First Look

June 17, 2008

How should small firms think about loans in an environment of decentralized banking? The answer depends on the level of competition between decentralized banks, according to new research by HBS professor Ramana Nanda and MIT Sloan coauthor Rodrigo Canales. Using loan data from Mexico, the scholars found that while banks could benefit from local knowledge to set the terms of loans, a lack of competition suggested that "the organizational structure of decentralized banks might allow them to better exploit their market power in concentrated banking markets by restricting credit or charging higher interest rates from small businesses." Nanda and Canales's paper, "Bank Structure and the Terms of Lending to Small Businesses," is available as a pdf for download. This week also sees a Harvard Business Review article on better organizational design in multiunit enterprises such as stores, restaurants, or bank branches; and cases on Turkey's Finansbank, the British band Radiohead, and the Tribune Company, one of the largest media companies in the United States.
— Martha Lagace

Working Papers

Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints


We use a micro dataset that collects information across individuals, countries, and time to investigate the determinants of entrepreneurial activity in 37 developed and developing nations. We focus both on individual characteristics and on countries' regulatory differences. We show that individual characteristics, such as gender, age, and status in the workforce are important determinants of entrepreneurship, and we also highlight the relevance of social networks, self-assessed skills, and attitudes toward risk. Moreover, we find that regulation plays a critical role, particularly for those individuals who become entrepreneurs, to pursue a business opportunity. The individual characteristics that are impacted most by regulation are those measuring working status, social networks, business skills, and attitudes toward risk.

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Bank Structure and the Terms of Lending to Small Businesses


Using loan-level data from Mexico, we study the relationship between the organizational structure of banks and the terms of lending to small businesses. We find that banks with decentralized lending structures—where branch managers have autonomy over the terms of lending-give larger loans to small firms and those with more "soft information"—particularly in states with weak legal enforcement of financial contracts. However, decentralized banks are also more responsive to the competitive environment when setting loan terms. They are more likely to restrict credit and to charge higher interest rates when they have market power, more so to smaller firms that have fewer outside options for external finance. These findings highlight a "darker side" to decentralized banks and suggest that the relative benefit of a decentralized bank structure for small business lending depends critically on the nature of the competitive environment in which banks are located.

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Cases & Course Materials

Finansbank 2006

Harvard Business School Case 208-108

How do financial policy requirements and benefits of ownership concentration affect the need for and process of corporate restructuring? This case provides students with an opportunity to analyze the restructuring of a Turkish multinational business group by way of a merger. Finansbank AŞ is a bank headquartered in Turkey with additional operations in Holland, Switzerland, Russia, Romania, and Ukraine. It was founded by Hüsnü Özyeğin in 1987 and in April 2006, the National Bank of Greece (NBG) offered to buy part of the bank. Students can consider which factors contributed to Finansbank’s growth and success. In order to then assess the terms of NBG’s offer, they can evaluate given valuations of the bank and analyze why the proposed deal is structured so the Özyeğin retains a stake and buys back the non-Turkish operations. Students can also consider the offer from the perspective of minority shareholders.

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Radiohead: Music at Your Own Price (A)

Harvard Business School Case 508-110

In October 2007, the British band Radiohead caused a stir when it announced it would allow customers to decide how much to pay for its new album, released exclusively as a digital download and available only from the band's own website. The pricing plan represented a significant break from the industry standard of fixed prices for music, typically 99 cents for individual songs and upward of $9.99 for complete albums. How viable is such a "name-your-own-pricing" plan? And what does Radiohead's move say about the future of the music industry?

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Radiohead: Music at Your Own Price (B)

Harvard Business School Supplement 508-111

Supplements the (A) case.

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Sensors Unlimited: Bringing InGaAs Technology to the Market

Harvard Business School Case 608-138

Sensors Unlimited was a small start-up in short-wavelength infrared imaging. Its learning base came out of Bell Labs, RCA's Sarnoff Lab, and the Rockwell Science Center, and as it built its capabilities and ventured into new application areas, it discovered a "killer app" for optical communications which led to its acquisition at the height of the telecom bubble. After the subsequent telecom meltdown, the founders reacquired many of the assets of the company and focused it on industrial and military applications. The case focus presents a question of whether the company should sell out again, this time to a military aerospace firm.

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Tribune Company, 2007

Harvard Business School Case 208-148

This case describes the proposed acquisition of Tribune Company by Sam Zell in 2007. Tribune Company is one of the largest newspapers and broadcasting companies in the United States. Zell's proposed acquisition is unusual in several respects. It is two-tiered, employs an ESOP as the acquisition vehicle, involves a high degree of leverage as well as the significant asset sales, and Zell himself will own almost no common stock in the post-deal Tribune. The case is set in late October 2007, at which point the first stage of the acquisition has been completed but the second stage has not. Recent deterioration in both Tribune's operating results and credit market conditions make it unclear whether the transaction can be closed as scheduled in 2007, or indeed at all.

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Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882-1950

Publisher's Abstract

In Experiments in Financial Democracy, I challenge the idea that it was colonial institutions that sent Brazil, a civil law country, down a particular path of corporate governance and finance. Detailed archival research reveals significantly different patterns of corporate governance and finance between the beginning of the twentieth century and the 1990s. In order to attract investors, the founders of companies organized before 1910 often included in the statutes stronger protections for small shareholders than what was mandated by law. The most important of these protections were maximum vote provisions that capped the number of votes a single shareholder (and sometimes even a single proxy voter) could exercise during a shareholder meeting. An analysis of the shareholder lists of nearly 100 Brazilian companies revealed a correlation between corporate statutes that protected small shareholders and less concentrated ownership and control. I maintain that the corporate governance rules in the past help to explain the peak in equity market development observed between 1890 and 1914 (by some measures, equity markets were more developed then than they are today).

The Multiunit Enterprise


A multiunit enterprise is a geographically dispersed organization built from standard units (stores, restaurants, or branches) that are aggregated into larger geographic groupings (districts, regions, and divisions). Although this organizational structure has become the norm in several industries, it has received little attention from academics and consultants. Garvin and Levesque set out to fill that gap in management thinking with their research. The authors closely studied the office supply company Staples for two years and then collected data from 12 other multiunit enterprises. In this article, they discuss the unique problems that such corporations face, describe how managers tackle those challenges, and offer lessons that will help all types of organizations execute strategy. In a multiunit enterprise, four tiers of management constitute the field organization: store, district, regional, and divisional heads. All these managers are responsible for meeting targets set by corporate headquarters and implementing strategy. To do so, they adhere to five principles of organizational design. First, the field organization's different tiers have overlapping responsibilities; together they create a multilayered net to catch any problems that arise. Second, managers at all levels serve as integrators, coordinating diverse activities and optimizing the efforts of the whole organization rather than its parts. Third, higher-level managers filter data from headquarters to frontline managers, who otherwise might feel overwhelmed by a constant stream of initiatives. Fourth, regional and divisional heads in particular act as translators, defining in concrete terms how the field organization can roll out initiatives. Finally, all managers share responsibility for talent development.

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