First Look

March 17, 2009

Do commitment savings products—such as accounts that restrict withdrawals until a pre-set goal has been reached—help women to improve their status in the household? Yes, according to new research by HBS professor Nava Ashraf and colleagues. Their working paper, "Female Empowerment: Impact of a Commitment Savings Product in the Philippines" [PDF], describes the challenges of implementing the widespread policy goal of women's empowerment and the potential for achieving this goal through, for example, a variety of savings products including a lockbox. "[A] simple design feature, such as a restriction on withdrawals or encouraging savings through marketing of door-to-door deposits, can benefit both those in search of self-control devices as well as those who desire to have more decision-making power in the household," write the researchers. Coauthor Dean Karlan is a professor of economics at Yale University, while Wesley Yin is an assistant professor at the University of Chicago's Harris School of Public Policy. Other highlights this week are even more faculty work on finance issues, including two working papers for download: "Gray Markets and Multinational Transfer Pricing" [PDF] and "A Corporate Arbitrage Approach to the Cross-section of Stock Returns" [PDF], as well as articles in the influential Journal of Finance and Journal of Public Economics. Cases examine the investment decisions over the past 40 years of Berkshire Hathaway, the growth strategy of the Cleveland Clinic's health-care services, and the career dilemma of a young man, Lawrence Trinh, who would like to do well in an emerging market while doing good.
— Martha Lagace

Working Papers

Female Empowerment: Impact of a Commitment Savings Product in the Philippines


Female 'empowerment' has increasingly become a policy goal, both as an end to itself and as a means to achieving other development goals. Microfinance in particular has often been argued, but not without controversy, to be a tool for empowering women. Here, using a randomized controlled trial, we examine whether access to, and marketing of, an individually held commitment savings product leads to an increase in female decision-making power within the household. We find positive impacts, particularly for women who have below-median decision-making power in the baseline, and we find this leads to a shift towards female-oriented durables goods purchased in the household.

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Gray Markets and Multinational Transfer Pricing


Gray markets arise when a manufacturer's products are sold outside of its authorized channels; for instance, when goods designated for a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase internal transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that when a gray market competitor is present, the optimal price for internal transfers exceeds marginal cost but decreases in the competitiveness of the domestic economy. Moreover, we illustrate that gray markets may cause unintended social welfare consequences when domestic governments mandate the use of arm's length transfer prices between international subsidiaries. Specifically, a shift to arm's length transfer pricing erodes domestic consumer surplus by making the gray market less competitive domestically. Under certain circumstances, the domestic welfare destruction arising from this erosion dominates the domestic welfare gains that accompany a shift to arm's length transfer pricing. Finally, the analysis illustrates that in a gray market setting, the transfer price that maximizes a multinational's profits may also be the same one that maximizes the social welfare of the domestic economy that houses it.

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A Corporate Arbitrage Approach to the Cross-section of Stock Returns


When investors overvalue a particular firm characteristic, corporations endowed with that characteristic can absorb some of the demand by issuing equity. We use time-series variation in differences between the attributes of stock issuers and repurchasers to shed light on characteristic-related mispricing. When issuing firms are large relative to repurchasing firms, for example, we find that large firms subsequently underperform. This holds true even when we restrict attention to the returns of firms that do not issue at all, suggesting that issuance is partly an attempt to arbitrage mispriced characteristics. Our approach helps forecast returns to portfolios based on book-to-market, size, price, distress, payout policy, profitability, and industry. Our results provide a new perspective on equity market timing more generally.

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Cases & Course Materials

Avid Radiopharmaceuticals: The Venture Debt Question

Harvard Business School Case 809-086

The CEO of a promising biotech company must decide how to respond to the macro-economic slump of late 2008. He had planned to pursue an aggressive schedule, moving the firm's Alzheimer's and Parkinson's disease imaging compounds through clinical trials and into the market. This involved expanding the firm's facilities and headcount, and he planned to fund this by taking venture debt. Although clinical trial data is extremely encouraging, questions about raising his next venture round and the overall environment has made him question the wisdom of this plan. This case provides students an opportunity to explore the true cost of venture debt and when it is best used to achieve the goals of all parties-venture capitalists, entrepreneurs, and venture lenders.

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Banco Hipotecario S.A.

Harvard Business School Case 206-102

In 2003, the chairwoman and controlling shareholder of Argentina's leading residential mortgage lender are considering how to bring the bank's restructuring to a successful conclusion as the country's economy continues to suffer from the impact of the 2001-2002 currency crisis and default. As the bank's competitors, many of whom were also creditors, begin to close ranks, Banco Hipotecario's management and shareholders need to come up with a plan that will satisfy creditors and keep the bank's business model intact.

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Berkshire Hathaway

Harvard Business School Case 709-449

Berkshire Hathaway describes the history and strategy of one of the best known investment firms over the last forty years. The case describes the investment philosophy of Warren Buffett, its legendary chairman and CEO, the gradual diversification of its portfolio, its capital allocation strategy, compensation structure, and corporate governance approach, leading up to August 2008.

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The Cleveland Clinic: Growth Strategy 2008

Harvard Business School Case 709-473

The Cleveland Clinic's health care services are internationally renowned for quality. In 2008, The Clinic is restructuring the organization into teams defined around patient needs, rather than traditional medical specialties. "Patients First!" takes shape as the teams measure and report outcomes, coordinate care, and develop to support improving value for patients. In addition to restructuring care delivery in the hospitals and throughout northeastern Ohio, The Clinic has investments, facilities, and staff in several other states in the U.S. as well as in Canada and Abu Dhabi. It is also considering initiatives in Austria, China, and India. Students can explore strategy transformation, geographic expansion, the process of introducing new measurement approaches, alignment of activities with strategic goals, and issues in leading change both within a company and across an economic sector

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Exeter Group, Inc.

Harvard Business School Case 409-001

Jonathan Kutchins and Mark Cullen, managing partners of IT consulting firm Exeter Group, Inc., are considering four potential client engagements. Three of them involve prominent universities, an area of market strength for the firm, and one involves a top-tier strategy consulting firm, a new market for Exeter. Each of the projects has both attractive and unattractive attributes, with various degrees of upside and downside risk. As a relatively new and small IT consulting firm, Exeter needs to make careful choices about how it allocates resources to projects, and it is not clear if the firm has the capacity to add all four projects at once. Thus Kutchins and Cullen have to decide which, if any, of these projects to do. In some cases they must also decide whether they want to try to restructure the nature of the engagement to better fit the firm's service model. Although young and small, the firm has grown successfully and is optimistic about its future prospects. Kutchins and Cullen thus want to make decisions about these very specific client engagements in the context of their overall strategy and the contributions of these engagements in helping the firm achieve its long-term goals.

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Fannie Mae: Public or Private?

Harvard Business School Case 709-025 

In 1987, President Ronald Reagan established the President's Commission on Privatization to identify federal government functions that could be shifted to the private sector. One agency that the Commission considered was the Federal National Mortgage Association, or Fannie Mae. Fannie Mae was a Depression-era creation that was charged with establishing a secondary market for home loans. By purchasing qualifying residential mortgages from individual home loan issuers, Fannie Mae provided these institutions with funds for the continued issuance of mortgages, thereby promoting the government's goal of increased homeownership. Although lawmakers had already partially privatized Fannie Mae in 1954 and again in 1968, the agency in 1987 still retained close links to the federal government, including an emergency line of credit from the U.S. Treasury. After its deliberations, the President's Commission recommended Fannie Mae be restructured into a fully private firm. Now it was up to Congress and the President to decide whether to accept and implement the Commission's findings.

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Khosla Ventures: Biofuels Strategy

Harvard Business School Case 809-004

By 2008, a number of the firm's early cleantech investments were showing promise, and the companies were starting to need significantly more money to create the massive scale required in the energy sector. As Khosla thought about the hundreds of millions of dollars required by his portfolio companies, he wondered how he should position his firm at this stage of development. Should Khosla develop a new fund that focused on later-stage investments? Should he seek investments from large industry players such as the major oil companies? Should he try raising money from the managers of the sovereign funds in countries such as Singapore, Kuwait, and China? How should the firm work with its strategic partners? Khosla knew that lining up enough later stage funding would be challenging, as the cleantech industry was still unproven for investors. Nevertheless, he was determined to continue his pattern of making bold investments in this emerging field.

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Lawrence Trinh: Venturing to Vietnam

Harvard Business School Case 409-017 

Should Lawrence Trinh pursue his aspiration of working in Vietnam-and if so, what set of principles and practices should he adopt if he encounters corruption? These are questions that reverberate for many students who wish to work in emerging markets and other contexts that pose stiff ethical challenges. Trinh seeks to combine his background in financial services with his desire to contribute to Vietnam's economic development, and he has to decide among four job offers with investment firms. But it is a complicated decision. First, none of the job offers fit his selection criteria perfectly. Second, despite growing reforms, Vietnam is still ranked poorly on indices of corruption. Third, Trinh's father (who fled Vietnam following the war) frowns upon doing anything that could contribute to the communist regime. Fourth, Trinh's girlfriend is about to start her next stage of medical training in the United States, which means that pursuing his aspiration now will separate them. All of these considerations raise three questions: (1) Is the timing right for Trinh to embark on his personal mission of contributing to the well-being of Vietnam? (2) Which job offer should he accept? (3) What set of principles and practices should he adopt that will enable him to remain true to his values and sustain his capacity to be a true agent of change, yet not undermine his ability to succeed as an investor?

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Linux vs. Windows

Harvard Business School Case 707-465 

As of 2006, Microsoft is finding that its dominant position in client and server operating systems is under attack from Linux. While Linux has only 3% of the worldwide installed base of PC operating systems, it had captured 20% of the server market by the end of 2005 and was quickly becoming a formidable alternative for productivity programs with OpenOffice. Linux's "business model" to compete against Microsoft is significantly different than those of traditional for-profit software companies. Linux is open source (all code is made available for redistribution by anyone) and harnesses the collective power of thousands of programmers-both independent and employees of major software firms such as IBM, HP, Intel, Sun, and Dell-which allows it to work out bugs quickly and release new operating systems several times per year. Students are faced with the analysis of competitive interaction between the Windows and Linux business models and value loops and are asked to reason whether a clear winner will emerge.

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Pitney Bowes: Employer Health Strategy

Harvard Business School Case 709-458

Pitney Bowes, a Fortune 500 mail and document management firm, offered its first health plans in the years following World War II. Over the ensuing decades, Pitney Bowes adapted its approach to employee health amid rising health care costs, shifting employer attitudes towards health benefits and a rapidly changing policy environment. By 2008, the firm was widely regarded as an innovator in employee health, having dedicated substantial time and resources to its health benefits under the leadership of then CEO Michael Critelli and Corporate Medical Director Jack Mahoney. The case provides an overview of the history of employee health benefits in the U.S. and at Pitney Bowes. The range of health plans Pitney Bowes offered to employees in 2008, as well as the firm's contracting policies with commercial insurers and self-insured plan administrators, are examined in detail. Pitney Bowes health and wellness programs are also described, enabling an analysis of the firm's overall employee health strategy in 2008 and a discussion of where Pitney Bowes should focus its attention moving forward.

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Tata Motors in Singur: Public Purpose and Private Property (B)

Harvard Business School Case 709-029

In October 2008, Tata Motors canceled their car manufacturing plant in West Bengal state, in the face of widespread farmer protests over land acquisition issues. This meant abandoning a project in which the company had invested $300 million and delaying the launch of the Nano, the world's cheapest car. What strategy could Tata have pursued to avoid this outcome? Would similar problems arise in Gujarat state, where the project had been relocated?

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Are Licensing Markets Local? An Analysis of the Geography of Vertical Licensing Agreements in Bio-Pharmaceuticals


As the value chain of the pharmaceutical industry disaggregates, upstream discovery is increasingly carried out by small research-specialized firms while downstream development, testing, and marketing is conducted by global pharmaceutical firms. Licensing plays an important role in this emerging division of labor. Alcácer and his co-authors theorize that, similar to markets for upstream inputs such as scientific knowledge, proximity also may matter for licensing, which they conceptualize as downstream end markets for small biotechnology firms. They examine whether co-location affects the likelihood of vertical licensing transactions between biotechnology firms and global pharmaceutical firms. Discussions with industry executives indicate that large firms search globally for in-licensing opportunities and that licensing transactions should not be sensitive to the geographic locations of the transacting parties. However, an analysis of compounds developed by small biotechnology firms licensed to global pharmaceutical firms suggests that licensing transactions are more likely to occur between firms located in the same geographic area. The results point to the possibility that licensing markets are sensitive to the proximity of the partners and that despite global search processes by multinationals in the pharmaceutical industry, licensing markets are localized.

Global Currency Hedging


Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar) and the euro and Swiss franc (particularly in the second half of the period) have moved against world equity markets. Thus, these currencies should be attractive to risk-minimizing global equity investors despite their low average returns. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk-minimizing investors should adjust their currency positions in response to movements in interest differentials.

Taxes, Institutions and Foreign Diversification Opportunities


Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). The worldwide tax regime employed by the U.S. potentially distorts this choice by penalizing FDI, relative to FPI, in low-tax countries. On the other hand, weak investor protections in foreign countries may increase the value of control, creating an incentive to use FDI rather than FPI. By combining data on U.S. outbound FPI and FDI, this paper analyzes whether the composition of U.S. outbound capital flows reflects these incentives to bypass home and host country institutional regimes. The results suggest that the residual tax on U.S. multinational firms' foreign earnings skews the composition of outbound capital flows-a 10% decrease in a foreign country's corporate tax rate increases U.S. investors' equity FPI holdings by approximately 10%, controlling for effects on FDI. Investor protections also seem to shape portfolio choices, though these results are not robust when only within-country variation is employed.

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Protect Strategic Expenditures


No abstract is available at this time.

Do Funds-of-Funds Deserve Their Extra Fees?


Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in publicly reported databases. Instead, the correct funds-of-funds benchmark is the set of direct hedge fund investments an investor could achieve on her own without recourse to funds-of-funds. We use asset allocation concepts to estimate characteristics of the funds-of-funds benchmark distribution. Since the benchmark characteristics are reasonable, we conclude that funds-of-funds, on average, deserve their fees-of-fees.

The Market for Mergers and the Boundaries of the Firm


We relate the property rights theory of the firm to empirical regularities in the market for mergers and acquisitions. We first show that high market-to-book acquirers typically do not purchase low market-to-book targets. Instead, mergers pair together firms with similar ratios. We then build a continuous-time model of investment and merger activity combining search, scarcity, and asset complementarity to explain this like-buys-like result. We test the model by relating like-buys-like to search frictions. Search frictions and assortative matching vary inversely, supporting the model over standard explanations.