First Look

March 8, 2011

For CEOs the scarcest resource they control is time, so how they spend it should be of utmost interest. Researchers Oriana Bandiera, Luigi Guiso, Andrea Prat, and Raffaella Sadun tracked 94 CEOs of 600 Italian companies over a week, recording the time devoted to work activities. In particular, they were eager to learn how much time CEOs spent with insiders (employees) versus outsiders (suppliers, investors, consultants). One insight: "The patterns we observe are consistent with the hypothesis that time spent with outsiders is on average less beneficial to the firm and more beneficial to the CEO and that the CEO spends more time with outsiders when governance is poor." Read "What Do CEOs Do?"

Launching a space shuttle and filming a big-budget movie have at least one thing in common: they are highly complex, risky endeavors. The people who engage in these projects must develop "risky trust" among team members who are vulnerable to high economic, legal, or reputational risks, according to Amy Edmondson and Faaiza Rashid. Their paper "Risky Trust: How Multi-entity Teams Develop Trust in a High Risk Endeavor" investigates risky trust in the US construction industry to offer insights for trust repair.

To design the first machine capable of sustained, manned flight, the Wright Brothers built on ideas and knowledge from many renowned tinkers from around the world. The role of free information exchange in making Kitty Hawk possible is explored in the case "The Wright Brothers and Their Flying Machines." Authors Tom Nicholas and David Chen also tell us what happened after the brothers won a US patent for a "flying machine."

— Sean Silverthorne


Concentrating on Governance


This paper develops a novel trade-off view of corporate governance. Using a simple model that integrates agency costs and bargaining benefits of management friendly provisions, we identify the economic determinants of the resulting trade-offs for shareholder value. Consistent with the theory, our empirical analysis shows that provisions that allow managers to delay takeovers have a significant bargaining effect and a positive relation with shareholder value in concentrated industries. By contrast, non-delay provisions have an unambiguously negative relation with value, and more so in concentrated industries. Overall, our analysis suggests that there are governance trade-offs for shareholders, and industry concentration is an important determinant of their severity.

The Empire Struck Back: Sanctions and Compensation in the Mexican Oil Expropriation of 1938


The Mexican expropriation of 1938 was the first large-scale non-Communist expropriation of foreign-owned natural resource assets. The literature makes three assertions: the U.S. did not fully back the companies, Mexico did not fully compensate them for the value of their assets, and the oil workers benefited from the expropriation. This paper finds that none of those assertions hold. The companies devised political strategies that maneuvered a reluctant President Roosevelt into supporting their interests, and the Mexican government more than fully compensated them as a result. Neither wages for oil workers nor Mexican government oil revenue rose after the expropriation.

Immigrant Entrepreneurs in U.S. Financial History, 1775-1914


Throughout its history, the U.S. has been the beneficiary of a worldwide in-migration of entrepreneurial talent. This article surveys finance, one of the many sectors in which immigrants made a conspicuous impact. Part I demonstrates the dominant role of immigrants in forming public financial policies from 1775 to 1817. Part II surveys 12 merchant and investment banking firms founded during the nineteenth century by individual immigrants or family groups and traces their histories until 1914. Part III suggests, from this small sample, a series of hypotheses and tentative conclusions about their experiences and influence. Part IV compares the financial environment of the nineteenth century with that of the late twentieth and early twenty-first centuries. The article ends with a supporting appendix that describes 19 additional immigrants or immigrant families and their firms.


Working Papers

Competing Ad Auctions


We present a two-stage model of competing ad auctions. Search engines attract users via Cournot-style competition. Meanwhile, each advertiser must pay a participation cost to use each ad platform, and advertiser entry strategies are derived using symmetric Bayes-Nash equilibrium that lead to the VCG outcome of the ad auctions. Consistent with our model of participation costs, we find empirical evidence that multi-homing advertisers are larger than single-homing advertisers. We then link our model to search engine market conditions: we derive comparative statics on consumer choice parameters, presenting relationships between market share, quality, and user welfare. We also analyze the prospect of joining auctions to mitigate participation costs, and we characterize when such joins do and do not increase welfare.

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What Do CEOs Do?


We develop a methodology to collect and analyze data on CEOs' time use. The idea—sketched out in a simple theoretical set-up—is that CEO time is a scarce resource and its allocation can help us identify the firm's priorities as well as the presence of governance issues. We follow 94 CEOs of 600 top Italian firms over a pre-specified week and record the time devoted each day to different work activities. We focus on the distinction between time spent with insiders (employees of the firm) and outsiders (people not employed by the firm). Individual CEOs differ systematically in how much time they spend at work and in how much time they devote to insiders vs. outsiders. We analyze the correlation between time use, managerial effort, quality of governance, and firm performance and interpret the empirical findings within two versions of our model, one with effective and one with imperfect corporate governance. The patterns we observe are consistent with the hypothesis that time spent with outsiders is on average less beneficial to the firm and more beneficial to the CEO and that the CEO spends more time with outsiders when governance is poor.

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Top Executive Background and Financial Reporting Choice: The Case of Goodwill Impairment


We study the role of executive functional background in explaining goodwill impairment choices. We focus on top executives (CEOs and CFOs) whose employment history includes experience in investment banking, auditing, or private equity/venture capital. On average, we find that former auditors are significantly more likely to impair goodwill. However, further investigation reveals that former auditors and investment bankers are more likely to impair goodwill when their reputation concerns are low, suggesting that those executives are subject to their own opportunistic motives. We also find that the greater propensity of former auditors and investment bankers to report goodwill impairments is concentrated in firms that have a board member with a similar background. Finally, we find that former investment bankers are more likely than other executives in our study to disclose pro forma earnings excluding goodwill impairment. Overall, our results suggest that executive functional background is a significant explanatory factor of goodwill impairment reporting and that its effect is better understood in the context of upper echelons theory and agency theory.

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Risky Trust: How Multi-entity Teams Develop Trust in a High Risk Endeavor


This paper explicates the challenge of risky trust, which we define as trust that exists between parties vulnerable to high economic, legal, or reputational risks at individual or organizational levels. Drawing from analyses of data collected in a grounded case study of a multi-million dollar construction project, we identify dimensions, antecedents, and behavioral consequences of risky trust. Undertaken in the U.S. construction industry, a context known for its lack of trust, our study offers insights for trust repair.

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Cases & Course Materials


Mukti Khaire, Akiko Kanno, and Nobuo Sato
Harvard Business School Case 811-061

Yoshito Hori, dean of the Graduate School of Management, GLOBIS University, was planning to launch a full-time English MBA program in September 2012. GLOBIS University was already offering successful part-time MBA programs in English and Japanese. The full-time English program was a necessary step to fulfill Hori's ambition to make GLOBIS the number one business school in Asia; however, it remained to be seen whether the school could attract international students who needed to relocate to Japan and compete with other world-class international business schools.

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The Wright Brothers and Their Flying Machines

Tom Nicholas and David Chen
Harvard Business School Case 811-034

Wilbur (1867-1912) and Orville (1871-1948) Wright were fascinated by the mystery of flight, and they built on the ideas of prominent earlier figures such as Octave Chanute (1832-1910), the French-born American who was influential in fostering the free exchange of ideas surrounding aeronautics. Information exchange between practical tinkerers from across the globe led to a process of cumulative innovation unhindered by rivalry operating through the intellectual property rights system. Yet in 1903, the year the Wright Brothers achieved controlled sustained flight at Kitty Hawk, North Carolina, they applied for and were subsequently granted a U.S. patent for a "flying-machine," which changed the industry irrevocably. While American manufacturers diverted resources from science and technology to patent wars and legal disputes, European aeronautics advanced more rapidly.

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Investcorp and the Moneybookers Bid

Matthew Rhodes-Kropf and Carin-Isabel Knoop
Harvard Business School Case 811-013

In January 2007, Hazem Ben-Gacem, managing director and co-head of Investcorp Technology Partners (ITP), needs to decide what to bid at an auction for Moneybookers Limited, one of the top three e-payment solution providers in Europe. However, approximately 70% of Moneybookers revenues were related to transactions from online gaming sites (down from 100% in 2002). Although the thesis was that e-commerce transactions would soon make up a much larger chunk of the company's revenues, high gaming revenue still raised some questions. Between now and when Ben-Gacem had first submitted a bid of 60 million for Moneybookers back in November 2006, the U.S. Congress had enacted the Unlawful Internet Gambling Enforcement Act putting pressure on e-payment firms with gambling exposure. How would investors in ITP view this transaction? Ben-Gacem also worried about whether Moneybookers could manage the growth of its business and the evolution of regulation around monetary transactions. Moneybookers had effectively become a type of bank with deposit accounts and capital adequacy requirements and all the reporting that went along with it. But could an Internet startup maintain the compliance and accounting standards necessary to handle such scrutiny? Could it succeed—and if it did—what would it be worth?

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National Public Broadcasting

Richard S. Ruback and Royce Yudkoff
Harvard Business School Case 211-058

Bob Williams, the CEO of National Public Broadcasting (NPB), was considering an unsolicited offer to purchase the company in the early spring of 2006. The company was a media underwriting representative for public television and radio stations throughout the United States. When Mr. Williams and his wife, Linda Williams, started NPB in 1996, they had imagined it would grow quickly and be acquired by a larger media representation firm in a few years. But the business proved to be more complex than they had anticipated with slower growth and less interest from strategic acquirers, and, as a result, Mr. Williams had been running NPB ever since. The unsolicited offer gave the Williams and their partners the potential opportunity to realize a significant cash payment for the business. The case explores the impact on the sale of the ownership structure decisions that were made when NPB was formed and the complexity of the sales process for small businesses.

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Boston Properties (A)

Ryan D. Taliaferro and Aldo Sesia Jr.
Harvard Business School Case 211-018

Investment manager Eliza Baena confronts an apparent convertible bond arbitrage opportunity when she notices a narrowing spread between two Boston Properties (BXP) bonds, one a convertible bond and the other a straight bond, in the wake of the 2008 Lehman bankruptcy. Baena must decide if there is an opportunity, how to structure a trade to exploit it, and how much of her fund's capital to allocate. Case exposition includes descriptions of basic financing arrangements that support arbitrage strategies, such as rehypothecation and margin lending.

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Boston Properties (B)

Ryan D. Taliaferro and Aldo Sesia Jr.
Harvard Business School Supplement 211-041

The (B) case briefly recounts the action that investment manager Eliza Baena takes in the matter of the Boston Properties (BXP) bonds described in the (A) case. She must decide what to do next.

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