First Look

Abstract—From public speaking to first dates, people frequently experience performance anxiety. And when experienced immediately before or during performance, anxiety harms performance. Across a series of experiments, we explore the efficacy of a common strategy that people employ to cope with performance-induced anxiety: rituals. We define a ritual as a predefined sequence of symbolic actions often characterized by formality and repetition that lack direct instrumental purpose. Using different instantiations of rituals and measures of anxiety (both physiological and self-report), we find that enacting rituals improves performance in public and private performance domains by decreasing anxiety. Belief that a specific series of behaviors constitute a ritual is a critical ingredient to reduce anxiety and improve performance: engaging in behaviors described as a “ritual” improved performance more than engaging in the same behaviors described as “random behaviors.”

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51401

Abstract—How does the shadow banking system respond to changes in the capital regulation of commercial banks? This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. A key feature of our model is defaultable bank liabilities that provide liquidity services to households. The quality of the liquidity services provided by bank liabilities depends on their safety in case of default. Commercial bank debt is fully insured and thus provides full liquidity. However, commercial banks do not internalize the social costs of higher leverage in the form of greater bankruptcy losses (moral hazard) and are subject to a regulatory capital requirement. In contrast, shadow bank liabilities are subject to runs and credit risk and thus typically less liquid compared to commercial banks. Shadow banks endogenously limit their leverage as they internalize the costs. Tightening the commercial banks' capital requirement from the status quo leads to safer commercial banks and more shadow banking activity in the economy. While the safety of the financial system increases, it provides less liquidity. Calibrating the model to data from the financial accounts of the U.S., the optimal capital requirement is around 20%.

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Abstract—In several markets, firms compete not for consumer expenditure but instead for consumer attention. We model and characterize how households allocate their scarce attention in arguably the largest market for attention: the Internet. Our characterization of household attention allocation operates along three dimensions: how much attention is allocated, where that attention is allocated, and how that attention is allocated. Using click-stream data for thousands of U.S. households, we assess if and how attention allocation on each dimension changed between 2008 and 2013, a time of large increases in online offerings. We identify vast and expected changes in where households allocate their attention (away from chat and news towards video and social media), and yet we simultaneously identify remarkable stability in how much attention is allocated and how it is allocated. Specifically, we identify (i) persistence in the elasticity of attention according to income and (ii) complete stability in the dispersion of attention across sites and in the intensity of attention within sites. We illustrate how this finding is difficult to reconcile with standard models of optimal attention allocation and suggest alternatives that may be more suitable. We conclude that increasingly valuable offerings change where households go online, but not their general online attention patterns. This conclusion has important implications for competition and welfare in other markets for attention.

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Abstract—We study liquidity transformation in mutual funds using a novel dataset on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds’ cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.

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Abstract—We study the impact of the zero lower bound interest rate policy on the industrial organization of the U.S. money fund industry. We find that in response to policies that maintain low interest rates, money funds change their product offerings by investing in riskier asset classes, are more likely to exit the market, and reduce the fees they charge their investors. The consequence of fund closures resulting from interest rate policy is the relocation of resources in affected fund families and in the asset management industry in general, as well as decline in capital of issuers borrowing from money funds.

Abstract—Do monetary incentives encourage volunteering? Or, do they introduce a "greedy" signal and hence crowd out the motivation to volunteer? Since the strength of this greedy signal is normally unobserved, the answer is theoretically unclear, and corresponding empirical evidence is mixed. To help counter this ambiguity, this paper proposes that the strength of image signals—such as the desire to appear prosocial and not to appear greedy—relates to an individual's volunteer reputation. Experimental results support this possibility. Individuals with past histories of volunteering are less likely to volunteer if their histories are public, consistent with the strength of the prosocial signal being weaker. The crowd-out in response to public incentives is also less likely among such individuals, consistent with the strength of the greedy signal being weaker.

Abstract—In response to stakeholders’ growing concerns, companies are joining voluntary environmental programs to signal their superior environmental management capabilities. In contrast to the literature’s focus on certification programs that require a third-party audit, we show that corporate participation in programs that lack certification but instead incorporate civil society scrutiny can, under certain conditions, serve as a credible signal of environmental management capabilities by discouraging firms with inferior capabilities from joining. Specifically, we hypothesize that (a) institutional environments that support civil society scrutiny and (b) organizational characteristics that increase the impact of that scrutiny enhance the credibility of the signal. We find empirical support for these hypotheses by examining the decisions by nearly 2,600 companies in 44 countries whether to participate in the United Nations Global Compact.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=47799

Abstract—Effective dispute resolution is important for reducing private and social costs. We study how resolution responds to changes in price and communication using a new, extensive dataset of copyright infringement incidences by firms. The data cover two field experiments run by a large stock-photography agency. We find that substantially reducing the requested amount generates a small increase in the settlement rate. However, for the same reduced request, a message informing infringers of the price reduction and acknowledging the possible unintentionality generate a large increase in the settlement rate; including a deadline further increases the response. The small price effect, compared to the large message effect, can be explained by two countervailing effects of a lower price: an inducement to settle early, but a lower threat of escalation. Furthermore, acknowledging possible unintentionality may encourage settlement due to the typically inadvertent nature of these incidences. The resulting higher settlement rate prevents additional legal action and significantly reduces social costs.

Abstract—This appendix contains the following supplements to the main text: (i) additional facts regarding the size and concentration of the CDS market; (ii) some analysis relating buyer and seller capital to the CDS-bond basis; (iii) a discussion and some support evidence as to why capital might be slow moving in the CDS market; (iv) supportive analysis of the impact of the 2011 Japanese tsunami on CDS markets; and (v) a discussion of why the role of dealers as prime brokers does not impact the stylized facts and results presented throughout the paper.

Abstract—In the presence of managerial short-termism and asymmetric information about skill and effort provision, firms may opportunistically shift earnings from uncertain to more certain times. We document that firms report more negative discretionary accruals when financial markets are less certain about their future prospects. Stock-price responses to earnings surprises are moderated when firm-level uncertainty is high, consistent with performance being attributed more to luck rather than skill and effort, which can create incentives to shift earnings toward lower-uncertainty periods. We show that the resulting opportunistic earnings management is concentrated in CEOs, firms, and periods where such incentives are likely to be strongest: (1) where CEO wealth is sensitive to change in the share price, (2) where announced earnings are particularly likely to be an important source of information about managerial ability and effort, and (3) before implementation of Sarbanes-Oxley made opportunistic earnings management more challenging. Our evidence highlights a novel channel through which uncertainty affects managerial decision making in the presence of agency conflicts.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50792

Josh Golomb, president and general manager of DaVita Rx (Rx), was about to meet with Kent Thiry, CEO of Rx's corporate parent, DaVita Healthcare Partners Inc. (DaVita), in August 2013. The two would discuss whether Golomb should lead a new DaVita venture, Paladina Health (Paladina), which operated a network of primary care clinics. DaVita had launched Paladina in early 2011, and the startup was struggling to gain traction: Paladina had already used a significant amount of the $40 million in funding committed by DaVita; the company's primary care clinics had not yet reached the number of patients necessary to sustain a profitable business; and it was in the midst of trying to integrate with another primary care clinic operator that it had acquired years earlier but was just now merging into Paladina. Although the startup was young and still finding its way in an emerging industry, Thiry believed that Paladina would benefit from Golomb's experiences at Rx, which had also struggled in its early years. The situation at Rx became so precarious at one point that many of DaVita's senior leaders wanted to shut it down entirely. Rx made it through those challenging early years though, and was expected to exceed $600 million in revenues for 2013. However, Golomb wondered how relevant his Rx experience was to Paladina. Rx was closely tied to its parent company—DaVita provided dialysis services to patients with end-stage renal disease (ESRD) and Rx supplied medications to ESRD patients—while Paladina's connection to DaVita was less obvious. If Golomb took the job, what could he do to make Paladina's clinics as efficient as possible in terms of service and its economics, without compromising on its value proposition? Was Paladina just too different of a business to be part of the DaVita family? This case offers an example of "intrapreneurship"—i.e., entrepreneurial ventures launched within large companies—at a Fortune 500 company. DaVita has already had a successful experience launching Rx (after some difficult early years), and the company is now even serving patients from some of DaVita's leading competitors. However, Paladina is the company's first intrapreneurial venture outside of its core focus of serving end-stage renal disease (ESRD) patients—DaVita's main function is to provide dialysis services to ESRD patients and Rx provides medication to ESRD patients. Can Paladina succeed simply by following Rx's example, or will it face different challenges?

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RegionFly is a small, private airline specializing in ultra-premium services. Founded shortly after the "Golden Age of airline travel," RegionFly's financial performance had been strong for several decades. More recently, however, the results have taken a downward trend, due in part to the impact of the Great Recession on the entire airline industry. Not only were premium service providers affected more significantly, but the recent wave of mergers and acquisitions involving large airlines also leveraged new economies of scale, thereby reducing costs and increasing the competitive pressure on air travel prices. As a result of the deterioration in their financial performance, RegionFly was recently acquired by a larger provider, and several top managers were replaced. The new management team, supported by an external consulting firm, introduced a series of aggressive cost-cutting measures that resulted in a downsizing of the workforce, and impacted some distinctive features of the services provided by RegionFly that had been historically associated with the success of the company. Additionally, top management introduced a new product profitability criterion to be used in support of strategic decisions related to the composition of the product mix offering. The application of the new criterion lead to the elimination of two of the seven routes included in RegionFly's portfolio. To the surprise of top management, however, the cost-cutting and product-cutting measures did not result in an improvement in the profitability of the company, which, in fact, deteriorated even further. As the profitability of another route falls under the threshold, management is faced with an important decision: should the product profitability criterion be enforced, thus eliminating yet another route from the portfolio? “RegionFly: Cutting Costs in the Airline Industry” provides an introduction to costs allocations, to the evaluation of product profitability, and to the impact of the methodology used to allocate fixed costs on strategic decisions, such as eliminating product lines or firm segments.

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This case describes the megafarm model launched by the CP Group as part of their efforts to ensure the safety and quality of their supply chain of agricultural products (particularly eggs) in China while also promoting the welfare of Chinese farmers. This model was developed in close partnership with the local government and received financing support from a local bank. The case asks students to discuss the potential for scaling this model across China.

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No abstract available.

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No abstract available.

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The Container Store (TCS) is a Texas-based retailer of organization and storage solutions. The company prides itself in taking care of its employees first, and its cofounder and CEO Kip Tindell practices Conscious Capitalism. Since its beginnings in 1978, TCS grew to a chain of around 70 stores located in over 20 states by 2013. Tindell believed TCS's employee-first culture and the seven Foundation Principles, which guided the company, were what differentiated the company from other retailers. With plans to grow to 300 stores, TCS went public in late 2013. Since its IPO, same store sales have suffered, and the company's stock in early 2016 was trading well below its IPO price. As such, the company's culture and Foundation Principles were being put to the test.

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In February 2015, zulily cofounder and CEO Darrell Cavens faced a major challenge in his business, a Seattle-based daily deals site that catered to moms. The more he spent to acquire new customers, the less he retained them in the form of repeat purchases. This was an entirely new conundrum in the company. Up to that point, customer repeat purchase rates had been incredibly consistent. Cavens and his executive team had just discovered this adverse dynamic and needed to resolve it as soon as possible. What was causing the decline in repeat purchase rates? How should Cavens resume new customer acquisition in order to return to the company’s previously higher level of growth?

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Fasten, a new ridesharing start-up in Boston, entered the scene in September 2015 hoping its unique vision of transparency for both driver and passenger and strategy to keep riders’ fares low and charge drivers a flat $0.99 fee per ride as opposed to the 20-30% commission charged by its competition, would help differentiate it and gain the necessary traction in an ostensibly concentrated market between Uber and Lyft. Despite both Uber’s and Lyft’s valuations skyrocketing to $50 billion and $5.5 billion respectively, heavy investment in top notch Silicon Valley software developers and technological innovations such as autonomous vehicles, aggressive marketing strategies, and cutthroat poaching practices—all of which forced number three competitor Sidecar out by January 2016—Fasten’s leadership felt confident their 17 years of experience in Russia’s car services industry positioned them well to truly understand their customers and ultimately expand to other major cities. But with limited budgets to acquire talented and expensive platform developers, Fasten needed to ensure its core IT services could compete, and that its word-of-mouth approach to attract the essential network of drivers and passengers could get it the vital foothold it would need to grow.

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