Showing papers by "London Business School published in 2006"
TL;DR: The most powerful way to prevail in global competition is still invisible to many companies as discussed by the authors, which is why the concept of the corporation itself has not yet been recognized as a powerful competitive advantage.
Abstract: The most powerful way to prevail in global competition is still invisible to many companies. During the 1980s, top executives were judged on their ability to restructure, declutter, and delayer their corporations. In the 1990s, they’ll be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible — indeed, they’ll have to rethink the concept of the corporation itself.
15,465 citations
TL;DR: In this article, the relationship between corporate environmental performance and environmental disclosure was investigated by testing economics-based theories of voluntary disclosure using a more rigorous research design, and they found a positive association between environmental performance with the extent of discretionary environmental disclosures.
Abstract: Previous empirical evidence provided mixed results on the relationship between corporate environmental performance and environmental disclosures. We revisit this relation by testing economics based theories of voluntary disclosure using a more rigorous research design. In particular, we improve on the prior literature by focusing on purely voluntary environmental disclosures and by developing two reliable environmental performance measures using actual toxic emissions and waste management data. We also develop a content analysis index based on the Global Reporting Initiative sustainability reporting guidelines to assess the extent of discretionary disclosures in environmental and social responsibility reports. This index better captures firm disclosures related to its commitment to protect the environment than the indices employed by prior studies. Using a sample of 191 firms from the five most polluting industries in the U.S., we find a positive association between environmental performance and the extent of discretionary environmental disclosures. The result is consistent with the predictions of the economics based voluntary disclosure theory.
2,050 citations
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TL;DR: In this article, the extent of firm level over-investment of free cash flow is examined, and the evidence suggests that certain governance structures such as the presence of activist shareholders appear to mitigate overinvestment.
Abstract: This paper examines the extent of firm level over-investment of free cash flow. Using an accounting based framework to measure over-investment and free cash flow, I find evidence that, consistent with agency cost explanations, over-investment is concentrated in firms with the highest levels of free cash flow. Further tests examine whether firms' governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the presence of activist shareholders, appear to mitigate over-investment.
1,345 citations
TL;DR: In this article, the authors argue that internationalization has differing effects on firm survival and growth, moderated by organizational age, managerial experience, and resource fungibility, and provide insights into the evolution of capabilities across borders and may be tested and built on by organization researchers.
Abstract: Recent critiques of internationalization process models question the wisdom of delaying internationalization. Internationalizing late allows firms to assemble resources and gain experience but also allows inertia to develop. We resolve this tension by positing that internationalization has differing effects on firm survival and growth. These effects are moderated by organizational age, managerial experience, and resource fungibility. Our framework provides insights into the evolution of capabilities across borders and may be tested and built on by organization researchers.
1,089 citations
TL;DR: In this paper, the authors investigate the role of accrual accounting in the asymmetrically timely recognition (incorporation in reported earnings) of gains and losses, and show that nonlinear accruals models incorporating the asymmetry in gain and loss recognition (timelier loss recognition, or conditional conservatism) offer a substantial specification improvement, explaining substantially more variation in accruality than equivalent linear specifications.
Abstract: We investigate the role of accrual accounting in the asymmetrically timely recognition (incorporation in reported earnings) of gains and losses. Timely recognition requires accruals when it precedes complete realization of the gains and losses in cash. We show that nonlinear accruals models incorporating the asymmetry in gain and loss recognition (timelier loss recognition, or conditional conservatism) offer a substantial specification improvement, explaining substantially more variation in accruals than equivalent linear specifications. Conversely, conventional linear accruals models, by omitting the loss recognition asymmetry, exhibit substantial attenuation bias and offer a comparatively poor specification of the accounting accrual process. Linear specifications also understate the ability of current earnings to predict future cash flows. These findings have implications for our understanding of accrual accounting and conservatism, as well as for researchers estimating discretionary accruals, earnings management, and earnings quality.
854 citations
TL;DR: In this paper, the authors use meta-analytic techniques to quantitatively compare Williamson's Markets and Hierarchies with transaction cost theory, and show that Williamson's markets and hierarchies are similar to ours.
Abstract: Since the publication of Williamson's Markets and Hierarchies, many empirical articles have investigated the tenets of transaction cost theory. Using meta-analytic techniques, we quantitatively syn...
839 citations
TL;DR: In this paper, the authors argue that the value of social proximity to the knowledge source depends crucially on the nature of the knowledge at hand, and they examine patent data and compare citation rates across proximate and distant actors on three dimensions: (1) the inventor collaboration network; (2) firm membership; and (3) geography.
769 citations
TL;DR: In this article, the authors consider how innovators benefit from value appropriation and creation, and they provide an integrative guide that explains how firms should manage their position along the value chain to capture returns from innovation, thus extending and qualifying Teece's original predictions and prescriptions.
Abstract: Extending Teece's landmark 1986 article, we consider how innovators benefit from value appropriation and creation. We elaborate on value appropriation, first by pointing out the importance of "industry architectures", i.e. sector-wide templates that circumscribe the division of labor; and second, by treating complementarity and factor mobility as distinctive components of cospecialization. This allows us to qualify Teece's prediction, by positing that firms can create an "architectural advantage" in terms of high levels of value appropriation without the need to engage in vertical integration. Such architectural advantage comes about when firms can enhance both complementarity and mobility in parts of the value chain where they are not active. We then elaborate on value creation by indicating how actors can benefit from investing in assets that appreciate because of innovation, which suggests that firms can benefit from encouraging imitation while investing in complementary assets. We also consider how investment in complementary assets changes the scope of the firm and thereby the development of capabilities that support future innovation. Finally, we provide an integrative guide that explains how firms should manage their position along the value chain to capture returns from innovation, thus extending and qualifying Teece's (1986) original predictions and prescriptions.
705 citations
TL;DR: This article showed that firms with superior environmental performance have more resources and enjoy better financial performance subsequently, while firms with poor relative environmental performance face resource constraints and their financial performance deteriorates further.
Abstract: We hypothesize that firms pursuing a proactive environmental strategy: (1) possess resources and capabilities not available to the other firms and (2) enjoy better financial performance subsequently. Using longitudinal data between 1990 and 2003 from the four most polluting industries in the U.S., we show that firms with superior environmental performance have more resources and enjoy better financial performance subsequently. In contrast, firms with poor relative environmental performance face resource constraints and their financial performance deteriorates further. Our results are consistent with the resource based view of the firm and indicate that although becoming "green" is associated with improvement in firm performance, such a strategy cannot be easily mimicked by all firms.
647 citations
TL;DR: In this article, a number of implementable customer lifetime value (CLV) models that are useful for market segmentation and allocation of marketing resources for acquisition, retention, and cross-selling are presented.
Abstract: As modern economies become predominantly service-based, companies increasingly derive revenue from the creation and sustenance of long-term relationships with their customers. In such an environment, marketing serves the purpose of maximizing customer lifetime value (CLV) and customer equity, which is the sum of the lifetime values of the company’s customers. This article reviews a number of implementable CLV models that are useful for market segmentation and the allocation of marketing resources for acquisition, retention, and cross-selling. The authors review several empirical insights that were obtained from these models and conclude with an agenda of areas that are in need of further research.
642 citations
TL;DR: In this article, the authors consider how innovators benefit from value appropriation and creation, and they provide an integrative guide that explains how firms should manage their position along the value chain to capture returns from innovation.
TL;DR: In this paper, the authors show that the evidence reported by Teoh, Welch and Wong (1998) in support of the alternative hypothesis, that IPO firms opportunistically inflate earnings to influence the IPO price, is unreliable for a variety of reasons.
Abstract: Financial reporting around the time of IPOs is consistent with listed firms reporting more conservatively than previously as private firms, consistent with the results in Ball and Shivakumar (2005). We hypothesize that IPO firms supply the higher quality financial reports demanded by public investors, who face higher information asymmetry than private investors. The market mechanisms for enforcing this demand include monitoring by internal and external auditors, boards, analysts, rating agencies, the press and other parties. Once public, firms are subject to greater regulatory scrutiny and penalties. From the point of releasing the public prospectus document onwards, IPO firms face a greater threat of shareholder litigation and regulatory action if they do not meet higher reporting standards. The evidence is overwhelmingly in favor of this hypothesis. We show that the evidence reported by Teoh, Welch and Wong (1998) in support of the alternative hypothesis, that IPO firms opportunistically inflate earnings to influence the IPO price, is unreliable for a variety of reasons. We provide cleaner evidence, from samples of U.K. and U.S. IPOs, that IPO prospectus financials are conservative by several standards. We conjecture that the types of bias we observe in conventional estimates of "discretionary" accruals occur in a broad genre of studies on earnings management around large transactions and events.
TL;DR: In this article, the effect of structural integration on innovation outcomes depends on the developmental stage of acquired firms' innovation trajectories, and it is shown that structural integration decreases the likelihood of introducing new products for firms that have not launched products before being acquired and for all firms immediately after acquisition.
Abstract: Large, established firms acquiring small, technology-based firms must manage them so as to both exploit their capabilities and technologies in a coordinated way and foster their exploration capacity by preserving their autonomy. We suggest that acquirers can resolve this coordination-autonomy dilemma by recognizing that the effect of structural form on innovation outcomes depends on the developmental stage of acquired firms’ innovation trajectories. Structural integration decreases the likelihood of introducing new products for firms that have not launched products before being acquired and for all firms immediately after acquisition, but these effects disappear as innovation trajectories evolve.
TL;DR: This article examined the role of managerial incentives and discretion in hedge fund performance and found that hedge funds with greater managerial incentives, proxied by the delta of the option-like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high-water mark provisions in the incentive contracts, are associated with superior performance.
Abstract: Using a comprehensive hedge fund database, we examine the role of managerial incentives and discretion in hedge fund performance. Hedge funds with greater managerial incentives, proxied by the delta of the option-like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high-water mark provisions in the incentive contracts, are associated with superior performance. The incentive fee percentage rate by itself does not explain performance. We also find that funds with a higher degree of managerial discretion, proxied by longer lockup, notice, and redemption periods, deliver superior performance. These results are robust to using alternative performance measures and controlling for different data-related biases.
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TL;DR: In this article, the authors developed a comprehensive and parsimonious measure of corporate financing activities and document a negative relation between this measure and both future stock returns and future profitability, and analyzed the association between their measure of external financing and sell-side analysts' forecasts.
Abstract: We develop a comprehensive and parsimonious measure of corporate financing activities and document a negative relation between this measure and both future stock returns and future profitability. The economic and statistical significance of the results using our comprehensive measure of external financing is stronger than in previous research focusing on individual categories of corporate financing activities. To discriminate between risk versus misvaluation as explanations for this relation, we analyze the association between our measure of external financing and sell-side analysts' forecasts. Consistent with the misvaluation explanation, we find that our measure of external financing is positively related to overoptimism in sell-side analysts' forecasts.
TL;DR: In this article, service quality research in traditional services and, more recently, in e-services tends to take a long time and is typically multichannel, whereas in virtual channels of delivery such as the Internet are typically multi-channel.
Abstract: Services employing virtual channels of delivery such as the Internet are typically multichannel. Service quality research in traditional services and, more recently, in e-services tends to take a s...
TL;DR: This longitudinal study of a major European manufacturer suggests that to understand how firm boundaries are set and what their impacts are, it needs to complement the microanalytic focus on transactions with a systemic analysis at the level of the firm.
Abstract: The concept of vertical architecture defines the scope of a firm and the extent to which it is open to final and intermediate markets; it describes the configurations of transactional choices along a firms value chain. A firm can make or buy inputs, and transfer outputs downstream or sell them. Permeable vertical architectures are partly integrated and partly open to the markets along a firms value chain. Increased permeability enables more effective use of resources and capacities, better matching of capabilities with market needs, and benchmarking to improve efficiency. Partial integration promotes a more dynamic, open innovation platform and enhances strategic capabilities by linking key parts of the value chain. This permeable vertical architecture, accompanied by appropriate transfer prices and incentive design, facilitates resource allocation and guides a firms growth process. Our longitudinal study of a major European manufacturer suggests that to understand how firm boundaries are set and what their impacts are, we need to complement the microanalytic focus on transactions with a systemic analysis at the level of the firm. It also shows how, over and above transactional alignment, decisions about boundaries and vertical architectures can transform a firms strategic and productive capabilities and prospects.
TL;DR: This paper combines elements from scatter search, a generic population-based evolutionary search method, and a recently introduced heuristic method for the optimisation of unconstrained continuous functions based on an analogy with electromagnetism theory to provide near-optimal heuristic solutions for resource-constrained project scheduling.
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TL;DR: In this article, the authors conduct four empirical analyses based on three different data sets and show that the flat-rate bias is more important and has a greater regularity and time-persistence than the pay-per-use bias.
Abstract: A common assumption underlying the analysis of consumers' choice between optional tariffs is that consumers choose the tariff that maximizes consumer surplus and, thus, the tariff that leads for a given amount of usage to the lowest billing rate. Yet, there is evidence that many users prefer a flat rate even though their billing rate would be lower on a pay-per-use tariff (flat-rate bias) and some users prefer a pay-per-use tariff even though they would save money on a flat rate (pay-per-use bias). The authors conduct four empirical analyses based on three different data sets. They show that the flat-rate bias is more important and has a greater regularity and time-persistence than the pay-per-use bias. They classify potential causes of the flat-rate bias as insurance effect, taxi meter effect, convenience effect, and overestimation effect and show that the insurance, the taxi meter and the overestimation effect lead to a flat-rate bias. They provide evidence that underestimation of usage is a major cause of the pay-per-use bias. They show that the flat-rate bias does not significantly increase customer churn and thus results in a short- and long-term profit increase. In contrast, the pay-per-use bias largely increases churn so that the additional short-term profit is in the long-term offset by higher churn.
TL;DR: In this paper, the authors examined whether earnings momentum and price momentum are related both in time-series as well as in cross-sectional asset pricing tests, and found that price momentum is captured by the systematic component of earnings momentum.
TL;DR: Information reporting by a privately informed expert concerned about being perceived to have accurate information and when the expert’s reputation is updated on the basis of the report as well as the realized state is analyzed.
Abstract: This paper analyzes information reporting by a privately informed expert concerned about being perceived to have accurate information. When the expert’s reputation is updated on the basis of the report as well as the realized state, the expert typically does not wish to truthfully reveal the signal observed. The incentives to deviate from truthtelling are characterized and shown to depend on the information structure. In equilibrium, experts can credibly communicate only part of their information. Our results also hold when experts have private information about their own accuracy and care about their reputation relative to others.
TL;DR: It is common for scholars interested in race and poverty to invoke a lack of access to job networks as one of the reasons that African Americans and Hispanics face difficulties in the labor market as discussed by the authors.
Abstract: It is common for scholars interested in race and poverty to invoke a lack of access to job networks as one of the reasons that African Americans and Hispanics face difficulties in the labor market....
TL;DR: In this article, the authors examine whether irrational behavior among small investors drives post-IPO prices and find that large investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic.
Abstract: We examine whether irrational behavior among small (retail) investors drives post-IPO prices. We use prices from the grey market (the when-issued market that precedes European IPOs) to proxy for small investors' valuations. High grey market prices (indicating overoptimism) are a very good predictor of first-day aftermarket prices, while low grey market prices (indicating excessive pessimism) are not. Moreover, we find long-run price reversal only following high grey market prices. This asymmetry occurs because larger (institutional) investors can choose between keeping the shares they are allocated in the IPO, and reselling them when small investors are overoptimistic.
TL;DR: In this article, the authors study the long-run evolution of investor protection, equity financing and corporate ownership in the U.K. over the 20th century and assess its influence on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages.
Abstract: This paper is the first study of long-run evolution of investor protection, equity financing and corporate ownership in the U.K. over the 20th century. Formal investor protection only emerged in the second half of the century. We assess its influence on ownership by comparing cross-sections of firms at different times in the century and the evolution of firms incorporating at different stages of the century. Investor protection had little impact on dispersion of ownership: even in the absence of investor protection, there was a high rate of dispersion of ownership, primarily associated with mergers. Ownership dispersion in the UK relied more on informal relations of trust than on formal systems of regulation. Preliminary evidence for this comes from the geographical proximity of shareholders to their boards of directors, the absence of price discrimination in takeovers and retention of directors of target boards in merged firms.
TL;DR: In this article, the authors used a new database of long-run stock, bond, bill, inflation, and currency returns to estimate the equity risk premium for 17 countries and a world index over a 106-year interval.
Abstract: We use a new database of long-run stock, bond, bill, inflation, and currency returns to estimate the equity risk premium for 17 countries and a world index over a 106-year interval. Taking U.S. Treasury bills (government bonds) as the risk-free asset, the annualised equity premium for the world index was 4.7% (4.0%). We report the historical equity premium for each market in local currency and US dollars, and decompose the premium into dividend growth, multiple expansion, the dividend yield, and changes in the real exchange rate. We infer that investors expect a premium on the world index of around 3-3 1/2% on a geometric mean basis, or approximately 4 1/2-5% on an arithmetic basis.
TL;DR: The measurement and substantive issues that future research should address in advancing the understanding of the cultural intelligence construct are discussed and a framework that reflects and reconciles two different approaches to integrating culture and intelligence is proposed.
Abstract: Despite the extensive research on culture and intelligence in organizational psychology, little attention has been given to the integration of the two constructs. This special issue aims to stimulate new research directions by synthesizing the two streams of research. In this introduction to the special issue, we propose a framework that reflects and reconciles two different approaches to integrating culture and intelligence—the cultural variation of intelligence approach versus the cultural intelligence approach. Our focus is on the latter approach, which centers on validating the emerging construct called cultural intelligence—defined as the capability to be effective across cultural settings. Specifically, we discuss the measurement and substantive issues that future research should address in advancing our understanding of the cultural intelligence construct.
TL;DR: In this paper, the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy was examined, and the tradeoff theory offers an explanation for why young/small firms use bank debt exclusively; why large/mature firms employ mixed debt financing; and why bank debt is senior.
Abstract: We examine the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy. Flexible bank debt offers a superior tradeoff between tax shields and bankruptcy costs. Ease of renegotiation limits bank debt capacity, however. Optimal debt structure hinges upon which party has bargaining power in private workouts. Weak firms have high bank debt capacity and utilize bank debt exclusively. Strong firms lever up to their (lower) bank debt capacity, augment with market debt, and place the bank senior. Therefore, the tradeoff theory offers an explanation for: (i) why young/small firms use bank debt exclusively; (ii) why large/mature firms employ mixed debt financing; and (iii) why bank debt is senior. The tradeoff theory also generates predictions consistent with international evidence. In countries where the bankruptcy regime entails soft (tough) enforcement of contractual priority, bank debt capacity is low (high), implying greater (less) reliance on market debt.
Journal Article•
TL;DR: The authors of as discussed by the authors conducted an historical analysis of more than 100 management innovations that took place over 130 years and studied 11 recent cases of management innovation, in most cases interviewing one or more of the key innovators.
Abstract: Despite the importance of management innovation, it is poorly understood and usually not systematically fostered. To research the process, the authors first conducted an historical analysis of more than 100 management innovations that took place over 130 years. Then they studied 11 recent cases of management innovation, in most cases interviewing one or more of the key innovators. The research revealed that, compared with the process of technological innovation, management innovation tends to be more diffuse and gradual. It typically follows four stages. The first stage is some type of dissatisfaction with the status quo, such as a crisis or strategic threat. That stage is followed by inspiration from other sources. The third stage is the invention of the management innovation itself. While most innovators identified a precipitating event that preceded the innovation, such as a challenge from a boss or a new assignment, few recalled a distinct ?eureka moment?when the innovation occurred. The fourth stage is validation, both internally and through external sources such as academics, consultants, media organizations or industry associations.
TL;DR: The authors developed and compared two theories of professional forecasters' strategic behavior, reputational cheap talk and winner-take-all competition, and found that in a winner-takes-all contest, equilibrium forecasts are excessively differentiated.
TL;DR: The relationship between the citation rate of an article and the extent of collaboration and the number of institutions/article for the period of study showed an inverse relationship between citation rate and collaboration.
Abstract: Study Objective. The primary objective was to analyze the relationship between the citation rate of an article and the extent of collaboration. The secondary objective was to analyze the relationship between the number of authors/article and the number of institutions/article for the period of study.
Methods. We counted the number of original research articles published in six leading journals—Cell, Science, Nature, New England Journal of Medicine, The Lancet, and Journal of the American Medical Association—for the years 1975, 1985, and 1995. For each article, we determined the number of authors and the number of separate institutions. We also determined the number of times each article that was published in 1995 was cited in future scientific articles from the Science Citation Index database.
Results. Science, Cell, Nature, New England Journal of Medicine, The Lancet, and Journal of the American Medical Association had 2014, 868, 3856, 643, 785, and 465 total articles published/3-year study period, respectively. There was a median of 2, 2, 2, 3, 3, and 3 institutions/article, respectively. All of the final models had a significant linear author component for which all of the parameter estimates were positive, yet variable. Thus, the number of times an article was cited correlated significantly with the number of authors and the number of institutions.
Conclusion. A correlation exists between the number of authors and the number of times an article is cited in other articles. Investigators who are open to collaborations and those who seem to adequately manage those collaborations produce a superior product that results in a higher impact.