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    First Look at New Research, March 27, 2018

    First Look

    27 Mar 2018

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

    Do CEOs matter?

    Extending a line of research studying the impact of CEOs on their organizations, Raffaella Sadun and colleagues discover that in some British hospitals, "we find little evidence that individual CEOs have an impact on a large set of measures of hospital performance." The Impact of CEOs in the Public Sector: Evidence from the English NHS.

    The incumbent's advantage in capitalizing on technology opportunity

    Looking at the world of regulated medical technology, researchers Cirrus Foroughi and Ariel Dora Stern consider over 35,000 new medical devices to identify predictors of digital innovation in the medical device industry. Digital Innovation with High Costs of Entry: Evidence from Software-Driven Medical Devices.

    How successful are Europe's nonfinancial disclosure requirements?

    This study looks at how companies reacted after the European Union increased disclosure requirements of environmental, social, and governance performance metrics. "Overall, the results are consistent with the equity market perceiving that this disclosure regulation of nonfinancial information would lead to net costs for firms with weak nonfinancial performance and disclosure," report authors Jody Grewal, Edward J. Riedl, and George Serafeim. Market Reaction to Mandatory Nonfinancial Disclosure.

    Other new publications from Harvard Business School faculty are listed below.

    —Sean Silverthorne
    LinkedIn
    Email
    • forthcoming
    • Harvard Journal on Legislation

    From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces

    By: Edelman, Benjamin, and Abbey Stemler

    Abstract—Online marketplaces have transformed how we shop, travel, and interact with the world. Yet, their unique innovations also present a panoply of challenges for communities and states. Surprisingly, federal laws are chief among those challenges despite the fact that online marketplaces facilitate transactions traditionally regulated at the local level. In this article, we survey the federal laws that frame the situation, especially §230 of the Communications Decency Act (CDA), a 1996 law largely meant to protect online platforms from defamation lawsuits. The CDA has been stretched beyond recognition to prevent all manner of prudent regulation. We offer specific suggestions to correct this misinterpretation to assure that state and local governments can appropriately respond to the digital activities that impact physical realities.

    Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54300

    • August 2017
    • Journal of Law & Economics

    Tort Reform and Innovation

    By: Galasso, Alberto, and Hong Luo

    Abstract—Current academic and policy debates focus on the impact of tort reforms on physicians’ behavior and medical costs. This paper examines whether these reforms also affect incentives to develop new technologies. We develop a theoretical model that predicts that the impact of reducing liability risks for physicians on innovation may be positive or negative, depending on the characteristics of the technology. Empirically, we find that, on average, laws that limit the liability exposure of healthcare providers are associated with a significant reduction in medical device patenting. Tort reforms have the strongest impact in medical fields in which the probability of facing a malpractice claim is the largest, and they do not seem to affect the amount of new technologies of the highest and lowest quality. Our results underscore the importance of considering dynamic effects in the economic analysis of tort laws.

    Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54284

    • forthcoming
    • Management Science

    Market Reaction to Mandatory Nonfinancial Disclosure

    By: Grewal, Jody, Edward J. Riedl, and George Serafeim

    Abstract—We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an on average negative market reaction, (ii) a less negative market reaction for firms having higher pre-directive nonfinancial performance, and (iii) a less negative reaction for firms having higher pre-directive nonfinancial disclosure levels. Results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Overall, the results are consistent with the equity market perceiving that this disclosure regulation of nonfinancial information would lead to net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure.

    Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54302

    Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts

    By: Cao, Sheng, Xianjie He, Charles C.Y. Wang, and Huifang Yin

    Abstract—We study how sell-side analysts produce information in a context where the central government can influence financial intermediaries. Leveraging seven economic periods between 2005 and 2015 when the Chinese government had strong incentives to prop up the stock market, we show that sell-side analysts employed at state-owned brokerages issued relatively optimistic earnings forecasts and stock recommendations during these periods. This relative optimism is particularly pronounced in earnings forecasts for larger firms and for state-owned enterprises and is found regardless of analysts' experience or star status or of their brokerages' degree of dependence on commissions. Although these optimistic forecasts are also relatively less accurate, the evidence suggests that they influence investors' beliefs. These findings highlight the role of government incentives in the behavior and output of analysts in emerging-market contexts.

    Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54281

    Self-Employment Dynamics and the Returns to Entrepreneurship

    By: Dillon, Eleanor W., and Christopher T. Stanton

    Abstract—Small business owners and others in self-employment have the option to transition to paid work. If there is initial uncertainty about entrepreneurial earnings, this option increases the expected lifetime value of self-employment relative to pay in a single year. This paper first documents that moves between paid work and self-employment are common and consistent with experimentation to learn about earnings. This pattern motivates estimating the expected returns to entrepreneurship within a dynamic lifecycle model that allows for non-random selection and gradual learning about the entrepreneurial earnings process. Using longitudinal data on men from the Panel Survey of Income Dynamics (PSID), the model accurately fits entry patterns into self-employment by age. The option value of returning to paid work is found to constitute a substantial portion of the monetary value of entrepreneurship. The model is then used to evaluate policies that change incentives for entry into self-employment.

    Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=51676

    Digital Innovation with High Costs of Entry: Evidence from Software-Driven Medical Devices

    By: Foroughi, Cirrus, and Ariel Dora Stern

    Abstract—Does technological opportunity enable the rise of new entrants or reinforce the position of incumbents? Research on this classic topic often ignores the high costs of entry seen in some industries. We offer a novel approach to this question in the context of regulated medical technology, where the introduction of software is of growing importance and has created fresh opportunities for new product development. Pioneering a new application of supervised document classification, we consider over 35,000 new medical devices that came to market in the United States from 2002 to 2016 in order to identify predictors of digital innovation in this industry. We consider the relative importance of key factors such as geographic and within-firm capabilities and the role of financial resources. We find that location in a region of concentrated expertise and prior firm commercialization experience reinforce one another in predicting digital innovation. While venture capital funding appears to play a role in supporting innovative entrants, closer analysis suggests that this funding selects on other variables that predict digital innovation; in this regulated industry, financial resources do not substitute for existing capabilities. We conclude that incumbent firms have an advantage in innovating in this setting.

    Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54282

    The Impact of CEOs in the Public Sector: Evidence from the English NHS

    By: Janke, Katharina, Carol Propper, and Raffaella Sadun

    Abstract—We investigate whether top managers affect the performance of large public sector organizations. As our case study we examine CEOs of English public hospitals, which are large, complex organizations with multi-million turnover. We study the impact of individual CEOs on a wide set of measures of hospital performance, intermediate operational outcomes and inputs. We adopt two econometric approaches: a parametric approach that exploits the movement of CEOs across different hospitals and a non-parametric difference-in-difference matching estimator. Overall, we find little evidence that individual CEOs have an impact on a large set of measures of hospital performance. This result is not due to the allocation of good performers to poorly performing hospitals.

    Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54280

    Experience Markets: An Application to Outsourcing and Hiring

    By: Stanton, Christopher T., and Catherine Thomas

    Abstract—New employers in a global online labor market are less likely to hire and, when they do, pay higher hourly wages than employers with market experience. This paper documents significant differences between how inexperienced and experienced employers evaluate job applicants, which alters their demand. There is limited evidence that workers’ costs are higher when applying to an inexperienced employer. New employers enter the market uncertain about their value for it, and experience resolves this uncertainty. The analysis reveals large heterogeneity in employers’ values for offshoring labor services in this market, with implications for market policies to attract new employers.

    Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54291

    • Harvard Business School Case 718-438

    Sandlands Vineyards

    Approximately 80% of the wineries in the U.S. break even or lose money. An even greater percentage lose money on an economic basis (i.e., after a charge for the cost of equity). Tegan Passalacqua is a successful, young, Californian winemaker who specializes in making “old vine” wine (i.e., wine from vines that are at least 60 and up to 100+ years old). By day, he is the head winemaker at Turley Wine Cellars, a leading Zinfandel producer. In his spare time, however, he runs his own winery called Sandlands, which produces premium wines using historic, out-of-favor grape varieties such as Carignane, Mataro, and Chenin Blanc. Despite the odds, Sandlands appears to be succeeding. The question is why and whether his performance is sustainable. The case is set in December 2017 as Passalacqua was deciding whether to buy a building and develop a winery at a cost of up to $500,000. Because he already owns an old vine vineyard, and has limited resources, he must decide if this is the right investment to make next.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/718438-PDF-ENG

    • Harvard Business School Case 718-496

    General Motors and Autonomous Vehicle Regulation

    No abstract available.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/718496-PDF-ENG

    • Harvard Business School Case 718-430

    Redfin: Redefine Real Estate

    Founded in 2004, Redfin envisioned a light-touch model in which clients self-served using the digital platform in exchange for a significantly lower fee than traditional agents. Realizing the narrow appeal of its initial model, Redfin had made significant changes to its strategy while maintaining some key distinctive choices. As of 2016, Redfin served in more than 80 markets throughout the U.S., employed over 700 full-time agents, and had grown over 40% annually since 2014. With additional capital raised through an IPO, Glenn Kelman faced decisions on how to allocate these resources in order to grow. Should Redfin adjust its advertising strategy? Should it reconsider the policy of hiring lead agents only as full-time employees? Should Redfin purchase homes and hold inventories?

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/718430-PDF-ENG

    • Harvard Business School Case 718-459

    Corporate Strategy: Course Introduction 2018

    This course overview note was prepared to aid students in Corporate Strategy.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/718459-PDF-ENG

    • Harvard Business School Case 718-462

    Corporate Strategy: Organization

    No abstract available.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/718462-PDF-ENG

    • Harvard Business School Case 718-460

    Corporate Strategy: Resources

    No abstract available.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/718460-PDF-ENG

    • Harvard Business School Case 718-461

    Corporate Strategy: Scope

    No abstract available.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/718461-PDF-ENG

    • Harvard Business School Case 817-131

    The Entrepreneurial Manager Module 3: Operating the Business Model

    No abstract available.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/817131-PDF-ENG

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