Showing papers by "London Business School published in 2014"

Corporate social responsibility and access to finance

Abstract: We investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to (1) reduced agency costs due to enhanced stakeholder engagement and (2) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. We provide evidence that both better stakeholder engagement and transparency around CSR performance are important in reducing capital constraints. The results are further confirmed using several alternative measures of capital constraints, a paired analysis based on a ratings shock to CSR performance, an instrumental variables approach, and a simultaneous equations approach. Finally, we show that the relation is driven by both the social and environmental dimension of CSR. Copyright © 2013 John Wiley & Sons, Ltd.

The Impact of Corporate Sustainability on Organizational Processes and Performance

Abstract: We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of 180 U.S. companies, we find that corporations that voluntarily adopted sustainability policies by 1993-termed as high sustainability companies-exhibit by 2009 distinct organizational processes compared to a matched sample of companies that adopted almost none of these policies-termed as low sustainability companies. The boards of directors of high sustainability companies are more likely to be formally responsible for sustainability, and top executive compensation incentives are more likely to be a function of sustainability metrics. High sustainability companies are more likely to have established processes for stakeholder engagement, to be more long-term oriented, and to exhibit higher measurement and disclosure of nonfinancial information. Finally, high sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance. This paper was accepted by Bruno Cassiman, business strategy.

Reducing implicit racial preferences: I. A comparative investigation of 17 interventions.

Abstract: Many methods for reducing implicit prejudice have been identified, but little is known about their relative effectiveness. We held a research contest to experimentally compare interventions for reducing the expression of implicit racial prejudice. Teams submitted 17 interventions that were tested an average of 3.70 times each in 4 studies (total N = 17,021), with rules for revising interventions between studies. Eight of 17 interventions were effective at reducing implicit preferences for Whites compared with Blacks, particularly ones that provided experience with counterstereotypical exemplars, used evaluative conditioning methods, and provided strategies to override biases. The other 9 interventions were ineffective, particularly ones that engaged participants with others' perspectives, asked participants to consider egalitarian values, or induced a positive emotion. The most potent interventions were ones that invoked high self-involvement or linked Black people with positivity and White people with negativity. No intervention consistently reduced explicit racial preferences. Furthermore, intervention effectiveness only weakly extended to implicit preferences for Asians and Hispanics.

National Institutions and Subnational Development in Africa

Abstract: We investigate the role of national institutions on subnational African development in a novel framework that accounts both for local geography and cultural-genetic traits. We exploit the fact that the political boundaries in the eve of African independence partitioned more than two hundred ethnic groups across adjacent countries subjecting similar cultures, residing in homogeneous geographic areas, to different formal institutions. Using both a matching-type and a spatial regression discontinuity approach we show that differences in countrywide institutional structures across the national border do not explain within-ethnicity differences in economic performance, as captured by satellite images of light density. The average non-effect of national institutions on ethnic development masks considerable heterogeneity partially driven by the diminishing role of national institutions in areas further from the capital cities.

External Adjustment, Global Imbalances, Valuation Effects

Abstract: We provide an overview of the recent developments of the literature on the determinants of long-term capital flows, global imbalances, and valuation effects We present the main stylized facts of the new international financial landscape in which external balance sheets of countries have grown in size and discuss implications for the international monetary and financial system

Labor Protection and Leverage

Abstract: This paper exploits inter-temporal variations in employment protection across countries and finds that rigidities in labor markets are an important determinant of firms' capital structure decisions. Over the 1985-2007 period, we find that reforms increasing employment protection are associated with a 187 basis point reduction in leverage. We interpret this finding to suggest that employment protection increases operating leverage, crowding out financial leverage. This result is robust across measures of employment protection and leverage, and does not appear to be due to pre treatment differences between treated and control firms, omitted variables, unobserved changes in regional economic conditions, and reverse causality. Heterogeneous treatment effects are consistent with our economic intuition: we find that the negative effect is more pronounced in firms that are subject to frequent hiring and firing.

The Limits of Model-Based Regulation

Abstract: In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions Model-based regulation was meant to enhance the stability of the financial sector by making capital charges more sensitive to risk Exploiting the staggered introduction of the model-based approach in Germany and the richness of our loan-level data set, we show that (1) internal risk estimates employed for regulatory purposes systematically underpredict actual default rates by 05 to 1 percentage points; (2) both default rates and loss rates are higher for loans that were originated under the model-based approach, while corresponding risk-weights are significantly lower; and (3) interest rates are higher for loans originated under the model-based approach, suggesting that banks were aware of the higher risk associated with these loans and priced them accordingly Further, we document that large banks benefited from the reform as they experienced a reduction in capital charges and consequently expanded their lending at the expense of smaller banks that did not introduce the model-based approach Counter to the stated objectives, the introduction of complex regulation adversely affected the credit risk of financial institutions Overall, our results highlight the pitfalls of complex regulation and suggest that simpler rules may increase the efficacy of financial regulation

Consumption, income changes and heterogeneity: evidence from two fiscal stimulus programs

Abstract: Almost half of American families did not adjust their consumption following receipt of the 2001 or 2008 tax rebates. Another 20 percent, with low income and more likely to rent, spent a small but significant amount. Households with large spending propensity held high levels of mortgage debt. The heterogeneity is concentrated in a few nondurable categories and a handful of “new vehicle” purchases. The cumulated predictions of the heterogeneous response model tend to be smaller and more accurate than their homogeneous response model counterparts, offering new insights on the evaluation of the two fiscal stimulus programs. (JEL D12, D91, E21, E32, E62)

Job titles as identity badges: how self-reflective titles can reduce emotional exhaustion

Abstract: Job titles help organizations manage their human capital and have far-reaching implications for employees’ identities. Because titles do not always reflect the unique value that employees bring to their jobs, some organizations have recently experimented with encouraging employees to create their own job titles. To explore the psychological implications of self-reflective job titles, we conducted field research combining inductive qualitative and deductive experimental methods. In Study 1, a qualitative study at the Make-A-Wish Foundation, we were surprised to learn that employees experienced self-reflective job titles as reducing their emotional exhaustion. We triangulated interviews, observations, and archival documents to identify three explanatory mechanisms through which self-reflective job titles may operate: selfverification, psychological safety, and external rapport. In Study 2, a field quasiexperiment within a health care system, we found that employees who created selfreflective job titles experienced less emotional exhaustion five weeks later, whereas employees in two control groups did not. These effects were mediated by increases in self-verification and psychological safety, but not external rapport. Our research suggests that self-reflective job titles can be important vehicles for identity expression and stress reduction, offering meaningful implications for research on job titles, identity, and emotional exhaustion.

Knowledge worth having in ‘excess’: The value of tacit and firm‐specific human resource slack

Abstract: Whether holding resources in excess of what is needed to sustain routine operations (i.e., having slack) increases or decreases firm performance is a question of ongoing interest to management scholars. We contribute to existing theory by arguing that human resource slack generally decreases a firm's performance but that holding excess numbers of employees who possess important tacit knowledge that is specific to firms may benefit the firm. We find that the value of these excess resources increases as firms face competitive pressures and decreases when firms' operational choices facilitate the standardization of workflows. We obtain initial empirical evidence for our predictions by testing them on a novel dataset comprising six years of data for 4,070 manufacturing plants in Mexico.

Do Accelerators Accelerate? A Study of Venture Accelerators as a Path to Success?

Abstract: A fundamental challenge for new ventures is overcoming liabilities of newness - particularly, lack of business knowledge and lack of social embeddedness. Accelerators, intense, time- compressed entrepreneurial programs, attempt to alleviate these liabilities and accelerate venture development by facilitating learning and network development in new ventures. However, because of time compression diseconomies and the potential for inappropriate standardization, the literature suggests that such attempts at acceleration may be ineffective or even counterproductive. We test these competing ideas by comparing performance effects of accelerator-backed new ventures to a matched set of non–accelerator new ventures. Compared to the non-accelerator new ventures, we find that ventures backed by top accelerators are faster in raising venture capital and gaining customer traction. Intriguingly, our results also indicate that prior founder experience (e.g., prior entrepreneurial experience, formal education) is not a su...

The Power of the Street: Evidence from Egypt's Arab Spring

Abstract: During Egypt's Arab Spring, unprecedented popular mobilization and protests brought down Hosni Mubarak's government and ushered in an era of competition between three groups: elites associated with Mubarak's National Democratic Party (NDP), the military, and the Islamist Muslim Brotherhood. Street protests continued to play an important role during this power struggle. We show that these protests are associated with differential stock market returns for firms connected to the three groups. Using daily variation in the number of protesters, we document that more intense protests in Tahrir Square are associated with lower stock market valuations for firms connected to the group currently in power relative to non-connected firms, but have no impact on the relative valuations of firms connected to other powerful groups. We further show that activity on social media may have played an important role in mobilizing protesters, but had no direct effect on relative valuations. According to our preferred interpretation, these events provide evidence that, under weak institutions, popular mobilization and protests have a role in restricting the ability of connected firms to capture excess rents.

The Impact of Corporate Sustainability on Organizational Processes and Performance

Abstract: We investigate the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes. Using a matched sample of 180 companies, we find that corporations that voluntarily adopted environmental and social policies many years ago – termed as High Sustainability companies – exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies – termed as Low Sustainability companies. In particular, we find that the boards of directors of these companies are more likely to be responsible for sustainability and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of nonfinancial information. Finally, we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The outperformance is stronger in sectors where the customers are individual consumers instead of companies, companies compete on the basis of brands and reputations, and products significantly depend upon extracting large amounts of natural resources.

Corporate Use of Social Media

Abstract: We examine corporate adoption of social media and provide the first large-sample evidence on the determinants and market consequences of the decision to disseminate quarterly earnings news through social media. We find that social media usage for earnings news is distinct from other forms of voluntary disclosure and document a number of interesting attributes of this disclosure mechanism. Social media usage for earnings news is inversely related to the number of social media followers, suggesting that firms with large social media followings are hesitant to use social media for financial information. However, we find that earnings news is more likely to be communicated when the news is positive, suggesting that some firms are opportunistic in their use of social media. Moreover, when we examine the market response to social media communications, we find that trading volume increases and that the primary driver is increases in large rather than small trades. This is inconsistent with the notion that social media primarily benefits small investors. Lastly, we find that the market reaction is stronger for firms that follow a consistent rather than ad hoc social media disclosure policy.

The Role of External Involvement in the Creation of Management Innovations

Abstract: There has recently been renewed scholarly interest in management innovating, the creation of new organizational practices, structures, processes and techniques. We suggest that external involvement in the process of management innovating can transpire in three different ways: direct input from external change agents; prior external experience of internal change agents; and the use of external knowledge sources by internal change agents. We ask whether the type of innovation created (radical or not; systemic or not) depends on the use of these three forms of involvement and whether the forms are substitutes or complements. We empirically investigate this through an archival study of 23 major historical innovations, using in-depth data from a large number of sources in the academic literature. We use three complementary methods of analysis: unstructured qualitative observations, correlational analysis and crisp-set qualitative comparative analysis. We find that the presence of external change agents is associated with systemic and incremental innovations; that the absence of external experience is associated with systemic and radical innovations; and that the presence of external sources of knowledge has no clear effect. Furthermore the three forms of involvement act to a large degree as substitutes. We contribute new theoretical arguments for the facilitators of management innovation, demonstrate the usefulness of an open innovation lens to the study of management innovation, show that management innovating is a relatively complex form of strategic process and highlight how the creation of management innovations is similar to and different from the genesis of other types of innovation.

Big Data for Big Business? A Taxonomy of Data-driven Business Models used by Start-up Firms

Abstract: Why this paper might be of interest to Alliance Partners: This paper reports a study which provides a series of implications that may be particularly helpful to companies already leveraging ‘big data’ for their businesses or planning to do so. The Data Driven Business Model (DDBM) framework represents a basis for the analysis and clustering of business models. For practitioners the dimensions and various features may provide guidance on possibilities to form a business model for their specific venture. The framework allows identification and assessment of available potential data sources that can be used in a new DDBM. It also provides comprehensive sets of potential key activities as well as revenue models. The identified business model types can serve as both inspiration and blueprint for companies considering creating new data-driven business models. Although the focus of this paper was on business models in the start-up world, the key findings presumably also apply to established organisations to a large extent. The DDBM can potentially be used and tested by established organisations across different sectors in future research.

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. Mortgage selection by heterogeneous borrowers helps the model explain 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.

The Supply Chain Effects of Bankruptcy

Abstract: This paper examines how a firm's financial distress and the legal environment regarding the ease of bankruptcy reorganization can alter product market competition and supplier-buyer relationships. We identify three effects, predation, bail-out, and abetment, that can change firms' behavior from their actions in the absence of financial distress. The predation effect increases competition before potential bankruptcy as the non-distressed competitor behaves as if it has some first-mover advantage, which could benefit a supplier with price control. The bailout effect reflects the supplier's incentive to grant the distressed firm concessions to preserve competition, improving supply chain efficiency and providing support for the exclusivity rule in Chapter 11 of the United States Bankruptcy Code when the supplier and the distressed firm are financially linked. The abetment effect is that the supplier may deliberately abet the competitor's predation, leading to increased operational disadvantages for the distressed firm before bankruptcy. Together these effects stress that a firm's bankruptcy potential can hurt its competitors and benefit its suppliers/customers. They also provide guidelines for firms' operational decisions in such situations, a rationale for observed firm actions surrounding bankruptcies, and motivation for policies supporting reorganization and relaxing broad enforcement of non-discriminatory pricing regulations.

Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World

Abstract: We study the relationship between employee satisfaction and firm performance around the world, using lists of the “Best Companies to Work For” in 14 countries Employee satisfaction is associated with superior long-run returns, current valuation ratios, future profitability, and earnings surprises in flexible labor markets, such as the US and UK, but not rigid labor markets, such as Germany These results are consistent with employee satisfaction improving recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing In rigid labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies

Dividend payouts and information shocks

Abstract: We examine changes in firms� dividend payouts following an exogenous shock to the information asymmetry problem between managers and investors. Agency theories predict a decrease in dividend payments to the extent that improved public information lowers managers� need to convey their commitment to avoid overinvestment via costly dividend payouts. Conversely, dividends could increase if minority investors are in a better position to extract cash dividends. We test these predictions by analyzing the dividend payment behavior of a global sample of firms around the mandatory adoption of IFRS and the initial enforcement of new insider trading laws. Both events serve as proxies for a general improvement of the information environment and, hence, the corporate governance structure in the economy. We find that, following the two events, firms are less likely to pay (increase) dividends, but more likely to cut (stop) such payments. The changes occur around the time of the informational shock, and only in countries and for firms subject to the regulatory change. They are more pronounced when the inherent agency issues or the informational shocks are stronger. We further find that the information content of dividends decreases after the events. The results highlight the importance of the agency costs of free cash flows (and changes therein) for shaping firms� payout policies.

Price Promotion For Emotional Impact

Abstract: Managers and academics often think of price promotions merely as incentives that entice consumers to accept offers that they might not have considered otherwise. Yet the prospect of paying a lower price for a product of given quality can also discourage deliberation, in a sense “dumbing down” the purchase encounter by making it less consequential. The authors examine this possibility in a dual-system theory of consumer behavior. Specifically, they argue that price promotion lowers a consumer's motivation to exert mental effort, in which case purchase decisions are guided less by extensive information processing and more by a quicker, easier, strong conditioner of preference: affect. Field data from a large daily deal company and four controlled experiments support this idea and document its implications primarily for product choice, in turn providing insight into the form and cause of brand switching that manufacturers and retailers can leverage to improve the allocation of promotional budgets and categor...

Employee-Based Brand Equity: Why Firms with Strong Brands Pay Their Executives Less:

Abstract: This article examines the concept of employee-based brand equity—the value that a brand provides to a firm through its effects on the attitudes and behaviors of its employees—and empirically demonstrates its significance on executive pay. Executives value being associated with strong brands and, therefore, accept substantially lower pay at firms that own strong brands. Consistent with identity theory, this effect is stronger for chief executive officers and younger executives than for other executives. Data from a large, cross-industry sample of executives suggest that academics and practitioners should take a broader view of the contributions of brand-related investments to firm value and make use of strong brands in pay negotiations that are typically viewed as being outside the realm of marketing.

How do firms make money selling digital goods online

Abstract: We review research on revenue models used by online firms who offer digital goods. Such goods are non-rival, have near zero marginal cost of production and distribution, low marginal cost of consumer search, and low transaction costs. Additionally, firms can easily observe and measure consumer behavior. We start by asking what consumers can offer in exchange for digital goods. We suggest that consumers can offer their money, personal information, or time. Firms, in turn, can generate revenue by selling digital content, brokering consumer information, or showing advertising. We discuss the firm’s trade-off in choosing between the different revenue streams, such as offering paid content or free content while relying on advertising revenues. We then turn to specific challenges firms face when choosing a revenue model based on either content, information, or advertising. Additionally, we discuss nascent revenue models that combine different revenue streams such as crowdfunding (content and information) or blogs (information and advertising). We conclude with a discussion of opportunities for future research including implications for firms’ revenue models from the increasing importance of the mobile Internet.

How Do Industry Peers Respond to Control Threats

Abstract: This paper studies how industry peers respond when another firm in the industry is the subject of a hostile takeover attempt. The industry peers cut their capital spending, free cash flows, and cash holdings, and increase their leverage and payouts to shareholders. They also adopt more takeover defenses. The stock price reaction upon announcement of the takeover is positive and larger for peer firms with higher capital spending and higher free cash flows. Before the takeover attempt, the peer firms borrow less and invest more than predicted. Both stock returns and performance improve after the takeover attempt. These results are consistent with the argument that the control threat has important spillover effects for the other firms in the industry. This paper was accepted by Wei Xiong, finance.

In pursuit of progress: promotion motivation and risk preference in the domain of gains.

Abstract: This article examines the role of promotion motivation in decision making in the domain of gains. Using a stock investment paradigm in which individuals believed that they were making decisions that were real and consequential, we found that promotion motivation, and not prevention motivation, predicted the likelihood of switching between risky and conservative choices in the domain of gains. Promotion-focused participants chose a relatively risky option when their stock portfolio remained unchanged (stuck at 0, the status quo) but switched to a relatively conservative option when they had just experienced a large gain (Studies 1-4), both when regulatory focus was measured (Study 1) and manipulated (Studies 2-4). Studies in which progress was manipulated (Study 3) and measured (Study 4) provided evidence that it is perceptions of progress that underlie this tactical switch in risk preferences within the promotion system. We discuss the implications of these findings for decision making and the role of progress in self-regulation.

Household Debt and the Dynamic Effects of Income Tax Changes

Abstract: Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to changes in their income. Homeowners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields more limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the economy.