First Look

Abstract—Since the early 1990s, strategy beyond markets has been an active area of research inquiry. Since its inception, the scholarship emanating from this research stream has grown substantially in quantity, quality, and breadth. Likewise, firms across the world have increasingly implemented broad and sophisticated non-market strategies. Within strategy beyond markets, there are a handful of focus areas. In Private Politics we observe firms working more closely with NGOs and other special interest groups to preempt unfavorable policy choices, react swiftly to crises, and proactively develop socially responsible strategies. In Public Politics, firms have become increasingly sophisticated in using campaign funding, lobbying, committee participation, and other instruments to influence local, national, and international political environments. Also firms that are heavily influenced by politics are more likely to craft Integrated Political Strategy as part of a more comprehensive competitive strategy and/or international expansion strategy. Despite significant progress in the literature, we have identified three areas for extension and enhancement in understanding strategy beyond markets. First, we currently have limited understanding of the critical attributes for firms to establish a sustainable non-market strategy. While there have been excellent studies highlighting the importance of preemption in Private Politics, political ties in Public Politics, and forum shopping in Integrated Political Strategy, it is unclear if these types of factors are sustainable in the context of political or market dynamics. Furthermore it is unclear whether these factors differ significantly from those identified in the broader competitive strategy literature (e.g., are political resources different fundamentally from market resources; do firms organizing political resources use a fundamentally different logic than firms utilize to organize market resources.) Second, there has been very little (if any) significant research linking firm strategy to both nonmarket outcomes and firm performance. Most research has developed theories and/or empirical analyses that explore the determinants of a firm’s strategy beyond markets. Very few studies have shown that a firm’s strategy increases policy performance; almost none have demonstrated a link between policy and firm profitability. Third, the topical areas of analysis appear to be limited. Environmental issues and corporate social responsibility dominate Private Politics research, heavily regulated firms dominate Public Politics studies, and theoretical studies dominate research on Integrated Political Strategy. With this AiSM volume we seek theoretical and/or empirical articles that extend and/or enhance the literature by addressing strategy beyond markets in the three areas discussed above in the context of Private Politics, Public Politics or Integrated Political Strategy.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49464

Abstract—The conflict following the Arab Spring is not the first wave of civil war in the Muslim world in recent time. From the mid-1980s to the end of the century, an average of one in 10 predominantly Muslim countries experienced violent civil war in any given year. We provide a partial explanation for this statistic: a foreign aid windfall to poor, non-oil producing Muslim countries during the twin oil crises of the 1970s allowed the recipient states to become more repressive and stave off rebellion. When oil prices fell in the mid-1980s, the windfall ended, and the recipient countries experienced a significant uptick in civil war. To provide a causal interpretation we leverage a quasi-natural experiment of oil price induced aid disbursements that favored Muslim countries over non-Muslim countries. Our empirical findings are consistent with existing theories that foreign aid can "buy" stability.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49522

Abstract—People demonstrate an impressive ability to self-deceive, distorting misbehavior to reflect positively on themselves—for example, by cheating on a test and believing that their inflated performance reflects their true ability. But what happens to self-deception when self-deceivers must face reality, such as when taking another test on which they cannot cheat? We find that self-deception diminishes over time only when self-deceivers are repeatedly confronted with evidence of their true ability (Study 1); this learning, however, fails to make them less susceptible to future self-deception (Study 2).

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49533

Abstract—Financial constraints are fundamental to empirical research in finance and economics. We propose two tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms typically classified as constrained do not in fact behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and they use the proceeds of equity issues to increase payouts to shareholders. Our evidence suggests that extant findings that have been attributed to constraints may instead reflect differences in the growth and financing policies of firms at different stages of their lifecycles.

Publisher's link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2338575

Abstract—No abstract available

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49520

Abstract—Time-driven activity-based costing (TDABC) is an innovative costing tool in healthcare that can be used to directly compare the true cost of competing technologies over the full care cycle. Rather than only comparing therapeutic effectiveness over a limited number of outcome measures, healthcare stakeholders will need to move toward comparing the value of care delivery and therefore the cost of therapies. Measuring the value of advanced technologies like proton beam therapy versus intensity-modulated radiation therapy (IMRT) is especially crucial, given the high upfront cost of developing, building, and delivering care with these modalities. An incomplete understanding of the value of costly, yet effective, technologies could impede medical innovation and decrease the quality of cancer care through a reduction of patient access by third-party payers. With TDABC, providers may begin to uncover clinical situations in which higher-cost, advanced therapies are actually justified over the full episodic care cycle. Understanding provider costs will become even more important as healthcare reform transitions to value-based purchasing.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=49518

WORKING PAPERS

Abstract—Foreign participation in local-currency bond markets in emerging countries has increased dramatically over the past decade. In light of this trend, we revisit sovereign debt sustainability and incentives to default when the sovereign is temporarily excluded from capital markets. Differently from previous analyses, we assume that in addition to accumulating international reserves, countries can borrow internationally using their own currency. As opposed to traditional sovereign debt models (all in foreign currency), the asset valuation effects occasioned by currency depreciation (or appreciation) act to absorb global shocks and render consumption smoother. In this setting, countries do not accumulate high levels of reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating high levels of reserves acts as a hedge against negative external shocks. A quantitative exercise, in which our model matches features of the Brazilian economic fluctuations and exchange-rate volatility, suggests this strategy to be highly effective for smoothing consumption and reducing the occurrence of default.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=44340

Abstract—Under fairly general assumptions, expected stock returns are a linear combination of two accounting fundamentals: book to market and ROE. Empirical estimates based on this relation predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of 1.05. In sharp contrast, standard factor-model-based proxies fail to exhibit predictive power internationally. We show analytically and empirically that the importance of ROE in forecasting returns depends on the quality of accounting information. Overall, a tractable accounting-based valuation model provides a unifying framework for obtaining reliable proxies of expected returns worldwide.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=49238

Abstract—and goals, compensation design is subject to isomorphic pressures, which cannot be completely explained by industry affiliation or peer group membership. Inter-firm professional network connections, such as board interlocks and compensation consultants, provide means and opportunities to observe and imitate organizational behavior across firms. Using information disclosed in proxy statements of publicly traded companies, I predict and find that firms connected through board interlocks or common compensation consultants display a higher degree of isomorphism in the design of executive compensation contracts. However, consultants with larger customer base and greater expertise mitigate these isomorphic tendencies. Additionally, interlocks and compensation consultants exert different influences on different aspects of the compensation design.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=49497

Abstract—We use value of information theory and examine the effect of regulation requiring mandatory measurement and peer disclosure of nonfinancial performance information in the hospital industry. We posit that mandatory nonfinancial performance measurement has an information effect and a referent performance effect. The information (referent performance) effect arises because the new performance signals induce more precise posterior beliefs about individual (relative) performance. Using panel data from the Japanese National Hospital Organization, we analyze performance improvements following regulation requiring standardized measurement and peer disclosure of absolute and relative patient satisfaction performance. After controlling for ceiling effects, bounded dependent variables, and regression to the mean, results show that mandatory nonfinancial performance information measurement and peer disclosure improves overall performance (information effect) with larger improvements for poorly performing hospitals (referent performance effect). These effects are found even in the absence of any compensation-based incentives to improve performance.

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Abstract—We study three types of budgeting (authoritative, consultative, and participative) that differ in the influence that managers have on their approved budgets and the opportunities they provide for managers to build budgetary slack into their budget requests. We provide evidence that when organizations implicitly communicate that budgeting will be participative, it establishes psychological contracts in managers. If managers subsequently experience budgeting that is inconsistent with their psychological contracts, then their psychological contracts are breached. This leads to feelings of violation and distrust, even when the terms of the managers' economic contracts are fulfilled. We examine whether managers whose psychological contracts are breached seek redress by building additional budgetary slack into their budget requests. Experimental results indicate that authoritative and consultative budgeting result in psychological contract breach to a greater extent than participative budgeting. To seek redress, managers build in more budgetary slack when budgeting is authoritative or consultative than when it is participative. Furthermore, the effects of the extent of psychological contract breach on built-in budgetary slack persist in the future when budgeting is participative.

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Abstract—Bounded dependent variables are frequently encountered in settings of interest for accounting researchers. The econometric modeling of these variables presents particular challenges. Linear estimation methods (e.g., OLS) are often inadequate in the study of bounded dependent variables and may produce predicted values that lie outside the unit interval. Established nonlinear approaches, such as logit and probit transformations or censored and truncated regressions may attenuate the shortcomings of linear regressions. However these approaches are not suitable in settings where a material portion of the observations is at the boundaries. Nonlinear methods use restrictive distributional assumptions and employ ad-hoc transformations for observations at the boundaries. The fractional response model (FRM) (Papke and Wooldridge 1996, 2008) overcomes many limitations of established linear and non-linear econometric solutions in the study of bounded data. In this study, we review the econometric characteristics of the FRM and propose its applicability to a wide range of phenomena of interest for accounting scholars. We provide examples of accounting research that routinely uses bounded dependent variables, present results from Monte Carlo simulations to highlight the advantages of using the FRM relative to conventional models, and conduct an archival extension that compares the results from a traditional OLS model and the FRM to the study of managerial compensation. We conclude that the FRM provides an improved methodological approach to the study of bounded dependent variables.

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Abstract—Himachal Pradesh outperforms other Indian states in implementing universal primary education. Through comparative field research, this article finds that bureaucratic norms—unwritten rules that guide public officials—influence how well state agencies deliver services for the poor. The findings call attention to the informal, everyday practices that generate state capacity.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=46981