- 04 Jun 2008
- Working Paper Summaries
Coming Clean and Cleaning Up: Is Voluntary Disclosure a Signal of Effective Self-Policing?
This paper demonstrates some of the benefits and limitations of industry self-policing programs. Many self-regulation programs are operated exclusively by the private sector, often in the hope of garnering goodwill with consumers or staving off more stringent government regulation. Less well known are voluntary self-regulation programs operated by government regulators seeking innovative approaches to further regulatory objectives and to stretch shrinking agency budgets. Little is known about the effects of these programs, or how they might contribute to the overall effectiveness of a regulatory regime. Michael Toffel and Jodi Short seek to determine whether the self-policing required under the U.S. Environmental Protection Agency's Audit Policy affects the behavior of regulators and participating facilities and the relationship between them. Specifically, the researchers examine whether self-policing is associated with improved environmental performance at these facilities and whether regulators reduce their scrutiny over self-policing facilities. Key concepts include: Among the facilities that participated in this self-policing program, only those with superior compliance records actually improved their environmental performance. Regulators rewarded self-policing facilities that already had clean past compliance records with an inspection holiday, but they did not significantly decrease scrutiny of self-policing facilities that had poor past compliers. Closed for comment; 0 Comments.
- 22 May 2008
- Working Paper Summaries
Testing Strategy with Multiple Performance Measures Evidence from a Balanced Scorecard at Store24
To what extent do balanced scorecards provide useful information for testing and validating an organization's strategy? Numerous case studies of balanced scorecard implementations document their use in translating organizational strategies to objectives and measures, communicating strategic objectives to employees, evaluating the performance of business units, and aligning the incentives of employees across business units and functions. There has been comparatively little research, however, on the potential learning and feedback role of balanced scorecards. Analyzing balanced scorecard data from Store24—a privately held convenience store retailer in New England—during the implementation of an innovative but ultimately unsuccessful strategy, this study investigates whether, when, and how information about problems with the firm's strategy was captured in the multiple performance measures of its balanced scorecard. Key concepts include: Store24's balanced scorecard contained useful and timely information for detecting problems in its strategy. The results also suggest that Store24 executives eventually learned about problems with the strategy despite a lack of reliance on such formal analysis. Analysis of the balanced scorecard could have yielded more timely information as well as more detail on why the strategy was not working as planned. Multiple measures in a balanced scorecard might systematically be used to test how well different drivers of performance are working to achieve strategic objectives and superior financial performance. Closed for comment; 0 Comments.
- 21 May 2008
- Research & Ideas
Going Negative in Political Advertising
Companies rarely run negative ads against competitors, but political candidates often do. Why the difference? It's a byproduct of our political system's winner-take-all approach, says professor John Quelch. Key concepts include: Negative ads ask us to vote against someone rather than for someone, an approach that sometimes works in political advertising. Companies rarely run negative ads against competitors; typically competitors won't be mentioned at all. In politics the winner takes all, an environment that encourages desperate candidates to go negative. Closed for comment; 0 Comments.
- 19 May 2008
- Research & Ideas
Connecting School Ties and Stock Recommendations
School connections are an important yet underexplored way in which private information is revealed in prices in financial markets. As HBS professor Lauren H. Cohen and colleagues discovered, school ties between equity analysts and top management of public companies led analysts to earn returns of up to 5.4 percent on their stock recommendations. Cohen explains more in our Q&A. Closed for comment; 0 Comments.
- 12 May 2008
- Research & Ideas
Accounting Information as Political Currency
Corporate donors that gave at least $10,000 to closely watched races in the U.S. congressional elections of 2004 were more likely to understate their earnings, say Harvard Business School's Karthik Ramanna and MIT colleague Sugata Roychowdhury. Such "downward earnings management" may have functioned as a political contribution. In this Q&A, Ramanna explains how accounting and politics influence each other. Key concepts include: Firms manage accounting numbers to avoid regulatory scrutiny. The implication is that firms manage accounting numbers to influence political decisions. Accrual accounting gives managers some flexibility to make estimates about the future. The data used to construct these measures are available for the larger companies in most developed and fast-developing nations. Closed for comment; 0 Comments.
- 28 Apr 2008
- HBS Case
Negotiating with Wal-Mart
What happens when you encounter a company with a great deal of power, like Wal-Mart, that is also the ultimate non-negotiable partner? A series of Harvard Business School cases by James Sebenius and Ellen Knebel explore successful deal-making strategies. From the HBS Alumni Bulletin. Closed for comment; 0 Comments.
- 24 Apr 2008
- Working Paper Summaries
Bank Accounting Standards in Mexico: A Layman’s Guide to Changes 10 Years after the 1995 Bank Crisis
Mexico was the first emerging market compelled to reformulate the financial reporting of its banks as a result of a financial crisis. In the last decade, Mexico has undergone a process of internationalization of its banking industry. Today, more than 80 percent of the equity of Mexican banks belongs to internationally active bank corporations. This internationalization demands more transparent regulation, including standardized accounting rules and better disclosure of information. The case of Mexico can therefore serve as an example of the relevance of these changes, as well as of their scope and limitations. This paper attempts to clarify the nature and structure of the new accounting standards, and explains how they have affected financial statements and their interpretation. Key concepts include: Mexican bank accounting standards enjoyed special treatment during most of the 20th century because banking was an industry protected from foreign competition in a relatively closed economy. More transparent bank accounts and stricter accounting processes in Mexico are especially crucial today, in light of the predominantly foreign ownership of the Mexican banking system. The classification of financial operations still varies from country to country. National differences emerge despite the fact that financial instruments, products, and transactions are either very similar or the same worldwide. Legal and regulatory stipulations, accounting history, tax structure, and local business practices create differences in the way financial transactions are recorded in the financial statements. Closed for comment; 0 Comments.
- 23 Apr 2008
- Op-Ed
The Gap in the U.S. Treasury Recommendations
U.S. Treasury recommendations for strengthening the regulation of the financial system are a good start but fall short, says Harvard Business School professor emeritus Dwight B. Crane. Here's his suggestion for bringing regulation into the 21st century. Key concepts include: The Treasury proposal recognizes that fundamental change in the regulatory structure is required for managing risk in the financial system. The difficulty with the approach is that the risk in the financial system will not disappear—it will simply move to the non-prudentially regulated firms. The United States should include all financial service firms under the regulatory authority of the new prudential regulator. Closed for comment; 0 Comments.
- 10 Apr 2008
- Working Paper Summaries
Where Does it Go? Spending by the Financially Constrained
Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates. Key concepts include: The conclusion that a material fraction of funds was used to pay for necessities suggests that the federal Earned Income Tax Credit program is central to the lives of the poor. Loans tended to be used to obtain necessities, especially funds spent in the first few days of the loans. Consumer advocates who seek to ban settlement products should consider how a ban would affect households' ability to smooth consumption. Similarly, businesses that are pricing and marketing these products should be mindful that the products are not a luxury for the users. These findings document the fairly rapid speed of spending of refunds, which may help policymakers think about the economic stimulus impact of tax refunds and rebates. Closed for comment; 0 Comments.
- 09 Apr 2008
- Research & Ideas
The Matchmaker of the Modern Economy
In the wake of World War II, Georges Doriot helped found the world's first public venture capital firm, American Research and Development. Doriot (1899–1987) was also a professor at Harvard Business School for 40 years. Our book excerpt from Creative Capital: Georges Doriot and the Birth of Venture Capital (HBS Press) describes how ARD first came to "marry" investors and innovators. Key concepts include: A decorated brigadier general, favorite professor, and quirky personality, Georges Doriot shepherded many companies to life before launching American Research and Development (ARD) in 1946. The idea of venture capital was still so new in 1946 that ARD's founders were forced to reengineer aspects of various financial regulatory structures in order to make it viable. World War II was a watershed for entrepreneurialism. Closed for comment; 0 Comments.
- 07 Apr 2008
- Research & Ideas
The Debate over Taxing Foreign Profits
Corporate tax policy has suddenly become a hot topic in the U.S., including the issue of whether current tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor Mihir Desai makes a case for exempting foreign profit from taxes if proper safeguards are put in place. Key concepts include: The United States is increasingly an outlier in its taxation of corporate income earned on foreign soil. Critics argue the ability to defer U.S. taxation until profits are repatriated provides an incentive to ship jobs overseas. On the other hand, the current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition. An alternative may be to exempt foreign income from taxes paired with safeguards against an overly aggressive use of tax havens. Closed for comment; 0 Comments.
- 02 Apr 2008
- Research & Ideas
Four Companies that Conquered America
Any self-respecting global company needs to compete in the United States, but many have floundered on its shores. Professor John Quelch spotlights the strategies of four that succeeded: Royal Bank of Scotland, IKEA, ING, and Dyson. Key concepts include: Royal Bank of Scotland built strong market share by acquiring regional banks and letting them maintain local identities. IKEA offers a unique furniture buying experience coupled with category-killer prices. ING gave its entrepreneurial general manager the green light to offer retail banking services exclusively on an online basis. Dyson started with a great product, then found a big-bang distributor: Best Buy. Closed for comment; 0 Comments.
- 31 Mar 2008
- HBS Case
JetBlue’s Valentine’s Day Crisis
It was the Valentine's Day from hell for JetBlue employees and more than 130,000 customers. Under bad weather, JetBlue fliers were trapped on the runway at JFK for hours, many ultimately delayed by days. How did the airline make it right with customers and learn from its mistakes? A discussion with Harvard Business School professor Robert S. Huckman. Key concepts include: JetBlue's dependence on a reservations system that relied on a dispersed workforce and the Web broke down when thousands of passengers needed to rebook at once. A crisis forces an organization to evaluate its operating processes rapidly and decide where it needs to create greater formalization or structure. Closed for comment; 0 Comments.
- 27 Feb 2008
- Research & Ideas
Podcast: Revisiting Rental Housing
The subprime loan debacle, which has caused thousands of families to lose their homes, has cast light on another housing crisis in the U.S.: the lack of affordable rentals. In this podcast Harvard Business School professor Nicholas Retsinas discusses how this situation came to be, and his new book, Revisiting Rental Housing. Closed for comment; 0 Comments.
- 22 Feb 2008
- Working Paper Summaries
Consumer Demand for Prize-Linked Savings: A Preliminary Analysis
Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. Prize-linked assets are offered in over twenty countries around the world—including the U.K., Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States. Key concepts include: PLS products are promising, despite formidable barriers to success in the United States. The low income population that was studied expressed substantial interest in a savings product that provides prizes as part of its return. This product appeals to non-savers, who do not save with traditional products. The product appeals to heavy lottery players, and by virtue of this fact, has the potential of turning their gambling activities into demand for savings. PLS products might face an uphill battle in the United States due significantly to well-established gambling and lottery industries that might oppose PLS, and the roadblocks due to legal uncertainty and prohibitions around this new product. Businesses or state treasurers might be reluctant to innovate around a product that must compete against heavily marketed alternatives. Closed for comment; 0 Comments.
- 12 Feb 2008
- Working Paper Summaries
The Small World of Investing: Board Connections and Mutual Fund Returns
How does information flow in security markets, and how do investors receive information? In the context of information flow, social networks allow a piece of information to flow along a network often in predictable paths. HBS professors Lauren Cohen and Christopher Malloy, along with University of Chicago colleague Andrea Frazzini, studied a type of dissemination through social networks tied to educational institutions, examining the information flow between mutual fund portfolio managers and senior officers of publicly traded companies. They then tested predictions on the portfolio allocations and returns earned by mutual fund managers on securities within and outside their networks. Key concepts include: Social networks are important for information flow between firms and investors. Across the spectrum of U.S. mutual fund portfolio managers, fund managers place larger concentrated bets on stocks they are connected to through their education network, and do significantly better on these holdings relative to non-connected holdings, and relative to connected firms they choose not to hold. A portfolio of connected stocks held by managers outperforms non-connected stocks by up to 8.4 percent per year. This connection is not driven by firm, fund, school, industry, or geographic location effects, nor by a subset of the school connections (e.g., Ivy League). The bulk of this premium occurs around corporate news events such as earnings announcements. This finding suggests that the excess return earned on connected stocks is driven by information flowing through the network. As the information will eventually be revealed into stock prices, advance knowledge implies return predictability. Closed for comment; 0 Comments.
- 11 Feb 2008
- Research & Ideas
Does Democracy Need a Marketing Manager?
It's more than coincidence that we feel more association with our favorite consumer brands than with our elected politicians or government institutions. Can the power of marketing be used to promote public participation in politics? Harvard Business School professor John A. Quelch and research associate Katherine E. Jocz discuss their new book, Greater Good: How Good Marketing Makes for Better Democracy. Plus: book excerpt. Key concepts include: The core benefits of marketing align closely with the requirements of democracy: exchange, consumption, choice, information, engagement, and inclusion. Voter apathy in the United States could be improved by better marketing of candidates, the political process, political parties, and government institutions. This year's presidential race is increasing voter interest because it offers a diversity of choices. Closed for comment; 0 Comments.
- 30 Jan 2008
- Working Paper Summaries
Cost of External Finance and Selection into Entrepreneurship
Entrepreneurs are, on average, significantly wealthier than people who work in paid employment. Research shows that entrepreneurs comprise fewer than 9 percent of households in the United States but they hold 38 percent of household assets and 39 percent of the total net worth. This relationship between personal wealth and entrepreneurship has long been seen as evidence of market failure, meaning that talented but less wealthy individuals are precluded from entrepreneurship because they don't have sufficient wealth to finance their new ventures. Nanda studied how changes in the cost of external finance affected the characteristics and likelihood of individuals becoming entrepreneurs. He finds that market failure accounts for only a small fraction of the relationship between personal wealth and entrepreneurship in advanced economies such as the U.S. Key concepts include: Entrepreneurs are, on average, significantly wealthier than people who work in paid employment. The wealthy are also more likely to become entrepreneurs. Talent matters in entrepreneurship, more so for the less wealthy. The relationship between individual wealth and entrepreneurship in advanced economies is driven at least in part by the fact that wealthy individuals can start lower growth-potential businesses because they do not face the discipline of external finance. It may be misguided to provide a simple scheme of cheap credit for new ventures, as not all who take up the scheme will be those who really need it. Closed for comment; 0 Comments.
- 17 Jan 2008
- Research & Ideas
If Marketing Experts Ran Elections
Most Americans seem indifferent about the political process, judging by lackluster voter turnout historically, although the primaries so far seem to be bucking the trend. Professor John Quelch discusses what politicians can learn from consumer marketing. Key concepts include: Americans are turned off by the electoral process for a number of reasons including a belief their vote won't make a difference and the mixed messages from candidates. People have stronger relationships with their favorite consumer brands than they do with politicians or parties. Politics needs better marketing, focusing on current and emerging customer needs, developing product and service solutions, informing interested citizens about them, and making them easily accessible. Closed for comment; 0 Comments.
Evaluating the Impact of SA 8000 Certification
The Social Accountability 8000 Standard (SA 8000), along with other types of certification standards and corporate codes of conduct, represents a new form of voluntary "private-governance" of working conditions in the private sector, initiated and implemented by companies, labor unions, and nongovernmental activist groups cooperating together. There is an ongoing debate about whether this type of governance represents real and substantial progress or mere symbolism. This paper reviews prior evaluations of private codes of conduct governing workplace conditions, including Ethical Trading Initiative's Base Code, Nike's Code of Conduct, and Fair Trade certification. The authors then discuss several best practices that should be employed in future evaluations of such codes of conduct. Key concepts include: An ongoing debate is raging about whether such codes represent substantive efforts to improve working conditions or are merely symbolic efforts that allow organizations to score marketing points and counteract stakeholder pressure by merely filing some paperwork. Evaluations designed with the features described in this paper will help introduce systematic evidence to these important debates. This could help identify which particular codes are best able to distinguish organizations possessing superior working conditions. Such evaluations may shed light on which elements of the codes are most effective, which types of monitoring systems represent best practices, and which areas are most in need of improvement. Closed for comment; 0 Comments.