Publications
- In press
- Chap. 1 in Business Models and Modelling
The Business Model: Nature and Benefits
Abstract—This paper considers the nature of the business model and its strategic relevance to negotiations. We elaborate a substantive definition of the business model as decisions enforced by the authority of the firm; this definition enables the analysis of business models through the analysis of individual firm choices. We situate negotiation outcomes within the strategy literature by considering "ambivalent value"-value produced by the interaction of partner firms that does not necessarily accrue to any of them. The extent of "ambivalent value" is unclear, but its persistence, despite changing structural market features, promises to help sustain superior profits in the long run. We conclude with an exploration of some ways in which firms' business models may impact their negotiation outcomes. Several of the proposed pathways work intuitively through the intrinsic characteristics (motivation, personality, etc.) of agents negotiating on behalf of the firm; others operate independently of those characteristics.
Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49412
- Forthcoming
- Management Science
Fake It Till You Make It: Reputation, Competition, and Yelp Review Fraud
Abstract—Consumer reviews are now part of everyday decision making. Yet, the credibility of these reviews is fundamentally undermined when businesses commit review fraud, creating fake reviews for themselves or their competitors. We investigate the economic incentives to commit review fraud on the popular review platform Yelp, using two complementary approaches and datasets. We begin by analyzing restaurant reviews that are identified by Yelp's filtering algorithm as suspicious or fake-and treat these as a proxy for review fraud (an assumption we provide evidence for). We present four main findings. First, roughly 16% of restaurant reviews on Yelp are filtered. These reviews tend to be more extreme (favorable or unfavorable) than other reviews, and the prevalence of suspicious reviews has grown significantly over time. Second, a restaurant is more likely to commit review fraud when its reputation is weak, i.e., when it has few reviews, or it has recently received bad reviews. Third, chain restaurants-which benefit less from Yelp-are also less likely to commit review fraud. Fourth, when restaurants face increased competition, they become more likely to receive unfavorable fake reviews. Using a separate dataset, we analyze businesses that were caught soliciting fake reviews through a sting conducted by Yelp. These data support our main results and shed further light on the economic incentives behind a business's decision to leave fake reviews.
Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49389
- September 2015
- Journal of Public Economics
Asset Accumulation and Labor Force Participation of Disability Insurance Applicants
Abstract—This paper provides empirical evidence of the existence of forward-looking asset-accumulation behavior among disability-insurance applicants, previously examined only in the theoretical literature. Using panel data from the RAND Health and Retirement Study, I show that rejected applicants for Social Security Disability Insurance (SSDI) possess significantly more assets than accepted applicants immediately prior to application and exhibit lower attachment to the labor force. These empirical results are consistent with the theoretical prediction in Diamond and Mirrlees (1978) and Golosov and Tsyvinski (2006) that certain individuals with high unwillingness to work maximize utility by planning in advance for their future disability insurance application. Because the existing empirical literature on disability insurance does not account for this intertemporal channel, it may underestimate the total work-disincentive effect of SSDI.
Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49390
Working Papers
Patent Trolls: Evidence from Targeted Firms
Abstract—We develop a theoretical model of, and provide the first large-sample evidence on, the behavior and impact of non-practicing entities (NPEs) in the intellectual property space. Our model shows that NPE litigation can reduce infringement and support small inventors. However, the model also shows that as NPEs become effective at bringing frivolous lawsuits, the resulting defense costs inefficiently crowd out some firms that, absent NPEs, would produce welfare-enhancing innovations without engaging in infringement. Our empirical analysis shows that on average, NPEs appear to behave as opportunistic patent trolls. NPEs sue cash-rich firms-a one standard deviation increase in cash holdings increases a firm's chance of being targeted by NPE litigation more than fourfold. We find moreover that NPEs target cash unrelated to the alleged infringement at essentially the same frequency as they target cash related to the alleged infringement. By contrast, cash is neither a key driver of intellectual property lawsuits by practicing entities (e.g., IBM and Intel), nor of any other type of litigation against firms. The cash-targeting behavior we observe is driven by large aggregator NPEs and is not the behavior of small innovators. We find further suggestive evidence of NPE opportunism, such as forum shopping and targeting of firms that may have reduced ability to defend themselves against litigation. Finally, we find that NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court).
Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=47648
Scrutiny, Norms, and Selective Disclosure: A Global Study of Greenwashing
Abstract—Under increased pressure to report environmental impacts, some firms selectively disclose relatively benign impacts, creating an impression of transparency while masking their true performance. We identify key company- and country-level factors that limit firms' use of selective disclosure by intensifying scrutiny on them and by diffusing global norms to their headquarters countries. We test our hypotheses using a novel panel dataset of 4,750 public companies across many industries and headquartered in 45 countries during 2004-2007. Results show that firms that are more environmentally damaging, particularly those in countries where they are more exposed to scrutiny and global norms, are less likely to engage in selective disclosure. We discuss contributions to the literature that spans institutional theory and strategic management and to the literature on information disclosure.
Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=40289
Experimental Evidence on Decision Making Under Information Asymmetry
Abstract—We provide experimental evidence on how individuals make decisions in an operations management setting when there is information asymmetry among the participants. Common equilibrium assumptions yield the least cost separating outcome as the unique equilibrium. In this equilibrium, the more informed party undertakes a costly signal to resolve the information asymmetry that exists. Our experimental results provide evidence that participants are unlikely to choose to separate when a pooling equilibrium is also available. This result is important for research and practice because separating and pooling outcomes have divergent implications. We also show that pooling choice behavior is influenced by changes in the underlying newsvendor model parameters. In robustness tests, we show that choosing a pooling outcome is especially pronounced among participants who report a high level of understanding of the setting and that participants who pool are rewarded by the less informed party with higher payoffs. Finally, we demonstrate through a reexamination of Lai et al., (2012) and Cachon and Lariviere (2001) how pooling outcomes can substantively extend the implications of other extant signaling game models in the operations management literature.
Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=47633
Concentrated Capital Losses and the Pricing of Corporate Credit Risk
Abstract—Using proprietary credit default swap (CDS) data from 2010 to 2014, I show that capital fluctuations for sellers of CDS protection are an important determinant of CDS spread movements. I first establish that markets are dominated by a handful of net protection sellers, with five sellers accounting for nearly half of all net selling. In turn, a reduction in their total capital increases CDS spreads. Capital fluctuations of the largest five sellers account for over 10% of the time-series variation in spread changes, a significant amount given that observable firm and macroeconomic factors account for less than 17% of variation during this time period. I then demonstrate that the concentration of sellers creates fragility-higher concentration results in more volatile risk premiums. I also employ a number of complementary approaches to address identification, such as using the 2011 Japanese tsunami as an exogenous shock to the risk bearing capacity of CDS traders. My findings are consistent with asset pricing models with limited investment capital, but also suggest that both the level and distribution of capital are crucial for accurately describing price dynamics.
Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=49425
Cases & Course Materials
- Harvard Business School Case 515-090
Target Stores: The Hunt for 'Unvolunteered Truths'
No abstract available.
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- Harvard Business School Case 215-058
Generating Higher Value at IBM (A)
This case analyzes IBM's financial performance and its capital allocation decisions over a 10-year period from 2004 to 2013, during which IBM returned more than $140B to shareholders through a combination of dividends and share repurchases. During this time, CEO Sam Palmisano created, announced, and then regularly updated a long-term financial "roadmap" as part of the firm's strategic transformation. The roadmap showed both a destination (a target EPS number) and a detailed path to that destination in terms of revenue growth, margin expansion, and share repurchases. After successfully achieving its first roadmap, the firm announced a second 5-year roadmap known as the "2015 EPS roadmap." The case is set in May 2014, just after IBM's annual investor briefing. Despite more than 10 years of strong financial performance, IBM reported relatively weak financial results in the first quarter of 2014. Sophia Johnson, an equity analyst, must decide whether to revise her investment recommendation based on what she heard that day.
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- Harvard Business School Case 215-059
Generating Higher Value at IBM (B)
This case updates the events in "Generating Higher Value at IBM (A)."
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- Harvard Business School Case 215-079
Transforming Alkermes into a Global Biopharmaceutical Company
In the summer of 2011, Jim Frates, CFO of Alkermes, faced choices about how to finance the acquisition of Dublin, Ireland-based Elan Drug Technologies (EDT)-a deal that was expected to close in the fall. The case describes the history of Alkermes, provides information about the planned merger, and details the funding options. The case gives students the opportunity to analyze the role CFOs play in biopharmaceutical firms, to evaluate the attractiveness of the merger, and to select a funding option.
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- Harvard Business School Case 515-073
Jimmy Choo
Jimmy Choo is a British luxury accessories brand, specializing in shoes, handbags, accessories, and fragrances. Founded in 1996 in London by couture shoe designer Jimmy Choo and Vogue accessories editor Tamara Mellon OBE, the brand enjoyed immediate success and rapidly acquired a sophisticated clientele. The brand's reputation as a celebrity favorite helped fuel its rapid international expansion and in the early 2010s Jimmy Choo had a store network encompassing 150+ stores in 30+ countries and was present in the most prestigious department and specialty stores worldwide, except for mainland China. Appointed as Chief Executive Officer in July 2012, Pierre Denis, an experienced executive from LVMH, developed a new vision for the brand and made the entry into the Chinese market one of his top priorities. The case describes how Jimmy Choo's leadership team analyzed the Chinese luxury market and designed an entry strategy into China. The case explores the challenges and opportunities for foreign luxury brands like Jimmy Choo to launch in China and contemplates different marketing mix possibilities.
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- Harvard Business School Case 515-025
Gilead: Hepatitis-C Access Strategy (A)
Gilead had come up with an innovative drug for Hepatitis C, which affected 180 million people worldwide. The drug was priced at $1,000 a pill for the U.S. market. Gilead had to decide how to price and market the pill in developing countries that bore the brunt of the disease. The company had earned accolades for its work in HIV/AIDS, where its innovative medicines now accounted for 60% of all patients on anti-retroviral (ARV) medicines. Much of this was accomplished through generic licensing, which brought a $10,000/year treatment regimen down to $100! Should the company replicate that strategy for Hepatitis C? If so, how would its U.S. healthcare customers, who were paying $84,000 per patient, react? On the other hand, Gilead had to balance the interests of its shareholders, who paid $11 billion for an acquisition that led to the new Hepatitis C drug.
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- Harvard Business School Case 115-063
Greece's Debt: Sustainable?
The case "Greece's Debt: Sustainable?" describes the Greek economic crisis, bailout from the European Union and the International Monetary Fund (IMF), and the debt restructuring that followed. Because of a lack of trust in Greece's ability to repay its debt, two programs were organized that provided financial assistance to Greece. This was followed by a debt restructuring that provided debt relief to Greece through a combination of lowering interest rates, lengthening debt maturity, and rebates on interest and principal. The case outlines how International Financial Reporting Standards (IFRS), U.S. GAAP, and International Public Sector Accounting Standards (IPSAS) define accounting for debt and describes the controversy that existed around the proper valuation of Greece's debt. Because Greece had not adopted accrual accounting, its debt was reported in face value terms, according to the Maastricht treaty. This was in contradiction to accounting practices that prescribed fair valuation of debt in line with market prices or present value techniques. The case ends with a series of questions that steer the discussion towards the importance of accrual accounting and valuation of debt. Did Greece have too much debt and as a result a solvency problem? Should Greece push lenders to take a haircut on the debt? Were the austerity measures really necessary? Or did Greece have too little debt, therefore allowing the country to avoid austerity measures, increase spending, and spark growth?
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