- 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.
- 08 Feb 2008
- Working Paper Summaries
Psychological Influence in Negotiation: An Introduction Long Overdue
This paper attempts to encourage a better dialogue between research on social influence and on negotiation. It provides an overview of the literature on both areas, and identifies opportunities for creating more effective and useful research. First, HBS professors Deepak Malhotra and Max Bazerman identify those elements of psychological influence that do not require the influencer to change the economic or structural aspects of the bargaining situation in order to persuade the target. Second, they review prior research on behavioral decision-making in negotiation to identify those ideas that may be relevant to influence in negotiation. Third, they provide a framework for thinking about how to leverage behavioral decision research to wield influence in negotiation. Fourth, they consider how targets of influence might defend against these tactics. Fifth, because psychological influence is, by definition, aimed at achieving one's own ends through the strategic manipulation of another's judgment, they consider the ethical issues surrounding its application in negotiation. Key concepts include: A broader research field of negotiation is needed, one that more closely matches real-world views of what negotiation entails. This paper conceptualizes and organizes a new domain of academic inquiry—psychological influence in negotiation—contrasting it with literature on social influence. The last 50 years of research on social influence has focused largely on economic and structural elements of influence. However, psychological influence is an interesting and important domain of study in its own right, and is very relevant to the field of negotiation research. Closed for comment; 0 Comments.
- 07 Feb 2008
- Working Paper Summaries
Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice
Retirement assets make up a large and growing percentage of the mutual fund universe. In 2004, nearly 40 percent of all mutual fund assets were held by defined contribution plans and individual retirement accounts. This percentage is steadily increasing largely because these retirement accounts represent the majority of new flows into non-money market mutual funds. With such a large and growing percentage of their assets coming from retirement accounts, mutual funds are likely to be interested in securing these big clients. This paper examines a new channel through which mutual fund families can attract assets: by becoming a 401(k) plan's trustee. HBS professor Lauren Cohen and colleague Breno Schmidt provide evidence consistent with the trustee relationship affecting families' portfolio choice decisions. These portfolio decisions, however, have the potential to be in conflict with the fiduciary responsibility mutual funds have for their investors, and can impose potentially large costs. Key concepts include: Mutual fund families systematically distort their portfolios to attract 401(k) clients, presenting a conflict of interest. Mutual fund families that become trustees significantly overweight 401(k) sponsor firms' stock in their fund families. The trustee family performs a valuable service to the sponsor company by buying or holding its stocks around times of substantial selling of the sponsor firm by all other funds. Increased buying of sponsor firm shares by its trustee can have substantial price impact by propping up the sponsor firm's price. The overweighting can in some cases result in a large cost to the mutual fund investors. One possible remedy is to require the trustee to be independent of the mutual fund providers in the plan. This could greatly reduce the overweighting behavior currently seen by ostensibly ridding the relationship of its embedded, and unneeded, conflict of interest. Closed for comment; 0 Comments.
- 06 Feb 2008
- Working Paper Summaries
On Best-Response Bidding in GSP Auctions
Keyword auctions have become a critical source of revenue for Google and Yahoo!, among others. This new form of advertising has provided a new way for advertisers to reach customers. But advertisers also face the complex task of optimizing bids to increase their exposure while avoiding unnecessary costs. HBS professor Benjamin Edelman and colleagues analyzed a class of bidding strategies that attempt to increase advertiser utility under limited assumptions about other players' behavior. Under a strategy they call Balanced Bidding (BB), advertisers converge to the advertiser-preferred equilibrium—achieving stability of bids and reducing advertisers' costs relative to other possible outcomes. Key concepts include: Sponsored search advertisers should consider others' responses when deciding how much to bid. If all players follow the BB strategy, it is possible to determine the expected time to convergence. Closed for comment; 0 Comments.
- 05 Feb 2008
- First Look
- 04 Feb 2008
- Research & Ideas
Podcast: The Potential Partnership of India and China
Even without cooperation between them, China and India appear headed toward economic superpower status in the coming decades. But what if they worked together? In this podcast, Harvard Business School professor Tarun Khanna discusses the possibility of Sino-Indian cooperation and its impact on global business. Closed for comment; 0 Comments.
- 04 Feb 2008
- Research & Ideas
Putting Entrepreneurship in the Social Sector
Despite the best of intentions and trillions of dollars worth of assets, nonprofits have been unable to solve many of society's worst ills. A new casebook by 4 Harvard Business School professors argues that the social sector should take an entrepreneurial approach. Q&A with coauthor Jane C. Wei-Skillern. Key concepts include: Societal problems are increasingly large and complex, taxing the ability of nonprofit organizations to solve them. A new model for the social sector based on entrepreneurship would allow organizations to create more value with their limited resources and tap additional resources not directly under their control. MBA students are increasingly interested in courses and careers related to social enterprise. Closed for comment; 0 Comments.
- 01 Feb 2008
- What Do You Think?
How Sustainable Is Sustainability in a For-Profit Organization?
Online forum now closed. For managers, sustainability can mean the integration and intersection of social, environmental, and economic responsibilities. The concept is admirable, says Jim Heskett, but does it also confuse managers entrusted with the bottom line? How should they make trade-offs? Jim sums up reader responses. Closed for comment; 0 Comments.
- 31 Jan 2008
- Working Paper Summaries
Peer Effects and Entrepreneurship
How do your coworkers affect your decision to become an entrepreneur? The vast majority of entrepreneurs launch their new ventures following a period of employment in established organizations. To date, factors such as the degree of bureaucracy that individuals have experienced have been shown to shape their likelihood to go into business for themselves. But socialization matters, too. Nanda and Sørensen show that the career experiences of coworkers shape both the information and the resources available to prospective entrepreneurs, as well as the value that individuals attach to entrepreneurial activity as a career choice. Key concepts include: Who your coworkers are, and what they have done in their careers, influence the likelihood that you will become an entrepreneur. Peers matter in 2 ways: by structuring coworkers' access to information and resources that help identify entrepreneurial opportunities, and by influencing coworkers' perceptions about entrepreneurship as a career choice. Company policies and practices related to hiring and retention may have indirect consequences for entrepreneurial activity. These findings have policy implications. For instance, policies that encourage long worker tenures will tend to lower rates of movement between firms, thereby indirectly reducing the supply of prospective entrepreneurs. 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.
- 29 Jan 2008
- First Look
- 28 Jan 2008
- Research & Ideas
Billions of Entrepreneurs in China and India
Entrepreneurship in both China and India is rising dramatically and thriving under quite different conditions. HBS professor Tarun Khanna explains what it all means in this Q&A about his new book, Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours. Plus: book excerpt. Key concepts include: In China and India, much of entrepreneurship is in response to constraints—societal, political, or other. The business landscapes of China and India differ in two main respects: their degree of openness to outside influence, and the extent and type of government involvement. Foreign direct investment pours into China. India has embraced foreign direct investment much less, for good and bad reasons. Traditionally, India has been more open to ideas than has China. In India, caste is both less important and more important than it used to be. Closed for comment; 0 Comments.
- 25 Jan 2008
- Working Paper Summaries
What Do Non-Governmental Organizations Do?
Non-governmental organizations play an increasingly important role in international development. They serve as a funnel for development funds both from individual donors in wealthy countries and from bilateral aid agencies. At the same time, NGOs are frequently idealized as organizations committed to "doing good" while setting aside profit or politics—a romantic view that is too starry-eyed. Development-oriented NGOs, which have existed for centuries, have played a growing role in development since the end of World War II; there are currently 20,000 international NGOs. This paper argues that the strengths of NGOs and their weaknesses easily fit into economists' conceptualization of not-for-profit contractors. Key concepts include: Strengths of the NGO model produce corresponding weaknesses in agenda-setting, decision-making, and resource allocation. The increased presence of NGOs can be explained by 3 factors: a trend to outsource government services; new ventures by would-be not-for-profit "entrepreneurs"; and the increasing professionalization of existing NGOs. As NGOs increasingly produce their own funding and develop their own professionalized class, it is appropriate to expose them to greater market forces beyond donor preferences. The use of aid vouchers allowing beneficiaries to purchase private goods and services is one tool for introducing more market forces. Closed for comment; 0 Comments.
- 24 Jan 2008
- Working Paper Summaries
The Impact of Component Modularity on Design Evolution: Evidence from the Software Industry
What factors should influence the design of a complex system? And what is the impact of choices on both product and organizational performance? These issues are of particular importance in the field of software given how software is developed: Rarely do software projects start from scratch. The authors analyzed the evolution of a commercial software product from first release to its current design, looking specifically at 6 major versions released at varying periods over a 15-year period. These results have important implications for managers, highlighting the impact of design decisions made today on both the evolution and the maintainability of a design in subsequent years. Key concepts include: Data show strong support for the existence of a relationship between component modularity and design evolution. Tightly coupled components have a higher probability of survival as a design evolves compared with loosely coupled components. Tightly coupled components are also harder to augment, in that the mix of new components added in each version is significantly more modular than the legacy design. Closed for comment; 0 Comments.
- 23 Jan 2008
- First Look
- 23 Jan 2008
- Op-Ed
A House Divided: Investment or Shelter?
For decades Americans viewed their homes as a safe harbor, a place to put down roots. But the last decade saw the rise of housing as an investment opportunity. What comes next? asks Harvard Business School professor Nicolas P. Retsinas, director of Harvard's Joint Center for Housing Studies. Closed for comment; 0 Comments.
- 22 Jan 2008
- Research & Ideas
New Challenges in Leading Professional Services
Professional service firms are being challenged as never before—by clients, associates, and the competition, just for starters. But old-style PSF leaders are not equipped to respond, says Harvard Business School professor Thomas J. DeLong. He discusses his new book When Professionals Have to Lead. Plus: Book excerpt. Key concepts include: Today's leaders of professional service firms are being overwhelmed by demanding clients, human capital challenges, lack of organizing strategies, and perhaps most of all, unrealistic expectations of the task itself. There is also on ongoing trend to focus on the development of only the highfliers and ignore a vast number of very competent professionals who are the heart and soul of the firm. The integrated leadership model is built on 4 specific dimensions: setting direction, gaining commitment to the direction, executing on the direction, and setting a personal example. 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.
First Look: February 12, 2007
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