- 24 Apr 2008
- Working Paper Summaries
Bank Accounting Standards in Mexico: A Layman’s Guide to Changes 10 Years after the 1995 Bank Crisis
Mexico was the first emerging market compelled to reformulate the financial reporting of its banks as a result of a financial crisis. In the last decade, Mexico has undergone a process of internationalization of its banking industry. Today, more than 80 percent of the equity of Mexican banks belongs to internationally active bank corporations. This internationalization demands more transparent regulation, including standardized accounting rules and better disclosure of information. The case of Mexico can therefore serve as an example of the relevance of these changes, as well as of their scope and limitations. This paper attempts to clarify the nature and structure of the new accounting standards, and explains how they have affected financial statements and their interpretation. Key concepts include: Mexican bank accounting standards enjoyed special treatment during most of the 20th century because banking was an industry protected from foreign competition in a relatively closed economy. More transparent bank accounts and stricter accounting processes in Mexico are especially crucial today, in light of the predominantly foreign ownership of the Mexican banking system. The classification of financial operations still varies from country to country. National differences emerge despite the fact that financial instruments, products, and transactions are either very similar or the same worldwide. Legal and regulatory stipulations, accounting history, tax structure, and local business practices create differences in the way financial transactions are recorded in the financial statements. Closed for comment; 0 Comments.
- 23 Apr 2008
- Op-Ed
The Gap in the U.S. Treasury Recommendations
U.S. Treasury recommendations for strengthening the regulation of the financial system are a good start but fall short, says Harvard Business School professor emeritus Dwight B. Crane. Here's his suggestion for bringing regulation into the 21st century. Key concepts include: The Treasury proposal recognizes that fundamental change in the regulatory structure is required for managing risk in the financial system. The difficulty with the approach is that the risk in the financial system will not disappear—it will simply move to the non-prudentially regulated firms. The United States should include all financial service firms under the regulatory authority of the new prudential regulator. Closed for comment; 0 Comments.
- 10 Apr 2008
- Working Paper Summaries
Where Does it Go? Spending by the Financially Constrained
Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates. Key concepts include: The conclusion that a material fraction of funds was used to pay for necessities suggests that the federal Earned Income Tax Credit program is central to the lives of the poor. Loans tended to be used to obtain necessities, especially funds spent in the first few days of the loans. Consumer advocates who seek to ban settlement products should consider how a ban would affect households' ability to smooth consumption. Similarly, businesses that are pricing and marketing these products should be mindful that the products are not a luxury for the users. These findings document the fairly rapid speed of spending of refunds, which may help policymakers think about the economic stimulus impact of tax refunds and rebates. Closed for comment; 0 Comments.
- 09 Apr 2008
- Research & Ideas
The Matchmaker of the Modern Economy
In the wake of World War II, Georges Doriot helped found the world's first public venture capital firm, American Research and Development. Doriot (1899–1987) was also a professor at Harvard Business School for 40 years. Our book excerpt from Creative Capital: Georges Doriot and the Birth of Venture Capital (HBS Press) describes how ARD first came to "marry" investors and innovators. Key concepts include: A decorated brigadier general, favorite professor, and quirky personality, Georges Doriot shepherded many companies to life before launching American Research and Development (ARD) in 1946. The idea of venture capital was still so new in 1946 that ARD's founders were forced to reengineer aspects of various financial regulatory structures in order to make it viable. World War II was a watershed for entrepreneurialism. Closed for comment; 0 Comments.
- 07 Apr 2008
- Research & Ideas
The Debate over Taxing Foreign Profits
Corporate tax policy has suddenly become a hot topic in the U.S., including the issue of whether current tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor Mihir Desai makes a case for exempting foreign profit from taxes if proper safeguards are put in place. Key concepts include: The United States is increasingly an outlier in its taxation of corporate income earned on foreign soil. Critics argue the ability to defer U.S. taxation until profits are repatriated provides an incentive to ship jobs overseas. On the other hand, the current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition. An alternative may be to exempt foreign income from taxes paired with safeguards against an overly aggressive use of tax havens. Closed for comment; 0 Comments.
- 02 Apr 2008
- Research & Ideas
Four Companies that Conquered America
Any self-respecting global company needs to compete in the United States, but many have floundered on its shores. Professor John Quelch spotlights the strategies of four that succeeded: Royal Bank of Scotland, IKEA, ING, and Dyson. Key concepts include: Royal Bank of Scotland built strong market share by acquiring regional banks and letting them maintain local identities. IKEA offers a unique furniture buying experience coupled with category-killer prices. ING gave its entrepreneurial general manager the green light to offer retail banking services exclusively on an online basis. Dyson started with a great product, then found a big-bang distributor: Best Buy. Closed for comment; 0 Comments.
- 31 Mar 2008
- HBS Case
JetBlue’s Valentine’s Day Crisis
It was the Valentine's Day from hell for JetBlue employees and more than 130,000 customers. Under bad weather, JetBlue fliers were trapped on the runway at JFK for hours, many ultimately delayed by days. How did the airline make it right with customers and learn from its mistakes? A discussion with Harvard Business School professor Robert S. Huckman. Key concepts include: JetBlue's dependence on a reservations system that relied on a dispersed workforce and the Web broke down when thousands of passengers needed to rebook at once. A crisis forces an organization to evaluate its operating processes rapidly and decide where it needs to create greater formalization or structure. Closed for comment; 0 Comments.
- 27 Feb 2008
- Research & Ideas
Podcast: Revisiting Rental Housing
The subprime loan debacle, which has caused thousands of families to lose their homes, has cast light on another housing crisis in the U.S.: the lack of affordable rentals. In this podcast Harvard Business School professor Nicholas Retsinas discusses how this situation came to be, and his new book, Revisiting Rental Housing. Closed for comment; 0 Comments.
- 22 Feb 2008
- Working Paper Summaries
Consumer Demand for Prize-Linked Savings: A Preliminary Analysis
Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. Prize-linked assets are offered in over twenty countries around the world—including the U.K., Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States. Key concepts include: PLS products are promising, despite formidable barriers to success in the United States. The low income population that was studied expressed substantial interest in a savings product that provides prizes as part of its return. This product appeals to non-savers, who do not save with traditional products. The product appeals to heavy lottery players, and by virtue of this fact, has the potential of turning their gambling activities into demand for savings. PLS products might face an uphill battle in the United States due significantly to well-established gambling and lottery industries that might oppose PLS, and the roadblocks due to legal uncertainty and prohibitions around this new product. Businesses or state treasurers might be reluctant to innovate around a product that must compete against heavily marketed alternatives. Closed for comment; 0 Comments.
- 12 Feb 2008
- Working Paper Summaries
The Small World of Investing: Board Connections and Mutual Fund Returns
How does information flow in security markets, and how do investors receive information? In the context of information flow, social networks allow a piece of information to flow along a network often in predictable paths. HBS professors Lauren Cohen and Christopher Malloy, along with University of Chicago colleague Andrea Frazzini, studied a type of dissemination through social networks tied to educational institutions, examining the information flow between mutual fund portfolio managers and senior officers of publicly traded companies. They then tested predictions on the portfolio allocations and returns earned by mutual fund managers on securities within and outside their networks. Key concepts include: Social networks are important for information flow between firms and investors. Across the spectrum of U.S. mutual fund portfolio managers, fund managers place larger concentrated bets on stocks they are connected to through their education network, and do significantly better on these holdings relative to non-connected holdings, and relative to connected firms they choose not to hold. A portfolio of connected stocks held by managers outperforms non-connected stocks by up to 8.4 percent per year. This connection is not driven by firm, fund, school, industry, or geographic location effects, nor by a subset of the school connections (e.g., Ivy League). The bulk of this premium occurs around corporate news events such as earnings announcements. This finding suggests that the excess return earned on connected stocks is driven by information flowing through the network. As the information will eventually be revealed into stock prices, advance knowledge implies return predictability. Closed for comment; 0 Comments.
- 11 Feb 2008
- Research & Ideas
Does Democracy Need a Marketing Manager?
It's more than coincidence that we feel more association with our favorite consumer brands than with our elected politicians or government institutions. Can the power of marketing be used to promote public participation in politics? Harvard Business School professor John A. Quelch and research associate Katherine E. Jocz discuss their new book, Greater Good: How Good Marketing Makes for Better Democracy. Plus: book excerpt. Key concepts include: The core benefits of marketing align closely with the requirements of democracy: exchange, consumption, choice, information, engagement, and inclusion. Voter apathy in the United States could be improved by better marketing of candidates, the political process, political parties, and government institutions. This year's presidential race is increasing voter interest because it offers a diversity of choices. Closed for comment; 0 Comments.
- 30 Jan 2008
- Working Paper Summaries
Cost of External Finance and Selection into Entrepreneurship
Entrepreneurs are, on average, significantly wealthier than people who work in paid employment. Research shows that entrepreneurs comprise fewer than 9 percent of households in the United States but they hold 38 percent of household assets and 39 percent of the total net worth. This relationship between personal wealth and entrepreneurship has long been seen as evidence of market failure, meaning that talented but less wealthy individuals are precluded from entrepreneurship because they don't have sufficient wealth to finance their new ventures. Nanda studied how changes in the cost of external finance affected the characteristics and likelihood of individuals becoming entrepreneurs. He finds that market failure accounts for only a small fraction of the relationship between personal wealth and entrepreneurship in advanced economies such as the U.S. Key concepts include: Entrepreneurs are, on average, significantly wealthier than people who work in paid employment. The wealthy are also more likely to become entrepreneurs. Talent matters in entrepreneurship, more so for the less wealthy. The relationship between individual wealth and entrepreneurship in advanced economies is driven at least in part by the fact that wealthy individuals can start lower growth-potential businesses because they do not face the discipline of external finance. It may be misguided to provide a simple scheme of cheap credit for new ventures, as not all who take up the scheme will be those who really need it. Closed for comment; 0 Comments.
- 17 Jan 2008
- Research & Ideas
If Marketing Experts Ran Elections
Most Americans seem indifferent about the political process, judging by lackluster voter turnout historically, although the primaries so far seem to be bucking the trend. Professor John Quelch discusses what politicians can learn from consumer marketing. Key concepts include: Americans are turned off by the electoral process for a number of reasons including a belief their vote won't make a difference and the mixed messages from candidates. People have stronger relationships with their favorite consumer brands than they do with politicians or parties. Politics needs better marketing, focusing on current and emerging customer needs, developing product and service solutions, informing interested citizens about them, and making them easily accessible. Closed for comment; 0 Comments.
- 14 Jan 2008
- Research & Ideas
Mapping Polluters, Encouraging Protectors
Where are the biggest polluters? And what is your company doing to protect the environment? A new Web site—both a public service and a research tool—posts managers' data in real time, allowing a balanced view of industrial environmental performance. HBS professor Michael W. Toffel and senior research fellow Andrew A. King explain. Key concepts include: The Web project was started to get around an information bottleneck. Users of MapEcos can easily find detailed information on the environmental performance of facilities across the United States. Managers can monitor peer companies' environmental information as well as disclose information about their own facilities. The scholars use the site to examine what industrial facilities do and what the public at large is concerned about. Closed for comment; 0 Comments.
- 13 Nov 2007
- Research & Ideas
Six Steps for Reinvigorating America
In the early stages of the 21st century, America has lost its way both at home and in the world, argues Harvard Business School professor Rosabeth Moss Kanter. In her new book, America the Principled, she details 6 opportunities for America to boost its economic vitality and democratic ideals. Q&A plus excerpt. Key concepts include: America at the start of the 21st century has lost its way both as a beacon to the world and as a can-do nation. Six opportunities should be pursued that widen prosperity, creates fair and flexible workplaces, motivates values-based capitalism, restores trust in government, empowers "citizen diplomats", and develops an ethos of community. Closed for comment; 0 Comments.
- 07 Nov 2007
- Op-Ed
How Marketing Hype Hurt Boeing and Apple
In his latest blog entry, professor John Quelch looks at the examples of Boeing and Apple to investigate why shareholders have little patience for companies that hype high but deliver low. Key concepts include: The penalties for not delivering on marketing promises are fast becoming as significant as not meeting quarterly earnings targets. Do not risk marketing hype unless you are sure of both your supply curve and your demand curve. Hype can hurt stock prices and investor confidence when expectations are not met. Closed for comment; 0 Comments.
- 05 Nov 2007
- Research & Ideas
The Changing Face of American Innovation
Chinese and Indian scientists and engineers have made an unexpectedly large contribution to U.S. technology formation over the last 30 years, according to new research by HBS professor William R. Kerr. But that trend may be ebbing, with potentially harmful effects on future growth in American innovation. Key concepts include: Chinese contributions to U.S. innovation as recorded in patent and trademark data increased from under 2 percent of U.S. domestic inventors in 1975 to over 8 percent today. In the same period, Indian inventors also rose, to almost 5 percent of the total in 2000. Since 2000, Chinese scientists' contributions have leveled off, and Indian contributions have declined slightly. Will American innovation suffer? Closed for comment; 0 Comments.
- 15 Oct 2007
- Research & Ideas
Businesses Beware: The World Is Not Flat
With apologies to Thomas Friedman, managers who believe the hype of a flat world do so at their own risk, says HBS professor Pankaj Ghemawat. National borders still matter a lot for business strategists. While identifying similarities from one place to the next is essential, effective cross-border strategies will take careful stock of differences as well. A Q&A and book excerpt follow. Key concepts include: Some indicators of globalization aren't increasing as many experts have claimed. Toyota and Wal-Mart are examples of companies that understand how to deal with distance in a strategic way. Take a broad view of differences, figure out the ones that matter the most in your industry, and look at them not just as difficulties to be overcome but also as potential sources of value creation. Closed for comment; 0 Comments.
- 03 Oct 2007
- Working Paper Summaries
The Causes and Consequences of Industry Self-Policing
The corporate confession is a paradox, as described in this paper aimed at managers, policymakers, and citizens. Why would a firm that identifies regulatory compliance violations within its own operations turn itself in to regulators, rather than quietly fix the problem? Economic intuition suggests that firms will self-disclose violations only when the cost of doing so is less than the expected cost of hiding violations. However, while the cost of doing so can be increased regulatory scrutiny, there is often almost no expected cost of hiding violations. To explore the complex behavior of corporate self-disclosure, Short and Toffel conducted a large-scale analysis in the context of the U.S. Environmental Protection Agency's Audit Policy. They investigated what factors lead organizations to self-disclose violations that went undiscovered by regulators, and asked whether these self-disclosing organizations were obtaining any unofficial regulatory benefits above and beyond formal penalty mitigation. They also evaluated whether self-policing promotes the regulatory objective of improving compliance records. Key concepts include: Government regulatory scrutiny is a leading factor that drives firms in a public-private partnership where firms self-police their own regulatory compliance and self-disclose violations. Self-policing and self-disclosing provide mutual benefits for regulators and firms, although ongoing investment in government enforcement remains a critical success factor. Closed for comment; 0 Comments.
Negotiating with Wal-Mart
What happens when you encounter a company with a great deal of power, like Wal-Mart, that is also the ultimate non-negotiable partner? A series of Harvard Business School cases by James Sebenius and Ellen Knebel explore successful deal-making strategies. From the HBS Alumni Bulletin. Closed for comment; 0 Comments.