Knowledge that Transforms

This paper explores conflicting implications of firm‐specific human capital ( FSHC ) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect : FSHC may facilitate more‐sophisticated ‘gaming’ of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high‐ FSHC managers. Finally, profit losses increase more rapidly for high‐ FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits . Copyright © 2013 John Wiley & Sons, Ltd.

This paper explores the interplay between product market, strategic factor market, and resource development. More competition in the product market makes resource buyers bid higher for resources, as the value of trying to preempt the resources is higher. Holding other initial conditions constant, resources are developed more in industries with factor markets than in industries without. When buyers of resources cannot integrate more than one resource, developers choose to develop either at a low or high level, generating a type of heterogeneity that would not arise otherwise. Changes in the intensity of competition in the product market can have the opposite effect on resource development efforts depending on the presence or absence of factor markets . Copyright © 2013 John Wiley & Sons, Ltd.

In this paper, we develop a comprehensive model of M&A success. We integrate fundamental constructs of different schools and discuss their interdependencies with M&A success. Our theoretical framework was tested empirically across a sample of 106 SME transactions in the machinery, electronic, and logistic industries in the German ‐speaking part of Central Europe . The results of our study support the demand for an integrative perspective and theory on M&A . M&A success is a function of strategic complementarity, cultural fit, and the degree of integration. Strategic complementarity also positively influences cultural fit and the degree of integration. Cultural fit positively influences M&A success, but surprisingly has a negative impact on the speed and degree of integration. The degree of integration is positively related to speed of integration . Copyright © 2013 John Wiley & Sons, Ltd.

Nonfinancial measures ( NFMs ) are a common feature of strategic performance management frameworks. We examine the role of one widely used NFM : customer satisfaction, in one aspect of strategic performance management: CEO compensation schemes. Drawing on agency theory precepts, we hypothesize that the extent to which firms link CEO compensation to customer satisfaction is influenced by satisfaction's ability to act as a leading indicator of future profitability (lead indicator strength). We further hypothesize that the extent to which customer satisfaction's lead indicator strength influences the weighting of satisfaction in CEO compensation schemes has a positive influence on future shareholder value. Our empirical results offer strong support for both hypotheses and extend research on the use and efficacy of NFMs in CEO compensation schemes . Copyright © 2013 John Wiley & Sons, Ltd.

A common premise in prior research is that trust increases over time in relationships. Through a meta‐analysis of 39 studies, we find that the bivariate correlation between trust and relationship duration (1) is on average positive and small, and (2) varies significantly across studies indicating the presence of unobserved moderators. We therefore build a theoretical framework to specify four different mechanisms—initial bias correction, change in relationship value, identification, and trust‐based selection—that may affect the development of trust. We then argue that the relative strength of these mechanisms should influence whether trust increases, remains constant, or decreases over time . © 2013 The Authors. Strategic Management Journal published by John Wiley & Sons Ltd.

Extant research shows that resources are significant to a firm's choice of alliance formation. We focus on an important form of intangible resource—firm reputation—and examine how it affects a firm's propensity to form alliances. We propose an inverted U‐shaped relationship between a firm's reputation and its likelihood of alliance formation, resulting from the opposing mechanisms of opportunity and need. We also examine how this relationship may vary across two contingencies: (1) foreign and domestic firms; and (2) different levels of institutional development. Empirical analyses of China's venture capital ( VC ) industry provide support for our hypotheses . Copyright © 2013 John Wiley & Sons, Ltd.

This study investigates how component technological change affects the relationship between product modularity and organizational modularity (the across‐firm mirroring hypothesis). Studying the air conditioning industry, we show that the across‐firm mirroring hypothesis does not hold for technologically dynamic components and the associated supply relationships. In this case, the mirror gets “misted up” with buyers and suppliers having recourse to information sharing even in the presence of highly modular components. Our study contributes to the debate on the organizational implications of modularity and its ramifications for the theory of the firm . Copyright © 2013 John Wiley & Sons, Ltd.

Extant theories agree that debt should inhibit diversification but predict opposing performance consequences. While agency theory predicts that debt should lead to higher performance for diversifying firms, transaction cost economics ( TCE ) predicts that more debt will lead to lower performance for firms expanding into new markets. Our empirical tests on a large sample of Japanese firms support TCE by showing that firms accrue higher returns from leveraging their resources and capabilities into new markets when managers are shielded from the rigors of the market governance of debt, particularly bond debt. Furthermore, we find that the detrimental effects of debt are exacerbated for R&D intensive firms and that debt is not necessarily harmful to firms that are either contracting or managing a stable portfolio of markets . Copyright © 2013 John Wiley & Sons, Ltd.

When firms tap external knowledge sources, they risk spillovers of their own internal knowledge. If the value of this potential loss and the imitation capabilities of neighboring organizations are high, fear of imitation might overshadow the benefits of openness. In such situations, firms might voluntarily reduce their use of external sources, relative to knowledge available internally. Data pertaining to 4,623 European inventions and direct information about the use of knowledge sources confirm that firms reduce their use of external, relative to internal, knowledge when they conduct costly research projects in locations characterized by high levels of absorptive capacity in a specific technology. This study also reveals fear of imitation as a mediating factor of this behavior . Copyright © 2013 John Wiley & Sons, Ltd.

Our study demonstrates empirically that the choice of resource allocation strategy affects innovation performance. Allocating resources to a broader range of innovation projects increases new product sales, an effect that appears to outweigh that of resource intensity. In addition, we find that the performance benefit of breadth is higher for firms that allocate resources selectively at later stages of the innovation process. This breadth‐selectiveness effect is greatest for firms intending to create relatively more novel products, departing further from their knowledge base. Based on these results, we theorize that breadth increases performance because it spreads firms' bets on unproven innovative endeavors. Limiting resource commitments by selecting out deteriorating projects prevents an escalation in the costs of breadth. This advantage increases with the uncertainty implicit in greater innovative intent. The paper thus contributes to theory of how resource allocation strategies influence performance outcomes of innovation project portfolios . Copyright © 2013 John Wiley & Sons, Ltd.