Showing papers by "HEC Paris published in 2014"

Is Bitcoin a Decentralized Currency

Abstract: Bitcoin has achieved popularity by promising users a fully decentralized, low-cost virtual currency system. However, a limited set of entities controls Bitcoin's services, decision-making, mining, and incident resolution processes. These entities can decide Bitcoin's fate, bypassing the will of the multitude of users that populate the network.

Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

Abstract: There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences—in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.

Do Ratings of Firms Converge? Implications for Managers, Investors and Strategy Researchers

Abstract: Raters of firms play an important role in assessing domains ranging from sustainability to corporate governance to best places to work. Managers, investors, and scholars increasingly rely on these ratings to make strategic decisions, invest trillions of dollars in capital and study corporate social responsibility (CSR), guided by the implicit assumption that the ratings are valid. We document the surprising lack of agreement across social ratings from six well-established raters. These differences remain even when we adjust for explicit differences in the definition of CSR held by different raters, implying the ratings have low validity. Our results suggest that users of social ratings should exercise caution in interpreting their connection to actual CSR and that raters should conduct regular evaluations of their ratings.

The Organizational Drivetrain: A Road To Integration of Dynamic Capabilities Research

Abstract: Although the research domain of dynamic capabilities has become one of the most active in strategic management, critics have charged that it is plagued by confusion around the construct itself. In this paper, we uncover a potential reason for this confusion embedded in the unique nature of the construct's development path—a peculiarity that has led to split understandings of what constitutes a dynamic capability. We suggest a solution to this problem in the form of an illustrative metaphor—what we call the “organizational drivetrain.” Our drivetrain represents a theoretical model aimed at combining different views of the definition of dynamic capabilities by explaining how routines and simple rules interact. This shows that it is possible to advance the development of the framework by combining divergent understandings into a coherent whole. We conclude by offering specific recommendations for how to achieve a greater unity of understanding and move the field even further forward.

Is luxury compatible with sustainability? Luxury consumers’ viewpoint

Abstract: The luxury sector thus far has received scant attention from sustainable development activists and watchgroups. Yet, this focus is changing. Even if other sectors may be more relevant to the cause of sustainability, luxury brands that have gained intact reputations for sustainability must take care to maintain it. Therefore, the present research investigates the level of sensitivity of actual luxury buyers to the cause of sustainable development, insofar as it concerns the luxury sector, luxury brands and their purchases. Do consumers’ attitudes towards sustainability spill over to their opinions about the sustainability of luxury itself, or is luxury a world apart? The findings show that luxury buyers have ambivalent attitudes, such that they consider luxury and sustainability somewhat contradictory, especially with regard to the social and economic harmony facet of sustainable development.

Is luxury compatible with sustainability? Luxury consumers' viewpoint

Abstract: The luxury sector thus far has received scant attention from sustainable development activists and watchgroups. Yet, this focus is changing. Even if other sectors may be more relevant to the cause of sustainability, luxury brands that have gained intact reputations for sustainability must take care to maintain it. Therefore, the present research investigates the level of sensitivity of actual luxury buyers to the cause of sustainable development, insofar as it concerns the luxury sector, luxury brands and their purchases. Do consumers' attitudes towards sustainability spill over to their opinions about the sustainability of luxury itself, or is luxury a world apart? The findings show that luxury buyers have ambivalent attitudes, such that they consider luxury and sustainability somewhat contradictory, especially with regard to the social and economic harmony facet of sustainable development.

Central Clearing and Collateral Demand

Abstract: We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the “velocity drag” associated with variation margin movements. We demonstrate the impact on collateral demand of more widespread initial margin requirements, increased novation of CDS to central clearing parties (CCPs), an increase in the number of clearing members, the proliferation of CCPs of both specialized and non-specialized types, and client clearing. Among other results, we show that system-wide collateral demand is increased significantly by the application of initial margin requirements for dealers, whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements, however, mandatory central clearing is shown to lower, not raise, system-wide collateral demand, provided there is no significant proliferation of CCPs. Central clearing does, however, have significant distributional consequences for collateral requirements across various types of market participants.

Illiquidity Contagion and Liquidity Crashes

Abstract: Liquidity providers often learn information about an asset from prices of other assets. We show that this generates a self-reinforcing positive relationship between price informativeness and liquidity. This relationship causes liquidity spillovers and is a source of fragility: a small drop in the liquidity of one asset can, through a feedback loop, result in a very large drop in market liquidity and price informativeness (a liquidity crash). This feedback loop provides a new explanation for comovements in liquidity and liquidity dry-ups. It also generates multiple equilibria.

Emergence of power laws in online communities: the role of social mechanisms and preferential attachment

Abstract: Online communities bring together individuals with shared interest in joint action or sustained interaction. Power law distributions of user popularity appear ubiquitous in online communities but their formation mechanisms are not well understood. This study tests for the emergence of power law distributions via the mechanisms of preferential attachment, least efforts, direct reciprocity, and indirect reciprocity. Preferential attachment, where new entrants favor connections with already popular participants, is the predominant explanation suggested by prior literature. Yet, the attribution of preferential attachment or any other mechanism as a single unitary reason for the emergence of power law distributions runs contrary to the social nature of online communities and does not account for diversity of participants' motivation. Agent-based modeling is used to test if a single social mechanism alone or multiple mechanisms together can generate power law distributions observed in online communities. Data from 28 online communities is used to calibrate, validate, and analyze the simulation. Simulated communication networks are randomly generated according to parameters for each hypothesis. The fit of the power law distribution in the model testing subset is then compared against the fit for these simulated networks. The major finding is that, in contrast to research in more general network settings, neither preferential attachment nor any other single mechanism alone generates a power law distribution. Instead, a blended model of preferential attachment with other social network formation mechanisms was most consistent with power law distributions seen in online communities. This suggests the need to move away from stylized explanations of network emergence that rely on single theories toward more highly socialized and multitheoretic explanations of community development.

Are Retail Traders Compensated for Providing Liquidity

Abstract: This paper examines the extent to which individual investors provide liquidity to the stock market, and whether they are compensated for doing so. We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is signifi cantly enhanced during times of market stress, when market liquidity provisions decline. While a weekly rebalanced portfolio long in stocks purchased and short in stocks sold by retail investors delivers 19% annualized excess returns over a four factor model from 2002 to 2010, it delivers up to 40% annualized returns in periods of high uncertainty. Despite this high aggregate performance, individual investors do not reap the rewards from liquidity provision because (i) they experience a negative return on the day of their trade, and (ii) they reverse their trades long after the excess returns from liquidity provision are dissipated. During the fi nancial crisis, French active retail stock traders stepped up to the plate, increased stock holdings, and provided liquidity. In contrast, mutual fund investors fled from delegation by selling their mutual funds.

Moving Forward: Developing Theoretical Contributions in Management Studies

Abstract: How do we, as management researchers, develop novel theoretical contributions and, thereby, potentially break new ground in management studies? To address this question, we review previous methodological work on theorizing and advance a typology of the reasoning processes that underlie theoretical contributions and significant advances in management studies. This typology consists of various types of analogical and counterfactual reasoning, ranging from focused thought experiments aimed at prodding existing theory in the direction of alternative assumptions, constructs, and hypotheses to more expansive efforts for inducing new theoretical models and alternative explanations. Applying this typology, we detail the mechanisms behind the formation of novel theoretical contributions and illustrate the currency of our typology through a review of 24 major theoretical breakthroughs in management studies. We conclude the paper by discussing the implications of this typology for our collective efforts in building, elaborating, and expanding theory in management studies.

Asset Divestment as a Response to Media Attacks in Stigmatized Industries

Abstract: In stigmatized industries characterized by social contestation, hostile audiences, and distancing between industry insiders and outsiders, firms facing media attacks follow different strategies from firms in uncontested industries. Because firms avoid publicizing their tainted-sector membership, when threatened, they can respond by divesting assets from that industry. Our analyses of the arms industry demonstrate that media attacks on the focal firm and its peers both increase the likelihood of divestment for the focal firm. Specifically, attacks on the focal firm are the most consequential, followed by attacks on peers in the same industry subcategory, and by attacks on peers in different subcategories. These findings shed new light on divestment as a response to media attacks in stigmatized industries and lead us to rethink impression management theory.

Consumer Attitude Metrics for Guiding Marketing Mix Decisions

Abstract: Marketing managers often use consumer attitude metrics such as awareness, consideration, and preference as performance indicators because they represent their brand's health and are readily connected to marketing activity. However, this does not mean that financially focused executives know how such metrics translate into sales performance, which would allow them to make beneficial marketing mix decisions. We propose four criteria---potential, responsiveness, stickiness, and sales conversion---that determine the connection between marketing actions, attitudinal metrics, and sales outcomes. We test our approach with a rich data set of four-weekly marketing actions, attitude metrics, and sales for several consumer brands in four categories over a seven-year period. The results quantify how marketing actions affect sales performance through their differential impact on attitudinal metrics, as captured by our proposed criteria. We find that marketing--attitude and attitude--sales relationships are predominantly stable over time but differ substantially across brands and product categories. We also establish that combining marketing and attitudinal metrics criteria improves the prediction of brand sales performance, often substantially so. Based on these insights, we provide specific recommendations on improving the marketing mix for different brands, and we validate them in a holdout sample. For managers and researchers alike, our criteria offer a verifiable explanation for differences in marketing elasticities and an actionable connection between marketing and financial performance metrics.

The entrepreneurial earnings puzzle: Mismeasurement or real?

Abstract: A review of recent evidence on relative earnings from entrepreneurship versus wage work presents a puzzle: why do individuals become entrepreneurs when entrepreneurs on average apparently earn less than employees? After considering several potential explanations, we empirically analyze one: income underreporting by entrepreneurs. Using a nationwide panel survey representing U.S. households over 15 years, we estimate that entrepreneurs on average earn 4% less per year than employees. However, after correcting for income underreporting, the mean financial gain to entrepreneurship is positive and large, greater than 42%. However, we show that this estimate is built on some unpalatable model assumptions.

Conflict and Creativity in Interdisciplinary Teams

Abstract: We examine the effects of conflict and conflict asymmetry on creativity in interdisciplinary teams. Testing our hypotheses on teams working on graduate-level nanobiotechnology projects, we found task conflict to have a positive relationship with creativity whereas relationship conflict had a negative relationship with creativity. Our results also revealed that relationship conflict asymmetry had a positive effect on creativity. Examining the two components of creativity separately, we found that relationship conflict asymmetry explained variance in the novelty component, whereas task conflict, team size, and functional diversity explained variance in the usefulness component.

Conflict and Creativity in Interdisciplinary Teams

Abstract: We examine the effects of conflict and conflict asymmetry on creativity in interdisciplinary teams. Testing our hypotheses on teams working on graduate-level nanobiotechnology projects, we found task conflict to have a positive relationship with creativity whereas relationship conflict had a negative relationship with creativity. Our results also revealed that relationship conflict asymmetry had a positive effect on creativity. Examining the two components of creativity separately, we found that relationship conflict asymmetry explained variance in the novelty component, whereas task conflict, team size, and functional diversity explained variance in the usefulness component.

Divisive Faultlines and the Unplanned Dissolutions of Multipartner Alliances

Abstract: Received wisdom suggests that multipartner alliances are relatively unstable because of their complexity and the increased potential for free riding. Nonetheless, multipartner alliances do benefit from built-in stabilizing third-party ties that mitigate opportunism and conflict between partner pairs. Previous empirical research on multipartner alliance stability has been inconclusive. We shed some light on these inconsistencies by recognizing that within multipartner alliances, schisms can occur not only between a pair of partners but also between subgroups of partners that are divided by faultlines. We suggest that divisive faultlines can form between subgroups of partners within a multipartner alliance as a function of their prior experience with one another. When a subgroup of alliance partners has relatively strong ties to each other and weak ties to other partners, destabilizing factions can develop that hamper reciprocity among the partners. Using a longitudinal analysis of 59 multipartner alliances, we found that, in general, faultlines as modeled by the dispersion of tie strength within multipartner alliances increase the hazard of unplanned dissolutions. We also found that multipartner alliances comprising a mix of centrally and peripherally positioned partners within the industry network were less apt to suffer the effects of divisive faultlines. We suggest that this is due to the greater opportunity costs of dissolution and the presence of relatively high-status partners who can act as peacekeepers and coordinators of their lower-status partners.

The future of luxury: Challenges and opportunities

Abstract: Luxury branding has changed significantly over recent years and many say that it will never be what it once was: a discreet and tiny economic sector aimed at the rich The rapid growth of emerging countries, led by China, has created new context for luxury growth that changes its essence and behaviour The industry also faces challenges from technological advances and the increasing shift towards digitalization The purpose of this article is to highlight the main areas of concern for the future of the luxury industry and how changes within it are affecting the notion of luxury itself We hope to offer insight into the directions brand management can take to address this while proposing new areas for academic research to focus on

Materialism: the good, the bad, and the ugly

Abstract: Materialism has a generally held connotation that is associated with character deficiencies, self-centeredness, and unhappiness, and most extant research views materialism as having a negative influence on well-being. In this article, we review and synthesise research that supports both positive and negative outcomes of behaviours associated with materialism. We conceptualise materialism in terms of the motives underlying materialistic behaviour, and situate our review and synthesis of materialism research within this context. In doing so, we document the utility of a motives-based view of materialism and propose research agendas that arise from this motives-based perspective.

Equilibrium Fast Trading

Abstract: High-speed market connections improve investors' ability to search for attractive quotes in fragmented markets, raising gains from trade. They also enable fast traders to observe market information before slow traders, generating adverse selection, and thus negative externalities. When investing in fast trading technologies, institutions do not internalize these externalities. Accordingly, they overinvest in equilibrium. Completely banning fast trading is dominated by offering two types of markets: one accepting fast traders, the other banning them. However, utilitarian welfare is maximized by having i) a single market type on which fast and slow traders coexist and ii) Pigovian taxes on investment in the fast trading technology.

Herding and Social Media Word-of-Mouth: Evidence from Groupon

Abstract: This study explores how herding, social media word-of-mouth (WOM), and their interaction effects drive product sales. While herding helps updating consumers’ beliefs about the product quality, social media WOM can also have an advertising effect. Using a panel data set consisting of about 500 deals from Groupon, we find both herding and Facebook-mediated WOM has a direct impact on sales, whereas Twitter-mediated WOM does not. More importantly, we theorize the interaction effect between herding and social media WOM and show they are complements in driving product sales. To uncover the underlying mechanisms, we find the herding effect is more salient for experience goods than for search goods, but the effect of Facebook-mediated WOM does not significantly differ between the two product categories. The comparison suggests that signaling product quality is the underlying mechanism of herding, while the effect of Facebook-mediated WOM is primarily through advertising, rather than signaling.

Managing Retention in Service Relationships

Abstract: In a repeat business context, past experiences with a service provider affect customers' decisions to renew their contract. How should a strategic firm manage customized service over time to maximize the long-term value from each customer relationship? We propose a dynamic model that relies on behavioral theories and empirical evidence to capture the effect of past service experiences on service quality expectations, customer satisfaction, and retention. Although firms can benefit from managing service expectations at the beginning of a relationship, we find that varying service in the long run is not optimal. Behavioral regularities explain the structure of optimal service policies and limit the value of responsive service. Loss aversion expands the range of optimal constant policies; however, if satisfying experiences are more salient, then firms should constantly vary service levels. Loyal or high-margin customers need not warrant better service; those who anchor less on past service experiences do---provided that retention is improved by better past experiences. The effect of customer memory on service levels is determined by whether habituation or rather goodwill drives defection decisions. This paper was accepted by Christian Terwiesch, operations management.

Firm‐specific human capital, organizational incentives, and agency costs: Evidence from retail banking

Abstract: This paper explores conflicting implications of firm-specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more-sophisticated �gaming� of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high-FSHC managers. Finally, profit losses increase more rapidly for high-FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits.

The Intentions with Which the Road is Paved: Attitudes to Liberalism as Determinants of Greenwashing.

Abstract: Previous literature has shown contradictory results regarding the relationship between economic liberalism at the country level and firms’ engagement in corporate social action. Because liberalism is associated with individualism, it is often assumed that firms will engage in mostly symbolic rather than substantive social and environmental actions; in other words, they will practice 'greenwashing'. To understand how cultural beliefs in the virtues of liberalism affect the likelihood of greenwashing, we disentangle the effects of the distinct and co-existing beliefs in the virtues of economic liberalism. We begin by conducting an exploratory qualitative analysis of managers’ sentiments on this matter, based on a focus group methodology. We then use these investigative elements to articulate a comparison of the conflicting theoretical arguments: in liberal contexts, are firms, as social entities, inherently selfish or pro-active when it comes to corporate social actions? We empirically test our hypotheses on a large-scale dataset. Finally, we show paradoxically that in countries where beliefs in the virtues of competition are strong, firms are more likely to greenwash, while in countries where beliefs in the virtues of individual responsibility are prominent, firms are more likely to focus on concrete actions. These findings suggest that in contexts where weak governments are seen as ideal, firms might feel the need to step in to fill institutional voids, in contexts in which competitive mindsets dominate, this tendency is counterbalanced.