An Investigation of Earnings Management through Marketing Actions (revised)
|Authors:||Craig J. Chapman and Thomas J. Steenburgh|
Prior research hypothesizes managers use "real actions," including the reduction of discretionary expenditures, to manage earnings to meet or beat key benchmarks. This paper examines this hypothesis by testing how different types of marketing expenditures are used to boost earnings for a durable commodity consumer product which can be easily stockpiled by end-consumers as well as who, within the firm, is responsible for these actions. Combining supermarket scanner data with firm-level financial data, we find evidence that differs from prior literature. Instead of reducing expenditures to boost earnings, soup manufacturers roughly double the frequency of marketing promotions (price discounts, feature advertisements, and aisle displays) at the fiscal year-end. Firms also engage in similar behavior following periods of poor financial performance. Furthermore, our results confirm managers' stated willingness to sacrifice long-term value in order to smooth earnings (Graham, Harvey, and Rajgopal, 2005) and use real actions to boost earnings to meet earnings benchmarks. We estimate that marketing actions can be used to boost quarterly net income by up to 5% depending on the depth and duration of promotion. However, there is a price to pay, with the cost in the following period being approximately 7.5% of quarterly net income. Finally, a unique aspect of the research setting allows tests of who is responsible for the earnings management. While firms appear unable to increase the frequency of aisle display promotions in the short run, they can reallocate these promotions within their portfolio of brands. Results show firms shifting display promotions away from smaller revenue brands toward larger ones following periods of poor financial performance. This indicates the behavior is determined by parties above brand managers in the firm. These findings are consistent with firms engaging in real earnings management and suggest the effects on subsequent reporting periods and competitor behavior are greater than previously documented.
Download the paper: http://www.hbs.edu/research/pdf/08-073.pdf
Geography, Poverty and Conflict in Nepal (revised)
|Authors:||Quy-Toan Do and Lakshmi Iyer|
This paper conducts an empirical analysis of the geographic, economic, and social factors that contributed to the spread of civil war in Nepal over the period 1996-2006. This within-country analysis complements existing cross-country studies on the same subject. Using a detailed dataset to track civil war casualties across space and over time, several patterns are documented. Conflict-related deaths are significantly higher in poorer districts and in geographical locations that favor insurgents, such as mountains and forests; a 10-percentage point increase in poverty is associated with 25-27 additional conflict-related deaths. This result is similar to that documented in cross-country studies. In addition, the relationship with poverty and geography is similar for deaths caused by the insurgents and deaths caused by the state. Furthermore, poorer districts are likely to be drawn into the insurgency earlier, consistent with the theory that a lower cost of recruiting rebels is an important factor in starting conflict. On the other hand, geographic factors are not significantly associated with such onset, suggesting that they instead contribute to the intensity of violence once conflict has started. Finally, in contrast with some cross-country analyses, ethnic and caste polarization, land inequality, and political participation are not significantly associated with violence.
Download the paper: http://www.hbs.edu/research/pdf/07-065.pdf
Demographics, Career Concerns or Social Comparison: Who Games SSRN Download Counts?
|Authors:||Benjamin Edelman and Ian Larkin|
We use a unique database of every SSRN paper download over the course of seven years, along with detailed resume data on a random sample of SSRN authors, to examine the role of demographic factors, career concerns, and social comparisons on the commission of a particular type of gaming: the self-downloading of an author's own SSRN working paper solely to inflate the paper's reported download count. We find significant evidence that authors are more likely to inflate their papers' download counts when a higher count greatly improves the visibility of a paper on the SSRN network. We also find limited evidence of gaming due to demographic factors and career concerns, and strong evidence of gaming driven by social comparisons with various peer groups. These results indicate the importance of including psychological factors in the study of deceptive behavior.
Download the paper: http://www.hbs.edu/research/pdf/09-096.pdf
Modularity for Value Appropriation: Drawing the Boundaries of Intellectual Property
|Authors:||Joachim Henkel and Carliss Baldwin|
Existing theory of modularity explains how modular designs create value. We extend this theory to address value appropriation. A product or process design that is modular with respect to intellectual property (IP) allows firms to better capture value in situations where knowledge and value creation are distributed across many actors. We use case studies to develop an inductive theory of "IP modularity," from which we derive testable propositions and managerial implications.
Download the paper: http://www.hbs.edu/research/pdf/09-097.pdf
Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry (revised)
|Authors:||Ramana Nanda and Tarun Khanna|
This study explores the importance of cross-border social networks for entrepreneurs in developing countries by examining ties between the Indian expatriate community and local entrepreneurs in India's software industry. We find that local entrepreneurs who have previously lived outside India rely significantly more on diaspora networks for business leads and financing. This is especially true for entrepreneurs who are based outside software hubs—where getting leads to new businesses and accessing finance is more difficult. Our results provide micro-evidence consistent with a view that cross-border social networks play an important role in helping entrepreneurs to circumvent the barriers arising from imperfect domestic institutions in developing countries.
Download the paper: http://www.hbs.edu/research/pdf/08-003.pdf
Cross-Functional Alignment in Supply Chain Planning: A Case Study of Sales and Operations Planning (revised)
|Authors:||Rogelio Oliva and Noel H. Watson|
In most organizations, supply chain planning is a cross-functional effort. Functional areas such as sales, marketing, finance, and operations traditionally specialize in portions of the planning activities, which results in conflicts over expectations, preferences, and priorities. We report findings from a detailed case analysis of a successful supply chain planning process. In contrast to traditional research in this area, which focuses on incentives, responsibilities, and structures, we adopt a process perspective and find that integration was achieved despite an incentive structure that did not support it. By drawing a distinction between the incentive landscape and the planning process, we identify process as an additional mediator, beyond structure and responsibilities, that can affect organizational outcomes. Thus, organizations may be capable of integration while different functions retain different incentives to maintain focus on their stakeholders' needs. We hypothesize that achieving alignment in the execution of plans can be more important than informational and procedural quality. We close by discussing the implications of our findings for organizations and researchers.
Download the paper: http://www.hbs.edu/research/pdf/07-001.pdf
Cases & Course Materials
Alibaba's Taobao (A)
Harvard Business School Case 709-456
Examines the decision of Alibaba Group to diversify from an international business-to-business (B2B) exchange (Alibaba.com) into a B2C and C2C exchange (Taobao.com) for Chinese retailers and consumers. In China, Taobao had managed to displace the once dominant eBay, the world's largest consumer marketplace. However, the company had little revenue because it offered services free of charge.
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Harvard Business School Case 309-088
College Summit, a nonprofit organization "committed to the day when every student who can make it in college makes it to college," was faced with an important strategic decision. After growing rapidly at more than 30% a year for the last several years, founder and CEO, J.B. Schramm; Chief Strategy Officer, Mora Segal; and the College Summit team must now decide whether or not to dramatically redefine their organization's theory of change. College Summit could continue to "get results and grow real fast" or make the bold choice to re-conceptualize its strategy to focus on system-level change. While there were numerous risks to pursuing the alternative strategy for Schramm and Segal, the possibility of helping redefine the purpose of secondary education might be too significant to ignore.
The Chad-Cameroon Petroleum Development and Pipeline Project (E)
Harvard Business School Supplement 209-082
No abstract is available at this time.
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Design Thinking and Innovation at Apple
Harvard Business School Note 609-066
Describes Apple's approach to innovation, management, and design thinking. For several years, Apple has been ranked as the most innovative company in the world, but how it has achieved such success remains mysterious because of the company's obsession with secrecy. This note considers the ingredients of Apple's success and its quest to develop, in the words of CEO Steve Jobs, insanely great products. Focuses on 1) design thinking, 2) product development strategy and execution, 3) CEO as chief innovator, and 4) bold business experimentation.
Daewoo Shipbuilding and Marine Engineering
Harvard Business School Case 609-018
Explores the journey of aggressive learning and capability building in the operations of a major Korean shipbuilder. While Daewoo Shipbuilding and Marine Engineering (DSHM) had once used its superior learning capability to topple its Japanese competition, it now faced the potential for a similar attack from new Chinese competitors. Without outsourcing some of its work to China, DSHM would become uncompetitive. However, in outsourcing the work, some skills would necessarily have to be transferred, potentially teaching the future competition and providing them with a platform to attack DSHM's core markets.
Harvard Business School Case 709-424
eHarmony's CEO needs to decide how to react to imitations of its business model, encroachment by competing models, and ascendance of free substitutes. The case provides four options to address these threats and asks students to choose one after they analyzed the company's strategy. The analysis begins with the understanding of value proposition, as derived from failures of substitutes. It proceeds to examine industry structure and important differences across its different niches. Students can then analyze the essence of a focused differentiation strategy and understand the importance of costly strategic trade-offs. They can also estimate the size of eHarmony's competitive advantage over two other competitors before articulating threats to sustainability, all of which will help them choose one of the four options.
Lance Johnstone: Developing 3000 North Broad
Harvard Business School Case 808-126
The case focuses on Lance Johnstone, a former NFL player, who has dabbled in real estate development during his playing career, and now, as a retired player, is trying to pursue the development of a 10-unit rental apartment building in a depressed area of Philadelphia, his hometown. The case presents the process Johnstone and his partner went through to purchase the vacant land and develop a construction budget and financing plan. Students are asked to evaluate the prospective financials for this development and assess the viability of the development plan and its prospective returns. The case then ends with a change in the fundamental assumption-the bank has withdrawn and a new bank will loan less than the original plan, and the construction budget has come in considerably higher. Students must evaluate the plan and prospective returns in light of this new information.
Harvard Business School Case 709-461
In 2008, executives at Microsoft must decide how to compete against Google in the market for Internet search and advertising. The case describes how Microsoft has responded to a set of competitive threats in the past, how Google has gained a dominant position in Internet search and advertising, and what Microsoft has done so far in its as-yet-unsuccessful effort to catch up with Google. The case then challenges students to construct a strategy that will allow Microsoft to achieve its objectives in the evolving market for search and advertising.
Paresh Patel: Building a Life in the Context of Global Business-October 2007
Harvard Business School Case 809-045
This case tells the story of Paresh Patel, born in Boston to an Indian immigrant family, as he develops an entrepreneurial career, participates in the Indian diaspora, and builds a family life. It provides background on Paresh's heritage, describes his youth and education (including HBS), his learning experience as the manager of a large family fund, his decision to launch a hedge fund in India, and the first years of the venture. It also profiles Nirva Patel and describes how they met, married, and managed the transition to a new life in Mumbai, including the impact on her career and personal aspirations. The case issue, set in October 2007, is whether to have their first child in Mumbai, or return to the U.S. for the delivery.
Political and Economic History of the People's Republic of China: An Annotated Timeline
Harvard Business School Note 309-073
Brief political, economic, and social timeline of China from 1949 to present to give context on and provide overview of modern Chinese history.
Progressive Corporation: Variable Dividends
Harvard Business School Case 209-004
In 2006, Progressive Corporation announced a change in its dividend policy. Henceforth, dividends would be paid annually rather than quarterly and, more importantly, would be set according to a formula that would result in considerably greater year-to-year variability than was the case historically. Under the new policy, dividends would be tied to the company's underwriting results, its performance relative to predetermined goals, and a target payout ratio. Progressive's new policy was intended to help with overall capital management in the cyclical property and casualty insurance business.
The Tip of the Iceberg: JP Morgan Chase and Bear Stearns (A)
Harvard Business School Case 309-001
Bear Stearns & Co. burned through nearly all of its $18 billion in cash reserves during the week of March 10, 2008, and an unprecedented provision of liquidity support from the Federal Reserve on Friday, March 13 was insufficient to reverse the decline in Bear's condition. Federal Reserve Chairman Benjamin Bernanke, Treasury Secretary Henry Paulson, and New York Fed President Timothy Geithner were intent on limiting the impact of Bear's problems on the wider financial system. James "Jamie" Dimon, Morgan's Chairman and CEO, was in frequent contact with these regulators over the weekend of March 14-16, negotiating possible scenarios for the rescue of Bear, without which Bear would be forced to seek bankruptcy protection when markets opened on Monday. Late on Sunday afternoon, March 16, Bear's board accepted Morgan's offer to purchase Bear for $2 per share, an offer that would not have been made without significant government assistance. There was hope that the Bear rescue would help avert the far-reaching spread of damage into the larger financial world that many policymakers viewed as likely to follow the failure of a major investment bank.
This case examines a seminal event in the financial and economic crisis that began in the summer of 2007 and provides background for better understanding the full scope of the crisis as it was revealed during the summer and fall of 2008. It was written to address two sets of issues. First, it provides the opportunity to understand the corporate finance issues of capital and liquidity and of firm valuation. Second, the case allows for the exploration of aspects of a firm's internal and external governance, as well as the challenges of navigating through a crisis when faced with compelling pressures from competing stakeholders.
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Visions of Web 3.0
Harvard Business School Case 808-147
Explores the Semantic Web, a vision for the next generation of the World Wide Web in which information is stored in machine-readable formats. While the Semantic Web would make information more easily accessible, barriers to its adoption are very high because website owners would need to recode data and content on their existing sites, agree on ontologies for structuring information, and develop new tools for querying Semantic Web data. The case profiles two start-ups with very different strategies for exploiting Semantic Web opportunities: Radar Networks and Metaweb Technologies.
Government and Markets: Toward a New Theory of Regulation
|Editors:||Edward Balleisen and David Moss, eds.|
|Publication:||Cambridge: Cambridge University Press, forthcoming|
No abstract is available at this time.
The Ascent of Money: A Financial History of the World
|Publication:||New York: Penguin Press, 2008|
Niall Ferguson traces the historical evolution of the financial system, from its origins in ancient Mesopotamia to the latest upheavals on what he calls "Planet Finance." In doing so, he reveals financial history as the essential backstory behind all history, from the civilization of the Renaissance to the origins of the French Revolution. Ferguson elucidates key financial institutions and concepts by showing where they came from. What is money? What do banks do? What's the difference between a stock and a bond? Why buy insurance or real estate? And how exactly do hedge funds make (and lose) money? This is history for the present, providing an invaluable long-term perspective on the current global "descent of money."
Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds
|Authors:||Francisco J. Gomes, Laurence J. Kotlikoff, and Luis M. Viceira|
|Publication:||American Economic Review Papers and Proceedings 98 (May 2008): 297-303|
We investigate optimal consumption, asset accumulation and portfolio decisions in a realistically calibrated life-cycle model with flexible labor supply. Our framework allows for wage rate uncertainly, variable labor supply, social security benefits, and portfolio choice over safe bonds and risky equities. Our analysis reinforces prior findings that equities are the preferred asset for young households, with the optimal share of equities generally declining prior to retirement. However, variable labor materially alters pre-retirement portfolio choice by significantly raising optimal equity holdings. Using this model, we also investigate the welfare costs of constraining portfolio allocations over the life cycle to mimic popular default investment choices in defined-contribution pension plans, such as stable value funds, balanced funds, and life-cycle (or target date) funds. We find that life-cycle funds designed to match the risk tolerance and investment horizon of investors have small welfare costs. All other choices, including life-cycle funds which do not match investors' risk tolerance, can have substantial welfare costs.
Breaking up Is Never Easy: Planning for Exit in a Strategic Alliance
|Authors:||Ranjay Gulati, Parth Mehrotra, and Maxim Sytch|
|Publication:||California Management Review 50, no. 4 (summer 2008): 147-163|
The article discusses the difficulties inherent in ending corporate alliances. The number of strategic alliances, and their significance to the allied firms, is said to be growing at an unprecedented rate. The topic of dissolving such arrangements is analyzed. Examples are provided of corporate relationships which ended disastrously, and the importance of planning ahead for various contingencies before entering into such agreements is emphasized. A template is provided which allows for symmetrical or asymmetrical exit options, depending on business conditions.
What T. R. Took: The Economic Impact of the Panama Canal, 1903-1937
|Authors:||Noel Maurer and Carlos Yu|
|Publication:||Journal of Economic History 68, no. 3 (September 2008)|
The Panama Canal was one of the largest public investments of its time. In the first decade of its operation, the canal produced significant social returns for the United States. Most of these returns were due to the transportation of petroleum from California to the East Coast. The United States also succeeded in leveraging the threat of military force to obtain a much better deal from the Panamanian government than it could have negotiated otherwise.
The Paranoid Style in the Study of American Politics
|Authors:||David Moss and Mary Oey|
|Publication:||In Government and Markets: Toward a New Theory of Regulation, edited by Edward Balleisen and David Moss. Cambridge: Cambridge University Press, forthcoming|
What drives policy making in a democracy? The conventional view is that political actors, like economic actors, pursue their self-interest, and that special interest groups dominate the policy making process by satisfying policy makers' need for money and other forms of political support. Indeed, many scholars regard this economic theory of regulation as a general theory of politics. George Stigler himself claimed that "temporary accidents aside," exceptions "simply will not arise: our extensive experience with the general theory in economics gives us the confidence that this is so." In this chapter, we suggest that exceptions-including major ones-may in fact arise. We focus on three historical cases in which special interests apparently gave way to the general interest in the policy making process: the enactment of Medicare in 1965, in which the powerful doctors lobby failed in its bid to stop the legislation; the Voting Rights Act of 1965, which passed overwhelmingly despite the absence of any economically powerful interest group behind it; and the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund), which became law over the strenuous objections of the powerful chemical industry lobby. In all three of these cases (and especially in the latter two), the proposed legislation became unstoppable in the aftermath of a relevant horror story-e.g., Love Canal, in the case of Superfund-that received extensive coverage in the press. Although one could argue that we focus only on high-profile cases, and that capture theory applies more cleanly to policies that slip under the public's radar screen, we have never seen the economic theory of regulation advertised as "a theory of minor legislative events." Ultimately, the challenge for scholars will be to identify the conditions under which special interests dominate (or capture) public policy and the conditions under which they do not. Although such a task lies far beyond the scope of this chapter, the three cases surveyed here suggest at least one potentially important dynamic: that in the presence of a free press, real-life horror stories with bearing on policy issues may serve to blunt the power of special interests by informing and catalyzing public opinion.
An Exploration of Marketing's Impact on Society: A Perspective Linked to Democracy
|Authors:||John A. Quelch and Katherine Jocz|
|Publication:||Journal of Public Policy and Marketing 27, no. 2 (fall 2008): 202-206|
The authors propose a political theory perspective for examining the impact of the modern aggregate marketing system on consumer welfare and society. Specifically, they suggest that the benefits marketing delivers to consumers are similar to the conditions required for representative democracy. This perspective encompasses a broader range of benefits than is usually considered in the marketing literature and could provide a possible template for evaluating marketing actions. Viewing marketing as democratic is consistent with the historical evolution of marketing and with existing definitions of marketing. Linking marketing to political science begins to connect individual-level outcomes with societal outcomes. The approach also lends itself to policy discussions and further research on the relationships among the three primary actors in the marketing system: consumers, marketers, and government. It raises several questions about optimal marketing systems.
Holding a Mirror up to Marketing
|Authors:||John A. Quelch and Katherine Jocz|
|Publication:||Marketing Management 17, no. 6 (November-December 2008): 16-21|
The Dove campaign addressed a common concern that crossed cultural boundaries. Confronted by standard visual stereotypes of beauty in the global media, many young women develop self-image and self-esteem problems. The Dove Real Beauty campaign rejected these narrow stereotypes in favor of celebrating the diversity of beauty, supplementing functional benefit claims with an important emotional appeal that was inclusive rather than elitist. Inclusiveness is one of six key benefits that good marketing delivers to consumers, the others being information, choice, engagement, exchange, and consumption. Here we show how political democracies aim to deliver these same six benefits to citizens. Marketing campaigns that focus on delivering all six "democratic" benefits, such as the Dove campaign, achieve a higher standard and more substantial, sustainable results.
Organizational Ambidexterity: Balancing Exploitation and Exploration for Sustained Performance
|Authors:||Sebastian Raisch, Julian Birkinshaw, Gilbert Probst, and Michael Tushman|
|Publication:||Organization Science (in press)|
Organizational ambidexterity has emerged as a new research paradigm in organization theory, yet several issues that are fundamental to this debate remain controversial. We explore four central tensions here: Should organizations achieve ambidexterity through differentiation or through integration? Does ambidexterity occur at the individual or organizational level? Must organizations take a static or dynamic perspective on ambidexterity? Finally, can ambidexterity arise internally or do firms have to externalize some processes? We provide an overview of the seven articles included in this special issue and suggest several avenues for future research.
Minimally Altruistic Wages and Unemployment in a Matching Model with Monopsony
|Author:||Julio J. Rotemberg|
|Publication:||Supplement. Journal of Monetary Economics 55 (October 2008): 97-110|
A monopsony model with a symmetric equilibrium is developed where posting higher wages reduces employee departures. This monopsony implies that wage changes have small effects on profits so that employer altruism affects wages as well. Even selfish firms act altruistically if workers punish firms that fail to do so. If the marginal utility of income falls sharply with income, the model can explain modest responses of wages to shifts in labor demand. If there are fluctuations in the altruism required by workers, the low correlation of wages and employment and the sizes of the cyclical fluctuations in these two series can be rationalized.
Creating Value Together
|Authors:||Maxim Sytch and Ranjay Gulati|
|Publication:||Business Intelligence. MIT Sloan Management Review 50, no. 1 (fall 2008): 12-13|
Conventional wisdom suggests that companies should avoid growing dependent on their business partners. If one company, the thinking goes, grows too dependent on a counterpart by getting the entire input for a particular activity from it and is not able to switch quickly to alternative sources of supply, then the counterpart company gets powerful levers of influence. By threatening to exit the relationship, the supplier may then renegotiate the relationship toward more favorable terms and claim a bigger share of the economic pie. And this bigger share will come at the purchasing company's expense. What matters for a company's performance in a buyer-supplier relationship is not just the share of the pie it gets, but also how big the entire pie is. Research suggests that, if smartly managed, dependence on one's business partners brings significant benefits to value creation in interorganizational relations; it can boost the overall pool of value to be distributed and, subsequently, the performance of a company. Dependence, therefore, should not be avoided but actively harnessed. We also show that ineffective management of dependence may just as quickly shrink the value in the exchange, hurting all companies' performance in the relationship. In that respect, relying on a tug-of-war in which the more powerful company tries to squeeze out value at the expense of its more dependent partner is particularly detrimental. It results in the dominant partner claiming a bigger share of a rapidly shrinking pie. Remarkably, in such circumstances, a more powerful business can be left with a net loss.