- Review of Financial Studies
Abstract—Bank-affiliated private equity groups account for 30% of all private equity investments. Their market share is highest during peaks of the private equity market, when the parent banks arrange more debt financing for in-house transactions yet have the lowest exposure to debt. Using financing terms and ex-post performance, we show that overall banks do not make superior equity investments to those of standalone private equity groups. Instead, they appear to expand their private equity engagement to take advantage of the credit market booms while capturing private benefits from cross-selling of other banking services.
Publisher's link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571921
- RAND Journal of Economics
Fear of Rejection? Tiered Certification and Transparency
Abstract—The sub-prime crisis has shown a harsh spotlight on the practices of securities underwriters, which provided too many complex securities that proved to ultimately have little value. This uproar calls attention to the fact that the literature on intermediaries has carefully analyzed their incentives, but that we know little about the broader strategic dimensions of this market. The paper explores three related strategic dimensions of the certification market: the publicity given to applications, the coarseness of rating patterns, and the sellers' dynamic certification strategies. In the model, certifiers respond to the sellers' desire to get a chance to be highly rated and to limit the stigma from rejection. We find conditions under which sellers opt for an ambitious certification strategy, in which they apply to a demanding but non-transparent certifier and lower their ambitions when rejected. We derive the comparative statics with respect to the sellers' initial reputation, the probability of fortuitous disclosure, the sellers' self-knowledge and impatience, and the concentration of the certification industry. We also analyze the possibility that certifiers opt for a quick turnaround time at the expense of a lower accuracy. Finally, we investigate the opportunity of regulating transparency.
Abstract—When does increased service quality competition lead to customer defection, and which customers are most likely to defect? Our empirical analysis of 82,235 customers exploits the varying competitive dynamics in 644 geographically isolated markets in which a nationwide retail bank conducted business over a five-year period. We find that customers defect at a higher rate from the incumbent following increased service quality (price) competition only when the incumbent offers high (low) quality service relative to existing competitors in a local market. We provide evidence that these results are due to a sorting effect, whereby firms trade-off service quality and price, and in turn, the incumbent attracts service (price) sensitive customers in markets where it has supplied relatively high (low) levels of service quality in the past. Furthermore, we show that it is the high quality incumbent's most profitable customers who are the most attracted by superior quality alternatives. Our results appear to have long-run implications whereby sustaining a high level of service quality is associated with the incumbent attracting and retaining more profitable customers over time.
Download working paper: http://www.hbs.edu/faculty/product/39914
Abstract—This paper reviews recent academic work on the spatial concentration of entrepreneurship and innovation in the United States. We discuss rationales for the agglomeration of these activities and the economic consequences of clusters. We identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation. While arguments exist for and against policy support of entrepreneurial clusters, our understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.
Download working paper: http://www.people.hbs.edu/wkerr/130424-CGK-IPE.pdf
Abstract—This paper examines the circumstances under which so-called "independent" directors voice their independent views on public boards in a sample of Chinese firms. Controlling for firm and board characteristics, we find that independent directors' dissent is associated with breakdown of social ties between the independent director and the board chairperson, who locates at the center of the board bureaucracy in China. In particular, independent directors tend to "time" their dissent into a restricted set of socially appropriate circumstances. Dissent is more likely to occur when the chairperson who appointed the independent director has left the board. Dissent also tends to occur at the end of board "games," defined as a 60-day window prior to departure of the board chairperson or departure of the independent director herself. The endgame effect is particularly strong, seeing 27% of the dissent issued at board "endgames," which represents only 4% of independent directors' average tenure. While directors with foreign experience are more likely to dissent, we do not find that academics, accounting, and law professionals are significantly more active in dissenting. We also show that dissent is consequential, to the director and the firm. For directors, dissent significantly increases the likelihood for a director to exit the director labor market. For firms, around announcement of dissent, firms suffer an economically and statistically significant cumulative abnormal return of -0.97%. Although literature has suggested that dissent might be reflective of diverse viewpoints, and perhaps beneficial in and of itself through reduction of firm variability, we do not find this offsetting beneficial effect to be strong.
Download working paper: http://ssrn.com/abstract=2252200
Abstract—This paper decomposes excess return predictability in U.S. and U.K. inflation-indexed and nominal government bonds. We find that nominal bonds reflect time-varying inflation and real rate risk premia, while inflation-indexed bonds reflect time-varying real rate and liquidity risk premia. These three risk premia exhibit quantitatively similar degrees of time variation. We estimate a systematic liquidity premium in U.S. inflation-indexed yields over nominal yields, which declined from 100 bps in 1999 to 30 bps in 2005 and spiked to over 150 bps during the crisis 2008-2009. We find no evidence that shocks to relative inflation-indexed bond issuance generate return predictability.
Download working paper: http://www.hbs.edu/faculty/product/40097
Cases & Course Materials
- Harvard Business School Case 113-058
In early 2012, Investindustrial, a European private equity group, publicly announced their intention to sell their 76.7% stake in Ducati Motor Holding S.p.A., an iconic Italian producer of sport performance motorcycles. The decision followed a six-year turnaround during which Ducati returned to profitability and significantly expanded its product line. Investindustrial's team had the following exit alternatives: 1) a trade sale to an automotive buyer; 2) a secondary buyout, partial or complete, by a financial investor; 3) a relisting in Hong Kong. Each option had its pros and cons, but all required a careful valuation of Ducati to maximize the investors' return on their flagship investment.
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- Harvard Business School Case 313-110
Google's Project Oxygen started with a fundamental question raised by executives in the early 2000s: do managers matter? The topic generated a multi-year research project that ultimately led to a comprehensive program, built around eight key management attributes, designed to help Google employees become better managers. By November 2012, the program had been in place for several years, and the company could point to statistically significant improvements in managerial effectiveness and performance. Now executives were wondering: how could Google build on the success of this project, extending it to senior leaders, teams, and other constituencies while striving to create truly amazing managers?
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- Harvard Business School Case 313-104
No abstract available.
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- Harvard Business School Case 813-030
Julia and Nate Burstein were living their dream running their own business and balancing the demands between their work and family obligations while creating a company that was responsive to their employees' and their customers' needs. The Bursteins had joined a large multinational manufacturing company after receiving their MBAs from HBS, but soon left to join Julia's family plastics business. After the business was sold, they struck out on their own to search for a similar business. They purchased Elasto Therm, with $8 million in revenue from manufactured rubber and urethane components, with their own cash, bank financing, and the seller, partly in the form of an employee stock ownership plan (ESOP). Initially, Nate ran the business and after a few years changed roles with Julia to stay at home with their young children for three years. The two were in charge as co-CEOs before Julia relinquished her responsibilities to be at home again. The couple significantly strengthened the organization's talent, focused on innovation, growth, and provided a learning environment for their employees. Through cost efficiencies and pricing strategies, Elasto Therm was able to achieve higher margins than their competitors and focused on low-volume, short-run orders as they continued to expand the business. The 2008 recession forced them to reexamine all aspects of the business, and it retained profitability after painful cutbacks in the organization. To continue their growth into the next decade, they are faced with the choice of acquiring other businesses or growing more organically by adding to their sales organization to achieve geographic expansion.
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