Towards an Understanding of the Role of Standard Setters in Standard Setting
|Authors:||Abigail Allen and Karthik Ramanna|
We investigate the idiosyncratic influence of standard setters in standard setting. In particular, we examine how FASB members' length of tenure on the board, their past professional experience, and their political contributions vary with the degree to which the accounting standards they propose are perceived as increasing accounting "relevance" and/or decreasing accounting "reliability." Among other results, we find that length of tenure on the board and a prior career in investment banking/investment management are associated with proposing standards perceived as decreasing accounting "reliability"; while contributions to the Democratic Party are associated with proposing standards perceived as increasing accounting "reliability." Broadly, the evidence, by highlighting the influence of standard setters, can broaden our understanding of the political economy of standard setting beyond the role of corporate lobbying.
Download the paper: http://ssrn.com/abstract=1617398
How Did Increased Competition Affect Credit Ratings?
|Authors:||Bo Becker and Todd Milbourn|
The credit rating industry has historically been dominated by just two agencies, Moody's and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how, in fact, increased competition affects the credit ratings market. Increased competition from Fitch coincides with lower-quality ratings from the incumbents: rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories.
Download the paper: http://www.hbs.edu/research/pdf/09-051.pdf
The Impact of Supply Learning on Customer Demand: Model and Estimation Methodology
|Authors:||Nathan Craig, Nicole DeHoratius, and Ananth Raman|
To set service levels, firms must understand how changes in service affect customer demand. Supply learning is a process whereby customers use past supplier performance to build beliefs about supplier capabilities and hence about future supplier performance. This paper presents a multi-period model of service level competition among suppliers selling substitutable products to a customer that engages in supply learning. We observe how a supplier's service level performance molds a customer's beliefs as well as how a customer's beliefs affect its order quantities. We identify two dimensions of supplier performance: consistency, the probability that a supplier delivers in the current period conditional on availability in the prior period, and recovery, the probability that a supplier delivers in the current period conditional on a stockout in the prior period. We also provide a method for estimating the impact of changes in supplier performance along these two dimensions on customer demand. Using data from Hugo Boss, a manufacturer of branded apparel, we find increases in consistency and recovery to be associated with increases in orders from Hugo Boss's retailer customers
Download the paper: http://www.hbs.edu/research/pdf/11-034.pdf
A Comparative-Advantage Approach to Government Debt Maturity
|Authors:||Robin Greenwood, Samuel G. Hanson, and Jeremy C. Stein|
We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a simple setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk and hence should aim to partially crowd out the private sector's use of short-term debt.
Download the paper: http://www.hbs.edu/research/pdf/11-035.pdf
Reversing the Queue: Performance, Legitimacy, and Minority Hiring
|Authors:||Andrew Hill and David Thomas|
Studies of minority hiring have found that poor-performing firms or firms in highly competitive contexts are more likely to hire minority candidates. However, most work has examined hiring for entry and mid-level positions, not senior management. Management positions differ in terms of the amount of uncertainty in identifying candidates qualified for the job, in the intensity of external evaluations of both managerial and firm performance, and in the level of accountability for that performance. Furthermore, the influence of senior minority managers on hiring practices may differ substantially, depending on where a manager sits in the firm's hierarchy. Examining hiring practices on coaching staffs of teams in America's National Football League from 1970 to 2007, we find that better-performing teams are less likely to hire minorities to fill lower-level and mid-level coaching positions (as predicted by prior literature on labor queues), but that such teams are more likely to hire minorities into leadership positions. We also find that minority head coaches hire more minorities for subordinate coaching jobs, but that the presence of a minority offensive or defensive coordinator (with a white head coach) is a significant, negative predictor of minority hiring in junior and mid-level positions.
Download the paper: http://www.hbs.edu/research/pdf/11-032.pdf
Network Effects in Countries' Adoption of IFRS
|Authors:||Karthik Ramanna and Ewa Sletten|
If a country's accounting standards represent a political-economic equilibrium, why is that equilibrium for some countries shifting over time in favor of IFRS? We develop and test the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS influences a country's shift away from local accounting standards. That is, as more jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering transactions costs to foreign financial-statement users come to outweigh institutional differences (e.g., auditing technology) that make IFRS adoption costly. We find that perceived network benefits increase the degree of IFRS harmonization among countries, although larger countries and countries less dependent on foreign trade have a differentially lower response to these perceived benefits.
Download the paper: http://ssrn.com/abstract=1590245
Making the Numbers? 'Short Termism' & the Puzzle of Only Occasional Disaster
|Authors:||Nelson P. Repenning and Rebecca M. Henderson|
Much recent work in strategy and popular discussion suggests that an excessive focus on "managing the numbers"-delivering quarterly earnings at the expense of longer-term investments-makes it difficult for firms to make the investments necessary to build competitive advantage. "Short termism" has been blamed for everything from the decline of the U.S. automobile industry to the low penetration of techniques such as TQM and continuous improvement. Yet a vigorous tradition in the accounting literature establishes that firms routinely sacrifice long-term investment to manage earnings and are rewarded for doing so. This paper presents a model that can reconcile these apparently contradictory perspectives. We show that if the source of long-term advantage is modeled as a stock of capability that accumulates gradually over time, a firm's proclivity to manage short-term earnings at the expense of long-term investment can have very different consequences depending on whether the firm's capability is close to a critical "tipping threshold." When the firm operates above this threshold, managing earnings smoothes revenue with few long-term consequences. Below it, managing earnings can tip the firm into a vicious cycle of accelerating decline. Our results have important implications for understanding managerial incentives and the internal processes that lead to sustained advantage.
Download the paper: http://www.hbs.edu/research/pdf/11-033.pdf
The Artful Dodger: Answering the Wrong Question the Right Way
|Authors:||Todd Rogers and Michael I. Norton|
What happens when people try to "dodge" a question they would rather not answer by answering a different question? In four online studies using paid participants, we show that listeners can fail to detect dodges when speakers answer similar-but objectively incorrect-questions (the "artful dodge"), a detection failure that went hand-in-hand with a failure to rate dodgers more negatively. We propose that dodges go undetected because listeners' attention is not usually directed at a dodge detection goal (Is this person answering the question?) but rather towards a social evaluation goal (Do I like this person?). Listeners were not blind to all dodge attempts, however. Dodge detection increased when listeners' attention was diverted from social goals to determining the relevance of the speakers' answers (Study 1), when speakers answered egregiously dissimilar questions (Study 2), and when listeners' attention was directed to the question asked by keeping it visible during speakers' answers (Study 4). We also examined the interpersonal consequences of dodge attempts: in Study 2, listeners who detected dodges rated speakers more negatively, while in Study 3, listeners rated speakers who answered a similar question in a fluent manner more positively than speakers who answered the actual question, but disfluently (Study 3). These results add to the literatures on both Gricean conversational norms and inattentional blindness. We discuss the practical implications of our findings in the contexts of interpersonal communication and public debates.
Download the paper: http://www.hbs.edu/research/pdf/09-048.pdf
Cases & Course Materials
Societe Generale (A): The Jerome Kerviel Affair
Harvard Business School Case 110-029
This case illustrates the tension/balance that firms with complex and risky business models must consider in designing their internal controls. It describes the environment in which a derivatives trader engaged in massive directional positions on major European stocks and indexes without being detected for over a year. Although the case could be used to teach the basics of internal controls, it is likely to be more effective by eliciting a debate about how predictable the incident was, and whether or not there was anything fundamentally flawed about the company's choices in terms of strategy, control systems, and culture. It also provides an opportunity to discuss the challenges of dealing jointly with a market-wide crisis (subprime) and a company-level crisis.
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Compass Maritime Services, LLC: Valuing Ships
Benjamin C. Esty and Albert Sheen
Harvard Business School Case 211-014
Tom Roberts, a founding partner of Compass Maritime Services, a New Jersey-based shipping research and consulting firm, has been asked by a new potential customer in May 2008 for advice on purchasing a capesize bulk carrier. After identifying a suitable ship with his colleague Basil Karatzas, they must determine an appropriate offer price for the ship and justify their recommendations.
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MindTree: A Community of Communities
David A. Garvin and Rachna Tahilyani
Harvard Business School Case 311-049
MindTree is a mid-sized Indian IT services company known for its knowledge management practices, its collaborative communities, and its strong culture and values. The CEO has set a goal of becoming a $1 billion company by 2014; to reach that goal, employees must create several new businesses. The head of knowledge management must decide how his function should change in order to become more supportive of innovation and new business development.
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Regina E. Herzlinger and Beatriz Munoz-Seca
Harvard Business School Case 311-035
Cathy Hoffmann has rapidly grown her novel facilities for day care therapy for elders with mild cognitive and physical problems. But she needs to decide whether to franchise or own the next expansion.
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Werner von Siemens and the Electric Telegraph
Geoffrey G. Jones and Bjoern von Siemens
Harvard Business School Case 811-004
This case describes the nineteenth century founding by Werner Siemens of the Siemens electrical business in Germany. Werner's dual role as inventor and entrepreneur is explored as he created one of the world's first multinational enterprises, whose growth initially rested on its pioneering role in the new telegraph industry. Werner sent his brothers to open businesses in Great Britain and Russia, and the case explores the advantages and disadvantages of family business as a form of organization, as well as the challenges growing it poses for such family firms.
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Freddie Mac: Managing in Conservatorship
Robert Steven Kaplan, Nitin Nohria, and Ben Creo
Harvard Business School Case 411-048
Ed Haldeman has recently become CEO of Freddie Mac, one of three major government sponsored enterprises (GSEs) charged with supporting U.S. residential mortgage finance. The company was placed into conservatorship by the U.S. treasury on September 7, 2008. Conservatorship places various restrictions on Haldeman and the organization in terms of management. Haldeman's challenge is to lead Freddie Mac, build its culture, upgrade its operations, and generally prepare the organization for re-emerging from conservatorship. In the background, housing prices continue to deteriorate, and the company continues to lose money. In addition, political views continue to shift regarding the future regulatory and equity ownership frameworks for Freddie Mac as it emerges from this difficult period.
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B Lab: Building a New Sector of the Economy
Christopher Marquis, Andrew Klaber, and Bobbi Thomason
Harvard Business School Case 411-047
The founders of B Lab are on a mission to create a new sector of the economy and are specifically focused on a three objectives: 1) building a community of Certified B Corporations (B=Benefit) that legally expand their corporate responsibilities to include consideration of diverse stakeholder interests; 2) advancing the public policies necessary to create a new corporate form called a Benefit Corporation; and 3) creating an investment rating system to help drive institutional investment to the emerging asset class of "impact investments." The case considers the challenges associated with achieving each of these objectives, let alone all three at the same time. Is B Lab's tripartite strategy its secret sauce or its albatross?
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Driving Sustainability at Bloomberg L.P.
Christopher Marquis, Daniel Beunza, Fabrizio Ferraro, and Bobbi Thomason
Harvard Business School Case 411-025
Describes the addition of environmental, social, and governance (ESG) performance indicators to the Bloomberg terminal. The initiative grew out of Bloomberg's broader sustainability initiatives and is an example of how committed employees can create positive social change within organizations. Issues highlighted in the case for discussion include the following: How can committed employees implement an innovative sustainability initiative within a large corporation? How can ESG data be more strategic for both Bloomberg and investors? And finally, how should the ESG data industry be structured, and what impact does ESG data have on the future institutionalization of sustainability?
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Paradise Travel Advisory Service
Paul W. Marshall, Charles Miller, and Collins Ward
Harvard Business School Case 811-020
managers in a troubled company are faced with developing and implementing a plan to increase revenue in a travel service business.
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Malcolm Life Enhances Its Variable Annuities
Robert C. Pozen and David J. Pearlman
Harvard Business School Case 311-041
The case involves an insurance CEO choosing between different designs for a variable annuity product in light of hedging, marketing, and pricing issues. The case provides students with background on the economics and regulation of life insurance and variable annuities. Then it asks students to calculate the returns on capital of different product designs for a variable annuity based on specified assumptions including a range of hedging scenarios.
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Note: Regulation of Hedge Fund Managers in the U.K. Before and After the Global Financial Crisis
Robert C. Pozen and Melissa Hammerle
Harvard Business School Note 311-014
This note will examine the regulatory framework for hedge funds in the United Kingdom (UK) before and after the financial crisis of 2008. First, it will discuss European Union (EU)-level regulation that applies to the UK as an EU member state. Second, it will discuss UK-specific regulation. Finally, this note will cover anticipated changes to regulation, both at the EU-level and within the UK, resulting from the financial crisis.
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