First Look

Abstract—In two field studies, we explore the impact of providing employees and teammates with prosocial bonuses, a novel type of bonus spent on others rather than on oneself. In Experiment 1, we show that prosocial bonuses in the form of donations to charity lead to happier and more satisfied employees at an Australian bank. In Experiment 2, we show that prosocial bonuses in the form of expenditures on teammates lead to better performance in both pharmaceutical sales teams in Belgium and sports teams in Canada. These results suggest that a minor adjustment to employee bonuses-shifting the focus from the self to others-can produce measurable benefits for employees and organizations.

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Abstract—Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks' leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks' low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a 10 percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.

Download working paper: http://www.nber.org/papers/w19018

Abstract—In this paper, we describe an operational methodology for characterizing the architecture of technical systems and demonstrate its application to a large sample of software releases. Our methodology is based upon network graphs and allows us to identify and define three fundamental architectural patterns, which we call core-periphery, multi-core, and hierarchical. We apply our methodology to a sample of 1,286 software releases from 17 applications and find that 70% to 80% of these systems possess a core-periphery architecture under our classification scheme. This type of architecture is characterized by having a single dominant cyclic group (the Core) that is large relative to other cyclic groups and above a threshold with respect to system size. We find that the size of the Core varies widely, even for systems that perform the same function. These differences appear to be associated with different models of development-open, distributed organizations tend to develop systems with smaller Cores, while closed collocated organizations tend to develop systems with larger Cores. Our findings represent a first step in establishing some "stylized facts" about the fine-grained structure of large, real-world technical systems.

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Abstract—We study the lags with which new technologies are adopted across countries and their long-run penetration rates once they are adopted. Using data from the last two centuries, we document two new facts: there has been convergence in adoption lags between rich and poor countries, while there has been divergence in penetration rates. Using a model of adoption and growth, we show that these changes in the pattern of technology diffusion account for 80% of the Great Income Divergence between rich and poor countries since 1820.

Download working paper: http://www.nber.org/papers/w19010

Abstract—Store liquidation is the time-constrained divestment of retail outlets through an in-store sale of inventory. The retail industry depends extensively on store liquidation, not only as a means for investors to recover capital from failed ventures, but also to allow managers of going concerns to divest stores in efforts to enhance performance and to change strategy. Recent examples of entire chains being liquidated include Borders Group in 2012, Circuit City in 2009, and Linens `n Things in 2008; the value of inventory sold during these liquidations alone is $3B. The store liquidation problem is related to but also differs substantially from the markdown optimization problem that has been studied extensively in the literature. This paper introduces the store liquidation problem to the literature and presents a technique for optimizing key decision variables, such as markdown, inventory, and store closing decisions during liquidations. We show that our approach could improve net recovery on cost (i.e., the profit obtained during liquidations stated as a percentage of the cost value of liquidated assets) by 2 to 7 percentage points in the cases we examined. The paper also identifies ways in which current practice in store liquidation differs from the optimal decisions identified in the paper and traces the consequences of these differences.

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Abstract—This paper, based on a five-year longitudinal study at two UK-based banks, documents and analyzes the practices used by risk managers as they aim to gather and establish influence in their organizations. Specifically, we examine how influence-seeking risk managers (1) establish and maintain interpersonal connections with decision makers and how they (2) adopt, deploy, and reconfigure tools-practices that we define collectively as toolmaking. Using prior literature and our empirical observations, we distinguish between influence activities to which toolmaking was not central, and those to which toolmaking was important. As for the influence activities which imply toolmaking, we can outline the contours of three modes of operation, which describe experts operating as Compliance Experts, Engaged Toolmakers, or Technical Champions, depending on the communicability of the tools and on the extent to which the experts are involved in practices related to those tools. Our study contributes to the accounting and management literature on influence-gathering, underlining that toolmaking plays a vital role in explaining how functional experts may compete in the intraorganizational marketplace for influential ideas and the attention of decision makers. Specifically, as risk management becomes more tool-driven and toolmaking may become more prevalent, our study provides a more nuanced understanding of the nature and consequences of risk managers' influence activities. An explicit focus on toolmaking extends accounting research that has hitherto focused attention on the structural arrangements and interpersonal connections when explaining the emergence of the influential financial expert.

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Abstract—How do certain risk measurements in organizations come to be seen as more reliable and acceptable than others? Taking a multiple-control perspective, I investigate the aftermath of a control debacle at a financial services company (MultiBank), focusing on its insurance division (EurInsurance), which suffered large losses in the European insurance crisis of 2002-2003. At MultiBank, the insurance crisis opened up a field of contestability in which new control agents got the opportunity to become implicated in divisional control. The struggle for custody over divisional control was a micropolitical process of interprofessional competition, played out between accountants and risk controllers who promoted conflicting measures of the key strategic uncertainty, EurInsurance's capital adequacy. The control agents engaged in credentializing strategies (Power, 1992); they mobilized and drew on different cultural resources to construct the reliability of their techniques and to discredit and "minoritize" the others. This credibility contest was won by the accountants who (unlike their opponents) were able to demonstrate the "institutional appropriateness" of their controls. Importantly, the fate of the competing control systems was contingent, not on how well their technologies addressed the problem of EurInsurance's capital adequacy, but rather on the controllers' capacity to generate top managerial acceptance and a widespread consensus among both internal and external stakeholders. The outcome of this type of professional competition is not determined by claims about representing the underlying economic reality, but by claims about representing those who care about it most. While competing controller groups have been observed to appeal to top management's logic of functionalism, this paper argues that, in certain circumstances, controller groups may successfully draw on the logic of appropriateness as they supply new control systems.

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Abstract—Enterprise Risk Management (ERM) has become a crucial component of contemporary corporate governance reforms. Now that principles, guidelines, and standards abound, it is time to take stock. Has the idea of ERM reached maturity with proven, unambiguous concepts and tools? Or is it still emerging and unproven? Or is it simply taken for granted, its value "proven" by the apparent demand? This paper portrays ERM as an evolving discipline and presents empirical findings on its current state of maturity, as evidenced by academic surveys and our own field research. Reviewing academic surveys, we observe that contingency theories of ERM have become a current trend but have produced few significant results. By surveying the development and content of these theories we argue that they have been based on an inadequate and insufficiently specified concept of ERM. Based on a ten-year field project, over 250 interviews with senior risk officers, and three detailed case studies in high reliability organizations, we put forward a more nuanced specification of ERM, outlining its emerging design parameters that suggest observable variation in the "ERM mix" adopted by organizations. We also propose a so far misunderstood or neglected contingent variable: the type of risk that the ERM practices address. We outline a "minimum necessary contingency framework" (Otley, 1980) that is sufficiently nuanced, yet observable to empirical researchers so that they may, in due course, hypothesize about "fit" between contingent variables, such as risk types and the ERM mix, as well as outcomes (organizational effectiveness).

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Abstract—Many organizations, including corporations and governments, wish to encourage charitable giving, and offer incentives for their employees, customers, and citizens to do so. The most common of these incentives is a match rate, where the organization agrees to pay, for example, $1 for every $1 donated. However, these incentives may not be efficient. In this short article we suggest alternative ways of matching that existing theory and data suggest might be more effective at encouraging donations. These include non-linear matching, social (and team) matching, and lottery matching-each of which novel schemes could be tested empirically against a standard match incentive.

Download working paper: http://www.hbs.edu/faculty/product/44797

Abstract—Individuals benefit from accessing others' expertise, known as knowledge sourcing. Previous research has theorized supply-side explanations (e.g., availability of knowledge) and demand-side explanations (e.g., a challenging task) for why people source knowledge, but thus far the influence of information processing-how people interpret and synthesize information-on knowledge sourcing has received little attention. In this paper, we introduce an information processing perspective on knowledge sourcing by theorizing how knowledge sourcing is enabled by conditions known to influence individual and group information processing. We develop a multi-level model to examine knowledge sourcing from an electronic knowledge repository (KR) and find that when individuals have strong information processing capabilities-stemming from experiential knowledge-bases like work experience or experience with the organizational context-they engage in more frequent KR sourcing. Also, when individuals are embedded in teams with strong social information processing capabilities, such as teams with experience working together, they engage in more KR sourcing. The multi-level perspective is critical: we also find that team experience moderates the relationship between individual experience and KR sourcing. Our paper advances theory on knowledge management and offers insight for supporting team performance.

Download working paper: http://ssrn.com/abstract=2101693