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.
Research this week leans towards defying expectations. Common wisdom, for example, might suggest that a CEO who has risen through the ranks of her company would favor her former divisions in budget choices, as opposed to divisions in which she has little to no experience. Instead, "reverse-favoritism" seems the order of the day, according to HBS professor Yuhai Xuan. Writing in the December issue of the Review of Financial Studies, Xuan found that "after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. [...] The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful division managers in previously unaffiliated divisions." Xuan's article is titled "Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions."
This week also sees a comprehensive look at how and why multinationals vary in size from country to country. Contrary to popular expectations, "corporate headquarters in the U.S. are about twice the size of European counterparts," HBS professor David Collis and coauthors write in the working paper "International Differences in the Size and Roles of Corporate Headquarters: An Empirical Examination" [PDF]. Whether your own HQ is bloated or lean 'n' mean, there is as yet no perfect model for headquarters size, the paper continues. "The size and role of corporate headquarters vary widely both between countries and within countries.[...] [T]here is more variation within each country than there is between countries," the authors observe.
International Differences in the Size and Roles of Corporate Headquarters: An Empirical Examination
|Authors:||David Collis, David Young, and Michael Goold|
This paper examines differences in the size and roles of corporate headquarters around the world. Based on a survey of over 600 multibusiness corporations in seven countries (France, Germany, Holland, U.K., Japan, U.S., and Chile), the paper describes the differences among countries and then applies a model of the factors determining the size of corporate headquarters (Young, Collis, and Goold, 2003) to systematically examine those differences. The data shows that there are significant differences among countries in the size and role of corporate headquarters and strongly suggests the existence of a developing country model, a European model, a U.S. model, and a Japanese model of corporate headquarters. Contrary to popular expectations, corporate headquarters in the U.S. are about twice the size of European counterparts. Headquarters there exert a higher level of functional influence and have larger staffs in certain key areas, such as IT and R&D. U.S. managers are generally more satisfied than their European counterparts with their larger more powerful headquarters, which suggests that, at least in the U.S. context, large corporate headquarters can create value.
Download the paper: http://www.hbs.edu/research/pdf/10-044.pdf
Intra-Industry Foreign Direct Investment
|Authors:||Laura Alfaro and Andrew Charlton|
|Publication:||American Economic Review 99, no. 5 (December 2009)|
We use a new firm-level dataset that establishes the location, ownership, and activity of 650,000 multinational subsidiaries. Using a combination of four-digit-level information and input-output tables, we find the share of vertical FDI (subsidiaries that provide inputs to their parent firms) to be larger than commonly thought, even within developed countries. Most subsidiaries are not readily explained by the comparative advantage considerations whereby multinationals locate activities abroad to take advantage of factor cost differences. Instead, multinationals tend to own the stages of production proximate to their final production, giving rise to a class of high-skill, intra-industry vertical FDI.
Measuring and Managing Macrofinancial Risk and Financial Stability: A New Approach
|Authors:||Dale F. Gray, Robert C. Merton, and Zvi Bodie|
|Publication:||In Central Banking, Analysis, and Economic Policies. Central Bank of Chile, forthcoming|
This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators. The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks." At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees—some explicit and others implicit. Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis. The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions. Risk adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.
Unravelling in Two-Sided Matching Markets and Similarity of Preferences
|Author:||Hanna W. Halaburda|
|Publication:||Games and Economic Behavior (forthcoming)|
This paper investigates the causes and welfare consequences of unravelling in two-sided matching markets. It shows that similarity of preferences is an important factor driving unravelling. In particular, it shows that under the ex-post stable mechanism (the mechanism that the literature focuses on), unravelling is more likely to occur when participants have more similar preferences. It also shows that any Pareto-optimal mechanism must prevent unravelling, and that the ex-post stable mechanism is Pareto-optimal if and only if it prevents unravelling.
Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions
|Publication:||Review of Financial Studies 22, no. 12 (December 2009): 4919-|
This paper investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multi-divisional firms. I find that after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. The pattern of reverse-favoritism in capital allocation is more pronounced if the new CEO has less authority or if the unaffiliated divisions have more bargaining power. I find evidence that having a specialist CEO negatively affects segment investment efficiency. The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful divisional managers in previously unaffiliated divisions.
Cases & Course Materials
Finance Myopia in a Systems Business
J. Bruce Harreld
Harvard Business School Case 810-071
This short case describes the tensions that often arise between finance executives attempting to curtail unproductive activities and strategy executives trying to optimize overall firm performance.
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Memo from Counsel: Antitrust Law and Customer Allocation
Lynn S. Paine and Lara Adamsons
Harvard Business School Note 310-048
When do antitrust laws come into play in a bidding situation? What should a company do if an antitrust violation is uncovered? This memo discusses "hard-core" antitrust violations, focusing on bid rigging and market allocation, under the laws of the U.S. and other leading antitrust regimes.
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Nettwerk: Digital Marketing in the Music Industry
John Deighton and Leora Kornfeld
Harvard Business School Case 510-055
How is music marketed in the digital era? Nettwerk Music Group built on its foundation as a social, grassroots marketer of music and artists and emerged as a leader in the Internet-enabled social media environment. For most of the past decade Nettwerk CEO Terry McBride let fans consume music on their own terms. He encouraged file-sharing, the remixing of his artists' songs and videos, and an environment in which "the audience is the record company." In the digital marketplace compact discs mattered much less, said McBride. "Digital assets" were the currency, in the form of ad, television, movie, and videogame song placement, ringtones, mixes, and community-created content. But new artist-label contracts were needed if digital assets were going to flow freely. Moving away from the infrastructure of the music business also meant having to do without the financial, logistical, and promotional power of the major labels. To provide an alternative to the muscle of the major labels, the company is launching a venture capital project called "Polyphonic."
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Stolt-Nielsen Transportation Group
Lynn S. Paine and Lara Adamsons
Harvard Business School Case 310-043
Richard Wingfield considers whether to continue a cooperative agreement with industry peers in the deep-sea parcel tanker shipping industry. What are the economic and strategic implications of ending the agreement? What are the legal implications of continuing? Where is the line between cooperation and conspiracy, and what should a company do if the legality of a long-standing business practice comes into question?
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VF Brands: Global Supply Chain Strategy
Gary P. Pisano and Pamela Adams
Harvard Business School Case 610-022
This case examines VF Brands global supply chain strategy. Historically, VF has used a combination of in-house manufacturing and traditional arms-length sourcing arrangements. At the time of the case, the company is considering a third approach to supplier relations that involves much closer cooperation and partnerships. The goal of this "third way" approach is to create a sourcing relationship that combines some of the virtues of vertical integration with the flexibility of sourcing. Such arrangements are increasingly discussed in the operations literature and in practice. This case provides students an opportunity to do an in-depth analysis of such an arrangement and develop an understanding of the trade-offs involved.
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