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.

April 22

Failing grade for high school personal finance courses?

Researchers Shawn Cole, Anna Paulson, and Gauri Kartini Shastry assess the effectiveness of personal finance courses taught in high school. The bottom line: These courses do not seem to affect financial outcomes of students, but additional mathematics training "leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures."

Why location is important in R&D learning

Theory suggests that R&D labs assimilate more knowledge and know-how when they locate in proximity to other such facilities in research hotspots such as San Francisco or Cambridge. Research by Francesca Lazzeri and Gary Pisano now seems to support the theory, but underlines the importance of management in being able to fully take advantage of proximity.

The US shale revolution

The United States shale revolution is transforming the nation's energy outlook. A new case by Laura Alfaro, Richard H.K. Vietor, and Hilary White reviews potential policy implications that affect oil and gas producers, manufacturing and petrochemical interests, utilities, and environmentalists.

 

Publications

  • August 2013
  • Modernizing Insurance Regulation

Comparative Regulation of Market Intermediaries: Insights from the Indian Life Insurance Market

By: Anagol, Santosh, Shawn A. Cole, and Shayak Sarkar

Abstract—This book provides a look into the crucial changes coming to insurance regulation and an overview of how those changes will affect almost everyone.

Publisher's link: http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118758714.html

  • August 2013
  • Review of Economics and Statistics

Savings in Transnational Households: A Field Experiment Among Migrants from El Salvador

By: Ashraf, Nava, Diego Aycinena, Claudia Martínez A., and Dean Yang

Abstract—While remittance flows to developing countries are very large, it is unknown whether migrants desire more control over how remittances are used. This research uses a randomized field experiment to investigate the importance of migrant control over the use of remittances. In partnership with a Salvadoran bank, we offered U.S.-based migrants from El Salvador bank accounts in their home country into which they could send remittances. We randomly varied migrant control over El Salvador-based savings by offering different types of accounts across treatment groups. Migrants offered the greatest degree of control over savings accumulated the most savings at the partner bank, compared to others who were offered less or no control over savings. Effects of this treatment on savings are concentrated among migrants who expressed demand for control over remittances in the baseline survey. We also find positive spillovers of our savings intervention in the form of increased savings at other banks (specifically, banks in the U.S.). We interpret the effects we find as arising from the joint effect of the bank account offers and the marketing pitch made to study participants by our project staff.

Publisher's link: http://www.people.hbs.edu/nashraf/aamy_SavingsinTransnationalHouseholds.pdf

  • August 2013
  • Journal of Finance

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

By: Cole, Shawn A., Martin Kanz, and Leora Klapper

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.

Publisher's link: http://www.hbs.edu/faculty/Publication%20Files/Loan%20Officers_dfe8fbaa-3d6f-4299-87e5-e57dd61b1057.pdf

  • August 2013
  • Review of Financial Studies

Smart Money? The Effect of Education on Financial Outcomes

By: Cole, Shawn A., Anna Paulson, and Gauri Kartini Shastry

Abstract—Household financial decisions are important for household welfare, economic growth, and financial stability. Yet, our understanding of the determinants of financial decision-making is limited. Exploiting exogenous variation in state compulsory schooling laws in both standard and two-sample instrumental variable strategies, we show education increases financial market participation, measured by investment income and equities ownership, while dramatically reducing the probability that an individual declares bankruptcy, experiences a foreclosure, or is delinquent on a loan. Further results and a simple calibration suggest the result is driven by changes in savings or investment behavior, rather than simply increased labor earnings.

Publisher's link: http://www.hbs.edu/faculty/Publication%20Files/cps-smart%20money%202013%20august_d4fb3555-e078-415a-8b20-aa50dc878205.pdf

  • August 2013
  • American Economic Review: Papers and Proceedings

Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment

By: Cole, Shawn A., Daniel Stein, and Jeremy Tobacman

Abstract—No abstract available.

Publisher's link: http://www.hbs.edu/faculty/Publication%20Files/Dynamics%20of%20Demand_31bd8eb4-6cd2-4d72-8919-d83239aaf349.pdf

  • August 2013
  • Journal of Financial Economics

Vulnerable Banks

By: Greenwood, Robin, Augustin Landier, and David Thesmar

Abstract—We present a model in which fire sales propagate shocks across bank balance sheets. When a bank experiences a negative shock to its equity, a natural way to return to target leverage is to sell assets. If potential buyers are limited, then asset sales depress prices, in which case one bank's sales impact other banks with common exposures. We show how this contagion effect adds up across the banking sector and how it can be estimated empirically using balance sheet data. We compute bank exposures to system-wide deleveraging, as well as the spillovers induced by individual banks. Applying the model to European banks, we evaluate a variety of interventions to reduce their vulnerability to fire sales during the sovereign debt crisis.

Publisher's link: http://www.hbs.edu/faculty/Publication%20Files/vulnerable%20banks%20jfe_6542a41e-b149-44b9-b1bf-599613e6e12d.pdf

  • August 2013
  • Journal of Experimental Psychology: General

The (Perceived) Meaning of Spontaneous Thoughts

By: Morewedge, Carey K., Colleen E. Giblin, and Michael I. Norton

Abstract—Much human thought arises unbidden, spontaneously intruding upon consciousness. The thought and name of a former lover might come to mind during dinner with one's spouse. Or worse, it may be blurted out during an intimate moment. Because no trace of the past lover is present, the thought lacks an apparent cause. In the latter case it almost certainly occurs without intent, given its potential consequences. The seeming randomness of such thoughts might provide reason to dismiss them as the wanderings of a restless mind. We propose that it is precisely the lack of control over and access to the process by which spontaneous thoughts come to mind that leads them to be perceived to reveal special self-insight. Drawing on previous theory and research, we propose that the greater self-insight they are attributed leads spontaneous thoughts to exert a greater impact on attitudes and behavior than similar deliberate thoughts. Compare a wife's thought of a former lover while perusing her yearbook to that same thought during an intimate moment with her husband. In the former case, the reason for the production of that thought is clear ("I thought of him because I looked at his picture while reminiscing about the past"). In the latter case, she lacks both control over the thought and access to its origin. We suggest that its apparent spontaneity should lead her to attribute it special meaning ("Why would I think of him in this moment unless it is important?"), and it should consequently exert a greater influence on her judgment ("I must still have feelings for him"). In this paper, we report a series of five studies examining how the perceived spontaneity of thought influences the extent to which it is believed to yield meaningful self-insight and influences judgment.

Publisher's link: http://www.hbs.edu/faculty/Publication%20Files/morewedge%20giblin%20norton_7536b7c0-9e8b-46d3-b42e-d27e790c80a9.pdf

  • August 2013
  • Journal of Experimental Social Psychology

Getting the Most Out of Giving: Concretely Framing a Prosocial Goal Maximizes Happiness

By: Rudd, Melanie, Jennifer Aaker, and Michael I. Norton

Abstract—Across six field and laboratory experiments, participants assigned a more concretely framed prosocial goal (e.g., making someone smile or increasing recycling) felt happier and reported creating greater personal happiness after performing a goal-directed act of kindness than did those who were assigned a functionally similar, but more abstractly framed, prosocial goal (e.g., making someone happy or saving the environment). Moreover, mediation analyses revealed that this effect was driven by differences in the size of the gap between participants' expectations and reality. Compared to those who pursued an abstractly framed prosocial goal, those who pursued a concretely framed goal perceived that the actual outcome of their goal-directed efforts more accurately matched their expectations, causing them to experience a greater boost in happiness. Evidence that participants are unable to predict this effect, believing that pursuing abstractly framed prosocial goals would have either an equal or greater positive impact on their own happiness, is also presented.

Publisher's link: http://www.hbs.edu/faculty/Publication%20Files/rudd%20aaker%20norton_f755239e-42e7-41ed-9ee0-76e85c19445d.pdf

 

Working Papers

Abstract—Financial literacy and cognitive capabilities are convincingly linked to the quality of financial decision-making. Yet, there is little evidence that education intended to improve financial decision-making is successful. Using plausibly exogenous variation in exposure to state-mandated personal finance and mathematics high school courses, affecting millions of students, this paper answers the question "Can good financial behavior be taught in high school?" It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes. Instead, we find additional mathematics training leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.

Download working paper: http://www.hbs.edu/faculty/Pages/download.aspx?name=13-064.pdf

Abstract—I document that public U.S. firms hold twice as much cash as large privately held firms, a surprising finding that is robust to three alternative identification strategies: matching, within-firm variation, and instrumental variable. Public firms' greater access to capital accounts for about one-quarter of the difference. The remainder can be explained by differences in the extent to which public and private firms engage in market timing in response to misvaluation shocks. I show that the risk of misvaluation induces public firms to raise capital and accumulate cash reserves when they perceive their equity to be overvalued, resulting in greater demand for precautionary cash holdings.

Download working paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1719204

Payout Policy

By: Farre-Mensa, Joan, Roni Michaely, and Martin C. Schmalz

Abstract—We survey the literature on payout policy, with a particular emphasis on developments in the last two decades. Of the traditional motives of why firms pay out (agency, signaling, and taxes), the cross-sectional empirical evidence is most persuasive in favor of agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts are made over the last 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motives such as changes in compensation practices and management incentives are better able to explain the observed variation in payout patterns over time than the traditional motives. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm's larger financial ecosystem, with important implications for financing, investment, and risk management.

Download working paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2400618

Corporate Financial Policies in Misvalued Credit Markets

By: Harford, Jarrad, Marc Martos-Vila, and Matthew Rhodes-Kropf

Abstract—We theoretically and empirically investigate the repercussions of credit market misvaluation for a firm's borrowing and investment decisions. Using an ex-post measure of the accuracy of credit ratings to capture debt market misvaluation, we find evidence that firms take advantage of inaccuracies by issuing more debt and increasing leverage. The result goes beyond a wealth transfer and has real investment implications: approximately 75% of the debt issuance funds increased capital expenditures and cash acquisitions. In the cross section, misvaluation affects financially constrained firms the most, supporting the theoretical prediction that debt overvaluation loosens financial constraints.

Download working paper: http://www.hbs.edu/faculty/Pages/download.aspx?name=14-097.pdf

Abstract—Scholars and practitioners alike now recognize that a firm's capacity to assimilate and use know-how from external sources-what Cohen and Levinthal (1990) called "absorptive capacity"-plays a central role in innovation performance. In recent years, a common strategy pursued by companies to increase their absorptive capacity has been to locate new R&D facilities in close geographic proximity to technology "hotspots" like Cambridge, Massachusetts, or the San Francisco Bay Area. Such a strategy is predicated on the assumption that geographic proximity facilitates absorption. Unfortunately, more than two decades after the publication of Cohen and Levinthal's landmark piece on absorptive capacity, precious little is known about how different organizational strategies and managerial practices-including location choices-actually impact a firm's ability to exploit external sources of know-how. A key barrier to empirical progress on this front has been a lack of direct measures of absorption. In this paper, we develop a novel measure of absorptive capacity that attempts to directly track the influence of external sources of know-how on the internal R&D activities of individual laboratories. We then use this measure to examine laboratory level differences in absorptive capacity and the degree to which a lab's geographic proximity to a given knowledge base influences its absorptive capacity. To identify patterns of absorption, we exploit a quasi-natural experiment that has occurred in the pharmaceutical industry over the past two decades. Since 1989, a number of major pharmaceutical companies (Merck, Novartis, Pfizer, etc.) have chosen to locate new laboratories in one or more major life science hotspots (Massachusetts, the San Francisco Bay Area, and San Diego County). Because these are de novo green-field labs, we have an unusual opportunity to study how the capabilities of the lab evolved over time and whether those capabilities were influenced by the technological activities of the surrounding local scientific and technological ecosystems. Our sample includes 39 R&D laboratories (at varying degrees of distance from three major life sciences hotspots-Massachusetts, San Diego County, and the San Francisco Bay Area). Our findings indicate that geographic proximity is a significant predictor of how much know-how a lab absorbs from a given hotspot. The importance of geographic proximity is also shown to be increasing over time. However, our results also show significant residual variance at both the individual laboratory and company levels, suggesting an important role of managerial practices and policies in driving absorption. The latter finding was consistent with our field interviews of R&D executives from laboratories involved in our study. The study provides further evidence of the geographically bounded nature of knowledge.

Download working paper: http://ssrn.com/abstract=2423341

Abstract—Himachal Pradesh has surged ahead of other Indian states in implementing universal primary education. Through a combination of field research methods, this paper connects these achievements to bureaucratic norms, unwritten rules within the state that guide the behavior of public officials and structure their relations with civic agencies outside the state. Bureaucratic norms are a critical component of state capacity that shape when and how public agencies implement policies effectively on behalf of marginalized citizens.

Download working paper: http://www.hbs.edu/faculty/Pages/download.aspx?name=14-099.pdf

Abstract—Community-based initiatives that work to empower the poor and promote their participation have gained strong support among scholars and practitioners of development. Yet the questionable assumptions about culture and development that inform these initiatives render it unclear as to whether and how community participation can be promoted in practice, especially in settings that depart from the ideal conceptions of community. Through a detailed case study of the UNICEF-IKEA Bal Adhikar Pariyojana (BAP), a grassroots initiative that seeks to advance child rights in India, this paper examines how traditionally disempowered community members learn to mobilize collectively around child education and health in the least likely setting of rural Uttar Pradesh. Building on the recent literature on culture and public action, and relying on extensive field research, village-level comparisons, and interviews with key stakeholders, this paper traces the process by which BAP fieldworkers and community members make strategic use of the cultural understandings, norms, and identities that govern family, gender, and caste relations to build new community-based networks that promote the rights of children. Yet there are serious drawbacks to these cultural strategies when attempting to scale up participation directed at an unresponsive state. To maintain ties with different caste groups, BAP takes an apolitical posture and does not actively build the capacity of communities to mobilize politically and make demands on state agencies. The findings suggest that cultural strategies for promoting community participation in rural India need to be understood within a broader political context of poor local governance and caste politics.

Download working paper: http://www.hbs.edu/faculty/Pages/download.aspx?name=14-100.pdf

Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing

By: Marquis, Christopher, and Michael W. Toffel

Abstract—Under increased pressure to report environmental impacts, some firms selectively disclose relatively benign impacts, creating an impression of transparency while masking their true performance. We identify key company- and country-level factors that, by intensifying scrutiny on firms and diffusing global norms to their headquarters' countries, limit firms' use of selective disclosure. We test our hypotheses using a novel panel dataset of 4,750 public companies across many industries and headquartered in 45 countries during 2004-2007. Results show that firms that are more environmentally damaging, particularly those in countries where they are more exposed to scrutiny and global norms, are less likely to engage in selective disclosure. We discuss contributions to the literature that spans institutional theory and strategic management and to the literature on information disclosure.

Download working paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1836472

Financial vs. Strategic Buyers

By: Martos-Vila, Marc, Matthew Rhodes-Kropf, and Jarrad Harford

Abstract—This paper introduces the impact of debt misvaluation on merger and acquisition activity. Debt misvaluation helps explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). The effects of overvalued debt might seem limited since both acquirer types and target firms can access the debt markets. However, fundamental differences in governance and project co-insurance between the two types of acquirer interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.

Download working paper: http://www.people.hbs.edu/mrhodeskropf/Financial_Buyers_v51.pdf

Profits and Economic Development

By: Schwab, Dan, and Eric Werker

Abstract—Are rents, or excess profits, good for development? Using industry-level manufacturing data, this paper demonstrates a negative effect of rents, measured by the mark-up ratio, on productivity growth. The negative effect is strongest in poor countries, suggesting that high profits stymie economic development rather than enable it. Consistent with the rent-seeking mechanism of our model, we find that high rents are associated with a slower reduction in tariffs. A country's average mark-up in manufacturing is a strong negative predictor of future economic growth, indicating that we may be measuring a phenomenon of the broader business environment.

Download working paper: http://ssrn.com/abstract=2409251

Abstract—In this paper, I examine the relation between Integrated Reporting (IR) and the composition of a firm's 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. This result is more pronounced for firms with high growth opportunities, not controlled by a family, operating in "sin" industries, and exhibiting more stable IR practice over time. I find that the results are robust to the inclusion of firm fixed effects, controls for the quantity of sustainability disclosure, and alternative ways of measuring IR. Moreover, I show that investor activism on environmental or social issues or a large number of concerns about a firm's environmental or social impact leads a firm to practice more IR and that this investor or crisis-induced IR affects the composition of a firm's investor base.

Download working paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2378899

 

Cases & Course Materials

  • Harvard Business School Case 714-008

The U.S. Shale Revolution: Global Rebalancing?

Beginning less than a decade ago, the U.S. shale revolution began transforming the nation's energy outlook. Technological advances in horizontal drilling and "fracking" facilitated access to substantial new reserves of natural gas and light oil, imbedded in shale formations thousands of feet beneath the earth's surface. With gas reserves up by more than 47%, natural gas prices fell from $12 to $3 per thousand cubic feet. Tight oil production in North Dakota and Texas soared to more than 500,000 barrels daily. Because government policy directly controlled gas exports (as LNG), oil exports, and pipeline imports, public policy became the object of intense disputes among oil and gas producers, manufacturing and petrochemical interests, utilities, and environmentalists. Exporting gas (or oil) could affect higher prices in the United States but yield significant revenues, jobs, and balance-of-payments benefits. Refraining from exporting, however, would help consumers, reduce coal combustion, and attract energy-intensive businesses to the United States. And by reducing imports, America's foreign policy interests in the Middle East could also change. It remained to be seen what U.S policy would ultimately imply for the world economy.

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  • Harvard Business School Case 514-055

VP Group: Vegpro Grows Beyond Kenya

In 2013, Kenyan horticulture producer and exporter VP Group is weighing potential expansion opportunities against the growing risks in its production and export markets. With $121 million in 2012 revenues, VP Group has grown rapidly in recent years by expanding its vegetable and flower production beyond Kenya into Ethiopia and Ghana, exploring new products such as sugar, and vertically integrating by bringing marketing and logistics operations in-house. The company's leadership is excited about future growth opportunities but also concerned about the impact of VP Group's growth on its entrepreneurial culture. The company also faces increasing cost pressures due to rising costs in Kenya and flat prices in UK supermarkets, its main buyers. VP Group's size, vertical integration, and focus on sustainability leave it well positioned as a long-term partner to UK supermarkets, but changes to the overall operating environment might require the company to rethink its strategy.

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  • Harvard Business School Case 813-190

FanMode: Launching a Global Sports Venture

No abstract available.

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  • Harvard Business School Case 214-023

Kumbh Mela: India's Pop-up Mega-City

No abstract available.

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  • Harvard Business School Case 414-059

(Re)Building a Global Team: Tariq Khan at Tek

Tariq Khan arrived home after a nearly 16-hour meeting. He was grappling with whether to take the global sales and marketing team manager position that had been offered to him and had spent the entire day with the senior leadership of his potential new team. He wanted to understand the causes of the group's multiple problems and get a handle on how to help them thrive. But so far, the meeting had raised more questions than answers.

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  • Harvard Business School Case 814-091

VCPE Simulation User's Guide

This user guide is intended for HBS students and ExEd participants who are using the Private Equity and Venture Capital Simulation.

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http://hbr.org/product/vcpe-simulation-users-guide/an/814091-PDF-ENG

  • Harvard Business School Case 814-030

Iora Health

No abstract available.

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  • Harvard Business School Case 214-008

Rawabi

Bashar Masri is developing the first new stand-alone Palestinian city 25 kilometers north of Jerusalem and 9 kilometers north of Ramallah in the West Bank on 6,300 dunams (1,556 acres) for 40,000 people with financial support from the Qatari investment authority and assistance from The Portland Trust. The first phase with 5,000 homes along with a commercial city center, parks, schools, and other public facilities will be available for occupancy in 2014. The eventual $1.5 billion new city has a host of startup problems including what should be built when and at what price along with infrastructure issues.

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  • Harvard Business School Case 714-489

Sustainability of Competitive Advantage

No abstract available.

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