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.

November 6

Does management really work?

For executives of all stripes, the title of this recently published Harvard Business Review article is most compelling: "Does Management Really Work?" The answer, according to authors Nicholas Bloom, Raffaella Sadun, and John Van Reenen, is that companies that focus on targets, incentives, and monitoring experience "big improvements in outcomes such as productivity and longevity, and that good nuts-and-bolts management at individual firms shapes national performance." Unfortunately, many companies have forgotten how to do these fundamentals effectively, the researchers find.

Exploring effectiveness of voluntary regulation

In a laboratory experiment, Francesca Gino, Erin Krupka, and Roberto Weber gave participants the choice of having their competitive tasks watched by an external monitor or self-reported. "Our results show that the opportunity to avoid being submitted to regulation produces more unethical conduct than situations in which regulation is either exogenously imposed or entirely absent," according to the paper, "License to Cheat: Voluntary Regulation and Ethical Behavior." The results will be published in a forthcoming edition of Management Science.

The penalty for a botched conference call

Investor relations officials spend a fair amount of time preparing for and managing conference calls, those end-of-quarter communications between company executives, analysts, investors, and the media. A new working paper underscores why getting the conference call messaging right is so important. Francois Brochet, Patricia Naranjo, and Gwen Yu studied the consequences of calls held in English by non-US firms. In calls where investors had a difficult time interpreting the language or where there was more "linguistic complexity," the stock's trading volume and price movement declined after the call. Read Causes and Consequences of Linguistic Complexity in Non-US Firm Conference Calls.

 

Publications

The Architecture of Innovation: The Economics of Creative Organizations

Abstract

Innovation is a much-used buzzword these days, but when it comes to creating and implementing a new idea, many companies miss the mark-plans backfire, consumer preferences shift, or tried-and-true practices fail to work in a new context. So is innovation just a low-odds crapshoot? In The Architecture of Innovation, Harvard Business School professor Josh Lerner-one of the foremost experts on how innovation works-says innovation can be understood and managed. The key to success? Incentives. Fortunately, new research has shed light on the role incentives can play in promoting new ideas, but these findings have been absent from innovation literature-until now. By using the principles of organizational economics, Lerner explains how companies can set the right incentives and time horizons for investments and create a robust innovation infrastructure in the process.

Buy the book: http://www.amazon.com/Architecture-Innovation-Economics-Creative-Organizations/dp/1422143635/ref=sr_1_1?s=books&ie=UTF8&qid=1351005820&sr=1-1&keywords=The+Architecture+of+Innovation

The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy

Abstract

In 1776 the United States government started out on a shoestring and quickly went bankrupt fighting its War of Independence against Britain. At the war's end, the national government owed tremendous sums to foreign creditors and its own citizens. But lacking the power to tax, it had no means to repay them. The Founders and Finance is the first book to tell the story of how foreign-born financial specialists-immigrants-solved the fiscal crisis and set the United States on a path to long-term economic success. Pulitzer Prize-winning author Thomas K. McCraw analyzes the skills and worldliness of Alexander Hamilton (from the Danish Virgin Islands), Albert Gallatin (from the Republic of Geneva), and other immigrant founders who guided the nation to prosperity. Their expertise with liquid capital far exceeded that of native-born plantation owners Washington, Jefferson, and Madison, who well understood the management of land and slaves but had only a vague knowledge of financial instruments-currencies, stocks, and bonds. The very rootlessness of America's immigrant leaders gave them a better understanding of money, credit, and banks and the way each could be made to serve the public good. The remarkable financial innovations designed by Hamilton, Gallatin, and other immigrants enabled the United States to control its debts, to pay for the Louisiana Purchase of 1803, and-barely-to fight the War of 1812, which preserved the nation's hard-won independence from Britain.

Buy the book: http://www.hup.harvard.edu/catalog.php?isbn=9780674066922

Learning and the Disappearing Association Between Governance and Returns

Abstract

The correlation between governance indices and abnormal returns documented for 1990-1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

Read the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589731

Does Management Really Work?

Abstract

HBR's 90th anniversary is a sensible time to revisit a basic question: Are organizations more likely to succeed if they adopt good management practices? The answer may seem obvious to most HBR readers, but these three economists cast their net much wider than that. In a decade-long study of thousands of organizations in 20 countries, they and their interview team assessed how well manufacturers, schools, and hospitals adhere to three management basics: targets, incentives, and monitoring. They found that huge numbers of companies follow none of those fundamentals, that adopting the basics yields big improvements in outcomes such as productivity and longevity, and that good nuts-and-bolts management at individual firms shapes national performance. At 14 textile manufacturers in India, for example, an intervention-involving free, high-quality advice from a consultant who was on-site half-time for five months-cut defects by half, reduced inventory by 20%, and raised output by 10%. A control group saw no such gains. The authors' global data set suggests that implementing good management at schools and hospitals yields change more slowly than at manufacturers-but it does come eventually. And the macroeconomic potential-for incomes, productivity, and delivery of critically needed services-is huge. A call for "better management" may sound prosaic, but given the global payoffs, it's actually quite radical.

Read the article: http://hbr.org/2012/11/does-management-really-work/ar/1

Which U.S. Market Interactions Affect CEO Pay? Evidence from UK Companies

Abstract

This paper examines how different types of interactions with U.S. markets by non-U.S. firms are associated with higher level of CEO pay, greater emphasis on incentive-based compensation, and smaller pay gap with U.S. firms. Using a sample of CEOs of UK firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of an U.S. exchange listing is related to higher UK CEO pay; however, the effect is similar when UK firms have a listing in any foreign country implying a foreign listing effect not unique to the U.S. Product market relationships measured by the extent of sales in the U.S. by UK companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.-UK pay gap. The product market effect is incremental to the effect of a U.S. exchange listing, the extent of the firm's non-U.S. foreign market interactions, and the characteristics of the executive. The U.S-UK CEO pay gap reduces in UK firms that make U.S. acquisitions. Further, the firm's use of a U.S. compensation consultant increases the sensitivity of UK pay practices to U.S. product market relationships.

Read the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1738083

Self-serving Altruism? The Lure of Unethical Actions That Benefit Others

Abstract

In three experiments, we propose and find that individuals cheat more when others can benefit from their cheating and when the number of beneficiaries of wrongdoing increases. Our results indicate that people use moral flexibility to justify their self-interested actions when such actions benefit others in addition to the self. Namely, our findings suggest that when people's dishonesty would benefit others, they are more likely to view dishonesty as morally acceptable and thus feel less guilty about benefiting from cheating. We discuss the implications of these results for collaborations in the social realm.

License to Cheat: Voluntary Regulation and Ethical Behavior

Abstract

While monitoring and regulation can be used to combat socially costly unethical conduct, their intended targets are often able to avoid regulation or hide their behavior. This surrenders at least part of the effectiveness of regulatory policies to firms' and individuals' decisions to voluntarily submit to regulation. We study individuals' decisions to avoid monitoring or regulation and thus enhance their ability to engage in unethical conduct. We conduct a laboratory experiment in which participants engage in a competitive task and can decide between having the opportunity to misreport their performance or having their performance verified by an external monitor. To study the effect of social factors on the willingness to be subject to monitoring, we vary whether participants make this decision simultaneously with others or sequentially as well as whether the decision is private or public. Our results show that the opportunity to avoid being submitted to regulation produces more unethical conduct than situations in which regulation is either exogenously imposed or entirely absent.

Read the paper: http://www.francescagino.com/uploads/4/7/4/7/4747506/gino_krupka_weber_management_science_2013.pdf

Engaging Supply Chains in Climate Change

Abstract

Suppliers are increasingly being asked to share information about their vulnerability to climate change and their strategies to reduce greenhouse gas emissions. Their responses vary widely. We theorize and empirically identify several factors associated with suppliers being especially willing to share this information with buyers, focusing on attributes of the buyers seeking this information and of the suppliers being asked to provide it. We test our hypotheses using data from the Carbon Disclosure Project's Supply Chain Program, a collaboration of multinational corporations requesting such information from thousands of suppliers in 49 countries. We find evidence that suppliers are more likely to share this information when requests from buyers are more prevalent, when buyers appear committed to using the information, when suppliers belong to more profitable industries, and when suppliers are located in countries with greenhouse gas regulations. We find evidence that these factors also influence the comprehensiveness of the information suppliers share and their willingness to share the information publicly.

Read the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1943690

Learning from My Successes and from Others' Failures: Evidence from Minimally Invasive Cardiac Surgery

Abstract

Learning from past experience is central to an organization's adaptation and survival. A key dimension of prior experience is whether an outcome was successful or unsuccessful. While empirical studies have investigated the effects of success and failure in organizational learning, to date the phenomenon has received little attention at the individual level. Drawing on attribution theory in psychology, we investigate how individuals learn from their own past experiences with both failure and success and from the experiences of others. For our empirical analyses, we use ten years of data from 71 cardiothoracic surgeons who completed over 6,500 procedures using a new technology for cardiac surgery. We find that individuals learn more from their own successes than from their own failures but learn more from the failures of others than from others' successes. We also find that individuals' prior successes and others' failures can help individuals overcome their inability to learn from their own failures. Together, these findings offer both theoretical and practical insights into how individuals learn directly from their prior experience and indirectly from the experiences of others.

The Litigation of Financial Innovations

Abstract

This paper examines the litigation of patents relating to financial products and services. I show that these grants are being litigated at a rate 27 to 39 times greater than that of patents as a whole. The patents being litigated are disproportionately those issued to individuals and to smaller, private entities, as well as those whose features may proxy for higher quality. Larger entities are disproportionately targeted in litigation. I discuss how the findings are in large part consistent with the theoretical literature on the economics of litigation.

With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship

Abstract

To what extent do peers affect our occupational choices? This question has been of particular interest in the context of entrepreneurship and policies to create a favorable environment for entry. Such influences, however, are hard to identify empirically. We exploit the assignment of students into business school sections that have varying numbers of classmates with prior entrepreneurial experience. We find that the presence of entrepreneurial peers strongly predicts subsequent entrepreneurship rates of students without an entrepreneurial background but in a more complex way than the literature has previously suggested: a higher share of entrepreneurial peers leads to lower rather than higher subsequent rates of entrepreneurship. However, the decrease in entrepreneurship is entirely driven by a significant reduction in unsuccessful entrepreneurial ventures. The effect on the rate of successful post-MBA entrepreneurs, instead, is insignificantly positive. In addition, sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful entrepreneurs. The results are consistent with intra-section learning, where the close ties between section-mates lead to insights about the merits of business plans.

Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt

Abstract

This paper examines the relation between a borrowing firm's ownership structure and its choice of debt source using a novel, hand-collected data set on corporate ownership, control, and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the firm's choice between bank debt and public debt. A one-standard-deviation increase in the divergence reduces the borrowing firm's reliance on bank debt financing as measured by the ratio of bank debt to total debt by approximately 23% and increases its reliance on public debt financing as measured by the ratio of public debt to total debt by approximately 18%. The effect of the control-ownership divergence on borrowing firms' debt choice is more pronounced for firms with high financial distress risk, firms that are informationally opaque, and firms that are family controlled. Moreover, this effect is weakened by the presence of multiple large owners and in countries with strong shareholder rights. Overall, our results are consistent with the hypothesis that firms controlled by large shareholders with excess control rights choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.

Read the paper: http://people.hbs.edu/yxuan/LinMaMalatestaXuanOwnershipStructureChoiceOfDebt.pdf

Multivoxel Patterns in Face-sensitive Temporal Regions Reveal an Encoding Schema Based on Detecting Life in a Face

Abstract

More than a decade of research has demonstrated that faces evoke prioritized processing in a 'core face network' of three brain regions. However, whether these regions prioritize the detection of global facial form (shared by humans and mannequins) or the detection of life in a face has remained unclear. Here, we dissociate form-based and animacy-based encoding of faces by using animate and inanimate faces with human form (humans, mannequins) and dog form (real dogs, toy dogs). We used multivariate pattern analysis of BOLD responses to uncover the representational similarity space for each area in the core face network. Here, we show that only responses in the inferior occipital gyrus are organized by global facial form alone (human vs. dog) while animacy becomes an additional organizational priority in later face-processing regions: the lateral fusiform gyri (latFG) and right superior temporal sulcus. Additionally, patterns evoked by human faces were maximally distinct from all other face categories in the latFG and parts of the extended face perception system. These results suggest that once a face configuration is perceived, faces are further scrutinized for whether the face is alive and worthy of social cognitive resources.

Book: http://www.ncbi.nlm.nih.gov/pubmed/22798395

 

Working Papers

Delay as Agenda Setting

Abstract

We examine a multi-issue dynamic decision-making process that involves endogenous commitment. Our primary focus is on actions that impact delay, an extreme form of lack of commitment. Delay is strategically interesting when decision makers with asymmetric preferences face multiple issues and have limited resources for influencing outcomes. A delayed decision becomes part of the subsequent agenda, thereby altering the allocation of resources. The opportunity to delay decisions leads the players to act against their short-run interests by changing the expected decision delay. We characterize delay equilibria and explore how delay affects agenda preferences and, when possible, bargaining.

Download the paper: http://www.hbs.edu/faculty/product/39907

No Margin, No Mission? A Field Experiment on Incentives for Pro-Social Tasks

Abstract

A substantial body of research investigates the effect of pay for performance in firms, yet less is known about the effect of non-financial rewards, especially in organizations that hire individuals to perform tasks with positive social spillovers. We conduct a field experiment in which agents recruited by a public health organization to sell condoms are randomly allocated to four groups. Agents in the control group are hired as volunteers, whereas agents in the three treatment groups receive a small monetary margin on each pack sold, a large margin, and a non-financial reward, respectively. The analysis yields three main findings. First, non-financial rewards are more effective at eliciting effort than either financial rewards or the volunteer contract, and are also the most cost-effective of the four schemes. Second, non-financial rewards leverage intrinsic motivation and, contrary to existing laboratory evidence, financial incentives do not appear to crowd it out. Third, the responses to both types of incentives are stronger when their relative value is higher. Indeed, financial rewards are effective at motivating the poorest agents, and non-financial rewards are more effective when the peer group is larger. Overall, the findings demonstrate the power of non-financial rewards to motivate agents in settings where there are limits to the use of financial incentives.

Download the paper: http://www.hbs.edu/faculty/product/41031

Causes and Consequences of Linguistic Complexity in Non-U.S. Firm Conference Calls

Abstract

We examine the determinants and capital market consequences of linguistic complexity in conference calls held in English by non-U.S. firms. We find that linguistic complexity is positively associated with the language barrier in the firms' home country. Also, linguistic complexity in firms' conference calls affects the extent to which the capital market reacts to the information releases. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases, after controlling for the actual earnings news. Further, the capital market's response to linguistic complexity is more pronounced when there is greater implicit (as captured by the presence of foreign investors) or explicit (as captured by how actively analysts ask questions) demand for the English conference calls. This suggests that the form in which financial information is presented can impose additional processing costs by limiting investors' ability to interpret the reported financials.

Download the paper: http://www.hbs.edu/faculty/product/43264

Governing Misvalued Firms

Abstract

Equity overvaluation is thought to create the potential for manager misbehavior, while monitoring and corporate governance curb misbehavior. Thus, the effects of corporate governance should be greatest when firms become overvalued. We test this simple yet powerful idea. Using proxies of firm and industry price deviations from fundamentals and standard measures of corporate governance, we demonstrate that firm performance seems most impacted by governance when firm and industry deviations are high. Our findings suggest that misvaluation may modulate the fundamental governance relationship between shareholders and CEOs.

Download the paper: http://www.hbs.edu/faculty/product/43386

Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

Abstract

We study the frequency of restatements by foreign firms listed on the U.S. exchanges. We find that the restatement rate by U.S. listed foreign firms is significantly lower than that of comparable U.S. firms and the difference depends on the home country characteristics of the foreign firm. Foreign firms from countries with a weak rule of law are less likely to restate than firms from strong rule of law countries are, despite companies from the weaker rule of law countries having higher levels of earnings management. After controlling for the materiality of the restatement, firms from weak rule of law countries are more likely to opt for less visible restatement disclosure methods. We interpret these findings as home country enforcement affecting firms' likelihood of reporting existing accounting irregularities. This suggests that for U.S. listed foreign firms, less frequent restatements can be a signal of opportunistic reporting rather than high quality earnings

Download the paper: http://www.hbs.edu/faculty/product/43286

Ambiguity Squared: Growing a New Business in a Nascent Industry

Abstract

This paper explores how entrepreneurs grow a new business in a nascent industry. Through a longitudinal, qualitative study of a new company in the nascent smart cities industry, we examine how company leaders grew a new venture while facing the ambiguity inherent in the very early phases of a new industry. We identify two distinct essential journeys that enabled the company to grow: an internal journey focused on developing and refining a business model and an external journey focused on legitimating both the firm and its growing industry. Our study illuminates the activities entrepreneurs undertake in pursuing these interconnected journeys. We also show how externally and internally oriented activities can interfere with each other. Not only do they require different skills and approaches, but successfully pursuing one can impair an entrepreneur's ability to manage the other. Pursuing both journeys simultaneously is thus even more challenging than the challenges considered separately would imply. We argue that growth in a new industry may require skillful attention to both journeys while also managing their problematic interactions. Our findings contribute to research on entrepreneurship in nascent industries and suggest directions for future research.

Download the paper: http://www.hbs.edu/faculty/product/40160

 

Cases & Course Materials

Netflix: Valuing a New Business Model

Francois Brochet, Suraj Srinivasan, and Michael Norris
Harvard Business School Case 113-018

In autumn 2011, Netflix was working to right the ship after publicly stumbling through a price hike and strategic shift and then retreat. The company was changing its business model to focus on streaming video service rather than the DVDs by mail that had brought the company success and praise. One important wrinkle in this business model shift came in the accounting of streaming content. The case describes the rule, FAS 63, that Netflix used to account for streaming content and the implications for the future of the company that could be attributed to this accounting shift.

Purchase this case:
http://hbr.org/search/113018-PDF-ENG

Viterra

Ray A. Goldberg and Matthew Preble
Harvard Business School Case 913-401

As Mayo Schmidt's tenure as CEO of the Canadian-based agribusiness Viterra wound down before its sale to the Swiss-based commodity company Glencore, he reflected on his tenure, which had seen the firm grow from a Canadian-focused agricultural cooperative to an international agribusiness with operations across the globe, including significant operations in Australia. Now he wondered: What would the future hold for agriculture?

Purchase this case:
http://hbr.org/search/913401-PDF-ENG

SCMS: Battling HIV/AIDS in Africa

Ananth Raman, Noel Watson, Santiago Kraiselburd, and Emmanuel Akili
Harvard Business School Case 613-023

In 2005, USAID and the U.S. President's Emergency Plan for AIDS Relief (PEPFAR), created the Supply Chain Management System (SCMS) to procure and distribute essential medicines and supplies; provide technical assistance to transform existing supply chains; and collaborate with in-country and global partners to coordinate efforts. The new U.S. Global Health Initiative (GHI) initialized in 2010 sought to build on these efforts through strengthened platforms and systems. PEPFAR's five-year strategy, as contribution to the GHI, focused on transitioning the program from an emergency response to a sustainable, country-owned effort. The case describes the general approach designed by SCMS, the intricacies of its successful implementation in Ethiopia, and the challenges moving forward in that country.

Purchase this case:
http://hbr.org/search/613023-PDF-ENG