China Business Knowledge.