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.

January 8, 2008

Family-controlled firms are a common phenomenon around the world—and more prevalent in the United States than you might think. As Belen Villalonga and Raphael Amit discuss in their forthcoming article, "How are U.S. Family Firms Controlled?" founding families in the U.S. have a hand in over a third of the 500 largest corporations and more than half of all public corporations. Among the findings: "Founding families are the only blockholders whose control rights exceed their cash flow rights." Villalonga is an associate professor at Harvard Business School while Amit is a professor at the Wharton School of the University of Pennsylvania.

HBS professors have written several working papers for download on topics ranging from banking deregulation to the role of government intervention in economies heavily dependent on oil. Also up this week: a variety of business cases including "Millions of Customers and the Search for a Business: The Challenge of IRC-Hispano," about how the world's largest Spanish-language chat organization handled a disconnect between its high number of customers and relatively low level of revenues. Happy New Year!

 

Working Papers

The Political Economy of 'Natural' Disasters

Abstract

Natural disasters occur in a political space. Although events beyond our control may trigger a disaster, the level of government preparedness and response greatly determines the extent of suffering incurred by the affected population. We use a political economy model of disaster prevention, supported by case studies and preliminary empirics to explain why some governments prepare well for disasters and others do not. We show how the presence of international aid distorts this choice and increases the chance that governments will under-invest. Policy suggestions that may alleviate this problem are discussed.

Download the paper: http://www.hbs.edu/research/pdf/08-040.pdf

A Resource Belief-Curse: Oil and Individualism

Abstract

We study the correlation between a belief concerning individualism and a measure of luck in the US during the period 1983-2004. The measure of beliefs is the answer to a question related to whether the poor should be helped by the government or if they should help themselves, while the measure of luck is the share of the oil industry in the state's economy multiplied by the price of oil. The correlation is negative, suggesting that more reliance on luck is correlated with less individualism. We provide three short models that help interpret this correlation. One implication of this finding is that societies that depend heavily on oil, and perhaps natural resources more generally, will experience a heavier demand for government intervention. We argue that this is one aspect that the good design of policies on the extraction of oil and mineral resources should take into account.

Download the paper: http://www.hbs.edu/research/pdf/08-035.pdf

What Do Non-Governmental Organizations Do?

Abstract

No abstract is available at this time.

Download the paper: http://www.hbs.edu/research/pdf/08-041.pdf

Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship

Abstract

We study how US branch-banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau's Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved ex ante allocative efficiency across the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in 'churning' at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also 'democratize' entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.

Download the paper: http://www.hbs.edu/research/pdf/07-033.pdf

I Rented the Documentary First, but I Want to Watch the Comedy Now: Intrapersonal Conflict and Myopia in Online DVD Rentals

Abstract

We report on a field study demonstrating systematic differences between the preferences people anticipate they will have over a series of options in the future and their subsequent revealed preferences over those options. Using a novel panel data set, we analyze the film rental and return patterns of a sample of online DVD rental customers over a period of four months. We predict and find that people are more likely to rent DVDs in one order and return them in the reverse order when should DVDs (e.g., documentaries) are rented before want DVDs (e.g., action films). This effect is sizeable in magnitude, with a one standard deviation change in the difference between sequentially rented films' standardized rankings on a scale from the most extreme want to the most extreme should movie increasing the odds of a preference reversal by 10%. Similarly, we also predict and find that should DVDs are held significantly longer than want DVDs. Our study ties together the previously disjoint literatures on intrapersonal conflict and hyperbolic discounting and shows in the field that the impact of intrapersonal conflict can be large in magnitude.

Download the paper: http://www.hbs.edu/research/pdf/07-099.pdf

How Is Foreign Aid Spent? Evidence from a Natural Experiment

Abstract

We use oil price fluctuations to construct a new instrument to test the impact of transfers from wealthy OPEC nations to their poorer Muslim allies. The instrument identifies plausibly exogenous variation in foreign aid. We investigate how aid is spent by tracking its short-run effect on aggregate demand, the national accounts, and the balance of payments. We find that much aid is consumed, primarily in the form of imported non-capital goods. Some aid is invested and aid has a positive, though statistically imprecise, effect on growth. Aid has no effect on the financial account but leads to unaccounted capital flight.

Download the paper: http://www.hbs.edu/research/pdf/07-074.pdf

 

Cases & Course Materials

Antegren: A Beacon of Hope

Harvard Business School Case 408-025

The CEO of Biogen Idec faces a set of difficult decisions regarding a promising drug for Multiple Sclerosis that is headed for early approval by the FDA. The first in a series focuses on operational decisions triggered by the drive for early approval. Sparks discussion about a leader's economic, legal, and ethical responsibilities to multiple constituencies and how a leader can guide a company to execute effectively, fulfilling those responsibilities, in a complex situation. Decisions facing the company include how to sustain credible research on the drug's efficacy and safety, how to increase manufacturing capacity to meet expected demand, and how to secure insurer reimbursement. All of these challenges arise against the backdrop of the accelerated approval process, uncertainty about what the FDA will ultimately decide, and whether the company should indeed pursue early approval.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=408025

Antegren: A Beacon of Hope (B)

Harvard Business School Supplement 408-026

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=408026

Antegren: A Beacon of Hope (C)

Harvard Business School Supplement 408-027

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=408027

Antegren: A Beacon of Hope (D)

Harvard Business School Supplement 408-028

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=408028

Creativity Under the Gun at Litmus Corporation

Harvard Business School Case 808-075

Teaches students to diagnose the circumstances under which time pressure can facilitate or hinder creativity. A team's creative "genius", Miles Grady, who previously conceptualized a revolutionary material for an important new product, must now significantly change that material so that the team can create an entirely new business. This early new business development project, while supported by management, has a looming deadline for proof-of-concept. The deadline has already been extended, but the team does not seem close to the breakthrough it needs. The team's leader, Stanley Carmine, who has managed to get a few weeks' extension from management, needs to figure out how best to manage Grady under the looming deadline. He studies Grady's past "daily laboratory logs" to discover the connections, if any, between time pressure, other circumstances, and Grady's level of creativity.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=808075

D2Hawkeye: Growing the Medical IT Enterprise

Harvard Business School Case 808-006

In mid-March 2007, Chris Kryder sat in his office and thought about how to best finance his company's growth. Over the previous five years as founder and CEO of D2Hawkeye, a Waltham, Massachusetts-based healthcare analytics company, Kryder had grown the firm from a six-person start-up into a leading developer and provider of medical analytics in the U.S. He had three term sheets in hand—two from strategic investors and one from a venture capital firm. Each offer had its advantages and disadvantages and Kryder needed to decide which offer to accept.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=808006

Iceland: Small Fish in a Global Pond

Harvard Business School Case 708-472

Describes the economic development of Iceland since 1945, focusing in particular on the years since 2000, when Iceland experienced strong growth and Icelandic companies aggressively internationalized.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=708472

Millions of Customers and the Search for a Business: The Challenge of IRC-Hispano

Harvard Business School Case 106-053

Like many online services, IRC-Hispano, the world's largest Spanish-language chat organization, has many customers but sees few revenues. As an association, its structure presents many limitations and hurdles to overcome involving investing in technology platform updates and generating ideas and initiatives to monetize the use community.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=106053

 

Publications

Estimating Demand Uncertainty Using Judgmental Forecasts

Abstract

Measuring demand uncertainty is a key activity in supply chain planning, but is difficult when demand history is unavailable such as for new products. One method that can be applied in such cases uses dispersion among forecasting experts as a measure of demand uncertainty. This paper provides a test for this method, and presents a heteroscedastic regression model for estimating the variance of demand using dispersion among experts' forecasts and scale. We test this methodology using three datasets, demand data at item level, sales data at firm level for retailers, and sales data at firm level for manufacturers. We show that the variance of a random variable (demand and sales for our datasets) is positively correlated with both dispersion among experts' forecasts and scale: the variance increases sublinearly with dispersion and more than linearly with scale. Further, we use longitudinal datasets with sales forecasts made 3-9 months before earnings report date for retailers and manufacturers to show that the effects of dispersion and scale on variance of forecast error are consistent over time.

Grist: A Strategic Approach to Climate

Abstract

Climate change will affect everything businesses do, as government efforts to mitigate carbon emissions cause their prices to rise steeply. This special edition of Forethought takes a hard-nosed look at the risks and opportunities of climate change. Michael E. Porter and Forest L. Reinhardt argue that the effects of climate change on companies' operations are now so tangible and certain that the issue is best addressed with the tools of the strategist, not the philanthropist.

Opinion: Place Your Bets on the Future You Want

Abstract

This piece posits that success in a carbon-constrained world will be determined by innovation and acumen, requiring companies to make bold moves.

How Are U.S. Family Firms Controlled?

Abstract

In large U.S. corporations, founding families are the only blockholders whose control rights on average exceed their cash flow rights. We analyze how they achieve this wedge, and at what cost. Indirect ownership through trusts, foundations, limited partnerships, and other corporations is prevalent but rarely creates any wedge (a pyramid). The primary sources of the wedge are dual-class stock, disproportional board representation, and voting agreements. Each control-enhancing mechanism has a different impact on value. Our findings suggest that the potential agency conflict between large shareholders and public shareholders in the United States is as relevant as elsewhere in the world.