Knowledge that Transforms

Research Summary We examine whether CEO personality traits influence the likelihood of engaging in behaviors that impose agency costs on the firm. We use an established open‐language machine learning program to measure CEO Big Five personality traits based on CEO remarks during earnings conference calls. We theorize and find that higher levels of agreeableness and conscientiousness in CEOs are associated with lower agency costs (operationalized here as unrelated diversification and the decoupling of CEO pay from firm performance), while higher levels of neuroticism are associated with higher agency costs. By revealing how CEO personality traits affect agency costs, our study offers a new perspective on the sources of agency problems and broadens the application of CEO Big Five personality traits to corporate governance. Managerial Summary This study explores how a CEO 's personality can shape decisions that affect company performance. Using an advanced language analysis tool, we assessed CEOs ' personality traits based on what they say during earnings calls. We find that CEOs who are more agreeable and conscientious are less likely to make decisions that benefit themselves at the expense of the company—such as expanding into unrelated businesses or earning pay that does not reflect company performance. In contrast, CEOs with higher levels of neuroticism are more likely to engage in these costly behaviors. These findings suggest that understanding a CEO 's personality can offer valuable insights into their leadership behavior and help boards and investors make better governance and hiring decisions.

Research Summary This article investigates the impacts of Airbnb on hotel demand and the price and nonprice response strategies of incumbent hotels to Airbnb. We constructed a unique dataset of tourist hotels and Airbnb listings before and after the entry of Airbnb in Taiwan. We found that the entry of Airbnb makes the hotel industry more heterogeneous. Low quality hotels compete on price with Airbnb after Airbnb's entry. In contrast, prices and the investment in service quality increase for high quality hotels. These findings suggest that high quality hotels reposition themselves in the higher end of the lodging market as a response strategy to the entry of Airbnb. Managerial Summary Incumbent hotels can use a number of strategies to respond to Airbnb's entry. Using a unique dataset of Taiwanese data from before and after Airbnb's entry, we found that hotels' responses differ across the value chain. Low quality hotels compete on price with Airbnb after Airbnb's entry. In contrast, prices and the investment in service quality increase for high quality hotels. The increase of investment in service quality allows high quality hotels to reposition themselves in the higher end of the lodging market.

Research Summary We examine how learning‐by‐doing (LBD) rates in manufacturing, the extent to which performance depends on own production experience, are associated with firms' diversification decisions. We argue that the LBD rates of industries affect the characteristics of not only the first‐order knowledge that firms generate via operating a particular process but also the second‐order knowledge that firms develop about the learning process itself. We maintain that first‐order knowledge generated via LBD has low transferability; accordingly, firms are less likely to diversify as their industries exhibit higher rates of LBD. We also argue that second‐order knowledge about LBD affects the locus of diversification; specifically, firms are more likely to choose target industries with similar LBD rates. Hypotheses are tested using data from over 350 U.S. manufacturing industries. Managerial Summary We investigate how manufacturing firms' diversification decisions differ depending on the LBD rates of their industries. LBD rates reflect the extent to which production performance depends on own production experience. Consistent with our argument that production knowledge generated from LBD is difficult to transfer to new contexts, results indicate that firms in high‐LBD industries are less likely to diversify than those in low‐LBD industries. We also argue, however, that firms in high‐LBD industries can develop general know‐how to accelerate LBD and that this know‐how is applicable in other high‐LBD manufacturing contexts. Therefore, they prefer to enter other high‐LBD industries to leverage that know‐how. Our results show that firms are more likely to choose diversification into industries with similar LBD rates.

Research Summary Many scholars bemoan the difficulty of learning from individual research reports. Replication is often prescribed as a salve, but few replications are conducted, and even fewer allow the formation of a coherent understanding. In this article, we propose a complement to replication that emphasizes the mapping of epistemic uncertainties. We demonstrate our approach by exploring the results of six related studies on the link between social and financial performance. We show that our method allows the synthesis of seemingly conflicting findings, and we propose that it should be used proactively, prior to replication, to speed the growth of knowledge. Managerial Summary Any single empirical study provides a weak basis for inference. As a result, scholars advocate repeated analysis of important issues, but evidence from replications can be hard to integrate into a coherent understanding. For example, six important studies of the link between corporate social and financial performance have been published in this journal, but their conflicting results have defied integration. We show that a new approach to empirical research allows their reconciliation: all six suggest that across firms, social and financial performance are correlated but that improvements in social performance seldom precede increased financial performance.

Research summary There has been an ongoing debate over whether start‐ups should be “flat” with minimal hierarchical layers. To reconcile this debate, this article distinguishes between creative and commercial success (i.e., novelty vs. profitability), and examines how these outcomes are variously influenced by a start‐up's hierarchy. This study suggests that while a flatter hierarchy can improve ideation and creative success, it can result in haphazard execution and commercial failure by overwhelming managers with the burden of direction and causing subordinates to drift into power struggles and aimless idea explorations. I find empirical support for this trade‐off using a large sample of game development start‐ups. These findings offer one resolution to the debate by sorting out the conditions under which hierarchy can be conducive or detrimental to start‐ups. Managerial summary Academics, management gurus, and popular media outlets have argued that “authoritarian,” tall hierarchies are outmoded and will be supplanted by “egalitarian,” flat structures. In recent years, this argument has been largely substantiated by a few “successful” flat start‐ups, such as Valve, Zappos, Github, Medium, and Buffer. As these nascent firms constantly garner much attention for their egalitarian ideal—which itself is a signal of their rarity—the myth that start‐ups should be flat (often referred to as “flat organization,” “holacracy,” or “boss‐less firm”) has become widespread among entrepreneurs. My study cautions against this myth, suggesting that adding a few hierarchical levels of managers can substantially help start‐ups achieve commercial success and survive in their hostile environments, albeit at a potentially marginal cost of creativity.

Research Summary Across many industries, firms employ a conversion funnel business model to attract customers with basic and affordable products, generate lock‐in, and then sell them more advanced and expensive products. We argue that this business model, coupled with high customer switching costs, results in a market outcome characterized by aggressive pricing and reduced profits. A sudden reduction in customer switching costs disrupts the conversion funnel and can eventually increase industrywide prices and profitability, an outcome that contradicts conventional wisdom in strategy research. We develop a stylized model to formalize our ideas and provide supportive evidence using a difference‐in‐differences methodology with staggered treatment for a large, global sample of mobile telecommunications operators. Managerial Summary Industry changes that lower customer frictions can surprisingly be beneficial for companies. Building on the telecommunications industry, we document how a reduction in customer switching costs following mobile number portability increases the profitability of mobile operators. We explain this finding based on a change in companies' business model. When switching costs are high, companies adopt a funnel business model designed to convert customers from basic to advanced products. While advantageous for a single company, when strategic interactions are accounted for, the diffusion of this business model has a depressive effect on average market prices and profitability. A reduction in customer switching costs breaks the funnel and decouples product pricing decisions that, counterintuitively, can lead to higher industrywide prices and greater profitability.

Research Summary Scholars have long recognized that interlocking directors act as conduits (or “pipes”) in the interorganizational diffusion of governance practices. Yet, this research generally depicts interlocks as homogenous, overlooking the possibility that directors differ in their beliefs about a given practice. Our study explores this idea in the context of the spread of two practices—lone‐insider board structures and CEO‐chair separation—across S&P 500 firms from 1997 to 2016. We theorize and show that politically conservative directors are more likely to transmit the lone‐insider structure, whereas politically liberal directors are likelier to transmit the CEO‐chair separation structure. We further illustrate that these effects are stronger when the focal firm faces shareholder pressure for governance reform, and weaker when the institutional norms curtail director discretion. Managerial Summary Prior research suggests that corporate directors who sit on multiple boards cause those firms to learn from each other and adopt similar practices. Yet, directors differ in their views on governance practices, which means that they should also differ in their propensity to act as “pipes” in this diffusion process. We argue and show that interlocking directors' political ideologies influence this process, such that conservative directors are likelier to transmit the lone‐insider board structure (where the CEO is the only firm employee on the board), whereas liberal directors are likelier to transmit the practice that separates the CEO and board chair roles. These differences are most evident when firms' shareholders exert pressure for governance reform, although they have diminished somewhat since the 2002 Sarbanes‐Oxley Act.

Research Summary This study investigates the relationships between consumer income, consumer education, and firms' propensities to span multiple market categories. Despite their positive correlation, I theorize contrasting effects of income and education on firms' variety‐enhancing spanning. Specifically, I propose that the strong purchasing power of high‐income communities should reduce the need for firms to operate in multiple categories, but culturally omnivorous preferences among educated elites should encourage firms' spanning. Analyses of 6,072 restaurants in a metropolitan area and a large‐scale survey offer support for these predictions. Education, though not income, has a further positive effect on firms' atypicality‐enhancing spanning. This study contributes to category and management research by focusing on audience heterogeneity as important antecedents of firms' action and explicating the multifaceted nature of spanning. Managerial Summary This study examines how restaurants decide their culinary categories and menus depending on residents' income and education levels of a city they are located in. I find restaurants in higher‐income communities tend to be more specialized in a single or fewer categories while those in lower‐income communities are more likely to diversify into multiple categories to reach a broader customer base. By comparison, restaurants in more educated communities tend to diversify into multiple categories and provide fusion food because educated cultural omnivores like to explore novelty. These findings imply that retail firms should consider the separate effects of income and education levels of target consumers in determining their business scope and product portfolio.

Research Summary We estimate firm‐level physical risk from climate change based on managerial evaluation and firms' exposure to climate hazard events and find that climate risk results in unfavorable corporate financing terms related to bank loans (higher interest paid, higher likelihood of being required to collateralize the loan, and greater number of covenant constraints). Firms that take measures aimed at managing climate risk, including corporate climate strategy, board‐level governance, specific or integrated process to cope with climate change, climate opportunities, and climate policy involvement, are able to mitigate the negative impact of climate risk on loan contracting. We further find that higher climate risk level is associated with inferior financial performance and higher default probability, which potentially lead to more stringent loan terms. Managerial Summary We examine how a firm's exposure to climate risk affects its financing terms from bank loans. Climate risk exposure is assessed by firm managers and also reflects the degree to which the firm is subject to climate‐induced natural disasters. The results show that if exposed to higher climate risk, which hurts financial performance and heightens default likelihood, firms face higher interest rates and more stringent collateral and covenant constraints when borrowing from banks. Nevertheless, firm managers could significantly mitigate this adverse climate impact on loan financing by integrating climate change into business strategy, having the board take direct responsibility for climate change issues, establishing a climate change‐focused risk management process, seeking business opportunities from climate change, and engaging in activities that influence climate policies.

Research Summary We examine how the performance of a firm's prior alliances influences its propensity to persist with the alliance mode or switch to independent operations in the context of new product introductions (NPIs). Drawing on the behavioral theory of the firm (BTOF), we argue that a firm's alliance performance has a U‐shaped effect on its likelihood of undertaking the subsequent NPI independently and that competitive intensity strengthens this U‐shaped relationship. We also predict that firms with above‐aspiration alliance performance are more likely to achieve breakthrough performance in the subsequent NPI if they switch to independence than if they continue to ally. Data on NPIs in the global aircraft manufacturing industry (1944–2000) support our hypotheses. Our study extends the alliance literature and contributes to research on how firm performance influences subsequent strategic choices. Managerial Summary The dilemma of whether to continue or exit an alliance or relationship is a common one for individuals, countries, and firms. Our study examines firms' strategic decision to switch to independent operations after having partnered with other firms. Using the aircraft product development context, we show that firms that make such a change in their strategy are the ones that performed either much better or much worse than what they expected. Firms with alliance performance close to their expectations tend to persist with their current strategy. Of the firms that change their strategy, the high performers benefit much more from changing their strategy than low performers. We provide insights regarding when it is preferable for managers to continue to ally or to switch to independence, especially in launching new products.