Catering to Characteristics (revised)
|Authors:||Greenwood, Robin, and Samuel Hanson|
When investors overvalue a particular firm characteristic, corporations endowed with that characteristic can absorb some of the demand by issuing equity. We use time-series variation in differences between the attributes of stock issuers and repurchasers to shed light on characteristic-related mispricing. During years when issuing firms are large relative to repurchasing firms, for example, we show that large firms subsequently underperform. This holds true even when we restrict attention to the returns of firms that do not issue at all, suggesting that issuance is partly an attempt to cater to broad time-varying patterns in characteristics mispricing. Our approach helps forecast returns to portfolios based on book-to-market (HML), size (SMB), price, distress, payout policy, profitability, and industry. Our results are consistent with the view that firms play an important role as arbitrageurs in the stock market.
Download the paper: http://www.hbs.edu/research/pdf/09-099.pdf
Download the supplement: http://www.people.hbs.edu/rgreenwood/papers/CTSupplementaryResults.pdf
Principles that Matter: Sustaining Software Innovation from the Client to the Web
Economic analysis often reviews the role of principles—such as respect for intellectual property rights—in driving innovation. Given the interdependent nature of innovation in information technology, three core principles have emerged that work together to ensure that complementary, interconnected products coexist and compete. These core principles are particularly important when applied to platforms, which have played a central role in enabling the development and distribution of the variety of applications and services that drive the popularity of software. The first principle focuses on enabling choice: firms should allow consumers and partners to have a real choice between complementary products and services from otherwise competing firms (e.g., a browser should enable a consumer to choose a home page provided by a competitor). The second principle focuses on opportunity: specifically, opportunity that is facilitated by giving developers platform access and the ability to innovate and build on platform technologies to create new products and services. The third principle focuses on interoperability: vendors should enable products to work together so customers can realize the full benefit of complementary products offered by competing vendors. Following this principle enables products to connect to each other in appropriately defined ways and ensures that users can port their data between products securely and reliably. This paper reviews the rationale for these principles and examines their impact on competition in the cloud computing ("Internet-software") environment.
Download the paper: http://www.hbs.edu/research/pdf/09-142.pdf
Informed and Interconnected: A Manifesto for Smarter Cities
|Authors:||Rosabeth Moss Kanter and Stanley S. Litow|
The need for a fresh approach to U.S. communities is more urgent than ever because of the biggest global economic crisis since the Great Depression. Through examination of the barriers to solving urban problems (and the ways they reinforce each other), this paper offers a new approach to community transformation which calls for leaders to use technology to inform and connect people. We need to convert the social safety net into a social safety network through the creation of smarter communities that are information-rich, interconnected, and able to provide opportunities to all citizens. This process has already begun through such programs as Harlem Children's Zone, Baltimore's CitiStat, Elevate Miami, and others. And they can be replicated. But technology alone is not the answer. Realization of the vision requires leaders to invest in the tools, guide their use, and pave the way for transformation. Perhaps the urgency of the current economic crisis can provide the impetus to overcome resistance to change and turn problems into an opportunity to reduce costs, improve services to communities, and make our cities smarter.
Download the paper: http://www.hbs.edu/research/pdf/09-141.pdf
The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution
|Authors:||N. Gregory Mankiw and Matthew Weinzierl|
Should the income tax include a credit for short taxpayers and a surcharge for tall ones? The standard Utilitarian framework for tax analysis answers this question in the affirmative. Moreover, a plausible parameterization using data on height and wages implies a substantial height tax: a tall person earning $50,000 should pay $4,500 more in tax than a short person. One interpretation is that personal attributes correlated with wages should be considered more widely for determining taxes. Alternatively, if policies such as a height tax are rejected, then the standard Utilitarian framework must fail to capture intuitive notions of distributive justice.
Download the paper: http://www.hbs.edu/research/pdf/09-139.pdf
Optimal Taxation in Theory and Practice
|Authors:||N. Gregory Mankiw, Matthew Weinzierl, and Danny Yagan|
We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.
Download the paper: http://www.hbs.edu/research/pdf/09-140.pdf
Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery
|Authors:||David M. Cutler, Robert S. Huckman, and Jonathan T. Kolstad|
|Publication:||American Economic Journal: Economic Policy (forthcoming)|
We consider the welfare economics of firm entry when input supply is inelastic. Prior studies suggest that with elastic supply of inputs, free entry is likely to lead to an inefficiently high number of firms as entrants "steal" business from incumbents. When firms face input scarcity, in contrast, the welfare loss from free entry is reduced. Further, free entry may increase use of high-quality inputs, as oligopolistic firms underuse these inputs when entry is constrained. We assess these predictions empirically by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for coronary artery bypass graft (CABG) surgery in the state. Within a few years of the repeal of CON legislation, the number of CABG facilities increased 49 percent. Consistent with theory, we show that entry led to a redistribution of surgeries from lower- to higher-quality surgeons. The value of the improved outcomes due to this redistribution was roughly equal to the additional fixed costs incurred by new entrants, making firm entry approximately welfare neutral.
'Fair Marriages': An Impossibility
|Publication:||Economics Letters (forthcoming)|
For the classical marriage model (introduced in Gale and Shapley, 1962) efficiency and envy-freeness are not always compatible, i.e., fair matchings do not always exist. However, for many allocation of indivisible goods models (see Velez, 2008, and references therein), fairness can be restored if a sufficiently large amount of money is available for distribution/compensation as well. Interpreting the agents as the objects to be allocated, one might try to restore fairness for marriage markets in a similar fashion. We prove that there are marriage markets where no amount of money can guarantee the existence of a fair allocation.
Checking Your Identities at the Door? Positive Relationships Between Non-Work and Work Identities
|Authors:||Nancy Rothbard and Lakshmi Ramarajan|
|Publication:||In Exploring Positive Identities and Organizations: Building a Theoretical and Research Foundation, edited by Laura M. Roberts and Jane E. Dutton. Psychology Press, 2009|
In this chapter we examine factors that enable individuals to experience compatibility between their work and non-work identities. Specifically, we suggest that identity compatibility is influenced by (a) the extent to which individuals can control the co-activation of identities, and (b) the routinization of identity co-activation. We argue that factors such as status and respect allow for greater control over whether and when identities are co-activated. We also argue that compatibility arises from cognitive routines which emerge from active and passive adaptation to situations in which co-activation of identities occurs frequently.
Cases & Course Materials
Cirque du Soleil—The High-Wire Act of Building Sustainable Partnerships
Harvard Business School Case 709-411
The case describes the history and business model of Cirque du Soleil (CdS). The case allows for a rich discussion and analysis of Cirque du Soleil's business model with an emphasis on how it interacts with that of MGM Mirage. Le Cirque and MGM's business models complement one another: MGM makes important capital investments in theaters tailored to CdS's shows that are located in the middle of MGM casinos; CdS acts as a magnet for traffic for an exclusive clientele that spends large amounts of money at the casino. CdS's partnership with MGM has been tremendously profitable. This raises the question of why hold up and opportunism have not destroyed competitive advantage for both entities: What features in CdS and MGM Mirage's business models have resulted in such a successful partnership? The case is set at a juncture where Daniel Lamarre (CdS's CEO) is looking for new opportunities for growth. Lamarre is pondering the likelihood of success of Cirque's first resident show in Asia at Tokyo Disney Resort, its entry in the Macao market, and a new partnership with two subsidiaries of Dubai World, the sovereign wealth fund of the Emirate. The question is: Can Le Cirque find a new model of complementary relationships that will be as profitable as its relationship with MGM Mirage?
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Going to the Oracle: Goldman Sachs, September 2008
Harvard Business School Case 309-069
On September 23, 2008, in the midst of an historic crisis in the U.S. financial markets, Warren Buffet's Berkshire Hathaway invested $5 billion in Goldman Sachs. Goldman CEO, Lloyd Blankfein, said: "We are pleased that given our longstanding relationship, Warren Buffett, arguably the world's most admired and successful investor, has decided to make such a significant investment in Goldman Sachs." He added that the deal "will further bolster our strong capitalization and liquidity position," calling Buffett's decision "a strong validation of our client franchise and future prospects." For his part, Buffett called Goldman "an exceptional institution" with "…an unrivaled global franchise, a proven and deep management team, and the intellectual and financial capital to continue its track record of outperformance." This case provides an opportunity to evaluate Goldman's decision to raise capital, the cost to the firm of Buffett's investment, and the decision by Warren Buffett to make the investment, all in the context of a profound market crisis that may have altered the usual metrics for such decisions.
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HubSpot: Inbound Marketing and Web 2.0
Harvard Business School Case 509-049
This case introduces the concept of inbound marketing, pulling customer prospects toward a business through the use of Web 2.0 tools and applications like blogging, search engine optimization, and social media. Students follow the growth of HubSpot, an entrepreneurial venture which, in its quest for growth, faces significant challenges including the following: developing market segmentation and targeting strategies to decide which customers to serve and which to turn away, configuring pricing strategies to align with the value delivery stream customers experience, and determining whether inbound marketing programs can generate enough scale or whether traditional outbound marketing methods need to be employed to accelerate growth.
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The Jenner Situation
Harvard Business School Case 809-070
Dr. Bill Lemont is the new chief medical officer of a large academic medical center. During his first week on the job he has become aware of the abusive behavior and temper outbursts of a prominent orthopedic surgeon. How Dr. Lemont handles the situation will be scrutinized inside and perhaps outside the hospital.
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Mapping Your Network
Harvard Business School Exercise 409-129
This exercise is designed to help students and professionals map their professional networks and identify areas of strength and weakness in their networks. "Network" refers to the set of relationships that is critical to someone's ability to learn new skills and competencies, get things done, advance in his or her career, and develop personally and professionally. The exercise takes 15 to 20 minutes to complete.
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Mary Kay Inc.: Asian Market Entry (B)
Harvard Business School Supplement 509-067
By 2008, over half of Mary Kay Cosmetics' $2.8 billion sales were from outside the U.S. Sales from China exceeded $500 million in 2008 through over 450,000 beauty consultants. China was Mary Kay Cosmetics' second most important national market with revenues growing at over 20 percent each year. In contrast, Mary Kay Cosmetics had decided to exit the Japanese market in 2001.
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Who Is the Fairest of Them All? Choosing a Leader at Deronde International
Harvard Business School Case 409-113
Alain Deronde, the CEO of a French personal care company, has to choose a successor to head global product development from a diverse set of candidates with different backgrounds, strengths, and weaknesses. The candidates include Elise Bernier, Vice President of Marketing for Skin Care Products; Antoine Lambert, General Manager of Coeur Tendre (an ex-entrepreneur whose company Deronde had bought); Yang Jianguo, Country Manager of Deronde International's Chinese subsidiary; and Yves Saurac, Vice President of Product Development for Developed Markets.
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Who Killed Bhavani Manjula?—A Story of Microfinance in Andhra Pradesh
Harvard Business School Case 508-021
Abstract unavailable at this time.
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