- 17 Jun 2010
- Working Paper Summaries
When Do Analysts Add Value? Evidence from Corporate Spinoffs
The impact of financial analysts on capital market efficiency has been much debated in academia and in practice. A large body of academic research finds that analysts act as important information intermediaries who contribute to the overall efficiency of capital markets. Other research, however, has identified contexts in which the value of analyst coverage may be relatively more limited, such as when analysts face possible conflicts of interest, or when the company or situation they are presented with is especially complex. Still other research questions the informativeness of analyst recommendations in light of regulatory changes. In this paper, HBS doctoral graduate Emilie Rose Feldman and professors Stuart C. Gilson and Belén Villalonga examine 1,793 analyst reports written at the time of corporate spinoffs to determine how much value analysts create as information intermediaries in this setting. Spinoffs provide an interesting context for this purpose because the degree of information asymmetry between corporate insiders and investors is especially high. The paper is one of the first to provide very fine-grained detail on the quantity and types of analyses included in analyst reports. Key concepts include: Analysts pay relatively little attention in their reports to the subsidiaries that will be spun off, even though subsidiaries generally account for an economically significant share of firms' operations before the spinoff. The complexity associated with forecasting earnings and stock prices in the context of corporate spinoffs, combined with analysts' apparent disregard for subsidiaries in their analysis of corporate spinoffs, seem to limit analysts' ability to add value as information intermediaries in this setting. The potential for analysts to add value in this situation is especially high because while the new entities created by the spinoff have no stock price history—similar to an IPO—analysts may have been following the businesses of the parent and subsidiary for an extended time, giving them a comparative advantage in forecasting both entities' future financial performance. Closed for comment; 0 Comments.
- 16 Jun 2010
- Working Paper Summaries
Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2008-2009 Financial Crisis
The global financial crisis of 2008-2009 has led academics and practitioners to question many widely held beliefs about business and economics. One such belief relates to the value of corporate diversification. Popular views about diversification have swung like a pendulum over the past half-century, from a generally positive view in the 1960s and 1970s, when many large conglomerates were formed, to a generally negative view in the 1980s and early 1990s, when many such conglomerates were dismantled or at least fell out of the stock market's favor. In 2009, in the wake of the global financial crisis, a new view seems to be emerging that conglomerates are ready for a comeback. In this paper, HBS doctoral candidate Venkat Kuppuswamy and professor Belén Villalonga examine whether and why conglomerates have become more valuable during the 2008-2009 financial crisis. They find that they have, and that the increase does not simply reflect changes in investor perceptions but real differences in corporate finance and investment. Key concepts include: The change in the value of diversification triggered by the financial crisis reflects real differences in corporate finance and investment as opposed to a faddish change in investor sentiment or perceptions. There were two channels through which the financial crisis increased the intrinsic value of corporate diversification: greater access to credit markets as a result of the debt coinsurance provided by conglomerates, and access to (and/or more efficient use of) internal capital markets. While these financing alternatives are always available to diversified firms, evidence suggests that they became particularly valuable during the crisis. It remains to see whether the value advantage gained by conglomerates during the crisis will persist or disappear once the crisis is over. On the one hand, as credit becomes cheaper and more broadly available, both diversified and focused firms are likely to revert to their equilibrium leverage levels. The value of internal capital markets is also likely to decline as external capital markets return to their pre-crisis levels of efficiency and availability—partly because of the increased efficiency of external markets and partly because of the reduced pressure to allocate internal funds efficiently. On the other hand, the financing advantage that conglomerates have enjoyed during the crisis may have allowed them to tackle unique investment opportunities that can give them a sustainable competitive advantage over their focused rivals—or even put some of those rivals out of business. While it is too early for us to be able to analyze in this study some of these long-term effects, the shift in the relative pricing of diversified and single-segment firms suggests that the stock market anticipates that the advantage gained by conglomerates will last well beyond the crisis. Closed for comment; 0 Comments.
- 10 Jun 2010
- Working Paper Summaries
Corporate Governance and Internal Capital Markets
What is the impact of corporate ownership on corporate diversification and on the efficiency of firms' internal capital markets? Corporate governance and internal capital markets are two topics closely intertwined in theoretical research; for example, agency problems—which corporate governance mechanisms seek to mitigate in a variety of ways—are at the heart of every theory of inefficient internal capital markets. Yet surprisingly few empirical studies have looked into the actual link between corporate governance and internal capital markets. This paper by University of Amsterdam professor Zacharias Sautner and HBS professor Belén Villalonga seeks to fill the gap by taking advantage of a natural experiment provided by a tax change in Germany in 2002. The researchers provide direct evidence of the effect of governance structures on how markets work, as well as new evidence about the benefits and costs of ownership concentration. Key concepts include: In 2002, Germany repealed the prevailing 52 percent corporate tax on capital gains from investments in other corporations, thus eliminating a significant barrier to changes in ownership structures. Corporate governance has a significant impact on internal capital markets. Specifically, ownership concentration reduces the extent of corporate diversification, but increases the probability that internal capital markets are efficient. Both ownership concentration and corporate diversification have potential benefits and costs, as documented in prior studies. Given prior findings that there is no diversification discount in Germany, our results imply that the benefits and costs of ownership concentration just offset each other when it comes to diversification strategies. However, our own finding that more concentrated ownership leads to more efficient allocation of internal resources suggests that the net benefits of ownership concentration may in fact be positive. There is no "one size fits all" solution to governance problems. The recent tax reform in Germany may have been partially counterproductive. The broader policy implication is that caution should be exercised when implementing tax or other legal reforms that seek convergence in international corporate governance systems. Closed for comment; 0 Comments.
- 09 Jun 2010
- Working Paper Summaries
Agency Costs, Mispricing, and Ownership Structure
Under what circumstances do firms access capital markets when the potential for agency costs is high? The prevailing view holds that controlling shareholders sell shares to outsiders only when internal capital is inadequate to fund attractive investment opportunities. While the role of market efficiency in corporate finance has attracted considerable research attention, the interaction of stock market mispricing with agency problems is not well understood. HBS doctoral graduate Sergey Chernenko and professors C. Fritz Foley and Robin Greenwood propose a new explanation—based on stock market mispricing—for why firms with a controlling shareholder raise outside equity, even when firms cannot commit not to expropriate minority shareholders. Key concepts include: Stock mispricing offsets agency costs and induces a controlling shareholder to raise capital. Higher misvaluations are required to support the creation of ownership structures that give rise to more expropriation. To the extent that agency costs are deadweight instead of distributional transfers, mispricing facilitates the creation of inefficient ownership structures. Closed for comment; 0 Comments.
- 03 Jun 2010
- Working Paper Summaries
Platforms and Limits to Network Effects
Why do platforms that restrict choice and charge higher prices seem to prosper alongside platforms offering cheap or free unlimited choice? In the online dating market, for example, eHarmony deliberately limits the number of candidates available to its customers. Headhunters show only a few candidates to the companies, and even fewer companies to the candidates. In the housing market, brokers limit the number of houses they show to potential buyers and sellers. In this paper, HBS professors Hanna Halaburda and Mikolaj Jan Piskorski challenge conventional understanding of platform competition and network effects by describing a two-sided matching environment and studying the indirect network effects in this environment. They show that the interplay between more choice and more competition influences the strength of network effects and attractiveness of a platform. Some agents may opt for a platform with few choices to avoid higher levels of competition. The researchers' model helps explain why platforms that limit their choice set coexist (and thrive) alongside platforms that offer greater choice. Key concepts include: Excessive increases in the number of candidates decrease agents' expected payoffs, due to increased competition. Some agents rationally opt for platforms that constrain choice even if they do not receive any additional service from such platforms, to avoid higher levels of competition. The strength of network effects depends on the type of the agent and on the number of available candidates on both sides of the market. A platform could use these factors to its advantage by offering fewer candidates to its members on both sides of the market. Agents may be willing to pay for participation in such a platform (and hence rationally decide to limit their choices) because they would face less competition. Closed for comment; 0 Comments.
- 26 May 2010
- Working Paper Summaries
Unraveling Results from Comparable Demand and Supply: An Experimental Investigation
In many professional labor markets, most entry-level hires begin work at around the same time: for example, soon after graduating from college or graduate or professional school. Despite a common start time, offers can be made and contracts can be signed at any time prior to the start of employment, sometimes well over a year before employment will begin. "Unraveling" happens in markets in which competition for the elite firms and workers is fierce, but the quality of workers may not be reliably revealed until after a good deal of hiring has already been completed. Thus unraveling is sometimes a cause of market failure, particularly when contracts come to be determined before critical information is available. In this paper Muriel Niederle of Stanford, Alvin E. Roth of HBS, and M. Utku Ünver of Boston College consider conditions related to supply and demand that tend to facilitate or mitigate unraveling. Key concepts include: It is commonly suggested by economists and lay participants in markets that unraveling results from competition related to an imbalance of demand and supply. Unraveling can have many causes, because markets are multidimensional and time is only one-dimensional (and so transactions can only move in two directions in time, earlier or later). So there can be many different reasons that make it advantageous to make transactions earlier. When looking at a labor market, it is not uncommon for participants on both sides of the market to be nervous about their prospects, and it can be difficult to be sure which is the short side of the market. Even in a market with more applicants than positions there may be a shortage of the most highly qualified applicants. Attempts to prevent or reverse unraveling are often a source of new market design in the form of new rules or market institutions. Closed for comment; 0 Comments.
- 19 May 2010
- Working Paper Summaries
The Job Market for New Economists: A Market Design Perspective
How should the most appropriate employers and job candidates find each other? Newly minted economists typically send applications to an average of 80 potential employers, and as a result, many employers receive hundreds of applications. It is extremely time-consuming to sort through all the applications, and as the process unfolds, there is a risk of coordination failure, in which employers and candidates who would be well-suited do not manage to create a match. In this paper, HBS professors Peter A. Coles and Alvin E. Roth and colleagues provide an overview of the market for new PhD economists and describe new mechanisms to improve the matching process. They conclude by discussing the emergence of platforms for transmitting job market information, and other design issues that may arise in the market for new economists. Key concepts include: Practical market design is often a response to particular problems. A new market design often leads the way to developing new knowledge. Two new mechanisms have facilitated matches. The first, a signaling service, allows job candidates to express interest to a limited number to potential employers prior to interviews at association meetings. The second mechanism, a web-based "scramble," reduces search costs and "thickens" the late part of the job market for candidates and employers still seeking a match. Closed for comment; 0 Comments.
- 13 May 2010
- Working Paper Summaries
Just Say No to Wall Street: Putting A Stop to the Earnings Game
Over the last decade, companies have struggled to meet analysts' expectations. Analysts have challenged the companies they covered to reach for unprecedented earnings growth, and executives have often acquiesced to analysts' increasingly unrealistic projections, adopting them as a basis for setting goals for their organizations. As Monitor Group cofounder Joseph Fuller and HBS professor emeritus Michael C. Jensen write, improving future relations between Main Street and Wall Street and putting an end to the destructive "earnings game" between analysts and executives will require a new approach to disclosure based on a few simple rules of engagement. (This article originally appeared in the Journal of Applied Corporate Finance in the Winter 2002 issue.) Key concepts include: Managers must confront the capital markets with courage and conviction. Managers must be forthright and promise only those results they have a legitimate prospect of delivering, and they must be clear about the risks and uncertainties involved. Managers must recognize that an overvalued stock can be damaging to the long-run health of the company, particularly when it serves as a pretext for overpriced acquisitions. Managers must work to make their organizations more transparent to investors and to the markets. To limit wishful thinking, managers must reconcile their own company's projections to those of the industry and their rivals. While recent history may have obscured the analyst role, managers should not simply presume that analysts are wrong when disagreement occurs. In fact, analysts have a vital monitoring role to play in a market economy. Closed for comment; 0 Comments.
- 06 May 2010
- Working Paper Summaries
Introductory Reading For Being a Leader and The Effective Exercise of Leadership: An Ontological Model
Effective leadership does not come from mere knowledge about what successful leaders do; or from trying to emulate the characteristics or styles of noteworthy leaders; or from trying to remember and follow the steps, tips, or techniques from books or coaching on leadership. And it certainly does not come from merely being in a leadership position or in a position of authority or having decision rights. This paper, the sixth of six pre-course reading assignments for an experimental leadership course developed by HBS professor emeritus Michael C. Jensen and coauthors, accompanies a course specifically designed to provide actionable access to being a leader and the effective exercise of leadership as one's natural self-expression. Key concepts include: One of the conditions for realizing the promise of the leadership course is that students must be open to examine, question, and then transform their worldviews (models of reality) and frames of reference (mindsets). Students create for themselves a powerful 4-part contextual framework that calls them into being as a leader. Having done this what remains is to confront one's own Ontological Perceptual and Functional constraints so as: 1) to relax their ability to restrict one's perceptions of what must be dealt with in any leadership situation, and 2) to relax their ability to restrict one's freedom of choice for action in any leadership situation. Students cannot master that which they do not create for themselves. This is especially true of anything that is at first counterintuitive. Closed for comment; 0 Comments.
- 29 Apr 2010
- Working Paper Summaries
The Great Leap Forward: The Political Economy of Education in Brazil, 1889-1930
In 1890, with only 15 percent of the population literate, Brazil had the lowest literacy rate among the large economies in the Americas. Yet between 1890 and 1940, Brazil had the most rapid increase in literacy rates in the Americas, catching up with and even surpassing some of its more educated peers such as Mexico, Colombia, and Venezuela. This jump in literacy was simultaneously accompanied by a brisk increase in the number of teachers, number of public schools, and enrollment rates. Why were political elites in Brazil willing to finance this expansion of public education for all? André Martínez-Fritscher of Banco de México, Aldo Musacchio of HBS, and Martina Viarengo of the London School of Economics explain how state governments secured funds to pay for education and examine the incentives of politicians to spend on education. They conclude that the progress made in education during these decades had mixed results in the long run. Key concepts include: Competition in national elections and a literacy requirement may have provided the right incentives for state political parties and state politicians to spend on education in a way that increased literacy rates in a significant way over the period studied. Brazil started from an extremely low base and ended in what today would be considered a low level of literacy as well (around 40 percent of the population). Between 1889 and 1930 there was significant progress in the provision of elementary education in Brazil. It was to a large extent a consequence of the fact that some states got more taxation powers and had the obligation to spend on public education. Positive trade shocks can be converted into long-term development if there is electoral competition, and economic assets are not concentrated in a few hands. Expenditures on education between 1889 and 1930 altered the development path of some states and changed their relative rankings compared to other states in a somewhat permanent way. Closed for comment; 0 Comments.
- 28 Apr 2010
- Working Paper Summaries
Environmental Federalism in the European Union and the United States
Under what circumstances will individual states take the lead in passing the most stringent environmental regulations, and when will the federal government take the lead? When a state takes a leadership role, will other states follow? HBS professor Michael Toffel and coauthors describe the development of environmental regulations in the U.S. and EU that address automobile emissions, packaging waste, and global climate change. They use these three topics to illustrate different patterns of environmental policymaking, describe the changing dynamics between state and centralized regulation in the United States and the EU. Key concepts include: State governments have been an important source of policy innovation and diffusion for automobile emissions in the EU and the U.S., and packaging waste policies in the EU. In these cases, state authorities were the first to regulate, and their regulations resulted in the adoption of more stringent regulatory standards by the central government. With climate change policies, the EU and its member states have developed regulations in tandem, reinforcing each other. In the U.S., state governments developed more innovate regulations than the federal government for both climate change and packaging waste, but these policies have not substantially diffused to other states. Closed for comment; 0 Comments.
- 22 Apr 2010
- Working Paper Summaries
Audit Quality and Auditor Reputation: Evidence from Japan
High-quality external auditing is a central component of sound corporate governance, yet what determines audit quality? Douglas J. Skinner, of the University of Chicago Booth School of Business, and Suraj Srinivasan, of Harvard Business School, study the Japanese audit market, where recent events provide a powerful setting for investigating the effect of auditor reputation on audit quality absent litigation effects. Specifically, Skinner and Srinivasan analyze events surrounding the collapse of ChuoAoyama, the PricewaterhouseCoopers affiliate in Japan that was implicated in a massive accounting fraud at Kanebo, a large Japanese cosmetics company. Taken as a whole, the researchers' evidence provides support for the view that auditor reputation is important in an economy where the legal system does not provide incentives for auditors to deliver quality. Key concepts include: Auditors' reputation for delivering quality is extremely important. A substantial number of clients dropped ChuoAoyama as the extent of its audit quality problems became apparent, but before it became clear that the firm would be forced out of business. The events at ChuoAoyama and particularly the decision by the Japanese Financial Services Agency (FSA) to suspend the firm's operations can be seen as a watershed event in Japanese audit practice. The FSA used these events to send a message to the Japanese auditing community that the old ways of doing business would no longer be tolerated, and that it was serious about reforming audit practice. Closed for comment; 0 Comments.
- 21 Apr 2010
- Working Paper Summaries
Why Do Firms Use Non-Linear Incentive Schemes? Experimental Evidence on Sorting and Overconfidence
The use of "non-linear" performance-based incentive contracts is very common in many business environments. The most well-known example is salesperson compensation, though many other types of performance-based pay, including stock options, bonus systems based on defined metrics, and pay based on subjective performance, often exhibit non-linear characteristics. Research has demonstrated that non-linear incentives are highly distortionary because employees manipulate their work in order to maximize their pay. While some scholars have recommended that companies stop using non-linear incentives, little research has been done to investigate the possible benefits of non-linear schemes. In this paper, HBS professor Ian Larkin and Ross School of Business professor Stephen Leider (HBS PhD '09) explore the role that the behavioral bias of overconfidence may play in explaining the prevalence of non-linear incentive schemes. They conclude that the linearity or non-linearity of an incentive system could play an important role in sorting employees according to their level of confidence; in addition, there may be three possible benefits to having overconfident employees. Key concepts include: First, overconfidence is valuable for certain job functions; for example, salespeople lose deals much more frequently than they win them, and being overconfident may help them be effective despite the many failures they go through. Second, absent non-linear contracts, employers and overconfident employees may have a difficult time agreeing to a compensation scheme in the first place. Non-linear systems allow employers and employees with fundamentally different beliefs form compensation agreements. Third, the non-linearity of an incentive system may allow firms to lower their wage bill. A convex scheme, for example, may allow firms to take advantage of overconfident employees' systematic and persistent bias toward believing they will perform well. The study confirms recent findings in psychology literature that overconfidence is not an individual trait so much as a trait around a specific task. Closed for comment; 0 Comments.
- 15 Apr 2010
- Working Paper Summaries
The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis
What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund. Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance. Key concepts include: Angel-funded firms are significantly more likely to survive at least four years (or until 2010) and to raise additional financing outside the angel group. Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent. Investment success is highly predicated by the interest level of angels during the entrepreneur's initial presentation and by the angels' subsequent due diligence. Access to capital per se may not be the most important value-added that angel groups bring. Some of the "softer" features, such as angels' mentoring or business contacts, may help new ventures the most. Closed for comment; 0 Comments.
- 14 Apr 2010
- Working Paper Summaries
The Economic Crisis and Medical Care Usage
The global economic crisis has taken a historic toll on national economies and household finances around the world. What is the impact of such large shocks on individuals and their behavior, especially on their willingness to seek routine medical care? In this research, Annamaria Lusardi of Dartmouth College, Daniel Schneider of Princeton University, and Peter Tufano of Harvard Business School find strong evidence that the economic crisis—manifested in job and wealth losses—has led to large reductions in the use of routine medical care. Specifically, more than a quarter of Americans reported reducing their use of such care, as did between 5 and 12 percent of Canadian, French, German, and British respondents. Key concepts include: Large shares of Americans reduced their use of routine medical care since the economic crisis. These reductions were strongly related to economic distress brought on by the global financial crisis as measured by wealth loss and unemployment. The across-the-board reduction in medical care usage by Americans may speak to behavioral changes that reflect the national psyche broadly: The economic crisis in the United States—deeper and more widespread than elsewhere—may have touched the population at large, perhaps via negative expectations about the future. The cutbacks in health-care usage by people losing wealth or jobs, even in countries with "universal" systems, may reflect the fact that seeking care entails not only out-of-pocket expenses, but also costs of time away from work or job hunting. Reductions in routine care today might lead to undetected illness tomorrow and reduced individual health and well-being in the more distant future. Closed for comment; 0 Comments.
- 08 Apr 2010
- Working Paper Summaries
Multinational Strategies and Developing Countries in Historical Perspective
HBS professor Geoffrey Jones offers a historical analysis of the strategies of multinationals from developed countries in developing countries. His central argument, that strategies were shaped by the trade-off between opportunity and risk, highlights how three broad environmental factors determined the trade-off. The first was the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second was the market and resources of the host country. The third was competition from local firms. Jones explores the impact of these factors on corporate strategies during the three eras in the modern history of globalization from the nineteenth century until the present day. He argues that the performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats. The paper highlights in particular the changing nature of political risk faced by multinationals. The era of expropriation has, for the moment, largely passed, but multinationals now experience new kinds of policy risk, and new forms of home country political risk also, such as the Alien Tort Claims Act in the United States. Key concepts include: The strategies of multinationals in the developing world have changed over time. Initially they sought access to resources through exclusive contracts. As anti-globalization policies increased, they needed enhanced political contacts, and strengthened local managements. The pursuit of markets and lower cost labor is now the central focus. They still need local political and business contacts, but also have to respond to local competition and demands to incorporate local relevance into global products. Multinationals initially enjoyed insider advantages in colonial regimes. With decolonization, political risk rose sharply. They were often expropriated, and many divested. Now multinationals face regular, adverse shifts in policy by host governments. The recent period of globalization has also seen the growth of home country political risk. In particular, multinationals face criticism and legal action for real or alleged environmental or human rights abuses in developing countries. Developing countries, or at least the larger and more fast-growing ones in Asia and Latin America, are increasingly seen as indispensable by multinationals in every industry. However recent decades have seen a sharp growth of highly competitive local firms, who can compete with frugal engineering, and are going global. Closed for comment; 0 Comments.
- 07 Apr 2010
- Working Paper Summaries
Location Strategies for Agglomeration Economies
Locations thick with similar economic activity expose firms to pools of skilled labor, specialized suppliers, and potential inter-firm knowledge spillovers that can provide firms with opportunities for competitive advantage. While certainly attractive, the lure of these agglomeration economies varies. Some firms should be wary of aiding their competitors by co-locating with them, for example, because each "agglomeration economy" differs in how readily competitors can leverage contributions made by others. HBS professor Juan Alcácer and Wilbur Chung of the University of Maryland develop a framework to better understand how firms respond to agglomeration economies. Key concepts include: Firms' location choices balance the perceived risk of aiding competitors with a recognition that some agglomeration economies will be of limited use to others. Firms, on average, place more value on pools of skilled labor and specialized suppliers than on potential knowledge inflows from competitors. The priority placed on labor and suppliers persists even for industries that are more R&D intensive. Economically larger firms are less attracted to industry employment, but more attracted to industry supplier activity. Closed for comment; 0 Comments.
- 31 Mar 2010
- Working Paper Summaries
When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge
Entrepreneurial firms rich in knowledge but poor in other resources can use superior architectural knowledge of a technical system to gain strategic advantage over larger and better endowed rivals. This paper presents a model and provides examples showing that architectural knowledge can be applied strategically to change a firm's scope and boundaries, make innovations more or less autonomous, and change the span of problems it must solve. Key concepts include: Architectural knowledge is knowledge about the components of a complex system and how they are related. Architectural knowledge includes knowledge about how the system performs its functions; how the components are linked together; and the behavior of the system, both planned and unplanned, in different environments. For a small entrepreneurial firm with limited financial resources facing larger rivals, the most valuable architectural knowledge pertains to bottlenecks and remodularizations that isolate the bottlenecks. Such knowledge can form the basis of a small footprint technical architecture that delivers an ROIC (higher return on invested capital) advantage. Technical systems that are susceptible to remodularization around bottlenecks are strategic targets of opportunity for entrepreneurial firms. Incumbents risk being displaced by smaller rivals with superior architectural knowledge leading to an ROIC advantage. Closed for comment; 0 Comments.
- 25 Mar 2010
- Working Paper Summaries
Local R&D Strategies and Multi-location Firms: The Role of Internal Linkages
While geographic co-location has obvious benefits for firm innovation, it can also have serious drawbacks. HBS professor Juan Alcácer and Ross School of Business professor Minyuan Zhao explore how firms tap into the rich resources of technology clusters while protecting the value of their innovations. To understand R&D dynamics in a cluster, the scholars argue, we must recognize that a firm located in a particular cluster may also be part of an extended network, with its operations strategically integrated across multiple locations and multiple business lines. Key concepts include: When surrounded by direct competitors, the technology leaders in a cluster favor technologies that can be quickly developed internally, and more of their R&D projects involve researchers from other locations, particularly from primary R&D sites. Internal linkages across a firm protect firm knowledge from appropriation not only in countries where intellectual property rights protection is weak, but also in risky competitive environments in general. Closed for comment; 0 Comments.
The Role of Institutional Development in the Prevalence and Value of Family Firms
Family firms dominate economic activity in most countries, and are significantly different from other companies in their behavior, structural characteristics, and performance. But what explains the significant variation in the prevalence and value of family firms around the world? The two leading explanations are legal investor protection and institutional development, but cross-country studies are unable to rule out the alternative explanation that cultural norms are what account for these differences. In contrast, China provides an excellent laboratory for addressing this question because it offers great variation in institutional efficiency across regions, yet the country as a whole shares cultural and social norms together with a common legal and regulatory framework. In this paper, HBS professor Belén Villalonga and coauthors study ownership data from a sample of nearly 1,500 publicly listed firms on the Chinese stock market. They conclude that institutional development plays a critical role in the prevalence and value of family firms, and that the differences observed across regions are not attributable to cultural factors. Key concepts include: Family firms do not inhibit growth and development, as is sometimes argued. This seems clear due to the relatively higher prevalence of family firms even in regions with high institutional efficiency. The effects of family, ownership, control, and management in China are remarkable similar to those found by professor Villalonga in her earlier research based on U.S. data. Namely, family ownership is positively related to value, family control in excess of ownership is negatively related to value, and family management, when exercised by the firm's founders as is primarily the case in China, is positively related to value. However, in China these effects are largely driven by the low institutional efficiency regions. In the high efficiency regions, none of these effects are significant. These findings are particularly relevant for China as it continues its transition from a central planning system to a market economy. On average, family firms are significantly smaller, younger, and less capital-intensive than non-family firms. Yet they exhibit significantly lower systematic risk, and they are not significantly different from non-family firms in their growth and leverage. Closed for comment; 0 Comments.