First Look

April 27, 2010

Do Powerful Politicians Cause Corporate Downsizing? The answer is yes, on multiple levels. It turns out that firms are highly sensitive to government spending shocks and to fiscal stimulus regarding investments in new capital, funds for research and development, and payouts to shareholders. Employing an empirical approach that looks at changes in congressional committee chairmanship over 40-plus years, HBS professors Lauren Cohen, Joshua Coval, and Christopher Malloy transcend standard explanations about interest-rate and tax channels to help economists better interpret the corporate impact of fiscal remedies. New from Harvard Business Press this week is Rethinking the MBA: Business Education at a Crossroads. Carefully buttressing their argument with thoughtful interviews and empirical data collected from leading schools, authors Srikant M. Datar, David A. Garvin, and Patrick G. Cullen, all of HBS, explain how and why business schools need to reinvent themselves. (Watch for a forthcoming Q&A on HBS Working Knowledge.) In cases this week, Professor Allen Grossman and Catherine Ross write in "International AIDS Vaccine Initiative" how the nonprofit tried to improve the existing incentive structure for the development of a vaccine against AIDS and other diseases disproportionately affecting the poor in tropical countries. And "Dollarama Inc." by André F. Perold describes the financial risks and opportunities behind the Canadian firm's decision to price certain goods above a buck.
— Martha Lagace


Rethinking the MBA: Business Education at a Crossroads


: "Business Schools Face Test of Faith." "Is It Time to Retrain B-Schools?" As these headlines make clear, business education is at a major crossroads. For decades, MBA graduates from top-tier schools set the standard for cutting-edge business knowledge and skills. Now the business world has changed, say the authors of Rethinking the MBA, and MBA programs must change with it. Increasingly, managers and recruiters are questioning conventional business education. Their concerns? Among other things, MBA programs aren't giving students the heightened cultural awareness and global perspectives they need. Newly minted MBAs lack essential leadership skills. Creative and critical thinking demand far more attention. In this compelling and authoritative new book, the authors document a rising chorus of concerns about business schools gleaned from extensive interviews with deans and executives as well as from a detailed analysis of current curricula and emerging trends in graduate business education; provide case studies showing how leading MBA programs have begun reinventing themselves for the better; and offer concrete ideas for how business schools can surmount the challenges that come with reinvention, including securing faculty with new skills and experimenting with new pedagogies. Rich with examples and thoroughly researched, Rethinking the MBA reveals why and how business schools must define a better pathway for the future.

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Circulation of Ideas across Academic Communities: When Locals Re-import Exported Ideas


The circulation of ideas across academic communities is central to academic pursuits and has attracted much past scholarly attention. As North American-based scholars with European ties, we decided to examine the impact of Organization Studies in North American academia with the objective of understanding what, if anything, makes some Organization Studies' articles more likely to have impact in North America than others. To set the stage for better understanding the role of Organization Studies in this academic community, we first present the key characteristics of North American academia. Second, relying on archival data spanning the first 29 years of Organization Studies (1980 to 2008, inclusive), we identify an apparent dynamic of select reimportation of exported ideas. Put otherwise, top North American journals tend to reimport ideas authored (and exported) by select North American scholars in Organizations Studies. Third, we discuss the implications of this process on the field of organization studies and on the circulation of ideas across academic communities.

The Predictive Value of Accruals and Consequences for Market Anomalies


We revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions and market value of equity as a proxy for all future cash flows. We find that, on average, accruals improve upon current cash flow from operations in predicting future cash flows. In the cross-section, accruals' contribution is positively associated with proxies for quality of accruals and governance. Next, we investigate the implications of accruals' predictive value for accrual-based market anomalies. We find that portfolios formed on stock return predictions using information from current CFO and accruals yield significantly positive returns on average, as opposed to CFO alone. We also find that Sloan's (1996) accrual anomaly is related to our accrual contribution anomaly. Indeed, when accruals' contribution to future cash flow prediction is the highest, the accrual anomaly vanishes. Collectively, our results suggest that the predictive value of accruals and market participants' ability to process it are a significant driver of accrual-based anomalies.

Consumer Policy

An abstract is unavailable at this time.



Working Papers

Do Powerful Politicians Cause Corporate Downsizing?


This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate reactions follow both Senate and House committee chair changes, are present among large and small firms and within large and small states, are partially reversed when the congressman resigns, and are most pronounced among geographically concentrated firms. The effects are economically meaningful and the mechanism—entirely distinct from the more traditional interest rate and tax channels—suggests new considerations in assessing the impact of government spending on private sector economic activity.

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Intensities and Risk Aversion in School Choice: A Laboratory Experiment


We experimentally investigate in the laboratory two prominent mechanisms that are employed in school choice programs to assign students to public schools. We study how individual behavior is influenced by preference intensities and risk aversion. Our main results show that 1) the Gale-Shapley mechanism is more robust to changes in cardinal preferences than the Boston mechanism independently of whether individuals can submit a complete or only a restricted ranking of the schools, and 2) subjects with a higher degree of risk aversion are more likely to play "safer" strategies under the Gale-Shapley but not under the Boston mechanism. Both results have important implications for the efficiency and the stability of the mechanisms.

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Network Effects in Countries' Adoption of IFRS


If a country's accounting standards represent a political-economic equilibrium, why is that equilibrium for some countries shifting over time in favor of IFRS? We develop and test the hypothesis that network effects from the extant worldwide adoption of IFRS explain a country's shift away from local accounting standards. That is, as more jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering transactions costs to foreign financial-statement users come to outweigh institutional differences (e.g., auditing technology) that make IFRS adoption costly. If true, the implication is that worldwide IFRS adoption is self-perpetuating. We find that perceived network benefits increase the degree of IFRS harmonization, although larger countries and countries less dependent on foreign trade have a differentially lower response to the IFRS network value. Also, benefits expected to accrue due to economic relations with the EU are a significant component of the perceived network value.


Cases & Course Materials

International AIDS Vaccine Initiative

Allen Grossman and Catherine Ross
Harvard Business School Case 310-015

Dedicated to accelerating the development of a safe, effective, accessible, preventive HIV vaccine, the International AIDS Vaccine Initiative (IAVI) pioneered ways of addressing the inadequate incentive structures that prevented progress toward vaccines for AIDS and other diseases predominantly affecting poor populations in tropical countries. As an intermediary nonprofit organization, IAVI brought together partners with different perspectives and motivations from nonprofit, industry, government, and scientific research sectors toward developing vaccines. IAVI played several roles: honest broker, integrator, and communicator of knowledge regarding AIDS vaccine research; passionate advocate for AIDS vaccines at national and international levels; and coordinator and manager of research and development initiatives. In 2008, IAVI invested further in its own laboratories and research infrastructure, moving a step upstream in vaccine development partnerships and clinical research. How should IAVI manage tensions between what is necessary to achieve its mission and what is necessary to build new incentive structures that enable key actors to work together effectively?

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Indus Towers: Collaborating with Competitors on Infrastructure

Ranjay Gulati, Francisco de Asís Martínez-Jerez, V.G. Narayanan, and Rachna Tahilyani
Harvard Business School Case 110-057

The case describes the formation of Indus Towers, the largest telecom tower company in the world that has a joint venture created to build and manage the passive infrastructure of wireless telecom operators by bringing together three competitors in India's tough telecom market—Bharti AirteI, Vodafone Essar, and Idea Cellular—and merging their tower holdings. It focuses on the issue as to how do you collaborate with your competitors in setting up towers but engage in a brutal competition with them in the marketplace?

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Dollarama Inc.

Andre F. Pérold
Harvard Business School Case 210-041

Dollarama is the leading operator of dollar stores in Canada. The firm performed extraordinarily well after a leveraged buyout in 2004 and recently executed a highly successful IPO. The company sources its goods primarily from Asia. It has strong brand recognition and competitive advantages in operations, purchasing, and merchandising. In the face of margin pressures, Dollarama recently took the risky decision to move from the single one-dollar price point to multiple price points. The additional price points offer some flexibility, but customers' appetite for purchasing products priced above one dollar has yet to be fully determined. Dollarama is on a fast growth track but remains chiefly concerned about its vulnerability to supply disruptions and to increases in merchandise costs from higher input prices. The firm appears quite overvalued based on a multiples analysis but considerably undervalued based on a discounted cash flow analysis.

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Merger Integration at Bank of America: The TrustWeb Project

Gary P. Pisano and Bradley R. Staats
Harvard Business School Case 610-054

This case explores project management in a large organization through the eyes of a young project manager, Mike Morris. Morris is tasked with leading a project within the overall merger integration effort at Bank of America. Morris encounters difficulties with managing stakeholders, setting requirements, and reporting progress.

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