First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty. Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice. For complete details on faculty research, see our Working Papers section.

August 14, 2007

Are hedge funds best equipped to monitor management? While large institutional investors—pension funds and mutual fund investment companies—are usually the biggest blockholders, there is virtually zero evidence that these institutional shareholders are effective monitors of management, say Harvard's Robin Greenwood and Michael Schor. Their new working paper, available for download, outlines the advantages and limits of hedge funds to manage the task. As they suggest, hedge funds may be better than large institutional investors at "identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover." At the same time, research results indicate that "the scope for hedge fund activism to have pervasive effects on corporate governance is somewhat limited."

Also new this week: a business history study of how advertising adopted the language of development and modernity in 1950s West Africa; and cases on environmental sustainability at designer Herman Miller, controversy at diamond purveyor De Beers, and the growth of Chinese pharmaceutical firm WuXi.

 

Working Papers

Hedge Fund Investor Activism and Takeovers

Abstract

We examine long-horizon stock returns around hedge fund activism in a comprehensive sample of 13D filings by portfolio investors between 1993 and 2006. Abnormal returns surrounding investor activism are high for the subset of targets that are acquired ex-post, but not detectably different from zero for targets that remain independent a year after the initial activist request. Announcement returns show a similar pattern. Firms that are targeted by activists are more likely to get acquired than those in a control sample. We argue that the combination of hedge funds' short investment horizons and their large positions in target firms makes M&A the only attractive exit option. The results also suggest that hedge funds may be better suited to identifying undervalued targets and prompting a takeover, than at engaging in long-term corporate governance or operating issues.

Download the paper: http://www.hbs.edu/research/pdf/08-004.pdf

Correlated Equilibrium and Nash Equilibrium as an Observer's Assessment of the Game

Abstract

Noncooperative games are examined from the point of view of an outside observer who believes that the players are rational and that they know at least as much as the observer. The observer is assumed to be able to observe many instances of the play of the game; these instances are identical in the sense that the observer cannot distinguish between the settings in which different plays occur. If the observer does not believe that he will be able to offer beneficial advice then he must believe that the players are playing a correlated equilibrium, though he may not initially know which correlated equilibrium. If the observer also believes that, in a certain sense, there is nothing connecting the players in a particular instance of the game then he must believe that the correlated equilibrium they are playing is, in fact, a Nash equilibrium.

Download the paper: http://www.hbs.edu/research/pdf/08-005.pdf

Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia

Abstract

The controversy over whether and how much to charge for health products in the developing world rests, in part, on whether higher prices can increase use. We test this hypothesis in a field experiment in Zambia using door-to-door marketing of a home water purification solution. Our methodology separates the screening effect of prices (charging more changes the mix of buyers) from the psychological effect of prices (charging more stimulates greater use for a given buyer). We find that higher prices screen out those who use the product less. The amount paid does not have a psychological effect on use, but there is some evidence that the act of paying increases use. We use our data to estimate an economic model of product use, simulate counterfactuals, and develop tentative implications for pricing policy.

Download the paper: http://www.hbs.edu/research/pdf/07-034.pdf

 

Cases & Course Materials

BT Plc: The Broadband Revolution (A)

Harvard Business School Case 407-001

This paper proposes that patents are real options that allow holders of patents the right but not the obligation to sue others. We suggest that the likelihood of a patent's being litigated is positively associated with the value of the patent and the extent of disclosure (prior art cited) in the patent. However, under the conditions of greater value, increases in disclosure reduce the likelihood of litigation of the focal patent. Similarly, under conditions of greater disclosure, increases in value reduce the likelihood of litigation of the focal patent. Rare events logit analyses of business method patents that were litigated compared to patents that were not litigated offer empirical evidence supporting the hypotheses.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=407001

Cradle-to-Cradle Design at Herman Miller: Moving Toward Environmental Sustainability

Harvard Business School Case 607-003

Herman Miller decided to implement the cradle-to-cradle (C2C) design protocol during the design of its mid-level office chair, Mirra. The C2C protocol was a set of environmentally friendly product development guidelines.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=607003

De Beers at the Millennium

Harvard Business School Case 706-518

At the time of the millennium, diamond demand was threatened by an increasing awareness among jewelry customers that diamond production and trading in some countries was being linked to growing inequities and human rights violations. This, in turn, had an impact on De Beers' reputation and consumer confidence in the diamond as a product that represented integrity, love, and commitment. In 2000, De Beers' sustainability depends on the ability of its leaders to shift the paradigm of both the firm and its context and embrace a distinctly different strategy.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=706518

Kinder Morgan, Inc.-Management Buyout

Harvard Business School Case 207-123

Kinder Morgan, Inc., was a leader in the transportation and distribution of energy throughout North America, managing a master limited partnership with over $35 billion in infrastructure assets. In the summer of 2006, Richard Kinder, the founder and chairman of Kinder Morgan, led a consortium of buyers to take the company private. The independent board of directors of Kinder Morgan must decide whether or not to accept Kinder's offer and assess the fairness of the proposal, given the conflicts of interest in this management buyout.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207123

Nordic Telephone Company's Bid for TDC

Harvard Business School Case 207-122

Nordic Telephone Company, formed by a consortium of private equity firms, has made a public tender offer for Denmark's leading telecommunications company, TDC. TDC's board of directors approved the take-private transaction, and 88% of shareholders have accepted the offer. Nordic Telephone must gain 90% of TDC's shares to force compulsory redemption under Denmark law. However, a pension fund that held 5.5% of the outstanding stock has rejected the offer. Should Nordic Telephone lower its 90% acceptance threshold and purchase TDC without a guarantee of full ownership, or should TDC walk away from the table?

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207122

Putnam Investments: Rebuilding the Culture

Harvard Business School Case 406-009

Charles "Ed" Haldeman Jr. is promoted CEO of Putnam Investments after the firm was badly damaged by a series of improper trading practices. He is charged with the task of managing the crisis, repairing the company culture, and putting the firm back into a pattern of growth. Haldeman realizes that nothing less than a radical change in the culture of Putnam Investments would be enough to win back the trust of clients and employees who felt betrayed by the firm's apparent misconduct. He must confront some tough decisions about recently uncovered questions concerning the handling of certain accounting transactions three years earlier and about the continued lagging performance of Voyager, the firm's flagship equity fund.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=406009

USG Corp. (A)

Harvard Business School Case 807-090

Deals with CEO Bill Foote's decision of how to deal with USG's exposure to asbestos liability. USG was the largest building materials company in the United States, with 14,000 employees and gross revenues of $3.8 billion. Although USG used asbestos in a small subset of its products (and never in its SHEETROCK), as more companies that were heavy users of asbestos went bankrupt, USG was faced with shouldering the burden of the entire building materials industry. USG was otherwise a solvent, growing company. Bankruptcy was an option, but a successful reorganization was by no means assured. How would USG keep its highly motivated (and non-unionized) workforce and continue to attract top managerial talent? Would there be any value left for the shareholders? In the Johns Manville bankruptcy, shareholder equity was wiped out entirely.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=807090

WuXi PharmaTech

Harvard Business School Case 806-003

WuXi Pharmatech has gone from zero to $21 million in sales in three years. The company must decide its growth strategy and how best to finance and organize for rapid growth.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=806003

 

Publications

Corporate Legitimacy and Advertising: British Companies and the Rhetoric of Development in West Africa, 1950-1970

Abstract

Development, modernity, and industrialization became dominant themes in corporate advertising in Africa in the 1950s and remained prevalent through the following two decades while many African nations were gaining independence. British businesses operating there created a publicity strategy that couched their presence in less developed countries in terms of a commitment and a positive contribution to the progress of the new states. Eventually, British companies tried to "Africanize" their corporate image through these campaigns.

Multi-agent Learning and the Descriptive Value of Simple Models

Abstract

Behavioral research suggests that human learning in some multi-agent systems can be predicted with surprisingly simple "foresight-free" models. The current note discusses the implications of this research, and its relationship to the observation that social interactions tend to complicate learning.

Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk

Abstract

This paper proposes a new approach to measure, analyze, and manage sovereign risk based on the theory and practice of modern contingent claims analysis (CCA). The paper provides a new framework for adapting the CCA model to the sovereign balance sheet in a way that can help forecast credit spreads and evaluate the impact of market risks and risks transferred from other sectors. This new framework is useful for assessing vulnerability, policy analysis, sovereign credit risk analysis, and design of sovereign risk mitigation and control strategies. Applications for investors in three areas are discussed. First, CCA provides a new framework for valuing, investing, and trading sovereign securities, including sovereign capital structure arbitrage. Second, it provides a new framework for analysis and management of sovereign wealth funds being created by many emerging market and resource-rich countries. Third, the framework provides quantitative measures of sovereign risk exposures which facilitates the design of new instruments and contracts to control or transfer sovereign risk.

Business Methods Patents as Real Options: Value and Disclosure as Drivers of Litigation.

Abstract

This paper proposes that patents are real options that allow holders of patents the right but not the obligation to sue others. We suggest that the likelihood of a patent's being litigated is positively associated with the value of the patent and the extent of disclosure (prior art cited) in the patent. However, under the conditions of greater value, increases in disclosure reduce the likelihood of litigation of the focal patent. Similarly, under conditions of greater disclosure, increases in value reduce the likelihood of litigation of the focal patent. Rare events logit analyses of business method patents that were litigated compared to patents that were not litigated offer empirical evidence supporting the hypotheses.