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.

February 5, 2008

How does your social network affect your mutual fund returns? New research indicates that success may be partly due to personal connections forged at school. And it almost doesn't matter which school you attended. United States mutual fund portfolio managers "place larger concentrated bets on stocks they are connected to through their education network, and do significantly better on these holdings relative to non-connected holdings, and relative to connected firms they choose not to hold," write HBS professors Lauren H. Cohen and Christopher Malloy and University of Chicago professor Andrea Frazzini. Their paper, "The Small World of Investing: Board Connections and Mutual Fund Returns," available for download, won a Barclays Global Investors Award from the European Finance Association in 2007.

This week is a bonanza for working papers with 8 others here for download. Work by Michael Beer and colleagues, for example, outlines how successful CEOs try to manage paradox rather than frame decisions as "either-or" dilemmas. In another paper, Benjamin Edelman and fellow researchers discuss strategy for bidding in keyword auctions like those used by Google and MSN. A case series on Berkshire Partners helps complete the picture.

 

Working Papers

On Best-Response Bidding in GSP Auctions

Abstract

How should players bid in keyword auctions such as those used by Google, Yahoo! and MSN? We model ad auctions as a dynamic game of incomplete information, so we can study the convergence and robustness properties of various strategies. In particular, we consider best-response bidding strategies for a repeated auction on a single keyword, where in each round, each player chooses some optimal bid for the next round, assuming that the other players merely repeat their previous bids. We focus on a strategy we call Balanced Bidding (BB). If all players use the BB strategy, we show that bids converge to a bid vector that obtains in a complete information static model proposed by Edelman, Ostrovsky, and Schwarz. We prove that convergence occurs with probability 1, and we compute the expected time until convergence.

Download the paper: http://www.hbs.edu/research/pdf/08-056.pdf

Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice

Abstract

We explore a new channel for attracting inflows using a unique dataset of corporate 401(k) retirement plans and their mutual fund family trustees. Families secure substantial inflows by being named trustee of a 401(k) plan. This affords the plan sponsor potential influence on the family's portfolio decisions. Consistent with this, we find that family trustees significantly overweight their 401(k) client firm's stock. Trustee overweighting is more pronounced when the conflict of interest of the trustee family is more severe and when other mutual funds are selling the client firm's stock. This overweighting is not explained by superior information. We quantify a potentially large benefit to the 401(k) sponsor firm of having its price propped up by its trustee fund's more severe overweighting. We also estimate the resulting loss to mutual fund investors, which can be large in some cases.

Download the paper: http://www.hbs.edu/research/pdf/08-054.pdf

The Small World of Investing: Board Connections and Mutual Fund Returns

Abstract

This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year. Returns are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through the education networks. Our results suggest that social networks may be an important mechanism for information flow into asset prices.

Download the paper: http://www.hbs.edu/research/pdf/08-055.pdf

Embracing Commitment and Performance: CEOs and Practices Used to Manage Paradox

Abstract

We tend to assume that great leaders must make difficult choices between two or more conflicting outcomes. In an interview study with 26 CEOs of top American and European companies (including IKEA, Campbell Soups, Nokia, H&M), we find that instead of choosing between conflicting outcomes such as long-term strategy or short-term performance drivers, top-tier managers argue that their role is to embrace such paradoxes to make both things happen simultaneously. The study identifies five groups of practices that make this possible. Together, they reveal a systematic approach to managerial work at the top, which is seldom found in the literature. By building on the engagement of many in the development of the organization, the practices are important for our understanding of how a CEO facilitates the partaking of many in strategy making. The paper contributes to theory by relating the current findings to the literature on the connection between commitment and performance and on the strategic management literature that focuses on the proliferation of strategy and strategy as practice.

Download the paper: http://www.hbs.edu/research/pdf/08-052.pdf

Psychological Influence in Negotiation: An Introduction Long Overdue

Abstract

This paper discusses the causes and consequences of the (surprisingly) limited extent to which social influence research has penetrated the field of negotiation and then presents a framework for bridging the gap between these two literatures. The paper notes that one of the reasons for its limited impact on negotiation research is that extant research on social influence focuses almost exclusively on economic or structural levers of influence. With this in mind, the paper seeks to achieve five objectives: (1) Define the domain of psychological influence as consisting of those tactics which do not require the influencer to change the economic or structural aspects of the bargaining situation in order to persuade the target; (2) Review prior research on behavioral decision making to identify ideas that may be relevant to the domain of psychological influence; (3) Provide a series of examples of how behavioral decision research can be leveraged to create psychological influence tactics for use in negotiation; (4) Consider the other side of influence, i.e., how targets of influence might defend against the tactics herein considered; and (5) Consider some of the ethical issues surrounding the use of psychological influence in negotiation.

Download the paper: http://www.hbs.edu/research/pdf/08-058.pdf

Do Legal Origins Have Persistent Effects Over Time? A Look at Law and Finance around the World c. 1900

Abstract

How persistent are the effects of legal institutions adopted or inherited in the distant past? A substantial literature argues that legal origins have persistent effects that explain clear differences in investor protections and financial development around the world today (La Porta et al., 1998, 1999 and passim). This paper examines the persistence of the effects of legal origins by examining new estimates of different indicators of financial development in more than 20 countries in 1900 and 1913. The evidence presented does not yield robust results that can sustain the hypothesis of persistence effects of legal origin, but it is not powerful enough to reject it either. Then the paper examines if there were systematic differences in the extent of investor protections across countries, since that is the main channel through which legal origin affects financial development, and shows that all the evidence supports the idea of relative convergence in corporate governance practices across legal families circa 1900. The paper concludes that, if the evidence presented is representative, the variation observed in financial development around the world today is likely a product of events of the twentieth century rather than a consequence of long-term (and persistent) differences occasioned by legal traditions.

Download the paper: http://www.hbs.edu/research/pdf/08-030.pdf

Laws vs. Contracts: Legal Origins, Shareholder Protections, and Ownership Concentration in Brazil, 1890-1950

Abstract

The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. Archival evidence such as company statutes and shareholder lists document that in many Brazilian corporations voting rights provisions, in particular, maximum vote provisions and graduated voting scales (that provided for less-than-proportional votes as shareholdings increase), balanced the relative voting power of small and large investors. In companies with such provisions the concentration of ownership and control is shown to have been significantly lower than in the average company. Overall, from the sample of Brazilian companies studied it seems like the concentration of control was significantly lower before 1910 than what it is today.

Download the paper: http://www.hbs.edu/research/pdf/08-053.pdf

Unconventional Insights for Managing Stakeholder Trust

Abstract

No abstract is available at this time.

Download the paper: http://www.hbs.edu/research/pdf/08-057.pdf

Managing Functional Biases in Organizational Forecasts: A Case Study of Consensus Forecasting in Supply Chain Planning

Abstract

To date, little research has been done on managing the organizational and political dimensions of generating and improving forecasts in corporate settings. We examine the implementation of a supply-chain planning process at a consumer electronics company, concentrating on the forecasting approach around which the process revolves. Our analysis focuses on the forecasting process and how it mediates and accommodates the functional biases that can impair the forecast accuracy. We categorize the sources of functional bias into intentional, driven by misalignment of incentives and the disposition of power within the organization, and unintentional, resulting from informational and procedural blind spots. We show that the forecasting process, together with the supporting mechanisms of information exchange and elicitation of assumptions, is capable of managing the potential political conflict and the informational and procedural shortcomings. We also show that the creation of an independent group responsible for managing the forecasting process, an approach that we distinguish from generating forecasts directly, can stabilize the political dimension sufficiently to enable process improvement to be steered. Finally, we find that while a coordination system—the relevant processes, roles and responsibilities, and structure—can be designed to address existing individual and functional biases in the organization; the new coordination system will in turn generate new individual and functional biases. The introduced framework of functional biases (whether those biases are intentional or not), the analysis of the political dimension of the forecasting process, and the idea of a coordination system are new constructs to better understand the interface between operations management and other functions.

Download the paper: http://www.hbs.edu/research/pdf/07-024.pdf

 

Cases & Course Materials

Berkshire Partners: Purchase of Rival Company (A)

Harvard Business School Case 208-023

Berkshire Partners, a private equity firm in Boston, was pleased with their recent investment in the Holmes Group, a home comfort consumer electronics company. The portfolio company was exceeding key financial targets and Berkshire Partners was confident that it would be another successful investment. Holmes' management team then suggested acquiring a kitchen electronics company, the Rival Company. The management of Holmes believed that Rival would complement their existing portfolio of products and it was the perfect time to buy due to a depressed stock price caused by declining earnings. The investment team at Berkshire now had to decide if the possible returns from an investment in Rival were enough to risk the successful investment in Holmes, or if Rival could be acquired without risking Berkshire's investment in Holmes.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208023

Berkshire Partners: Purchase of Rival Company (B)

Harvard Business School Supplement 208-024

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208024

Berkshire Partners: Purchase of Rival Company (C)

Harvard Business School Supplement 208-025

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208025

Silic (A): Choosing Cost or Fair Value on Adoption of IFRS

Harvard Business School Case 108-030

A French real estate firm must choose to report its primary asset (investment property) using either cost or fair-value accounting methods upon adoption of international accounting standards (IAS) in 2005.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=106073

 

Publications

Studying Creativity, Its Processes, and Its Antecedents: An Exploration of the Componential Theory of Creativity

Abstract

We use the componential theory of creativity as a framework for describing the ways in which researchers can study organizational creativity. We begin by laying out the theory, and then review methods for assessing each of the elements of the theory: domain-relevant skills, creativity-relevant processes, intrinsic motivation, the work environment, the creative process, and creative outcomes. The review emphasizes the assessment of creative outcomes. Finally, we describe and illustrate the primary research methodologies for studying creativity, highlighting the challenges of and opportunities for probing creativity in organizational settings.

Publisher's site:
http://www.workpsychologyarena.com/books/

The Value of a Broader Product Portfolio

Abstract

The mantra "Every product must stand on its own bottom line" may no longer be the one to chant. Nowadays, broadening your portfolio can increase both your chances of a big win and the benefit your other products can get from a hit's popularity.

Economic Links and Predictable Returns

Abstract

This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating this return predictability across assets. We use a dataset of firms' principal customers to identify a set of economically related firms, and show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long/short equity strategy based on this effect yields monthly alphas of over 150 basis points, or over 18 percent per year.

Loyalty Based Portfolio Choice

Abstract

I evaluate the effect of loyalty on individuals' portfolio choice using a unique dataset of retirement contributions. I exploit the statutory difference that in 401(k) plans stand alone employees can invest directly in their division, while conglomerate employees must invest in the entire firm, including all unrelated divisions. Consistent with loyalty, employees of stand-alone firms invest 10 percentage points (75%) more in company stock than conglomerate employees. Support is also found using variation in loyalty between different groups of employees, both across and within firms. The cost to employees of loyalty is large, and can amount to nearly a 20 percent loss in retirement income.

Creativity, Improvisation, and Organizations

Abstract

Although the literatures on both organizational creativity and organizational improvisation have been expanding in recent years, the links between these literatures have not been deeply explored. This chapter explores those links to create a conceptualization of improvisational creativity in organizations. After reviewing existing theory on the creative process in organizations, and existing theory on organizational improvisation, we synthesize the two, fill in some conceptual gaps, and propose a preliminary model. The chapter ends with research questions suggested by our analysis.

Publisher's site:
http://www.researchmethodsarena.com/books/

Mastering the Management System

Abstract

Companies have always found it hard to balance pressing operational concerns with long-term strategic priorities. The tension is critical: World-class processes won't lead to success without the right strategic direction, and the best strategy in the world will get nowhere without strong operations to execute it. In this article, Kaplan, of Harvard Business School, and Norton, founder and director of the Palladium Group, explain how to effectively manage both strategy and operations by linking them tightly in a closed-loop management system. The system comprises five stages, beginning with strategy development, which springs from a company's mission, vision, and value statements, and from an analysis of its strengths, weaknesses, and competitive environment. In the next stage, managers translate the strategy into objectives and initiatives with strategy maps, which organize objectives by themes, and balanced scorecards, which link objectives to performance metrics. Stage three involves creating an operational plan to accomplish the objectives and initiatives; it includes targeting process improvements and preparing sales, resource, and capacity plans and dynamic budgets. Managers then put plans into action, monitoring their effectiveness in stage four. They review operational, environmental, and competitive data; assess progress; and identify barriers to execution. In the final stage, they test the strategy, analyzing cost, profitability, and correlations between strategy and performance. If their underlying assumptions appear faulty, they update the strategy, beginning another loop. The authors present not only a comprehensive blueprint for successful strategy execution but also a managerial tool kit, illustrated with examples from HSBC Rail, Cigna Property and Casualty, and Store 24. The kit incorporates leading management experts' frameworks, outlining where they fit into the management cycle.

Remedying Hyperopia: The Effects of Self-Control Regret on Consumer Behavior

Abstract

The extant literature on self-control is premised on the notion of myopia (i.e., short-sightedness or present-biased preferences) and assumes that choosing vices generates regret. An alternative perspective challenges this approach and suggests that consumers often suffer from a reverse self-control problem, namely excessive farsightedness and over-control, or "hyperopia" (Kivetz and Simonson, 2002; Kivetz and Keinan, 2006). The present research examines whether consumers can foresee the detrimental long-term consequences of hyperopia. We demonstrate that anticipating long-term regret relaxes self-control and motivates consumers to counteract their righteousness. A series of five studies demonstrates the effect of self-control regrets on real choices and actual shopping behavior. The findings indicate that consumers are more likely to select indulgences and luxuries when they judge the long-term rather than short-term regrets of others, anticipate their own regret at the distant rather than near future, and reflect on their regret regarding an actual past decision that they made in the distant rather than recent past. The paper concludes with two field experiments that examine the effect of anticipatory regret on consumers' purchases at a shopping mall and during Thanksgiving. The results indicate that anticipating long-term regret leads consumers to buy pleasurable indulgent products rather than practical necessities and to spend more money on shopping. The implications of the findings for the literature on self-control and for marketers as well as consumers are discussed.

Harnessing Our Inner Angels and Demons: What We Have Learned About Want/Should Conflicts and How That Knowledge Can Help Us Reduce Short-Sighted Decision Making

Abstract

Although observers of human behavior have long been aware that people regularly struggle with internal conflict when deciding whether to behave responsibly or indulge in impulsivity, psychologists and economists did not begin to empirically investigate this type of want/should conflict until recently. In this paper, we review and synthesize the latest research on want/should conflict, focusing our attention on the findings from an empirical literature on the topic that has blossomed over the last 15 years. We then turn to a discussion of how individuals and policy makers can use what has been learned about want/should conflict to help decision makers select far-sighted options.

Ambidexterity as a Dynamic Capability: Resolving the Innovator's Dilemma

Abstract

How do organizations survive in the face of change? Underlying this question is a rich debate about whether organizations can adapt—and if so, how. One perspective, organizational ecology, presents evidence suggesting that most organizations are largely inert and ultimately fail. A second perspective argues that some firms do learn and adapt to shifting environmental contexts. Recently, this latter view has coalesced around two themes. The first, based on research in strategy, suggests that dynamic capabilities, the ability of a firm to reconfigure assets and existing capabilities, explains long-term competitive advantage. The second, based on organizational design, argues that ambidexterity, the ability of a firm to simultaneously explore and exploit, enables a firm to adapt over time. In this paper we review and integrate these comparatively new research streams and identify a set of propositions that suggest how ambidexterity acts as a dynamic capability. We suggest that efficiency and innovation need not be strategic tradeoffs and highlight the substantive role of senior teams in building dynamic capabilities.

The Implications of Unverifiable Fair-value Accounting: Evidence from the Political Economy of Goodwill Accounting

Abstract

I study the evolution of SFAS 142, which uses unverifiable fair-value estimates to account for acquired goodwill. I find evidence consistent with the FASB issuing SFAS 142 in response to political pressure over its proposal to abolish pooling accounting. The result is interesting given this proposal was due in part to SEC concerns over pooling misuse. I also find evidence consistent with lobbying support for SFAS 142 increasing in firms' discretion under the standard. Agency theory predicts such unverifiable discretion can be used opportunistically.

The Founder's Dilemma

Abstract

Most entrepreneurs want to make a lot of money and to run the show. New research shows that it's tough to do both. If you don't figure out which matters more to you, you could end up being neither rich nor king.