First Look

October 18, 2011

A 250-year-old Rivalry

One thing you can say about the fine art auction business is this: it's not a winner-take-all market. Sotheby's and Christie's have been battling it out for 250 years, with neither competitor able to overtake the other. The new case "Sotheby's & Christie's Inc.," by Ramon Casadesus-Masanell and C.J. Wise, explores this duopoly and the struggles the companies face in the recession.

Where Chain Restaurants Thrive

Many people feel that big chain restaurants ruin local neighborhoods, motivating some cities to ban or otherwise regulate their existence. A new study suggests that the market, left to its own devices, might make the same decision. In the paper "Restaurant Organizational Forms and Community in the US in 2005," Glenn R. Carroll and Magnus Thor Torfason find that chains thrive best in communities that are growing rapidly or in areas with high levels of population churn. By contrast, independent restaurants are favored in established, more affluent areas, "due to a combination of general familiarity, preference for restaurants that support a local identity, and active protection of that identity," the authors theorize.

Bank Policy And Overdrafters

Between 2000 and 2005, United States banks closed 30 million checking accounts of excessively overdrafting customers. It's a significant action because people whose accounts are shuttered have to turn to costly fee-based alternatives to receive banking services—if they can get them at all. To help policymakers sort through this issue, researchers Dennis F. Campbell, Asís Martínez Jerez, and Peter Tufano performed an analysis of involuntary closures to determine contributing factors, from the perspective of both customers and the banks themselves. Among the findings: closures were most frequent in counties with high rates of households headed by single mothers, low levels of college education, high rates of property crime, a strong presence of multimarket versus local banks, higher levels of bank competition, and low rates of voter turnout. Their paper, "Bouncing Out of the Banking System: An Empirical Analysis of Bank Account Closures," will be published in a forthcoming issue of Journal of Banking and Finance.

— Sean Silverthorne


Optimizing Organic Waste to Energy Operations


A waste-to-energy firm that recycles organic waste with energy recovery performs two environmentally beneficial functions: it diverts waste from landfill and it produces renewable energy. At the same time, the waste-to-energy firm serves and collects revenue from two types of customers: waste generators who pay for waste disposal service and electricity consumers who buy energy. Given the process characteristics of the waste-to-energy operation, the market characteristics for waste disposal and energy, and the mechanisms regulators use to encourage production of renewable energy, we determine the profit-maximizing operating strategy of the firm. We also show how regulatory mechanisms affect the operating decisions of the waste-to-energy firm. Our analyses suggest that if the social planner's objective is to maximize landfill diversion, offering a subsidy as a per kilowatt-hour for electricity is more cost effective, whereas if the objective is to maximize renewable energy generation, giving a subsidy as a lump sum to offset capital costs is more effective. This has different regulatory implications for urban and rural settings where the environmental objectives may differ.

Bouncing Out of the Banking System: An Empirical Analysis of Bank Account Closures


Using a new database, we document the factors that relate to the extent of involuntary consumer bank account closure resulting from excessive overdraft activity. Consumers who have accounts involuntarily closed for overdraft activity may have limited or no access to the formal banking system. In the period 2000 through 2005, there were approximately 30 million checking accounts reportedly closed for excessive overdrafting. Closure rates jointly reflect (a) financial mismanagement on the behalf of families and (b) bank forbearance policies regarding overdrawn customers. We focus on five factors to explain the incidence of involuntary closures: personal traits, community traits, economic trends, bank policies, and credit access through the alternative financial services sector. We find that involuntary closures are most frequent in U.S. counties with high rates of households headed by single mothers, low levels of college education, high rates of property crime, a strong presence of multi-market vs. local banks, higher levels of competition among banks, and low rates of electoral participation. Negative shocks to income and rates of employment are also associated with increases in closure activity within counties over time. We interpret these results as consistent with involuntary consumer account closures being jointly driven by thin margins between income and expenditures, general consumer inability to budget and forecast, bank incentives, and community norms and social capital. Furthermore, using both national data and a natural experiment, we find that access to payday lending seems to lead to higher rates of involuntary account closure.

Restaurant Organizational Forms and Community in the U.S. in 2005


Recent sociological theory and research highlights food, drink, and restaurants as culturally meaningful and related to social identity. An implication of this view holds that the prevalence of corporate chain restaurants affects the sociological character of communities, as many activists, popular-based movements, and theorists contend. The analysis we report here seeks to identify the ecological niche properties of chain and independent restaurants-which kinds of communities support restaurant chains and which kinds of communities tend to support independent local restaurants and food service providers instead. We analyze data from a 2005 sample of 49 counties across the United States with over 17,000 active restaurants. We argue that demographic stability affects the community composition of organizational forms, and we also investigate arguments about a community's income distribution, age distribution, population trends, geographic sprawl, and commuter population. We find that communities with less stable demographic makeups support more chain restaurants, but that other factors, including suburban sprawl and public transit commuters, also have some impact.

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The Dark Side of Creativity: Original Thinkers Can Be More Dishonest


Creativity is a common aspiration for individuals, organizations, and societies. Here, however, we test whether creativity increases dishonesty. We propose that a creative personality and a creative mindset promote individuals' ability to justify their behavior, which, in turn, leads to unethical behavior. In five studies, we show that participants with creative personalities tended to cheat more than less creative individuals and that dispositional creativity is a better predictor of unethical behavior than intelligence (Experiment 1). In addition, we find that participants who were primed to think creatively were more likely to behave dishonestly than those in a control condition (Experiment 2) and that greater ability to justify their dishonest behavior explained the link between creativity and increased dishonesty (Experiments 3 and 4). Finally, we demonstrate that dispositional creativity moderates the influence of temporarily priming creativity on dishonest behavior (Experiment 5). The results provide evidence for an association between creativity and dishonesty, thus highlighting a dark side of creativity.

Anxiety, Advice, and the Ability to Discern: Feeling Anxious Motivates Individuals to Seek and Use Advice


Across eight experiments, we describe the influence of anxiety on advice seeking and advice taking. We find that anxious individuals are more likely to seek and rely on advice than are those in a neutral emotional state (Experiment 1), but this pattern of results does not generalize to other negatively valenced emotions (Experiment 2). The relationships between anxiety and advice seeking and anxiety and advice taking are mediated by self-confidence; anxiety lowers self-confidence, which increases advice seeking and reliance upon advice (Experiment 3). Though anxiety also impairs information processing, impaired information processing does not mediate the relationship between anxiety and advice taking (Experiment 4). Finally, we find that anxious individuals fail to discriminate between good and bad advice (Experiment 5a-c) and between advice from advisors with and without a conflict of interest (Experiment 6).

Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980


We provide evidence for the long-standing concern on auditor conflicts of interest from providing non-audit services (NAS) to audit clients by using rarely explored NAS fee data from 1978 to 1980. Using this earlier setting, we find cross-sectional evidence of improved earnings quality when auditors provide NAS, especially those related to information services. This is consistent with better audit quality from knowledge spillovers due to the joint offering of audit and consulting services. Events related to the repeal of these NAS disclosures in 1982 are associated with a small positive stock price reaction suggesting no adverse economic consequences of withdrawing NAS disclosures. Further, following the repeal of disclosure requirements we find no change in the earnings quality of client firms. In sum, data drawn from an earlier time period suggest that auditors' reputational incentives, possible synergies, and knowledge transfers imply that NAS offered by audit firms can be associated with improved audit and reporting quality in client firms.

Specialization and Variety in Repetitive Tasks: Evidence from a Japanese Bank


Sustaining operational productivity in the completion of repetitive tasks is critical to many organizations' success. Yet research points to two different work-design-related strategies for accomplishing this goal: specialization to capture the benefits of repetition and variety (i.e., working on different tasks) to keep workers motivated and provide them opportunities to learn. In this paper, we investigate how these two strategies may bring different productivity benefits over time. For our empirical analyses, we use two-and-a-half years of transaction data from a Japanese bank's home loan application-processing line. We find that over the course of a single day, specialization, as compared to variety, is related to improved worker productivity. However, when we examine workers' experience across a number of days, we find that variety helps improve worker productivity. Additionally, we show that part of this benefit results from workers' cumulative experience with changeovers. Our results highlight the need for organizations to transform specialization and variety into mutually reinforcing strategies rather than treating them as mutually exclusive. Overall, our paper identifies new ways to improve operational performance through the effective allocation of work.


Cases & Course Materials

Sotheby's & Christie's Inc.

Ramon Casadesus-Masanell and C.J. Wise
Harvard Business School Case 710-412

The fine art auction business has remained a duopoly over its 250 year history. The industry is dominated by Sotheby's and Christie's Inc. Curiously, neither competitor has been able to overtake the other by a notable margin despite the clear network effects of this platform business. As we enter unprecedented economic times, as technology pushes forward infiltrating almost all areas of business, and as new competitors fight to enter the fine art sales space, these two auction houses explore modifications to their business model. Some efforts by the two organizations have already begun but are in the infantile stage, and thus the success of these initiatives is entirely unproven. Sotheby's and Christie's must decide how to respond to this economic and cultural turning point and whether to keep investing in these ancillary aspects of their operations.

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Hassina Sherjan

Robert G. Eccles, George Serafeim, and Pippa Eccles
Harvard Business School Case 112-029

Hassina Sherjan was born in Afghanistan but grew up and was educated in the United States. A trip to Afghanistan when she was an adult inspired her to move back to her home country with two missions. The first was to educate young women through a non-profit organization she started called Aid Afghanistan for Education and a for-profit company, Boumi, that manufactures and distributes products for the home such as curtains, cushion covers, tea cozies, coasters, bedclothes, and bathroom accessories. The mission of Boumi is to create jobs in Afghanistan, especially for women, based on traditional Afghani designs and using only locally grown cotton. Sherjan wants to grow Boumi so that it can be a substantial, if not major, funding source for Aid Afghanistan for Education. In order to grow Boumi, Sherjan must confront a number of challenges including funding, finding and managing skilled workers, and getting distribution for Boumi products in major markets such as Europe and the United States.

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Khosla Ventures: Biofuels Gain Liquidity

Joseph B. Lassiter, William A. Sahlman, Alison Berkley Wagonfeld, and Evan Richardson
Harvard Business School Case 812-035

Samir Kaul, a partner at Khosla Ventures, looked out his office window. It was late June 2011, and like almost every day in Menlo Park, the sun was shining. Kaul was reflecting on what had been a very positive 10 months in the venture capital business. Over that span, he had helped three of his portfolio companies through IPOs and helped Khosla Ventures raise its third fund, bringing the total outside capital raised by the group to more than $2.1 billion.

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Exchange-Traded Funds at Vanguard (A)

Robert C. Pozen and Steven Vickers
Harvard Business School Case 311-134

Vanguard Group management, led by CEO John Brennan, was considering whether to launch exchange-traded funds (ETFs) in early 2000. ETFs, first created in the early 1990s, combined aspects of traditional mutual funds and closed-end funds. The U.S. ETF industry had reached $36 billion in assets under management, growing rapidly over the past few years. Because ETFs were exclusively index-tracking products, Vanguard, the largest index mutual fund company, had some potential expertise in managing ETFs. However, entering this market would present unique challenges for Vanguard. Vanguard had a philosophy espousing low-turnover investing, while ETFs enabled short-term trading. The company would also need to develop a distribution network for ETFs. Finally, since Vanguard's mutual fund investors owned the company, management considered whether existing shareholders would benefit from an ETF product launch.

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The Cleveland Clinic: Improving the Patient Experience

Ananth Raman and Anita Tucker
Harvard Business School Case 612-031

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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China or the World? A Financial Reporting Strategy for Hong Kong's Capital Markets

Karthik Ramanna, Gwen Yu, and G.A. Donovan
Harvard Business School Case 112-035

Set in 2010, the case discusses the strategic directions Hong Kong could pursue, particularly vis-a-vis China, as it seeks to preserve its preeminence in the region. In 2010, the Hong Kong Exchange announced that it would allow listed Chinese companies to report using Chinese GAAP without reconciliation to IFRS. The exchange was responding to the demands of its largely Chinese clientele and also coping with increased global competition to attract listings from Chinese companies. However, there were concerns around whether this change would undermine Hong Kong's position as a financial center in the long-term. Hong Kong's position as a global financial powerhouse was due in part to its rigorous emphasis on compliance and enforcement-allowing companies to report under Chinese GAAP, the practice of which was highly variable, could compromise Hong Kong's high corporate governance standards.

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Perella Weinberg Partners: New Firm, Old Values

Clayton Rose and Aman Malik
Harvard Business School Case 312-013

In the five years since it opened its doors, the investment banking boutique Perella Weinberg Partners had grown into a firm that advised a roster of blue-chip clients on critical transactions and had over $8 billion of client assets under management. The three co-founders, all veterans of Wall Street, were proud of the firm they had created and were pleased with its success to date, but they also knew that it had reached a key inflection point. How much could they, or would they, want to grow? What was the best way to enhance their "relevance"? What were the costs, benefits, and impediments to growth? Another looming question was whether the firm should go public at some point.

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Scotty Smiley

Scott A. Snook and Doug Crandall
Harvard Business School Case 412-058

U.S. Army Lieutenant Scotty Smiley faces the biggest challenge of his young life. What will he do after learning that the wounds he received from a car bomb in Iraq have left him permanently blinded? On April 6, 2005, Lieutenant Scotty Smiley was grievously wounded by a suicide bomber while leading his infantry platoon during a combat patrol in Iraq. This is a biographical case that outlines who Scotty was prior to this incident and asks readers to consider the following fundamental question: What does this tragic event mean for who he is and how he will lead his life? And by extension, what role do life crucibles play in helping to shape who we are and how we lead?

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Term Sheet Negotiations: A 'Rich-vs.-King' Approach

Noam Wasserman, Furqan Nazeeri, and Kyle Anderson
Harvard Business School Note 812-028

To give students and entrepreneurs a framework to guide their term-sheet negotiations with venture capitalists.

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