Research Seminars

Financialization and the institutional foundations of the new capitalism

Accounting & Management Control

Speaker: Bruce Carruthers
Northwestern University

20 October 2017 - HEC Paris - Room T004 - From 2:00 pm to 4:00 pm

One of key features of capitalism as a form of economic organization concerns its ability to change. Innovation often occurs by using old things in new ways, or by taking pre-existing elements and rearranging them into novel configurations [termed ‘conversion’ by Streeck and Thelen (2005, p. 26)]. Change can also happen when old activities are simply discontinued, or when new activities are added [what Mahoney and Thelen (2010, p. 16) call ‘layering’]. Capitalist innovation does not arise ex nihilo, nor does it involve wholesale rejection of the past. As even casual students of contemporary capitalism realize, much of today’s capitalism resembles the old-fashioned kind studied by nineteenth-century social theorists like Marx, Durkheim andWeber. Heavy industry still exists, tangible goods are still manufactured in factories using assembly line methods, commodities are sent around the world via rail or ship, people still make steel and dig coal and iron ore out of the ground, and so on. Nevertheless, a growing number of scholars have identified ‘financialization’ as a significant change: the growth in importance of financial markets and financial institutions, and the increasing involvement of economic actors in financial transactions (Krippner, 2011; Greenwood and Scharfstein, 2013; Philippon and Reshef, 2013). Such transactions consist of traditional activities like lending (e.g. bank loans and bonds) and investment (e.g. equities), but also newer ones involving derivatives and securitization. What is the significance of this change, and what undergirds it?
The markets that organize capitalism are based on a set of underlying institutional preconditions. What do such foundations consist of? Since markets are venues for economic exchange, the first precondition concerns the objects of exchange. What do buyers buy from sellers, and how are these objects constituted? This is not a matter of physical reality since market exchange involves rights over things or services, not necessarily the things or services themselves. But by virtue of private property rights, tangible and intangible objects are commodified and ownership rights over them can be freely transferred from one owner to another.
Second, markets depend on information to suppose an interdependent role structure: buyers and sellers. Markets cannot function without actors willing to act in both of these roles. If everyone wants to sell and no-one wants to buy, then market exchange will not occur. The same is true with only buyers, but no sellers. As Akerlof (1970) showed, asymmetries of information can cause markets to unravel. In his analysis, sellers possessed information that they could not credibly convey to buyers, but the more general problem is that both buyers and sellers seek information about the objects they transact. Too much uncertainty will curtail market exchange. Third, markets depend on regulation that is sufficient to suppose binding agreements. Many bilateral transactions unfold over time, they are not completed ‘on the spot’. For example, one party might receive goods and pay for them later, or someone might pay for goods, and receive them later. In modern markets, contracts are the vehicle typically used to make an agreement formally binding.1 Finally, market economies contain the possibility of failure by firms, who then face bankruptcy. Firms that are unprofitable will eventually close down and cease their activities: their assets will be distributed to their creditors and employees lose their jobs. Corporate bankruptcy or insolvency law provides the means to identify and extinguish failing firms.
Financialization, as I discuss below, involves the modification and rearticulation of these preconditions. Krippner (2011) emphasized the political origins of financialization, but here I explore its institutional basis, an aspect she does not treat. I have listed these preconditions as analytically separable, but in historical fact they were usually linked together. For example, the development of corporate lawenabled fictive individuals to become both owners of property and objects of property rights, where financial instruments functioned as the unit of ownership. A corporation was owned (by shareholders), and their ownership interests could be freely exchanged, but the corporation itself could also own property (for instance, other corporations). With the passage of general laws of incorporation and their modification at the end of the nineteenth century, corporations could own, buy, sell and enter into binding agreements. They could also fail, although limited liability protected the personal wealth of shareholders. In addition, these preconditions are often shaped through public regulation. Regulations may set restrictions on market entry (i.e. on who may act as a buyer or seller in a particular market), set prices or quality standards, standardize the contracts that govern exchange, mandate the provision of certain types of information by market actors or set the terms of market exit. The dynamism of contemporary capitalism stems, in part, from the emergence of new ways to satisfy these preconditions. Through institutional change, capitalism was able to financialize within an overarching framework of private property, information, regulation and failure, maintaining its identity as a distinct economic system. This complex combination of change and continuity unfolded as small variations were amplified into large and often unintended transformations. The outcomes were variably intended.

Tough on criminal wealth? Exploring the link between organized crime asset confiscation and regional entrepreneurship

Strategy & Business Policy

Speaker: Elisa OPERTI

19 October 2017 - HEC Room T017 - From 1:30 pm to 3:00 pm

This paper joins a recent stream of research delving into the market and societal implications of initiatives against organized crime. We ask the question “How does the fight against organized crime affect entrepreneurial entries in a region?” We focus on asset confiscation in relation to alleged connections of their owners with organized crime, one of the most debated judiciary tools to fight the interests of organized crime activities in a region. Consistent with research in institutional economics, we propose that criminal organizations provide “third-best” institutional frameworks that can limit expropriation and favor dispute resolution. Confiscation weakens criminal organizations’ ability to provide governance, creating an institutional vacuum that can lower founding rates, unless it is paired with complementary measures that favor institutional replacement. Using data on asset confiscation in Italian provinces between 2009 and 2013, we show that confiscation events increase entry rates only when local institutions can guarantee the redeployment of confiscated assets in legitimate markets.

Star Analyst Voting and Recommendation Bias

Accounting & Management Control

Speaker: Qiang Cheng
Singapore Management University

18 October 2017 - HEC Paris - Room T004 - From 2:00 pm to 4:00 pm

Being voted as a star analyst increases an analyst’ compensation, reputation, and mobility. In this
paper, we examine financial analysts’ economic incentives arising from currying favor from
mutual funds in star analyst voting. Using the proprietary, detailed voting data from China, we
find that analysts issue more optimistically biased recommendations to the firms owned by the
voting funds. The extent of the recommendation bias increases with the relative weight of the
firm in the voting funds’ portfolios and the weight of the funds’ vote in the calculation of final
voting outcome, and decreases with the reputation of the brokerage houses that employ the
analysts. In addition, we find that the capital markets do not seem to recognize and discount
analysts’ recommendation bias arising from such voting connections. Collectively these findings
indicate that analysts issue biased recommendations to secure favourable votes from, or return
favour to mutual funds that vote for them.

What’s in a frame? An in-depth exploration of the role of framing in fostering collaboration in the context of two environmental non-profits

Management & Human Resources

Speaker: Simona GIORGI
Carroll School of Management, Boston College

18 October 2017 - Bernard Ramanantsoa room - From 10:45 am to 12:15 pm

This study examines the role of framing in fostering a collaborative agreement between two environmental non-profits in the U.S. that aimed at saving a particular type of natural ecosystems, wetlands. Building on 87 interviews, 17 months of participant observation, and extensive archival data, I show that framing can be a double-edged sword that can promote, but also hinder collaboration between seemingly compatible organizations. Unlike previous work that focused on instances of success and portrayed framing as a strategic tool for persuading others, my analysis documents how framing initially resonated with what the intended recipient valued, but over time revealed a deeper-seated cultural difference in how such value was constructed. More specifically, differences in orders of worth, or principles used to construct the value of nature – either as something worthy per se or for the exchange and use value of its services – prevented collaboration between the two organizations. These findings shed light on the underpinnings of framing resonance, highlighting the complex cultural basis of inter-organizational collaboration.

Performance Consequences of Pay Dispersion: It Depends on Type of Incentive Structure and Workplace Sex Composition

Management & Human Resources

Speaker: Mahmut BAYAZIT
School of Management, Sabanci University

17 October 2017 - Bernard Ramanantsoa room - From 11:15 am to 12:45 pm

Pay Dispersion, variance of the pay distribution within the organization, is continuing to attract a fair amount of public attention as the gap between the CEO pay and the average worker has widened over the years despite calls and rules to increase transparency in executive compensation practices. Recently, Shaw (2014) called for more research on pay dispersion to understand whether and when high or low levels of dispersion is effective as well as the behavioral processes that mediate its’ effect on organizational performance (Shaw, 2014). In the present study to respond to this call we propose type of incentive structure [i.e., the extent to which employees are covered by individual (e.g., bonus) and/or collective incentive (e.g., gainsharing) schemes] and workplace sex composition as joint contingencies on the performance effects of pay dispersion. In addition, we draw on the Exit-Voice-Loyalty-Neglect (EVLN) framework (Hirschman, 1970) to examine the potential mediating mechanisms of dispersion-performance relationship. We analyze a unique employee-employer linked survey data collected in 2003 and 2004 from a sample of 3050 nationally representative for-profit organizations with more than 20 employees in Canada to test our hypotheses. Our analyses, consistent with our hypotheses, reveal that in workplaces with high individual but low collective incentive coverage, the marginal effect of pay dispersion on productivity was positive in male-dominated workplaces but negative in female-dominated workplace, suggesting that the competitive dynamics created by the combination of high pay dispersion and individual incentive coverage differ in their performance implications according to the sex composition of the workplace. In addition, the marginal effect of pay dispersion on productivity was negative in firms that utilized collective incentives regardless of the individual incentive coverage for both male- and female-dominated workplaces. Finally, voluntary turnover, employee training and absenteeism mediated this moderated relationship whereas labor actions did not. These findings offer valuable insights about dispersion-performance relationship and have important theoretical and practical implications.

Workplace courage: Turning good stories into good social science

Management & Human Resources

Speaker: Jim Detert
Darden School of Business, University of Virginia, USA

12 October 2017 - Room Bernard Ramanantsoa - From 10:30 am to 12:00 pm

Courage is one of the oldest and most ubiquitous concepts in the world. It has been written about extensively in philosophy, religion, throughout the humanities and, more recently, in psychology. Despite this, our understanding of “workplace courage” remains quite limited. This is an important gap, as those who teach leadership know that students/practitioners are compelled by a lay belief that courage is linked to leader effectiveness and other important outcomes. But, whether this is true, or what we might do to help leaders develop their courage if it is true, cannot meaningfully be addressed until we answer more basic and fundamental questions about workplace courage as a social science construct. In this talk I will therefore quickly review my motivations for studying workplace courage, the limited extant literature, and then present results from several initial studies undertaken (using multiple methods and a total sample over 6,000) to begin shedding light on the construct of workplace courage and how this construct might be pursued in future research. I am particularly interested in discussing with you how we might address the “perspective problem” more directly and satisfactorily in future research on courage (and many other organizational constructs).

Ambiguous Policy Announcements

Economics & Decision Sciences

Speaker: Luigi Paciello
Professor , EIEF

12 October 2017 - HEC Campus - T Building - Room T004 - From 2:00 pm to 3:00 pm

We study the effects of an announcement of a future shift in monetary policy in a new Keynesian model, where ambiguity-averse households with heterogeneous net financial wealth face Knightian uncertainty about the credibility of the announcement. The response of aggregate demand to the announcement of a future loosening in monetary policy falls when financial wealth is more concentrated. The concentration of financial wealth matters because households with great net financial wealth (creditors) are those who are the most likely to believe the announcement, due to the potential loss of wealth from the prospective policy easing. And when creditors believe the announcement more than debtors, their expected wealth losses are larger than the wealth gains that debtors expect. So aggregate net wealth is perceived to fall, which attenuates the effects of forward guidance announcements and can even lead to a contraction in aggregate demand when financial wealth is concentrated enough. We calibrate the model to the Euro area after allowing agents to trade in short and long term nominal assets as well in real assets, and find that the effect can be quantitatively important.

Trust in Leadership Across Organizational Levels: Implications for Individuals, Teams, and Organizations

Management & Human Resources

Speaker: Ashley Fulmer
Tippie College of Business, University of Iowa

9 October 2017 - T020 - From 10:45 am to 12:15 pm

Trust is credited as a key to success in a wide range of micro and macro arenas, from employee performance and team collaboration to leadership effectiveness and organizational competitiveness. Little research, however, has examined trust across these arenas. In this presentation, I will focus on trust in leadership and discuss empirical evidence to bridge some of these gaps as identified by my analyses, answering questions such as how to foster trust in organizational leaders from the interactions between employees and their supervisors and what leaders can do to build trust that is shared among team members. I will also outline avenues for future studies that will continue the integration of trust across the individual, team, and organization levels. Together, this research program has implications for a more realistic, nuanced, and complex understanding of the critical phenomenon of trust in organizations.

“The quality of earnings and non-earnings information in stock returns, and their relative effect on the cost of equity”

Accounting & Management Control

Speaker: Eli Amir
Tel Aviv University

6 October 2017 - HEC Paris - Room T004 - From 2:00 pm to 4:00 pm

While prior literature shows that the quality of earnings information explains the variation in firms’ cost of equity, earnings information, after all, represents only a small part of firm specific, value-relevant, information. In addition, whereas different firms report earnings according to similar rules, their information environment on non-disclosure days is more heterogeneous. Using daily stock returns, we estimate the quality of information during earnings and non-earnings announcement days, and find that although the quality of information increases during earnings announcements, it explains less of the variation in expected returns than the quality of information on non-earnings days. Our findings suggest that the quality of earnings has but only a small effect on the cost of equity relative to the quality of information released on non-earnings days.

Examining the Impact of Ridehailing Services on Public Transit Use

Informations Systems and Operations Management

Speaker: Gordon Burtch
Assistant Professor of Information Systems & Decision Sciences (Carlson School of Management - Minnesota University)

6 October 2017 - in Room Bernard Ramanantsoa (Building V) - From 2:00 am to 3:30 am


We examine the impact that ridehailing services (e.g., Uber, Lyft) have had on the use of various modes of public transportation in the United States, via a city-level analysis. We first evaluate these effects by exploiting the temporally and spatially staggered entry of Uber across the United States. Recognizing that the timing and location of Uber’s entry is likely to be endogenous with respect to dynamic variables that reflect a local economic environment, we introduce a novel time-series matching procedure that can deliver plausible identification under a difference-in-differences estimation framework. Subsequently, we re-evaluate the effects by exploiting a natural experiment in which the Google Maps application incorporated Uber and Lyft services into its transit / direction recommendations. Under both identification strategies we find consistent results. Our estimates indicate that ridehailing service entry has lead to significant reductions in the utilization of road-based, short-haul public transit services (e.g., bus), yet increased utilization of rail-based and long-haul transit services (e.g., subway, commuter rail). Finally, we show that resulting cannibalization and complementarity effects are attenuated and amplified, respectively, by transit agencies’ quality of service.

Short Bio:

Gord is an Assistant Professor of Information & Decision Sciences and Jim & Mary Lawrence Fellow at the University of Minnesota's Carlson School of Management, as well as a Consulting Researcher with Microsoft Research NYC. His research, which focuses on the economic evaluation of information systems, employs empirical analyses rooted in econometrics and field experimentation to identify and quantify the drivers of individual participation in online social contexts. His work has been published in a variety of top tier outlets, including Management Science, Information Systems Research, MIS Quarterly. In 2014, Gord won the ISR best paper award, and in 2016 he won the ISR best reviewer award. He holds a PhD from Temple University’s Fox School of Business, as well as Bachelor of Engineering and MBA degrees from McMaster University’s DeGroote School of Business.