First Look

March 5, 2013

Measuring The 'pinocchio Effect'

Want to spot a liar? Start counting how often that person uses third-person pronouns, numbers, and profanity in their speech. That surprising finding was found in research using an ultimatum game, described in, "Evidence for the Pinocchio Effect: Linguistic Differences Between Lies, Deception by Omissions, and Truths," published in the journal Discourse Processes. Liars generally used more of these words, while those who deceived by omission used fewer words than other participants, according to the researchers.

Why Is Asia So Difficult For E-commerce Companies?

As e-commerce markets mature in North American and Europe, Asia is becoming increasingly attractive. Problem is, most competitors, including giants Amazon and eBay, have failed to find significant success there. Why? "While late entry and local regulations partly explain their low market share in the region, these firms also face unique challenges in Asia due to diverse cultures, multiple languages, and poor infrastructure," write Sunil Gupta and Tanya Bijlani. Order their Asia Business Insights article, "E-Commerce in Asia: Challenges and Opportunities."

Getting Inside A Coffee Company's Accounting Controversy

Students interested in gaining a better understanding of strategic, financial, and accounting analysis of a business might be interested in the new case, "Trouble Brewing for Green Mountain Coffee Roasters," by Suraj Srinivasan and Michael Norris. The company, famous for developing the Keurig single-serve coffee machine, was enveloped in a stock-deflating controversy in 2011 after its accounting practices were questioned by hedge fund manager David Einhorn. Readers will be challenged to assess the merits of Einhorn's arguments and counter claims by other analysts.

— Sean Silverthorne


How to Identify the Best Customers for Your Business


How can businesses achieve profitable growth so that their costs don't grow faster than sales? This article focuses on scaling a venture's sales process and provides a methodology for identifying core customers and some implications for governance criteria and potential product changes as well as sales management.


Prolonged Thought: Proposing Type 3 Processing


Current models of thought generally assume two types of processing: Type 1 (fast, unconscious) and Type 2 (slow, deliberative, conscious). We propose, considering a wealth of real world phenomena, that this taxonomy is incomplete. Examples of these phenomena are creativity, 'sleeping on it,' etc. These phenomena seem to be at least in part slow, unconscious processes. We therefore propose Type 3 processing in order to better understand prolonged thought processes. We sketched possible outlines of Type 3 processing.

E-Commerce in Asia: Challenges and Opportunities


Asia is becoming increasingly attractive to businesses, especially to e-commerce firms that thrive on global and scalable business models. Yet, most global e-commerce players, with a few exceptions, have failed to achieve significant success in Asia. This article describes five major challenges that e-commerce firms face in emerging Asian markets.


Issuer Quality and Corporate Bond Returns


We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time variation in expected corporate bond returns.


The Cost of High-Powered Incentives: Employee Gaming in Enterprise Software Sales


This paper investigates the pricing distortions that arise from the use of a common non-linear incentive scheme at a leading enterprise software vendor. The empirical results demonstrate that salespeople are adept at gaming the timing of deal closure to take advantage of the vendor's accelerating commission scheme. Specifically, salespeople agree to significantly lower pricing in quarters where they have a financial incentive to close a deal, resulting in mispricing that costs the vendor 6%-8% of revenue. Robustness checks demonstrate that price discrimination by the vendor does not explain the identified effects.


Does the Law and Finance Hypothesis Pass the Test of History?


For the body of work known as the law and finance literature, the development of financial markets and the concentration of ownership across countries is to a large extent the consequence of the legal system nations created or inherited decades or hundreds of years ago. Despite the seemingly historical nature of this explanation, most of the body of work supporting the law and finance hypothesis has been ahistorical. This paper summarizes the business history literature and provides evidence on investor protection and financial development over the long run that challenges the main tenets of the law and finance literature.

Evidence for the Pinocchio Effect: Linguistic Differences Between Lies, Deception by Omissions, and Truths


The study used Linguistic Inquiry and Word Count and Coh-Metrix software to examine linguistic differences with deception in an ultimatum game. In the game, the Allocator was given an amount of money to divide with the Receiver. The Receiver did not know the precise amount the Allocator had to divide, and the Allocator could use deception. Allocators either lied, deceived through omission, or were truthful with the Receiver with their allocation decision. Liars used a higher percentage of third-person pronouns, numbers, and profanity than other participants. Participants using deception by omission used fewer words and a lower percentage of causation words than other participants. Support was found for the "Pinocchio effect": liars generally used more words than other participants, although truthful Allocators with suspicious partners did not significantly differ from liars on word count. Allocators with suspicious partners used more negative emotion words and profanity. Mixed support was found for indexes from Coh-Metrix that measured whether liars had a higher cognitive load. Results are discussed in terms of strategic and non-strategic linguistic cues.


Working Papers

Finding the God Particle of the Sustainability Business Case: Greener Pastures for Shareholder Value


The start of the 2000s saw a flurry of international publications on "the business case" for sustainability, seeking to map out the returns on investment and to differentiate recommended actions from cases of corporate philanthropy. Reports by business organizations and others identified different categories of justifications, incentives, benefits, and levels of making the business case. 1) Research over the last decade has pointed to a complex relation between sustainability and financial performance. 2) Results have been influenced by different input and output variables applied by what is defined as "sustainability" or "socially responsible" actions, the scope of the agenda covered, and the definition of what is the ultimate goal (e.g., increased profit, shareholder value, or longer-term success and value of the business).

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Cases & Course Materials

Home Essentials: Building a Global Service Business with Local Operations

Applegate, Lynda M., William R. Kerr, and David Lane
Harvard Business School Case 811-078

Chris Exline founded Home Essentials, a furniture rental business targeted toward expatriates, in Singapore but rapidly moved the base of operations to Hong Kong. The company was highly successful in Singapore and Hong Kong and then pursued rapid global expansion. Lacking frameworks for deciding upon countries to enter and services to deliver in each country, Exline used gut instinct. Lacking control systems and information, he failed to identify problems early and had trouble understanding the root cause of failures. The global financial crisis intensified the problems. The case ends by describing how Exline was able to turn around the troubled company and develop necessary governance systems. The question of whether to once more attempt to grow beyond Hong Kong and, if so, the approach to take in selecting countries, is a central issue Exline faced at the time of the case.

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Olam: On a New Course

Bell, David E., Forest Reinhardt, and Mary Shelman
Harvard Business School Case 513-044

From modest beginnings as a cashew trader in Nigeria, Olam, founded by Indian nationals in 1989, has grown into a leading global agricultural trading company, with annual revenues of $14 billion. The company recently has begun investing in farms and in the production of packaged goods, shifting from its traditional focus on the midstream of the value chain. The case raises questions involving competitive positioning, corporate strategy, sustainable development, and the management of business and political risk.

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OSI in China

Bell, David E., and Mary Shelman
Harvard Business School Case 513-045

OSI, one of the world's largest suppliers of processed meats to McDonald's and other QSRs, was in the middle of a $400 million expansion in China that included backward integration into poultry production. However, its current customers took only a portion of each bird produced and OSI had to develop a go-to-market strategy for the rest. The case describes the opportunities and challenges of operating in China and raises questions involving vertical integration, competitive positioning, corporate strategy, organizational design, marketing and branding, and the management of business and political risk.

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Grantham, Mayo, and Van Otterloo, 2012: Estimating the Equity Risk Premium

Hanson, Samuel G., Erik Stafford, and Luis M. Viceira
Harvard Business School Case 213-051

No abstract available.

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Kirkpatrick Corporation

Hawkins, David F.
Harvard Business School Case 113-070

No abstract available.

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Social Media in Health Care

Herzlinger, Regina E., Selin Gunal Tyler, and Charles C. Huang
Harvard Business School Case 311-093

This note reviews the social media firms in health care that help providers and consumers to interact and their nascent business models

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Blink Booking

Kerr, William R., Magnus Thor Torfason, and Alexis Brownell
Harvard Business School Case 813-121

Rebeca Minguela hopes to create an arbitrage platform, similar to Rocket Internet, that can bring start-up ideas and opportunities to Spain. However, Blink Booking, her first venture and proof of concept, is rocked by a co-founder's breach of confidence and departure. Minguela must repair the damage to Blink's management team, restore investor confidence, and continue Blink's rapid growth to deliver on the venture's initial promise. The case explores management team roles, equity splits, and related entrepreneurial challenges that Minguela must navigate. Minguela must also decide whether her long-term goal of an incubator-like platform for Spain is really feasible. The case describes how her vision differs from Rocket Internet-a large German incubator that also provides its entrepreneurs with ready-made business models from existing companies-allowing students to compare the models and discuss the ethics of cloning.

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Pemex (A): In a Free Fall?

Maurer, Noel, and Aldo Musacchio
Harvard Business School Case 713-051

Abstract not available.

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Pemex (B): The Rebound

Musacchio, Aldo, Noel Maurer, and Regina Garcia-Cuellar
Harvard Business School Case 713-052

Supplement for case 713-051.

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Sino-Ocean Land: Responding to Change

Retsinas, Nicolas P., Jeffrey Hu, and Runjiao Xu
Harvard Business School Case 211-107

In 2010, Sino-Ocean Land Holdings Limited was a highly successful, large real estate developer based in Beijing, China. Sino-Ocean Land had three main business segments-property development, property investment/management, and other real estate related businesses. From 2005 to 2009, the company focused on becoming a leading regional developer with a multiproduct offering. That strategy was successful, riding the wave of spectacular growth in the Chinese real estate sector from 1998 to 2008, following a loosening of Chinese state real estate regulations. Although Sino-Ocean Land had gone public in 2007, its key shareholders were still state owned enterprises. The state maintained significant influence on the company and the real estate market, in general. The case explores the interactions between the company and the state, examining land acquisition, financing, and corporate governance. Following the global financial crisis of 2008, Sino-Ocean Land must devise a new five-year strategic plan. CEO Li Ming must grapple with the changing market dynamics and regulatory environment to decide the best course for the company. Key issues that he must determine include whether the focus should be local or national; whether to continue with multiproduct offerings, or specialize in one product type; and whether to continue to pursue primarily development, or to shift to property investment and holding.

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Jim Johnson's Re-election to the Goldman Sachs Board

Srinivasan, Suraj, and Kelly Baker
Harvard Business School Case 113-050

The case presents the opposition by a leading institutional investor in Goldman Sachs to the re-election of Jim Johnson to the board of directors of the company. The investor, Sequoia Fund, opposes the re-election citing Jim Johnson's prior track record as the CEO of Fannie Mae, which has been criticized for its role in the financial crisis and for serving on the compensation committees of two companies that experienced option backdating scandals. The case allows students to discuss issues surrounding director performance assessment, director elections, investor engagement with companies, and director reputation.

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Trouble Brewing for Green Mountain Coffee Roasters

Srinivasan, Suraj, and Michael Norris
Harvard Business School Case 113-035

In October 2011, noted hedge fund manager David Einhorn of Greenlight Capital delivered a presentation at an investors' conference analyzing the business and accounting quality weaknesses of Green Mountain Coffee Roasters. Until then Green Mountain had exhibited rapid business and stock price growth. He questioned Green Mountain, the maker of Keurig single-serve coffee machines and their famous K-Cups, about their growth prospects, their handling of acquisitions, their plan for the expiration of an important patent, accounting practices, and other issues. Following Einhorn's presentation, Green Mountain's stock experienced a significant decline despite claims by many analysts that Einhorn had not presented any new information. The case presents Einhorn's argument and the counter claims by the analysts. Students are charged with assessing the merits of Einhorn's arguments and the counter claims. The case exposes students to a detailed strategic, financial, and accounting analysis of a business and provides an example of how a thorough business and accounting analysis using primarily public information can change market's perception of valuation of a company.

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