First Look

November 15, 2011

Why Public Firms Invest Less Than Private Ones

Private firms continually weigh the pros and cons of going public. New research from John Asker, Joan Farre-Mensa, and Alexander Ljungqvist suggests there may be another reason to remain private: increased willingness to invest to become more competitive. In evaluating the investment practices of stock market-listed and privately held firms in the US, the researchers discovered that "private firms invest substantially more than do public firms matched on size and industry " (10 percent of total assets versus 4 percent), and that private firms "are 3.5 times more responsive to changes in investment opportunities than are public firms…." Public firms may suffer in this regard because of conflicting interests between management and investors, and because shareholders use their liquidity to sell when times get tough rather than to pressure management. Read the working paper, "Comparing the Investment Behavior of Public and Private Firms."

The Decision To Lobby

Which firms most actively lobby legislators? In the new paper "The Dynamics of Firm Lobbying," William R. Kerr, William Lincoln, and Prachi Mishra find less than 10 percent of firms engage in lobbying, that those that do tend to be large, and that lobbying firms continue to do so year after year. Among the factors that limit lobbying, the researchers explain, are the large upfront costs in dollars and learning that it takes to become effective.

Eyeing A Future For Video Tracking

At Sealed Air Corp., its video tracking technology called VTID was a nifty application in search of a job to do. After failing to find a market in three industries, Sealed Air rolled out VTID in the quick-serve restaurant business. The technology allows a smart camera to monitor food service workers and alert their supervisors to food handling or storage violations in real time. After seven years, can this technology finally be commercialized? The case, "Sealed Air Corporation: Deciding the Fate of VTID," was written by Elie Ofek.

— Sean Silverthorne


True North Groups: A Powerful Path to Personal and Leadership Development


All too often, we find ourselves forced to confront life's challenges on our own. What we need is an intimate group with whom we can examine our beliefs and share our lives. For the past thirty-five years, Bill George and Doug Baker have found the answer in True North Groups—small groups that gather regularly to explore members' greatest challenges. These groups provide opportunities for the honest conversations essential to develop the self-awareness, compassion, emotional intelligence, and authenticity required to be inspired human beings and inspiring leaders.


Business Model Innovation and Competitive Imitation: The Case of Sponsor-Based Business Models


This paper provides the first formal model of business model innovation. Our analysis focuses on sponsor-based business model innovations where a firm monetizes its product through sponsors rather than setting prices to its customer base. We analyze strategic interactions between an innovative entrant and an incumbent where the incumbent may imitate the entrant's business model innovation once it is revealed. The results suggest that an entrant needs to strategically choose whether to reveal its innovation by competing through the new business model or conceal it by adopting a traditional business model. We also show that the value of business model innovation may be so substantial that an incumbent may prefer to compete in a duopoly rather than to remain a monopolist.

Bias in Search Results?: Diagnosis and Response


I explore allegations of search engine bias, including understanding a search engine's incentives to bias results, identifying possible forms of bias, and evaluating methods of verifying whether bias in fact occurs. I then consider possible legal and policy responses, and I assess search engines' likely defenses. I conclude that regulatory intervention is justified in light of the importance of search engines in referring users to all manner of other sites, and in light of striking market concentration among search engines.

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Measuring the Prevalence of Questionable Research Practices with Incentives for Truth-telling


Cases of clear scientific misconduct have received significant media attention recently, but less flagrant transgressions of research norms may be more prevalent and in the long run more damaging to the academic enterprise. We surveyed over 2,000 psychologists about their involvement in questionable research practices, using an anonymous elicitation format supplemented by incentives for honest reporting. The impact of incentives on admission rates was positive and greater for practices that respondents judge to be less defensible. Using three different estimation methods, we find that the proportion of respondents that have engaged in these practices is surprisingly high relative to respondents' own estimates of these proportions. Some questionable practices may constitute the prevailing research norm.

The Role of Finance and Private Investment in Developing Sustainable Cities


Three trends will drive urban investment, development, and entrepreneurship in the next two decades. This article provides tools to identify the situations and circumstances that will be most favorable for private sector involvement in consideration of these trends. The first trend is urbanization. Over the next twenty years, the number of people living in cities will double, with three billion additional urban dwellers. Second, shared resources like clean water, clean air, energy, and places to put solid waste are already scarce and constrained. Urbanization will only exacerbate these pressures. Third, almost no local or national government can mobilize both the capital and the political consensus to make investments in the infrastructure that will lead to more effective use of these resources. There is a largely unrecognized opportunity for the private sector to engage in selective investments that consider these trends. Investors and entrepreneurs can make money by extending these "common good" kinds of items, which use resources more productively. In the winning situations, this makes these cities more economically competitive at the same time. This article further argues for investments grounded in the basics of smart physical configuration. Examples are the compact arrangement of buildings, efficient use of water and power, and deployment of transit that reduces congestion. Investment and urban planning in three Asian cities are profiled as illustrations. Two sample proformas featuring multiple classes of securities illustrate the concepts.

The Analyst Recommendation and Earnings Forecast Anomaly

An abstract is unavailable at this time.



Working Papers

Comparing the Investment Behavior of Public and Private Firms


We evaluate differences in investment behavior between stock market-listed and privately held firms in the United States using a rich new data source on private firms. Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar, matched private firms, especially in industries in which stock prices are particularly sensitive to current earnings. These differences do not appear to be due to unobserved differences between public and private firms, how we measure investment opportunities, lifecycle differences, or our matching criteria. We suggest that the patterns we document are most consistent with theoretical models emphasizing the role of managerial myopia.

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The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance


We investigate the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes. Using a matched sample of 180 companies, we find that corporations that voluntarily adopted environmental and social policies many years ago-termed "high sustainability" companies-exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies- termed "low sustainability" companies. In particular, we find that the boards of directors of these companies are more likely to be responsible for sustainability, and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit better measurement and disclosure of nonfinancial information. Finally, we provide evidence that high sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.

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First-Party Content, Commitment and Coordination in Two-Sided Markets


The strategic use of first-party content by two-sided platforms is driven by two key factors: the nature of buyer and seller expectations (favorable vs. unfavorable) and the nature of the relationship between first-party content and third-party content (complements or substitutes). As a result, first-party content is a strategic instrument that plays a dual role. On the one hand, it enables platforms facing unfavorable expectations to compensate for their difficulty in attracting third-party sellers. They should over-invest in first-party content that substitutes for third-party content relative to platforms benefitting from favorable expectations. On the other hand, platforms that benefit from favorable expectations capture a larger share of total surplus from buyers and sellers. They derive a higher return on investment in first-party content that complements third-party content relative to platforms facing unfavorable expectations. As a result, the latter under-invest in complementary first-party content. These results hold with both simultaneous and sequential entry of the two sides. With two competing platforms-incumbent facing favorable expectations and entrant facing unfavorable expectations-and singlehoming on one side of the market, the incumbent always invests (weakly) more in first-party content relative to the case in which it is a monopolist.

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Organizational Toolmaking: Transformations in the Influence of Experts


In this study, we examine transformations in the influence of risk experts in two large U.K. banks over a period of six years. Our analysis highlights that a process we term toolmaking (whereby experts create tools that embody their expertise) is central to the way in which experts garner influence in complex organizational settings. We develop a framework that conceptualizes the transformations in the influence of experts via two interdependent processes. First, experts can change their knowledge from personally communicable, tacit knowledge into tool-generated, highly communicable knowledge. The second interdependent movement involves how experts develop their personal involvement in producing analysis and interpretation in important organizational decision-making forums. Based on the ability to combine and balance these two processes, we distinguish analytically among four positions of influence that experts can occupy-box-tickers, disconnected technicians, ad hoc advisors, and frame-makers-and trace the movements of experts between these positions. The findings and theoretical framework contribute to our understanding of how and why experts can become influential, complementing existing explanations focused on (a) the cognitive and political dimensions of what influence-seeking organizational actors do and (b) the structural conditions under which they operate.

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The Dynamics of Firm Lobbying


We study the determinants of the dynamics of firm lobbying behavior using a panel data set covering 1998-2006. Our data exhibit three striking facts: (i) few firms lobby, (ii) lobbying status is strongly associated with firm size, and (iii) lobbying status is highly persistent over time. Estimating a model of a firm's decision to engage in lobbying, we find significant evidence that up-front costs associated with entering the political process help explain all three facts. We then exploit a natural experiment in the expiration in legislation surrounding the H-1B visa cap for high-skilled immigrant workers to study how these costs affect firms' responses to policy changes. We find that companies primarily adjusted on the intensive margin: the firms that began to lobby for immigration were those that were sensitive to H-1B policy changes and were already advocating for other issues, rather than firms that became involved in lobbying anew. For a firm already lobbying, the response is determined by the importance of the issue to the firm's business rather than the scale of the firm's prior lobbying efforts. These results support the existence of significant barriers to entry in the lobbying process.

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Cases & Course Materials

KKR: Leveraging Sustainability

Robert G. Eccles, George Serafeim, and Tiffany A. Clay
Harvard Business School Case 112-032

The case describes KKR's Green Portfolio Program, one of the firm's environmental initiatives, which has achieved $160 million in cost savings. While pleased with its progress in achieving greater energy efficiency and reduced carbon emissions, the firm is looking for other ways to expand its sustainability initiatives, such as in its supply chain and incorporating sustainability into its due diligence and deal-making processes.

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"Longtop Financial Technologies (A)

David F. Hawkins, Annelena Lobb, and Aldo Sesia
Harvard Business School Case 112-036

An abstract is unavailable at this time.

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"Denise Frazer and Paolo Canto: A Case Vignette on Feedback—Denise Frazer's Perspective

Joshua D. Margolis and Anthony J. Mayo
Harvard Business School Case 412-045

Denise Frazer and Paolo Canto, two HBS students, have decided to give each other feedback on their class participation. While Denise believes that she has provided concrete, actionable feedback to Paolo, she does not feel that Paolo is reciprocating. His feedback is general and superficial. Denise and Paolo have set a time to meet to discuss their latest class participation, and Denise has decided to use this time to address her issues with Paolo. This case should be used with its partner case: "Denise Frazer and Paolo Canto: A Case Vignette on Feedback—Paolo Canto's Perspective."

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Michael Lester at Lachlan Consulting

Anthony J. Mayo and Joshua D. Margolis
Harvard Business School Case 412-041

Michael Lester, a consultant with Lachlan, was frustrated by his client's unwillingness to provide key data for an important presentation. Lester must decide how best to confront Nadine Robert, his client, knowing that his personal success and the reputation of his consulting firm hinge on his ability to build and sustain a strong relationship. How firm should he be with the client? What type of feedback would help this situation?

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Sealed Air Corporation: Deciding the Fate of VTID

Elie Ofek
Harvard Business School Case 512-029

: In mid-2010 the Sealed Air Corporation has to decide on next steps for its novel video tracking technology (called VTID) after unsuccessful attempts to market it in three different industry settings. The company must determine whether its most recent target market, the quick-serve restaurant segment, is still worth pursuing or whether the company should look for a different application and market altogether. The company could also revisit the previous two applications, tracking and tracing processed meat and tracking employee safety practices. At the other extreme, after seven years of R&D and marketing efforts and millions of dollars in expenses, the company could cease attempts to commercialize VTID.

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The Cleveland Clinic: Improving the Patient Experience (Abridged)

Ananth Raman, Anita Tucker, and Rachel Gordon
Harvard Business School Case 611-015

Healthcare has traditionally focused on medical outcomes and financial performance. The big question is always, "How much is it going to cost?" What would happen, though, if healthcare also considered the question of "How does the patient feel?" This case looks at the Cleveland Clinic's attempt to answer the latter question by attempting to institutionalize empathy as part of its delivery of care.

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George Serafeim, Robert G. Eccles, and Tiffany A. Clay
Harvard Business School Case 112-031

GoodGuide, a high-technology start-up company founded by University of California, Berkley Professor Dara O'Rourke, is at a critical junction. The venture capital-funded company has yet to find the business model to monetize a very promising product that provides consumers and manufacturers with information about the sustainability of a product.

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Mike Mayo Takes on Citigroup (B)

Suraj Srinivasan and Amy Kaser
Harvard Business School Supplement 112-051

"Mike Mayo Takes on Citigroup (B)" is a supplementary exercise to go with the "Mike Mayo Takes on Citigroup (A)" case and is designed to give students an opportunity to understand the creation of deferred tax liabilities (DTLs) and the life cycle of a DTL using an example based on the difference between Modified Accelerated Cost Recovery System (MACRS) depreciation, which is allowed for tax purposes, and straight line depreciation, which is typically the method used for financial statements.

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Ken Langone: Member, GE Compensation Committee

Suraj Srinivasan and Lizzie Gomez
Harvard Business School Case 111-060

On September 17, 2003, Richard Grasso stepped down as chairman and CEO of the New York Stock Exchange following weeks of intense public criticism over the size of his $190 million compensation package. As chairman of the committee that oversaw Grasso's payout, Ken Langone believed firmly that the payment was fair and reasonable. However, NYSE members, government regulators, and the media alike blamed the board for its oversight and viewed Langone as the mastermind behind Grasso's huge payout. Calls to oust Langone from all his board positions came within days of Grasso's resignation. Ken Langone also served as a member of the compensation committee on the board of General Electric which came under pressure to drop Langone from its board. This case follows the backlash against Langone over his role in the NYSE crisis and the resulting departure from General Electric's board of directors.

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Pepsi-Lipton Brisk

Thales S. Teixeira and Alison Caverly
Harvard Business School Case 512-011

This case showcases key decisions in promoting the re-launch of Brisk, a ready-to-drink iced tea by Pepsi-Lipton. The decisions are as follows: creative, media, and metrics selection. It also deals with budget allocation to traditional (Super Bowl, television) and new (viral ads and social) media.

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Learning to Negotiate

Michael A. Wheeler
Harvard Business School Note 912-004

This brief note introduces to the student the challenges and rewards of learning to be a more skilled negotiator. Negotiation requires the integration of keen analytic insight with emotional intelligence capabilities.

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