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.

July 12

Conserving land for profit

"Our business model merges conservation and capitalism seamlessly and symbiotically." So says the Web site of Patagonia Sur, LLC, which aims to encourage both land conservation and economic development. The new case study, "Patagonia Sur: For-Profit Land Conservation in Chile," discusses the challenges that founder Warren Adams faced as he tried to persuade investors that the idea of conserving land for profit was both economically sensible and ethically sound. The case was written by Arthur I. Segel, Nicolas Ibanez, and Jay Verjee.

Tax-fraud-investigation management

Early in 2009, the United States government sued UBS AG, demanding that the giant Swiss bank give up the names of more than 50,000 customers who allegedly hid their massive off-shore accounts from the IRS, resulting in very public scrutiny of the wealth management business. In the two-part case "Wealth Management Crisis at UBS," Paul M. Healy, George Serafeim, and David Lane discuss how UBS dealt with the challenges surrounding the investigation and its eventual resolution.

Forcing firms to cough up information

From both regulatory organizations and shareholders, firms have been facing increasing pressure to divulge information about their products and business practices-details about toxic chemical disposal, for example. In a new working paper, Anil R. Doshi, Glen W.S. Dowell, and Michael W. Toffel discuss which organizations are most likely to resist or acquiesce to disclosure mandates, and whether those mandates induce firms to clean up their acts. Read "How Firms Respond to Mandatory Information Disclosure."

 

Publications

Blending Quantitative and Qualitative Methods in Organizational Research

An abstract is unavailable at this time.

Evidence on the Use of Unverifiable Estimates in Required Goodwill Impairment

Abstract

SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted managers will, on average, use the fair value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on management's future actions (including managers' conceptualization and implementation of firm strategy). Thus, agency theory predicts managers will, on average, use the discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory derived predictions, does not confirm the private information hypothesis.

Read the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1134943

 

Working Papers

Fiduciary Duties and Equity‐Debtholder Conflicts

Abstract

We use an important legal event as a natural experiment to examine the effect of management fiduciary duties on equity‐debt conflicts. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors' fiduciary duties in firms incorporated in that state. This change limited managers' incentives to take actions favoring equity over debt for firms in the vicinity of financial distress. We show that this ruling increased the likelihood of equity issues, increased investment, and reduced firm risk, consistent with a decrease in debt-equity conflicts of interest. The changes are isolated to firms relatively closer to default. The ruling was also followed by an increase in average leverage and a reduction in covenant use. Finally, we estimate the welfare implications of this change and find that firm values increased when the rules were introduced. We conclude that managerial fiduciary duties affect equity‐bondholder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.

Download the paper: http://www.hbs.edu/research/pdf/10-070.pdf

How Firms Respond to Mandatory Information Disclosure

Abstract

We explore which organizations are particularly likely to resist, or acquiesce to, new institutional pressures that arise from mandatory information disclosure regulations. We hypothesize that when information is disclosed about organizational performance, certain organizational characteristics amplify pressures to improve. Examining organizational responses to a change in a prominent information disclosure program, we provide some of the first empirical evidence characterizing organizations' heterogeneous responses to information disclosure regulations. We find that private ownership and proximity to headquarters and corporate siblings are associated with superior performance trends following information disclosure. We also find that regional density moderates effect of establishment size on performance improvement. We find no evidence that capability transfers are associated with performance improvement. We highlight implications for institutional theory, managers, and policymakers.

Download the paper: http://www.hbs.edu/research/pdf/12-001.pdf

Issuer Quality and the Credit Cycle

Abstract

We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734528

Platform Competition under Asymmetric Information

Abstract

In the context of platform competition in a two-sided market, we study how ex ante uncertainty and ex post asymmetric information concerning the value of a new technology affect the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead to a market failure: competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, we consider multi-homing. We find that multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which results in market inefficiency. Second, the model provides a new argument for why it is usually entrants, not incumbents, who bring major technological innovations to the market.

Download the paper: http://www.hbs.edu/research/pdf/11-080.pdf

The International Politics of IFRS Harmonization

Abstract

The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of the international political dynamics of countries' IFRS harmonization decisions. The analysis is based on a field study of three jurisdictions in particular: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize these jurisdictions' IFRS responses: proximity to existing political powers at the IASB; and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1875682

 

Cases & Course Materials

Elizabeth Jacobs: Price-Earnings Ratios and Employee Stock Option Grants

David F. Hawkins
Harvard Business School Case 111-087

Analyst questions the value of accounting measurement of earnings per share and stock option costs for equity valuation purposes.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/111087-PDF-ENG

Mittel Technologies, AG

David F. Hawkins
Harvard Business School Case 111-065

CFO of German heavy equipment manufacturer examines through company examples potential impact of proposed changes to revenue recognition rules.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/111065-PDF-ENG

Shareholders' Equity: Accounting and Analysis

David F. Hawkins
Harvard Business School Note 111-055

Technical note covering various aspects of accounting for stockholders' equity.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/111055-PDF-ENG

Wealth Management Crisis at UBS (A)

Paul M. Healy, George Serafeim, and David Lane
Harvard Business School Case 111-082

The case describes the challenges that UBS faced as a result of the U.S. Department of Justice investigation for tax fraud, which claimed that UBS had helped some 52,000 U.S. residents hide billions of dollars in untaxed assets in secret Swiss accounts between 2000 and 2007, depriving the U.S. Treasury of hundreds of millions of dollars in taxes.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/111082-PDF-ENG

Wealth Management Crisis at UBS (B)

Paul M. Healy, George Serafeim, and David Lane
Harvard Business School Supplement 111-090

The case describes the resolution of the U.S. Department of Justice investigation for tax fraud and the increasing pressure on the wealth management business.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/111090-PDF-ENG

The Israeli-Palestinian Negotiating Partners: 2010 Strategic Re-assessment

James K. Sebenius and Shula Gilad
Harvard Business School Case 911-025

A network of influential Israelis and Palestinians, jointly trained in negotiation at Harvard since 2002, faces organizational, strategic, and funding challenges in 2010. Unlike "people-to-people" or "Track II" initiatives, the Israeli-Palestinian Negotiating Partners (IPNP) consists of relatively senior people on both sides of the conflict who have undergone advanced negotiation training together and now constitute a unique network in the region. IPNP's academic sponsor, the Harvard Negotiation Project, is helping to assess this unique negotiation initiative and to assist the organization to conduct a basic re-assessment in the face of changes in regional politics, the conflict, and the funding environment.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/911025-PDF-ENG

Stuyvesant Town—Peter Cooper Village: America's Largest Foreclosure

faculty names
Harvard Business School Case 211-106

In July 2010, William Ackman, the founder of Pershing Square, is considering a potential new opportunity: the acquisition of the distressed Stuyvesant Town and Peter Cooper Village (ST/PCV) complex. The property had recently been abandoned by its owners and had come under the control of CW Capital, the special servicer for the vast amount of debt that was in default. Any investment in a distressed property could be very risky and might require the company to seek protection in the bankruptcy courts. While the bankruptcy process was not new for Ackman, it could add significant complexity and unknown outcomes. Ackman must consider whether this is a worthwhile investment, given the ambiguous valuation and significant public scrutiny of any investment deal.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/211106-PDF-ENG

Patagonia Sur: For-Profit Land Conservation in Chile

Arthur I Segel, Nicolas Ibanez, and Jay Verjee
Harvard Business School Case 211-103

Warren Adams founded Patagonia Sur in 2007 as one of the world's first for-profit land conservation businesses. His goal was to purchase over 100,000 acres of land in southern Chile and run a variety of sustainable businesses to generate annual returns for investors. Patagonia Sur planned to derive various streams of revenue from the land—including eco-tourism, sustainable land development, carbon credits, water rights and eco-brokerage—thereby giving a financial return to investors on top of achieving a positive environmental impact. By 2011, Warren had raised over $20 million from high net worth individuals, and Patagonia Sur had over 60,000 acres in Patagonia under management. However, institutional investors seriously questioned whether Patagonia Sur could ever do more than break even on an annual basis. Further, they worried that in fact the risk of the investment went up significantly as the company spent both its capital and management time on so many different revenue streams. In addition, some investors felt that for-profit conservation was morally wrong. Warren needed to convince both individual and institutional investors that his vision would succeed in both generating returns and preserving the natural beauty of Patagonia.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/211103-PDF-ENG