First Look

January 24, 2017

Among the highlights included in new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Do public companies compromise their future with too many shareholder payouts?

From 2005-2014, S&P companies distributed $6.4 trillion in stock buybacks and dividends, which amounts to 93 percent of the firms' net income. Researchers Jesse M. Fried and Charles C.Y. Wang question the argument that the payouts are evidence firms focus too much on short-term gain rather than long-term investment. Their working paper is titled Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right.

The growth of Chinese philanthropy

The case study Zhang Xin and the Emergence of Chinese Philanthropy describes the founding of SOHO China Foundation, established by husband and wife real estate moguls Zhang Xin and Pan Shiyi. "The case provides a vehicle for discussing the dynamics of business philanthropy in China and the future directions it may take," according to authors Geoffrey G. Jones and Amanda Yang.

Measuring the true costs and value of health care

Robert S. Kaplan and Michael E. Porter discuss how health care provider organizations have difficulty measuring and managing the true costs and values of health care globally. Read Managing Healthcare Costs and Value in the January issue of the journal Strategic Finance.

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

— Sean Silverthorne
  • January 2017
  • Review of Financial Studies

Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

By: Chang, Tom Y., Samuel M. Hartzmark, David H. Solomon, and Eugene F. Soltes

Abstract—We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year (“positive seasonality quarters”) have higher returns when those earnings are usually announced. Analysts have more positive forecast errors in positive seasonality quarters, consistent with the returns being driven by mistaken earnings estimates. We show that investors appear to overweight recent lower earnings following positive seasonality quarters, leading to pessimistic forecasts in the subsequent positive seasonality quarter. The returns are not explained by risk-based explanations, firm-specific information, increased volume, or idiosyncratic volatility.

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  • February 2017
  • Academic Radiology

Dissecting Costs of CT Study: Application of TDABC (Time-driven Activity-based Costing) in a Tertiary Academic Center

By: Kaplan, Robert S., Yoshimi Anzai, Marta E. Heilbrun, Derek Haas, Luca Boi, Kirk Moshre, Satoshi Minoshima, and Vivian S. Lee

Abstract—The lack of understanding the true costs (not charges) of delivering health care services poses tremendous challenges in the containment of health care costs. In this study, we applied an established cost accounting method, time-driven activity-based costing (TDABC), to assess the costs of performing an abdomen and pelvis computed tomography (AP CT) in an academic radiology department. We then identified opportunities for improved efficiency in the delivery of this service.

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  • January 2017
  • Strategic Finance

Managing Healthcare Costs and Value

By: Kaplan, Robert S., Michael E. Porter, and Mark L. Frigo

Abstract—Rising health care costs are a major global challenge. A number of factors contribute to this trend, including aging populations and medical technology. But an underlying and misunderstood source of health care’s escalating costs has been the inability of health care provider organizations (such as large academic medical centers) to properly measure and manage the true costs and value of health care. The paper contains an interview with Kaplan and Porter about their experiences with improving the measurement of health care outcomes and cost.

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  • forthcoming
  • Journal of Political Economy

Growth Through Heterogeneous Innovations

By: Kerr, William R., and Ufuk Akcigit

Abstract—We build a tractable growth model where multi-product incumbents invest in internal innovations to improve their existing products, while new entrants and incumbents invest in external innovations to acquire new product lines. External and internal innovations generate heterogeneous innovation qualities, and firm size affects innovation incentives. This framework allows us to analyze how different types of innovation contribute to economic growth and how the firm size distribution can have important consequences for the types of innovations realized. Our model aligns with many observed empirical regularities, and we quantify our framework by matching Census Bureau operating data with patent data for U.S. firms. We observe that internal innovation scales moderately faster with firm size than external innovation.

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  • forthcoming
  • Strategic Management Journal

Elevating Repositioning Costs: Strategy Dynamics and Competitive Interactions

By: Menon, Anoop R., and Dennis Yao

Abstract—This paper proposes an approach for modeling competitive interactions that incorporates the costs to firms of changing strategy. The costs associated with strategy modifications, which we term “repositioning costs,” are particularly relevant to competitive interactions involving major changes to business strategies. Repositioning costs can critically affect competitive dynamics and, consequently, the implications of strategic interaction for strategic choice. While the literature broadly recognizes the importance of such costs, game-theoretic treatments of major strategic change, with very limited exceptions, have not addressed them meaningfully. We advocate greater recognition of repositioning costs and illustrate with two simple models how repositioning costs may facilitate differentiation and affect the value of a firm’s capability to reduce repositioning costs through investments in flexibility.

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The Rise of American Ingenuity: Innovation and Inventors of the Golden Age

By: Akcigit, Ufuk, John Grigsby, and Tom Nicholas

Abstract—We examine the golden age of U.S. innovation by undertaking a major data collection exercise linking U.S. patents to state and county-level aggregates and matching inventors to Federal Censuses between 1880 and 1940. We identify a causal relationship between patented inventions and long-run economic growth and outline a basic framework for analyzing key macro and micro-level determinants. We find a positive relationship between innovation and drivers of regional performance including population density, financial development, and geographic connectedness. We also explore the impact of social structure measured by slavery and religion. We then profile the characteristics of inventors and their life cycle finding that inventors were highly educated, positively selected through exit early in their careers, made time allocation decisions such as delayed marriage, and tended to migrate to places that were conducive to innovation. Father's income was positively correlated with becoming an inventor, though not when controlling for the child's education. We show there were strong financial returns to technological development. Finally, we document an inverted-U shaped relationship between inequality and innovation but also show that innovative places tended to be more socially mobile. Our new data help to address important questions related to innovation and long-run growth dynamics.

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Abstract—During the period 2005–2014, S&P 500 firms distributed to shareholders more than $3.95 trillion via stock buybacks and $2.45 trillion via dividends—$6.4 trillion in total. These shareholder payouts amounted to over 93% of the firms' net income. Academics, corporate lawyers, asset managers, and politicians point to such shareholder-payout figures as compelling evidence that “short-termism" and “quarterly capitalism” are impairing firms' ability to invest, innovate, and provide good wages. We explain why S&P 500 shareholder-payout figures provide a misleadingly incomplete picture of corporate capital flows and the financial capacity of U.S. public firms. Most importantly, they fail to account for offsetting equity issuances by firms. We show that, taking into account issuances, net shareholder payouts by all U.S. public firms during the period 2005–2014 were in fact only about $2.50 trillion, or 33%, of their net income. Moreover, much of these net shareholder payouts were offset by net debt issuances and, thus, were effectively recapitalizations rather than firm-shrinking distributions. After excluding marginal debt capital inflows, net shareholder payouts by public firms during the period 2005–2014 were only about 22% of their net income. In short, S&P 500 shareholder-payout figures are not indicative of actual capital flows in public firms, and thus cannot provide much basis for the claim that short-termism is starving public firms of needed capital. We also offer three other reasons why corporate capital flows are unlikely to pose a problem for the economy.

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  • Harvard Business School Case 917-012

Three Problems in Protecting Competition

In three mini-cases, readers see a range of disputes in competition law—and apply legal principles to assure fair competition.

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  • Harvard Business School Case 516-030

InMobi: Reimagining Mobile Advertising

InMobi, a mobile advertising company, considered one of India's first unicorns, has launched a new product called Miip. InMobi hopes that the product will grow its revenue eight times by 2018. Visually identified by a mascot, Miip seeks to reimagine adverting by becoming a user's trusted companion on the mobile phone, introducing them to new, relevant products, much as a friend would. As the CEO and co-founder Naveen Tewari introduces the product in China, he wonders if the product will be as successful as InMobi anticipates.

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  • Harvard Business School Case 617-020

Indigo Agriculture

Indigo Agriculture had successfully developed and launched its first commercial product, microbe-enhanced cotton seeds, on an accelerated product development timeline. In late 2016, as the company was about to launch its second product, winter wheat, the management team proposed to again accelerate the development timeline and introduce six new products in four countries within the next 12 months. The CEO and Director of Business Development met to discuss the feasibility of accelerating the timeline, potential bottlenecks in the product development process, resource management, and the potential need for a more formalized development process.

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  • Harvard Business School Case 317-045

Zhang Xin and the Emergence of Chinese Philanthropy

This case examines the recent emergence of Chinese business philanthropy through the case of the SOHO China Foundation established by real estate wife and husband moguls Zhang Xin and Pan Shiyi. After exploring how they became billionaires through investing in the booming China real estate market in the 1990s, the case discusses their decision to found the Foundation in the context of the belated emergence of philanthropy in China and the continuing challenges it faces because of reputational issues and government supervision. A decision by the Foundation to endow $100 million to provide financial aid for Chinese students studying overseas, which included large gifts to Harvard and Yale, attracted widespread criticism in China. The case provides a vehicle for discussing the dynamics of business philanthropy in China and the future directions it may take.

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  • Harvard Business School Case 117-006

Cost Variance Analysis

This note was written to provide students with fundamental concepts and methods for the analysis of cost variances. It focuses on the decomposition of cost variances into price, quantity, and mix variance components, an approach that allows students to identify the root causes of differences between expected and actual costs.

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  • Harvard Business School Case 716-414

Huaxia: Building a U.S.-Style Dairy in China

In 2015, Charles Shao, chairman of Huaxia, considered the alternatives to ensure sustainable growth of Huaxia and rebuild the overall health of China's dairy industry. He came to China in 2004 and set up Huaxia dairy farm with the goal to build a world-class dairy farm in China. In 2015, Huaxia had three farms in operation with approximately 20,000 cows (including 7,200 milking cows) and a daily production of 220 tons of raw milk. It sold most of its raw milk to top dairy brands in China while selling a small volume of dairy products under its own premium brand Wondermilk. Besides running his own dairy farms, Shao had been providing free training in dairy farm management to industry peers, developing a milk-traceability system, and setting up a consulting firm to offer dairy management services. Should he continue to invest in these initiatives that benefitted the whole industry or focus resources on growing his own business?

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  • Harvard Business School Case 317-064

Uber in China: Driving in the Gray Zone (B)

Starting in 2014, for two years Uber had fought an intense, costly battle for China’s ridesharing market with well-financed and well-connected domestic Chinese competitors. During this time, Uber also had to respond to an ever-shifting regulatory landscape that looked increasingly bleak in 2016. Then on August 1, 2016 Uber CEO Travis Kalanick shocked the global ridesharing industry by selling the company’s China operations to arch rival Didi Chuxing. Given the competition from domestic rivals and the uncertainties of government regulation, was the decision to exit China the right one for Uber? What does this latest reconfiguration of the market mean for China's burgeoning ridesharing industry? What lessons could other tech companies learn from Uber’s experiences in China?

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  • Harvard Business School Case 617-029

Anthony Starks at InSiL Therapeutics (A)

When Bruce Wayne hired Anthony Starks, he thought he had hit a home run by getting the most brilliant and passionate scientist-leader in the field to be his CSO. But a few months in, Wayne and Starks begin to clash over crucial forward-looking decisions about the direction of the company. As CEO, Wayne needs to make tough decisions about how to manage his passionate but increasingly unpredictable CSO.

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  • Harvard Business School Case 617-030

Anthony Starks at InSiL Therapeutics (B)

This case accompanies the (A) case from Anthony Starks's perspective.

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  • Harvard Business School Case 216-045


Matrix Capital Management, a long-short equity hedge fund based in Waltham, Massachusetts, is assessing its investment in Tableau, a data visualization company. Tableau, which conducted an IPO a few years ago, has been experiencing substantial growth as it aims at disrupting the business intelligence software market. Matrix's investment management team is attracted by two key features of the tech company: the large addressable market and the potential to emerge as a leader in this market. However, after hitting an all-time high in the first quarter of 2015, Tableau's share price began trading down, and by September of that year the stock was trading down year-to-date. Matrix's management team wonders whether the recent market volatility presents an opportunity to add to their existing long position. This case highlights a variety of methodologies to valuate a high-growth company in the tech sector and illustrates the challenge of living up to high market expectations.

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  • Harvard Business School Case 705-445

The U.S. Health Club Industry in 2004

In 2004, the $16.8 billion U.S. health club industry continued its strong record of growth. There were almost 27,000 health clubs in the United States, up from 6,700 two decades earlier, and these clubs claimed 41 million members, over 14% of the U.S. population. Nearly 67 million people used these clubs in 2004. As the industry grew, many large chains began to emerge, opening new outlets and buying up smaller chains and independents. Most industry observers believed the growth and consolidation would continue, providing many opportunities for investors. However, few health club chains were publicly listed, and the leading listed company, Bally Total Fitness, was under U.S. Securities and Exchange Commission investigation for accounting irregularities. Yet this investigation did little to dampen enthusiasm for the new personal health phenomenon, and rumors abounded of private equity deals in the offing. The key question for investors seemed to be how best to take advantage of the opportunity.

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