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 7

Why you shouldn't work with old school chums

Is it a good idea to work with friends? Research by Paul Gompers, Vladimir Mukharlyamov, and Yuhai Xuan suggests there are limits (in business) to pairing up with a buddy. Looking at the venture capital industry, the researchers discovered that investment returns could be enhanced when people collaborated for ability-based characteristics, but that those returns were "dramatically reduced" when the bond was over affinity-based characteristics, such as people who shared the same ethnic background, school, or previous employer. "Our conclusion is that, to paraphrase Ralph Waldo Emerson, you cannot afford to be stupid with old friends when you are venture capitalists co-investing together," the authors write in The Cost of Friendship.

Boosting creativity in multicultural teams

The dynamics of team performance is a hot research area, especially investigations into multicultural teams. In a recent article in the Journal of Cross-Cultural Psychology, Carmit Tadmor, Patricia Satterstrom, Sujin Jang, and Jeffrey Polzer look at the relatively unexplored area of creativity in multicultural teams. The researchers discovered that "even after controlling for individual creativity, multicultural experience had a superadditive effect on dyadic creativity." Read their account, "Beyond Individual Creativity: The Superadditive Benefits of Multicultural Experience for Collective Creativity in Culturally Diverse Teams."

Communicating benefits of CSR

In the note "Managing Stakeholders with Corporate Social Responsibility," Christopher Marquis and Laura Velez Villa review how strong stakeholder-company relationships developed around corporate social responsibility initiatives "deliver bottom line benefits."

 

Publications

Change Agents, Networks, and Institutions: A Contingency Theory of Organizational Change

Abstract

We develop a contingency theory for how structural closure in a network, defined as the extent to which an actor's network contacts are connected to one another, affects the initiation and adoption of change in organizations. Using longitudinal survey data supplemented with eight in-depth case studies, we analyze 68 organizational change initiatives undertaken in the United Kingdom's National Health Service. We show that low levels of structural closure (i.e., structural holes) in a change agent's network aid the initiation and adoption of changes that diverge from the institutional status quo but hinder the adoption of less divergent changes.

Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge

Abstract

We use the Business Roundtable's challenge to the SEC's 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access. We find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership in particular, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the Rule in response to the Business Roundtable challenge. We also examine intra-day returns and find that the value loss occurred just after the SEC's announcement on October 4. We find similar results on July 22, 2011, when the D.C. Circuit ruled in favor of the Business Roundtable. These findings are consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC's 2010 Rule.

The Size and Composition of Corporate Headquarters in Multinational Companies: Empirical Evidence

Abstract

Based on a six-country survey of nearly 250 multinationals (MNCs), this paper is the first empirical analysis to describe the size and composition of MNC headquarters and to account for differences among them. Findings are as follows: MNC corporate headquarters are more involved in "obligatory" and value creating and control functions than in operational activities; there are no systematic differences in the determinants of the size and composition of corporate headquarters between MNCs and purely domestic companies; and as the geographic scope of an MNC increases, two offsetting phenomena occur-headquarters decrease their influence over operational units that, ceteris paribus, reduces the size of headquarters, but the relative size of obligatory functions at headquarters increases with increased country heterogeneity. The net effect is that the size of corporate headquarters expands as MNC geographic scope increases. The notion of "administrative heritage" is validated as MNCs from different countries have substantially different corporate headquarters-U.S. headquarters are large (255 median staff for a 20,000 FTE MNC) and European headquarters smaller (124). Implications are drawn that countries will lose activities if domestic firms are acquired by foreign MNCs, and that MNCs need to allow more subsidiary autonomy as their geographic scope increases.

Communicating Frames in Negotiation

Abstract

An abstract is unavailable at this time.

Publisher's Link: http://ukcatalogue.oup.com/product/9780199730858.do

Risky Trust: How Multi-entity Teams Develop Trust in High Risk Endeavors

Abstract

An abstract is unavailable at this time.

Publisher's Link: http://www.oup.com/us/catalog/general/subject/Business/Management/OrganizationalBehavior/?view=usa&sf=toc&ci=9780199756087

Beyond Individual Creativity: The Superadditive Benefits of Multicultural Experience for Collective Creativity in Culturally Diverse Teams

Abstract

Although recent research has consistently demonstrated the benefits of multicultural experience for individual-level creativity, its potential advantages for collective creativity in culturally diverse teams have yet to be explored. We predicted that multicultural experience among members of a collective would enhance joint creativity in a superadditive fashion. Using a two-step methodology that included both individual and dyadic brainstorming sessions, we found that even after controlling for individual creativity, multicultural experience had a superadditive effect on dyadic creativity. Specifically, dyads performed best on a creative task in terms of fluency, flexibility, and novelty-three classic dimensions of creativity-when both dyad partners had high levels of multicultural experience. These results show that when it comes to multicultural experience, the creative whole is greater than the sum of its parts. Implications for diversity research are discussed.

 

Working Papers

Unobserved State Fragility and the Political Transfer Problem

Abstract

Autocrats experiencing a windfall in unearned income may find it optimal to donate to other countries some of the windfall in order to make the state a less attractive prize to potential insurgents. We put forward a model that makes that prediction, as well as the additional predictions that the recipients of the aid may themselves become more repressive with high levels of aid and experience conflict with medium levels of aid. We call these joint phenomena the political transfer problem and argue that the largest windfall of the 20th century, the period from 1973 to 1985 during which oil prices were at all-time highs, produced long-run political dynamics consistent with the model. In particular, major oil exporters have been politically repressive, generous with foreign aid when oil prices are high, and free of civil war; in contrast, the recipients of petro aid were relatively repressive (and peaceful) during the period of high oil prices but subject to civil war when oil prices fell and aid was reduced. Surprisingly, the political transfer problem did not seem to materialize when oil prices again began to creep up in the 21st century; this nonexistence of the problem can be explained by the model against the backdrop of evolving geopolitics and economics.

Download the paper: http://www.hbs.edu/research/pdf/13-009.pdf

The Need for (long) Chains in Kidney Exchange

Abstract

It has been previously shown that for sufficiently large pools of patient-donor pairs, (almost) efficient kidney exchange can be achieved by using at most 3-way cycles, i.e., by using cycles among no more than 3 patient-donor pairs. However, as kidney exchange has grown in practice, cycles among n>3 pairs have proved useful, and long chains initiated by non-directed, altruistic donors have proven to be very effective. We explore why this is the case, both empirically and theoretically. We provide an analytical model of exchange when there are many highly sensitized patients and show that large cycles of exchange or long chains can significantly increase efficiency when the opportunities for exchange are sparse. As very large cycles of exchange cannot be used in practice, long non-simultaneous chains initiated by non-directed donors significantly increase efficiency in patient pools of the size and composition that presently exist. Most importantly, long chains benefit highly sensitized patients without harming low-sensitized patients.

Download the paper: http://papers.nber.org/papers/W18202

Dividends as Reference Points: A Behavioral Signaling Approach

Abstract

We outline a dividend signaling approach in which rational managers signal firm strength to investors who are loss averse to reductions in dividends relative to the reference point set by prior dividends. Managers with strong but unobservable cash earnings separate themselves by paying high dividends but retain enough earnings to be likely not to fall short of the same level next period. The model is consistent with several features of the data, including equilibrium dividend policies similar to a Lintner partial-adjustment model; modal dividend changes of zero, stronger market reactions to dividend cuts than increases, relative infrequency and irregularity of repurchases versus dividends, and a core mechanism that does not center on public destruction of value, a notion that managers reject in surveys. Supportive new tests involve nominal levels and changes of dividends per share, announcement effects, and reference point currencies of ADR dividends.

Download the paper: http://papers.nber.org/papers/W18242

When Does a Platform Create Value by Limiting Choice?

Abstract

We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (to better satisfy their individual preference for variety, users have an incentive to consume more applications than the number that maximizes joint utility); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria, which result in different utility levels for the users); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems and create value by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the allocation that maximizes users' utility); eliminate equilibria that give lower utility to the users; and reduce the severity of the coordination problem faced by users.

Download the paper: http://www.hbs.edu/research/pdf/11-030.pdf

Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers

Abstract

This paper uses a series of experiments with commercial bank loan officers to test the effect of performance incentives on risk assessment and lending decisions. We first show that while high-powered incentives lead to greater screening effort and more profitable lending, their power is muted by both deferred compensation and the limited liability typically enjoyed by credit officers. Second, we present direct evidence that incentive contracts distort judgment and beliefs, even among trained professionals with many years of experience. Loans evaluated under more permissive incentive schemes are rated significantly less risky than the same loans evaluated under pay-for-performance.

Download the paper: http://www.hbs.edu/research/pdf/13-002.pdf

The Cost of Friendship

Abstract

This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people's desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based "birds-of-a-feather-flock-together" effects in collaboration can be costly.

Download the paper: http://papers.nber.org/papers/W18141

Monetary Policy and Long-Term Real Rates

Abstract

Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel.

Download the paper: http://www.hbs.edu/research/pdf/13-008.pdf

Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry

Abstract

Our paper tests a key prediction of property rights theory: that agents respond to marginal incentives embedded in property rights when making non-contractible, revenue-enhancing investments (Grossman and Hart, 1986; Hart and Moore, 1990). Using rich project-level data from the U.S. film industry, we exploit variation in property right allocations, investment choices, and film revenues to test the distinctive aspects of property rights theory. Empirical tests of these key theoretical predictions have been relatively sparse due to the lack of appropriate data. The U.S. film industry displays two distinct allocations of property rights, which differentially affect marginal returns on a particular class of investments. Studio-financed films are produced and distributed by studios that take in the lion's share of revenue. In contrast, independent films are distributed by studios under revenue-sharing agreements, which give studios 30%-40% of the revenue stream. Under either regime, the allocation of scarce marketing resources is determined by and paid for by the studio. After accounting for the endogenous nature of property-right allocations, we find that studio-financed films receive superior marketing investments compared to independent films and that these investments fully mediate the positive effect of vertical integration on film revenues. As a result, this study contributes to the empirical literature on property rights by showing that both predicted linkages (from marginal returns to investment and from investment to revenue) exist in a single empirical setting.

Download the paper: http://www.hbs.edu/research/pdf/13-007.pdf

 

Cases & Course Materials

China Risk Finance: Riding the Wave of China's Financial Services Industry

Regina M. Abrami, Matthew Shaffer, and Weiqi Zhang
Harvard Business School Case 912-417

With China shifting toward a consumer-led growth model, non-bank lending has a critical role to play, but how easy is it to do business in this sector? What are the promises and pitfalls of the industry, and how well is Zane Wang, the case protagonist, navigating them?

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http://hbr.org/search/912417-PDF-ENG

Start-Up Chile: April 2012

Lynda M. Applegate, William R. Kerr, Josh Lerner, Dina D. Pomeranz, Gustavo A. Herrero, and Cintra Scott
Harvard Business School Case 812-158

Start-Up Chile is a unique program to encourage entrepreneurs to bring their new ventures to Chile. Policymakers must evaluate its effectiveness in achieving economic and social goals.

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http://hbr.org/search/812158-PDF-ENG

GlaxoSmithKline in Brazil: Public-Private Vaccine Partnerships

Arthur A. Daemmrich and Ian McKown Cornell
Harvard Business School Case 712-049

Three years into a major public-private partnership (PPP) between GlaxoSmithKline (GSK) and Fiocuz, Brazil's principal health institute, the company assesses technology transfer and joint research under the agreement. GSK was selling its Synflorix vaccine (against pediatric pneumonia) at fixed prices even as it transferred technology and know-how to Brazil for eventual domestic production. At the same time, GSK was co-sponsoring research into a new vaccine for Dengue fever with the Brazilian government. GSK's management must consider whether the PPP provides strategic advantage to its consumer healthcare businesses in Brazil and to access other emerging markets as well as the risks posed by the aggressive product obsolescence built into the technology transfer agreement.

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Columbia's Final Mission (Abridged) (A)

Amy C. Edmondson and Kerry Herman
Harvard Business School Case 612-095

This case documents decision-making processes, organizational culture, and other contributors to NASA's failed Columbia mission in 2003. Addresses the question of how organizations should deal with "ambiguous threats"-weak signals of potential crisis-and explores why ambiguous threats are so challenging to manage.

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Frameworks for Dialogue and Research about Social Impact Investing

Herman B. Leonard
Harvard Business School Note 312-091

Social Impact Investment (SII) is a rapidly expanding field, but terminology in the field is poorly defined and imprecise. This note suggests frameworks that help to clarify important dimensions of SII projects, distinguishing and clarifying key differences in approaches to social impact investments undertaken by different organizations and funders.

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Managing Stakeholders with Corporate Social Responsibility

Christopher Marquis and Laura Velez Villa
Harvard Business School Course Overview 412-121

The note articulates the ways in which strong stakeholder-company relationships developed through corporate social responsibility initiatives and other types of social strategies deliver bottom line benefits. The analysis follows stakeholder logic models connecting the impact of CSR initiatives on a stakeholder group (employees, customers, investors, government, the community, and suppliers) and its effects on company revenues, costs, and market value.

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http://hbr.org/search/412121-PDF-ENG

Auditing in the Post-Sarbanes-Oxley World

Anette Mikes, Gwen Yu, and Dominique Hamel
Harvard Business School Note 112-059

An abstract is unavailable at this time.

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http://hbr.org/search/112059-PDF-ENG

ABC India (A)

Ramana Nanda
Harvard Business School Case 812-168

Siddharth Kapoor, the Founder and CEO of ABC India Pvt. Ltd., reflected on his meetings as he walked out of VC Ventures' offices in Mumbai. After a few months of intensely pitching his startup to several different investors, he finally had a term sheet in hand. Despite this huge milestone, Kapoor knew it was only the start of a long process of raising money. He only had three days to get back to Vikram Sharma and indicate whether he would like to initiate the diligence process. While he was familiar with some of the terms venture capital investors put into their contracts, many others were completely alien to him. Which terms were important? Which ones should he focus on negotiating? He also knew that money was only part of what the venture capital investors brought to the table. Was VC Ventures the right partner for his business? Kapoor knew he had a busy few days ahead of him as he thought through all of these questions before getting back to Sharma.

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Man Group (B)

Robert C. Pozen and Thomas M. Clay
Harvard Business School Supplement 312-129

The Man Group was a huge and successful UK-based hedge fund and fund of funds manager. Through acquisitions, the company had consciously diversified its portfolio of investment products. In 2007 Man had to decide whether or not to spin off its brokerage business. Man was also evaluating several new business opportunities with varying strategic and financial rationales. After the financial crisis, Man had to decide what to do in the fund of funds space.

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Switzerland: Foreign Pressure and Direct Democracy

Julio J. Rotemberg and Jonathan Naharro Martin
Harvard Business School Case 712-053

An abstract is unavailable at this time.

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Perfect Storm over Zurich Airport (A) (Abridged)

Michael L. Tushman and Carin-Isabel Knoop
Harvard Business School Case 412-145

An abstract is unavailable at this time.

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