First Look

July 25, 2017

Of particular interest among new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Banning protections on M&A deals

In 2011, the United Kingdom started to prohibit all deal protections—including termination fees—in mergers & acquisition deals. A new study examines the effect of this regulatory change. "We find that M&A deal volumes in the UK declined significantly in the aftermath of the 2011 Reforms, relative to deal volumes in the European G-10 countries, write authors Guhan Subramanian and Fernan Restrepo. "The Effect of Prohibiting Deal Protection on M&A Activity: Evidence from the United Kingdom" appears in a forthcoming issue of Journal of Law & Economics.

Effectively measuring the patient experience

Despite being the world's largest service industry, U.S. healthcare has only recently begun to try to rigorously document and understand the experience of its customers," writes Len Schlesinger in a July article on the athenaInsight website. In "A Better Way to Measure the Patient Experience," he shares insights on what metrics the industry really should be tracking.

Considering the efficacy of quadratic voting

Democracies tend to rely on the one-ballot-measure-vote-per-person system in its election processes, no matter that each person tends to care about some ballot measures more than others. But what would happen if each voter were given a pool of votes, such that people could give several votes to the issues that mattered to them personally -- and use the remaining few votes for the issues that didn't really affect them? That's the gist of a concept called "quadratic voting." In a new article, Louis Kaplow and Scott Duke Kominers look at whether such a system would induce more people to show up at the polls. "Who Will Vote Quadratically? Voter Turnout and Votes Cast Under Quadratic Voting" appears in a special issue of Public Choice.

A complete list of new publications follows.

— Carmen Nobel
 
  • forthcoming
  • Journal of Political Economy

Reserve Design: Unintended Consequences and the Demise of Boston's Walk Zones

By: Dur, Umut, Scott Duke Kominers, Parag A. Pathak, and Tayfun Sönmez

Abstract—Admissions policies often use reserves to grant certain applicants higher priority for some (but not all) available seats. Boston’s school choice system, for example, reserved half of each school’s seats for local neighborhood applicants while leaving the other half for open competition. This paper shows that in the presence of reserves, the effect of the precedence order (i.e., the order in which different types of seats are filled) on distributional objectives is comparable to the effect of adjusting reserve sizes. Either lowering the precedence order positions of reserve seats at a school or increasing the number of reserve seats weakly increases reserve-group assignment at that school. Using data from Boston, we show that reserve and precedence adjustments have similar quantitative effects. Our results illustrate that policies about precedence, heretofore underexplored, are inseparable from other aspects of admissions policy. Moreover, our findings explain the puzzling empirical fact that despite careful attention to the importance of neighborhood priority, Boston’s implementation of its 50-50 reserve–open seat split was nearly identical to the outcome of a counterfactual system without any reserves. Transparency about these issues—in particular, how precedence unintentionally undermined the intended admissions policy—led to the elimination of Boston’s walk zones.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52937

  • May 2017
  • American Economic Review

Stable and Strategy-Proof Matching with Flexible Allotments

By: Hatfield, John William, Scott Duke Kominers, and Alexander Westkamp

Abstract—We introduce a framework of matching with flexible allotments that can be used to model firms with cross-division hiring restrictions. Our framework also allows us to nest some prior models of matching with distributional constraints. Building upon our recent work on observable substitutability, we show that multi-division choice functions with flexible allotments enable stable and strategy-proof matching; these results illustrate the value of clearly mapping when stable and strategy-proof matching is possible.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52954

  • July 2017
  • Public Choice

Who Will Vote Quadratically? Voter Turnout and Votes Cast Under Quadratic Voting

By: Kaplow, Louis, and Scott Duke Kominers

Abstract—Who will vote quadratically in large-N elections under quadratic voting (QV)? First, who will vote? Although the core QV literature assumes that everyone votes, turnout is endogenous. Drawing on other work, we consider the representativeness of endogenously determined turnout under QV. Second, who will vote quadratically? Conditional on turning out, we examine reasons that, in large-N elections, the number of votes that an individual casts may deviate substantially from that under pure, rational QV equilibrium play. Because turnout itself is driven by other factors, the same determinants may influence how voters who do turn out choose the quantity of votes to cast. Independently, the number of votes actually cast may deviate dramatically from pure QV predictions because of the complex and refined nature of equilibrium play. Most plausibly, voting behavior and outcomes would be determined predominately by social and psychological forces, would exhibit few of the features emphasized in the analysis of hyper-rational equilibrium play and would have consequential properties that require a different research agenda to bring into focus. Some of our analysis also has implications for voting behavior under other procedures, including one person, one vote.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52939

  • forthcoming
  • Proceedings of the National Academy of Sciences of the United States of America

Computer Vision Uncovers Predictors of Physical Urban Change

By: Naik, Nikhil, Scott Duke Kominers, Ramesh Raskar, Edward L. Glaeser, and César A. Hidalgo

Abstract—Which neighborhoods experience physical improvements? In this paper, we introduce a computer vision method to measure changes in the physical appearances of neighborhoods from time-series street-level imagery. We connect changes in the physical appearance of five U.S. cities with economic and demographic data and find three factors that predict neighborhood improvement. First, neighborhoods that are densely populated by college-educated adults are more likely to experience physical improvements—an observation that is compatible with the economic literature linking human capital and local success. Second, neighborhoods with better initial appearances experience, on average, larger positive improvements—an observation that is consistent with “tipping” theories of urban change. Third, neighborhood improvement correlates positively with physical proximity to the central business district and to other physically attractive neighborhoods—an observation that is consistent with the “invasion” theories of urban sociology. Together, our results provide support for three classical theories of urban change and illustrate the value of using computer vision methods and street-level imagery to understand the physical dynamics of cities.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52917

  • forthcoming
  • The Corporate Contract in Changing Times: Is the Law Keeping Up?

Using the Deal Price for Determining 'Fair Value' in Appraisal Proceedings

By: Subramanian, Guhan

Abstract—This essay presents new data on appraisal litigation and appraisal outs. I find that appraisal claims have not meaningfully declined in 2016 and that perceived appraisal risk, as measured by the incidence of appraisal outs, has increased since the Dell appraisal in May 2016. After reviewing current Delaware appraisal doctrine, this essay proposes a synthesizing principle: if the deal process involves an adequate market canvass, meaningful price discovery, and an arms-length negotiation, then there should be a strong presumption that the deal price represents fair value in an appraisal proceeding; but if the deal process does not have these features, deal price should receive no weight. This approach would represent a middle ground between the competing approaches advanced by 29 law, economics, and finance professors in the DFC Global appraisal, currently on appeal to the Delaware Supreme Court.

Publisher's link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911880

  • forthcoming
  • Journal of Law & Economics

The Effect of Prohibiting Deal Protection on M&A Activity: Evidence from the United Kingdom

By: Subramanian, Guhan, and Fernan Restrepo

Abstract—Since 2011, the UK has prohibited all deal protections—including termination fees—in M&A deals. Prior to 2011, the UK permitted termination fees up to 1% of deal value and there was no prohibition on other protection devices. We examine the effect of this regulatory change on deal volumes, the incidence of competing offers, deal jumping rates, deal premiums, and completion rates in the UK, relative to the other European G-10 countries. We find that M&A deal volumes in the UK declined significantly in the aftermath of the 2011 Reforms, relative to deal volumes in the European G-10 countries. We find no countervailing benefits to target shareholders in the form of higher deal premiums or more competing bids. Completion rates and deal jumping rates also remained unchanged. We estimate that the incidence-rate ratio of UK deals to non-UK deals after the reform was approximately 50% the incidence-rate ratio of UK deals to non-UK deals prior to the reform. In addition, we estimate USD 19.3 billion in lost deal volumes per quarter in the UK relative to the control group due to the 2011 Reforms, implying a quarterly loss of USD 3.2 billion for shareholders of UK companies. Our results suggest that deal protections provide an important social welfare benefit by facilitating the initiation of M&A deals.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52924

Abstract—I propose and formalize an argument for why economists working in the welfarist normative tradition should include nonwelfarist principles in how they judge economic policy. The key idea behind this argument is that the world is too complex, and our ability to model it too limited, for us to fully trace a policy’s effects on welfare. Nonwelfarist principles can be valuable to a welfarist facing this limitation if they act as informational proxies, carrying accumulated knowledge about the effects of policy that otherwise cannot be considered. This argument can be seen both as extending a familiar logic for rule utilitarianism beyond the realm of individual ethics and as a specific version of a broader argument made for centuries by theorists from Hume to Hayek. I also provide evidence of an example in which real-world policy judgments are consistent with this theoretical argument. Results from a novel U.S. opinion survey show that approximately half of respondents reject redistribution driven by envy even though it generates direct utilitarian gains. That share rises as the role of envy is made more salient, consistent with respondents using nonwelfarist principles to encode concerns about the unobservable consequences of policy.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51704

  • Harvard Business School Case 902-412

Tobacco and the Future of Rural Kentucky

Governor Patton decides how to use settlement funds to develop a long-term plan for Kentucky's tobacco producers and rural communities.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/902412-PDF-ENG

  • Harvard Business School Case 117-012

ATH Technologies: Making the Numbers

An exercise that takes students through five stages of growth in an entrepreneurial start-up in the medical devices industry: 1) founding, 2) growth, 3) push to profitability, 4) relocation process, and 5) takeover by new management. At each stage, students must confront tensions in balancing profit, growth, and control. Difficulties encountered in the business are due to management's attempts to design and use formal control systems to achieve profit and performance goals.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/117012-PDF-ENG

  • Harvard Business School Case 117-013

ATH Technologies (A): Making the Numbers

No abstract available.

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https://cb.hbsp.harvard.edu/cbmp/product/117013-PDF-ENG

  • Harvard Business School Case 117-014

ATH Technologies (B)

Supplements the (A) case. Designed as an in-class handout.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/117014-PDF-ENG

  • Harvard Business School Case 117-015

ATH Technologies (C)

Supplements the (A) case. Designed as an in-class handout.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/117015-PDF-ENG

  • Harvard Business School Case 117-016

ATH Technologies (D)

Supplements the (A) case. Designed as an in-class handout.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/117016-PDF-ENG

  • Harvard Business School Case 117-017

ATH Technologies (E)

Supplements the (A) case. Designed as an in-class handout.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/117017-PDF-ENG

  • Harvard Business School Case 717-488

Cotopaxi: Managing Growth for Good

Cotopaxi, an innovative outdoor gear business targeting millennials, focuses on profit and social impact. This registered benefit corporation was formed by Davis Smith who coalesced his experiences as a Wharton MBA student along with professional knowledge from an unpaid internship in Peru and his previous e-commerce startups in the U.S. and Brazil. Cotopaxi’s social cause is fighting global poverty; their target is to donate 10% of their profits, but as a new capital-intensive business they give 2% of their revenue. Their income streams are mainly direct-to-consumer sales along with corporate sales and a special experience-based event—Questival. Their direct-to-consumer model lowers costs compared to competitors and allows Cotopaxi to offer lower prices, but they face a challenge in positioning their products as high quality.

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https://cb.hbsp.harvard.edu/cbmp/product/717488-PDF-ENG

  • Harvard Business School Case 717-468

Wal-Mart Update, 2017

In 2017 Wal-Mart was still the world’s largest company, with over $480 billion in annual revenue and operations in 28 countries. Although it had mostly vanquished its rival discount retailers in the U.S., it was struggling to find the right growth strategy. Facing a mature U.S. market, it had looked to international sales as an engine of growth in the early 2010s, but international sales had also stagnated over the past few years. Wal-Mart's leadership had targeted the rapidly growing e-commerce arena as a strategic priority, but there it faced intense competition from dominant online retailer Amazon. In such a competitive environment, how should Wal-Mart respond to the reality that its traditional strengths no longer guaranteed robust growth?

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https://cb.hbsp.harvard.edu/cbmp/product/717468-PDF-ENG