First Look

June 27, 2017

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

Building Hyperloop One

Elon Musk popularized the idea of a pod-in-tube transportation system, and now a startup team is trying to make it reality. The new case study Hyperloop One details challenges faced by the team and cites historic parallels and precedents. The case was written by William A. Sahlman, Ramana Nanda, Robert White, Allison M. Ciechanover, and Jeff Huizinga.

Leading Coca-Cola in Turkey

Management challenges for executives stationed in a turbulent environment are discussed in the new case study Global Leadership in a Dynamic and Evolving Region: Molinas @ The Coca-Cola Company. President Galya Frayman Molinas and her largely female and Turkish senior leadership team "grapple with the significant financial impact of massive protests in Turkey, the rise of anti-American sentiments, growing national health concerns, the reduction of the US Fed's financial stimulus, and capital flight from emerging markets,” describe case authors Tsedal Neeley and Esel Çekin.

Improving profit in the mobile-money market

An electronic currency ecosystem is evolving in the developing world that revolves around mobile-money agents, whose networks allow money to be stored as digital currency on mobile phones and then transferred to friends and family. In the new paper Inventory Management for Mobile Money Agents in the Developing World, researchers Karthik Balasubramanian, David F. Drake, and Douglas Fearing lay out an inventory model that could make such businesses more profitable.

A complete list of new research and publications from Harvard Business School faculty follows.

— Sean Silverthorne
 
  • 2017
  • New York: Oxford University Press

Profits and Sustainability: A History of Green Entrepreneurship

By: Jones, G.

Abstract—This book explores whether profits and environmental sustainability are compatible through the lens of a global history of green entrepreneurship between the nineteenth century and today. It tells the story of the extraordinary and often eccentric men and women who defied convention and imagined that business could help save the planet rather than consume it. The social and religious beliefs that drove many of these individuals are explored as the book explores how they overcame huge obstacles to execute their strategies in industries as diverse as renewable energy, organic food, natural beauty, eco-tourism, recycling, architecture, and finance. The pioneering efforts to build certification schemes and environmental reporting are examined, alongside the contested relationship between green business and governments. The struggles of entrepreneurial pioneers have rarely proved profitable, as they were forced to compete with conventional businesses that ignored negative environmental externalities and were often subsidized by governments in the United States and elsewhere. Yet the book shows that these entrepreneurs contributed significantly to the growth of environmental awareness among consumers, business leaders, and others. However the Earth's environmental health has continued to deteriorate. If combining profits and sustainability has proved challenging in the past, and remains so today, the book argues that one reason was how they have both been defined.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52778

  • forthcoming
  • Journal of International Economics

The Real Effects of Capital Control Taxes: Firm-Level Evidence from a Policy Experiment

By: Alfaro, Laura, Anusha Chari, and Fabio Kanczuk

Abstract—Emerging-market governments adopted capital control taxes to manage the massive surge in foreign capital inflows in the aftermath of the global financial crisis. Theory suggests that the imposition of capital controls can drive up the cost of capital and curb investment. This paper evaluates the effects of capital controls on firm-level stock returns and real investment using data from Brazil. On average, there is a statistically significant drop in cumulative abnormal returns consistent with an increase in the cost of capital for Brazilian firms following capital control announcements. The results suggest significant variation across firms and financial instruments. Large firms and the largest exporting firms appear less negatively affected compared to external-finance-dependent firms, and capital controls on equity inflows have a more negative announcement effect on equity returns than those on debt inflows. Real investment falls in the three years following the controls. Overall, the findings have implications for macro-finance models that abstract from heterogeneity at the firm level to examine the optimality of capital control taxation.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52787

  • Summer 2017
  • RAND Journal of Economics

Performance Feedback in Competitive Product Development

By: Gross, Daniel P.

Abstract—Performance feedback is ubiquitous in competitive settings where new products are developed. This article introduces a fundamental tension between incentives and improvement in the provision of feedback. Using a sample of 4,294 commercial logo design tournaments, I show that feedback reduces participation but improves the quality of subsequent submissions, with an ambiguous effect on high-quality output. To evaluate this trade-off, I develop a procedure to estimate agents' effort costs and simulate counterfactuals under alternative feedback policies. The results suggest that feedback on net increases the number of high-quality ideas produced and is thus desirable for a principal seeking innovation.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52780

  • forthcoming
  • Journal of Accounting & Economics

Is the SEC Captured? Evidence from Comment-Letter Reviews

By: Heese, Jonas, Mozaffar Khan, and Karthik Ramanna

Abstract—SEC oversight of publicly listed firms ranges from comment letter (CL) reviews of firms’ reporting compliance to pursuing enforcement actions against violators. Prior literature finds that firm political connections (PC) negatively predict enforcement actions, inferring SEC capture. We present new evidence that firm PC positively predict CL reviews and substantive characteristics of such reviews, including the number of issues evaluated and the seniority of SEC staff involved. These results, robust to identification concerns, are inconsistent with SEC capture and indicate a more nuanced relation between firm PC and SEC oversight than previously suggested.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52776

  • forthcoming
  • Journal of Financial Economics

Reexamining Staggered Boards and Shareholder Value

By: Wang, Charles C.Y., and Alma Cohen

Abstract—Cohen and Wang (2013) (CW2013) provide evidence consistent with market participants perceiving staggered boards to be value reducing. Amihud and Stoyanov (2016) (AS2016) contests these findings, reporting some specifications under which the results are not statistically significant. We show that the results retain their significance under a wide array of robustness tests that address the concerns expressed by AS2016. Our empirical findings reinforce the conclusions of CW2013.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52775

Inventory Management for Mobile Money Agents in the Developing World

By: Balasubramanian, Karthik, David F. Drake, and Douglas Fearing

Abstract—Mobile money systems, platforms built and managed by mobile network operators to allow money to be stored as digital currency, have burgeoned in the developing world as a mechanism to transfer money electronically. Mobile money agents exchange cash for electronic value and vice versa, forming the backbone of an emerging electronic currency ecosystem that has potential to connect millions of poor and “unbanked" people to the formal financial system. Unfortunately, low service levels due to agent inventory management are a major impediment to the further development of these ecosystems. This paper describes models for the agent's inventory problem, unique in that sales of electronic value (cash) correspond to an equivalent increase in inventory of cash (electronic value). This paper presents a base inventory model and an analytical heuristic that are used to determine optimal stocking levels for cash and electronic value given an agent's historical demand. When tested with a large sample of transaction-level data provided by an East African mobile operator, both the base model and the heuristic improved agent profitability by reducing inventory costs (defined here as the sum of stockout losses and cost of capital associated with holding inventory). The heuristic increased estimated agent profits by 15% relative to profits realized through agents actual decisions, while also offering substantial computational advantages relative to the base model.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=52788

Abstract—We experimentally test how effort responds to wages—randomly assigned to accrue to individuals or to a charity—in the presence of expectations-based reference points or targets. When individuals earn money for themselves, higher wages lead to higher effort with relatively muted targeting behavior. When individuals earn money for a charity, higher wages instead lead to lower effort with substantial targeting behavior. A reference-dependent theoretical framework suggests an explanation for this differential impact: when individuals place less value on earnings, such as when accruing earnings for a charity instead of themselves, more targeting behavior and a more sluggish response to incentives should result. Results from an additional experiment add support to this explanation. When individuals select into earning money for a charity and thus likely place a higher value on those earnings, targeting behavior is muted and no longer generates a negative effort response to higher wages.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=50189

Abstract—Research on geography and knowledge spillovers is premised on the proposition that proximity reduces the cost of search and coordination. Thus, learning from proximate parties is easier than from more distant ones. As a consequence, nearby individuals, teams, and firms share overlapping knowledge and correlated outcomes. In this paper we theorize that spatial spillovers fundamentally depend on the presence of existing relationships. Using multidimensional network formation data from the random placement of teams at a startup boot camp, we show that spatial spillovers decline if team members have existing ties within a particular social setting. For teams with preexisting ties within the boot camp, localized spillovers appear small or nonexistent. For teams without preexisting ties we find that outcomes improve if neighbors are high performing, but that outcomes worsen if neighboring teams are low performing. Our findings suggest that existing relationships do affect spillovers, primarily by capping downsides, but also by limiting the upsides of being near a high-performing team.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=52779

Evaluating Firm-Level Expected-Return Proxies

By: Lee, Charles M.C., Eric C. So, and Charles C.Y. Wang

Abstract—We argue, from an extensive literature review, that in the vast majority of research settings, biases in alternative expected-return proxies (ERPs) are irrelevant. Therefore, in most settings, the choice between alternative ERPs should be based on an evaluation of their relative measurement-error variances. We develop a parsimonious evaluation framework that empirically estimates a given ERP’s cross-sectional and time-series measurement-error variances. We then apply this framework to five classes of firm-level ERPs nominated by recent studies, including factor-based ERPs from finance and implied costs of capital (ICC) estimates from accounting. Our analyses show ICCs are particularly useful in tracking time-series variations in expected returns. We also find broad support for a “fitted” or “characteristic-based” approach to ERP estimation.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=48124

  • Harvard Business School Case 217-059

A Note on Franchising (Abridged)

Examines the motivations for franchising. Examines the academic literature in the area and draws implications for franchising patterns. Also provides data on franchising patterns.

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  • Harvard Business School Case 317-065

Responsibilities to Society

This module note for students outlines an approach to help managers deliver on their responsibilities in relation to society. The approach frames these responsibilities in terms of potential harms to third parties beyond investors, customers, and employees. The approach aims to help managers identify relevant harms, analyze their responsibility for harms, and determine an appropriate response. The approach also considers limits on how far managers ought to go to address these harms, emphasizing respect for boundaries relating to political legitimacy and legal authority. The module note was written for students in the first-year course Leadership and Corporate Accountability.

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This case examines the career of the Russian business oligarch Boris Berezovsky. Berezovsky was one of a small group of business tycoons that became fabulously rich after the collapse of the Soviet Union in 1991, as the new Russian government, advised by prominent Harvard economists, privatized state assets. The case provides an opportunity to explore how this happened, and what its impact was both at the time and for the subsequent development of capitalism in Russia. Berevosky's business empire suffered a major reversal after the appointment of Russian President Vladimir Putin in 2000. Berevosky's opposition to Putin's plans to restore the authority of the Russian state led to his exile in Britain, where he reinvented himself as an opponent of authoritarianism.

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Galya Frayman Molinas, President of Coca-Cola's Turkish business and a 20-year company veteran, is unexpectedly asked to take the helm of a newly expanded territory with operations across eight additional countries in Central Asia: Armenia, Azerbaijan, Georgia, Kazakhstan, Kirgizstan, Tajikistan, Turkmenistan, and Uzbekistan. With seemingly competing instructions to accelerate growth, while not diluting focus in Turkey or Central Asia, Molinas must decide how to balance change versus continuity across functions and country locations. In the meantime, tensions arise among the newly combined members of her business unit, as some fear being sidelined or losing their autonomy. Molinas wonders whether her team's leadership is too homogenous to manage this diverse and disgruntled group across emerging markets. Centralizing, decentralizing, or creating a hybrid structure is now Molinas' first priority. On top of these pressing organizational issues, shortly after assuming her new role, domestic and international events suddenly derail her unit's 17 consecutive months of record-breaking performance. Molinas and her largely female and Turkish senior leadership team grapple with the significant financial impact of massive protests in Turkey, the rise of anti-American sentiments, growing national health concerns, the reduction of the U.S. Fed's financial stimulus, and capital flight from emerging markets. While Turkey's revenue is in a precipitous decline, Molinas needs the Central Asian region to help alleviate the financial gap during this turbulent time. Molinas questions whether her unit's structure and her homogenous senior team's background are too narrow to help her counteract the external crises.

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Supplements the (A) case.

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https://cb.hbsp.harvard.edu/cbmp/product/417069-PDF-ENG

Supplements the (A) case.

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https://cb.hbsp.harvard.edu/cbmp/product/417070-PDF-ENG

Supplements the (A) case.

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https://cb.hbsp.harvard.edu/cbmp/product/417071-PDF-ENG

This case, set in the 1920s and 1930s, discusses the contributions of Harvard Business School (HBS) Professors Elton Mayo and Fritz Roethlisberger to management research and to the Human Relations Movement in management scholarship. The case focuses on their research program at the Western Electric Hawthorne Works manufacturing plant and the resulting insights, publications, course development, and impact. Brief biographical details of Mayo and Roethlisberger are given, along with a synopsis of the origins of academic research at HBS.

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https://cb.hbsp.harvard.edu/cbmp/product/717469-PDF-ENG

  • Harvard Business School Case 817-027

Hyperloop One

This case explores the attempt of Shervin Pishevar, a prominent Silicon Valley investor, to shepherd hyperloop, a futuristic pod-in-tube transportation technology, from concept to transformative reality via Hyperloop One and Sherpa Capital, both companies he co-founded. The case outlines the technology—first brought to widespread attention by Tesla and SpaceX executive Elon Musk—then follows Pishevar as he builds a team, develops prototypes, recruits investors and partners, and navigates the many obstacles in pursuit of this "moonshot." Students are presented with historical parallels and precedents that may illuminate certain aspects of the challenge.

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  • Harvard Business School Case 717-482

Cantel Medical

Cantel Medical Corporation provided infection prevention and control products and services for patients, caregivers, and other healthcare providers. In 2016, Cantel generated sales of $665 million and net profits of $60 million, double the levels of five years earlier. Chief Executive Officer Jørgen B. Hansen, appointed on August 1, 2016, was aiming to double the size of the business again. Cantel operated in three major vertical market segments: endoscopy, water purification and filtration, and healthcare disposables, which together accounted for more than 95% of Cantel’s sales. Over 90% of revenues were generated in North America. Hansen was looking to add new verticals to the portfolio, but he also saw opportunities to drive growth in Cantel’s core businesses, both at home and internationally. Over two decades, the company had delivered consistent organic growth and integrated over 30 acquisitions, providing total annual returns of 22% to its shareholders, with relatively limited leverage. Hansen was determined to maintain that track record, but the key question was how to achieve this goal. Was there enough growth in Cantel’s three key verticals in North America, or would more be needed? If so, which other verticals should Cantel consider? Should the company stick to infection control or add other products to its offering to leverage its customer relationships? How much would a drive into international markets help? And what organization was best suited to Cantel’s strategy? It had been run as a holding company in the past. Did that structure still make sense as the company ventured overseas?

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