Publications
An Investigation of Earnings Management through Marketing Actions
| Authors: | Craig J.Chapman, Thomas J. Steenburgh |
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| Publication: | Management Science (forthcoming) |
Abstract
Prior research hypothesizes that managers use "real actions," including the reduction of discretionary expenditures, to manage earnings to meet or beat key benchmarks. This paper examines this hypothesis by testing how different types of marketing expenditures are used to boost earnings for a durable commodity consumer product, which can be easily stockpiled by end consumers. Combining supermarket scanner data with firm-level financial data, we find evidence that differs from prior literature. Instead of reducing expenditures to boost earnings, soup manufacturers roughly double the frequency and change the mix of marketing promotions (price discounts, feature advertisements, and aisle displays) at the fiscal quarter end when they have greater incentive to boost earnings. Our results confirm managers' stated willingness to sacrifice long-term value in order to smooth earnings (Graham, Harvey, and Rajgopal, 2005) and their stated preference to use real actions to boost earnings to meet different types of earnings benchmarks. We estimate that marketing actions can be used to boost quarterly net income by up to 5% depending on the depth and duration of promotion. However, there is a price to pay, with the cost in the following period being approximately 7.5% of quarterly net income. Finally, a unique aspect of the research setting allows tests of who is responsible for the earnings management. While firms appear unable to increase the frequency of aisle display promotions in the short run, they can reallocate these promotions within their portfolio of brands. Results show firms shifting display promotions away from smaller revenue brands toward larger ones following periods of poor financial performance. This indicates the behavior is determined by parties above brand managers in the firm. These findings are consistent with firms engaging in real earnings management and suggest the effects on subsequent reporting periods and competitor behavior are greater than previously documented.
Implicit Voice Theories: Taken-for-granted Rules of Self-censorship at Work
| Authors: | J.R. Detert, Amy C. Edmondson |
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| Publication: | Academy of Management Journal (forthcoming) |
Abstract
This article examines, in a series of four studies, the nature and impact of implicit voice theories-largely taken-for-granted beliefs about when and why speaking up at work is risky or inappropriate. In Study 1, qualitative data from 190 interviews conducted in a knowledge-intensive multinational corporation suggest that reluctance to speak up, even with pro-organizational suggestions, is driven by specific implicit theories about speaking up in hierarchies. Study 2 uses open-ended survey responses, with data from 185 working adults, to examine the generalizability of the implicit voice theories identified in Study 1. Studies 3 and 4 develop and test survey measures for five implicit voice theories, using additional samples comprised of more than 300 adults. The analyses establish psychometric properties of the new measures, including showing their discriminant validity from voice-related individual and organizational factors and their incremental predictive validity on workplace silence. Collectively, the results from the four studies indicate the prevalence of implicit voice theories and suggest that they are an important addition to extant explanations of workplace silence. We discuss implications of these results for theory and practice and suggest directions for future research.
Paper not available
Working Papers
Platform Envelopment
| Authors: | Thomas Eisenmann, Geoffrey Parker, and Marshall Van Alstyne |
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Abstract
Due to network effects and switching costs in platform markets, entrants generally must offer revolutionary functionality. We explore a second entry path that does not rely upon Schumpeterian innovation: platform envelopment. Through envelopment, a provider in one platform market can enter another platform market, combining its own functionality with the target's in a multi-platform bundle that leverages shared user relationships. We build upon the traditional view of bundling for economies of scope and price discrimination and extend this view to include the strategic management of a firm's user network. Envelopers capture share by foreclosing an incumbent's access to users; in doing so, they harness the network effects that previously had protected the incumbent. We present a typology of envelopment attacks based on whether platform pairs are complements, weak substitutes, or functionally unrelated, and we analyze conditions under which these attack types are likely to succeed.
Download the paper: http://www.hbs.edu/research/pdf/07-104.pdf
Unstable Equity? Combining Banking with Private Equity Investing
| Authors: | Lily Fang, Victoria Ivashina, Josh Lerner. |
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Abstract
Theoretical work suggests that banks can be driven by market mispricing to undertake activity in a highly cyclical manner, accelerating activity during periods when securities can be readily sold to other parties. While financial economists have largely focused on bank lending, banks are active in a variety of arenas, with proprietary trading and investing being particularly controversial. We focus on the role of banks in the private equity market. We show that bank-affiliated private equity groups accounted for a significant share of the private equity activity and the banks' own capital. We find that banks' share of activity increases sharply during peaks of private equity cycles. Deals done by bank-affiliated groups are financed at significantly better terms than other deals when the parent bank is part of the lending syndicate, especially during market peaks. While bank-affiliated investments generally involve targets with better ex-ante characteristics, bank-affiliated investments have slightly worse outcomes than non-affiliated investments. Also consistent with theory, the cyclicality of banks' engagement in private equity and favorable financing terms are negatively correlated with the amount of capital that banks commit to funding of any particular transaction.
Download the paper: http://www.hbs.edu/research/pdf/10-106.pdf
Leveraging Team Familiarity to Handle Uncertainty: A Resource-based View of Team Performance
| Authors: | Heidi K. Gardner, Francesca Gino, Bradley R. Staats |
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Abstract
Teams are increasingly deployed to handle uncertain tasks. How can they effectively use their knowledge resources to assure quality communications and high performance when confronting uncertainty? Drawing on the resource-based view (RBV) of the firm, we introduce the notion of team RBV to explain how teams can translate their resources-knowledge of each other and knowledge of their work-into superior performance. We develop and test theory linking these resources to communication quality. We demonstrate that interpersonal familiarity is a critical resource for teams to overcome the negative effects of uncertainty on their communication quality and ultimately to benefit their performance.
Paper not available.
Boundary Spanning in a For-profit Research Lab: An Exploration of the Interface Between Commerce and Academe
| Authors: | Christopher C. Liu, Toby E. Stuart |
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Abstract
In innovative industries, private-sector companies increasingly are participants in open communities of science and technology. To participate in the system of exchange in such communities, firms often publicly disclose what would otherwise remain private discoveries. In a quantitative case study of one firm in the biopharmaceutical sector, we explore the consequences of scientific publication-an instance of public disclosure-for a core set of activities within the firm. Specifically, we link publications to human capital management practices, showing that scientists' bonuses and the allocation of managerial attention are tied to individuals' publications. Using a unique electronic mail dataset, we find that researchers within the firm who author publications are much better connected to external (to the company) members of the scientific community. This result directly links publishing to current understandings of absorptive capacity. In an unanticipated finding, however, our analysis raises the possibility that the company's most prolific publishers begin to migrate to the periphery of the intra-firm social network, which may occur because these individuals' strong external relationships induce them to reorient their focus to a community of scientists beyond the firm's boundary.
Download the paper: http://www.hbs.edu/research/pdf/11-012.pdf
Multinational Firms, Labor Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide
| Authors: | Jordan Siegel, Lynn Pyun, B.Y. Cheon |
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Abstract
The organizational theory of the multinational firm states that foreignness is a liability to be overcome, in particular that being a foreigner "unembedded" in host-country social networks is a source of competitive disadvantage, whereas a distant literature on labor market discrimination suggests that exploiting the bigotry of others might be a source of competitive advantage. We seek to turn the first literature somewhat on its head by building on insights from the second literature. Specifically, multinationals hold a particularly significant competitive weapon as outsiders going into distant markets, by being able as outsiders to see the major social schisms common in host labor markets and potentially exploit the social divide for their own competitive advantage. Using two unique data sets from South Korea, we show that multinationals in the 2000s have derived significant advantage in the form of improved profitability by aggressively hiring the excluded group, namely women, in the local managerial labor market. Our results are economically meaningful and realistic in size, in addition to being robust to the inclusion of firm fixed effects. Multinationals, even those from home markets that discriminate heavily against women, often show evidence of having seen the strategic opportunity. It is not that multinationals alone have derived such advantage, as firms, foreign and domestic, that exploit the opportunity saw a significant profit benefit. Yet foreign multinationals have been significantly more likely than domestic firms to employ women in positions of managerial responsibility. Also, while the market is moving towards a new equilibrium "freer" of discrimination, that movement has been relatively slow, thus presenting a long-lasting competitive opportunity for multinationals.
Download the paper: http://www.hbs.edu/research/pdf/11-011.pdf
Cases & Course Materials
ProPublica
Michel Anteby, Philippe Bertreau, Charlotte Newman
Harvard Business School Case 410-140
Stephen Engelberg, ProPublica's managing editor, entered the organization's newsroom located in lower Manhattan on September 16, 2008. He knew a historical financial debacle was happening at his doorstep, yet none of his journalists were covering that beat. It would take much effort to get up to speed on the story. Uncovering what caused the recent turmoil in financial markets and Lehman's failure would require skills, knowledge of financial services, and connections within the industry. ProPublica had been created only a year earlier as an independent, non-profit newsroom focused on investigative journalism. It was now fully staffed with close to 30 members, including journalists who had joined partly because of the promise of editorial latitude they were offered. As Engelberg weighed his various options, he knew all the major U.S. newsrooms were heading full speed to allocate resources covering the developing debacle. ProPublica needed to live up to the public's expectations. Should he assign the story to one of his journalists and, if so, whom? Alternatively, should he hire new talent? In that case who would be a good fit? Moreover, how might this impact ProPublica's model and culture?
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http://cb.hbsp.harvard.edu/cb/product/410140-PDF-ENG
Life Journey Profile: Nicole Gardner
Bhaskar Chakravorti, Shirley M. Spence
Harvard Business School Case 810-111
Examine the life journey of an HBS 2002 alum, in her own words, and her perspective on success.
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http://cb.hbsp.harvard.edu/cb/product/810111-PDF-ENG
Kent Thiry: 'Mayor' of DaVita
William W. George, Natalie Kindred
Harvard Business School Case 410-065
Kent Thiry, CEO of dialysis provider DaVita, is considering how to integrate employees from recently acquired Gambro Healthcare without damaging DaVita's robust, unconventional internal culture. When Thiry joined DaVita in 1999, breaking an important promise to his family in order to do so, he was determined to create a differentiated company with a community-like culture. Over six years, he had engineered an impressive financial turnaround and successfully developed the strong culture he had envisioned. In late 2004, DaVita acquired arch-rival Gambro Healthcare, whose 12,000 employees would nearly double DaVita in size once the integration is completed in fall 2005. Confident that the deal makes business sense but worried about potential adverse impacts of the integration-especially in light of rumors that Gambro employees are suspicious of Thiry's authenticity and critical of DaVita's arguably eccentric culture-Thiry is considering whether to impose DaVita's culture on the new arrivals, or just allow Gambro to operate independently for a period of time.
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http://cb.hbsp.harvard.edu/cb/product/410065-PDF-ENG
Advanced Leadership Note: An Institutional Perspective and Framework for Managing and Leading
Rosabeth Moss Kanter, Rakesh Khurana
Harvard Business School Note 410-076
Large-scale societal issues increasingly appear on the agenda of business leaders, including poverty, health, education, business-government relations, and the degradation of the environment. These problems are not entirely new, but the forces of globalization and the economic crisis have made them more visible and increase their urgency. They share several characteristics that signal the need for new kinds of societal leadership and academic scholarship. From the perspective of leadership, one common characteristic of these global problems is that they include both technical and political components. The political context surrounding any problem must be understood and managed, and a variety of institutions across sectors must be mobilized before technical solutions can be applied. Along similar lines, technical knowledge of solutions alone is not enough to scale successful demonstration projects that address these complex problems. That step involves resources and skills centered on forging appropriate systemic connections to effectively distribute solutions. Thus, these challenges cannot be dealt with by one profession or institution acting alone; indeed, effective action most often occurs at the intersections of professional and institutional fields. Holistic solutions, however, can be difficult to implement because of the complex interactions (or failures to interact) among many participants who deal with just one piece of an issue. Finally, solutions to these problems require concurrent actions at several system levels and/or among many stakeholders. This means that social capital as well as financial capital is required to forge relationships, influence opinion leaders and gatekeepers, and ensure cultural appropriateness. This note incorporates these concepts under the rubric of institutional leadership. This introductory note covers the following: (1) key dimensions of the institutional environment surrounding organizations, including the role of stakeholders and the need for new collaborations in creating new markets and solving critical societal problems; (2) the core assumptions of the institutional perspective on organizations and markets, especially in contrast to assumptions of neoclassical economics; and (3) managerial implications-analytics, skills, and success factors.
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http://cb.hbsp.harvard.edu/cb/product/410076-PDF-ENG
Equitas Microfinance: The Fastest Growing MFI on the Planet
V.G. Narayanan, V. Kasturi Rangan
Harvard Business School Case 510-104
Founded as a for-profit microfinance company, Equitas had acquired nearly a million clients in the short two years since it was founded. The founder, Vasu, and his management team wished to accelerate the already impressive spurt to three million clients in the next two years. The case describes the company's business model, which attempts to integrate microfinance with social development, and provides students with the opportunity to discuss the scaling options and challenges facing the founder.
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http://cb.hbsp.harvard.edu/cb/product/510104-PDF-ENG
Bank of America Acquires Merrill Lynch (A)
Robert C. Pozen, Charles E. Beresford
Harvard Business School Case 310-092
On December 22, 2008, Bank of America (BofA) chairman and CEO Ken Lewis convened a special board of directors meeting to review his company's pending acquisition of investment bank Merrill Lynch. Negotiations for the acquisition had begun a few months earlier, during the disastrous week in September in which Lehman Brothers declared bankruptcy. Initially both Merrill and BofA viewed their agreement favorably, but in the intervening months, as Merrill's anticipated losses ballooned and the government stepped in with such programs as the TARP, BofA found itself tied to a financial anchor with a hard-line from the government that prevented BofA from abandoning ship. This case provides background on the financial crisis and the chain of events between September and December of 2008 in which Merrill, BofA, and the government attempted to negotiate the acquisition. This case focuses class discussion on several decisions-whether BofA should have initially agreed to buy Merrill Lynch, whether it should have accepted capital contributions from the Treasury, and how it should have responded to the deterioration in Merrill Lynch's position in the first quarter.
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http://cb.hbsp.harvard.edu/cb/product/310092-PDF-ENG
Note on the Asset Management Industry
Clayton Rose, Scott Waggoner
Harvard Business School Note 311-013
This note provides an overview of the structure and function of the asset management industry, with a primary focus on the U.S. It was designed to support the HBS MBA course "Managing the Financial Firm."
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http://cb.hbsp.harvard.edu/cb/product/311013-PDF-ENG
Note on the Banking Industry
Clayton Rose, Scott Waggoner
Harvard Business School Note 311-011
This note provides an overview of the structure and function of the banking industry, with a primary focus on the U.S. It was designed to support the HBS MBA course "Managing the Financial Firm."
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http://cb.hbsp.harvard.edu/cb/product/311011-PDF-ENG
Note on the Insurance Industry
Clayton Rose, Scott Waggoner
Harvard Business School Note 311-012
This note provides an overview of the structure and function of the Insurance industry, with a primary focus on the U.S. It was designed to support the HBS MBA course "Managing the Financial Firm."
Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/311012-PDF-ENG
Marketing Analysis Toolkit: Customer Lifetime Value Analysis
Thomas Steenburgh, Jill Avery
Harvard Business School Note 511-029
Customers are increasingly being viewed as assets that bring value to the firm. Customer lifetime value is a metric that allows managers to understand the overall value of their customer base and relate it to three customer strategies firms employ: asset acquisition-attracting new customers to the firm; asset maximization-maximizing the value the firm extracts from each customer; and asset retention-retaining existing customers for the long-term. The note gives students a foundation for analyzing marketing cases, as well as providing an analytical structure and process for completing a marketing plan. The note is accompanied by a free Excel worksheet that contains sample problems, prebuilt Excel models to calculate customer lifetime value, and charts and graphs that help visualize the results.
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http://cb.hbsp.harvard.edu/cb/product/511029-PDF-ENG
Marketing Analysis Toolkit: Pricing and Profitability Analysis
fThomas Steenburgh, Jill Avery
Harvard Business School Note 511-028
Pricing is one of the most difficult decisions marketers make and the one with the most direct and immediate impact on the firm's financial position. This toolkit will introduce the fundamental terminology and calculations associated with pricing and profitability analysis. Users will learn how to produce and interpret demand curves and calculate the price elasticity of demand. The concepts of revenue, costs, contribution margin, gross margin, and net income will be introduced to inform profitability analyses. Finally, retailer profitability metrics including retailer margin and penny profit are discussed. The note gives students a foundation for analyzing marketing cases, as well as providing an analytical structure and process for completing a marketing plan. The note is accompanied by a free Excel worksheet that contains sample problems; prebuilt Excel models to calculate demand curves, price elasticity, and profitability metrics for firms and their channel partners; and charts and graphs that help visualize the results.
Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/511028-PDF-ENG