First Look

Abstract—Using a novel, proprietary database of micro-level trading activities by asset managers, we show strong evidence of asset managers engaging in strategic trading in order to “cloak” their most valuable trades. This takes the form, for instance, of a manager who sells her entire position of Microsoft on March 30, and then repurchases to re-establish the same position on April 1. This manager will economically be holding the same position throughout, yet without having to publicly signal this position. These cloaked trades earn an abnormal return of 370 basis points in the following month, or over 36% per year. We further show that the same managers do not engage in such information-rich cloaked trading around other month ends (non-reporting months), nor in institutional accounts (that are not subject to the reporting requirements) at the exact same quarter-end dates. Moreover, the returns to these cloaked trades continue to accrue over the subsequent quarter and do not reverse in the following year, implying that these cloaked trades are informative about fundamental firm value, which is gradually revealed into prices.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51971

Abstract—The U.S. health care system is inefficient, unreliable, and crushingly expensive. There is no shortage of proposed solutions, but central to the best of them is the idea that health care needs more competition. In other sectors, competition improves quality and efficiency, spurs innovation, and drives down costs. Health care should be no exception. Yet providers and payers continue to try to stymie competition. Many are actively pursuing consolidation, buying up market share, and increasing their bargaining power. In this article, the authors argue that health care payers and providers must stop fighting the emergence of a competitive health care marketplace and make competing on value central to their strategy. All stakeholders in the health care industry—regulators, providers, insurers, employers, and patients themselves—have roles to play in creating real competition and positive change. In particular, five catalysts will accelerate progress: Put patients at the center of care, create choice, stop rewarding volume, standardize value-based methods of payment, and make data on outcomes transparent.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51981

Abstract—Using a difference-in-difference approach, we study how intellectual property right (IPR) protection affects innovation in China in the years around the privatizations of state-owned enterprises (SOEs). Innovation increases after SOE privatizations, and this increase is larger in cities with strong IPR protection. Our results support theoretical arguments that IPR protection strengthens firms’ incentives to innovate and that private sector firms are more sensitive to IPR protection than SOEs.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51975

Abstract—Online marketplaces such as eBay, Uber, and Airbnb have the potential to reduce racial, gender, and other forms of bias that affect the off-line world. And in the early days of Internet commerce, the relative anonymity of transactions did make it harder for participants to discriminate. But as listings began to include photos, names, and other means of identification, bias emerged in areas ranging from labor markets to credit applications to housing—sometimes made worse by a lack of regulation, the absence of in-person interactions, and the use of automation and big data. How can companies reverse the tide? The key lies in more intentional platform design, say the authors, who offer a framework for creating a thriving marketplace while minimizing the risk of discrimination. For starters, they say, companies must track and report on potential problems and carefully test choices that may influence the extent of discrimination. And they should thoroughly examine four design decisions, asking themselves the following questions: 1) Are we providing too much information? In many cases, the simplest, most effective change a platform can make is to withhold information such as race and gender until after a transaction has been agreed to; 2) Could we further automate the process? Features such as “instant book,” allowing a buyer to sign up for a rental, say, without the seller’s prior approval, can reduce discrimination while increasing convenience; 3) Can we make discrimination policies more top of mind? Presenting them during the actual transaction process, rather than burying them in fine print, makes them less likely to be broken; 4) Should we make our algorithms discrimination aware? To ensure fairness, designers need to track how race or gender affects the user experience and set explicit objectives. Seemingly small design features can have an outsize impact on discriminatory behavior. Smart choices and transparent experimentation can create markets that are both more efficient and more inclusive.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51982

Abstract—Assessing productivity gains from multinational production has been a vital topic of economic research and policy debate. Positive productivity gains are often attributed to productivity spillovers; however, an alternative, much less emphasized channel is selection and market reallocation whereby competition leads to factor reallocation both within and between domestic firms and exits of the least productive firms. We investigate the roles of these different mechanisms in determining aggregate productivity gains using a unifying framework that explores the mechanisms’ distinct predictions on the distributions of domestic firms—within-firm productivity improvement shifts the productivity distribution rightward, while selection and market reallocation shifts the revenue and employment distributions leftward and raises left truncations. Using a rich cross-country firm panel dataset, we find significant evidence of both mechanisms and effects of competition in product, technology, and labor space. However, selection and market reallocation account for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of productivity gains from multinational production.

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Abstract—In recent decades, advances in information and communication technology and falling trade barriers have led firms to retain within their boundaries and in their domestic economies only a subset of their production stages. A key decision facing firms worldwide is the extent of control to exert over the different segments of their production processes. We describe a property-rights model of firm boundary choices along the value chain that generalizes Antràs and Chor (2013). To assess the evidence, we construct firm-level measures of the upstreamness of integrated and non-integrated inputs by combining information on the production activities of firms operating in more than 100 countries with input-output tables. In line with the model's predictions, we find that whether a firm integrates upstream or downstream suppliers depends crucially on the elasticity of demand for its final product. Moreover, a firm's propensity to integrate a given stage of the value chain is shaped by the relative contractibility of the stages located upstream versus downstream from that stage, as well as by the firm's productivity. Our results suggest that contractual frictions play an important role in shaping the integration choices of firms around the world.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=49090

Abstract—Using a difference-in-difference approach, we study how intellectual property right (IPR) protection affects innovation in China in the years around the privatizations of state-owned enterprises (SOEs). Innovation increases after SOE privatizations, and this increase is larger in cities with strong IPR protection. Our results support theoretical arguments that IPR protection strengthens firms’ incentives to innovate and that private sector firms are more sensitive to IPR protection than SOEs.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51977

Abstract—Technology standards are pervasive in the modern economy, and a target for public and private investments, yet evidence on their economic importance is scarce. I study the conversion of 13,000 miles of railroad track in the U.S. South to standard gauge between May 31 and June 1, 1886 as a large-scale natural experiment in technology standards adoption that instantly integrated the South into the national transportation network. Using route-level freight traffic data, I find a large redistribution of traffic from steamships to railroads serving the same route that declines with route distance, with no change in prices and no evidence of effects on aggregate shipments, likely due to collusion by Southern carriers. Counterfactuals using estimates from a joint model of supply and demand for North-South freight transport suggest that if the cartel were broken, railroads would have passed through 50% of their cost savings from standardization, generating a 10% increase in trade on the sampled routes. The results demonstrate the economic value of technology standards and the potential benefits of compatibility in recent international treaties to establish transcontinental railway networks, while highlighting the mediating influence of product market competition on the public gains to standardization.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50869

Abstract—Small businesses were among the hardest hit in the Great Recession, accounting for more than 60% of the total jobs lost. The economic crisis was one focused on the banking sector, which is one reason for the disproportionately high impact on America’s small businesses, which tend to be heavily credit dependent. While some aspects of the economy have recovered in the years since, small businesses have struggled, primarily due to a lingering credit gap that is the result of banks being less likely to make the smaller dollar loans—those less than $250,000—that small firms (more than 70%) seek. A rapidly growing financial technology (fintech) sector has quickly stepped in to fill this gap, and incumbent banks are exploring a variety of partnership strategies with the new entrants. Yet, while the much needed increase in sources for financing has been welcome by small businesses, these innovative fintech lenders have sparked concerns around transparency and the high costs charged to borrowers. These concerns are exacerbated by a “spaghetti soup” of regulators, where no one federal entity has oversight, and protections around small business borrowing slip through the cracks. This paper takes a detailed look at the current state of small business lending, the causes for the persistent low-dollar loan gap, the solutions being driven by innovative fintech lenders, and the key concerns around oversight and regulation. Finally, our objective is to provide regulatory recommendations that will protect small business borrowers and not dampen the innovation that has proven so promising for filling the gap in small business access to credit.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51972

Abstract— Using data on MIT bachelor's graduates from 1994 to 2012, this paper empirically examines the extent to which the inflow of elite talent into the financial industry affects the supply of innovators in science and engineering (S&E). I first show that finance does not systematically attract those who are best prepared at college graduation to innovate in S&E sectors. Among graduates who majored in S&E, cumulative GPA strongly and positively predicts long-term patenting; this result is robust to controlling for choices of major and career. In contrast, GPA negatively predicts the probability of taking a first job in finance after college. There is suggestive evidence that S&E and finance value different sets of skills: innovating in S&E calls for in-depth knowledge and/or interest in a specific subject area, whereas finance tends to value a combination of general analytic skills and social skills over academic specialization. I then provide evidence that anticipated career incentives influence students' acquisition of S&E human capital during college. The 2008–2009 financial crisis, which substantially reduced the availability of jobs in finance and led to a worsening labor market in general, prompted some students to major in S&E instead of management or economics and/or to improve their academic performance. This response to the shock is driven by students with below-average academic credentials who were freshmen at the peak of the crisis.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50225

No abstract available.

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No abstract available.

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In 2010, the board and senior management team of Falabella, a leading retailer with operations throughout Latin America, faced choices about what to do with its financial services division. More than 4.5 million customers had CMR credit cards that could be used in Falabella stores, and Banco Falabella competed with other banks by offering personal banking services. The case covers many of the key questions the leaders of the firm faced, including whether to allow credit card holders to use their cards for purchases outside of Falabella stores, whether to develop personal banking services further, and whether to make substantial changes to the strategy or to exit the business.

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Supplements the (A) case and provides an update describing choices Falabella made.

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No abstract available.

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This case follows Qalaa Holdings, a successful Egypt-based private equity firm, and gives insight into the types of investments it pursued, its growth over time, and the limited partner base it had at hand. It also allows students to consider and debate whether the traditional private equity fund structure can be applied in Africa. In particular, the case focuses on one of Qalaa’s largest and most difficult greenfield infrastructure projects: Egyptian Refining Company. It tracks the project from its structuring stage in 2007, through the adverse periods of the global financial crisis and Arab Spring, until 2012. At this time, Hisham El-Khazindar, co-founder and managing director, had to decide on the fate of the project. While passionate about contributing to Africa’s development, he could not ignore the challenges: the sheer size and complexity of the project, the high financial stakes, and the region’s on-going unstable political environment.

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This historically focused background note highlights the role of African American Labor Leaders in both the Labor Movement and the Civil Rights Movement. In doing so, it attempts to both highlight these noteworthy individuals and demonstrate the innate connection between the labor and civil rights movements.

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By many measures the largest health-club chain in the United States in the early 2000s, Bally Total Fitness sold most of its remaining fitness clubs to 24 Hour Fitness in 2014 and disappeared from the industry top 100 rankings. After Bally was bedeviled by accounting fraud, which indicated that it had never made a profit, several groups of investors tried to rescue the company, but their efforts were to no avail. It was an ignominious end.

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In 2016, 24 Hour Fitness was the number-two fitness chain in the United States, generating revenues of $1.4 billion from 441 clubs and serving 3.8 million members. Based in San Ramon, California, 24 Hour Fitness operated clubs in 13 states. Having grown rapidly to become the largest club operator by 2004, the company was sold to a private equity group in 2005 for $1.6 billion. The growth continued until the original founder, Mark Mastrov, left in 2008. Since then, growth had stagnated, and the company lost its leadership position to LA Fitness in 2012. Throughout, 24 Hour Fitness had retained its traditional positioning, offering several club types to satisfy a wide range of customers concentrated in a particular area at affordable prices averaging $39 per month. However, this positioning was increasingly coming under pressure. Small studios offering focused facilities at as little as $10 per month were growing, while LA Fitness provided full-line gyms for an average of $33 per month. Premium clubs also continued to flourish, while the competition from not-for-profits such as university and employee gyms continued unabated. In 2016, the new CEO announced a new strategy to counter these challenges: rebranding 24 Hour as a lifestyle and media company. He declared, “We know we can do great things. We’re very excited about the platform that we have to build on.” Perhaps this strategy would help restore the company’s fortunes.

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In 2015, the U.S. health-club industry generated revenues of $25.8 billion, up from $14.8 billion in 2004. Members of health clubs accounted for 17% of the population, up from 14%. The number of clubs had grown from 26,830 in 2004 to 36,180. In the process, the list of leading chains had changed significantly. While a higher proportion of Americans exercised on any given day, the majority still did not, and the average number of hours exercised had remained essentially flat. Meanwhile, the prevalence of people classified as overweight and obese had grown from 66.3% to 70.2%. A slowdown in growth and other challenges that the health-club industry had faced since 2004 meant that investors were more careful with their money. The steady rise of LA Fitness to industry leadership with a 7% market share suggested that there were still opportunities for consolidation. However, some observers argued that the industry would always be fragmented—it was simply too easy to enter. Another key debate concerned how best to position in an industry where new formats and business models proliferated. The sector had attracted a great deal of private equity in the past. Would it prove a good opportunity for investors in the future?

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