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 25

Don't let a good recession go to waste

In a guest column for Business Today, Ranjay Gulati, an expert on doing business in turbulent markets, explains that most companies make a big mistake in a recession—they cut the budget. A topsy-turvy economy is an excellent strategic time to make up ground on competitors, he explains, so a better approach is to reallocate resources rather than cut them. Read, "Is Cost Cutting By Companies of Any Help During Recession?"

Does dark matter expand the economy?

Many scientists believe that so-called dark matter binds the universe in some kind of cosmological hold. In a new paper, Shane Greenstein and Frank Nagle look into the invisible contributions to the economy of "digital dark matter" by looking specifically at the effects thrown off by Apache server software. Their paper "Digital Dark Matter and the Economic Contribution of Apache" is forthcoming in Research Policy.

Shareholder activism shakes up boards

Although proxy contests are considered generally to be ineffective at removing board directors, shareholder activist campaigns are much more successful, argue Ian D. Gow, Sa-Pyung Sean Shin, and Suraj Srinivasan. "... we find that directors are almost twice as likely to leave over a two-year period if the firm is the subject of a shareholder activist campaign," they report in the working paper Consequences to Directors of Shareholder Activism.



  • August 2013
  • Social Psychological & Personality Science

Matchmaking Promotes Happiness

By: Anik, Lalin, and Michael I. Norton

Abstract—Four studies document and explore the psychology underlying people's proclivity to connect people to each other-to play "matchmaker." First, Study 1 shows that chronic matchmaking is associated with higher well-being. Studies 2 and 3 show that matching others on the basis of how well they will get along leads to a greater increase in happiness and is more intrinsically rewarding than other tasks (e.g., deciding which people would not get along). Study 4 investigates a moderator of the rewarding nature of matchmaking: the type of connection. We show that bridging ties are relatively more attractive than bonding ties: the more unlikely the match, the more rewarding it is. Taken together, these studies provide correlational and causal evidence for the role of matchmaking in promoting happiness.

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  • August 2013
  • Venezuela Before Chávez: Anatomy of an Economic Collapse

Oil, Macroeconomic Volatility and Crime in the Determination of Beliefs in Venezuela

By: Di Tella, Rafael, Javier Donna, and Robert MacCulloch

Abstract—At the beginning of the twentieth century Venezuela had one of the poorest economies in Latin America, but by 1970 it had become the richest country in the region and one of the twenty richest countries in the world, ahead of countries such as Greece, Israel, and Spain. Between 1978 and 2001, however, Venezuela's economy went sharply in reverse, with non-oil GDP declining by almost 19% and oil GDP by an astonishing 65%. What accounts for this drastic turnabout? The editors of Venezuela Before Chávez, who each played a policymaking role in the country's economy during the past two decades, have brought together a group of economists and political scientists to systematically examine the impact of a wide range of factors affecting the economy's collapse, from the cost of labor regulation and the development of financial markets to the weakening of democratic governance and the politics of decisions about industrial policy.

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  • August 2013
  • Research Policy

Digital Dark Matter and the Economic Contribution of Apache

By: Greenstein, Shane, and Frank Nagle

Abstract—Researchers have long hypothesized that research outputs from government, university, and private company R&D contribute to economic growth, but these contributions may be difficult to measure when they take a non-pecuniary form. The growth of networking devices and the Internet in the 1990s and 2000s magnified these challenges, as illustrated by the deployment of the descendent of the NCSA HTTPd server, otherwise known as Apache. This study asks whether this experience could produce measurement issues in standard productivity analysis, specifically, omission and attribution issues, and, if so, whether the magnitude is large enough to matter. The study develops and analyzes a novel data set consisting of a 1% sample of all outward-facing web servers used in the United States. We find that use of Apache potentially accounts for a mismeasurement of somewhere between $2 billion and $12 billion, which equates to between 1.3% and 8.7% of the stock of prepackaged software in private fixed investment in the United States and a very high rate of return to the original federal investment in the Internet. We argue that these findings point to a large potential undercounting of the rate of return from IT spillovers from the invention of the Internet. The findings also suggest a large potential undercounting of "digital dark matter" in general.

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  • August 2013
  • Marketing Science

Why, When, and How Much to Entertain Consumers in Advertisements? A Web-based Facial Tracking Field Study

By: Teixeira, Thales, Rosalind Picard, and Rana el Kaliouby

Abstract—The presence of positive entertainment (e.g., visual imagery, upbeat music, humor) in TV advertisements can make them more attractive and persuasive. However, little is known about the downsides of using too much entertainment. This research focuses on why, when, and how much to entertain consumers in TV advertisements. We collected data in a large-scale field study using 82 ads with various levels of entertainment shown to 178 consumers in their homes and workplaces. Using a novel web-based face tracking system, we continuously measure consumers' smile responses as well as their viewing interest and purchase intent. A simultaneous Bayesian hierarchical model is estimated to assess how different levels of entertainment affect purchases by endogenizing viewing interest. We find that entertainment has an inverted U-shape relationship with purchase intent. Importantly, we separate entertainment into that which comes before the brand versus that which comes after and find that the former is positively associated with purchase intent while the latter is not.

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  • August 2013
  • Columbia FDI Perspectives

Government-held Equity in Foreign Investment Projects: Good for Host Countries?

By: Wells, Louis T.

Abstract—Host governments have often sought some equity in mining and other foreign investment projects, but as shareholders they have rarely gained what they anticipated. Only in special cases might the benefits to governments outweigh the risks and often unanticipated costs governments encounter.

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Working Papers

Abstract—This paper examines the relation between managerial ownership and bank risk exposure for a large sample of international financial institutions. We seek empirical evidence suggested by theories concerning conflicts between managers and owners over risk-taking. We argue that managers holding equity of their bank take less risk because they have fewer opportunities to diversify risk compared with outside shareholders. Our findings are consistent with this idea. We document lower risk levels for banks that employ bank managers with higher equity stakes. We also demonstrate that regulation hardly affects the risk-taking of bank managers holding on their bank's shares. This contrasts with outside shareholders who are more likely to expose their bank to higher risk levels when regulation protects the bank against default. Managerial equity incentives may, therefore, serve as a risk-reduction instrument.

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Short-termism, Investor Clientele, and Corporate Performance

By: Brochet, Francois, Maria Loumioti, and George Serafeim

Abstract—Using conference call transcripts to measure the time horizon that senior executives emphasize when they communicate with investors, we develop a measure of corporate short-termism. We find that the measure of short-termism is associated with various proxies for earnings management, suggesting that our proxy partially captures opportunistic behavior. We also show that firms focusing more on the short-term have a more short-term oriented investor base and fewer analysts issuing long-term forecasts, suggesting that corporate and capital market short-termism are related. Moreover, consistent with analytical models that emphasize the costly nature of short-termism, we find that short-term oriented firms exhibit lower future accounting and stock market performance and a higher implied cost of capital.

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Consequences to Directors of Shareholder Activism

By: Gow, Ian D., Sa-Pyung Sean Shin, and Suraj Srinivasan

Abstract—We examine how shareholder activist campaigns affect the careers of directors of the targeted firms. Using a comprehensive sample of shareholder activism between 2004 and 2011, we find that directors are almost twice as likely to leave over a two-year period if the firm is the subject of a shareholder activist campaign. While it has been argued that proxy contests are an ineffective mechanism for replacing directors, as they rarely succeed in getting a majority of shareholder support, our results suggest that director turnover takes place following shareholder activism even without shareholder activists engaging in, let alone winning, proxy contests. Performance sensitivity of director turnover is also higher in the presence of shareholder activism. We also find that director election results matter for director retention: directors are more likely to leave in the year following activism when they receive lower shareholder support. Contrary to consequences on the targeted firm's board, we find no evidence that directors lose seats on other boards, a proxy for reputational consequences, as a result of shareholder activism.

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Abstract—We explore the impact of corporate social responsibility (CSR) ratings on sell-side analysts' assessments of firms' future financial performance. We suggest that when analysts perceive CSR as an agency cost, due to the prevalence of agency logic, they produce pessimistic recommendations for firms with high CSR ratings. Moreover, we theorize that over time, the emergence of a stakeholder focus, and the gradual weakening of the agency logic, shifts the analysts' perceptions of CSR ratings and results in increasingly less pessimistic recommendations. Using a large sample of publicly traded U.S. firms over 15 years, we confirm that in the early 1990s, analysts issue more pessimistic recommendations for firms with high CSR ratings. However, in subsequent years up to 2007, analysts progressively assess these firms less pessimistically, and eventually they assess them optimistically. Furthermore, we find that more experienced analysts and higher-status brokerage houses are the first to shift the relation between CSR ratings and investment recommendation optimism. We find no significant link between firms' CSR ratings and analysts' forecast errors, indicating that learning is unlikely to account for the observed shifts in recommendations. We discuss implications for both future research and practice.

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Abstract—Significant negotiation-related achievements from career of Ambassador Tommy Koh of Singapore are highlighted in brief form along with elements of his background and career. In light of these accomplishments, Koh was selected as the recipient of the 2014 Great Negotiator Award, presented by the Program on Negotiation, an interuniversity consortium of Harvard, MIT, and Tufts that is based at the Harvard Law School. Summaries of several of Koh's negotiations are presented in order to stimulate further research and analysis. Among numerous other activities, the episodes described include his leadership in forging the United States-Singapore Free Trade Agreement (USSFTA), the development and ratification of a charter for the Association of Southeast Asian Nations (ASEAN), the resolution of territorial and humanitarian disputes in the Baltics and Asia, and successful chairmanship of two unprecedented global megaconferences: the Third U.N. Conference on the Law of the Sea and the U.N. Conference on the Environment and Development, also known as the Earth Summit.

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Abstract—Using survey data collected from senior corporate executives around the world I analyze how detection of bribery impacts firm competitiveness. The data suggest that the most significant impact is on employee morale, followed by business relations and reputation, and then regulatory relations. I find that who initiated the bribery act, how it was detected, and how the firm responded after detection are all associated with the impact on a firm's reputation, business relations, regulatory relations, and employee morale. Internally initiated bribery from senior management is more likely to be associated with a significant impact on firm competitiveness. Bribery detected by the control systems of the firm is less likely to be associated with a significant impact on both business and regulatory relations. Finally, bribery cases where the initiator of the bribery is dismissed are less likely to be associated with a significant impact on firm competitiveness. These results shed light on which organizations' competitiveness is more likely to be affected by the detection of bribery.

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Abstract—In this paper, I examine the relation between Integrated Reporting (IR) and the composition of the investor base. I hypothesize and find that firms that practice IR have a more long-term oriented investor base with more dedicated and fewer transient investors. In additional analyses, I find that the results are robust to the inclusion of firm fixed effects and that changes in IR lead changes in investor base while changes in investor base do not lead changes in IR, supporting a causal effect of IR on investor base. Finally, I find that investor activism on environmental and social issues leads to firms practicing more IR, but this investor-induced IR does not affect the composition of the investor base.

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Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors

By: Short, Jodi L., Michael W. Toffel, and Andrea R. Hugill

Abstract—Supply chain auditors provide companies with strategic information about the practices of suppliers, yet little is known of what influences auditors' ability to identify and report dangerous, illegal, and unethical behavior at factories. Drawing on insights from the literature on street-level bureaucracy and on regulatory and audit design, we theorize and investigate the factors that shape the practices of private supply chain auditors. We find evidence that their reporting practices are shaped by an array of social factors, including an auditor's experience, gender, and professional training; ongoing relationships between auditors and audited factories; and gender diversity on audit teams. By providing the first comprehensive and systematic findings on supply chain auditing practices, our study suggests strategies for designing more credible monitoring regimes.

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Cases & Course Materials

  • Harvard Business School Case 114-026

Showdown at Cracker Barrel

In the fall of 2011, activist investor, Sardar Biglari, has acquired nearly 10% ownership in the Cracker Barrel restaurant chain. He believes that the board and senior management have failed and the company has underperformed relative to its peers. When he is denied a seat on the board, Biglari initiates a proxy fight in an attempt to win a board position and change the direction of Cracker Barrel's strategy. Two leading proxy advisory firms, ISS and Glass Lewis, disagree on supporting Biglari. One advises shareholders to vote Biglari to the board, while the other advises against it. Shareholders must decide.

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This case centers around Qualcomm shareholders' 2012 Say-on-Pay vote and the dispute between the Institutional Shareholder Services and management regarding the appropriateness of the CEO's compensation plan. Was ISS right that Qualcomm CEO's pay was inflated and justified by benchmarking to aspirational peers? Or was management correct that its CEO's pay is warranted by Qualcomm's recent firm performance?

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  • Harvard Business School Case 213-047

Aqua Bounty

Valuation of a pre-revenue biotech company at IPO using probability trees and real option techniques. Company is based in Massachusetts and lists in London on AIM. Products are genetically modified fast-growing salmon for fish farmers and disease-prevention drugs and diagnostic kits for farmed shrimp.

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Perry Capital owns shares in King and, to facilitate approval of the merger, buys shares in Mylan, whilst hedging out its economic exposure to Mylan's share price using derivatives. The price at which Mylan proposes to merge with King is generous to King shareholders, but the merger does not look likely to be approved by Mylan shareholders, who must vote upon it. If Perry can swing the voting in favor of the deal, it will gain handsomely on its King shares without facing any corresponding losses on its Mylan holdings since those are hedged. Carl Icahn, another shareholder in Mylan, opposed the deal and sued Perry for alleged vote buying.

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