Showing papers by "London Business School published in 2001"

Social capital, knowledge acquisition, and knowledge exploitation in young technology-based firms

Abstract: Employing a sample of 180 entrepreneurial high-technology ventures based in the United Kingdom, we examine the effects of social capital in key customer relationships on knowledge acquisition and knowledge exploitation. Building on the relational view and on social capital and knowledge-based theories, we propose that social capital facilitates external knowledge acquisition in key customer relationships and that such knowledge mediates the relationship between social capital and knowledge exploitation for competitive advantage. Our results indicate that the social interaction and network ties dimensions of social capital are indeed associated with greater knowledge acquisition, but that the relationship quality dimension is negatively associated with knowledge acquisition. Knowledge acquisition is, in turn, positively associated with knowledge exploitation for competitive advantage through new product development, technological distinctiveness, and sales cost efficiency. Further, our results provide evidence that knowledge acquisition plays a mediating role between social capital and knowledge exploitation. Copyright © 2001 John Wiley & Sons, Ltd.

Telecommunications Infrastructure and Economic Development: A Simultaneous Approach

Abstract: In diesem Beitrag wird untersucht, welchen Einflus die Telekommunikations-Infrastruktur auf die wirtschaftliche Entwicklung ausubt. Diese wichtige Frage hat im Zusammenhang mit der Diskussion um Informationsautobahnen Aktualitat erlangt. In der vorliegenden Studie wird der Einflus der Telekommunikations-Infrastruktur fur 21 OECDLander fur die vergangenen 20 Jahre analysiert. Es wird ein Strukturgleichungsmodell geschatzt, in dem Investitionen in die Telekommunikations-Infrastruktur als endogene Variable erfast werden und in einem Mikromodell Angebot und Nachfrage nach Telekommunikations- Investitionen spezifiziert werden. Das Mikromodell wird dann zusammen mit der Makro-Wachstumsgleichung geschatzt. Als Ergebnis stellen die Autoren dann eine positive Kausalbeziehung zwischen Telekommunikations-Investitionen und wirtschaftlicher Entwicklung fest, wenn eine kritische Masse an Telekommunikations- Infrastruktur existiert.

Learning Through Acquisitions

Abstract: Research on acquisitions has typically focused on acquisitions per se, examining issues such as performance and implementation problems. This study moves beyond that perspective and studies the inf...

Momentum, Business Cycle and Time Varying Expected Returns

Abstract: In recent years there has been a dramatic growth in academic interest in the predictability of asset returns based on past history. A growing number of researchers argue that time-series patterns in returns are due to investor irrationality, and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation, and is at odds with market efficiency. This paper argues that profits to momentum strategies are a result of persistent differences in conditionally expected returns, and are consistent with time-varying expected returns. Standard macroeconomic variables are able to predict momentum payoffs, and these payoffs disappear once returns are adjusted for variations in expected returns.

Value-at-Risk-Based Risk Management: Optimal Policies and Asset Prices

Abstract: This article analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using Value-atRisk (VaR). We find that VaR risk managers often optimally choose a larger exposure to risky assets than non-risk managers and consequently incur larger losses when losses occur. We suggest an alternative risk-management model, based on the expectation of a loss, to remedy the shortcomings of VaR. A general-equilibrium analysis reveals that the presence of VaR risk managers amplifies the stock-market volatility at times of down markets and attenuates the volatility at times of up markets. In recent years, we have witnessed an unprecedented surge in the usage of risk management practices, with the Value-at-Risk (VaR)–based risk management emerging as the industry standard by choice or by regulation [Jorion (1997), Dowd (1998), Saunders (1999)]. VaR describes the loss that can occur over a given period, at a given confidence level, due to exposure to market risk. The wide usage of the VaR-based risk management (VaR-RM) by financial as well as nonfinancial firms [Bodnar et al. (1998)] stems from the fact that VaR is an easily interpretable summary measure of risk 1 and also has an appealing rationale, as it allows its users to focus attention on “normal market conditions” in their routine operations. However, evidence abounds that in practice VaR estimates not only serve as summary statistics for decision makers but are also used as a tool to manage and control risk—where economic agents struggle to maintain the VaR of their market

Ownership and Control of German Corporations

Abstract: In a study of the ownership of German corporations, we find a strong relation between board turnover and corporate performance, little association of concentrations of ownership with managerial disciplining, and only limited evidence that pyramid structures can be used for control purposes. The static relationship of ownership to control in Germany is therefore similar to the United Kingdom and the United States. However, there are marked differences in dynamic relations involving transfers of ownership. There is an active market in share blocks giving rise to changes in control, but the gains are limited and accrue solely to the holders of large blocks, not to minority investors. We provide evidence of low overall benefits to control changes and the exploitation of private benefits of control.

Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence

Abstract: We model underpricing as being endogenous to the wealth loss minimization problem encountered in a stock market flotation. The benefits of reducing underpricing depend on the entrepreneur's participation in the offering, via the secondary shares he sells, as well as the magnitude of the dilution he suffers on his retained shares, which increases in the number of newly issued shares. However, reducing underpricing is costly. Therefore, it is not surprising that there is positive underpricing in equilibrium, as entrepreneurs trade off the costs and benefits of lower underpricing. Using two large data sets of US IPOs, we find support for the comparative statics predictions of our model, in particular those which distinguish our model from existing work. We also find support for the prediction that equilibrium wealth losses are unrelated to the level of underpricing-reduction costs and the quality of underwriter, which indicates that entrepreneurs choose such variables optimally. Non-monetary considerations such as private benefits of control appear not to be taken into account by the entrepreneur. Our empirical results are robust to a number of economic and econometric considerations.

Bookbuilding and strategic allocation

Abstract: In the bookbuilding procedure, an investment banker solicits bids for shares from institutional investors prior to pricing an equity issue. The banker then prices the issue and allocates shares at his discretion to the investors. We examine the books for 39 international equity issues. We find that the investment banker awards more shares to bidders who provide information in their bids. Regular investors receive favorable allocations, especially when the issue is heavily oversubscribed. The investment banker also favors revised bids and domestic investors. INVESTMENT BANKS COMMONLY "BUILD A BOOK" before pricing an equity issue. In the United States, it has been standard practice for a number of years. In many other countries where fixed-price offerings were traditionally used, the bookbuilding procedure is becoming increasingly common, especially for international equity issues.1 Under the formal bookbuilding procedure, the investment banker solicits indications of interest from institutional investors. Such indications consist of a bid for a quantity of shares and might include a maximum price (i.e., a limit price) or other details. The investment banker uses the information to construct a demand curve. The issue price is not set according to any explicit rule, but rather based on the banker's interpretation of investors' indications of interest. He generally sets the price at a level at which demand exceeds supply, and then allocates shares to the bidders at his discretion. Thus, the

Rational Momentum Effects

Abstract: Momentum effects in stock returns need not imply investor irrationality, heterogeneous information, or market frictions. A simple, single-firm model with a standard pricing kernel can produce such effects when expected dividend growth rates vary over time. An enhanced model, under which persistent growth rate shocks occur episodically, can match many of the features documented by the empirical research. The same basic mechanism could potentially account for underreaction anomalies in general.

Managing Product Variety: An Integrative Review and Research Directions

Abstract: Rapidly evolving technologies, global competition, and sophisticated customers have contributed to an increase in product variety in many industries. However, simply increasing variety does not guarantee an increase in long run profits, and can in fact worsen a firm's competitiveness. This makes variety management a crucial dimension of successful business practice. In this paper, I first provide a framework for managerial decisions about variety. Variety decisions can be viewed as variety-creation decisions that determine the amount, type, and timing of end-product variety, and variety-implementation decisions, which focus on the design and operation of internal processes and a supply chain to support a firm's variety-creation strategy. I sort the gamut of variety-related decisions into four key decision themes in variety creation: 1) dimensions of variety, 2) product architecture, 3) degree of customization, and 4) timing, and three key decision themes in variety implementation: 1) process capabilities, 2) points of variegation, and 3) day-to-day decisions. I describe each theme, and then review the relevant literature on each theme, with a focus on research that adds insight on problems faced in practice. Finally, I identify untapped avenues for future research that would be of value to the practicing manager, paying special attention to interdependencies among decision themes.

Agent-based simulation-an application to the new electricity trading arrangements of England and Wales

Abstract: This paper presents a large-scale application of multiagent evolutionary modeling to the proposed new electricity trading arrangements (NETA) in the UK. This is a detailed plant-by-plant model with an active specification of the demand side of the market. NETA involves a bilateral forward market followed by a balancing mechanism and then an imbalance settlement process. This agent-based simulation model was able to provide pricing and strategic insights, ahead of NETA's actual introduction.

The Walkdown to Beatable Analyst Forecasts: The Roles of Equity Issuance and Insider Trading Incentives

Abstract: Security regulators and the business press have alleged that firms play an 'earnings-guidance game' where analysts make optimistic forecasts at the start of the year and then 'walk down' their estimates to a level the firm can beat by the end of the year. In a comprehensive sample of I/B/E/S individual analysts' forecasts of annual earnings from 1983-1998, we find strong support for the claim in the post-1992 period. We examine whether the 'walk down' to beatable targets is associated with managers' incentives to sell stock after earnings announcements on the firm's behalf (via new equity issuance) or from their personal accounts (insider trades). Consistent with these hypotheses, we find that the 'walk down' to beatable targets is most pronounced in firms that are either net issuers of equity or in firms where managers are net sellers of stock after an earnings announcement. These findings provide new insights on how capital market incentives affect communications between managers and analysts.

The Strategy of Professional Forecasting

Abstract: This paper develops and compares two theories of strategic behaviour of professional forecasters. The first theory posits that forecasters compete in a forecasting contest with pre-specified rules. In equilibrium of a winner-take-all contest, forecasts are excessively differentiated. According to the alternative reputational cheap talk theory, forecasters aim at convincing the market that they are well informed. The market evaluates their forecasting talent on the basis of the forecasts and the realized state. If the market has naive views on forecasters' behaviour, forecasts are biased toward the prior mean. Otherwise, equilibrium forecasts are unbiased but imprecise.

Brownfield Entry in Emerging Markets

Abstract: This paper focuses on the brown-field entry mode, as a special case of acquisition, in which the resources transferred by the investor dominate over those provided by the acquired firm. We see this mode as having particular relevance for entry strategies in emerging markets. The choice of entry mode is analyzed on the basis of a framework utilizing both resource-based and transaction-cost theories. The resource requirements have to be matched with resources available to the investor through an acquired firm, and the decision has to account for the costs of acquiring and integrating the resources.

When The Muse Takes It All: A Model For The Experience of Timelessness in Organizations

Abstract: I propose a model in which I describe the way individuals experience timelessness by becoming engrossed in attractive work activities, the contextual conditions that facilitate or hinder that process, and the effects of timelessness on the creativity of organizational members. Building upon multidisciplinary perspectives, I suggest that timelessness is a constellation of four experiences: a feeling of immersion, a recognition of time distortion, a sense of mastery, and a sense of transcendence.

Marketing-mix variables and the diffusion of successive generations of a technological innovation

Abstract: Research addressing the diffusion of successive generations of technological innovations has generally ignored the impact of marketing-mix variables. As a result, there have been several calls for the development of multiple-generation models that incorporate marketing-mix variables. The authors develop a model of first-time sales and subscriptions for successive generations of a technological innovation, which explicitly captures the effects of marketing-mix variables through a proportional hazards framework. The empirical analysis estimates the impact of price for two generations of cellular telephones in a European country. The results suggest that there are important substantive insights to be gained from the parameter estimates for this marketing-mix variable when intergenerational interdependencies are considered. For example, although the time path of the estimated price elasticities in a multiple-generation setting closely follows those reported previously for single generations, the auth...

Small firms under MICROSCOPE: international differences in production/operations management practices and performance

Abstract: Although the importance of operations in reaching world-class competitiveness has been highlighted in the operations management literature, small and medium-sized companies (SMEs) have been found to have a poor uptake of world-class practices. Reports on a study of 285 SMEs located in Italy, the UK, and other northern European countries. The data are taken from the MICROSCOPE facilitated self-assessment benchmarking database, which studied operations practices and performance in small firms. The level of world-class practices and performance was compared across companies by company size and by country of origin. Significant differences were found between “micro” companies (fewer than 20 employees) and larger companies (between 20 and 200 employees). Other significant differences were found by country, which may be attributed to differences in regional policies and infrastructures regarding small firms.

Evolving the E-Business

Abstract: For most firms, becoming an e-business is an evolutionary journey. Partly descriptive and partly prescriptive, this article identifies six stages for this journey, each of them determining the course of the next. The article concludes with six lessons representing an essential agenda for evolving the business.

Unleash innovation in foreign subsidiaries.

Abstract: In multinational corporations, growth-triggering innovation often emerges in foreign subsidiaries from employees closest to customers and least attached to the procedures and politeness of the home office. But too often, heavy-handed responses from headquarters squelch local enthusiasm and drive out good ideas--and good people. The authors' research into more than 50 multinationals suggests that encouraging innovation in foreign subsidiaries requires a change in attitude. Companies should start to think of foreign subsidiaries as peninsulas rather than as islands--as extensions of the company's strategic domain rather than as isolated outposts. If they do, innovative ideas will flow more freely from the periphery to the corporate center. Basing their arguments on a rich array of examples, the authors say that encouraging such "innovation at the edges" also requires a new set of practices, with two aims: to improve the formal and informal channels of communication between headquarters and subsidiaries and to give foreign subsidiaries more authority to see their ideas through. The challenge for executives of multinationals is to find ways to liberalize, not tighten, internal systems and to delegate more authority to local subsidiaries. It isn't enough to ask subsidiary managers to be innovative; corporate managers need to give them incentives and support systems to facilitate their efforts. The authors suggest four approaches: give seed money to subsidiaries; use formal requests for proposals as a way of increasing the demand for seed money; encourage subsidiaries to be incubators for fledgling businesses; and build international networks. As part of the last approach, multinationals also need to create roles for idea brokers who can link entrepreneurs in foreign subsidiaries with other parts of the company.

Global Account Management in Multinational Corporations: Theory and Evidence

Abstract: This paper uses two theoretical perspectives, information processing and resource dependency, to examine global account management (the co-ordination of activities involved in serving a single customer in multiple countries). It is hypothesized that global account management structures allow the multinational corporation (MNC) to increase its information processing capacity as well as its bargaining power vis-a-vis the global customer. Using data on 106 global accounts in 16 MNCs, we find support for both perspectives individually. Furthermore, evidence is presented for an interaction effect in which the effectiveness of structures for increasing information processing is conditional upon the presence of high customer dependence.

Information Policy: Shaping the Value of Agency Relationships

Abstract: We evaluate how changes in information use affect agency relationships. Information asymmetry redistributes value, but imperfect monitoring also encourages agents to take inefficient actions to influence this redistribution, thereby reducing joint agency value. Changing focus, from minimizing principals' costs to maximizing joint agency value, we argue that more monitoring is nof always better, and we explore, through a six-sector framework, how more extensive use of information benefits (or damages) value creation and affects its distribution.

Corporate Growth Convergence in Europe

Abstract: It is widely believed that the implementation of the Single Market Programme in 1992 has had an impact on national markets in Europe, and some people have argued that it has induced a convergence in industrial structures across countries. Using a newly available database, however, covering nearly every firm above 100 employees in 14 European countries over the time period 1994 to 1998, we do not find strong evidence for 'convergence' in manufacturing in Europe. 'Full' convergence in corporate sizes within industries is unambiguously rejected by the data, although there may be some industries where some form of conditional convergence is observed. A Gibrat process best describes the growth of very large and mature firms; but smaller and younger firms depart from this prediction. While we can identify significant correlates of growth such as firm size, age or the internal organization of the firm, most of the variation in corporate growth remains unpredictable.

Bookbuilding: How Informative is the Order Book

Abstract: When using a formal bookbuilding procedure, underwriters observe the demand curves of investors as stated in the "book" prior to pricing shares in an equity issue. The purpose of this paper is to examine whether the investment bank uses the information in the book when setting the issue price and whether this information can help predict subsequent secondary aftermarket prices. We examine the details of the institutional bids for shares for a sample of 63 international equity issues. We find that the issue price is closely related to the limit prices submitted by bidders. The level of oversubscription has a smaller but significant effect. The price primarily reflects the information in the price contingent bids of certain bidders such as large bidders and frequent bidders. Aftermarket returns in IPOs are positively correlated with oversubscription and elasticity of the demand.

Getting 360 degrees feedback right.

Abstract: Over the past decade, 360-degree feedback has revolutionized performance management. But one of its components--peer appraisal--consistently stymies executives and can exacerbate bureaucracy, heighten political tensions, and consume lots of time. For ten years, Maury Peiperl has studied 360-degree feedback and has asked: under what circumstances does peer appraisal improve performance? Why does peer appraisal sometimes work well and sometimes fail? And how can executives make these programs less anxiety provoking for participants and more productive for organizations? Peiperl discusses four paradoxes inherent to peer appraisal: In the Paradox of Roles, colleagues juggle being both peer and judge. The Paradox of Group Performance navigates between assessing individual feedback and the reality that much of today's work is done by groups. The Measurement Paradox arises because simple, straightforward rating systems would seem to generate the most useful appraisals--but they don't. Customized, qualitative feedback, though more difficult and time consuming to generate, is more helpful in improving performance. During evaluations, most people focus almost exclusively on reward outcomes and ignore the constructive feedback generated by peer appraisal. Ironically, it is precisely this overlooked feedback that helps improve performance--thus, the Paradox of Rewards. These paradoxes do not have neat solutions, but managers who understand them can better use peer appraisal to improve their organizations.

Why is Knowledge Management So Difficult

Abstract: Knowledge management promises much, but often delivers very little. There are no simple solutions to this challenge. This article starts by trying to define what knowledge management is. It then identifies where the problems lie and suggests five steps to resolve those problems. The article is based on research in a dozen leading companies, including HP, Ericsson, ABB, Skandia and Xerox.