What is science good for?

A nonbusiness discipline can provide a useful framework for thinking about old problems in new ways. People who study management, for instance, freely borrow from many fields of science to theorize about organizational behavior and business strategy. Evolutionary psychology and biology are especially popular sources of inspiration. But should they be? Evolutionary biologist Richard Dawkins has spent much of his career explaining science to the public. More than 20 years ago, his book The Selfish Gene shattered the popular belief that evolution necessarily favors altruism and self-sacrifice. In a conversation with HBR senior editor Diane Coutu, Dawkins discusses the role of science in our lives and identifies some of the more glaring public misperceptions of scientific theories. In particular, he disentangles the current notion that certain behaviors are in some way preprogrammed and explodes some contemporary myths about the Human Genome Project. Dawkins says much of the popular fear surrounding genetic manipulation is unfounded. "Humans have been practicing it for thousands of years, to no obvious ill effect," he says. Modern foot-long corncobs, the result of more than 1,000 years of artificial selection, are "quite Frankenstein-like" compared to their half-inch-long progenitors, he points out. He also touches on agriculture giant Monsanto and the media: "Part of the reason for Monsanto's troubles is that the company came up against an extraordinary amount of unfortunate, even malevolent, media hype," he says. "And people were more or less misled, by one scare story after another, into stampeding." A staunch defender of science as a haven of rational thought, Dawkins counsels businesspeople to recognize the limitations--as well as the beauty--of science.     

The financial crisis: What is there to learn?

Many are currently studying the origins of the financial crisis in an attempt to answer two seemingly simple questions: why did it happen, and can another crisis be prevented? Those two questions have proved incredibly divisive. The majority opinion of The United States Financial Crisis Inquiry Commission was submitted with two dissenting positions. Furthermore, The 2010 Economic Report of the United States President does not perfectly align with any opinion presented in that report. Few studies, however, provide proper consideration to the evolution of macroeconomic thought and lengthening of the business cycle preceding the current crisis.     

What health care cost crisis?

Managed care has inherent limitations that, perhaps out of desperation for some degree of control of health care costs, we tend to disregard. A better understanding of the "crisis" and a host of new strategies become apparent when we separately consider the health care elements and cost elements of the crisis. Managed care is essentially palliative in that it eases symptoms without curing conditions. While this is not a call for the abandonment of managed care, it is a warning that our efforts will prove futile if we do not also address other fundamental elements of impaired health.     

What do a bank’s legal expenses reveal about its internal controls and operational risk?

Excessive (substantially above peer) litigation against a bank is indicative of operational risk because it often suggests failure to maintain a strong system of internal control. We examine the relation between bank performance and weak internal control using legal expense as a proxy. We find that legal expense is a strong determinant of loan losses and stock returns. Bank regulators should require reporting of legal expense on call reports to help identify institutions with weaknesses in internal control. Current reporting creates unnecessary information asymmetries because investors are not well informed about operational risk, leading to mispricing of bank securities.     

Current account sustainability in the US: What did we really know about it?

We analyze the sustainability of the US current account (CA) deficit by means of unit-root tests. First, we argue that there are several reasons to believe that the CA may follow a non-linear mean-reversion behavior under the null of stationarity. Using a non-linear ESTAR model we can reject the null of non-stationarity favoring the sustainability hypothesis. Second, we ask whether unit-root tests are a useful indicator of sustainability by comparing in-sample results for the 1960–2004 period to the developments observed up to the end of 2008. We find that the non-linear model outperforms the linear and random walk models in terms of forecast performance. The large shocks to the CA observed in the last five years induced a faster speed of mean reversion, ensuring the necessary adjustment to meet the inter-temporal budget constraint.     

What’s the value of politically connected directors?

This study examines the stock price response to Document 18, a regulation released in China in 2013 requiring independent directors with political connections to resign from the boards of directors for publicly listed firms. We document a significant positive price response in the window surrounding the directive’s promulgation date. This response is also of important economic magnitude. Our findings suggest that on average, the market views the costs of hiring politically connected directors as outweighing the associated benefits. Consistent with this view, we document that politically connected directors often shirk their board duties, as evidenced by their poor rates of attendance at board meetings. Further investigations show that the value decreasing effect of politically connected directors is apparent mainly for firms in regulated industries and varies with earnings management practices. However, the market views politically connected directors favorably if firms have significant business transactions with the government.     

Corporate financial policy: What really matters?

Reliable access to funding, as in Myers and Majluf (1984), is what really matters, but there are nontrivial indeterminacies in how such access is arranged and in the debt, cash-balance, and payout components of financial policy. These inferences are from a corporate “twins” comparison study of the financial policies of Henry Ford at Ford Motor Co. and Alfred P. Sloan, Jr. at General Motors Corp. The documented testimony of Ford and Sloan indicates that both focused on funding their business, with debt as a funding tool, not an element of an optimized leverage ratio. Their financial policies differ in five important respects, including (i) the use of debt versus large cash balances to meet funding needs and (ii) a commitment to paying large dividends versus a strong aversion to payouts. The data also point to the importance of the inability of managers to identify optimal policies with reliable precision.     

What do price discovery metrics really measure?

A market is typically considered to dominate price discovery if it is the first to reflect new information about the fundamental value. Our simulations indicate that common price discovery metrics – Hasbrouck information share and Harris–McInish–Wood component share – are only consistent with this view of price discovery if the price series have equal levels of noise, including microstructure frictions and liquidity. If the noise in the price series differs, the information and component shares measure a combination of leadership in impounding new information and relative avoidance of noise, to varying degrees. A third price discovery metric, the ‘information leadership share’ uses the information share and the component share together to identify the price series that is first to impound new information. This third metric is robust to differences in noise levels and therefore correctly attributes price discovery in a wider range of settings. Using four recent empirical studies of price discovery we show that the choice and interpretation of price discovery metrics can have a substantial impact on conclusions about price discovery.     

What can we learn about the market reaction to macroeconomic surprise? Evidence from the COVID-19 crisis

We investigate the impact of macroeconomic surprise and uncertainty on G7 financial markets around COVID-19 pandemic using two real-time, real-activity indexes recently constructed by Scotti (2016). We applies the wavelet analysis to detect the response of the stock markets to the macroeconomic surprise and an uncertainty indexes and then we use NARDL model to examine the asymmetric effect of the news surprise and uncertainty on the equity markets. We conduct our empirical analysis with the daily data from January, 2014 to September, 2020. Our findings indicate that G7 stock markets are sensitive to the macroeconomic surprise and uncertainty and the effect is more pronounced at the long term than the short term. Moreover, we show that the COVID-19 crisis supports the relationship between the macroeconomic indexes and the stock prices. The results are useful for investment decision-making for the investors on the G7 stock indices at different investment horizons.     

What is a global manager?

Riven by ideology, religion, and mistrust, the world seems more fragmented than at any time since, arguably, World War II. But however deep the political divisions, business operations continue to span the globe, and executives still have to figure out how to run them efficiently and well. In "What Is a Global Manager?" (first published in September-October 1992), business professors Christopher Bartlett and Sumantra Ghoshal lay out a model for a management structure that balances the local, regional, and global demands placed on companies operating across the world's many borders. In the volatile world of transnational corporations, there is no such thing as a "universal" global manager, the authors say. Rather, there are three groups of specialists: business managers, country managers, and functional managers. And there are the top executives at corporate headquarters who manage the complex interactions between the three--and can identify and develop the talented executives a successful transnational requires. This kind of organizational structure characterizes a transnational rather than an old-line multinational, international, or global company. Transnationals integrate assets, resources, and diverse people in operating units around the world. Through a flexible management process, in which business, country, and functional managers form a triad of different perspectives that balance one another, transnational companies can build three strategic capabilities: global-scale efficiency and competitiveness; national-level responsiveness and flexibility; and cross-market capacity to leverage learning on a worldwide basis. Through a close look at the successful careers of Leif Johansson of Electrolux, Howard Gottlieb of NEC, and Wahib Zaki of Procter & Gamble, the authors illustrate the skills that each managerial specialist requires.     

What is a global manager?

To compete around the world, a company needs three strategic capabilities: global-scale efficiency, local responsiveness, and the ability to leverage learning worldwide. No single "global" manager can build these capabilities. Rather, groups of specialized managers must integrate assets, resources, and people in diverse operating units. Such managers are made, not born. And how to make them is--and must be--the foremost question for corporate managers. Drawing on their research with leading transnational corporations, Christopher Bartlett and Sumantra Ghoshal identify three types of global managers. They also illustrate the responsibilities each position involves through a close look at the careers of successful executives: Leif Johansson of Electrolux, Howard Gottlieb of NEC, and Wahib Zaki of Procter & Gamble. The first type is the global business or product-division manager who must build worldwide efficiency and competitiveness. These managers recognize cross-border opportunities and risks as well as link activities and capabilities around the world. The second is the country manager whose unit is the building block for worldwide operations. These managers are responsible for understanding and interpreting local markets, building local resources and capabilities, and contributing to--and participating in--the development of global strategy. Finally, there are worldwide functional specialists--the managers whose potential is least appreciated in many traditional multinational companies. To transfer expertise from one unit to another and leverage learning, these managers must scan the company for good ideas and best practice, cross-pollinate among units, and champion innovations with worldwide applications.     

When is good news really good news?

The impression management literature suggests that managers often resort to biased disclosures. However, there is little systematic evidence on what types of strategies management uses to achieve this bias. Do managers simply lie? Or, do they use more subtle ways of introducing positive bias into corporate narratives, such as selecting specific information items which result in a more positive impression (‘selectivity’) or by keeping their narratives vague and general (‘vagueness’)? In order to differentiate between the two scenarios, I re-examine the positive forward-looking statements examined by Schleicher and Walker (2010) and compare, across firms with improving and deteriorating financial performance, the managerial choices made in relation to eight forecast attributes.

I make two observations. First, there are significant differences in the characteristics of good- and bad-news firms’ positive statements. In particular, bad-news firms’ positive statements involve more non-specific time horizons, more segmental forecasts, and more references to conditions and aims and objectives, but fewer directional forecasts, fewer numbers, and fewer reinforcing qualifiers. Second, the identified differences in good- and bad-news firms’ positive statements can be exploited for classification purposes: including into a classification model additional regressors that measure a positive forward-looking statement's level of selectivity and vagueness significantly increases the model's ability to separate firms with improving financial performance from firms with deteriorating financial performance. Overall, my results are consistent with (a) impression management operating predominantly through selectivity and vagueness and (b) selectivity and vagueness being an important signal for future financial performance.     

What should regulators do about merger policy?

I argue that merger policy needs to be driven by different considerations in Europe, Japan and the United States. In Europe the main challenge is to set up a system so that efficient consolidation can occur once the single currency is established. In Japan the policy ought to be directed towards trying to attract foreign institutions to acquire under-capitalized domestic institutions. Japan does not seem to be taking this route. In the US consolidation it is already occurring and the current policy should be continued.     

What do mutual fund managers’ private portfolios tell us about their skills?

I study a registry-based dataset of Swedish mutual fund managers’ personal portfolios. The majority of managers do not invest personal wealth into the very same funds they professionally manage. The managers who do invest personal money into their funds subsequently outperform the managers who do not. The results suggest that fund managers, in contrast to regular investors, are certain about their ability to generate an abnormal return, or lack thereof, and invest their personal wealth accordingly.     

What’s wrong with Pittsburgh? Delegated investors and liquidity concentration

What makes an asset institutional quality? This paper proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, it documents differences in investor composition across US cities and shows that delegated investors concentrate their investments in cities with higher turnover. It then estimates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid, even when assets have identical cash flows. The paper provides evidence for clientele equilibria arising in frictional asset markets and suggests that a liquidity channel may explain divergent paths in city development.