Changing the game even if corporate profits suffer
Over the last decade, critics have hacked away at the notion, made popular by Milton Friedman and many others, that managers should act to maximize shareholder value. Growing movements toward corporate environmental sustainability and social enterprise counter that business has a larger role to play in society. Along these lines, Rebecca Henderson and Karthik Ramanna offer a new paper, Managers and Market Capitalism, that identifies conditions when managers have a responsibility to structure market institutions in the interest of preserving the legitimacy of market capitalism, even if corporate profits take a hit as a result.
Catching up with the West
In his new paper Entrepreneurs, Firms and Global Wealth since 1850, historian Geoffrey Jones discounts current explanations for why Asia, Latin America, and Africa were slow to catch up with the West following the Industrial Revolution. Although contributors such as deficient institutions were important, Jones argues that lack of access to knowledge and capital were crucial.
What to do about income inequality
As US income equality grows, so might also public opinion favoring government-led wealth redistribution. But as new research by Ilyana Kuziemko, Michael I. Norton, Emmanuel Saez, and Stefanie Stantcheva demonstrates, there appears to be little broad enthusiasm for government share-the-wealth remedies. "We find that providing information about the rise of inequality has very large effects on whether respondents' view inequality as an important problem," they conclude. "However, this information has only small effects on their policy views, especially policies targeting poverty." Read their results in the paper, How Elastic Are Preferences for Redistribution? Evidence from Randomized Survey Experiments.
— Sean Silverthorne
- International Marketing Review
By: Deshpandé, Rohit, Amir Grinstein, Elie Ofek, and Sang-Hoon Kim
Abstract—Purpose: There is lack of research on the link between the personal disposition of an entrepreneurial firm's founder, the firm's strategic orientation, and its performance outcomes. Also, there is lack of cross-national research on entrepreneurial firms' strategic orientations. This paper addresses these gaps by exploring the differences in strategic orientation choices and their performance outcomes for American and Japanese entrepreneurial firms, focusing on founders' achievement motivation as a key personal disposition. Design/methodology/approach: A survey was conducted among 397 Japanese founders and 189 American ones. Findings: Our key counterintuitive finding is that Japanese and American founders of entrepreneurial firms are more similar than is often suggested. We first find that in both Japan and the U.S., achievement motivation is positively related to customer orientation and cost orientation while not related to technological orientation. Second, we find that the adoption of customer orientation is positively related to the profitability of both Japanese and American entrepreneurial firms, although the effect is stronger in the U.S. We also find that the adoption of technology orientation is negatively related to the profitability of both Japanese and American firms, although the effect is less negative in Japan. We finally find that the adoption of cost orientation does not have an impact on the profitability of both Japanese and American firms.
- Academy of Management Journal
By: Inoue, Carlos F.K.V., Sergio G. Lazzarini, and Aldo Musacchio
Abstract—In many countries, firms face institutional voids that raise the costs of doing business and thwart entrepreneurial activity. We examine a particular mechanism to address those voids: minority state ownership. Due to their minority nature, such stakes are less affected by the agency distortions commonly found in full-fledged state-owned firms. Using panel data from publicly traded firms in Brazil, where the government holds minority stakes through its development bank (BNDES), we find a positive effect of those stakes on firms' return on assets and on the capital expenditures of financially constrained firms with investment opportunities. However, these positive effects are substantially reduced when minority stakes are allocated to business group affiliates and when local institutions develop. Therefore, we shed light on the firm-level implications of minority state ownership, a topic that has received scant attention in the strategy literature.
- Cornell International Law Review
By: Pargendler, Mariana, Aldo Musacchio, and Sergio G. Lazzarini
Abstract—A large legal and economic literature describes how state-owned enterprises (SOEs) suffer from a variety of agency and political problems. Less theory and evidence, however, have been generated about the reasons why state-owned enterprises listed in stock markets manage to attract investors to buy their shares (and bonds). In this article, we examine this apparent puzzle and develop a theory of how legal and extralegal constraints allow mixed enterprises to solve some of these problems. We then use three detailed case studies of state-owned oil companies-Brazil's Petrobras, Norway's Statoil, and Mexico's Pemex-to examine how our theory fares in practice. Overall, we show how mixed enterprises have made progress to solve some of their agency problems, even as government intervention persists as the biggest threat to private minority shareholders in these firms.
By: Becker, Bo, and Victoria Ivashina
Abstract—Reaching for yield-the propensity to buy riskier assets in order to achieve higher yields-is believed to be an important factor contributing to the credit cycle. This paper analyses this phenomenon in the corporate bond market. Specifically, we show evidence for reaching for yield among insurance companies, the largest institutional holders of corporate bonds. Insurance companies have capital requirements tied to the credit ratings of their investments. Conditional on ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior appears to be related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for the insurance firms for which regulatory capital requirements are more binding. The results hold both at issuance and for trading in the secondary market and are robust to a series of bond and issuer controls, including issuer fixed effects as well as liquidity and duration. Comparison of the ex-post performance of bonds acquired by insurance companies does not show outperformance, but higher volatility of realized returns.
Download the paper: http://ssrn.com/abstract=2065841
By: Campbell, Dennis, and Maria Loumioti
Abstract—We study the portability of soft information in a decentralized financial institution. Theories from a variety of literatures suggest that difficulties in capturing, storing, and communicating soft information can inhibit its portability over time and across individuals within the organization. Using unique data on lending decisions made by employees in a highly decentralized financial services organization, we show that a monitoring system that captures soft information for vertical communication (to superiors) purposes also facilitates the horizontal communication of soft information (across employees) for decision-making purposes. Contrary to prevailing views on the limited portability of soft information, our results provide evidence that the "stock" of soft information accumulated in this system has persistent effects on the lending decisions of employees. We show that employees rely on this information to increase access to credit for borrowers, provide more favorable pricing terms, and reduce the ex-post risk of their lending decisions. These effects remain even when this information was acquired by employees other than the decision-maker, and they are not diminished by the physical separation of employees working in different business units.
Download the paper: http://ssrn.com/abstract=2233467
By: Henderson, Rebecca, and Karthik Ramanna
Abstract—In a capitalist system based on free markets, do managers have responsibilities to the system itself, and, in particular, should these responsibilities shape their behavior when they are attempting to structure those institutions of capitalism that are determined through a political process? A prevailing view-perhaps most eloquently argued by Milton Friedman-is that managers should act to maximize shareholder value, and thus that they should take every opportunity (within the bounds of the law) to structure market institutions so as to increase profitability. We maintain here that if the political process is sufficiently "thick," in that diverse views are well represented, and if politicians and regulators cannot be easily captured, then this shareholder-return view of political engagement is unlikely to reduce social welfare in the aggregate and thus damage the legitimacy of market capitalism. However, we contend that sometimes the political process of determining institutions of capitalism is "thin," in that managers find themselves with specialized technical knowledge unavailable to outsiders and with little political opposition-such as in the case of determining certain corporate accounting standards that define corporate profitability. In these circumstances, we argue that managers have a responsibility to structure market institutions so as to preserve the legitimacy of market capitalism, even if doing so is at the expense of corporate profits. We make this argument on grounds that it is both in managers' self-interest and, expanding on Friedman, managers' ethical duty. We provide a framework for future research to explore and develop these arguments.
Download the paper: http://ssrn.com/abstract=2231526
Abstract—This working paper integrates the role of entrepreneurship and firms into debates on why Asia, Latin America, and Africa were slow to catch up with the West following the Industrial Revolution and the advent of modern economic growth. It argues that the currently dominant explanations, which focus on deficient institutions, poor human capital development, geography, and culture are important but not sufficient. This is partly because recent research in business history has shown that several of the arguments are not empirically proved, but especially because the impact of these factors on the creation and performance of innovative business enterprises is not clearly specified. Modern economic growth diffused from its origins in the North Sea region to elsewhere in western and northern Europe, across the Atlantic, and later to Japan, but struggled to get traction elsewhere. The societal and cultural embeddedness of the new technologies posed significant entrepreneurial challenges. The best equipped to overcome these challenges were often entrepreneurs based in minorities who held significant advantages in capital-raising and trust levels. By the interwar years, productive modern business enterprise was emerging across the non-Western world. Often local and Western managerial practices were combined to produce hybrid forms of business enterprise. After 1945 many governmental policies designed to facilitate catch-up ended up crippling these emergent business enterprises without putting effective alternatives in place. The second global economy has provided more opportunities for catch up from the Rest and has seen the rapid growth of globally competitive businesses in Asia, Latin America, and Africa. This is explained not only by institutional reforms, but also by new ways for business in the Rest to access knowledge and capital, including returning diaspora, business schools, and management consultancies. Smarter state capitalism was also a greater source of international competitive advantage than the state intervention often seen in the past.
Download the paper: http://ssrn.com/abstract=2232177
By: Kuziemko, Ilyana, Michael I. Norton, Emmanuel Saez, and Stefanie Stantcheva
Abstract—This paper analyzes the effects of information about inequality and taxes on preferences for redistribution using randomized online surveys on Amazon Mechanical Turk (mTurk). About 5,000 respondents were randomized into treatments providing interactive information on U.S. income inequality, the link between top income tax rates and economic growth, and the estate tax. We find that the informational treatment has very large effects on whether respondents view inequality as an important problem. By contrast, we find quantitatively small effects of the treatment on views about policy and redistribution: support for taxing the rich increases slightly, support for transfers to the poor does not, especially among those with lower incomes and education. An exception is the estate tax-we find that informing respondents that it affects only the very richest families has an extremely large positive effect on estate tax support, even increasing respondents' willingness to write to their U.S. senator about the issue. We also find that the treatment substantially decreases trust in government, potentially mitigating respondents' willingness to translate concerns about inequality into government action. Methodologically, we explore different strategies to lower attrition in online survey platforms and show our main results are robust across methods. A small follow-up survey one month later reveals that our results persist over time. Finally, we compare mTurk with other survey vendors and provide suggestions to future researchers considering this platform.
Download the paper: http://papers.nber.org/papers/w18865
Cases & Course Materials
- Harvard Business School Case 613-066
By: Shih, Willy, and Ying Zhou
Managers at Cabot Corporation are faced with deciding the future of its fuel cell program. The (A) case recounts the view of the business manager and the technical project lead and the (B) case describes the perspective of a senior manager who is the head of the new business segment. Used in combination, the cases explore these very different perspectives, the different levels of subject matter expertise brought to the table by each team member, and they highlight the criteria and decision-making process used by the management of the company.
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- Harvard Business School Case 113-055
By: Srinivasan, Suraj, and Tim Gray
The Diamond Foods, Inc. case describes the major accounting blowup at the company in late 2011 that was triggered by a report by Off Wall Street (OWS), a prominent short selling research firm. Diamond Foods, a high flying growth company in 2011, grew from a walnut farmers' cooperative in 2005 into a branded snack foods manufacturer on the strength of a series of acquisitions. The accounting scandal that involved improper accounting for walnut purchases led to Diamond dropping its high profile acquisition of Pringles, an SEC and DOJ investigation, departure of the CEO and CFO, and the grounding of a high flying growth company. The case describes the history and growth of the company, the investigative and analytical work conducted by OWS, and allows students to understand implications of the growth strategy for financial performance and valuation. Additionally, the case highlights the role of corporate boards and audit committees in managing strategic and financial reporting risks.
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- Harvard Business School Case 613-044
By: Sucher, Sandra J., and Henry McGee
This history of the U.S. tobacco controversy is a reading for a class on "The Insider," a film about whistleblowing in the U.S. tobacco industry, taught in the course, "The Moral Leader."
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