Showing papers by "HEC Paris published in 2010"

Networked narratives: Understanding word-of-mouth marketing in online communities

Abstract: Word-of-mouth (WOM) marketing—firms' intentional influencing of consumer-to-consumer communications—is an increasingly important technique. Reviewing and synthesizing extant WOM theory, this article shows how marketers employing social media marketing methods face a situation of networked coproduction of narratives. It then presents a study of a marketing campaign in which mobile phones were seeded with prominent bloggers. Eighty-three blogs were followed for six months. The findings indicate that this network of communications offers four social media communication strategies—evaluation, embracing, endorsement, and explanation. Each is influenced by character narrative, communications forum, communal norms, and the nature of the marketing promotion. This new narrative model shows that communal WOM does not simply increase or amplify marketing messages; rather, marketing messages and meanings are systematically altered in the process of embedding them. The theory has definite, pragmatic implicati...

A Longitudinal Study of the Influence of Alliance Network Structure and Composition on Firm Exploratory Innovation

Abstract: This study examines the influence of the structure and composition of a firm’s alliance network on its exploratory innovation—innovation embodying knowledge that is novel relative to the firm’s extant knowledge. A longitudinal investigation of 77 telecommunications equipment manufacturers indicated that the technological diversity of a firm’s alliance partners increases its exploratory innovation. Further, network density among a firm’s alliance partners strengthens the influence of diversity. These results suggest the benefits of network “closure” (wherein a firm’s partners are also partners) and access to diverse information can coexist in an alliance network and that these combined benefits increase exploratory innovation.

The Missing Link Between the Theory and Empirics of Path Dependence: Conceptual Clarification, Testability Issue, and Methodological Implications

Abstract: Path dependence is a central construct in organizational research, used to describe a mechanism that connects the past and the future in an abstract way. However, across institutional, technology, and strategy literatures, it remains unclear why path dependence sometimes occurs and sometimes not, why it sometimes lead to inefficient outcomes and sometimes not, how it differs from mere increasing returns, and how scholars can empirically support their claims on path dependence. Hence, path dependence is not yet a theory since it does not causally relate identified variables in a systematized manner. Instead, the existing literature tends to conflate path dependence as a process (i.e. history unfolding in a self-reinforcing manner) and as an outcome (i.e. a persisting state of the world with specific properties, called 'lock-in'). This paper contributes theoretically and methodologically to tackling these issues by: (1) providing a formal definition of path dependence that disentangles process and outcome, and identifies the necessary conditions for path dependence; (2) distinguishing clearly between path dependence and other 'history matters' kinds of mechanisms; and (3) specifying the missing link between theoretical and empirical path dependence. In particular, we suggest moving away from historical case studies of supposedly path-dependent processes to focus on more controlled research designs such as simulations, experiments, and counterfactual investigation.

Why Do Older Consumers Buy Older Brands? The Role of Attachment and Declining Innovativeness

Abstract: The authors compare three mechanisms that may explain why older consumers tend to prefer older brands. Data are from the French perfume market, in which some market leaders are decades old while hundreds of new entrants launch yearly. The authors reveal monotonically increasing differences across age ranges. Younger consumers have a greater propensity to change their preferred brand, a form of innovativeness that benefits relatively recent entrants, whereas older consumers exhibit a propensity to remain attached for a longer duration to the same preferred brand. Nostalgia for options encountered during an early “formative period” has only a limited impact. Furthermore, strong heterogeneity emerges: At all ages, some consumers frequently change their preferred brand, whereas others remain attached to it for long periods. It is the proportion of these two behaviors that varies across age ranges. The resultant managerial implications indicate that mature consumers are attractive targets because they...

The level and quality of Value-at-Risk disclosure by commercial banks

Abstract: In this paper we study both the level of Value-at-Risk (VaR) disclosure and the accuracy of the disclosed VaR figures for a sample of US and international commercial banks. To measure the level of VaR disclosures, we develop a VaR Disclosure Index that captures many different facets of market risk disclosure. Using panel data over the period 1996–2005, we find an overall upward trend in the quantity of information released to the public. We also find that Historical Simulation is by far the most popular VaR method. We assess the accuracy of VaR figures by studying the number of VaR exceedances and whether actual daily VaRs contain information about the volatility of subsequent trading revenues. Unlike the level of VaR disclosure, the quality of VaR disclosure shows no sign of improvement over time. We find that VaR computed using Historical Simulation contains very little information about future volatility.

Limits of Arbitrage: The State of the Theory

Abstract: We survey theoretical developments in the literature on the limits of arbitrage. This literature investigates how costs faced by arbitrageurs can prevent them from eliminating mispricings and providing liquidity to other investors. Research in this area is currently evolving into a broader agenda emphasizing the role of financial institutions and agency frictions for asset prices. This research has the potential to explain so-called "market anomalies" and inform welfare and policy debates about asset markets. We begin with examples of demand shocks that generate mispricings, arguing that they can stem from behavioral or from institutional considerations. We next survey, and nest within a simple model, the following costs faced by arbitrageurs: (i) risk, both fundamental and non-fundamental, (ii) short-selling costs, (iii) leverage and margin constraints, and (iv) constraints on equity capital. We finally discuss implications for welfare and policy, and suggest directions for future research.

Learning from What Others Have Learned from You: The Effects of Knowledge Spillovers on Originating Firms

Abstract: Although research suggests knowledge spillovers often benefit imitators at the expense of originators, we investigate how originating firms may also benefit from their own spillovers. When an origi...

Corporate Fraud and Managers’ Behavior: Evidence from the Press

Abstract: Based on evidence from press articles covering 39 corporate fraud cases that went public during the period 1992–2005, the objective of this article is to examine the role of managers’ behavior in the commitment of the fraud This study integrates the fraud triangle (FT) and the theory of planned behavior (TPB) to gain a better understanding of fraud cases The results of the analysis suggest that personality traits appear to be a major fraud-risk factor The analysis was further validated through a quantitative analysis of keywords which confirmed that keywords associated with the attitudes/rationalizations component of the integrated theory were predominately found in fraud firms as opposed to a sample of control firms The results of the study suggest that auditors should evaluate the ethics of management through the components of the TPB: the assessment of attitude, subjective norms, perceived behavioral control and moral obligation Therefore, it is potentially important that the professional standards that are related to fraud detection strengthen the emphasis on managers’ behavior that may be associated with unethical behavior

Mind-Set Metrics in Market Response Models: An Integrative Approach

Abstract: Demonstrations of marketing effectiveness currently proceed along two parallel tracks: Quantitative researchers model the direct sales effects of the marketing mix, and advertising and branding experts trace customer mind-set metrics (e.g., awareness, affect). The authors merge the two tracks and analyze the added explanatory value of including customer mind-set metrics in a sales response model that already accounts for short- and long-term effects of advertising, price, distribution, and promotion. Vector autoregressive modeling of the metrics for more than 60 brands of four consumer goods shows that advertising awareness, brand consideration, and brand liking account for almost one-third of explained sales variance. Competitive and own mind-set metrics make a similar contribution. Wear-in times reveal that mind-set metrics can be used as advance warning signals that allow enough time for managerial action before market performance itself is affected. Specific marketing actions affect specific ...

Entrepreneurship and Credit Constraints: Evidence from a French Loan Guarantee Program

Abstract: We use information on a French loan guarantee program in order to assess the consequences of credit constraints for new ventures. Loan Guarantee Programs, as implemented in France, are an effective instrument to help young firms grow faster, both in terms of employment and capital. These effects are quite persistent, since they are still significant four years after obtaining the guarantee. Loan guarantees also allow firms to pay cheaper interest rate, but a potential drawback of this policy consists in guaranteed ventures adopting riskier strategies and thus filing more often for bankruptcy. Last, we find no effect, at the industry level, on creation rates.

Imperfect Competition in the Interbank Market for Liquidity as aRationale for Central Banking

Abstract: We study liquidity transfers between banks through the interbank borrowing and asset sale markets when, (i) surplus banks providingliquidity have market power, ii) there are frictions in the lendingmarket due to moral hazard, and, (iii) assets are bank-specific. We show that when the outside options of needy banks are weak, surplus banks may strategically under-provide lending, thereby inducing inefficient sales of bank-specific assets. A central bank can ameliorate this inefficiency by standing ready to lend to needy banks, provided it has greater information about banks (e.g.,through supervision) compared to outside markets, or is prepared to extend potentially loss-making loans. The public provision of liquidity to banks, in fact its mere credibility, can thus improve the private allocation of liquidity among banks. This rationale for central banking funds support in historical episodes preceding the modern era of central banking and has implications forrecent debates on the supervisory and lender-of-last-resort roles of central banks.

Individual Political Contributions and Firm Performance

Abstract: We present evidence that individuals make political contributions strategically by targeting politicians with power to affect their economic well-being. Individuals in Congressional districts with greater industry clustering choose to support politicians with jurisdiction over the industry. Importantly, individual political contributions are associated with improvements in operating performance of firms in industry clusters. The relation between contributions and firm performance is strongest for poorly performing firms, firms closer to financial distress, and for contributions in close elections. The results imply that individual political contributions are valuable to firms, especially during bad economic times.

Corporate Governance and Value Creation: Evidence from Private Equity

Abstract: We examine deal-level data from 395 private equity transactions in Western Europe initiated by large private equity houses during the period 1991 to 2007. We un-lever the deal-level equity return and adjust for un-levered return to quoted peers to extract a measure of abnormal performance of the deal. The abnormal performance is significantly positive on average, and stays positive in periods with low sector returns. In the cross-section of deals, higher abnormal performance is related to greater growth in sales and greater improvement in EBITDA to sales ratio (margin) during the private phase, relative to those of quoted peers. Finally, we show that general partners with an operational background (ex-consultants or ex-industry-managers) generate significantly higher outperformance in organic deals that focus exclusively on internal value creation programs; in contrast, general partners with a background in finance (ex-bankers or ex-accountants) generate higher outperformance in deals with significant M&A events. We interpret these findings as evidence, on average, of positive, but heterogeneous skills at deal partner level in private equity transactions.

Challenges in Marketing Socially Useful Goods to the Poor

Abstract: Market based solutions to alleviate poverty have become increasingly popular in recent years. Unfortunately, there are very few examples of profitable businesses that market socially useful goods in low-income markets and operate at a large scale. This article examines in-depth three case studies of multinational firms that tried to market unquestionably useful products -- clean water, eyeglasses, and nutritious yoghurt -- to the poor, and did not succeed commercially. The overarching lesson we draw from the case studies is that developing strategies for marketing socially useful goods to the poor, far from triggering a revolution in business thinking, requires firms to get back to the basic principles and rules of economics and business.

When the glass is half full and half empty: CEOs' ambivalent interpretations of strategic issues

Abstract: Organizational scholars have highlighted the importance of interpretive ambivalence for mindfulness, creativity, and strategic change. Ambivalence occurs when an issue is seen simultaneously as positive and negative. We examine organizational factors that influence the propensity of organizational leaders to evaluate a new strategic issue ambivalently. Data come from a survey of 220 German CEOs confronted with the enlargement of the European Union. We find that CEOs of firms with a more ambidextrous strategic orientation and a moderate sense of organizational control over their environment are most likely to be ambivalent about this issue. Our findings affirm the prevalence of interpretive ambivalence at the executive level and suggest ways for organizations to promote or prevent ambivalence in strategic sensemaking. Copyright © 2010 John Wiley & Sons, Ltd.

Intertemporal Tradeoffs for Gains and Losses: An Experimental Measurement of Discounted Utility*

Abstract: This article provides a parameter-free measurement of utility in intertemporal choice and presents new and more robust evidence on the discounting of money outcomes. Intertemporal utility was concave for gains and convex for losses, consistent with a hypothesis put forward by Loewenstein and Prelec (1992). Discount rates declined over time but less so than previously observed under the assumption of linear utility. For approximately 40% of our subjects constant discounting provided the best fit. The remaining 60% were most consistent with Harvey's (1986) power discounting. Our data provide little support for the popular quasi-hyperbolic model, which is widely used in economics today. We observed an asymmetry in the discounting of gains and losses that, unlike earlier findings, cannot be explained by a framing effect.

Recursive Methods in Discounted Stochastic Games: An Algorithm for δ → 1 and a Folk Theorem

Abstract: We present an algorithm to compute the set of perfect public equilibrium payoffs as the discount factor tends to one for stochastic games with observable states and public (but not necessarily perfect) monitoring when the limiting set of (long-run players’) equilibrium payoffs is independent of the initial state. This is the case, for instance, if the Markov chain induced by any Markov strategy profile is irreducible. We then provide conditions under which a folk theorem obtains: if in each state the joint distribution over the public signal and next period’s state satisfies some rank condition, every feasible payoff vector above the minmax payoff is sustained by a perfect public equilibrium with low discounting.

Separating curvature and elevation: A parametric probability weighting function

Abstract: This paper presents a preference foundation for a two-parameter family of probability weighting functions. We provide a theoretical link between the well-established notions of probabilistic risk attitudes (i.e., optimism and pessimism) used in economics and the important independent measures for individual behavior used in the psychology literature (i.e., curvature and elevation). One of the parameters in our model measures curvature and represents the diminishing effect of optimism and pessimism when moving away from extreme probabilities 0 and 1. The other parameter measures elevation and represents the relative strength of optimism vs. pessimism. Our empirical analysis indicates that the new weighting function fits elicited probability weights well, and that it can explain differences in the treatment of probabilities for gains compared to that for probabilities of losses.

Intercultural communication in foreign subsidiaries: The influence of expatriates' language and cultural competencies

Abstract: Despite their dual impact on intercultural communication, scholarly discussions on languages and cultural values have evolved separately in international management literature. Building on the three communication zones theory (Du-Babcock & Babcock, 1996), which describes intercultural communication through three different language proficiency zones, the present study explores the influence of expatriates' host country language and cultural competencies on intercultural communication in foreign subsidiaries. In contrast to international management literature in which cultural values and languages have been treated independently, interviews in 58 Nordic subsidiaries in Japan show that expatriates' host country language and cultural competencies are accompanied by different challenges and opportunities.

Language policies and communication in multinational companies: Alignment with strategic orientation and human resource management practices

Abstract: This article focuses on the degree of alignment among multinational company (MNC) strategic orientation, human resource management (HRM) practices, and language policies. On the one hand, the authors propose that the coherent, tight alignment among the HRM practices, language policies, and MNC strategic orientation, in terms of ethnocentricity, polycentricity, or geocentricity, is beneficial. On the other hand, they use international business research on language in MNCs to illustrate that what is good in theory is often more difficult in practice. For example, HRM practices and language policies in foreign subsidiaries may not be tightly aligned with the corporate-level activities, and some hybridization tends to occur, for example, because of contextual reasons in host countries.

The embedded sales force: Connecting buying and selling organizations

Abstract: Business-to-business firms are increasingly focusing on building long-term partnering relationships with key customers. Salespeople are often responsible for managing these relationships. To be effective as relationship managers, salespeople need to be embedded in both their firm’s and customers’ organizations. They need to have extensive knowledge of their customers’ business and also know and be able to leverage their firm’s resources to develop offerings tailored to their customers’ needs. Their companies and sales managers need to use different approaches to manage and support salespeople in this new role. In this paper, we examine some issues affecting the interfaces between elements of the embedded sales force and suggest some directions for future research and methods for examining these issues.

The Sense and Non-Sense of Holdout Sample Validation in the Presence of Endogeneity

Abstract: Market response models that use field-generated data are required to address potential endogeneity in the regressors to obtain consistent parameter estimates. Another requirement is that market response models predict well in a holdout sample. Combining both requirements, it may seem reasonable to subject an endogeneity-corrected model to a holdout prediction task, and this is quite common in the academic marketing literature. One may be inclined to expect that the consistent parameter estimates obtained via instrumental variable (IV) estimation predict better than the biased ordinary least squares (OLS) estimates. This paper shows that this expectation is incorrect. That is, if the holdout sample is similar to the estimation sample so that the regressors are endogenous in both samples, holdout sample validation favors regression estimates that are not corrected for endogeneity (i.e., OLS) over estimates that are corrected for endogeneity (i.e., IV estimation). A key take-away is that if consistent parameter estimates are the primary model objective, the model should be validated with an exogenous (rather than endogenous) holdout sample. If prediction is the primary model objective, we recommend refraining from correcting for endogeneity with IV estimation.