Showing papers in "Strategic Management Journal in 2023"

Distributed decision‐making in the shadow of hierarchy: How hierarchical similarity biases idea evaluation

Abstract: Research Summary Companies are increasingly opening up decision-making, involving employees on all levels in distributed—and purportedly “hierarchy-free”—decision processes. We examine how hierarchy reaches into such “democratized” systems, arguing that it is a source of homophily that biases idea evaluation decisions. Using a data set from internal crowdfunding at one of the world's largest industrial manufacturers, we show that idea evaluators overvalue hierarchically similar others' ideas. Competition in the form of lateral closeness dampens this bias, whereas uncertainty in the form of novelty amplifies this bias. We contribute to the literatures on decision biases in centralized versus distributed innovation and on structural similarity as a driver of employee behaviors. Managerial Summary Many companies are starting to involve employees on all levels in strategic decisions, so as to curb hierarchical rigidities and integrate multiple perspectives. However, such distributed decision-making opens the door to new biases and, ultimately, suboptimal strategic decisions. In the context of internal crowdfunding at a large industrial manufacturer, we show that employees evaluate hierarchically similar others' ideas overly favorably. Thus, hierarchy is not just a source of rivalry, but also of identification, leading to favoritism among hierarchical peers. Further, employees are particularly likely to assess ideas based on hierarchical similarity rather than content if the ideas are novel and therefore hard to evaluate. We provide suggestions for the design of distributed decision-making systems.

Are seed accelerators status springboards for startups? or sand traps?

Abstract: Research Summary Recent research finds participating in seed accelerators can improve startups' access to growth and funding, but effects are highly heterogeneous. Less understood is whether accelerator participation can also help startups obtain higher-status early partners. On one hand, participation may improve startups' quality and signal quality to desirable partners. Yet research suggests reasons any signaling effects might be quite small or even negative, since accelerators might be perceived as a “market for lemons.” Using two complementary and proprietary datasets of U.S. startups, we find many seed accelerators are indeed springboards—associated with startups raising from higher-status investors—but that others have very limited and some slight negative effects. We examine contingencies and mechanisms, and conclude with contributions to literatures on accelerators and organizational status. Managerial Summary Recent research has found that some seed accelerators help startups' grow and raise funds. In this research, we examine whether accelerators also help startups gain higher-status investors, which are desirable for the advice, signals, and networks they offer. Yet there are conflicting reasons why accelerators may help or hurt startups in obtaining higher-status investors. Using two proprietary datasets of U.S. startups, our results suggest many accelerators like Techstars and Y Combinator have notable benefits in helping startups raise from higher-status investors. Yet we also see substantial differences across accelerators. Interestingly, effects do not appear sensitive to regional entrepreneurial activity. We conclude with implications for entrepreneurs, accelerators, and policy makers.

Renewing the resource‐based view: New contexts, new concepts, and new methods

Abstract: Tuck School of Business at Dartmouth, 100 Tuck Hall, Hanover, New Hampshire 03755, USA Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis, Minnesota 55455, USA Harbert College of Business, 405 West Magnolia Ave., Auburn University, Auburn, Alabama 36849, USA David Eccles School of Business, University of Utah, 1655 East Campus Center Drive, Salt Lake City, Utah 84112, USA HEC Paris, 1 Rue de la Libération, 78350 Jouy-en-Josas, France The Wharton School, 2000 SteinbergDietrich Hall, University of Pennsylvania, Philadelphia, Pennsylvania 19104, USA

TASK BOTTLENECKS AND RESOURCE BOTTLENECKS : A holistic examination of task systems through an organization design lens

Abstract: Research Summary Using an organization design lens, we explore how key characteristics of both task systems and their associated resources may benefit firms. We unpack task system interdependencies by studying the interaction of decentralization and complexity, examining resource fungibility and resource slack, and exploring their joint alignment. Our context is the scheduled U.S. passenger airline industry over two decades. Results show that firm performance improves when (a) task system decentralization and complexity are aligned, either more or less of both; (b) having both resource fungibility and resource slack, not simply more of one or the other; and (c) aligning less decentralized and less complex task systems with fungible and available resources. Our findings underscore the importance of holistically managing tasks and resources to minimize bottlenecks within organizations. Managerial Summary Eliminating bottlenecks can help firms improve performance. Our study focuses on two types of bottlenecks—task system bottlenecks stemming from the design of activities and resource bottlenecks, created when necessary resources are already in use or available resources are not applicable. Our results show that firms benefit when task system properties of decentralization and complexity are aligned and when firms' resources are both fungible and available; these characteristics also reinforce each other. Thus, managers should be aware of both task system properties and resource characteristics to avoid bottlenecks, so that the tasks to which the resources are applied can be completed. In addition, managers should ensure to have available and fungible resources at their disposal, especially when organizations have a centralized and less complex design.

When opportunity meets ability: the moderating effects of prolific inventors on novel drug innovation following product development failure in biotechnology

Abstract: Research Summary Through a longitudinal study of the product development portfolios of 457 US-based firms in the biotechnology industry, we investigate how prolific inventors shape a firm's innovative direction following product development failure. Contrary to received wisdom, we argue and demonstrate that an increase in the number of prolific inventors is associated with a decrease in firm propensity to pursue novel product innovation following such failure. We further find that the presence of prolific inventors with greater collaborative strength and longer tenure negatively moderate the positive relationship between failure and the pursuit of novel product development. We discuss the implications of our results for research on learning from failure and strategic human capital. Managerial Summary In case of adverse events such as product development failure, managers often rely on the firm's prolific inventors to help the firm learn from failure. Our study shows that there are limits to this approach. While prolific inventors increase firm propensity for novel product development, such propensity is significantly decreased following product failure. We further establish that the presence of prolific inventors with greater collaborative strength and long tenures is especially likely to reduce firms' pursuit of novel products, while the presence of those with low collaborative strength and tenure tend to increase this propensity.

Navigating windows of opportunity: the role of international experience

Abstract: Research Summary Scholars have noted that pronounced changes in consumer demand and technology often offer firms temporary opportunities to strengthen their performance vis-à-vis rivals. This article contributes to the literature on windows of opportunity from an organizational learning perspective. It investigates whether the depth and breadth of a firm's international experience with pronounced changes in demand conditions (demand windows) and technologies (technological windows) affect its ability to take advantage of such changes within a country to increase its market share. The results, based on a sample of 615 telecommunication companies competing in 124 countries, suggest that mainly two out of four dimensions of international experience help firms to exploit windows of opportunity in a country. Managerial Summary What can help multinational companies (MNCs) to navigate periods of marked changes in demand and technology? When an MNC encounters a marked change in demand or technology in a country, it may have already experienced in the past many or just a few of these events, depending on its international footprint, and this serves to assess the MNC's international experience with such changes. Using data on telecommunication companies, we show that both (a) an MNC's repeated exposure to a certain type of change over time (depth of international experience) and (b) the variety of changes an MNC has been exposed to (breadth of international experience) in international markets may help the MNC to obtain market share advantages when such changes occur in a country.

Who Depends on why: Towards an Endogenous, Purpose‐Driven Mechanism in Organizations' Reference Selection

Abstract: Research Summary This paper investigates how firms select reference organizations, that is, other firms to which they compare themselves. We question the exogenous nature of references (i.e., them being defined via industry-categorizations) but suggest that, via motivations or purposes, firms endogenously select them. We evaluate our findings when analyzing proprietary data on hotels' self-selection of comparison-hotels. In support of our arguments, we find that in situations of increased uncertainty regarding firms' own relative abilities and standing, firms make adjustments to their selected references toward more similar ones. This enables them to obtain more diagnostic information about their relative abilities and this effect holds constant of (exogenous) industry-entry or exit events. Our findings contribute to an updated understanding about the role of comparison organizations in firms' decision-making. Managerial Summary Prior work shows that comparisons with other firms (i.e., references) play an important role for our understanding of firms' decision-making. For example, performance comparisons with references can trigger search or a decision-need, ultimately, leading to acquisition-decisions, new-product-introductions, and the like. When questioning the selection of such references, prior work has typically derived them from (exogenous) industry-categorizations. We review this practice by relying on rare, longitudinal data on firms' reference self-selection. When controlling for industry level effects, we find that firms adapt references as a function of changes in their comparison needs (e.g., self-assessment). This is important because it implies an endogenous reference selection mechanism and shifts the attention from industry-categorizations toward an understanding of comparison needs and their emergence when attempting to understand firms' decision-making.

Growing Platforms within Platforms: How Platforms Manage the Adoption of Complementor Products in the Presence of Network Effects?

Abstract: Research Summary Platform owners often use endorsements to actively manage complementor firms. We argue that the direct network effects of complementors' products play a centdeual role in the platform management by its owner. We test our predictions using data on the Apple's promotion of apps. We find that apps with network effects are more likely to receive an award. This likelihood increases when the app is introduced by a developer with a larger market share but declines when introduced in a concentrated segment. The likelihood decreases further if the app is introduced in a concentrated segment by a developer that holds a larger market share. Further, we observe that in concentrated segments, the “challenger” developer has a higher likelihood of receiving the award relative to the leader. Managerial Summary Many products offered through platforms have their own direct network effects. The value of the product for each user grows with the number of other consumers using the product. Many platform owners also actively manage their platforms to ensure platform growth and often use less traditional tools such as product endorsements to achieve this goal. In the context of video games listed in the iOS App Store and the Editors' Choice Awards as a form of product endorsement, we examine the tradeoffs that products with direct network effects (i.e., multiplayer video games) present to the platform owner (Apple). On the one hand, the platform owner may want to promote apps with direct network effects to help them achieve a momentum in terms of user growth. On the other hand, networked apps may become dominant in the segment with negative implications for future growth of the segment and the platform owner's profitability. We find evidence consistent with this tension and find that it critically depends on the complementor strength and market segment concentration. We also observe that in concentrated segments, the “challenger” developer has a higher likelihood of receiving the award relative to the leader.

Managing Exploration in Organizations: The Effect of Superior Monitoring on Subordinate Search Behavior

Abstract: Research Summary In this article, we explore the effects of managerial monitoring on the behavior of subordinates tasked with the search for alternatives in a complex environment. We argue that managerial monitoring will lead subordinates to exhibit more search than they would engage in otherwise as they try to impress their superiors by exerting more effort. We test and confirm our hypothesis in four laboratory studies with a total of 444 participants. Our findings show that search distance and duration are highly susceptible to managerial monitoring, whereas similar interventions from peers and subordinates are ineffective. Managerial Summary A key task for employees is to find new solutions to corporate problems when and where they occur. But what determines how long these individuals search and how far they venture before settling on one solution eventually? And how can and should managers steer this process, particularly if they are as unknowing about potential solutions as their subordinates? Here, we show that leaders can bring their staff to explore complex solution spaces longer and more remotely by regularly appraising their subordinates' efforts. This is because employees will feel an enhanced need to demonstrate their industriousness to their bosses, and long and distant search is easily justified. Whether this increases corporate performance depends on the complexity of the solution space and the opportunity costs of search.

Who gains and who loses from more information in technology markets? Evidence from the Sunshine Act

Abstract: Research Summary We consider the context of a technology market where participants (in particular, sellers) differ in reputation, and sellers observed participating in the transactions might suffer a reputation loss. Our theoretical model predicts that low-reputation idea sellers, thanks to the improvement in information disclosure, are more likely to be involved in technology transactions; at the same time, high-reputation idea sellers, to protect their reputations, might prefer avoiding any transactions. This shift in seller composition might affect the quantity and quality of collaborations. To test our theory, we assess the effect of the Physician Payment Sunshine Act on physician-firm collaborations. Overall, our findings indicate that while information disclosure might benefit some market participants, it can have unintended negative consequences for others. Managerial Summary In technology markets, more information about market participants generally leads to better outcomes. However, in contexts where sellers suffer a reputation loss if their transactions become known, higher-reputation sellers may leave the market, affecting the quality of ideas being traded and impacting buyers. On the other hand, lower-reputation sellers may benefit from increased visibility and share their ideas more frequently. Our research examined these effects in the context of the Physician Payment Sunshine Act, which made physician collaborations with medical device companies visible. The results suggest that the effects of information disclosure are not uniform and that some market participants may benefit while others may suffer losses.

Incidence and performance of spinouts and incumbent new establishments: Role of selection and redeployability within parent firms

Abstract: Research Summary Using matched employer-employee data from 30 U.S. states covering a wide range of industries, we compare spinouts with new establishments formed by incumbents (INEs). We propose a selection-based framework comprising idea selection by parents to internally implement ideas as INEs, entrepreneurial selection by founders to form spinouts, and exit selection to close ventures. Consistent with parents choosing better ideas in the idea selection stage, we find that INEs perform relatively better than spinouts, and more so with larger parents. Regarding the entrepreneurial selection stage, we find evidence consistent with resource requirements being a greater entry barrier to spinouts. Parents' resource redeployment opportunities are associated with lower relative survival of INEs, consistent with their being subject to greater selection pressures in the exit selection stage. Managerial Summary Spinouts, or new ventures started by employees leaving a parent firm, have received special attention because spinouts tend to outperform other types of new firms. This superior performance is typically attributed to the better knowledge and higher-quality ideas developed by the founders at parent firms. However, parent firms can also select and implement such ideas internally, particularly if they are good quality ideas. We compare spinouts with new establishments formed within parent firms and find that consistent with such a process of selection, the latter outperform spinouts, more so in the case of larger parents. Interestingly, new establishments of parent firms tend to close at a greater rate than spinouts, consistent with parent firms being able to redeploy resources elsewhere within their firms.

Disentangling the role of the institutional environment in the ownership competence framework: A comment on Foss et al. (2021)

Abstract: Research Summary We extend the ownership competence framework by discussing how the features of the institutional environment influence the exercise of ownership competence. Two amendments are proposed. First, we add a new dimension to the framework, institutional competence (“where to own”), which denotes that individuals and firms have heterogeneous abilities to assess how an institutional environment affects the potential uses of a resource. Second, we argue that institutional uncertainty moderates the three original dimensions of the framework, impairing the exercise of ownership competence of some entrepreneurs and firms more than of others. We use examples from the literature to illustrate our arguments. We also discuss the implications of our analysis. Managerial Summary The ownership competence framework is built on the idea that business owners have different abilities to deploy resources and create value. Starting from this contribution, we shed light on the specific role that the institutional environment plays in the exercise of ownership competence. We argue that the ownership competence framework must explicitly consider where ownership takes place in order to explain the actions of entrepreneurs and firms. We also claim that institutional uncertainty can influence value creation in more subtle ways than indicated in the original formulation of the ownership competence framework. All in all, this article paves the way for institutional aspects to be considered more explicitly in the strategic analysis of ownership.

Issue Information

Abstract: Strategic Management JournalVolume 44, Issue 2 p. 367-368 ISSUE INFORMATIONFree Access Issue Information First published: 15 January 2023 https://doi.org/10.1002/smj.3418AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Volume44, Issue2February 2023Pages 367-368 RelatedInformation

Ownership Competence: The Enabling and Constraining Role of Institutions

Abstract: Research Summary Monteiro and Miranda (2022) argue that owners differ in their ability to select and work within a particular institutional environment, suggesting “institutional competence” as a dimension of ownership competence distinct from what we call governance, matching, and timing competence. We agree that institutions matter and welcome the chance to describe their role in detail. However, rather than treating institutional competence as a separate channel by which owners create value from their assets, we think institutional features can be modeled as “shift parameters” that moderate the effect of ownership competencies on outcomes. In developing this argument, we reflect more broadly on the interplay between ownership competence and institutional uncertainty, noting that society at large benefits from individual-level ownership competence, ownership by some owners may cause harm to other owners, and property-rights enforcement and ownership competence are complements in generating private and societal benefits. Managerial Summary In “Ownership Competence” (Foss et al., 2021) we argued that business owners vary in their ability to create value out of the assets they own, distinguishing between governance, matching, and timing competence. Monteiro and Miranda (2022) argue that we should add “institutional competence” as a fourth kind of competence, describing the ability of owners to choose countries, regions, or environments where they can best exercise their ownership skills. We agree that these external conditions are important but argue that they work by modifying the impact of governance, matching, and timing competence rather than acting as an independent channel. In our response, we also comment on broader issues related to social and institutional aspects of ownership.

Training with AI: Evidence from chess computers

Abstract: We suggest that AI can help decision-makers learn; specifically, that it can help them learn strategic interactions by serving as artificial training partners and thus help them to overcome a bottleneck of scarce human training partners. We present evidence from chess computers, the first widespread incarnation of AI. Leveraging the staggered diffusion of chess computers, we find that they did indeed help chess players improve by serving as a substitute for scarce human training partners. We also illustrate that chess computers were not a perfect substitute, as players training with them were not exposed to and thus did not learn to exploit idiosyncratic (“human”) mistakes. We discuss implications for research on learning, on AI in management and strategy, and on competitive advantage.

Can powerful allies protect the CEO against performance declines? The role of the CEO 's subgroup power in CEO dismissal

Abstract: Research summary Drawing on research about power and faultlines, we identify the subgroup of directors in the board who share the same social identities with the CEO (i.e., CEO subgroup) and develop a concept of CEO subgroup power. We examine how CEO subgroup power affects the board's decision to dismiss the CEO, particularly when the firm experiences a performance decline. Using data from S&P 500 boards from 1998 to 2018, we find that powerful CEO subgroups reduce the risk of CEO dismissal and that the negative effect of CEO subgroup power on CEO dismissal is magnified when the firm experiences a decline in performance. Managerial summary Why do some boards fire the CEO when the firm is performing well, while others retain the CEO despite poor performance? We believe that looking into power dynamics among directors may help answer this question. Using data from S&P 500 boards from 1998 to 2018, we investigate how the risk of CEO dismissal varies by the power of the subgroup within the board that consists of directors who share the same social identities with the CEO (i.e., CEO subgroup). The results reveal that a powerful CEO subgroup can reduce the CEO dismissal risk and that this effect becomes stronger when the firm goes through a performance decline.

Bad medicine: Litigation, competition, and the marketing of prescription opioids

Abstract: Research Abstract How do competitors respond when a firm experiences an increased threat of penalties for questionable business activities? While conventional wisdom suggests that competitors will attempt to avoid similar activities, we draw attention to a countervailing incentive. If an increased threat of penalties induces one firm to reduce its engagement in an activity, competitors in an industry may see an opportunity to profit by increasing their engagement in the activity. We explain how this is theoretically possible even if competitors also experience an increased threat of penalties. As an empirical example, we show that following a lawsuit against Purdue Pharma, Purdue significantly decreased its spending to promote OxyContin, but other prescription opioid firms significantly increased their spending to promote competing opioids to the same physicians. Managerial Abstract Competitive dynamics can make questionable business activities in an industry difficult to stamp out on a case-by-case basis. Forcing one firm to decrease its engagement in a questionable activity may result in competitors stepping in to fill the void by increasing their engagement in similar activities. We find that this occurred in the prescription opioid industry. Following a lawsuit against Purdue Pharma, Purdue significantly decreased its spending to promote its controversial OxyContin product. But rather than attempt to distance themselves from association with Purdue, other prescription opioid firms significantly increased their spending to promote competing opioids to physicians previously targeted by Purdue, including in counties where the opioid epidemic was known to be severe.

Different people, different pathways: Human capital redeployment in multi‐business firms

Abstract: Research Summary Multi-business firms redeploy human capital to strengthen individual business units. However, we know little about the antecedents of such redeployments and their effects on unit outcomes. Contributing to the resource redeployment and strategic human capital literatures, we test the relationships between parent–unit industry relatedness, the direction of redeployment (parent-to-unit and unit-to-parent), the type of human capital, the likelihood of redeployment, and post-redeployment unit closure. Using Norwegian population-level microdata of spinouts, we find that parent–unit industry relatedness increases the likelihood of human capital redeployment and that this effect is stronger for generalists than for specialists. Further, we find that parent-to-unit and unit-to-parent redeployment of generalists and specialists have distinct effects on unit closure, largely because of differences in post-redeployment unit performance. Managerial Summary Firms with multiple business units often transfer employees between units to strengthen them. However, we do not know which employees are more likely to be sent and which employees, if any, affect the receiving unit's survival and performance. Analyzing over 9000 spinouts in Norway between 2004 and 2015, we find that employees are more likely to be sent when the parent and the unit are in related industries. We further show that employees with specialized professional knowledge are sent regardless of relatedness, while generalists are sent when industries are related. Regarding post-transfer unit survival, we find that parent-to-unit and unit-to-parent redeployment of generalists and specialists have distinct effects on survival, largely because of differences in the impact on post-transfer unit performance.

Shifting perspectives: How scrutiny shapes the relationship between CEO gender and acquisition activity

Abstract: Research Summary Several upper echelons studies have found that firms led by female executives are less likely to engage in risky endeavors than those led by male top executives. We argue that conceptualizing female CEOs as universally conservative decision-makers may paint too simplistic a picture and that the impact of CEO gender on strategic decision-making may vary significantly depending on the given situation CEOs are experiencing. We integrate executive job demands and gender research to propose that scrutiny will exhibit differential effects on female and male CEOs' acquisition activity. We show that in high-scrutiny contexts, the difference between male and female CEO acquisition activity disappears. In contrast, in low-scrutiny contexts, the difference between male and female CEOs' acquisition activity is exaggerated. Managerial Summary Substantial research has shown that female executives acquire at a lower rate than male executives. We argue that viewing female CEOs as universally conservative decision-makers may paint too simplistic a picture and that the impact of CEO gender on strategic decision-making may vary significantly depending on the given situation CEOs are experiencing. In particular, we argue and find that in high-scrutiny contexts, the difference between male and female CEO acquisition activity disappears. This research suggests that managers should consider the impact of environmental context—especially the role of scrutiny—when considering the risk propensity of female leaders.

Finding the right path to the top: How past interorganizational moves impact executive selection outcomes

Abstract: Research summary Executives are a critical strategic resource but often build careers across multiple organizations. We explore how firms value that interorganizational mobility by studying executive selection. We suggest that hiring firms will value the diverse experience and adaptability that past mobility across organizations fosters, but that prior mobility can also signal a higher retention risk or lack of competency. Using data from an executive search firm, we employ search-fixed effects model and structural equation models to estimate candidates' probabilities of receiving a job offer. We find that candidates' prior mobility indirectly increases their chances of being hired by increasing their functional diversity and reducing their tenure with their employer below 10 years. Net of these effects, prior mobility has a negative effect on hiring. Managerial summary Executives are increasingly building their careers across organizations. How do prospective employers evaluate their records of past moves when they are considered as external hires? We propose that by moving firms, individuals can accumulate diverse experience and become more adaptable, but employers may be concerned about retention or performance issues for those with records of frequent moves. Using executive search data, we find that prior mobility is valuable to the extent that it builds diverse functional experience; once it is accounted for, we find that prior mobility decreases the likelihood of receiving an offer. Further, staying at the same employer for 10 years or longer is unfavorable due to employers' concerns about adaptability and firm-specific skills. Our survey of fifty-four CHROs resonates with these findings.

When few give to many and many give to few: corporate social responsibility strategies under india's legal mandate

Abstract: Research Summary We investigate firms' corporate social responsibility (CSR) strategies under India's 2013 legal mandate. We study 12,086 firms and 86,755 projects from 2014 to 2017. Using an abductive approach, we examine firms’ choices of social causes, geographic locations, implementation channels, and number of projects through four theoretical lenses. Firms adopt two main CSR strategies: the first and most common has a narrow focus, while the second, pursued by few (typically leading firms and State-owned enterprises), is broader. Both strategies appear primarily driven by instrumental stakeholder concerns. While the second leads to stronger differentiation and holds greater potential for social impact, neither strategy leverages firms’ comparative efficiency over nonprofit actors. These insights shed light on how firms address grand challenges and can inform CSR regulations. Managerial Summary After India passed a law making corporate social responsibility (CSR) mandatory in 2013, firms had to decide how to spend the funds they were required to disburse. We examine their choices regarding their projects' target social causes, geographies, implementation channels, and how many projects to pursue. We find that they typically adopted one of two strategies: most firms chose a narrow focus on similar projects, whereas leading firms and State-owned enterprises typically adopted a broader and more distinctive approach. Both choices appear primarily driven by the desire to satisfy firms' stakeholders rather than efficiency considerations, but the broader strategy holds greater potential for social impact. Our paper identifies actions firms and governments can take to enhance the benefits of legal mandates for CSR.

Issue Information

Abstract: Strategic Management JournalVolume 44, Issue 5 p. 1139-1140 ISSUE INFORMATIONFree Access Issue Information First published: 05 April 2023 https://doi.org/10.1002/smj.3421AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Volume44, Issue5May 2023Pages 1139-1140 RelatedInformation

Issue Information

Abstract: No abstract is available for this article.

Managing risk in corporate groups: Limited liability, asset partitioning, and risk compartmentalization

Abstract: Research Summary Limited liability enables corporate parents to avoid financial responsibility of their subsidiaries. However, courts can disregard separate legal personality, “pierce the corporate veil,” and impose the debts of a subsidiary on its parent—an exception referred to as “enterprise liability.” We argue that in countries with weak enterprise liability, groups can better compartmentalize risks by incorporating more of their units as legally independent subsidiaries. Weaker enterprise liability may also induce headquarters to delegate more decision-making authority to their subsidiaries, invest more, and expand faster, although failure rates could rise. Using data from 16 countries across the Americas, Asia, and Europe, we provide evidence supporting these predictions. This paper highlights two channels—risk compartmentalization and subsidiary autonomy—through which limited liability laws affect organizational outcomes. Managerial Summary Limited liability is a key attribute of the corporate form. However, when the owner of a corporation is another corporation (as in corporate groups), a key justification for limited liability—to protect small, passive investors from unlimited losses—is severely weakened. We examine how variation in parent limited liability protections for subsidiaries across countries affect firm boundaries, internal organization, and performance. In countries with strong limited liability protections, groups partition their assets more finely into legally independent subsidiaries and grant their subsidiaries more autonomy. They also invest more and grow faster, although they experience higher rates of significant revenue declines. Our findings suggest that limited liability laws play a central role in shaping organizational structure and performance.

The half‐life of political capital: An examination of the temporal effects of board political connections

Abstract: Research Summary Does corporate political activity (CPA) help sustain performance? Prior literature did not address this question, only whether CPA increases profits—with mixed results over short timescales. We theorize about how political capital affects the regression-to-the-mean of profits through firm and industry persistence mechanisms. Using data on over 6000 firms from 14 democratic countries, we estimate time-varying, firm-specific performance persistence coefficients with random-coefficient models—and profit volatility measures. Triangulating identification methods suggests that the half-life of political capital is shorter than expected, also compared with other strategy interventions. Political connections are marginally effective at sustaining performance and reducing volatility, delaying profit convergence by only 0.180 years—and with no effect beyond 7 years. Preliminary evidence shows that legislative constraints further curb these modest benefits of CPA. Managerial Summary Corporate political activity (CPA) has an ambiguous impact on firm profits. Yet, it still is a prominent and recurrent firm strategy. Do firms use CPA to sustain existing performance advantages—rather than to create new ones? We show that one type of CPA—the co-optation of politicians into company boards—does increase the persistence and lowers the volatility of firm performance. However, this effect is surprisingly small: advantages only last 2.4% longer, 7.44 years compared to 7.26 years for politically unconnected firms. Political capital erodes faster than expected, presumably due to political cycles or politically motivated firm strategies that are detrimental to performance. CPA seems less effective at sustaining performance advantages than firm investments in R&D or skilled labor—and has a limited anticompetitive effect.

Board experiential diversity and corporate radical innovation

Abstract: Research Summary How does board experiential diversity affect corporate radical innovation? We find that the combined diversity of directors' educational, industrial, and organizational experiences spurs the quantity and quality of path-breaking patents developed at a firm. Instrumental variable analysis leveraging exogenous variation in firm access to the nonlocal supply of directors with diverse experiences indicates causality, which is corroborated by difference-in-differences tests. Firm heterogeneity suggests experientially diverse directors spur radical innovation by better serving the firm's advisory needs rather than via improved governance. Our findings enrich theoretical insights into how corporate board leadership may affect innovation and long-term value creation at the firm. Managerial Summary This study offers practical guidance on director recruitment. Board directors with diverse educational, industrial, and organizational experiences can support the invention of radical technology. This type of innovation can create substantial economic and social value. Noting the benefits of diverse experiences in the boardroom, corporate executives can search beyond the traditional director pedigree (e.g., Ivy League-educated financiers), where female and minority individuals remain underrepresented. In doing so, the firm can find more qualified candidates to assemble a demographically and intellectually diverse board, thus cultivating an inclusive corporate culture conducive to shareholder and stakeholder value creation.

Effect of organizational status on employment‐related corporate social responsibility: Evidence from a regression discontinuity approach

Abstract: Research Summary We examine the effect of organizational status on employment-related corporate social responsibility (CSR). As employees derive nonpecuniary benefits from both organizational status and employment-related CSR, lower status firms may invest in nonpecuniary employment-related CSR to compete in a status-segmented labor market. We identify the effect using a regression discontinuity design (RDD) in the context of the Fortune 1000 rankings, as we contend that the 500th rank position marks an artificial breakpoint in status where quality follows a smooth distribution. We find that firms just failing to make the Fortune 500 perform significantly better in nonpecuniary employment-related CSR. Our findings provide causal evidence for the labor market advantage of organizational status and a richer window into the strategic motivations behind CSR investments. Managerial Summary We examine one strategic investment that lower status firms make to compete in a status-segmented labor market: employment-based corporate social responsibility (CSR). We identify the effect using a regression discontinuity design (RDD) in the context of the Fortune 1000 rankings, as we argue that the 500th rank position creates a discontinuity in status at a precise location where quality differences can be assumed to follow a smooth distribution. We find that firms just failing to make it into the Fortune 500 perform significantly better in nonpecuniary employment-related CSR as compared to firms just in the Fortune 500. The findings demonstrate that building a reputation for being socially responsible may offset differences in status and make a lower status organization more appealing to employees.