First Look

Abstract—In the past few years, a number of well-known firms have failed—think of Blockbuster, Kodak, and RadioShack. When we read about their demise, it often seems inevitable—a natural part of "creative destruction." But closer examination reveals a disturbing truth: companies large and small are shuttering more quickly than ever. What does it take to buck this trend? One answer is this: ambidexterity. Firms must remain competitive in their core markets, while also winning in new domains. Clayton M. Christensen has been pessimistic about whether established companies can prevail in the face of disruption. Charles A. O'Reilly III and Michael L. Tushman have a contrasting point of view. The authors explain how shrewd organizations have used an ambidextrous approach to solve their own innovator's dilemma. They contrast these luminaries with companies that—often trapped by their own successes—have been unable to adapt and grow. Drawing on an extensive research program and over a decade of helping companies innovate, the authors present a set of practices to guide firms as they adopt ambidexterity. Senior leadership is crucial here. We discuss the importance of leading in a consistently inconsistent fashion. Readers will come away with a new understanding of how to improve their existing businesses through efficiency, control, and incremental change, while also seizing new markets where flexibility, autonomy, and experimentation rule the day.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50401

Abstract—We build an endogenous growth model to analyze the relationships between taxation, corruption, and economic growth. Entrepreneurs lie at the center of the model and face disincentive effects from taxation but acquire positive benefits from public infrastructure. Political corruption governs the efficiency with which tax revenues are translated into infrastructure. The model predicts an inverted-U relationship between taxation and growth, with corruption reducing the optimal taxation level. We find evidence consistent with these predictions and the entrepreneurial channel using data from the Longitudinal Business Database of the U.S. Census Bureau. The marginal effect of taxation for growth for a state at the 10th or 25th percentile of corruption is significantly positive; on the other hand, the marginal effects of taxation for growth for a state at the 90th percentile of corruption are much lower across the board. We make progress towards causality through Granger-style tests and by considering periphery counties where effective tax policy is largely driven by bordering states. Finally, we calibrate our model and find that the calibrated taxation rate of 37% is fairly close to the model's estimated welfare-maximizing taxation rate of 42%. Reducing corruption provides the largest potential impact for welfare gain through its impact on the uses of tax revenues.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50428

Abstract—People make personal plans regarding whether, when, where, and how to undertake certain actions. We discuss three questions related to personal plans. First, what are the effects of plans on behavior? Second, when are plans formed? Third, how do plans deviate from optimality? For each of these questions, we (a) offer a brief overview of research that sheds light on the issue and (b) identify gaps in current knowledge. We emphasize connections to the growing theoretical literature that gives personal plans a substantive role, but we conclude that more research is needed, especially on the latter two questions we cover.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50413

Abstract—We examine how language barriers affect the capital market reaction to information disclosures. Using transcripts from the English-language conference calls of non-U.S. firms, we find that the calls of firms in countries with greater language barriers are more likely to contain non-plain English and erroneous expressions. For non-U.S. firms that hire an English-speaking manager, we find less use of non-plain English and fewer erroneous expressions. Calls that have greater use of non-plain English and more erroneous expressions show lower intraday price movement and trading volume. The capital market responses to non-plain English and erroneous expressions are more negative when the firm is located in a non-English-speaking country and has more English-speaking analysts participating in the call. Our results highlight that when disclosure takes the form of verbal communication, language barriers between speaker and listener affect the transparency of the narrative, which in turn impacts the market reaction to the disclosure.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50424

Abstract—Economists have become increasingly interested in studying the nature of production functions in social policy applications, with the goal of improving productivity. Traditionally, models have assumed workers are homogenous inputs. However, in practice, substantial variability in productivity means the marginal productivity of labor depends substantially on which new workers are hired—which requires not an estimate of a causal effect, but rather a prediction. We demonstrate that there can be large social welfare gains from using machine learning tools to predict worker productivity by using data from two important applications—police hiring and teacher tenure decisions.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50430

Abstract—Scholars from many disciplines have investigated self-deception, but defining self-deception and establishing its possible benefits have been a matter of heated debate—a debate impoverished by a relative lack of empirical research. Drawing on recent research, we first classify three distinct definitions of self-deception, ranging from a view that self-deception is synonymous with positive illusions to a more stringent view that self-deception requires the presence of simultaneous conflicting beliefs. We then review recent research on the possible benefits of self-deception, identifying three adaptive functions: deceiving others, social status, and psychological benefits. We suggest potential directions for future research.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50431

Abstract—We demonstrate that simply by using the ethnic makeup surrounding a firm’s location, we can predict, on average, which trade links are valuable for firms. Using customs and port authority data on the international shipments of all U.S. publicly traded firms, we show that firms are significantly more likely to trade with countries that have a large resident population near their firm headquarters. We use the formation of World War II Japanese Internment Camps to isolate exogenous shocks to local ethnic populations and identify a causal link between local networks and firm trade. We also show that firms are more likely to acquire target firms, and report increased segment sales, in countries to which they are connected. Firms that exploit their local networks also see significant increases in future sales growth and profitability. In sum, our results document a surprisingly large impact of immigrants’ role as economic conduits for firms in their new countries.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50366

Abstract—The proliferation of big data makes it possible to better target city services like hygiene inspections, but city governments rarely have the in-house talent needed for developing prediction algorithms. Cities could hire consultants, but a cheaper alternative is to crowdsource competence by making data public and offering a reward for the best algorithm. A simple model suggests that open tournaments dominate consulting contracts when cities can tolerate risk and when there is enough labor with low opportunity costs. We also report on an inexpensive Boston-based restaurant tournament, which yielded algorithms that proved reasonably accurate when tested "out-of-sample" on hygiene inspections.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50429

Abstract—No abstract available.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50422

Abstract—Business managers routinely make decisions that significantly affect the lives of others in both positive and negative ways. In the light of these wide-ranging effects, much scholarship has been devoted to specifying the responsibilities of managers of for-profit business enterprises. Much of this scholarship is framed in relation to “shareholder primacy”—the view that managers should maximize shareholder wealth subject to the constraints of market mechanisms. In this chapter, I outline another alternative to shareholder primacy that aims to improve upon existing alternatives and avoid some of the difficulties they encounter. I argue that even though business enterprises are private associations, in overseeing them as loci of production, managers help to realize important market-specific social values. These values in turn ground responsibilities on the part of managers to pursue specific ends. By framing managerial responsibility in terms of the values realized through the functioning of business enterprises, this account of managerial responsibility is also meant to address debates about the role and purpose of business firms.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50371

Abstract—No abstract available.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50423

Abstract—Algorithms are powerful predictive tools, but they can run amok when not applied properly. Consider what often happens with social media sites. Today many use algorithms to decide which ads and links to show users. But when these algorithms focus too narrowly on maximizing click-throughs, sites quickly become choked with low-quality content. While clicks rise, customer satisfaction plummets. The glitches, say the authors, are not in the algorithms but in the way we interact with them. Managers need to recognize their two major limitations. First, they're completely literal; algorithms do exactly what they're told and disregard every other consideration. While a human would have understood that the sites' designers wanted to maximize quality as measured by clicks, the algorithms maximized clicks at the expense of quality. Second, algorithms are black boxes. Though they can predict the future with great accuracy, they won't say what will cause an event or why. They'll tell you which magazine articles are likely to be shared on Twitter without explaining what motivates people to tweet about them, for instance. To avoid missteps, you need to be explicit about all your goals—hard and soft—when formulating your algorithms. You also must consider the long-term implications of the data the algorithms incorporate to make sure they're not focusing nearsightedly on short-term outcomes. And choose the right data inputs, being sure to gather a wide breadth of information from a diversity of sources.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=50204

Abstract—We investigate whether the event of a woman being competitively elected as a state legislator encourages the subsequent political participation of women, using a regression discontinuity design on constituency level data from India. We find that female incumbents are more likely than male incumbents to re-contest and that there is a decline in the entry of new women candidates. This decline is most pronounced in states with entrenched gender bias and in male-headed parties, suggesting an intensification of barriers against women in these areas. Similar results for (mostly male) Muslim candidates indicate the presence of institutionalized demand-side barriers rather than gender-specific preferences and constraints.

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Abstract—We test whether politicians can use direct contact to reconnect with citizens, increase turnout, and win votes. During the 2014 Italian municipal elections, we randomly assigned 26,000 voters to receive visits from city council candidates, from canvassers supporting the candidates' party list or to a control group. While canvassers' visits increased turnout by 1.8 percentage points, candidates had no impact on participation. Candidates increased their own vote share in the precincts they canvassed, but only at the expense of their running mates. This suggests that their failure to mobilize nonvoters resulted from focusing on securing the preferences of active voters.

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Abstract—To get to work, employees need to commute. Across the globe, the average commute is 38 minutes each way per day. It is well known that longer commutes have negative effects on employees’ well-being and job-related outcomes. Yet, commuting may not similarly affect all employees, since some of them may naturally engage in behaviors to offset the negative effects of longer commutes. Drawing on psychological research on self-control, we theorize how engaging in future-oriented thinking about the tasks to complete during the workday (i.e., goal-directed prospection) while commuting to work influences work outcomes. Across two field studies and one field experiment, we find that individuals higher in trait self-control are less likely to report negative effects of longer commutes. While commuting, individuals with higher trait self-control engage in goal-directed prospection, partially offsetting the strain of commuting. In a field experiment, individuals asked to engage in goal-directed prospecting during commuting reported higher levels of job satisfaction and lower levels of emotional exhaustion. Although commuting is typically seen as the least desirable part of an employee’s day, our theory and results point to the benefits of viewing it as a useful time period to engage in goal-directed prospection.

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Abstract—We present findings from a field experiment on team diversity. Individuals working as canvassers in an elections-related experiment were randomly assigned a junior teammate, a senior manager, and a set of households to visit. This created random variation in the degree of horizontal diversity, vertical (or hierarchical) diversity, and external (or client) diversity within each team. We find that ethnic diversity among teammates decreases team performance, while diversity along the vertical dimension improves performance. The data on time use suggests that horizontally homogeneous teams organized tasks in a more efficient way, while vertically homogeneous teams exerted lower effort.

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Abstract—We explore the relationship between managerial incentives and misconduct using the setting of environmental harm. We find that high-powered executive compensation can increase the odds of environmental law breaking by 40%–60% and the magnitude of environmental harm by over 100%. We document similar results for the setting of executive compensation and illegal financial accounting. Finally, we outline some managerial and policy implications to blunt these adverse incentive effects.

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Abstract—Existing evidence on the impact of door-to-door canvassing comes from small-scale experiments that assign treatment at the individual level (at which voter choices are difficult to measure) and assumes greater control over canvassers' selection and behavior than is typical to most campaigns. This paper takes a different approach by assigning entire precincts to either a control group or a treatment group in a countrywide experiment during François Hollande's campaign in the 2012 French presidential elections. Overall, activists supporting the Parti Socialiste's candidate knocked on five million doors. Visits did not affect voter turnout but increased Hollande's vote share in the first round at the expense of his right-wing opponents and accounted for one fifth of his victory margin in the second round. This impact largely persisted in later elections, suggesting that even brief one-on-one discussions can have a large and lasting persuasion effect.

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Abstract—Private equity funds tend to select relatively small firms with low EBITDA multiples. Publicly traded equities with these characteristics have high risk-adjusted returns after controlling for common factors typically associated with value stocks. Hold-to-maturity accounting of portfolio net asset value eliminates the majority of measured risk. A passive portfolio of small, low EBITDA multiple stocks with modest amounts of leverage and hold-to-maturity accounting of net asset value produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index. The passive replicating strategy represents an economically large improvement in risk- and liquidity-adjusted returns over direct allocations to private equity funds, which charge average fees of 6% per year.

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Miranda Cresswell, marketing director, and Greg Marsh, founder and CEO of onefinestay, were grappling with branding and positioning dilemmas. onefinestay offered high-end home rentals to travelers who sought a more authentic and local experience than a typical upscale hotel might provide. onefinestay's brand had been "hacked" together quickly during the company's early years. After five years of rapid growth, Marsh brought Cresswell on board to do a comprehensive analysis of the company's brand and its positioning in the marketplace. Cresswell had spent several months gathering data and insights and was starting to experiment with use case scenarios that took a crack at segmenting the company's customers. The preliminary results were interesting but raised more questions than they answered, and Cresswell wondered if this was the best way to segment the market. While segmenting in this way was intriguing, it led to a branding challenge—as a start-up, it was difficult for onefinestay to have the resources to support multiple brand messages in the marketplace and different segments wanted different things from their travel experience. She pondered whether there were other ways to group customers that would allow for a more universal positioning for the brand or whether the company needed to focus on one or two segments to serve. Positioning the fledgling brand was a challenge. Who was the company competing against and how could it carve out a unique value proposition that would appeal to travelers and be differentiated from what was offered by other hospitality options? Was its current moniker "the unhotel" working for or against it?

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A manufacturer of building products and specialty chemicals, W.R. Grace & Co. filed for Chapter 11 bankruptcy in 2001 in response to a flood of lawsuits alleging that its products contained asbestos and had caused hundreds of thousands of people to contract asbestos-related diseases, such as mesothelioma and lung cancer. Nine years later, Grace is poised to emerge from bankruptcy with a plan of reorganization that establishes two special purpose trusts through which all current and future asbestos claims will be channeled, allowing the company to survive as an ongoing business. However, the company and asbestos claimholders' committees materially disagree over the size of the company's liability for asbestos and have hired experts to value the liability. Grace's expert argues the liability is worth between $83 million and $173 million, while the plaintiff's expert argues the liability could be as high as $6.2 billion.

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This case contains four vignettes that provide an introduction to the issues covered in the course, Private Equity Finance.

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By January 2015, Whistle Sports, a multi-platform sports network for millennials, had attracted over 54 million online subscribers on YouTube, Instagram, Twitter, Facebook, Google+, and Vine. It established partnerships with several professional sports leagues and amassed 225 partner channels on YouTube. Its revenue was largely generated through advertisements featured on YouTube. Whistle Sports recently announced that it raised $32 million in Series B financing, enough to bring the company into 2016. John West (MBA 1995), founder and CEO, wondered how the company should allocate its resources over the next year in order to become profitable and ensure future growth.

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Since its opening in Beijing in November 2007 as the first non-profit art center in China, Ullens Center for Contemporary Art (UCCA) had been operating with the mission to "promote the continued development of the Chinese art scene, foster international exchange, and showcase the latest in art and culture to hundreds of thousands of visitors each year." For the past six years, UCCA had worked with more than 100 artists and designers to present 87 art exhibitions and 1,826 public programs to over 1.8 million visitors, including many important leaders from all over the world. Given the context of the economic and political environment in the rapidly changing Chinese art market, the founders and senior management of UCCA wondered what they could do to achieve growth and financial viability while continuing to realize their mission.

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At the age of 39, Solmaz Altın took over the helm at Allianz Turkey. Solmaz quickly realized that, although the insurance market was thinly penetrated in Turkey, the company was operating in a very competitive environment with pressure on prices and, hence, cost control. Consequently, customer satisfaction was suffering. Despite the growing Turkish economy and a favorable regulatory environment, Solmaz was struggling to grow the company without further sacrificing customer satisfaction or profitability. Used as part of a course on service excellence, the case provides an insurance context in which to explore the link between customer satisfaction and competitive performance, and it challenges the students to ponder the extent of the relationship between customer satisfaction and financial performance. In the (A) case, the Allianz Turkey executives focus their initial efforts on the claims process of the automobile insurance business—a lowly rated segment of the insurance industry by their policyholders. They begin by creating a map of the customer experience and then doing extensive consumer research to determine what really matters to the policyholder. The insights gleaned from the detailed consumer analysis are quite different than the original beliefs of the management team. Students must devise a new customer service model for the claims process based upon the customer analysis.

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The (B) case describes the new customer service model for the claims process and the resulting increase in customer satisfaction as measured by the Net Promoter Score (NPS) metric. Students must first decide whether the initial effort is a success and then develop a plan for the future.

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