Showing papers by "London Business School published in 2011"

Strategic Planning for Public and Nonprofit Organizations: A Guide to Strengthening and Sustaining Organizational Achievement

Abstract: "Strategic planning is an important function in nonprofit and public organizations, and leaders are continually striving to increase efficiency and effectiveness. In this fourth edition of his perennial bestseller Strategic Planning for Public and Nonprofit Organizations, Bryson provides the most updated version of his thoughtful strategic planning model and outlines the reasons public and nonprofit organizations must embrace strategic planning to improve their performance. The book offers leaders, managers, and students detailed guidance on implementing the process, and specific tools and techniques to make the process work"--

Blockholder Trading, Market Efficiency, and Managerial Myopia

Abstract: This paper analyzes how blockholders can exert governance even if they cannot intervene in a firm's operations. Blockholders have strong incentives to monitor the firm's fundamental value, since they can sell their stakes upon negative information. By trading on private information (following the "Wall Street Rule"), they cause prices to reflect fundamental value rather than current earnings. This in turn encourages managers to invest for long-run growth rather than short-term profits. Contrary to the view that the U.S.'s liquid markets and transient shareholders exacerbate myopia, I show that they can encourage investment by impounding its effects into prices.

Incentives and Problem Uncertainty in Innovation Contests: An Empirical Analysis

Abstract: Contests are a historically important and increasingly popular mechanism for encouraging innovation. A central concern in designing innovation contests is how many competitors to admit. Using a unique data set of 9,661 software contests, we provide evidence of two coexisting and opposing forces that operate when the number of competitors increases. Greater rivalry reduces the incentives of all competitors in a contest to exert effort and make investments. At the same time, adding competitors increases the likelihood that at least one competitor will find an extreme-value solution. We show that the effort-reducing effect of greater rivalry dominates for less uncertain problems, whereas the effect on the extreme value prevails for more uncertain problems. Adding competitors thus systematically increases overall contest performance for high-uncertainty problems. We also find that higher uncertainty reduces the negative effect of added competitors on incentives. Thus, uncertainty and the nature of the problem should be explicitly considered in the design of innovation tournaments. We explore the implications of our findings for the theory and practice of innovation contests. This paper was accepted by Christian Terwiesch, operations management.

Governance Through Trading and Intervention: A Theory of Multiple Blockholders

Abstract: Traditional theories argue that governance is strongest under a single large blockholder, as she has large incentives to undertake value-enhancing interventions. However, most firms are held by multiple small blockholders. This paper shows that, while such a structure generates free-rider problems that hinder intervention, the same co-ordination difficulties strengthen a second governance mechanism: disciplining the manager through trading. Since multiple blockholders cannot co-ordinate to limit their orders and maximize combined trading profits, they trade competitively, impounding more information into prices. This strengthens the threat of disciplinary trading, inducing higher managerial effort. The optimal blockholder structure depends on the relative effectiveness of manager and blockholder effort, the complementarities in their outputs, information asymmetry, liquidity, monitoring costs, and the manager's contract.

The Real Effects of Financial Markets: The Impact of Prices on Takeovers

Abstract: Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An inter-quartile decrease in valuation leads to a 7 percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect.") Our results overturn prior literature which found a weak relation between prices and takeovers without instrumentation. These findings imply that financial markets have real effects: they impose discipline on managers by triggering takeover threats.

Increasing saving behavior through age-progressed renderings of the future self.

Abstract: Many people fail to save what they will need for retirement. Research on excessive discounting of the future suggests that removing the lure of immediate rewards by precommitting to decisions or elaborating the value of future rewards both can make decisions more future oriented. The authors explore a third and complementary route, one that deals not with present and future rewards but with present and future selves. In line with research that shows that people may fail, because of a lack of belief or imagination, to identify with their future selves, the authors propose that allowing people to interact with age-progressed renderings of themselves will cause them to allocate more resources to the future. In four studies, participants interacted with realistic computer renderings of their future selves using immersive virtual reality hardware and interactive decision aids. In all cases, those who interacted with their virtual future selves exhibited an increased tendency to accept later monetary r...

The impact of motivation, empowerment, and skill-enhancing practices on aggregate voluntary turnover: the mediating effect of collective affective commitment

Abstract: This study advances research on macro human resource management by examining collective commitment as a mediator of motivation, empowerment, and skill-enhancing practices and aggregate voluntary turnover. Findings from 20 top HR managers and 1,748 employees in 93 different job groups suggest collective affective commitment independently mediates the negative relationships between motivation and empowermentenhancing practices and aggregate voluntary turnover. Human resource practices functioning to enhance the knowledge, skills, and abilities of the workforce are positively associated with voluntary turnover but are not mediated by collective affective commitment. Functionally, this paper resolves the divergent thinking of 4 streams of research regarding HR practices, collective commitment and aggregate turnover. The implications for macro-HRM theory and practice are discussed.

Audited Financial Reporting and Voluntary Disclosure as Complements: A Test of the Confirmation Hypothesis

Abstract: We examine the “confirmation” hypothesis, that audited, backward-looking financial outcomes and disclosure of managers’ private forward-looking information are complements, because independent audit disciplines and hence enhances disclosure credibility. Committing to higher audit fees (a measure of the extent of financial outcome verification and thus the accuracy and freedom from manipulation of reported outcomes), is associated with management forecasts that are more frequent, specific, timely and accurate, and receive a larger market reaction. These relations are not driven by litigation risk and are robust to various tests. Private information disclosure and audited financial reporting are complements and cannot be evaluated separately.

Short-term forecasts of euro area GDP growth

Abstract: Summary This paper evaluates models that exploit timely monthly releases to compute early estimates of current quarter GDP (now-casting) in the euro area. We compare traditional methods used at institutions with a new method proposed by Giannone et al. The method consists in bridging quarterly GDP with monthly data via a regression on factors extracted from a large panel of monthly series with different publication lags. We show that bridging via factors produces more accurate estimates than traditional bridge equations. We also show that survey data and other ‘soft’ information are valuable for now-casting.

Disasters Implied by Equity Index Options

Abstract: We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk-neutral distribution of equity returns implied by options to the true distribution of consumption growth estimated from macroeconomic data. We attack the problem from three perspectives. First, we compare pricing kernels constructed from macro-finance and option-pricing models. Second, we compare option prices derived from a macro-finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro-finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from international macroeconomic data. The third comparison yields a viable alternative calibration of the distribution of consumption growth that matches the equity premium, option prices, and the sample moments of US consumption growth.

A Model of Mortgage Default

Abstract: This paper solves a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. It uses a zero-profit condition for mortgage lenders to solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable vs. fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Heterogeneity in borrowers' labor income risk is important for explaining the higher default rates on adjustable-rate mortgages during the recent US housing downturn, and the variation in mortgage premia with the level of interest rates.

Predicting stakeholder orientation in the multinational enterprise: A mid-range theory

Abstract: As the reach of corporations increasingly extends across borders, a key research question is whether overseas subsidiaries adopt a shareholder-centric orientation, centered on maximizing shareholder wealth, or a stakeholder-centric orientation, centered on creating value for a broader range of stakeholders. Existing theories, addressing the corporate level of analysis, focus on forces exogenous to the firm: local resource pressures, and institutional norms. Using a combination of induction and fuzzy-set analysis, I draw on documentary evidence and 298 interviews with managers and stakeholders to build theory about the conditions that shape subsidiaries’ stakeholder orientations. Two major findings emerge. First, although theory emphasizes external stakeholders’ control over resources, internal control through the corporate parent can crowd out the voices of local stakeholders. Second, although institutional theory proposes isomorphism with local norms and standards, some corporations are subject to scrutiny by global stakeholders, and their subsidiaries face higher requirements for social engagement than their peers. These findings are the foundation of a mid-range theory that combines conventional explanations, focused on environmental factors, and an internal-stakeholder perspective, based around the roles of the parent corporation as owner and resource provider, to predict stakeholder orientation.

Government Spending, Political Cycles and the Cross Section of Stock Returns

Abstract: Using a novel measure of industry exposure to government spending, we document predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9 percent per annum. Our results suggest market under reaction to predictable variation in the effect of government spending policies.

The Locus of Choice: Personal Causality and Satisfaction with Hedonic and Utilitarian Decisions

Abstract: Consumers may consume the same products or services with different goals, for example, for their own pleasure—a hedonic goal—or to achieve some higher level purpose—a utilitarian goal. This article investigates whether this difference in goals influences satisfaction with an outcome that was either self-chosen or externally determined. In four experiments we manipulate consumption goals, controlling for the outcomes, the option valence, and whether the externally made choice was determined by an expert or at random. Results show that the outcome of a self-made choice is more satisfying than the outcome of an externally made choice when the goal is hedonic but not when it is utilitarian. We hypothesize that this effect results from the greater perceived personal causality associated with terminally motivated activities, such as hedonic choices, relative to instrumentally motivated activities, such as utilitarian choices, and provide evidence that supports this explanation over alternative accounts.

The Effects of Top Management Team Integrative Complexity and Decentralized Decision Making on Corporate Social Performance

Abstract: We examine the influence of top management teams’ (TMTs’) integrative complexity and decentralization of decision making on corporate social performance. We argue that both factors increase TMT ability to gather information on, and attend to, stakeholder needs, thereby yielding higher corporate social performance. We further predict that decentralization moderates the relationship between integrative complexity and corporate social performance in such a way that the relationship is stronger under conditions of centralization. Using a Q-sort methodology, which translates complex qualitative observations into quantitative metrics, we examined integrative complexity and decentralization in 61 Fortune 500 firms and found support for our predictions. In the wake of numerous corporate scandals, corporate social performance has garnered much attention from business practitioners and academics alike. Corporate social performance refers to “a business organization’s configuration of principles of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm’s societal relationships” (Wood, 1991: 693). The dominant perspective taken in evaluating a firm’s corporate social performance is the stakeholder approach, according to which firms act in a socially responsible manner when they take the interests of multiple stakeholders (e.g., customers, employees) into account (McGuire, Dow, & Argheyd, 2003; Ruf, Muralidhar, Brown, Janney, & Paul, 2001).

Integrating distributed work: comparing task design, communication, and tacit coordination mechanisms

Abstract: We investigate coordination strategies in integrating distributed work. In the context of Business Process Offshoring (BPO), we analyze survey data from 126 offshored processes to understand both the sources of difficulty in integrating distributed work as well as how organizations overcome these difficulties. We find that interdependence between offshored and onshore processes can lower offshored process performance, and investing in coordination mechanisms can ameliorate the performance impact of interdependence. In particular, we outline a distinctive set of coordination mechanisms that rely on tacit coordination-and theoretically articulate and empirically show that tacit coordination mechanisms are distinct from the well-known duo of coordination strategies: building communication channels or modularizing processes to minimize the need for communication. We discuss implications for the study of coordination in organizations.

Conflict in Small Groups: The Meaning and Consequences of Process Conflict:

Abstract: Through three studies of interacting small groups, we aimed to better understand the meaning and consequences of process conflict. Study 1 was an exploratory analysis of qualitative data that helped us to identify the unique dimensions of process conflict to more clearly distinguish it from task and relationship conflict. Study 2 used a broader sampling of participants to (a) demonstrate why process conflict has been difficult to discriminate from task conflict in many conflict scales, and (b) develop a two-factor Process Conflict Scale that effectively distinguishes process from task conflict. Study 3 used this new scale to examine the relationship between process conflict and group viability (group performance, satisfaction, and effective group process). The results showed that process conflict negatively affects group performance, member satisfaction, and group coordination.

Thinking, feeling and deciding: The influence of emotions on the decision making and performance of traders

Abstract: We report on a qualitative investigation of the influence of emotions on the decision making of traders in four City of London investment banks, a setting where work has been predominantly theorized as dominated by rational analysis. We conclude that emotions and their regulation play a central role in traders' decision making. We find differences between high and low performing traders in how they engage with their intuitions, and that different strategies for emotion regulation have material consequences for trader behavior and performance. Traders deploying antecedent-focused emotional regulation strategies achieve a performance advantage over those employing primarily response-focused strategies. We argue that, in particular, response-focused approaches incur a performance penalty, in part because of the reduced opportunity to combine analysis with the use of affective cues in making intuitive judgments. We discuss the implications for our understanding of emotion and decision making, and for traders' practice.

Dynamic CEO Compensation

Abstract: We study optimal compensation in a fully dynamic framework where the CEO consumes in multiple periods, can undo the contract by privately saving, and can temporarily inflate earnings. We obtain a simple closed-form contract that yields clear predictions for how the level and performance-sensitivity of pay varies over time and across firms. The contract can be implemented by a "Dynamic Incentive Account": the CEO's expected pay is escrowed into an account that comprises cash and the firm's equity. The account features state-dependent rebalancing to ensure its equity proportion is always sufficient to induce effort, and time-dependent vesting to deter short-termism.

The Life Cycle of Family Ownership: International Evidence

Abstract: We show that in countries with strong investor protection, developed financial markets and active markets for corporate control, family firms evolve into widely held companies as they age. In countries with weak investor protection, less developed financial markets and inactive markets for corporate control, family control is very persistent over time. While family control in high investor protection countries is concentrated in industries with low investment opportunities and low M&A activity, this is not so in countries with low investor protection, where the presence of family control in an industry is unrelated to investment opportunities and M&A activity.

Do Hedge Funds Manage Their Reported Returns

Abstract: F or funds with high incentives and more opportunities to inflate returns, we find that (i) returns during December are significantly higher than returns during the rest of the year, even after controlling for risk in both the time series and the cross-section; and (ii) this December spike is greater than for funds with lower incentives and fewer opportunities to inflate returns. These results suggest that hedge funds manage their returns upward in an opportunistic fashion in order to earn higher fees. Finally, we find strong evidence that funds inflate December returns by underreporting returns earlier in the year but only weak evidence that funds borrow from January returns in the following year. (JEL G10, G19, G23, G30)

Power and Choice Their Dynamic Interplay in Quenching the Thirst for Personal Control

Abstract: Power and choice represent two fundamental forces that govern human behavior. Scholars have largely treated power as an interpersonal construct involving control over other individuals, whereas choice has largely been treated as an intrapersonal construct that concerns the ability to select a preferred course of action. Although these constructs have historically been studied separately, we propose that they share a common foundation—that both are rooted in an individual’s sense of personal control. Because of this common underlying basis, we hypothesized that power and choice are substitutable; that is, we predicted that the absence of one would increase the desire for the other, which, when acquired, would serve to satisfy the broader need for control. We also predicted that choice and power would exhibit a threshold effect, such that once one source of control had been provided (e.g., power), the addition of the other (e.g., choice) would yield diminishing returns. Six experiments provide evidence supporting these predictions.

The Role of Stock Ownership by US Members of Congress on the Market for Political Favors

Abstract: I examine whether stock ownership by politicians helps to enforce noncontractible quid pro quo relations with firms. The ownership by US Congress members in firms contributing to their election campaigns is higher than in noncontributors. This bias toward contributors depends on the financial incentives of politicians and the relation’s value. Firms with a stronger ownership-contribution association receive more government contracts. The financial gains from these contracts are economically large. When politicians divest stocks, firms discontinue contributions to the politicians, lose future contracts, and perform poorly. Politicians divest the stocks in contributors, but not in noncontributors, in anticipation of retirement.

The recognition heuristic: A decade of research

Abstract: The recognition heuristic exploits the basic psychological capacity for recognition in order to make inferences about unknown quantities in the world. In this article, we review and clarify issues that emerged from our initial work (Goldstein & Gigerenzer, 1999, 2002), including the distinction between a recognition and an evaluation process. There is now considerable evidence that (i) the recognition heuristic predicts the inferences of a substantial proportion of individuals consistently, even in the presence of one or more contradicting cues, (ii) people are adaptive decision makers in that accordance increases with larger recognition validity and decreases in situations when the validity is low or wholly indeterminable, and (iii) in the presence of contradicting cues, some individuals appear to select different strategies. Little is known about these individual differences, or how to precisely model the alternative strategies. Although some researchers have attributed judgments inconsistent with the use of the recognition heuristic to compensatory processing, little research on such compensatory models has been reported. We discuss extensions of the recognition model, open questions, unanticipated results, and the surprising predictive power of recognition in forecasting.

Social Influence and Entrepreneurship: The Effect of University Peers on Entrepreneurial Entry

Abstract: Theories of entrepreneurship have proposed that universities play an important role in fostering entrepreneurial rates. While extant research has mainly focused on universities’ structural and institutional influences on entrepreneurship, relatively less attention has been devoted to universities’ social environments and interpersonal influences. This paper examines the social transmission of entrepreneurial behavior across university peers. Based on the unique data on hedge fund foundings between 1979 and 2006, the study documents that entrepreneurial behaviors of university peers are an important driver of individual rates of entrepreneurship. Additional analyses show that social influence has a stronger effect on an individual’s transition to entrepreneurship when exerted by spatially proximate university peers, and university peers who share gender with the focal individual. These findings provide additional evidence that the similarity of entrepreneurial behavior across university peers arises due to social influence, rather than the institutional impact of universities. Together, the results strengthen evidence for the role of universities in shaping entrepreneurial entry and uncover novel pathways of social transmission of entrepreneurship.