Abstracts
"Contract Structure for Joint Production: Risk and Ambiguity under Compensatory Damages.". (with Michael Ryall) Forthcoming, Management Science
We develop a model in which the parties to a joint production project have a choice of specifying contractual performance in terms of actions or deliverables. Penalties for noncompliance are not specified; rather, they are left to the courts under the legal doctrine of compensatory damages. We analyze three scenarios of increasing uncertainty: Full Knowledge - where implications of partner actions are known; Risk - where implications can be probabilistically quantified; and, Ambiguity - where implications cannot be so quantified. Under Full Knowledge, action requirements dominate: they always induce the maximum economic value. This dominance vanishes in the Risk scenario. Under Ambiguity, deliverables specifications can interact with compensatory damages to create a form of ‘ambiguity insurance’, where ambiguity aversion is assuaged in a way that increases the aggregate, perceived value of the project. This effect does not arise under contracts specifying action requirements. Thus, deliverables contracts may facilitate highly novel joint projects that would otherwise be foregone due to excessive uncertainty. Suggested empirical implications include the choice of contract clause type depending upon the level of uncertainty in a joint development project, one application being the level of partner experience with inter-firm collaborations.
"Public vs. Private Firms: Energy efficiency, toxic emissions and abatement
spending." (with Y. Maggie Zhou)
In this paper, we examine the effect of ownership status on three environmentally relevant variables: energy efficiency, toxic emissions and spending on pollution abatement. Prior research has demonstrated that public firms invest less than private firms and suggests this difference in investment behavior is due to ‘short-termism’ - pressure from capital markets to strongly favor short over long term earnings. We extend this logic to other firm behavior, examining whether publicly owned plants invest in energy efficiency and pollution reduction differently than privately owned plants. Using data from the US Census of Manufactures from 1980-2009, linked with information on pollution from the EPA Toxic Release Inventory (TRI) and pollution abatement spending from the PACE survey, we find evidence that plants switching to public ownership are less energy efficient and spend less on pollution abatement than their privately owned counterparts. However, interestingly, we find that plants switching to public ownership have lower toxic emissions than other facilities. We also examine how different sources of external pressures alter these results and find that increased regulatory scrutiny is correlated with increased energy efficiency, toxic emissions and abatement spending. More concentrated institutional ownership in public firms is associated with lower energy efficiency as is a greater brand focus. These latter results are broadly consistent with the idea that publicly owned firms respond to pressures from capital markets with a reduced focus on environmentally relevant variables. However, since facilities switching to public ownership have lower toxic emissions, this suggests that there are two competing pressures in publicly owned facilities: cost pressures, consistent with lowered energy efficiency, and public perceptions, consistent with lower toxic emissions, particularly since TRI data became public.
"Evidence of Short-termism in US Capital Markets: 1982-2013."
In this paper, we provide evidence of increasing short-termism in US capital markets over the period of 1982-2013. Using a "market discount factor" estimated for publicly traded firms based on a capital asset pricing model, we show that US capital markets have become increasingly short-term oriented over the past thirty years. We corroborate this finding by estimating the impact of various investment behaviors and relevant ownership variables on our measure of market discounting of a firm. We also find that firms that have less financial slack and/or spend less on R&D, capital expenditure and advertising are more heavily discounted by the market. Consistent with prior research, we also find that public firms that are held by more transient institutional investors (i.e., investors that have significant turnovers of stocks) are more heavily discounted than their counterparts that are held by dedicated investors (i.e., investors that hold company shares for the long term). In an attempt to examine the impact of such short-term valuation on firm behaviors, we also estimate a system of equations using changes in firm institutional ownership types (e.g., a switch from transient to dedicated or vice versa) as an identification mechanism. Firms that have institutional investors that switch types from dedicated (i.e., long term holders) to transient (i.e., short term holders) are more likely to be discounted heavily by investors. Using this identification mechanism, we find that not only is short-termism affected by financial slack and firm level investments in R&D, advertising and capital expenditures, but such short-termism in turn is significantly correlated with future values of these variables. This suggests that market discounting is a reasonable predictor of firm investment horizons. To our knowledge, this is the first paper to demonstrate economy-wide evidence of increasing short-termism and the implications for investment behaviors by firms.
"R&D Alliances & Firm Performance: The Impact of Technological Diversity and Alliance Organization on Innovation." Academy of Management Journal (2007) Vol.50(2): 364-386
In this paper, I examine the impact of partner technological diversity and alliance organizational form on firm innovative performance. Using a sample of 463 R&D alliances in the telecommunications equipment industry, I find that alliances contribute far more to firm innovation when technological diversity is moderate, rather than low or high. Although this relationship holds irrespective of alliance organization, I find that hierarchical organization, such as an equity joint venture, improves firm benefits from alliances with high levels of technological diversity. Thus, alliance organizational form likely influences partner ability and incentives to share information, which affects performance.
"The Cost of Misaligned Governance in R&D Alliances." 2004 Journal of Law, Economics and Organization (2004) Vol.20(2): 484-526.
Transaction cost economics argues that appropriately aligning transactions with governance leads to more efficient outcomes. While empirical evidence demonstrates that firms choose governance consistent with transaction cost predictions, the performance implications of governance so selected are less well explored. Here, I examine the cost of inappropriate governance in the context of R&D alliances. Two types of inappropriate choice are evaluated: governance that gives rise to excessive contracting hazards or excessive bureaucracy. Using a sample of R&D alliances in the telecom equipment industry, I find that alliance governance selected according to transaction cost arguments improves collaborative benefits substantially over governance not so selected. Interestingly, governance imposing excessive bureaucracy reduces collaborative benefits more than governance imposing excessive contracting hazards does. These results provide empirical evidence of the cost of inappropriate governance and have implications for research on the limits of internal organization and that linking organizational form and innovation.
"Experience Effects and Collaborative Returns in R&D Alliances." Strategic Management Journal (2005) Vol.26(11): 1009-31
Focusing on the link between prior alliance experience and firm benefits from R&D collaborations, this paper explores whether firms learn to manage their alliances. While prior experience should increase collaborative benefits from the current alliance, I expect these returns: (1) to be most beneficial when alliance activities are more uncertain; and (2) to diminish at high levels of experience. Results from a sample of 464 R&D alliances in the telecom equipment industry generally match these expectations. The positive benefits of prior experience in complex alliances suggests that a broader set of alliance management processes allows the firm to manage situations of ambiguity more readily. The lack of cumulative benefits from prior experience appears to be partly due to knowledge depreciating over time, since only recent experience has a positive impact on collaborative returns. Overall, these results provide empirical evidence of the effect of prior experience on collaborative benefits, both directly and conditional on alliance characteristics, and have implications for learning to manage organizations more generally.
"Organizational Choice in R&D Alliances: Knowledge Based and Transaction Cost Perspectives." Managerial and Decision Economics (2004) Vol. 25: 421-36.
This study examines how firms choose organizational form for their R&D alliances. Encouraging cooperation in these alliances is often challenging, given the difficulties in knowledge sharing between partners and protecting the property rights over partner knowledge. Interestingly, knowledge based and transaction cost perspectives generate different hypotheses on alliance organization choice in this setting. When partner knowledge bases are very different, the risk of unintended transfer or leakage is reduced, yet the need for enhanced communication and knowledge sharing mechanisms remains undiminished. With a sample of 232 R&D alliances, I find more thorough support for the transaction cost hypothesis. Firms more likely select an equity joint venture as partner knowledge bases diverge and knowledge transfer becomes more difficult. When such knowledge bases are very different, however, firms are less likely to choose an equity joint venture over more contractual forms of alliance organization. Thus, these results provide empirical evidence on alliance organization choice and also have important implications for the fundamental question of why firms exist.
"The Scope and Governance of Knowledge-Sharing Alliances." (with Joanne Oxley) Strategic Management Journal (2004) Vol.25(8-9): 723-49.
Participants in research and development alliances face a difficult challenge: How to maintain sufficiently open knowledge exchange to achieve alliance objectives while controlling knowledge flows to avoid unintended leakage of valuable technology. Prior research suggests that choosing an appropriate organizational form or governance structure is an important mechanism in achieving a balance between these potentially competing concerns. This does not exhaust the set of possible mechanisms available to alliance partners, however. In this paper we explore an alternative response to hazards of R&D cooperation: reduction of the "scope" of the alliance. We argue that when partner firms are direct competitors in end product or strategic resource markets even "protective" governance structures such as equity joint ventures may provide insufficient protection to induce extensive knowledge sharing among alliance participants. Rather than abandoning potential gains from cooperation altogether in these circumstances, partners choose to limit the scope of alliance activities to those that can be successfully completed with limited (and carefully regulated) knowledge sharing. Our arguments are supported by empirical analysis of a sample of international R&D alliances involving electronics and telecommunications equipment companies.
"Do Prior Alliances Influence Contract Structure?" (with Michael Ryall) in Strategic Alliances: Governance and Contracts (2006) A. Arino & J. Reuer (eds.) London: Palgrave Macmillan.
We examine technology alliance contracts in detail, to explore if formal contract terms vary with prior alliances. Traditionally, formal governance has been viewed as the means to address the coordination difficulties inherent in alliances, via explicit contractual mechanisms. Formal contracting, however, is costly and not the only solution to the coordination problem. Relational governance, or discipline mechanisms outside the contract itself, can encourage cooperative behavior between partners. More specifically, repeated interactions can, through implicit mechanisms, reduce the threat of non-cooperative behavior in alliances. We use a case study approach to explore the contract mechanisms that reveal a possible interaction between contract structure and prior alliances. Based on our examination of contract terms, we devise a coding scheme to allow comparison of contracts empirically. Using our preliminary sample of 42 technology alliance contracts in the telecommunications equipment and microelectronics industries, we find that prior alliances are linked with contract structure. Interestingly, contracts are more complete or detailed when firms have prior alliances (whether with the same firm or other firms). This suggests that firms learn to draft more detailed contracts with prior alliance experience. In contrast, firms appear to draft less complete contracts when they have concurrent alliances with the same firm. Thus, concurrent alliances may represent the development of trust or the exchange of 'mutual hostages', both of which deter non-cooperative behavior and, thus, substitute for more formal governance.
"The Role of Lawyers in Strategic Alliances." Case Western Reserve Law Review (2003) Vol 53: 909-927.
In this paper, I examine organizational structure in strategic alliances, with a view to highlighting the role of lawyers in guiding such deals. This paper was prepared for the George A. Leet Symposium on Business Law.
"The Effects of the Uruguay Round: Empirical Evidence from US Industry," (with Jack Mutti and Bernie Yeung) (2000) Contemporary Economic Policy Vol. 18(1): 59-69.
This paper uses an event study to evaluate the anticipated results of the Uruguay Round on U.S. industry. Economists commonly use computable general equilibrium (CGE) models to predict the net economic efficiency effects of trade agreements. The event study method represents a complementary approach that relies upon stock price movements to assess how investors predict that an event, in this case the conclusion of the Uruguay Round, will affect industry profitability. The empirical estimates indicate that U.S. industries with comparative advantage (disadvantage) experience positive (negative) stock price reactions, reflecting an increase (a decrease) in the industry trade and investment opportunities as well as an increased (decreased) return to existing tangible and intangible assets. For the market as a whole the variation in stock prices does not differ significantly from zero, and the economic magnitude of industry gains and losses is small. These results are consistent with most CGE assessments and with the skeptical attitude that the real impact of the Uruguay Round Agreement remains uncertain.
"Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Contracts" (with Michael Ryall) (2009) Management Science Vol. 55(6): 906-25.
Formal contracting addresses the moral hazard problems inherent in inter-firm deals via explicit terms designed to achieve incentive alignment. Alternatively, when firms expect to interact repeatedly, relational mechanisms may achieve similar results without the associated costs. However, as we now know from a growing body of theoretical work, the resulting intuition – that relational mechanisms will be substituted for formal ones whenever possible – does not generally hold. The extent to which firms substitute relational mechanisms for formal ones in the presence of repeated interaction is an empirical question that forms the basis of this paper. We study a sample of 52 joint technology development contracts in the telecommunications and microelectronics industries and devise a coding scheme to allow empirical comparison of contract terms. Counter to the above intuition (but consistent with recent theoretical findings), we find that a firm’s contracts are more detailed and more likely to include penalties when it engages in frequent deals (whether with the same or different partners). Our results suggest complementarity between formal and relational contracts and have implications for optimal contracting, particularly in high technology sectors.
"Arms Race or Detente? How Interfirm Alliance Announcements Change the Stock Market Valuation of Rivals." (with Joanne Oxley and Brian Silverman) (2009) Management Science Vol. 55(8): 1321-37.
Most prior event studies suggest that the announcement of a new alliance is accompanied by a positive stock market response, with partners experiencing positive abnormal returns at the time an alliance is announced. This finding has been interpreted as evidence that alliances are effective vehicles for partners to acquire or access new skills and thus become stronger competitors. However, partners may also earn positive abnormal returns if alliances are used to shape competitive interactions, possibly attenuating competitive intensity in the industry as a whole. In this study we seek to disentangle these different mechanisms underlying value creation in alliances by examining how alliance announcements affect the stock market’s evaluation of allying firms’ rivals: If an alliance is expected to make partner firms more competitive, then this should lead to negative abnormal returns for partners’ rivals; if an alliance is expected to facilitate a reduction in competitive intensity, then this should lead to positive abnormal returns for rivals. Results from an event study analysis of R&D alliances announced in the global telecommunications and electronics industries during 1996-97 provides evidence consistent with competition attenuation in some alliances. Our research is thus an important counter to the increasingly narrow focus on learning and resource accumulation through alliances, and calls for a broader consideration of the roles and effects of collaboration, both for individual firms and for industry structure.
"Licensing University Inventions to Startups and Established Firms" (with Brent Goldfarb and Arvids Ziedonis)
Entrepreneurial firms have become increasingly prominent in the commercialization of university inventions. Yet little is known about the structure of the licensing agreements governing university technology commercialization, either to start-ups or more generally. In this study, we first apply the theoretical literature on licensing to generate predictions regarding contract structure. Under the presumption that start-ups have greater organizational uncertainty, we then explore the relevance of existing theoretical predictions to start-up licenses. To this end we observe detailed contract terms from 823 licensing agreements for 370 inventions licensed from Stanford University between 1989 and 2000. Our sample includes approximately 350 firms, 25% of which are start-ups. We anticipate that important differences exist in licensing to start-ups versus those to established firms. Apart from distinctions in the underlying technologies licensed, we expect differences between start-ups and established firms in the availability of complementary assets and the strength of incentives to commercialize the licensed technology to influence contract terms and structure. A goal of this paper is to (1) define differences between licenses to start-ups and established firms, particularly on exclusivity and royalty terms, (2) investigate correlations between these terms and royalty revenues (a performance metric), and (3) make suggestions for future theoretical developments based on our detailed examination of license contracts. The results of this study will improve our understanding the effect of incentive differences between start-ups and established firms and contribute to the dialogue on the role of large and small firms in technology development and commercialization.
