Research Paper Series


Departments: Strategy & Business Policy, GREGHEC (CNRS)

“Category spanning” – the provision of a range of distinct services – has long been frowned upon by organizational experts, because it’s seen to drain a producer firm’s appeal to audiences. Compared to “purer” competitors, category spanners are traditionally less feted and more poorly rewarded, and it’s become conventional wisdom that clients prefer focused producers – those who “stick to their knitting” in the colloquial British expression.Yet when it comes to corporate legal services, we found in a study of hundreds of law firms in New York, London and Paris over a decade that this generalised theory just doesn’t hold up. As clients expect more sophisticated services – particular in relation to acquisitions – they tend to value category spanners more positively and are willing to pay higher prices for them. That’s because clients assess a producer as a broader entity, rather than looking at expertise in isolation, when issues are complex.So we concluded that – at least as far as legal services are concerned – clients have no general preference for a single category of expertise. Instead, what matters is the “theory of value” – clients’ perception of issues and solutions, and how these can best be provided from a goal-based perspective.Our study – just published in the Academy of Management Journal – looked at eight practice areas that span most of corporate legal practice: competition; litigation; intellectual property; property; tax; mergers & acquisition; bankruptcy and employment over the period 2000 to 2010. We examined rankings given the law firms by three top guides for the legal profession – The Chambers and Partners, The Legal 500 and PLC Which lawyer – which rank according to practice area and location, and we also collected complementary information (on numbers of partners, gross revenue and other data) from a journal focusing on each city: American Lawyer for New York, The Lawyer for London and Juristes et Associés for Paris.What we found is that what matters more to clients is not whether firms straddle practice categories, but rather the clients’ own ability to identify, understand and appreciate the combinations of categories offered by law firms.The ability to convince clients that such a combination is beneficial also helps boost law firms’ bottom lines. As the Paris-based partner of a U.S. law firm law firm told us, the way to develop the more profitable areas of practice such as litigation and M&A is to demonstrate skill in tax, property, employment and other less glamorous areas of the law – because demonstrating diversity can be the best way to close the high-profitability deal.Some might suggest that clients often stick with their diversified law firms not out of appreciation of their many skills, but simply due to inertia: to minimize the cost of searching for another provider and haggling over a new contract. Yet we found no evidence for this, and in fact one study found that 56% of big companies from 60 countries use up to 10 multi-practice law firms. While we found insignificant evidence of a direct effect of category spanning on law firm performance – i.e., higher revenue per lawyer, our statistical results suggest that category spanning has an indirect positive impact on performance through the positive evaluation of clients (i.e., higher ranking positions).Plenty of “new economy” companies have shown they can thrive by spanning categories: Amazon, after all, quickly broadened its offerings from books to diapers and cloud computing storage. We hope our look at “old economy” law firms will help shed some further light on this evolving and fascinating area of organizational economics and sociology.

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Departments: Marketing, GREGHEC (CNRS)

This paper studies the impact of consumer resistance, which is triggered by deviations from a psychological reference point, on optimal pricing and cost communication. Assuming that consumers evaluate purchases not only in the material domain, we show that consumer resistance reduces the pricing power and profit. We also show that consumer resistance provides an incentive to engage in cost communication when consumers underestimate cost. While cheap communication does not affect behavior, persuasive communication may increase sales and profit. Finally, we show that a firm can benefit from engaging in operational transparency by revealing information about features of the production process.

Keywords: Price Fairness, Cost Communication, Operational Transparency


Departments: Finance, GREGHEC (CNRS)

We estimate international factor models with time-varying factor exposures and risk premia at the individual stock level using a large unbalanced panel of 58,674 stocks in 46 countries over the 1985-2017 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. The country market in excess of the world or regional market is required in addition to world or regional factors to capture the factor structure for both developed and emerging markets. We do not reject mixed CAPM models with regional and excess country market factors for 76% of the countries. We do not reject mixed multi-factor models in 80% to 94% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.

Keywords: large panel, approximate factor model, risk premium, international asset pricing, market integration


Departments: Strategy & Business Policy, GREGHEC (CNRS)

Organizational adaptation is a concept that describes both congruence within organizations, with respect to the strategies and structures deployed, and across organizations, with respect to the degrees to which organizations meet the expectations of their environments. A wide array of research traditions have explored the concept of adaptation, albeit with many different labels. This annotated bibliography tracks the foundations of organizational adaptation, its digressions, and its challenges. Such a review provides important resources for scholars interested in conducting research in organizational adaptation by identifying the multitude of perspectives that encompass adaptation.

Keywords: Adaptation, Organizational Change, Strategic Choice


Departments: Economics & Decision Sciences

This paper analyzes, empirically and theoretically, the link between capital inflows and the quality of economic institutions. Starting with the example of Southern European countries (Spain, Portugal, Italy and Greece), we show that they experienced a significant decline in the quality of their institutions in the run-up to the euro currency, a period of cheap external funding and large capital inflows. We confirm this joint pattern of capital flows and institutional decline in a large panel of countries since the mid-1990s. We then develop an open-economy model of the "soft budget constraint" syndrome wherein persistently cheap funding from abroad (i) raises the prevalence of extractive projects and (ii) expands their support by the (benevolent) government ex post. While the government may in principle limit the prevalence of extractive projects ex ante, we show that the incentives to do so is limited when foreign borrowing is cheap.

Keywords: Institutions, current account


Departments: Economics & Decision Sciences

This paper shows that bailouts of private agents can optimally take the form of the purchase of a defaulting asset, even if this also means paying off external asset holders. When anticipated, this form of bailouts leads to an endogenous implicit guarantee, where even an intrinsically worthless asset may be traded at a positive price. In the presence of borrowing constraints and imperfectly observable private liquidity needs, direct transfers are imperfect so that, when more constrained agents are also more exposed to a given asset, the compensation through asset purchases becomes optimal. I then show that this possibility of implicit guarantee is amplified by other frictions as risk-shifting and ultimately leads to a coordination problem for selecting stores of liquidity. Finally, I derive policy implications for financial regulation and international capital flows.

Keywords: Implicit guarantees, bailouts, intrinsically worthless assets


Departments: Economics & Decision Sciences, GREGHEC (CNRS)

We revisit well-known models of learning in which a sequence of agents make a binary decision on the basis of a private signal and additional information. We introduce efficiency measures, aimed at capturing the speed of learning in such contexts. Whatever the distribution of private signals, we show that the learning efficiency is the same, whether each agent observes the entire sequence of earlier decisions, or only the previous decision. We provide a simple necessary and sufficient condition on the signal distributions under which learning is efficient. This condition fails to hold in many prominent cases of interest. Extensions are discussed.


Departments: Economics & Decision Sciences, GREGHEC (CNRS), Finance

Equity crowdfunding has recently become available and is quickly expanding. Concerns have been raised that investors ('backers') may be following the crowd 'too much' and making investments ('pledges') based on past investments rather than private information. We construct a model of equilibrium rational herding where uninformed investors follow signals generated by in formed investors with private information and a public belief generated by all past pledges. We show that large investments provide positive public information about the project's quality, whereas periods of absence of investment provide negative information. An information cascade is shown to occur only if not enough positive signals are generated. We then empirically analyse a large number of pledges from a leading European equity crowdfunding platform. We show that a pledge is strongly affected by both the size of the most recent pledge, and the time elapsed since the most recent pledge. For pledges that are not adjacent in the order of arrivals, the correlation between their sizes is still positive, but after being separated by two or more intervening pledges the correlation is no longer statistically significant. The effects are strongest for less-informed investors, and in some specifications the effects are strongest at the early stage of a campaign. We find similar results in IV analysis. Results are consistent with our model and inconsistent with some alternative models

Keywords: Equity Crowdfunding, Herding


Departments: Economics & Decision Sciences, GREGHEC (CNRS)

We consider a Bayesian persuasion problem where the persuader and the decision maker communicate through an imperfect channel which has a fixed and limited number of messages and is subject to exogenous noise. Imperfect communication entails a loss of payoff for the persuader. We establish an upper bound on the payoffs the persuader can secure by communicating through the channel. We also show that the bound is tight: if the persuasion problem consists of a large number of independent copies of the same base problem, then the persuader can achieve this bound arbitrarily closely by using strategies which tie all the problems together. We characterize this optimal payoff as a function of the information-theoretic capacity of the communication channel


Departments: Finance, GREGHEC (CNRS)

We study the effect of demographics on innovation, arguing that a younger labor force produces more innovation. Using the native born labor force projected based on local historical births, we find that a younger age structure causes a significant increase in innovation. We confirm our finding at three levels of analysis – commuting zones, firms, and inventors – in demanding specifications that account for firm and inventor life cycles and location choices. Innovation activities reflect the innovative characteristics of younger labor forces. Our results indicate that demographics increase innovation through the labor supply channel rather than through a financing supply or consumer demand channel.

Keywords: Innovation; Demographics; Age structure; Labor markets; Firms; Inventors; Patents


Departments: Marketing, GREGHEC (CNRS)

While single-brand reward programs encourage customers to remain loyal to that one brand, coalition programs encourage customers to be “promiscuous” by offering points redeemable across partner stores. Despite the benefits of this “open relationship” with customers, store managers face uncertainty as to how rewards offered by partners influence transactions at their own stores. We use a model of multi-store purchase incidence to show how the value of points shared among partner stores can explain patterns in customer-level purchases across them. The model is used to empirically test hypotheses on how reward spillovers among partners are driven by: (1) differences in policies on reward redemption, (2) the overlap in product categories between stores, and (3) geographic distance between stores within a city. In addition, we leverage variation generated by a natural experiment, i.e., a devaluation of the program's points, to demonstrate how the value of points influences the positioning of partner stores within the coalition and the purchasing patterns across them. We conclude by delineating some managerial implications for the design of a coalition's reward policies, including a simulation showing that customer-centric targeted rewards can be an effective strategy to compensate for the devaluation.

Keywords: loyalty programs, rewards, retailing, Bayesian estimation


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