- 07 Dec 2010
- Working Paper Summaries
Towards an Understanding of the Role of Standard Setters in Standard Setting
Accounting standards promulgated by the Financial Accounting Standards Board (FASB) play an important role in the development and maintenance of capital markets worldwide, so it is important to understand how these standards come to be. Prior research has focused on the effect of corporate lobbying on the development of FASB standards, but has largely overlooked the role of the FASB members themselves. Looking at these individuals between 1973 and 2007, Harvard Business School doctoral candidate Abigail M. Allen and professor Karthik Ramanna examine how board members' professional experience, length of service on the board, and political leanings influenced accounting standards. Key concepts include: While corporate lobbying is likely to influence the nature of accounting standards proposed by the FASB, the board members themselves are likely to shape Generally Accepted Accounting Principles (GAAP) by controlling which standards are proposed. Length of service on the board is associated with proposing standards perceived both as more favorable by big auditors and as decreasing accounting "reliability." Affiliation with the Democratic Party, measured by political donations, is associated with proposing standards perceived both as less favorable by big auditors and as increasing accounting reliability. The evidence in this study can be used toward building a more comprehensive theory of accounting standard setting, which can be helpful in informing future efforts at designing standard setting institutions, including considerations on term limits and prior work experience. Closed for comment; 0 Comments.
- 06 Dec 2010
- Sharpening Your Skills
Sharpening Your Skills: Doing Business in Emerging Markets
Going global is one thing, targeting emerging economies quite another. In this collection from our archives, HBS faculty discuss strategy development, government relations, exploiting local opportunities, and risk management when dealing in emerging economies. Closed for comment; 0 Comments.
- 03 Dec 2010
- Working Paper Summaries
Creating Leaders: An Ontological Model
HBS professor emeritus Michael C. Jensen and coauthors have created an ontological approach to creating leaders in which leadership emerges through spontaneous and intuitive natural self-expression. Key concepts include: The ontological model of leader and leadership opens up and reveals the actual nature of being when one is being a leader. It also opens up and reveals the source of one's actions when exercising leadership. Ontology's associated phenomenological methodology provides actionable access to what has been opened up. Students do not need to study ontology or phenomenology. Closed for comment; 0 Comments.
- 02 Dec 2010
- What Do You Think?
Making Right Choices: Art or Science?
Summing Up Is choice an art or science? Jim Heskett's readers wonder whether the question is the right one to ask. (Online forum has closed; next forum opens January 6.) Closed for comment; 0 Comments.
- 01 Dec 2010
- Working Paper Summaries
Reversing the Null: Regulation, Deregulation, and the Power of Ideas
Who's to blame for the recent financial crisis? To some extent, the fault lies with scholars of economics, according to professor David Moss. In this paper, he argues that an academic focus on government failure in the second half of the 20th century led to the general idea that less was always more when it came to regulation--which, in part, contributed to the crisis. To that end, he calls for a fundamental shift in academic research on the government's role in the economy. Key concepts include: By shifting their focus from market failure to government failure, late-20th-century scholars of economics helped create the impression that government can't get anything right. This helped set the stage for a widespread deregulatory mindset. This mindset was important in helping to eliminate unnecessary regulation, but it also hampered the creation of vital new regulation--including regulation of the largest and most "systemically significant" financial institutions--that might have prevented the financial crisis in the first place. The existing null, that government is perfect, has prompted a great deal of work on government failure. Now, Moss suggests, it's time for scholars to try to gain a deeper understanding of when government succeeds and under what conditions. How can well-known sources of government failure, such as regulatory capture, be prevented or minimized? To get there, he says, scholars need to adopt a new null hypothesis--namely, that government always fails. As scholars go about trying to reject that null, they are likely to generate valuable new research on government and regulation, including what works, what doesn't, and why. Closed for comment; 0 Comments.
- 30 Nov 2010
- Working Paper Summaries
Sponsored Links’ or ’Advertisements’?: Measuring Labeling Alternatives in Internet Search Engines
In processing a search for a particular phrase, Internet search engines generally offer two types of results: the algorithmic results, which a search engine selects based on relevance, and the "sponsored links," for which advertisers pay. The latter often occupy prominent screen space. But does the average web surfer realize that they are advertisements? In an online experiment, Harvard Business School professor Benjamin Edelman and doctoral candidate Duncan S. Gilchrist show that "sponsored link" is too vague a term for some users to understand, and that "paid advertisement" is a label that better clarifies the nature of the link. They call on the FTC to compel search engines to improve their disclosures. Key concepts include: Through October 2010, leading search engines Google, Yahoo!, and Bing presented their advertisements with the labels "sponsored links," "sponsored results," and "sponsored sites," respectively. (In November, Google substituted the term "ads.") In an online experiment that replaced these labels with the term "paid advertisement," users were up to 33 percent less likely to click on the sponsored link. Certain categories of users were particularly influenced by the improved label. The improved labels had largest effect on users without college degrees, users with annual income below $100,000, and users who utilize the web less than 12 hours per week. The Federal Trade Commission has called for "clear and conspicuous disclosures" to label search advertisements. Because available evidence suggests users do not understand widely used labels, the researchers believe the FTC should require search engines to use the label "advertisement" or "paid advertisement" rather than vague or easily overlooked alternatives. Closed for comment; 0 Comments.
- 30 Nov 2010
- Working Paper Summaries
The New Face of Chinese Industrial Policy: Making Sense of Anti-Dumping Cases in the Petrochemical and Steel Industry
The researchers set out to explain differences in China's antidumping actions against importers in the petrochemical and steel industries. During the study period, 66 percent of the country's antidumping cases targeted petrochemical imports, while steel imports were targeted only in 5 percent of the cases. Why did China's petrochemical and steel industries behave so differently in seeking trade protection? The answers put forward by researchers Regina Abrami (Harvard Business School) and Yu Zheng (University of Connecticut) point toward the structural nature of the industries themselves, and against arguments that antidumping actions in China have been driven by retaliation or national industrial strategy alone. Key concepts include: Existing patterns of antidumping investigations in China mainly reflect how firms may respond to economic challenges in the context of structural constraints. Rather than serving as a defense against global competition, strong local interests in China seem to be facilitating it. They do so by getting in the way of the kinds of industrial consolidations that seem necessary to wage successful battles through antidumping mechanisms. The research does not dismiss a role for economic or political interests as motivating factors, but does suggest that in their own right they cannot explain fully the patterns that exist. The research demonstrates that domestic business interest groups can influence state policy outcomes in China; that their ability to do so is closely related to resolution of collective action problems; and that Chinese industrial strategy is a far less coordinated political outcome than the increasingly popular idea of "China Inc." suggests. Closed for comment; 0 Comments.
- 29 Nov 2010
- HBS Case
United Breaks Guitars
A new case coauthored by HBS marketing professor John Deighton and research associate Leora Kornfeld offers an object lesson in the dangers social media can bring for big, recognizable companies and their brands. From the HBS Alumni Bulletin. Open for comment; 0 Comments.
- 24 Nov 2010
- Working Paper Summaries
Valuation When Cash Flow Forecasts Are Biased
The valuation of forecasted cash flows can be an inaccurate process, especially when the forecasts are created by optimists who neglect to consider worst-case scenarios. In this paper, Harvard Business School professor Richard S. Ruback has developed methods of valuating forecasted cash flow when the predictions are biased upward. Key concepts include: Managers often recognize that their cash flow forecasts are too optimistic and boost their discount rates to account for that bias. But that only works if the optimism masks a potential permanent downside. The common practice of increasing the discount rate to account for optimistic cash flow forecasts can lead to significant valuation errors that increase with the length of the project, the cost of the capital, and the chance of a downside. When the optimistic cash flow forecasts omit a temporary downside, valuators should adjust the forecast by deflating it and then setting the discount rate equal to the cost of the capital. In other words, the common heuristic of boosting the discount rate to account for optimistic cash flow can lead to a substantial valuation error when the omitted downside isn't permanent. When the optimistic cash flow forecasts omit a potential permanent downside so that, if it occurs, there is no chance of recovery, valuators should deflate the cash flow forecast and increase the discount rate so that it includes the cost of capital as well as the probability of a downside. Closed for comment; 0 Comments.
- 23 Nov 2010
- First Look
First Look: November 23
What "Sponsored Link" doesn't tell readers … The politics behind California's budget crisis … How history shapes consumer credit regulation Closed for comment; 0 Comments.
- 23 Nov 2010
- Working Paper Summaries
Growth Through Heterogeneous Innovations
Economists have long recognized that innovation is central to economic growth and development. But as a profession, economics is just beginning to model the many types of innovations that exist and the amazing heterogeneity in the firms that conduct research and development--from General Electric to Silicon Valley start-ups. This paper provides theoretical and empirical evidence surrounding how firm size influences the types of R&D undertaken, with particular focus on choices to pursue exploration R&D (capturing new product lines) versus exploitation R&D (refining current product lines internally). From the choices made by individual firms and new entrepreneurs, the model then builds to consider aggregate economic growth. Research was conducted by Ufuk Akcigit of the University of Pennsylvania and William R. Kerr of Harvard Business School. Key concepts include: Exploration R&D seeks to create new technologies and products for the company to build market leadership. Exploitation R&D focuses on improving existing product lines that the firm already owns, in order to build stronger profits. Large firms have many product lines and thus naturally engage in extensive exploitation R&D to improve their current technologies. Small firms and new start-ups have a comparative advantage for undertaking exploration R&D. Quantitative tests find that exploration R&D has had a greater spillover effect into economic growth than exploitation R&D in the United States over the last couple of decades. This illustrates one channel through which small, innovative businesses and start-ups can play an especially important role in economic growth. Closed for comment; 0 Comments.
- 22 Nov 2010
- Research & Ideas
Seven Strategy Questions: A Simple Approach for Better Execution
Successful business strategy lies not in having all the right answers, but rather in asking the right questions, says Harvard Business School professor Robert Simons. In an excerpt from his book Seven Strategy Questions, Simons explains how managers can make smarter choices. Closed for comment; 0 Comments.
- 19 Nov 2010
- Working Paper Summaries
Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans
Companies generally pay their sales staff with some combination of salary, commissions, and bonuses for meeting quotas-with sales force costs averaging about 10 percent of sales revenue in the United States. This paper aims to gain insight into the most effective way to design a compensation plan, concentrating on whether bonuses boost sales productivity and whether they should be awarded quarterly or annually. Research, focusing on the sales force of a large office supply company, was conducted by Harvard Business School professor Thomas Steenburgh and Doug J. Chung and K. Sudhir of the Yale School of Management. Key concepts include: Bonuses do increase productivity. Quarterly bonuses increase sales force productivity more than annual bonuses. Sales people tend to give up when far away from reaching a quota, but they don't slow down once a quota is reached-especially if a firm offers commissions for overachievement. Closed for comment; 0 Comments.
- 19 Nov 2010
- Research & Ideas
The Landscape of Integrated Reporting: An E-Book
An e-book written by participants of a recent HBS workshop on integrated reporting is now available. HBS Dean Nitin Nohria offers a forward. Closed for comment; 0 Comments.
- 18 Nov 2010
- Working Paper Summaries
Payout Taxes and the Allocation of Investment
The corporate payout that shareholders periodically receive--dividends or repurchases of shares--is subject to taxation in many countries. Such taxes make it cheaper to finance investment out of retained earnings than from equity issues. Using tax data from 25 countries over a 19-year period, this paper discusses whether these taxes have a direct effect on investor behavior, and to what extent. Research was conducted by Bo Becker of Harvard Business School, Marcus Jacob of the European Business School, and Martin Jacob of the Otto Beisheim School of Management. Key concepts include: Capital expenditures are higher in firms with easy access to inside equity. High taxes tend to lock capital into companies that generate internal cash flows, ahead of companies that need to raise outside equity. Tax rates do affect investment decisions. Firms with low ownership by corporate insiders are less affected by tax changes than firms with high insider ownership. This may reflect the fact that insiders with high stakes have incentives aligned with other shareholders. Closed for comment; 0 Comments.
- 18 Nov 2010
- Research & Ideas
GM’s IPO: Back to the Future
General Motors reaches a milestone this week as it presents an initial public offering. HBS faculty discuss issues facing the automaker's revival. Closed for comment; 0 Comments.
- 17 Nov 2010
- Working Paper Summaries
Network Effects in Countries’ Adoption of IFRS
Between 2003 and 2008, 75 countries adopted, to various degrees, International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board. More countries, including the United States and China, are currently engaged in convergence projects. Researchers Karthik Ramanna (Harvard Business School) and Ewa Sletten (MIT Sloan School of Management) report on the role that perceived network benefits play in convincing some countries to shift from local accounting standards to IFRS. Key concepts include: In a country's decision to adopt IFRS, perceived network benefits from IFRS adoption—that is, lower transaction costs expected to accrue to foreign users of financial statements—come to outweigh institutional differences (e.g., auditing technology) that make IFRS adoption costly. The results suggest IFRS adoption among countries is self-perpetuating. Low GDP countries and countries more dependent on foreign trade have a differentially higher response to these perceived network benefits. Perceived network benefits are unlikely to be realized in low GDP countries since these countries are unlikely to rapidly adapt their corporate governance institutions to IFRS. Closed for comment; 0 Comments.
- 16 Nov 2010
- First Look
First Look: November 16, 2010
Government's role in regulation … Thinking clearly about environmental challenges … Case: "YouTube: Time to Charge Users?" Closed for comment; 0 Comments.
- 16 Nov 2010
- Lessons from the Classroom
Data.gov: Matching Government Data with Rapid Innovation
Data.gov is a young initiative of President Barack Obama for making raw data available on the Web. In an HBS executive education class for technology specialists, professor Karim Lakhani and the US Chief Information Officer, Vivek Kundra, sparked dialogue about new routes to innovation. Key concepts include: Data.gov makes government data--as long as it does not compromise national security or individual privacy--available on the Web in raw, machine-readable format. Data.gov is part of the Open Government initiative launched by President Barack Obama on his first day in office. As a lean organization with a mandate to move fast, Data.gov posted the first datasets five months later. Its goals are transparency, participation, collaboration, and management of systems and processes. The HBS case study of Data.gov, coauthored by professor Karim R. Lakhani, highlights a number of useful applications sparked by the Web site. One in particular creates benefits for taxpayers by sharing information between the Internal Revenue Service and the Department of Education. Closed for comment; 0 Comments.
First Look: Dec. 7
Bacon ice-cream vacations …The roller-coaster ride of Plavix … Chicken or egg? Closed for comment; 0 Comments.