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RESEARCH FEATURE WIRERESEARCH WIREBELOW IS A SUMMARY OF SEVERAL RESEARCH PROJECTS RECENTLY COMPLETED BY WHARTON FACULTY.D O G ROWTH STOCKS ULTIMATELYJUSTIFY THEIR PRICE?Conventional Wall Street wisdom echoes Graham andDodd, who asserted more than 50 years ago thatinvestors paying more than 20 times average earnings for astock typically stand to lose considerable money in the longrun. But according to Wharton Finance Professor Jeremy J.Siegel, this conventional wisdom is wrong.In a recently published study in the Journal of PortfolioManagement, Siegel analyzed the subsequent returns of the“nifty-fifty,” a group of highly capitalized growth stockswhich were touted in the early 1970s, but crashed in the1973-74 bear market. He found that the long-term performanceof these stocks often justified price-to-earnings ratiosof 40, 50, or even higher. And, contrary to popular wisdom,these stocks as a whole were not overvalued relative to themarket at their 1972 price peak. “Investors should not fearhigh-cap growth stocks which sell at 30 or more times earnings,”Siegel says. “Many of today’s star performers, such asCoca-Cola, Disney and McDonald’s, were members of thenifty-fifty.”$4Jeremy J. Siegel; The Nifty-Fifty Revisited: Do Growth Stocks UltimatelyJustify Their Price?CEOS HIRED FROM OUTSIDE EARN MORETHAN THOSE PROMOTED FROM WITHINCEOs hired from the outside earn salaries and bonusesaveraging 13 percent more than those promoted fromwithin, a Wharton study has found. And when factors suchas firm size, profitability, age, and influence over the boardof directors are controlled for, the study found that externalsuccessors’ salaries soar to as much as 36 percent more thanthose of their internally promoted counterparts.Evidence from a sample of 305 CEOs analyzed for thestudy validates the hypothesis that external CEOs who lackfirm-specific skills earn more than CEOs promoted fromwithin. The study’s authors suggest that in some situations— particularly when there’s a desire to forego the ways of thepast — firm-specific skills may even be undesirable.$4Dawn Harris and Constance Helfat; Specificity of CEO HumanCapital and CompensationHOW TO GAIN A COMPETITIVE ADVANTAGEIN THE BANKING INDUSTRYAs mergers, downsizing and regulatory changes continueto reshape the banking industry, a new Whartonstudy has quantitatively identified several areas in whichbanks can gain competitive advantage: managing risk,increasing customer satisfaction, and exercising prudence incapacity management (for example, adding new branchesand new employees).The study, sponsored by the Wharton Financial InstitutionsCenter, analyzes 219 large banks between 1984 and1992 and finds that while banks differ widely in their abilityto manage risk, large banks take on relatively more risk asmeasured by the stock market’s assessment of their risk. Thestudy’s author, Gerald R. Faulhaber, also found that if a bankimproved its customer satisfaction ranking by 10 percent(based on a nationally-recognized index), it could expect itsearnings to increase by 4 to 6 percent. As for expansion, thestudy found that, on average, banks over-estimated demandby 10 percent, resulting in a 25 percent earnings decrease.“This study shows that the three factors of managing risk, customersatisfaction and capacity management are the keys tocompetitive success in the banking industry,” Faulhaber said,“Those banks which fail to focus on these areas — and thereare many — are leaving money on the table.”$4Gerald R. Faulhaber; Banking Markets: Productivity, Risk, andCustomer SatisfactionHOW COMPANIES DETERMINE EXECUTIVE BONUSESThe merit of basing a CEO’s annual bonus contract on thefinancial performance of a company has long been questioned.But financial performance remains the basis used bythe vast majority of firms.A study conducted by Wharton researchers ChristopherIttner, David Larcker, and Madhav Rajan has found that only36 percent of firms use alternative performance measures,such as customer satisfaction or product quality, to determineexecutive bonus pay. Many argue that financialperformance-measured bonus pay is detrimental to a firm’slong-run performance, while others consider alternative performancemeasures subjective and easily manipulated toboost bonuses. Nevertheless, the study finds no evidence ofabuse of alternative performance measures. The researchersalso found that firms pursuing strategies based on innovationand new product development are most likely to useContinued on page 2421WHARTON ALUMNI MAGAZINE
ALUMNI PROFILESIWAO TOMITA, WG’63: CAREER ENTREPRENEURIn describing the long arc of his professional career, IwaoTomita talks about milestones. The first was his decision in1940 to enter Japan’s selective Naval Academy one yearbefore Pearl Harbor. “I never thought at the time that Iwould be involved in a Pacific War,” says Tomita, who wasborn in 1924 in Tokyo.He served as a supply officer on a battleship carrier anda frigate in the merchant marine from 1943 to early 1945.By the time the war was over, 20 of his 50 classmates fromthe Naval Academy were dead. For two months at the endof 1945, Tomita was chief administrative officer on twominesweepers, one of which was sunk when it hit a mine.A second milestone occurred in 1947, when Tomitafounded Yuka Industries, a company whose initial businesswas recycling transformer oil. Tomita left the company,now $100 million in revenues, in 1951 to start up Japan GasChemical, which has since become $2 billion MitsubishiGas Chemical. “My career was always to create new companies,”says Tomita. “I don’t like to wait a long time forstep-by-step promotions. I like to do things myself.”Meanwhile, there were other “lesser” milestones alongthe way. In 1950, Tomita passed his CPA exam. In 1957 hereceived a Fulbright scholarship to attend Wharton for oneyear. In 1961 he wrote a book, the first of several, entitled“How to Organize and Grow a Company with a Few CompetentPeople.” And in 1962, he decided to leave Japan Gas ChemicalCo. and complete his MBA at Wharton. “People athome thought I was crazy to quit. Why did I do it? BecauseI had been at the same company for 10 years and I was tiredof it. I wanted a new career. That is very unusual in Japan.”Tomita majored in accounting and finance at Wharton,and in 1963, established the first Arthur Young & Co. branchin Tokyo. In 1968 he foundedTohmatsu Awoki & Co. — nowTohmatsu & Co. — for what was thenTouche Ross & Co. Tomita is currentlya senior partner and memberof the board of Deloitte ToucheTohmatsu International.Tohmatsu, with $300 million inrevenues, 2,300 professionals and 18offices, is the largest accounting firm inJapan, and has as clients many of theTOMITAcountry’s major trading companiesand international banks. Approximately 100 Japaneseaccountants and consultants work in 45 locations worldwide.Tomita himself spends one third of his time in the U.S., onethird in Japan and Asia and one third in Europe. “One of mydaughters lives in New Jersey, and I have condominiums inBermuda and in San Diego, but mostly I stay in hotels,” hesays. “I am used to it.” He and his wife, whom he marriedin 1944, have three daughters and a home in Tokyo.Although Tomita considers himself “Americanized” byhis education and work experience, he is not a big fan of theU.S. economic system. “Americans concentrate on shorttermprofits and making money for their shareholders.Otherwise they get fired. Japanese think longer-term, whichmakes them more competitive. And Americans have lessloyalty to their company. If they don’t get enough moneythey just quit and go somewhere else, even the partners.”As for US-Japan trade, “it takes time for Japanese businessstructures to change. The U.S. government pushes theJapanese government to change now. It will happen, butgradually.” ”SUZANNE JANES PECK, WG’66; BETH PECK, WG’95:FAMILY TIESWhen Suzanne Janes Peck enteredWharton’s MBA program in January1965, her class had “seven women,one black and a lot of white males.”Which was okay with Peck, becauseshe went to Wharton with one goal inmind: To find a husband.“You have to remember that backthen the term ‘women’s lib’ hadn’t yetbeen coined,” says Peck, who earnedher BA from the College of NotreDame of Maryland and graduatedfrom Wharton with honors. “Wordswe have today — like mentor andempowerment — didn’t exist, at leastnot in the blue collar section of Wilmingtonwhere I grew up.“I saw [husband] Paul’s picture in theMBA face book, targeted him and gothim,” she adds. “He didn’t have achance. We were married before wegraduated.”The punch line is not just that Peckand her husband celebrated their 30thwedding anniversary in December, butthat Peck went on to have a successfulcareer in a non-traditional field —software technology. She is currentlyvice president of marketing andregional operations for Systems andContinued on page 23PHOTOGRAPHS / ANTHONY WOODBETH AND SUZANNE PECK22W INTER 1996
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