Volume2 Issue2 December 2009 Final

Accounting | Finance | Management | Marketing | Operations and Information Systems
Contributing Authors
Oliver Tiemann, Ludwig-Maximilians-Universität München, Germany
Jonas Schreyögg, Ludwig-Maximilians-Universität München, Germany
Alexandra Maßbaum, University of Paderborn, Germany
Caren Sureth, University of Paderborn, Germany
Lutz Kruschwitz, Freie Universität Berlin, Germany
Andreas Löffler, University of Paderborn, Germany
Ulf Schrader, Technical University of Berlin, Germany
Thorsten Hennig-Thurau, Bauhaus-University of Weimar, Germany
Alf Kimms, University of Duisburg-Essen, Germany
Julia Drechsel, University of Duisburg-Essen, Germany
Christiane Prange, Lyon Business School, France
Bodo B. Schlegelmilch, WU Wien, Austria, and Leeds University Business School, UK
Vo l u m e 2 | I s s u e 2 | D e c e m b e r 2 0 0 9 | w w w. b u s i n e s s - r e s e a r c h . o r g | I SS N 18 6 6 - 8 65 8
Editor-in-Chief
Sönke Albers (Kiel)
editor@business-research.org
Department Editors
Accounting
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niemann@business-research.org
Marketing
Adamantios Diamantopoulos (Vienna)
diamantopoulos@business-research.org
Finance
Christian Schlag (Frankfurt am Main)
schlag@business-research.org
Management
Peter Walgenbach (Jena)
walgenbach@business-research.org
Operations and Information Systems

Karl Inderfurth (Magdeburg)
inderfurth@business-research.org
Accounting Finance
Rainer Niemann (Graz) Christian Schlag (Frankfurt am Main)
niemann@business-research.org schlag@business-research.org
Jan Bouwens Tilburg University, The Netherlands Franklin Allen Wharton School, Philadelphia, USA
Jörg Budde Rheinische Friedrich-Wilhelms-Universität Bonn, Germany Laura Ballotta Cass Business School, City University, London, UK
Willem Buijink Tilburg University, The Netherlands Nicole Branger Westfälische Wilhelms-Universität Münster, Germany
Joachim Gassen Humboldt-Universität zu Berlin, Germany Engelbert Dockner WU Vienna, Austria
Martin Glaum Justus-Liebig-Universität Gießen, Germany Ralf Elsas LMU Munich, Germany
Christian Hofmann Universität Mannheim, Germany Michael F. Gallmeyer Texas A&M University, USA
Jochen Hundsdoerfer Freie Universität Berlin, Germany Robert Gillenkirch Universität Osnabrück, Germany
Vesa Kanniainen University of Helsinki, Finland Joachim Grammig Eberhard-Karls-Universität Tübingen, Germany
Laurence van Lent Tilburg University, The Netherlands Bruce Grundy University of Melbourne, Australia
Frank Moers Maastricht University, The Netherlands Dirk Hackbarth University of Illinois at Urbana-Champaign, USA
Lasse Niemi Helsinki School of Economics, Finland Holger Kraft Goethe-Universität Frankfurt am Main, Germany
Paolo Panteghini Università degli Studi di Brescia, Italy Andreas Löffler Universität Paderborn, Germany
Thomas Pfeiffer University of Vienna, Austria Claus Munk University of Southern Denmark, Odense, Denmark
Stefan Reichelstein Stanford University, USA Alessandro Sbuelz Università degli Studi di Verona, Italy
Christian Riegler WU Vienna, Austria Carsten Sørensen Copenhagen Business School, Denmark
Ulf Schiller Universität Bern, Switzerland Hans Stoll Vanderbilt University, Nashville, USA
Dirk Simons Universität Mannheim, Germany
Peter Birch Sørensen University of Copenhagen, Denmark
Ulrike Stefani Universität Konstanz, Germany
Hervé Stolowy HEC Paris, France
Caren Sureth Universität Paderborn, Germany
Stefan Wielenberg Leibniz Universität Hannover, Germany
Hannes Winner Universität Salzburg, Austria
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Management Marketing
Peter Walgenbach (Jena) Adamantios Diamantopoulos (Vienna)
walgenbach@business-research.org diamantopoulos@business-research.org
Andreas Al-Laham TU Kaiserslautern, Germany George Balabanis Cass Business School, City University, London, UK
Giuseppe Delmestri University of Bergamo, Italy Hans Baumgartner Pennsylvania State University, USA
Martha S. Feldman UC Irvine, USA Suzanne Beckmann Copenhagen Business School, Denmark
Peer Fiss University of Southern California, USA Daniel Bello Georgia State University, USA
Mike Geppert University of Surrey, UK Albert Bemmaor ESSEC Business School, France
Paul Gooderham The Norwegian School of Economics and Rod Brodie University of Auckland, New Zealand
Business Administration, Norway John Cadogan Loughborogh University, UK
Christian Grund Julius-Maximilians-Universität Würzburg, Germany Tamer Cavusgil Georgia State University, USA
Axel Haunschild University of London, UK René Darmon ESSEC Business School, France
Eric von Hippel MIT Sloan School of Management, USA Timothy Devinney Australian Graduate School of Management, Australia
Bernd Irlenbusch London School of Economics, UK Susan Douglas New York University, USA
Dirk Matten York University, Schulich School of Business, Canada Lutz Hildebrandt Humboldt Universität zu Berlin, Germany
Michael Mayer University of Bath, UK Roy Howell Texas Tech University, USA
Renate E. Meyer WU Vienna, Austria Harald Hruschka Universität Regensburg, Germany
Guido Möllering MPI Cologne, Germany Tomas Hult Michigan State University, USA
Philippe Monin EM Lyon, France Constantine Katsikeas University of Leeds, UK
Denise Rousseau Carnegie Mellon University, USA Daniel Klapper Goethe-Universität Frankfurt am Main, Germany
Kuno Schedler University of St. Gallen, Switzerland Harley Krohmer Universität Bern, Switzerland
Andreas Scherer University of Zurich, Switzerland Peter Leeflang University of Groningen, The Netherlands
David Seidl LMU Munich, Germany David Midgley INSEAD, France
Udo Staber University of Canterbury, New Zealand Vince Mitchell Cass Business School, City University, London, UK
Roy Suddaby University of Alberta, Canada Neil Morgan Indiana University, USA
Jörg Sydow Freie Universität Berlin, Germany Saeed Samiee University of Tulsa, USA
Janne Tienari Helsinki School of Economics, Finland Henrik Sattler Universität Hamburg, Germany
Anja Tuschke LMU Munich, Germany Bodo Schlegelmilch WU Vienna, Austria
Filippo Carlo Wezel University of Lugano, Switzerland Judy Siguaw Nanyang Technological University, Singapore
Michael Woywode RWTH Aachen, Germany Jagdip Singh Case Western Reserve University, USA
Bernd Skiera Goethe-Universität Frankfurt am Main, Germany
Rajan Varadarajan Texas A&M University, USA
Operations and Information Systems Udo Wagner University of Vienna, Austria
Berend Wierenga Erasmus University, The Netherlands
Karl Inderfurth (Magdeburg)
Russell Winer New York University, USA
inderfurth@business-research.org Heidi Winklhofer University of Nottingham, UK
Freimut Bodendorf Universität Erlangen-Nürnberg, Germany
Peter Chamoni Universität Duisburg-Essen, Germany
Charles Corbett University of California, USA
Werner Delfmann Universität zu Köln, Germany
Harald Dyckhoff RWTH Aachen, Germany
Bernhard Fleischmann Universität Augsburg, Germany
Martin Grunow Technical University of Denmark, Denmark
Daniel R. Guide, Jr. Pennsylvania State University, USA
Richard Hartl University of Vienna, Austria
Werner Jammernegg WU Wien, Austria
Peter Kelle Louisiana State University, USA
Alf Kimms Universität Duisburg-Essen, Germany
Herbert Kotzab Copenhagen Business School, Denmark
Heinrich Kuhn Universität Eichstätt-Ingolstadt, Germany
Rainer Lasch TU Dresden, Germany
Ronald Maier Universität Innsbruck, Austria
Dirk C. Mattfeld TU Braunschweig, Germany
Kaj Rosling Växjö University, Sweden
Detlef Schoder Universität zu Köln, Germany
Thomas Spengler TU Braunschweig, Germany
Leena Suhl Universität Paderborn, Germany
Gerhard Wäscher Universität Magdeburg, Germany
Matthieu van der Heijden University of Twente, The Netherlands
108
Effects of Ownership on Hospital Efficiency in Germany

Oliver Tiemann, Jonas Schreyögg...................................................................................................................................................... 115
Thin Capitalization Rules and Entrepreneurial Capital Structure Decisions
Alexandra Maßbaum, Caren Sureth...................................................................................................................................................147
Do Taxes Matter in the CAPM?
Lutz Kruschwitz, Andreas Löffler........................................................................................................................................................171
VHB-JOURQUAL2: Method, Results, and Implications of the German Academic Association for
Business Research‘s Journal Ranking
Ulf Schrader, Thorsten Hennig-Thurau............................................................................................................................................. 180
Cost Sharing under Uncertainty: An Algorithmic Approach to Cooperative Interval-Valued Games
Alf Kimms, Julia Drechsel...................................................................................................................................................................206
The Role of Ambidexterity in Marketing Strategy Implementation: Resolving the Exploration-Exploitation Dilemma
Christiane Prange, Bodo B. Schlegelmilch.........................................................................................................................................215
109
p 115
Oliver Tiemann of a panel (n = 1,046) of public, private for-profit, and pri-
Munich School of Management, vate non-profit hospitals between 2002 and 2006. This was
Ludwig-Maximilians-Universität München followed by a second-step truncated linear regression model
with bootstrapped DEA efficiency scores as dependent vari-
Jonas Schreyögg able. In this model we explored the impact of hospital organi-
Munich School of Management, zational and environmental characteristics while controlling
Ludwig-Maximilians-Universität München for patient heterogeneity. The results of our analysis show
that public hospitals performed significantly better than their
private for-profit and non-profit counterparts. We also found
Several studies have compared the efficiency of public, private a significant positive association between hospital size and
for-profit, and private non-profit hospitals. However, most of efficiency, and that competitive pressure had a significant
these studies have data and methodological limitations. In ad- negative impact on hospital efficiency. In addition, we found
dition, none of the studies has considered parameters for the a number of important interaction effects, between compe-
quality of care together with the number of cases as tradition- tition and ownership as well as hospital size and ownership.
al output parameter. In the German hospital sector different In particular, we found that private for-profit hospitals are
ownership types have co-existed for decades, making this an especially inefficient in regions with strong competition and
interesting field for investigating the effects of ownership on private for-profit hospitals are more efficient among the very
efficiency. The objective of the present study was to evaluate large hospitals with more than 1,000 beds. Furthermore,
the relative efficiency of public, private for-profit, and private when quality of care was considered as an additional output
non-profit hospitals in Germany. First, bootstrapped data en- in our efficiency models, our findings indicate an inevitable
velopment analysis (DEA) was used to evaluate the efficiency trade-off between efficiency and quality of care.
110
Volume 2 | Issue 2 | December 2009 | www.business-research.org | ISSN 1866-8658
147
p
Thin Capitalization Rules and Entrepreneurial Capital
Structure Decisions
Alexandra Maßbaum parameters. In Belgium, equity capital is always beneficial
Faculty of Business Administration and Economics, under the given tax rates and debt-equity ratio. For an Italian-
University of Paderborn type tax system, the financing decision mainly depends on the
ratio of the internal after-tax yield and the aftertax market
Caren Sureth rate of return. Assuming that these rates are almost equal,
Faculty of Business Administration and Economics, debt financing will be beneficial for most investors. With a lo-
University of Paderborn cal business tax and thin capitalization rules that distinguish
between long- and short-term debt (German type), the results
From a tax planner’s point of view, it is often attractive to depend significantly on the debt’s time structure. If the frac-
choose debt over equity financing. As this has led to an in- tion of long-term debt is large, equity capital is likely to be fa-
crease in debt financing of corporations, many countries have vorable. An advantage of debt capital arises if the fraction of
introduced thin capitalization rules to secure their tax rev- long-term debt is small.
enues. Thin capitalization rules are regulations that limit the The analysis helps investors not only to make their dividend
corporate tax deductibility of interest paid to shareholders. We and financing decisions under the respective tax systems but
analyze the influence of these regulations on investors’ divi- also to adjust their decisions when tax laws change. Our analy-
dend and financing decisions. We consider the Italian, Ger- sis is representative of all thin capitalization rules that refer to
man and Belgian thin capitalization rules in 2007 as examples a permitted debtequity ratio. As such regulations exist in sev-
of regulations with a given permitted debt-equity ratio. In eral countries, our results can be relatively easily transferred
2008 both Italy and Germany replaced their thin capitaliza- to dividend and financing decisions in various countries to
tion rules with an interest barrier. We find that full retention support investor’s decisions and help treasuries to decide
is always the optimal dividend policy. Further, often no gen- what thin capitalization type to implement under their given
eral statement regarding the profitability of either financing tax regime.
option can be made. The effects depend on tax and non-tax
171
p
Lutz Kruschwitz However, neither vanishing interest rates nor CARA utility
Department of Banking and Finance, functions are realistic cases. Since there seems to be no way
Freie Universität Berlin to extend our results beyond those two special cases, we con-
clude that taxes do have an impact on security prices in the
Andreas Löffler CAPM as a rule.
Department of Finance and Investment,
University of Paderborn
Authors contributing to the tax CAPM discussion usually

neglect the fact that the Treasury typically redistributes the
tax revenues that were collected from investors. Whereas this
may be acceptable for a partial model, it is certainly unaccept-
able for an equilibrium model. Surprisingly, this aspect has
been overlooked by a large number of authors. Based on a total
model that contains the redistribution we can show that equi-
librium security prices are not affected by taxation if either
the riskless rate vanishes or investors show constant absolute
risk aversion. Both results can be explained by economic rea-
soning.
111
p 180
VHB-JOURQUAL2: Method, Results, and Implications of the
German Academic Association for Business Research‘s Journal
Ranking
Ulf Schrader (process quality). The approach weights the individual assess-
Institute of Vocational Education and Work Studies, ments according to the expertise of the respondents.
Technical University of Berlin For VHB-JOURQUAL2, 1,011 VHB-members evaluated the
scientific quality of more than 1,633 international and Ger-
Thorsten Hennig-Thurau man-language academic journals. The final ranking com-
Department of Marketing and Media Research prises 666 business research journals which are all assessed
Bauhaus-University of Weimar by at least 10 respondents. Within the top ten journals are
four marketing and three finance journals, with the Journal
VHB-JOURQUAL represents the official journal ranking of of Finance being listed as the number one journal. The best
the German Academic Association for Business Research. German-language journal is Wirtschaftsinformatik, ranked
Since its introduction in 2003, the ranking has become the 169, followed by Schmalenbachs Zeitschrift für betrieb-
most influential journal evaluation approach in German- swirtschaftliche Forschung (zfbf), ranked 177.
speaking countries, impacting several key managerial de- The validity of ranking is supported by strong and significant
cisions of German, Austrian, and Swiss business schools. correlations with the first edition of VHB-JOURQUAL and
This article describes the concept of VHB-JOURQUAL, the with established rankings from the U.S., U.K., France, and the
method it uses to generate a quality index for an extensive Netherlands.
list of academic journals, and the results of the most recent The authors acknowledge the threat that the importance of
edition of VHB-JOUQUAL. VHB-JOURQUAL is based on an VHB-JOURQUAL might be carried to excess. They see it as a
individualized online-survey of members (i.e. professors and valid and useful tool to measure the scientific quality of jour-
researchers with Ph.D.) of the German Academic Associa- nal publications, but argue that it must not be confused with a
tion for Business Research (Verband der Hochschullehrer für measure of academics’ overall performance. At the same time,
Betriebswirtschaftslehre – VHB). The journal ranking mea- further development of the VHB-JOURQUAL approach offers
sures the scientific quality of academic journals according to promising research perspectives.
two dimensions: (1) scientific quality of the published articles
(outcome quality) and (2) quality of the peer review process
p 206
Cost Sharing under Uncertainty: An Algorithmic Approach to
Cooperative Interval-Valued Games
Alf Kimms rules may be used for specifying a fair way of sharing ex post
Mercator School of Management, procurement costs. The first rule states that the total procure-
University of Duisburg-Essen ment costs are distributed among the partners who cooperate.
And the second rule makes sure that no (sub)group of partners
Julia Drechsel can perform better by leaving the grand coalition where all
Mercator School of Management, actors are involved. Any allocation of costs that follows these
University of Duisburg-Essen rules is named an element of the so-called core of this type
of cooperative game. If the uncertain demand of each partner
In cooperative business settings like supply networks where can be described by an interval of possible demand values, we
actors can form coalitions, the partners within a coalition face a so-called interval valued game. In this case we can do a
have to negotiate the distribution of the outcome shares in bit more than just stipulating the two rules. We can compute
advance. But this is a problem if the outcome is uncertain. an interval of cost share values for each partner in advance
It seems that the best one can do is to negotiate rules with such that also in case of uncertain outcomes a cooperation
which the outcome is shared. As an illustrative example we between the partners can be viewed as stable. The respec-
use purchasing alliances where partners cooperate to reduce tive computation of these intervals is everything but trivial,
procurement costs. Each partner has to fulfil his demand by and the paper describes the technical details of doing this.
placing orders alone or several partners may cooperate to
place orders together, e.g. in order to save fixed costs. The
demand of each partner may be uncertain and so the total
demand of a coalition may be uncertain as well. Two simple
112
p 215
The Role of Ambidexterity in Marketing Strategy Implemen-
tation: Resolving the Exploration-Exploitation Dilemma
Christiane Prange in that they allocate their time to different tasks (contextual
Lyon Business School ambidexterity) or develop a preference for one strategy so that
eventually managers must be exchanged (peripatric ambidex-
Bodo B. Schlegelmilch terity). In this article, we suggest a multi-level and temporal
WU Wien and Leeds University Business School framework that synthesizes previous research and helps man-
agers to decide upon the most suitable type of ambidexterity.
Marketing managers today face many contradictory challeng- Examples from four firms further demonstrate that knowl-
es when formulating and implementing strategies. Most of edge of ambidextrous designs, associated tools and proce-
these strategies are not intuitively compatible, such as, the re- dures is a prominent requirement when companies want to
quirements of business development versus R&D, incremental solve their marketing dilemmas. Each of the ambidextrous de-
versus radical innovation or cost-driven versus high-quality signs facilitates the solution of a different marketing dilemma
strategies. A recent stream of research reinterprets these chal- and requires a specific, partly overlapping, set of implementa-
lenges as exploration versus exploitation activities and offers tion factors. These implementation factors relate to both the
some solutions by suggesting the concept of ambidexterity. individual and organizational level and require that managers
Ambidextrous organization designs are suggested to overcome take a holistic view on elements, such as, goals, structures,
intrinsically conflicting demands into organizational proce- cultures, communication, incentives, recruiting leadership is-
dures and toolsets that help to solve marketing dilemmas. Sev- sues, behavioral complexity, and organizational context. Each
eral variants of ambidexterity may be used, such as separating type of ambidexterity requires a specific combination of these
tasks between organizational units (structural ambidexterity) elements. Further, as firms may not only use single variants
or pursuing one task after the other (sequential ambidexter- of ambidexterity but focus on their dynamic interplay, the ad-
ity). Also, individuals may exhibit ambidextrous behaviors justment of implementation factors is even more pertinent.
113
Oliver Tiemann, Jonas Schreyögg
V o l u m e 2 | I s s u e 2 | D e c e m b e r 2 0 0 9 | w w w . b u s i n e s s - r e s e a r c h . o r g | ISSN 1866-8658
BuR - Business Research
Official Open Access Journal of VHB
Verband der Hochschullehrer für Betriebswirtschaft e.V.
Volume 2 | Issue 2 | December 2009 | 115-145
Effects of Ownership on Hospital Efficiency in

Germany
Oliver Tiemann, Munich School of Management, Ludwig-Maximilians-Universität München and Helmholtz Zentrum München, Germany
E-Mail: tiemann@bwl.lmu.de
Jonas Schreyögg, Munich School of Management, Ludwig-Maximilians-Universität München and Helmholtz Zentrum München, Germany
E-Mail: schreyoegg@bwl.lmu.de
Abstract
The objective of our study was to evaluate the efficiency of public, private for-profit, and private non-profit
hospitals in Germany. First, bootstrapped data envelopment analysis (DEA) was used to evaluate the effi-
ciency of a panel (n = 1,046) of public, private for-profit, and private non-profit hospitals between 2002
and 2006. This was followed by a second-step truncated linear regression model with bootstrapped DEA
efficiency scores as dependent variable. The results show that public hospitals performed significantly
better than their private for-profit and non-profit counterparts. In addition, we found a significant positive
association between hospital size and efficiency, and that competitive pressure had a significant negative
impact on hospital efficiency.
Keywords: public hospitals, ownership, data envelopment analysis, performance measurement, non-
parametric technique, truncated regression, Germany
Manuscript received September 23, 2008, accepted by Peter Walgenbach (Management) September 29,
2009.
1 Introduction reimbursement system, which was based on per-

A considerable number of empirical studies have diem charges, was to set financial incentives that
investigated whether public, private for-profit, and would increase the efficiency of German hospitals
private non-profit hospitals differ in terms of effi- (Schreyögg, Tiemann, and Busse 2006).
ciency. However, most of these studies have data Due to substantial overcapacities and the rapid
and methodological problems limiting the gener- changes currently taking place in the regulatory and
alizability of the findings. Furthermore, none of the competitive environment, the German hospital
studies has considered parameters for the quality of sector is now facing an extensive process of consoli-
care together with the number of cases as traditional dation and reorganization. In this context, hospitals
output parameter. The German hospital sector is are considering mergers, acquisitions, and coopera-
large, and several different ownership types have co- tive agreements as ways to improve competitive-
existed for decades, making this a fruitful field for ness. Over the past decade, the total number of hos-
studying the effects of ownership on efficiency. Be- pitals in Germany has decreased and a growing
cause of increasing cost pressure, the hospital sector number of hospitals have been privatized. Although
in Germany has been subject over the past two dec- there are several possible reasons for this develop-
ades to a variety of healthcare reforms aiming to ment, the main driver has been the need to increase
stabilize expenditures at sustainable levels. The hospital efficiency (Megginson, Nash, and van Ran-
most significant reform in recent years was the in- denborgh 1994).
troduction of a new system of reimbursement based The objective of the present study was to evaluate
on diagnosis-related groups (DRGs). The chief mo- the relative efficiency of public, private for-profit,
tivation behind this fundamental overhaul of the old and private non-profit hospitals in Germany. To do
115
so, we used a bootstrapped DEA approach followed 2.1 Theoretical Perspectives and
by a second-step truncated linear regression model Development of Hypotheses
while controlling for patient heterogeneity and ex- By ownership, hospitals can be generally divided
ploring the impact of hospital organizational and into private hospitals (i.e. private for-profit and
environmental characteristics. Failing to take prop- private non-profit), invested and owned by private
er account of these characteristics can lead to seri- entities (i.e. individual or several private owners)
ously flawed conclusions (Fried, Knox Lovell, and public hospitals, invested and owned mainly by
Schmidt, and Yaisawarng 2002). public entities such as governments. Agency theory
The paper is structured as follows. The next (i.e. and property-rights theory, as well as public choice
second) section reviews the relevant theoretical and theory provide different explanations for a common
empirical literature on the effects of ownership on outcome. Private for-profit ownership, they hy-
efficiency and quality of care. The third section pre- pothesize, is superior to public and private non-
sents the setting, data, and methodology used in this profit ownership because private for-profit owner-
paper to explore this relationship. The fourth sec- ship is associated with a higher productive effi-
tion describes and discusses the estimated results, ciency. These theories emphasize that differences in
and the final section draws conclusions and makes efficiency are due to substantial dissimilarities in
suggestions for future research. objectives, incentives, and control mechanisms
between ownership types. The following discussion
2 Theoretical and empirical highlights the main arguments.
background The agency theory assumes that managers (or
agents) seek to maximize their own utility rather
The hospital industry in Germany is a fruitful field
than that of the organization or its owners (or prin-
for studying the effects of ownership on hospital
cipals). As a result, in all three types of hospital
performance. It is one of the few sectors where dif-
ownership owners face a principal-agent problem
ferent types of ownership have co-existed for dec-
with those whom they hire to do the managing.
ades, and it is large, ensuring an appropriate sample
Although both public and private hospitals face this
size. When selecting a central performance criterion
problem, it is assumed that private for-profit hospi-
for our analysis, we followed the example of other
tals have better means to solve the principal-agent
theoretical and empirical studies that have dealt
dilemma and therefore their performance in terms
with the comparison of ownership types. Standard
of productive efficiency is expected to differ signifi-
performance measures such as return on invest-
cantly. The owners of a profit-seeking hospital have
ment and profitability were found to be inappropri-
profits as their measure of the manager’s success.
ate for public and private non-profit entities
The owner can limit divergences from his interest,
(Leibenstein 1966; Feldstein 1967; Rees 1988; Pes-
by making the manager's compensation a positive
tieau and Tulkens 1990). Consequently, we focus
function of the profits (i.e. a correlation between
our analysis on technical efficiency, which is a key
profits and managerial salaries and promotions). In
concept in measuring performance as it refers to the
addition, the income of executive physicians in pri-
optimal use of resources in the production process.
vate for-profit hospitals might also be tied to hospi-
In particular, technical efficiency (i.e. productive
tal's financial performance. Within the public and
efficiency) is a measure of how well an organization
private non-profit hospitals, individual decision
produces output from a given amount of input, or
makers rarely have their income tied to the hospi-
alternatively produces a given amount of output
tal's performance (e.g., pay scales designed for civil
with minimum quantities of inputs. In order to
servants); therefore no individual has a strong in-
address a key limitation of existing studies, our
centive to enforce efficient behavior. Accordingly, it
study examines both the productive efficiency im-
is expected that private for-profit hospitals realize a
plications and patient health outcomes (i.e. quality
higher level of efficiency than their public and pri-
of care) of hospital ownership. There have been
vate non-profit counterparts (Reder 1965; Rice
many theoretical contributions on the effects of
1966; Newhouse 1970; Lee 1971; Pauly and Redisch
hospital ownership on efficiency and quality of care.
1973; Foster 1974; Sloan 1976; Fama and Jensen
The following discussion highlights the main argu-
1983; Jacobs and Rapoport 2003).
ments.
116
According to the property-rights theory, ownership are others. Such hospitals produce services that are
of a firm involves two essential rights: (1) the right not likely to be produced by a for-profit institution,
to control the firm and (2) the right to appropriate unless, of course, dedicated subsidies exist for these
the firm's profits (i.e. financial surplus). Accord- services (e.g., supplementary for highly specialized
ingly, the defining difference is that public and non- services or centers in Germany). A profit-
profit hospitals are precluded from distributing, in maximizing hospital will produce services to the
financial form, its surplus to those in control of the point where the marginal costs equal the marginal
organization (i.e. non-distribution constraint). revenue. Public and private non-profit hospitals will
Within for-profit hospitals, assigning some of the expand their output at least to the point where the
financial surplus to the individual who manage the hospital just breaks even – that is, where the total
hospital thus provides a way to monitor his activi- cost equals total revenue. Much of the rationale for
ties. In this case, it is expected that the monitoring is public and private non-profit hospital ownership is
automatic and self-imposed by the manager and based on the welfare implications of these owner-
that managers will have strong incentives to behave ship types (Hall 1995; Steinberg 2006; Rathgeb
in the interests of the owners (Jacobs 1974; Clark- Smith and Gronbjerg 2006).
son 1972; Hansmann 1988). In addition, potential
Hypothesis 1: Private for-profit hospitals are
divergences of interests between owners and man-
more efficient than private non-profit and public
agers in private for-profit organizations are further
hospitals.
reduced by external mechanisms, including (a) a
market for ownership rights that enables the owners The character of the services that are provided by
to sell their shares if they are not satisfied with ma- hospitals implies that quality of care is one major
nagerial performance; (b) the threat of takeover; (c) objective for hospitals in addition to efficiency. For
the threat of bankruptcy; and (d) an extensive ma- the hospital sector, a common theoretical assump-
nagerial labor market (Villalonga 2000). Thus, tion is that better quality of care requires more re-
property-rights theory assumes that private for- sources and therefore reduces efficiency. It is fur-
profit ownership is associated with a higher effi- ther assumed that due to information asymmetries
ciency compared to the other types of ownership. between hospitals and other actors (e.g., patients
As part of public choice theories Buchanan and and purchasers) hospitals may be able to vary their
Tollison (1972), Niskanen (1975), and Shleifer and quality of care (Newhouse 1970; Weisbrod 1988).
Vishny (1994) argue that politicians impose their However, differences in the trade-off between pro-
objectives on public organizations in order to gain ductive efficiency and quality of care among public
votes, which may conflict with profit maximization and private non-profit providers have attracted little
and, therefore, with productive efficiency. In the attention from a theoretical point of view. Given the
case of private non-profit providers Newhouse strong efficiency focus of private for-profit providers
(1970) and Weisbrod (1988) argue that, because it is argued that due to the trade-off those hospitals
they lack the incentive to maximize profit, they offer a lower quality of care than hospitals of other
should be expected to diverge from strict cost- or ownership types. In contrast, private non-profit and
inefficiency-minimizing behavior and instead max- public hospitals allow more room for objectives
imize quality, quantity, and/or prestige. Sloan other than efficiency and are therefore able to pro-
(2000) supports this view and adds that productive vide a higher quality of care than private for-profit
efficiency will decay if objectives are vague and con- hospitals.
tradictory, which is typically the case in public and Another group of theorists argues that particularly
private non-profit hospitals. physicians represent a group that is typically acting
According to the theories mentioned above, private driven by high intrinsic motivation (Arrow 1963;
for-profit hospitals are expected to maximize profits Zismer 1999; Feess and Ossig 2007). Thus, physi-
on the basis of a high level of productive efficiency. cians are intrinsically motivated to deliver high
It is emphasized that dissimilarities in efficiency and quality of care. The enhanced behavioral discretion
quality of care are due to substantial differences in conditioned by the non-distribution constraint of
objectives, incentives, and control mechanisms. public and private non-profit hospitals might pro-
Owners may differ as some are more willing to sup- vide a fruitful field for intrinsic motivation of physi-
ply more than the profit-maximizing services than cians to act in the patient’s best interest. In contrast,
117
the extrinsic motivation conditioned by financial Brown 2003; Chang, Chang, Das, and Li 2004),
incentive schemes usually provided in private for- while six studies showed that publicly owned hospi-
profit hospitals can be expected to result in a crowd- tals are more efficient than private for-profit and
ing out of intrinsic motivation (Osterloh and Frey non-profit hospitals (Ozcan, Luke, and Haksever
2000; Frey and Jegen 2001). This effect lends sup- 1992; Burgess and Wilson 1996; Koop, Osiewalski,
port to the notion that private for-profit hospitals and Steel 1997; Chirikos and Sear 2000; McKay,
provide a lower quality of care. However, as physi- Deily, and Dorner 2003; Sari 2003). Burgess and
cians have to act in accordance with regulations and Wilson (1998) found no significant efficiency differ-
ethical rules (e.g., clinical guidelines, Hippocratic ences associated with ownership. Out of these ele-
Oath) a certain minimum standard of quality of care ven studies, seven studies have a large nation-wide
will be ensured. sample and are based on comparable large data
samples (i.e. sample sizes between 382 and 4,075
Hypothesis 2: The efficiency differences between
hospitals). Among all eleven studies, none of the
ownership types will decrease if quality of care is
studies have used patient-level information to con-
taken into account to determine efficiency (i.e.
trol for patient heterogeneity and to ensure the
quality-adjusted efficiency) due to an inevitable
comparability of the observed hospitals which may
trade-off between efficiency and quality of care.
be due to the lack of availability of adequate meas-
ures for patient heterogeneity between ownership
2.2 Empirical Evidence
types. Only two studies have used a two-stage analy-
There is a rich body of literature on hospital per-
sis (i.e. DEA followed by some form of regression
formance in the United States and Europe. Two
analysis), despite the fact that in recent years it has
major reviews have been published in recent years.
become the state-of-the-art approach (Burgess and
Hollingsworth (2008) reviewed the literature on
Wilson 1998; Ferrier and Valdmanis 1996). In addi-
frontier efficiency measurement techniques in
tion, the study periods of all eleven studies are dated
healthcare. From the early 1980s up to mid-2006 a
back to the late 1980s or 1990s, thus limiting the
total of 317 studies had been published, almost 80 %
generalizability of the results.
of which made use of non-parametric DEA while
Empirical data on the efficiency of the German hos-
most of the other studies used parametric stochastic
pital sector, and especially on the effect of owner-
frontier analysis (SFA). Reviewing the studies on
ship status on hospital efficiency, are scarce. The
efficiency differences of hospital ownership Hol-
efficiency of German hospitals has been investigated
lingsworth found 39 studies and concluded that
primarily using DEA. Staat and Hammerschmidt
public hospitals in Europe and the United States
(2000) were the first to employ DEA to German
appear to be more efficient than their private for-
hospitals, based on data of 160 hospitals in 1994.
profit and non-profit counterparts. Shen, Eggleston,
The authors found that DEA efficiency scores dif-
Lau, and Schmid (2007) applied meta-analytic me-
fered significantly between ownership types and
thods to conduct a quantitative review of the em-
that private non-profit hospitals were, on the aver-
pirical literature on hospital ownership published
age, less efficient than their public and private for-
between January 1990 and July 2004 (i.e. 16 em-
profit counterparts. Using aggregate state-level data
pirical studies). The authors concluded that owner-
from 1991 to 1996, Helmig and Lapsley (2001)
ship had an impact on efficiency, but the conven-
showed that public and non-profit hospitals appear
tional assumption that private for-profit hospitals
to use relatively fewer resources than private for-
operate more efficiently was not supported in the
profit hospitals (n= 288). Staat (2006) applied a
review by Shen, Eggleston, Lau, and Schmid (2007),
refined DEA approach to the same sample of 160
who indeed rather observed the opposite.
hospitals for the year 1994 and found no significant
Taken together Hollingsworth (2008) and Shen,
efficiency differences associated with ownership.
Eggleston, Lau, and Schmid (2007) reviewed eleven
Herr (2008) employed SFA to investigate the effi-
international studies that have compared all three
ciency of about 1,500 German hospitals between
different types of ownership in terms of efficiency.
2001 and 2003. Herr’s empirical results for the
In four studies public hospitals were found to be less
years 2000 through 2003 indicate that private for-
efficient than their counterparts (Zuckerman, Had-
profit and non-profit hospitals were less efficient
ley, and Iezzoni 1994; Ferrier and Valdmanis 1996;
than publicly owned hospitals.
118
Of the few studies that have investigated the effi- was positively associated with the observed in-
ciency of the German hospital sector to date, all hospital mortality rate.
have important drawbacks. One of these is the lack While testing the above mentioned hypotheses we
of detailed data, which means that the quality and also aimed to address methodological limitations of
the quantity of the information used to assess effi- previous studies. First, we used a two-step method-
ciency is often limited (e.g., aggregate state-level ology integrating covariates representing organiza-
data, small sample size), thus limiting the gener- tional and environmental characteristics in the sec-
alizability of results. Another drawback of these ond stage regression that may have impact on hos-
studies is their use of DEA. From a methodological pital efficiency. Second, we controlled for patient
point of view, some authors argue that results of heterogeneity among hospitals by including vari-
DEA analysis are much more robust when study ables representing case-mix complexity. Third, we
samples are very large (Shen, Eggleston, Lau, and relied on a large data sample to generate robust
Schmid 2007; Jacobs, Smith, and Street 2006). All results. Fourth, we performed a number of robust-
of the DEA studies that have investigated the effi- ness checks to investigate the validity of our results.
ciency of the German hospital sector thus far have
used DEA alone without using a two-stage ap- 3 Research design and methods
proach. In addition, none of the German studies
used patient-level information on diagnoses, proce- 3.1 Setting and Data
dures, and age to control for patient heterogeneity In Germany, approximately 1,800 hospitals provide
and to ensure the comparability of the observed inpatient care and receive DRG payments from
hospitals. social health insurance funds and private health
Our review of empirical studies suggests that, in insurance companies. The data for our study were
contrast to the assumed behavior outlined in theory, derived from the annual hospital reports collected
there is no evidence that private ownership is asso- and administered by the Research Data Centre of
ciated with higher efficiency compared to other the Statistical Offices of the Länder (For-
ownership types. In fact, our review indicates that schungsdatenzentrum der Statistischen Landesäm-
public hospitals use relatively fewer resources than ter 2008). This rich dataset covers all public, private
private for-profit and non-profit hospitals. In addi- for-profit, and private non-profit hospitals in Ger-
tion, none of the mentioned studies has considered many and contains hospital-level information on
parameters for the quality of care together with the costs and hospital infrastructure, as well as patient-
number of cases as traditional output parameter. level information on age, diagnoses, and certain
The output of the hospitals’ production process has procedures performed per case. Our study is based
been measured in terms of physical units (e.g., on data from the fiscal years 2002-2006, and the
number of patients treated or patient days). Al- unit of analysis was the hospital. Because of data
though an increasing number of studies have made privacy issues, we were able to obtain randomly
adjustments for case mix, the intermediate hospital selected data from only two-thirds of German acute
outputs (i.e. number of cases) are not adjusted for care hospitals (n = 1318). To ensure the comparabil-
final health outcomes/quality of care (e.g., mortality ity of the hospitals in the sample, hospitals provid-
rates or readmission rates). One reason for this ing only psychiatric care, day clinics, and hospitals
might be the paucity of validated measures of qual- with fewer than 50 beds were excluded from further
ity. The absence of quality measures requires the analysis. In addition, content-based plausibility
implicit assumption that there are no systematic checks were conducted to reveal measurement er-
variations in quality, or that variations in quality do rors. Finally, a total of 1,046 hospitals remained in
not systematically affect efficiency. However, studies the sample and due to missing values in some years
examining the trade-off between efficiency and our sample for the years 2002 through 2006 is
quality of care have provided evidence of an inevita- based on 4,902 observations.
ble trade-off between these two measures. Morey, German hospitals can have public (PUBLIC), pri-
Fine, Loree, Retzlaff-Roberts, and Tsubakitani vate for-profit (PRIVATE-FP), or private non-profit
(1992), Picone, Chou, and Sloan (2002) and Deily (PRIVATE-NP) ownership status. Between 1993
and McKay (2006) found that hospital efficiency and 2006, the share of private for-profit hospitals
119
rose from 16 % to 28 %, whereas the share of public recognize that the inputs and outputs are collected
hospitals decreased from 43 % to 34 %. During the routinely by hospital accounting departments, mak-
same period, the share of private non-profit hospi- ing measurement errors less relevant. Based on our
tals remained relatively constant (Forschungsdaten- understanding of the market constraints within the
zentrum der Statistischen Landesämter 2008). German hospital sector, we assumed variable re-
turns to scale, which may be appropriate when it is
3.2 First stage: Data Envelopment Analysis impossible to assume that all observed units are
In the hospital sector, data envelopment analysis operating at an optimal scale (Banker, Charnes, and
(DEA) has been the most frequently used approach Cooper 1984). In the healthcare sector, imperfect
for measuring efficiency (Hollingsworth 2008). competition and budgetary constraints, as well as
DEA is a linear programming technique for evaluat- regulatory constraints on entry, mergers, and exits,
ing the relative efficiency of individual organizations may often result in organizations operating at an
based on observed data. The relative efficiency of an inefficient scale size (Jacobs, Smith, and Street
organization is defined as the ratio of the weighted 2006).
sum of its outputs to the weighted sum of its inputs. When selecting inputs and outputs, we followed the
The weights are not pre-assigned, but rather deter- example of other studies that developed DEA
mined by the model, thus avoiding any bias result- frameworks for measuring hospital efficiency (Pi-
ing from subjectively assigned weights. DEA as- lyavsky, Aaronson, Bernet, Rosko, Valdmanis, and
sesses the efficiency of organizations in two stages. Golubchikov 2006; Jacobs, Smith, and Street 2006;
First, the location and the shape of the efficiency Burgess and Wilson 1998). For the purposes of our
frontier are determined based either on organiza- study, six inputs and two outputs were considered.
tions that use the lowest input mix to produce their The first input variable (SUPPLIES) is the amount
outputs or on organizations that achieve the highest spent on supplies per year, including operational
output mix given their inputs. The efficiency frontier expenses, but excluding payroll, capital, and depre-
is constructed by joining these observations and all ciation expenses. Taking into account the relative
linear observations in the input-output space. In our importance of resource use in terms of labor in the
study, we used an input-oriented DEA approach to hospital production process, additional input vari-
address the following question: "To what extent can ables were the number of full-time equivalents
the input factors, defined as supplies and labor, be (FTE) for the following personnel categories: clinical
reduced proportionally without changing the output staff (CLIN), nursing staff (NURS), medical-
quantities of German hospitals?" Second, DEA technical staff (MEDTECH), administrative staff
measures inefficiency as the radial distance from the (ADMIN), and other staff members (OTHER).
inefficient unit to the frontier and produces an effi- The first output variable (INPATIENT) reflects the
ciency score that reflects the relative efficiency of number of treated inpatient cases per year in each
each unit (Cooper, Seiford, and Zhu 2004). hospital. To adjust for variations in the quality of
DEA allows multiple inputs and outputs to be con- care between hospitals, we used the average mortal-
sidered simultaneously, which seems particularly ity rates per year in each hospital. Therefore, the
well-suited for measuring the efficiency of hospitals. second output represents 1 minus the average hos-
In contrast to parametric methods, where a specific pital mortality rate per year (1 - MORTALITY). This
pre-defined functional form is assumed to apply to could lead to the concern that case mix might vary
each observation, DEA has the advantage of requir- systematically across the hospitals in our sample,
ing no assumptions about the functional form of the which would be problematic because hospitals with
production or cost frontier. Although this reduces a more complex case mix should receive lower effi-
the need for a theoretical exposition of the model ciency scores in the first stage of our analysis. To
specification, there are other important considera- help address this potential issue, we included case-
tions. The DEA results are sensitive to the number mix measures in our regression analysis as control
of variables included in the model. In general, the variables (see further details in section 3.2). A de-
number of inputs and outputs is limited by the sam- scriptive overview of the inputs and outputs used for
ple size, which should not exceed one-third of the our DEA model is given in Table 1.
number of observed units (Banker, Charnes, Coo- A correlation analysis (Appendix 1) shows that our
per, Swarts, and Thomas 1989). It is important to multiple inputs are positively correlated with our
120
output set. This is an important prerequisite for OTHER Number of other 87.4 106.7
applying DEA. In addition, subsets of inputs and staff in FTE
outputs are often correlated. In our study especially PUBLIC 127.7 184.9
the input variables are highly correlated. This might PRIVATE-NP 60.0 45.9
suggest that a limited number of inputs might ade- 44.1 45.9
PRIVATE-FP
quately represent the selected input set in our effi-
SUPPLIES Amount of supplies 16.1 23.0
ciency assessment. However, several authors (e.g., in million euros
Dyson, Allen, Camanho, Podinovski, Sarrico, and
PUBLIC 22.8 38.8
Shale 2001; Jacobs, Smith, and Street 2006) argue
PRIVATE-NP 10.6 9.5
that omission of a highly correlated variable can
lead to significant changes in the efficiency esti- PRIVATE-FP 11.5 14.5
mates. They emphasize that correlation is an aggre- INPATIENT Number of treated 10,852 9,912
gate measure of the closeness of two sets of ob- cases
served data. Therefore, variations of the input levels PUBLIC 13,941 14,731
of individual hospitals may have little effect on the PRIVATE-NP 8,809 5,839
correlation, but significant effect on the measured 7,340 7,180
PRIVATE-FP
efficiency. It may also give evidence for a possible
1-MORTALITY 1 minus the average 0.974 0.015
production technology that is common among all mortality rates per
decision-making units. In addition Dyson, Allen, year
Camanho, Podinovski, Sarrico, and Shale (2001) PUBLIC 0.973 0.011
argue that the omission of variables in order to in-
PRIVATE-NP 0.974 0.018
crease discrimination is less relevant for large data
PRIVATE-FP 0.977 0.020
samples. Thus, we used all input variables for our
DEA model. DEA I** Average DEA effi- 0.634 0.138
ciency scores
Table 1: Variable definitions and descriptive PUBLIC 0.649 0.130
statistics for first-stage analysis*

Variable name Definition Mean SD
DEA II** Average DEA effi-
CLIN Number of clinical 78.17 106.54 ciency scores 0.636 0.137
staff in FTE
PUBLIC 0.654 0.128
PUBLIC 112.7 182.8
DEA III** Average DEA effi-
NURS Number of nursing 225.8 225.3 ciency scores 0.662 0.133
staff in FTE
PUBLIC 0.674 0.125
PUBLIC 296.6 353.4
*Pooled sample including university hospitals and hospitals with
MEDTECH Number of medical 163.3 231.3
beds ≥50.
technicians in FTE
**DEA models are specified in table 2.
PUBLIC 240.9 415.9
PRIVATE-NP 106.5 80.7 Three model specifications served as a sensitivity

92.0 110.0
analysis to test whether the efficiency scores and
PRIVATE-FP
ranks remained stable when a specific variable
ADMIN Number of adminis- 43.1 56.0
trative staff in FTE
(quality of care as second output) or specific provid-
ers (university hospitals) were removed or added.
PUBLIC 60.0 100.8
Efficiency models I and II both used INPATIENT as
the only output variable, whereas university hospi-
PRIVATE-FP 26.4 24.8 tals were removed in the second analysis. The third
121
DEA model reflects quality of care using 1-MOR- variant of the BCC (Banker, Charnes, and Cooper)
TALITY as a second output; here, too, university model can be formulated as a linear programming
hospitals were excluded. The specifications are problem as shown below (Banker, Charnes, and
summarized in Table 2. Cooper 1984). Let θ i , i = 1,…,n , be the hospital’s
Table 2: Specification of DEA models* efficiency where n represents the number of obser-
vations (i.e. the number of hospitals). Matrix
Models Trimming Output
X   k x n refers to k observed inputs of n com-
pared hospitals and matrix Y   r x n refers to r
observed outputs of the compared hospitals. Vectors
DEA I With university hospi- INPATIENT
tals x i   k and y i   k present the inputs and
outputs of unit i , i.e. the i th columns of matrix X
DEA II Without university INPATIENT and Y respectively. Furthermore, 1 refers to a
hospitals column vector of ones with a suitable dimension.
The DEA efficiency score, which is the reciprocal of
DEA III Without university INPATIENT &
the inefficiency, θ i can be obtained by solving the
hospitals 1-MORTALITY
following BCC linear programming model:
*Models are estimated per year (2002-2006)
(1) i  Maxi ,
3.3 Second Stage: Truncated Linear (2) s.t. Y  y 0  0,
Regression Model  X   i x 0  0,
(3)
An important assumption of our study was that
environmental and organizational factors may in- (4)  X   i x 0  0,
fluence the relative efficiency of hospitals in addi- (5) 1T   1,   0.
tion to ownership. By considering the impact of co-
variates reflecting environmental and organizational In the second step, we used the following model
factors on hospital efficiency we believe to provide a specifications for our regression analysis. Let Z i be
better explanation of the variation of efficiency and each corresponding vector of covariates (i.e. types of
more robust results about the effects of ownership ownership, hospital characteristics, environmental
than previous studies that did not control for these characteristics, and patient heterogeneity). Accord-
effects. We therefore used the DEA efficiency scores ing to Simar and Wilson (2007), we applied a trun-
obtained in the first stage of our analysis as depend- cated linear regression to model hospital’s efficien-
ent variable in a truncated linear regression model, cy. Therefore, we assumed θ i as being distributed
which became the favored approach owing to the based upon a set of m  n normally distributed
censored distribution of the DEA-based relative random variables,  j , j  1 , , m with
efficiency estimates (Simar and Wilson 2007). This
model is appropriate for these data, as these are (6)  j  Z j    j ,
bounded at both ends of the 0-1 distribution (Ja- where Z j refers to a vector of covariates,  repre-
cobs, Smith, and Street 2006). However, this ap- sents a parameter vector, and  j is a normally dis-
proach has been found to result in inconsistent es- tributed error term (i.e.  j  N  0 ,  2  ). On this
timates unless the DEA efficiency scores are cor-
basis  1 , , n is defined as the truncated set of
rected by a bootstrapping procedure. The procedure
 1 , , m with  j  1 , and Z i  Z j for
applied in the present study follows the bootstrap
approach developed by Simar and Wilson (1998, i   j .
2000). For our study, the bias-corrected scores were We applied linear regression analysis to assess
derived from 250 bootstrap iterations, which al- whether different types of ownership (PUBLIC,
lowed us to estimate a robust regression model as PRIVATE-FP, and PRIVATE-NP) led to differences
the second-stage analysis (Simar and Wilson 2007). in efficiency; we also considered a number of control
Based on our theoretical framework, the following variables. The use of control variables is of particu-
empirical model was used in the analysis. In the lar importance in the healthcare context because
input-oriented case, the variable returns to scale there are usually certain structural or regulatory
122
determinants of hospital efficiency that a hospital a hospital was located, which is a frequently used
cannot influence. definition in hospital studies (Chang, Chang, Das,
Heterogeneity in hospital characteristics was cov- and Li 2004; Rosko 1999, 2001, 2004; Rosko and
ered by the following variables. The first of these Chilingerian 1999; Chirikos and Sear 1994). Al-
was the number of licensed and staffed beds though there has been some controversy about the
(BEDS), an approach taken in previous studies to appropriate definition of a hospital's market area,
control for hospital size (Carey and Burgess 1999; Garnick, Luft, Robinson, and Tetreault (1987) re-
Dudley, Johansen, Brand, Rennie, and Milstein ported that, for the purpose of measuring competi-
2000; Harrison, Coppola, and Wakefield 2004). In tive activity, it made little difference whether a hos-
the context of strict hospital planning in Germany, pital's market was defined as a county or as a radius.
the number of beds per hospital can be seen, at least The HHI is obtained by squaring the regional mar-
in the medium term, as an exogenous factor outside ket share of a hospital (reflected by the distribution
of hospital management's control (Busse and Ries- of treated cases), and then summing the market
berg 2004). To account for higher resource con- shares of admissions for all of the hospitals in the
sumption due to differences in teaching activities, county. The higher the HHI, the more concentrated
we included a variable (TEACH) for the training of the regional market. We used HHI to measure the
non-medical staff. These activities are represented effects through the changes over time in hospitals'
by the ratio of trainee positions to the sum of all competitive environment. This specification allowed
non-medical personnel. Another important point is us to differentiate between the effects of ownership
that hospitals may hire out beds to self-employed and the effects of changes in market structure re-
ambulatory physicians (e.g., for ambulatory sur- sulting from recent healthcare reforms. Further-
gery). The estimated DEA efficiency scores in the more, variations may also result from the fact that
first stage of our analysis were higher for these hos- hospitals located in eastern or western Germany are
pitals because the referring cases were counted as different in terms of their infrastructure. After Ger-
hospital output, whereas the corresponding re- man reunification in 1990, hospitals in eastern
source use in terms of physicians was not consid- Germany received comparably higher subsidies
ered on the input side. To control for this fact, we from the federal government to upgrade their infra-
considered the proportion of all hospital beds that structure (Busse and Riesberg 2004). Thus, we
had been hired (HIRED BEDS) as variable in the defined being located in eastern Germany (includ-
regression models. The dummy variable "ambula- ing all of Berlin) as a dummy variable (EAST).
tory care" (AMBULATORY) is related to missing Because resource consumption can vary substan-
data from the first stage of our analysis, which only tially between patients, we also included 26 vari-
considers the inputs for the production of ambula- ables to control for variations associated with case-
tory care, whereas the outputs of the ambulatory mix complexity. We used patient-level information
activities (e.g., ambulatory visits) were not captured on diagnoses, procedures, and age to control for
in our data set. Because of the ongoing trend to- patient heterogeneity. To control for case-mix com-
wards privatization in Germany, one could argue plexity, we compiled a comprehensive list of co-
that a large number of the existing private for-profit morbidities that have been found in other studies to
hospitals were recently converted from public and affect mortality and resource use. In doing so, we
non-profit ownership status and that most of these relied on the Charlson Comorbidity Index (Sunda-
hospitals represent inefficient units. Therefore, we rarajan, Henderson, Perry, Muggivan, Quan, and
included a dummy variable (CONVERSION) to Ghali 2004). Thus, the full set of case-mix measures
account for public and non-profit hospitals that are included in all of the regression models de-
were privatized during the study period (n = 68). ployed in our second-stage analysis. Another com-
The set of explanatory variables representing the mon approach would be to use the case-mix index
different environmental characteristics were as whose weight reflects the relative costliness of
follows. The most important regressor is the Hir- DRGs. Due to data privacy issues, we were not per-
schman-Herfindahl index (HHI), which measures mitted to match the referring data. However, Carey
competitive pressure in a hospital's market, a stan- (2000, 2002) reported that individual-level meas-
dard economic measure of industry concentration. ures represent a vast improvement over aggregate
The market area was defined as the county in which case-mix measures and that the DRG case-mix in-
123
dex is therefore a relatively weak measure of sick- tions as dependent variables (see Table 1). Table 3
ness to control for patient heterogeneity. provides the definitions of variables for our second-
To check the robustness of our estimates, we per- stage analysis and the overall descriptive statistics of
formed three regression models using the DEA effi- our sample with respect to the dependent and inde-
ciency scores from three different DEA specifica- pendent measures.
Table 3: Variable definitions and descriptive statistics for second-stage analysis*
Variable name Definition Mean SD

HHI Index for concentration of hospital cases per county 0.345 0.219
PUBLIC 0.402 0.247
BEDS Number of beds per hospital 330.3 279.3
PUBLIC 417.7 418.6
EAST Dummy variable for hospitals located in the eastern part of Germany 0.183 0.379
PUBLIC 0.178 0.382
AMBULATORY Dummy variable for hospitals that provide ambulatory care 0.783 0.395
PUBLIC 0.856 0.351
HIRED BEDS Ratio of hired out beds to all beds 0.068 0.141
PUBLIC 0.065 0.115
TEACH Ratio of apprenticeship training positions 0.269 0.426
PUBLIC 0.302 0.518

Dummy variable for hospitals that were privatized during study
CONVERSION 68
period
PUBLIC 50
PRIVATE-NP 18
*Pooled sample including university hospitals and hospitals with beds ≥50.
124
4 Findings and discussion minus the average hospital mortality rate per year,
The regression results for the three regression mod- which represents an index variable. Syrjänen (2004)
els are summarized in Table 4. A correlation analy-
sis of our explanatory variables suggested that mul- Table 4: Regression results for each model
ti-collinearity was not an issue in our study (see
variance inflation factors in Appendix 3). The coeffi- Independent DEA I DEA II DEA III
cients can be interpreted as marginal effects, and variables
private for-profit hospitals served as a reference Coefficients
category. Throughout the models, ownership was
PUBLIC 0.019** 0.023*** 0.018**
coded as a dummy variable. The regression results
for all three models showed that public hospitals PRIVATE-NP 0.009 0.010 0.006
operate at a significantly higher level of efficiency PRIVATE-FP Served as reference category
than their counterparts. According to this result our HHI 0.086*** 0.085*** 0.069***
first hypothesis has to be rejected. However, the
BEDS (in 1,000) 0.061*** 0.085*** 0.064***
impact of public ownership was lower for the first
model, which included university hospitals (effect of EAST 0.012* 0.012* 0.024***
1.9 %; P≤0.01), than it was for the second model AMBULATORY -0.018*** -0.019*** -0.028***
(effect of 2.3 %; P≤0.001). University hospitals were HIRED BEDS 0.049* 0.054** 0.038*
clearly associated with lower efficiency in our first
TEACH 0.004 0.003 0.001
model. This can be explained by the fact that univer-
sity hospitals produce multiple outputs (i.e. a com- CONVERSION -0.002 0.002 0.009
bination of patient care, education, and research) 26 Case-mix va- Included Included Included
(Schreyögg and Reitzenstein 2008); as a result, riables
their production process is not adequately captured * P≤0.05; ** P≤0.01; *** P≤0.001
by our DEA models. found that mixing index and volume measures in
In addition to the different model variations per- DEA may lead to biased results for the most com-
formed for sensitivity purposes we checked the ro- monly used constant returns to scale variant of the
bustness of our findings in several ways. To begin BM model (Banker and Moorey model) and the
with, we re-estimated our first- and second-stage CCR model (Charnes, Cooper, and Rhodes model).
models with different windows for hospital sizes at However, this problem does not apply in our con-
the lower end of the sample. We performed four text as we used a variable returns to scale variant of
different models including all hospitals above 30 the BCC model. Thus, in our case the use of an index
beds, above 50 beds, above 70 beds, and above 100 variable leads to robust results (Hollingsworth and
beds. Efficiency differences between private hospi- Smith 2003; Syrjänen 2004).
tals and the two other hospital types tended to be According to our second hypothesis a trade-off be-
slightly larger when 30 beds were used as the lowest tween efficiency and quality of care would lead to
hospital size included in our study while the results smaller efficiency differences between ownership
hardly changed when sizes of 70 beds or 100 beds types. Compared to DEA models I and II the relative
were used as the minimum number of beds per efficiency of PUBLIC hospitals decreased in the
hospital instead of 50 beds. Second, we run the DEA III model when quality was considered as an
second-stage models modifying the number of peri- additional output. Thus, we indeed observed a
ods used in our regression (2 years, 3 years, 4 years, trade-off between efficiency and quality of care sup-
and 5 years). The modifications had very little effect porting hypothesis 2. However, the regression anal-
on the coefficients representing different ownership ysis that used quality-adjusted DEA efficiency scores
types (see Appendix 4 and 5 for regression results). as the dependent variable (i.e. DEA III) revealed
Looking at the development of efficiency scores over significantly higher efficiency for public ownership
time it turns out that efficiency of all ownership compared to other ownership types.
types slightly increases over the years to a similar Our general finding that public hospitals perform
extent. Finally, in our third DEA model we used 1 better than hospitals with other forms of ownership
is consistent with the results of several earlier stu-
125
dies which, however, as mentioned earlier, have lations in place regarding hospital planning. Com-
certain methodological limitations. Among the con- petition between hospitals in Germany does not
trol variables, market concentration (HHI) and occur primarily in terms of individual patients, but
hospital size (BEDS) were important exogenous with regard to the optimal fit of demand and supply
market effects, and the regression results revealed a in terms of hospital infrastructure (e.g., specialties,
significant positive association with efficiency in all departments, number of beds). Our findings indi-
three models (P≤0.001). In empirical studies on cate that hospitals operating in monopolistic or
hospital efficiency, the variable "beds per hospital" oligopolistic markets are more likely to agree with
is often used as a proxy for hospital size. However, the hospital planning authorities on a hospital infra-
as Breyer (1987) indicated, the variable also con- structure that enables a convergence of demand and
tains information on capital inputs. If beds are in- supply in the referring county. Overcapacities in
terpreted as a measure of size, we can conclude that urban areas result in greater competitive pressure
larger hospitals perform significantly better. How- (i.e. cutthroat competition), whereas counties with
ever, studies on the relationship between hospital lower competitive pressure are likely to be more
costs and hospital size measured in terms of beds rural. As a regulatory instrument, hospital planning
have generally identified a U-curve, because mar- is supposed to lead to optimal hospital infrastruc-
ginal costs tend to decline with increased size and ture and efficiency. Our results indicate, however,
then rise again, as indicated by a negative sign for that this is a questionable assumption that needs to
the variable "squared beds per hospital" in the re- be addressed by further research. However, Rosko
gression (Carr and Feldstein 1967). In our regres- (1999, 2001, 2004) and Rosko and Chilingerian
sion, the variable "squared beds per hospital" and (1999) found efficiency in the US hospital sector to
also the variable "cubed beds", which would imply a be negatively related to market competition, a find-
cubic relation, were not significant. Thus, our study ing similar to that in our own study.
shows that, in contrast to the evident relationship Figure 1 shows the DEA efficiency scores and qual-
between costs and hospital size, the relationship ity-adjusted DEA efficiency scores as predicted val-
between efficiency and hospital size is linear. In this ues (from the DEA II and DEA III models) versus
context, it is important to emphasize that this find- hospital size and market concentration for the dif-
ing is not biased by our scale assumptions. In our ferent types of ownership. Generally, there was a
DEA model specification we used variable returns to linear relationship between hospital size and DEA
scale because constant returns to scale are assumed efficiency scores and quality-adjusted DEA effi-
to represent a hospital planning view or a govern- ciency scores.
mental view (Steinmann, Dietrich, Karmann, and Taking a closer look at the three different curves, it
Zweifel 2004). becomes clear that public hospitals outperformed
In their review of the literature, Scherer and Ross their private for-profit and non-profit counterparts
(1990) and Button and Weyman-Jones (1992) up to a size of approximately 1,000 beds. From
found that the degree of competitiveness in a firm's 1,000 beds onwards, the private for-profit hospitals
market was a potential source of lower efficiency. operated with greater efficiency, which also holds
Classical economic theory predicts that organiza- after taking quality into account. However, most
tions in monopolistic or oligopolistic markets re- private for-profit providers in Germany operate
strict output and have higher average costs than within a size range of 50 to 800 beds. Indeed, of the
competitive organizations. In our study, market hospitals in our sample that had more than 1,000
competition was measured using the Hirschman- beds, only 15 were private for-profit hospitals, whe-
Herfindahl index, which is defined over a range reas 119 were public hospitals.
between zero and one such that increases in HHI Generally, the relationship between market concen-
correspond to decreases in hospital competition. tration and efficiency / quality-adjusted efficiency
Therefore, the positive coefficient lends support to was also linear, although the public hospitals in our
the notion that a hospital’s behavior is highly af- sample operated at a substantially higher level of
fected by competition in the hospital sector, though efficiency in all of the various settings of competitive
in a direction that is inverse to that seen in markets pressure (Figure 1).
for most other goods and services. In the German Private for-profit hospitals show a comparably low
context, this finding is also related to the strict regu- level of performance in very competitive markets.
126
Figure 1: DEA efficiency scores and quality-adjusted DEA efficiency scores

as predicted values versus hospital size and market concentration
.75
.75
.7
.7
Efficiency
.65
.65
.6
.6
.55
.55
0 .2 .4 .6 .8 1 0 500 1000 1500 2000
Market concentration (HHI) Hospital size (BEDS)
Quality-adjusted efficiency
.74
.74
.7
.7
.66
.66
.62
.62
0 .2 .4 .6 .8 1 0 500 1000 1500 2000

Market concentration (HHI) Hospital size (BEDS)
Private-FP Public Private-NP
Here, it is important to recognize that private for- other ownership types and thus differences between
profit and non-profit hospitals operate primarily in efficiency scores of different ownership types be-
urban and other more competitive areas, whereas come smaller.
public hospitals operate both in urban and non- As expected, other control variables also had a sig-
competitive regions (Figure 2). nificant impact on efficiency (Table 4); the case-mix
Furthermore, it is striking that in Figure 1, particu- variables, in particular, had a major impact in this
lar in relation to market concentration, the effi- regard (see Appendix 2 for the full model specifica-
ciency curves and quality-adjusted efficiency curves tion). Our set of case-mix variables accounted for
of private for-profit hospitals are descending first approximately two-thirds of the explained variance
and then raise linear. This descending curve can be in the three full models (based on ordinary least
explained by an interaction effect between private square estimates), which indicates the importance
ownership, hospital size and market concentration. of adjusting for patient heterogeneity. As expected,
Those private for-profit hospitals operating in more the operational efficiency of hospitals located in
competitive regions have comparably smaller enti- eastern Germany (EAST) was significantly greater
ties in these regions than hospitals of other owner- than that of their western counterparts. This can be
ship types. Therefore, the hospitals represented by explained by the large investments made to mod-
the descending curve combine three characteristics ernize hospital infrastructure in eastern Germany
that are associated with lower efficiency. If private after the German reunification in 1990. In addition,
for-profit hospitals operate in more concentrated hiring out a larger share of beds to ambulatory phy-
regions the size of the entities approaches that of sicians was associated with higher efficiency
127
Figure 2: Histogram with hospital density versus market concentration
Private-NP
3
Density
2
1
0
0 .2 .4 .6 .8 1
Public
3
Density
2
1
0
0 .2 .4 .6 .8 1
Private-FP
3
Density
2
1
0
0 .2 .4 .6 .8 1
Market concentration (HHI)
(HIRED BEDS), and the existence of ambulatory case on the average than hospitals with other forms
care activities was associated with lower efficiency of ownership. This study of a large German hospital
(AMBULATORY). sample (n = 1,614) with data from 2004 reflects the
Several of our findings are likely to be thought- pre-DRG era in Germany, during which prices could
provoking, because they are counter-intuitive and be negotiated. However, even after the introduction
are not in line with the arguments put forward by of DRGs, today there are still a substantial number
authors in the field of agency theory and property- of additional reimbursement components being
rights theory, as well as public choice theory. This paid on the top of DRGs that can be negotiated at
may be explained by a number of specific character- the hospital level (e.g., certain expensive drugs).
istics of the hospital market in Germany. Our results Indeed, these additional components account for
show that for-profit status was associated with lower approximately 20 % of total reimbursements for
efficiency. However, for-profit hospitals may have non-psychiatric inpatient care (Schreyögg, Tie-
found a different way to maximize their profits (i.e. mann, and Busse 2006). Shen, Eggleston, Lau, and
financial surplus) than hospitals with other forms of Schmid (2007) found comparable results for the US
ownership. Indeed, they may seek to maximize their hospital sector, concluding that the mission of pri-
profits by maximizing revenues instead of minimiz- vate for-profit hospitals puts greater emphasis on
ing inputs at a given output, which was defined as a earning profits (i.e. higher revenues per case due to
measure of efficiency in our study. Wörz (2008) higher prices) compared to public hospitals, which
supports this view, having found that private for- focus primarily on efficiency.
profit hospitals (and especially hospital chains) were Private for-profit providers are more efficient
able to generate significantly higher revenues per among the very large hospitals with more than
128
1,000 beds. This finding is in line with the theories additional input) would have helped us capture
mentioned above. Private for-profit providers have more of the resources required in and all of the out-
stronger incentive schemes and control mecha- put produced from the hospital production process.
nisms, which are of crucial importance for the man- Considering the number of outpatient cases in addi-
agement of larger organizations (Bishop and tion to inpatient cases is generally recommended in
Thompson 1992). order to measure patient care output (Jacobs,
Our results also indicate that private for-profit hos- Smith, and Street 2006). We intended to include a
pitals provide a higher quality of care compared to proxy for hospital outpatient activities (e.g., outpa-
other types of ownership. As mentioned above, tient surgery). However, data inconsistencies and
theoretical approaches assume that information measurement errors did not allow us to use this
asymmetries exist in the hospital market and thus information for further analysis.
particularly for-profit hospitals have the incentive Including other explanatory factors in addition to
(i.e. profit-seeking) to increase productive efficiency environmental and organizational characteristics
at the expense of quality of care. However, in the might have provided a better explanation of varia-
German hospital sector information asymmetry has tion in our estimates, thus potentially affecting our
decreased over the last decade due to a variety of interpretation of the relationship between owner-
healthcare reforms aiming at quality assurance (e.g., ship and efficiency. Another limitation may be that
mandatory publication of quality reports). Further- this study uses mortality as the only indicator for
more, the mentioned theoretical approaches do not quality of care. Moreover, we were not able to take
account for the strategic importance of quality of account of hospitals that were privatized during the
care in markets with substantial overcapacities (i.e. 3 years prior to our study period. Nevertheless, our
cutthroat competition). There is evidence that pri- study results gave no indication that the hospitals
vate for-profit hospitals (and especially private for- privatized during our study period were primarily
profit hospital chains) operating in more competi- inefficient units. Finally, our study employed only
tive regions have improved their quality manage- DEA, although it would have been possible to use
ment and hospital outcomes in order to attract pa- SFA in addition to DEA. SFA was not included in
tients (Busse, Nimptsch, and Mansky 2009). the analysis, however, because it relies on assump-
Our study has a number of strengths plus adds value tions about the functional form of the production or
compared to previous approaches. First, it applies a cost frontier that we aimed to avoid. Further, Linna
more refined approach to investigate the effects of (1998) found that both methods yielded comparable
ownership on hospital efficiency in Germany. To our results for individual efficiency.
knowledge, it is the first study to examine the rela-
tionship between ownership status and efficiency
using a panel data approach based on bootstrapped 5 Summary and outlook
DEA efficiency scores. Second, our panel (n = 1,046) In this paper, we investigated the effects of owner-
is large and covers the majority of all German acute- ship on hospital efficiency in Germany. Our findings
care hospitals over five years, allowing us to control show that public ownership was associated with
for serial correlation and providing greater statisti- significantly higher efficiency than other forms of
cal power than in previous studies leading to more ownership; private for-profit ownership, in particu-
robust estimates. Third, the sample is rich, contain- lar, was associated with lower efficiency. These key
ing information at the patient and hospital levels. findings remained unchanged after conducting a
Within our two step approach, this allowed us to number of sensitivity checks. Our results suggest
control appropriately for case-mix and other envi- that private for-profit hospitals place greater em-
ronmental and organizational characteristics, and is phasis on earning profits (i.e. higher revenues per
likely to have yielded more consistent results. case due to higher prices), whereas public hospitals,
Fourth, this is the first ownership study in the hos- because of resource constraints, focus primarily on
pital sector to incorporate quality measures as out- input efficiency. We also found a significant positive
puts in DEA models. association between hospital size and efficiency, and
Our study also has several important limitations. that competitive pressure had a significant negative
First, additional inputs and outputs (e.g., ambula- impact on hospital efficiency. From a strategic man-
tory cases as an additional output, or capital as an agement point of view, private for-profit hospitals
129
may be well advised to change their acquisition Acknowledgements

strategy in terms of choice of hospital size and loca- The authors are grateful for the insightful comments
tion. In addition, the ongoing trend towards privati- by two anonymous BuR reviewers on previous ver-
zation in Germany may not be an appropriate way sions of the paper. Furthermore, we would like to
to ensure the best use of the scarce resources in the thank the Research Data Centre of the Statistical
hospital sector, because public hospitals use rela- Offices of the Länder for providing the data for our
tively fewer resources than private for-profit hospi- analysis (No. 842-2008). Our research was sup-
tals. Additional longitudinal studies are thus needed ported within the Munich Center of Health Sciences
to measure and compare the efficiency of privatized (MC-Health) as part of LMUinnovativ.
hospitals. This could be a fruitful way to gain a bet-
ter understanding of the consequences of ongoing
privatization in the hospital sector.
Appendix 1: Correlation matrix for the input and output variables
Variables 1 2 3 4 5 6 7 8
1 - CLIN 1
2 - NURS 0.936 1
3 - MEDTECH 0.971 0.915 1
4 - ADMIN 0.950 0.893 0.940 1
5 - OTHER 0.870 0.890 0.872 0.874 1
6 - SUPPLIES 0.960 0.909 0.951 0.907 0.835 1
7 - INPATIENT 0.911 0.948 0.856 0.841 0.821 0.862 1
8 - 1-MORTALITY 0.084 0.067 0.088 0.073 0.074 0.093 0.075 1
Appendix 2: Correlation matrix for the organizational and environmental variables
Variables 1 2 3 4 5 6 7
1 - HHI 1
2 - BEDS 0.106 1
3 - EAST 0.359 0.101 1
4 - AMBULATORY 0.041 0.162 -0.072 1
5 - HIRED BEDS -0.041 -0.197 -0.168 -0.081 1
6 - TEACH 0.001 0.134 -0.060 0.018 -0.077 1
7 - CONVERSION 0.062 0.003 0.040 -0.035 -0.042 0.043 1
130
Appendix 3: Regression results for each model - full model specification

Independent vari-
DEA I DEA II DEA III
ables
Variance
Coeffi- Standard Coeffi- Standard Coeffi- Standard
z-value p-value z-value p-value inflation z-value p-value
cients error cients error cients error
factor
Ownership
PUBLIC 0.019 0.007 2.850 0.004 0.023 0.007 3.380 0.001 0.018 0.007 2.720 0.007
PRIVATE-NP 0.009 0.007 1.340 0.180 0.010 0.007 1.450 0.147 0.006 0.006 0.890 0.376
PRIVATE-FP served as reference category
Organizational and
environmental vari-
ables
HHI 0.086 0.010 8.970 0.000 0.085 0.010 8.860 0.000 1.29 0.069 0.009 7.420 0.000
BEDS (in thousands) 0.061 0.010 6.380 0.000 0.085 0.011 8.040 0.000 1.62 0.064 0.010 6.500 0.000
EAST 0.012 0.006 2.020 0.043 0.012 0.006 2.060 0.040 1.34 0.024 0.006 4.220 0.000
AMBULATORY -0.018 0.005 -3.480 0.001 -0.019 0.005 -3.750 0.000 1.15 -0.028 0.005 -5.690 0.000
HIRED BEDS 0.049 0.017 2.950 0.003 0.054 0.016 3.250 0.001 1.12 0.038 0.016 2.380 0.017
TEACH 0.004 0.005 0.940 0.347 0.003 0.005 0.750 0.454 1.15 0.001 0.005 0.190 0.853
CONVERSION -0.002 0.009 -0.180 0.857 0.002 0.009 0.180 0.859 1.12 0.009 0.009 0.950 0.344
131
Appendix 3 continued: Regression results for each model - full model specification
Independent vari-
ables
Variance
factor
Case-mix variables
AVAILAB. PET
-0.046 0.012 -4.020 0.000 0.008 0.014 0.530 0.599 1.08 0.010 0.014 0.730 0.466
(yes/no)
AVAILAB. CARD.
CATH. LAB. 0.027 0.006 4.370 0.000 0.024 0.006 3.820 0.000 1.68 0.020 0.006 3.320 0.001
(yes/no)
AGE ≥ 65a -0.099 0.025 -3.890 0.000 -0.110 0.025 -4.370 0.000 2.04 -0.185 0.024 -7.610 0.000
ARTIFICIAL RES-
-0.345 0.048 -7.180 0.000 -0.355 0.048 -7.330 0.000 1.19 -0.377 0.046 -8.230 0.000
PIRATIONa
SPECIAL FACILITY
-12.52 2.386 -5.250 0.000 -22.39 4.256 -5.260 0.000 1.74 -22.74 4.067 -5.590 0.000
HIVa
SPECIAL FACILITY
-3.519 2.802 -1.260 0.209 -3.343 2.885 -1.160 0.247 1.04 -4.633 2.790 -1.660 0.097
CYSTIC FYBROSISa
SPECIAL FACILITY
-10.15 2.287 -4.440 0.000 -11.15 2.280 -4.890 0.000 1.05 -12.11 2.195 -5.520 0.000
BURN INJURYa
SPECIAL FACILITY
-0.128 0.074 -1.730 0.084 -0.122 0.073 -1.660 0.098 1.11 -0.143 0.071 -2.020 0.043
BRAIN INJURYa
TRANSPLANTA-
-2.973 1.085 -2.740 0.006 -4.001 1.151 -3.480 0.001 1.06 -4.719 1.107 -4.260 0.000
TIONa
ACUTE MYOCAR-
-2.410 0.689 -3.500 0.000 -2.235 0.686 -3.260 0.001 1.48 -3.125 0.663 -4.710 0.000
DIAL INFARCTIONa
CONGESTIVE
0.393 0.212 1.860 0.064 0.463 0.210 2.200 0.028 1.50 0.368 0.202 1.820 0.068
HEART FAILUREa
132
Independent vari-
ables
Variance
factor
Case-mix variables
PERIPHERAL VAS-
-2.218 0.791 2.800 0.005 -1.766 0.790 -2.240 0.025 1.02 -1.996 0.765 -2.610 0.009
CULAR DISEASEa
CEREBRAL VAS-
0.407 0.212 1.920 0.055 0.398 0.210 1.900 0.058 1.40 0.078 0.203 -0.390 0.699
CULAR ACCIDENTa
DEMENTIAa -0.792 0.427 -1.860 0.063 -0.760 0.422 -1.800 0.072 1.20 0.556 0.417 1.330 0.183
PULMONARY
1.086 0.339 3.200 0.001 1.158 0.336 3.450 0.001 1.10 0.618 0.320 1.930 0.053
DISEASEa
CONNECTIVE TIS-
-0.469 0.094 -5.010 0.000 -0.455 0.093 -4.910 0.000 1.05 0.026 0.092 0.280 0.779
SUE DISORDERa
PEPTIC ULCERa 3.898 1.384 2.820 0.005 3.063 1.371 2.230 0.025 1.46 -1.795 1.323 -1.360 0.175
LIVER DISEASE a 0.795 0.494 1.610 0.108 1.028 0.500 2.050 0.040 1.33 0.721 0.465 1.550 0.121
DIABETESa 0.777 0.249 3.120 0.002 0.748 0.244 3.060 0.002 1.06 0.325 0.231 1.410 0.160
DIABETES COM-
-0.920 0.946 -0.970 0.331 -0.391 0.944 -0.410 0.679 1.11 -0.014 0.922 -0.020 0.988
PLICATIONSa
PARAPLEGIAa -8.831 1.393 -6.340 0.000 -8.758 1.376 -6.360 0.000 1.08 -7.220 1.207 -5.980 0.000
RENAL DISEASEa -0.172 0.199 -0.860 0.387 -0.153 0.197 -0.780 0.438 1.17 0.327 0.211 1.550 0.121
CANCERa -0.715 0.419 -1.710 0.088 -0.299 0.427 -0.700 0.484 1.19 -1.032 0.413 -2.500 0.013
METASTATIC CAN-
-0.373 0.352 -1.060 0.290 -0.490 0.350 -1.400 0.161 1.18 -1.072 0.339 -3.160 0.002
CERa
SEVERE LIVER
6.619 5.888 1.120 0.261 7.752 5.923 1.310 0.191 1.40 -0.591 5.731 -0.100 0.918
DISEASEa
133
Independent vari-
ables
Variance
factor
Case-mix variables
HIVa -166.8 128.2 -1.300 0.193 -138.6 130.5 -1.060 0.288 1.74 -144.0 126.4 -1.140 0.255
Years
YEAR 2003 0.017 0.006 2.720 0.006 0.017 0.006 2.750 0.006 1.61 0.014 0.006 2.300 0.021
YEAR 2004 0.022 0.006 3.480 0.000 0.027 0.006 4.280 0.000 1.68 0.026 0.006 4.230 0.000
YEAR 2005 0.024 0.006 3.750 0.000 0.030 0.006 4.710 0.000 1.83 0.036 0.006 5.710 0.000
YEAR 2006 0.052 0.007 8.010 0.000 0.054 0.007 8.280 0.000 2.04 0.040 0.006 6.290 0.000
INTERCEPT 0.576 0.010 58.03 0.000 0.567 0.010 57.06 0.000 0.662 0.010 68.53 0.000
PSEUDO-R² 0.146 0.161 0.157

a Share of
all cases per hospital
* p≤0.05; ** p≤0.01; *** p≤0.001
134
Appendix 4: Regression results – modification of the number of periods useda

Independent vari-
YEARS 2002-2006 YEARS 2003-2006 YEARS 2004-2006 YEARS 2005-2006
ables
Coeffi- Standard Coeffi- Standard Coeffi- Standard Coeffi- Standard
z-value p-value z-value p-value z-value p-value z-value p-value
cients error cients error cients error cients error
Ownership
PUBLIC 0.023 0.007 3.380 0.001 0.021 0.007 2.880 0.004 0.019 0.009 2.150 0.031 0.020 0.011 1.870 0.062
PRIVATE-NP 0.010 0.007 1.450 0.147 0.008 0.007 1.080 0.279 0.007 0.009 0.760 0.446 0.008 0.011 0.710 0.477
Organizational and
environmental vari-
ables
HHI 0.085 0.010 8.860 0.000 0.084 0.011 7.910 0.000 0.085 0.012 6.990 0.000 0.091 0.015 6.130 0.000
BEDS (in thousands) 0.085 0.011 8.040 0.000 0.076 0.012 6.530 0.000 0.087 0.013 6.510 0.000 0.088 0.016 5.340 0.000
EAST 0.012 0.006 2.060 0.040 0.012 0.006 1.940 0.052 0.011 0.007 1.470 0.141 0.005 0.009 0.570 0.570
AMBULATORY -0.019 0.005 -3.750 0.000 -0.020 0.006 -3.480 0.001 -0.018 0.007 -2.660 0.008 -0.016 0.008 -1.960 0.050
HIRED BEDS 0.054 0.016 3.250 0.001 0.038 0.018 2.090 0.037 0.026 0.021 1.210 0.226 0.025 0.026 0.970 0.330
TEACH 0.003 0.005 0.750 0.454 0.006 0.005 1.210 0.227 0.007 0.005 1.340 0.179 0.008 0.005 1.440 0.150
CONVERSION 0.002 0.009 0.180 0.859 0.002 0.011 0.200 0.839 0.001 0.013 0.070 0.948 -0.003 0.016 -0.160 0.875
135
Appendix 4 continued: Regression results – modification of the number of periods useda

Independent vari-
ables
Case-mix variables
AVAILAB. PET
0.008 0.014 0.530 0.599 0.013 0.016 3.220 0.403 0.002 0.018 0.120 0.907 0.002 0.021 0.100 0.924
(yes/no)
AVAILAB. CARD.
CATH. LAB. 0.024 0.006 3.820 0.000 0.022 0.007 0.840 0.001 0.016 0.008 1.950 0.051 0.005 0.010 0.540 0.592
(yes/no)
AGE ≥ 65b -0.110 0.025 -4.370 0.000 -0.109 0.028 -3.880 0.000 -0.151 0.033 -4.580 0.000 -0.167 0.039 -4.230 0.000
ARTIFICIAL RES-
-0.355 0.048 -7.330 0.000 -0.331 0.049 -6.710 0.000 -0.338 0.059 -5.700 0.000 -0.365 0.087 -4.200 0.000
PIRATIONb
SPECIAL FACILITY
-22.39 4.256 -5.260 0.000 -9.821 2.965 -3.310 0.001 -28.92 6.291 -4.600 0.000 -33.98 8.217 -4.140 0.000
HIVb
SPECIAL FACILITY
-3.343 2.885 -1.160 0.247 -2.067 3.203 -0.650 0.519 -2.015 3.923 -0.510 0.608 0.062 5.208 0.010 0.990
CYSTIC FYBROSISb
SPECIAL FACILITY
-11.15 2.280 -4.890 0.000 -13.02 2.624 -4.960 0.000 -13.49 3.104 -4.350 0.000 -10.84 4.183 -2.590 0.010
BURN INJURYb
SPECIAL FACILITY
-0.122 0.073 -1.660 0.098 -0.119 0.074 -1.600 0.109 -0.102 0.075 -1.360 0.173 -0.093 0.077 -1.210 0.228
BRAIN INJURYb
TRANSPLANTA-
-4.001 1.151 -3.480 0.001 -3.813 1.144 -3.330 0.001 -3.709 1.178 -3.150 0.002 -2.655 1.725 -1.540 0.124
TIONb
ACUTE MYOCAR-
-2.235 0.686 -3.260 0.001 -2.384 0.748 -3.190 0.001 -2.188 0.906 -2.410 0.016 -1.684 1.303 -1.290 0.196
DIAL INFARCTIONb
CONGESTIVE
0.463 0.210 2.200 0.028 0.568 0.283 2.010 0.045 1.622 0.458 3.540 0.000 2.112 0.599 3.530 0.000
HEART FAILUREb
136

Independent vari-
ables
Case-mix variables
PERIPHERAL VAS-
-1.766 0.790 -2.240 0.025 -2.307 0.974 -2.370 0.018 -2.328 1.323 -1.760 0.079 -5.261 2.437 -2.160 0.031
CULAR DISEASEb
CEREBRAL VAS-
0.398 0.210 1.900 0.058 0.319 0.216 1.480 0.139 0.204 0.247 0.820 0.410 0.138 0.290 0.480 0.633
CULAR ACCIDENTb
DEMENTIAb -0.760 0.422 -1.800 0.072 -0.887 0.457 -1.940 0.052 -0.723 0.500 -1.450 0.148 -0.823 0.573 -1.440 0.151
PULMONARY
1.158 0.336 3.450 0.001 1.140 0.385 2.960 0.003 1.659 0.495 3.350 0.001 1.199 0.554 2.160 0.031
DISEASEb
CONNECTIVE TIS-
-0.455 0.093 -4.910 0.000 -0.416 0.101 -4.110 0.000 -0.400 0.113 -3.520 0.000 -0.402 0.141 -2.860 0.004
SUE DISORDERb
PEPTIC ULCERb 3.063 1.371 2.230 0.025 2.783 1.496 1.860 0.063 3.217 1.722 1.870 0.062 4.739 2.141 2.210 0.027
LIVER DISEASEb 1.028 0.500 2.050 0.040 1.172 0.588 2.000 0.046 0.710 0.708 1.000 0.316 0.430 0.951 0.450 0.651
DIABETESb 0.748 0.244 3.060 0.002 0.656 0.265 2.480 0.013 0.580 0.309 1.880 0.060 0.750 0.490 1.530 0.126
DIABETES COM-
-0.391 0.944 -0.410 0.679 -0.131 1.286 -0.100 0.919 0.780 1.497 0.520 0.602 1.215 1.767 0.690 0.492
PLICATIONSb
PARAPLEGIAb -8.758 1.376 -6.360 0.000 -7.137 1.253 -5.700 0.000 -6.023 1.312 -4.590 0.000 -4.660 1.413 -3.300 0.001
RENAL DISEASEb -0.153 0.197 -0.780 0.438 -0.171 0.284 -0.600 0.548 -1.305 1.445 -0.900 0.366 -4.263 2.582 -1.650 0.099
CANCERb -0.299 0.427 -0.700 0.484 -0.738 0.387 -1.910 0.057 -0.492 0.464 -1.060 0.289 -0.528 0.652 -0.810 0.418
METASTATIC CAN-
-0.490 0.350 -1.400 0.161 -0.370 0.389 -0.950 0.342 -0.264 0.467 -0.570 0.571 -0.690 0.741 -0.930 0.352
CERb
SEVERE LIVER
7.752 5.923 1.310 0.191 7.262 6.534 1.110 0.266 5.102 7.798 0.650 0.513 6.268 12.99 0.480 0.629
DISEASEb
137

Independent vari-
ables
Case-mix variables
HIVb -138.6 130.5 -1.060 0.288 -15.76 71.84 -0.220 0.826 -65.83 79.80 -0.830 0.409 -19.65 108.9 -0.180 0.857
Years
YEAR 2003 0.017 0.006 2.750 0.006
YEAR 2004 0.027 0.006 4.280 0.000 0.010 0.006 1.630 0.103
YEAR 2005 0.030 0.006 4.710 0.000 0.012 0.006 1.960 0.050 0.003 0.006 0.430 0.666
YEAR 2006 0.054 0.007 8.280 0.000 0.036 0.006 5.580 0.000 0.027 0.006 4.110 0.000 0.024 0.006 3.950 0.000
INTERCEPT 0.567 0.010 57.06 0.000 0.591 0.011 54.25 0.000 0.603 0.013 47.94 0.000 0.606 0.015 40.33 0.000
PSEUDO-R² 0.161 0.136 0.142 0.142

a DEA II - Efficiency model including hospitals with beds ≥50, without university hospitals.
b Share of all cases per hospital.
138
Appendix 5: Regression results - modification in terms of hospital sizea

Independent vari-
BEDS>30 BEDS>50 BEDS>70 BEDS>100
ables
Ownership
PUBLIC 0.028 0.006 4.340 0.000 0.023 0.007 3.380 0.001 0.022 0.006 3.510 0.000 0.027 0.007 3.780 0.000
PRIVATE-NP 0.012 0.006 1.840 0.065 0.010 0.007 1.450 0.147 0.005 0.006 0.750 0.456 0.016 0.007 2.190 0.029
Organizational and
environmental vari-
ables
HHI 0.076 0.009 8.180 0.000 0.085 0.010 8.860 0.000 0.070 0.009 7.490 0.000 0.046 0.010 4.790 0.000
BEDS (in thousands) 0.109 0.011 10.16 0.000 0.085 0.011 8.040 0.000 0.024 0.021 1.160 0.247 0.058 0.021 2.700 0.007
EAST 0.022 0.006 3.910 0.000 0.012 0.006 2.060 0.040 0.013 0.006 2.270 0.023 0.026 0.006 4.300 0.000
AMBULATORY -0.010 0.005 -1.980 0.047 -0.019 0.005 -3.750 0.000 -0.019 0.005 -3.970 0.000 -0.016 0.005 -3.060 0.002
HIRED BEDS 0.072 0.017 4.340 0.000 0.054 0.016 3.250 0.001 0.060 0.016 3.730 0.000 0.171 0.022 7.650 0.000
TEACH 0.010 0.005 2.160 0.031 0.003 0.005 0.750 0.454 0.010 0.005 2.150 0.031 0.021 0.005 4.700 0.000
CONVERSION 0.001 0.009 0.070 0.942 0.002 0.009 0.180 0.859 0.001 0.009 0.130 0.897 0.014 0.009 1.490 0.136
139
Appendix 5 continued: Regression results - modification in terms of hospital sizea

Independent vari-
ables
Case-mix variables
AVAILAB. PET
0.009 0.014 0.630 0.527 0.008 0.014 0.530 0.599 0.026 0.014 1.810 0.070 0.020 0.014 1.470 0.142
(yes/no)
AVAILAB. CARD.
CATH. LAB. 0.026 0.006 4.270 0.000 0.024 0.006 3.820 0.000 0.013 0.006 2.210 0.027 0.012 0.006 1.980 0.048
(yes/no)
AGE ≥ 65b -0.196 0.026 -7.640 0.000 -0.110 0.025 -4.370 0.000 -0.124 0.020 -6.040 0.000 -0.387 0.033 -11.70 0.000
ARTIFICIAL RES-
-0.264 0.043 -6.070 0.000 -0.355 0.048 -7.330 0.000 -0.463 0.049 -9.380 0.000 -0.201 0.082 -2.460 0.014
PIRATIONb
SPECIAL FACILITY
-4.945 1.890 -2.620 0.009 -22.39 4.256 -5.260 0.000 -23.91 4.180 -5.720 0.000 -26.11 3.942 -6.620 0.000
HIVb
SPECIAL FACILITY
-2.711 2.806 -0.970 0.334 -3.343 2.885 -1.160 0.247 -4.083 2.818 -1.450 0.147 -4.324 2.645 -1.630 0.102
CYSTIC FYBROSISb
SPECIAL FACILITY
-11.05 2.274 -4.860 0.000 -11.15 2.280 -4.890 0.000 -8.842 2.246 -3.940 0.000 -10.76 2.129 -5.050 0.000
BURN INJURYb
SPECIAL FACILITY
-0.191 0.073 -2.610 0.009 -0.122 0.073 -1.660 0.098 -0.104 0.068 -1.530 0.127 -0.869 0.286 -3.040 0.002
BRAIN INJURYb
TRANSPLANTA-
-4.183 1.144 -3.660 0.000 -4.001 1.151 -3.480 0.001 -4.297 1.081 -3.970 0.000 -4.570 1.013 -4.510 0.000
TIONb
ACUTE MYOCAR-
-2.091 0.660 -3.170 0.002 -2.235 0.686 -3.260 0.001 0.000 0.000 -0.560 0.000 0.000 0.000 -1.360 0.173
DIAL INFARCTIONb
CONGESTIVE
0.246 0.208 1.180 0.237 0.463 0.210 2.200 0.028 0.000 0.000 2.660 0.008 0.000 0.000 5.590 0.000
HEART FAILUREb
140

Independent vari-
ables
Case-mix variables -1.791 0.782 -2.290 0.022 -1.766 0.790 -2.240 0.025 0.000 0.000 -0.460 0.649 0.000 0.000 0.120 0.906
PERIPHERAL VAS-
0.236 0.202 1.170 0.243 0.398 0.210 1.900 0.058 0.000 0.000 1.380 0.168 0.000 0.000 2.570 0.010
CULAR DISEASEb
CEREBRAL VAS-
-1.509 0.420 -3.590 0.000 -0.760 0.422 -1.800 0.072 0.000 0.000 -3.870 0.000 -0.001 0.000 -6.210 0.000
CULAR ACCIDENTb
DEMENTIAb 0.457 0.326 1.400 0.161 1.158 0.336 3.450 0.001 0.000 0.000 4.120 0.000 0.000 0.000 3.940 0.000
PULMONARY
-0.695 0.100 -6.970 0.000 -0.455 0.093 -4.910 0.000 0.000 0.000 -5.630 0.000 0.000 0.000 -4.940 0.000
DISEASEb
CONNECTIVE TIS-
7.734 1.345 5.750 0.000 3.063 1.371 2.230 0.025 0.000 0.000 2.420 0.015 0.001 0.000 5.160 0.000
SUE DISORDERb
PEPTIC ULCERb 0.516 0.465 1.110 0.267 1.028 0.500 2.050 0.040 0.000 0.000 2.940 0.003 0.000 0.000 1.600 0.111
LIVER DISEASEb -0.217 0.360 -0.600 0.547 0.748 0.244 3.060 0.002 0.000 0.000 1.970 0.048 0.000 0.000 1.560 0.118
DIABETESb -0.624 0.931 -0.670 0.503 -0.391 0.944 -0.410 0.679 0.000 0.000 0.480 0.632 0.000 0.000 0.430 0.671
DIABETES COM-
-12.21 1.452 -8.410 0.000 -8.758 1.376 -6.360 0.000 -0.002 0.000 -9.180 0.000 -0.003 0.000 -10.15 0.000
PLICATIONSb
PARAPLEGIAb -0.133 0.196 -0.680 0.498 -0.153 0.197 -0.780 0.438 0.000 0.000 -2.020 0.043 0.000 0.000 -2.050 0.041
RENAL DISEASEb -0.693 0.324 -2.140 0.033 -0.299 0.427 -0.700 0.484 0.000 0.000 1.120 0.265 0.000 0.000 0.060 0.955
CANCERb -1.299 0.335 -3.880 0.000 -0.490 0.350 -1.400 0.161 0.000 0.000 -2.230 0.026 0.000 0.000 -3.420 0.001
METASTATIC CAN-
2.741 5.592 0.490 0.624 7.752 5.923 1.310 0.191 0.001 0.001 1.890 0.058 0.002 0.001 2.840 0.005
CERb
SEVERE LIVER
-1.791 0.782 -2.290 0.022 -1.766 0.790 -2.240 0.025 0.000 0.000 -0.460 0.649 0.000 0.000 0.120 0.906
DISEASEb
141

Independent vari-
ables
Case-mix variables
HIVb -34.45 66.75 -0.520 0.606 -138.6 130.5 -1.060 0.288 -0.026 0.010 -2.680 0.007 -0.034 0.010 -3.530 0.000
Years
YEAR 2003 -0.035 0.006 -5.920 0.000 0.017 0.006 2.750 0.006 0.015 0.006 2.540 0.011 0.013 0.006 2.160 0.030
YEAR 2004 0.027 0.006 4.450 0.000 0.027 0.006 4.280 0.000 0.026 0.006 4.190 0.000 0.032 0.006 5.040 0.000
YEAR 2005 0.016 0.006 2.610 0.009 0.030 0.006 4.710 0.000 0.030 0.006 4.790 0.000 0.040 0.007 6.110 0.000
YEAR 2006 0.066 0.006 10.39 0.000 0.054 0.007 8.280 0.000 0.054 0.006 8.520 0.000 0.069 0.007 10.33 0.000
INTERCEPT 0.560 0.010 58.21 0.000 0.567 0.010 57.060 0.000 0.580 0.009 61.16 0.000 0.581 0.012 49.21 0.000
PSEUDO-R² 0.188 0.161 0.158 0.206

a DEA II - Efficiency model including hospitals with beds ≥50, without university hospitals.
b Share of all cases per hospital.
142
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Munich School of Management, Ludwig-Maximilians-Universität
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the Stanford University’s Center for Primary care and Outcomes
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Research. He received his doctoral degree in Economics in 2003
ing the health sector in Germany – an application of Data Envel-
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Economics in 2008, both from Berlin University of Technology.
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145
Thin Capitalization Rules and Entrepreneural Capital Structure
Decisions
Alexandra Maßbaum, Caren Sureth
BuR -- Business Research
Volume 2 | Issue 2 | December 2009 | 147--169
Thin Capitalization Rules and

Entrepreneurial Capital Structure Decisions
Alexandra Maÿbaum, Faculty of Business Administration and Economics, University of Paderborn, Germany, E-mail:
alexandra.massbaum@notes.upb.de
Caren Sureth, Faculty of Business Administration and Economics, University of Paderborn, Germany, E-mail: csureth@notes.upb.de
Abstract
Tax planners often choose debt over equity financing. As this has led to increased corporate debt
financing, many countries have introduced thin capitalization rules to secure their tax revenues. In a
general capital structure model we analyze if thin capitalization rules affect dividend and financing
decisions, and whether they can partially explain why corporations receive both debt and equity
capital. We model the Belgian, German and Italian rules as examples. We find that the so-called Miller
equilibrium and definite financing effects depend significantly on the underlying tax system. Further,
our results are useful for the treasury to decide what thin capitalization type to implement.
Keywords: business taxation, capital structure, critical income tax rate, financing decision, Miller
equilibrium, tax planning, thin capitalization
Manuscript received March 19, 2009, accepted by Rainer Niemann (Accounting) November 2,
2009.
1 Introduction shareholders in the following. Hence, for simplicity

Seen from a tax perspective it is often attractive we abstract from principal-agent conflicts.
for shareholders of corporations to provide capi- During the last few decades many authors have
tal as debt instead of equity capital. This has led contributed to the field of corporate capital struc-
to an extensive enlargement of debt financing of ture decisions (for an overview of different capital
corporations (OECD 1987: 8 et seq.). To protect structure models see Myers 2001 and Graham
tax revenues, the legislators of many countries 2006). In line with neoinstitutional theory, the
have reacted to this development by increasingly tax based trade-off theory (e.g., Myers 1984) and
implementing so-called thin capitalization rules the non-tax-oriented pecking-order theory (Don-
(e.g., in Italy and the Netherlands, see Gouthière aldson 1961) have gained attention. Here, the the-
2005 for an overview of different thin capitaliza- ory of Modigliani and Miller (1958) represents a
tion rules) or by tightening existing rules (e.g., in seminal work for many contributions based on
Germany, Denmark, the UK, Spain, and France). neoclassical theory. In this early work, taxes were
Thin capitalization rules are regulations that limit not included. Many extensions to Modigliani and
the corporate tax deductibility of interest paid to Miller (1958) take many different aspects into ac-
shareholders. count. Modigliani and Miller (1963) extend their
Moreover, we observe that corporations issue model themselves and integrate, among other as-
shares as well as debt. This raises the question pects, a corporate tax. Miller (1977) completes the
of whether thin capitalization rules cancel out the model anew and implements an income tax on the
tax shield of debt financing, which may explain shareholder level. In both approaches a classical
the attractiveness of one option over the other. corporate tax system is assumed.
Against this background we investigate how such Furthermore, in some contributions the income
regulations affect the capital structure decisions tax effects on the capital structure are modeled in
of corporate stockholders. We neglect problems a more refined manner. For instance, capital gains
of information asymmetry between managers and taxes and, in turn, the asymmetric taxation of div-
147
idends and capital gains are highlighted by Farrar Boadway and Bruce 1984; Devereux and Freeman
and Selwyn (1967), Brennan (1970), and Schneller 1991). This system is supposed to be close to the tax
(1980). Brennan (1970) and Zechner (1990) as- politicians' idea of a fair and efficient tax system
sume a progressive tax scale and allowances for (Devereux and Freeman 1991: 4-6; Fehr and Wie-
interest paid. gard 2003: 298). As Belgium is one of the countries
Some papers take account of tax policy details to have introduced an ACE tax and simultaneously
in various countries. Swoboda (1991) examines tightened the thin capitalization rules (e.g., Gerard
Germany's and Austria's 1991 tax laws in a Miller 2006) it is interesting to analyze its interdepen-
framework. In this context he considers Germany's dencies and possible capital structure effects.
corporate tax, income tax and also property tax, lo- Although the literature provides detailed investiga-
cal business tax and church tax. Fung and Theobald tions of tax rules, thin capitalization rules have to
(1984) consider the 1984 tax laws of France, Ger- date only been analyzed by Buettner, Overesch,
many, the United Kingdom, and the USA. Unlike Schreiber, and Wamser (2006), Overesch and
Swoboda, they restrict themselves to corporate and Wamser (2006) and Overesch and Wamser (2009).
income taxes. Holland and Steiner (1996) extend The authors empirically investigate financing deci-
Swoboda's approach and investigate the influence sions in a multinational firm under a restrictive tax
of Germany's solidarity surcharge on the capital rule for stockholders' debt financing, which is com-
structure. Laÿ (1999) models US tax law between parable to the German thin capitalization rules. In
1977 and 1994 as well as German tax law be- this work, the main elements of a thin capital-
tween 1976 and 1998, also using the Miller model. ization tax rule are considered without modeling
Kruschwitz (2007) models the German tax regime country-specific details of the regulation. Here,
in 2007. neither a specific debt-capital/equity-capital ratio,
Beyond detailed investigations of different taxes safe haven, nor a differentiation between profit-
there are many other extensions to the Modigliani dependent and profit-independent loans are car-
and Miller (1958) model. Hodder and Senbet ried out. A more sophisticated analysis of the influ-
(1990), Graham (2003), and Desai, Foley, and ence of thin capitalization rules on entrepreneurial
Hines (2004) consider international tax aspects, capital structure decisions has not yet been con-
DeAngelo and Masulis (1980a), DeAngelo and Ma- ducted.
sulis (1980b), and Graham (2000) take account of To fill this void, we integrate thin capitalization
non-debt-tax shields, e.g., Kraus and Litzenberger rules into a capital structure decision model in
(1973), Haugen and Senbet (1978), Kim (1978) the following analysis. We investigate its influ-
model bankruptcy costs, and Jensen and Meck- ence on corporate financing decisions analytically.
ling (1976) and Leland (1998) integrate agency It also helps the treasury to decide what type
costs (see Harris and Raviv 1991). Capital struc- of thin capitalization rule to implement under a
ture models under uncertainty are examined by given tax setting. Our study can be regarded as
Kim (1982), Zechner (1990), and Swoboda (1991). a first step towards an empirical study on the
Miller and Scholes (1978) and Litzenberger and van influence of specific thin capitalization rules on
Horne (1978) consider dividend policy. Schneller corporate capital structure and thus provides im-
(1980) and Graham (2003) offer a model that takes portant information to extend the work of Buett-
account of different systems to prevent double tax- ner, Overesch, Schreiber, and Wamser (2006),
ation of dividends. A dynamic model is presented Overesch and Wamser (2006) and Overesch and
by Fischer, Heinkel, and Zechner (1989). Wamser (2009). In contrast to empirical pub-
Beyond this finance-theory-oriented stream of lit- lic finance papers that are often lacking a suffi-
erature we refer to the discussion on intertem- cient theoretical foundation or do not account for
porarily neutral capital income taxation and con- all relevant tax details (Desai, Foley, and Hines
sumption-based tax systems in public finance. The 2004; Mintz and Weichenrieder 2005; Huizinga,
so-called ACE tax has become particularly popular Laeven, and Nicodème 2006; Weichenrieder and
as an investment and financing-neutral tax system Windischbauer 2008) we provide a detailed the-
with an allowance for corporate equity (ACE) de- oretical model. Moreover, future empirical papers
ductible from taxable profits, which represents the could verify whether the optimal financing and
opportunity costs of equity capital (Wenger 1983; dividend policies we derive are actually practised.
148
We consider thin capitalization rules that are char- return arises irrespective of the form of financing
acterized by a given permitted debt-equity capital because this balances out the advantage that debt
ratio because many countries limit debt financing capital incurs interest payments that are deductible
referring to such a permitted ratio. We take the from the corporate tax base (tax shield) and the
Italian, German, and Belgian rules as examples to advantage that equity capital typically leads to rela-
study their impact on capital structure decisions. tively lower income tax burden (Miller 1977: 269 et
The Italian and the German thin capitalization seq.).
rules are no longer in force. They have been substi- In section 2 we develop a framework for a gen-
tuted by rules that restrict interest deduction irre- eral capital structure model on the basis of Miller
spective of a permitted debt-to-equity ratio in those (1977) that includes thin capitalization rules. We
countries. Nevertheless, there are many countries integrate the Italian, German and Belgian thin
that apply this type of thin capitalization rule, capitalization rules into this model in sections 3
e.g., Bulgaria, Czech Republic, Denmark, Hun- to 5 and analyze whether a Miller equilibrium can
gary, Latvia, Lithuania, the Netherlands, Poland, emerge. If not, we determine the optimal capital
Portugal, Romania, Slovakia, and Slovenia. We re- structure and identify the most important value-
fer to Belgium, Germany, and Italy as examples driving factors. On the basis of Miller (1977), we
to model all major characteristics of this type of refer to a single investor's indifference towards
thin capitalization rule. These examples allow us providing capital as a loan or as equity capital to
to elaborate the mechanisms at work for different a corporation as a ``Miller equilibrium''. Note, that
implementations of such rules that are common in the following, this ``equilibrium'' is not a general
or discussed in several countries and to show how market equilibrium. In section 6 we summarize
they interact with different tax systems. and draw conclusions.
Our analysis can help investors not only to make This article is supplemented with Excel spread-
their dividend and financing decisions under thin sheets that provide the calculations that have been
capitalization rules with a given permitted debt- performed for Belgium, Italy, and Germany.1
equity ratio but also to adjust their decisions when
tax laws change. Our analysis is representative of
all thin capitalization rules that refer to such a
2 Capital structure under
permitted debt-equity ratio. restricted shareholder debt
As the financing behavior of investors is crucial for financing
designing thin capitalization rules and as the influ- 2.1 General assumptions
ence of thin capitalization rules depends on several In the following we integrate thin capitalization
other tax parameters (corporate tax rate, taxable for shareholder debt financing into Miller's cap-
fraction of dividends and capital gains, permit- ital structure model to derive conclusions about
ted ratio of debt to equity capital) it is important the effectiveness of this regulation for financing
for the treasury to know how these rules inter- decisions in corporations. Our model relies on the
act. Analyzing different types of thin capitalization following set of assumptions.
rules and performing sensitivity analyses help the We assume a perfect capital market under certainty
treasury to implement a rule that contributes to and identical debit and credit interest rates. The
a given political aim. Thus, the following investi- borrower is a domestic corporation. The investors
gation of different settings of thin capitalization are assumed to be domestic individuals who hold
rules and tax systems is of general relevance for their investment and accordingly the provided cap-
a comprehensive understanding of tax effects on ital in private means. On the corporate level taxes
capital structure decisions. on profits are considered. On the shareholder level
After developing the general model we apply our the individual income tax is taken into account.
model to selected countries. We refer to the capital All investors who have to decide to provide either
structure model by Miller (1977). Miller investi- equity or debt capital are assumed to be share-
gates the market for debt capital and shows that holders of the underlying corporation. Further we
this market always leads to an equilibrium in which
for every company the capital structure is irrele- 1 These Excel files can be downloaded from www.business-
vant to the value of the firm. The same after-tax research.org.
149
assume that the thin capitalization rule applies In the following the sum of retained earnings is
to all shareholders and thus to all investors (see given by G (Miller 1977: 268). G is not equal to
Appendix A2). capital gains as this variable neglects the internal
The interest payment Z amounts to i C, where growth caused by reinvesting retained earnings at
i denotes the market rate of return that can be the internal after-tax yield iä1 á c á a å. Further,
earned on the capital market and C denotes the capital gains are not liable to income tax until they
amount of debt capital provided by an investor. are realized at shareholder level. We have to take
On the corporate level dividends are not tax- account of the time effect arising from the delayed
deductible, whereas interest payments on debt are taxation of retained earnings. In the following,
generally tax-deductible as they are operating ex- the time lag of capital gains taxation compared to
penses. In line with Miller, the case of limited dividend taxation and the internal growth effect
interest deductibility, particularly due to losses, is from retained earnings are both captured in the
not considered (Miller 1977: 262). We assume that factor > 0. It is necessary to implement into our
a fraction of debt is subject to the thin capi- static model to highlight the difference in taxation
talization rule (see Appendix A2). The permitted of dividends and capital gains and the internal
debt-to-equity ratio will be denoted by and is growth of retained earnings in present value terms.
assumed to be exceeded. Consequently, not the We obtain
total amount of interest paid to a shareholder is n
ä1 à iæ1 á c á a çå
deductible, but only the interest on the permitted (2) ã ;
ä1 à i ån
fraction of debt capital multiplied with the corpo-
rate equity, thus i E. As the thin capitalization rule with G denoting the present value of capital gains.
applies to all shareholders, the shareholder's share We abstract from increases in value that are caused
in corporate equity is irrelevant. In the following by speculative developments. Here, i is the after-
the deductible amount of interest is denoted as the tax market rate of return that the shareholder is
utilized safe haven H. Hence, able to earn alternatively on the capital market and
( is given by i ã ä1 á iI åi. iI denotes the investor's
i E; if C > E; personal tax rate on interest income. If interest
(1) Hã
i C; if 0 ‹ C ‹ E. income is included in the investor's individual
tax assessment, the tax rate iI is equal to the
Equity capital E provided by the shareholder de- investor's personal income tax rate i . If there is
notes the equity capital that has already been pro- a withholding tax on interest income, iI is the
vided prior to the point of time when the financ- withholding tax rate. The variable n denotes the
ing decision is made. The investor's individual period in years after which the capital gains are
amount of equity is exogenously given. Further, it realized. We assume that n is exogenously given
is assumed that all investors offer the same mix and hence the investor is not able to decide on the
of equity and loans to the corporation and con- holding period n. Furthermore, we assume that
sequently all shareholders have an identical safe only a fraction of the capital gain is taxable. In
haven. It is therefore possible to determine the total the present value of assessable and taxable
overall safe haven for all shareholders jointly. It is capital gains G is G (see Swoboda 1991: 857,
not necessary to refer to the single shareholder. and Laÿ 1999: 119, who assume that capital gains
Some countries raise additional taxes on profits are tax-exempt).
on the corporate level. National tax rates and tax We abstract from personal allowances, income-
bases vary significantly. In the following the tax related expenses, standardized deductions, per-
rate of these taxes is denoted by a , the tax base by sonal exemptions, special expenses and extraordi-
F. nary charges in the model when calculating taxable
Under income tax law, earned interest is taxable at income. We assume there is no income from other
a fraction " with " ∈ [0,1]. The capital income from sources apart from interest income, dividends, and
shareholders' invested equity capital consists of capital gains. The fraction of interest that is not tax-
distributed dividends of the corporation and real- deductible on the corporate level is requalified as
ized capital gains. The taxable fraction of dividends hidden profit distribution and therefore treated
D is denoted as with ∈ [0,1]. as a dividend. Dividends and hidden distributions
150
are subject to an income tax rate iD , interest pay- The interest payments that are subject to income
ments to an income tax rate iI and capital gains tax are identical to the deductible interest pay-
to iG . Although the income tax schedule is pro- ments I d on the corporate level. A fraction " of I d
gressive in many countries, from the shareholders' is taxable. Hence, the interest payments that are
perspective the income tax rate can be regarded as liable to tax amount to
exogenously given.
(9) I taxable ã " I d ã " i Cæ1 á ç à i E :

2.2 Integrating taxes Only the fraction of the dividends is subject to

Now we will formally describe all relevant fiscal income tax
rules. In a first step we have to determine the
amount of interest that can be deducted when de- (10) Dtaxable ã D:
termining the corporate tax base. In total, interest
Interest that is interpreted as hidden distribution
payments amounting to I are paid to the investor:
of profits is treated as dividends and thus likewise
(3) I ã i C: taxable by the fraction . The hidden distribution
of profits corresponds to non-deductible interest
The interest payments can be deducted from the on the corporate level I nd . This amount denotes
corporate tax base up to an amount of I d . Interest the interest payments that exceed the safe haven.
payments on a fraction ä1 á å of the loans are
completely deductible, i.e., Iä1 á å, whereas in- (11) Btaxable ã B ã I nd ã i C á i E :

terest payments on a fraction of debt are only

deductible in the amount of the safe haven H. As Retained earnings G result from the difference
we assume the safe haven to be exceeded, it is equal between the profit Π, the corporate tax Tc and the
to i E. additional taxes Ta , as well as the dividends D and
the interest I. Thereby, the present value of the
(4) I d ã Iä1 á å à H ã i Cä1 á å à i E: capital gains G is taxable at the fraction . In
present value terms we obtain
The amount of non-deductible interest expenses
I nd which is requalified as a hidden distribution of (12) Gtaxable ã Π á Tc á Ta á D á I

profits is
ã Π á c Π á i Cä1 á å á i E

(5) I nd ã I á I d ã i C á i E: | {z }
Tc
The taxable income in terms of corporate tax re-

á F áD á |{z}
a iC :
sults from the deduction of debt-capital interest I d |{z}
I
Ta
from gross profit Π. Corporate tax amounts to:
Inserting equations (9), (10), (11), and (12) into eq.
(6) Tc ã c Π á I d ã c Π á i Cæ1 á ç á i E :

(8) leads to
Additional taxes on profits Ta are levied on the
(13) Ti ã iI " i C æ1 á ç à i E

corporate level. The tax base is equal to F; the tax | {z }
rate amounts to a . I taxable
à DàiC ái E

iD
(7) Ta ã a F: | {z }
Dtaxable à Btaxable
The taxable interest I taxable , dividends Dtaxable , and à Πá

Π á i Cä1 á å á i E

iG c
capital gains Gtaxable are subject to income tax.
á aF áDáiC :

Additionally, interest that is considered to be a | {z }
hidden distribution of profits is subject to income Gtaxable
tax. The taxable fraction of the hidden distribution
The total after-tax income of all investors Π is
of profits is denoted with Btaxable . Thus, the burden
composed of the difference of the gross profit Π,
resulting from income tax is
corporate tax Tc , additional taxes on the corporate
(8) Ti ã iI I taxable à iD Dtaxable à Btaxable level Ta and income tax Ti ,

à iG Gtaxable : (14) Π ã Π á Tc á Ta á Ti
151
(15) Π ãΠá Π á i Cæ1 á ç á i E á a F substantial shareholder, i.e. a shareholder with a

c
shareholding of at least 25ô, has to be requalified
| {z } |{z}
Tc Ta
as hidden distribution of profits if the permitted
á iI " i C æ1 á ç à i E

ratio of debt to equity capital of currently 4:1 is ex-
á DàiC ái E

iD ceeded (Romanelli 2006: 372). Therefore, interest
á Π á c Π á i Cä1 á å is not considered to be a hidden distribution until

iG
ái E á a F á D á i C : the debt of a substantial shareholder exceeds four

| {z } times their equity share.
Ti
Additionally, a regional tax on productive activities
Similar to Miller (1977), to identify the optimal (IRAP) is levied on the net value of the production
capital structure based on the total after-tax in- F. In line with IRAP interest expenses are not
come of all investors, we first have to determine tax-deductible. The tax rate a currently stands at
the optimal dividend policy. In a second step we 4.25ô (Romanelli 2006: 367 et seq.).
analyze the optimal capital structure. Against the Dividends and capital gains are 60ô tax-exempt if
background of the set of equations outlined above, the shareholder holds either 2ô of voting power
we are able to investigate both an optimal dividend or 5ô of the capital of listed companies, or if
policy and an optimal capital structure under thin they hold 20ô of voting power or 25ô of the
capitalization rules in a general capital structure capital of other companies. Otherwise dividends
model. Furthermore, analyzing the general setting and capital gains are liable to a final withholding
enables us to draw conclusions about a real-world tax of 12.5ô (Romanelli 2006: 377). As we consider
example, i.e. Italy. This is possible as the Italian substantial shareholders only, a withholding tax is
thin capitalization rules are fairly simple and thus not applicable.
correspond to those of our general model. Later, Interest income arising from loans is subject to a
we specify the model in more detail to study the withholding tax of 12.5ô that is creditable against
implications of modified and simultaneously more the shareholder's income tax liability. A final with-
complex thin capitalizations rules. Such rules have holding tax applies to interest on current accounts
been introduced in several countries. We take Ger- with bank offices and bonds, but not on loans
many and Belgium as examples of such modified (Romanelli 2006: 378).
rules and investigate whether the results of the Hence, interest payments, dividends, and capital
general model are robust under more complex gains are subject to the same income tax rate
shareholder financing rules. i ã iI ã iD ã iG .
This reduces the net profit given by equation (15)
to
3 General thin capitalization rules
(Italy) (16) Π ã Π á c Π á i Cæ1 á ç á i E á a F

3.1 Critical income tax rate

| {z } |{z}
Tc Ta
In the following, we integrate general thin cap- á i " i C æ1 á ç à i E

italization rules into our capital structure model.
á i DàiC ái E

Looking for corresponding real-world rules we find
á i Π á c Π á i Cä1 á å

that the rules in section 98 of the Italian Income
Tax Code fully comply with our general model. ái E á a F á D á i C :

These rules, which are characterized by a small

| {z }
Ti
number of attributes, no complicating exceptions,
and simple parameters, can be regarded as an To identify the optimal dividend policy, equation
illustrating example of our general setting. We (16) has to be differentiated with respect to divi-
implement these rules into our framework to in- dends D and set equal to zero:
vestigate the influence of thin capitalization rules
@Π
on a general basis on investors' financing decisions (17) ã iä á å ã 0:
@D
(see Appendix A1).
Under section 98 of the Income Tax Code interest We find an investor to be indifferent towards div-
on debt capital that a corporation receives from a idend policy only in two cases, namely if their
152
marginal income tax rate i amounts to i ã 0 or if (see Appendix A2). By means of equation (18) the
the factor amounts to ã . optimal financing decision can be determined for
The condition i ã 0 is only fulfilled if the investor every investor. All investors whose marginal tax
has no taxable income. Since we assume that the rate i equals the critical income tax rate iâ are in-
investor obtains interest payments and dividends different towards the allocation of debt and equity
and/or capital gains, this condition is not fulfilled capital. They are referred to as marginal investors.
in our model. Hence, dividend policy is irrelevant Investors who have lower tax rates will offer a loan
only if ã . Under current legislation we have to the corporation, while investors with higher tax
ã which leads to ã 1. The time and growth ef- rates will offer equity capital (Swoboda 1991: 853).
fects from capital gains are cancelled out perfectly Due to the progressive income tax scale in many
and thus ã 1. This is true only if the corporate countries, e.g., in Italy (Romanelli 2006: 378),
internal after-tax yield iä1 á a á a å is identical to a general irrelevance of the financing policy can
the after-tax market rate of return the shareholder never be achieved for all taxpayers. Irrelevance
is able to earn on the capital market i . Beyond this can only be achieved for the taxpayers who have
setting, dividend policy may not be irrelevant. That marginal tax rates that are identical to the critical
said, full retention is always the optimal dividend income tax rate. Therefore, within this analysis it is
policy. As long as retained earnings are taxed at only possible to investigate whether or not a Miller
a lower effective rate than distributed earnings, equilibrium can be reached for specific taxpayers.
full retention of profits always leads to the highest Furthermore, the after-tax profit of a firm can
net profit. The same result is achieved by Miller never be maximized through mixed financing. De-
although he does not outline it explicitly. Miller's pending on the single parameters, either an equity-
results are explained by Swoboda (1991: 853) and only or debt-only financing maximizes after-tax
Laÿ (1999: 45-46), who find a different result for profit, or the means of financing is irrelevant to the
the German tax code. Both base their assumptions after-tax profit of the firm.
on a split corporate tax scale in connection with the
full imputation system. From the authors' point of 3.2 Sensitivity analysis
view the optimal dividend policy depends on the In the following we analyze the implications of a
ratio between the personal income tax rate and the variation of different model parameters. Changes
corporate tax rate that is applied when profits are in gross profit Π and interest rate i do not influ-
retained. If the personal tax rate is significantly ence the critical income tax rate and therefore the
lower than the corporate tax rate, a distribution of financing decision. Hence, we concentrate on the
profits is beneficial to reduce the tax burden from factor , the tax rates, the taxable fraction of divi-
the corporate tax rate applied to retained profits dends and capital gains , the fraction of debt,
to the lower personal income tax rate (Laÿ 1999: the taxable fraction of interest ", and the permitted
139-140). ratio of debt to equity .
To identify the optimal capital structure based on
the optimal dividend policy, equation (16) has to be 3.2.1 Time and growth factor for capital
differentiated considering Dâ ã 0 with respect to gains
C. Rearranging finally leads to the critical income
tax rate iâ : To analyze how the different parameters affect
h i the investor's financing decisions, all variables are
â
(18) i ã c Cæ1 á ç à E assumed to be constant, except for the factor .
h We assume
± " Cæ1 á ç à E à ä C á Eå

i-1 ã 33ô; imax ã 43ô;

c
à c Cæ1 á ç à E á C : C ã e 100,000; E ã e 1,000;

ã ã 0.4; ã 4; " ã 1; i ã 6ô; ã 1.

Note that the factor is influenced by the after-tax
interest rate i and therefore by iâ . Nevertheless, Interest payments are fully tax-liable, hence " ã 1.
we assume that is exogenously given. To justify Dividends, hidden distributions, and capital gains
this simplification we have analyzed the interde- are subject to a shareholder relief system, i.e. they
pendency of and iâ using an iterative simulation are all subject to tax at a fraction of 40ô (Romanelli
153
2006: 377). Hence, in our model we obtain ã ã Only if 0.9288‹ ‹0.9964 will it depend on the
0.4. As the permitted ratio of debt to equity capital investor's individual income tax rate whether debt
is 4:1, in our model the debt-equity parameter or equity financing is optimal. If the personal in-
is equal to 4. All interest payments to substantial come tax rate is lower than the critical tax rate, the
shareholders are subject to the thin capitalization investor will offer a loan. If it is larger, they will
rules (Romanelli 2006: 372). These regulations provide equity capital. If the marginal tax rate is
imply ã 1. equal to the critical income tax rate, the investor
Then, the investor receives interest payments of is indifferent to either option. In this case we find
e 6,000 and the safe haven H amounts to e 240. the so-called Miller equilibrium for this investor.
We receive the critical income tax rate: Although at first sight the after-tax internal rate
â 79.2 of return falls short of the after-tax external rate
(19) i ã : of return ( < 1) shareholders are still willing to
2,544 á 2,368.32
provide equity capital as they benefit from prefer-
ential capital gains taxation. The time and growth
Table 1: Critical income tax rates for
factor does not reflect effects arising from the tax-
various in the general model (e.g., Italy)
able fraction of capital gains < 1. Consequently,
â
i providing equity capital can be optimal even for
0:01 3:14ô < 1.
0:25 4:06ô The specific outcome of the factor mainly de-
0:5 5:82ô pends on the ratio of the internal after-tax yield
0:75 10:32ô iä1 á c á a å and the after-tax market rate of return
0:85 14:92ô i . The holding period n exerts only little influence
0:9288 23:00ô on . Assuming that iä1 á c á a å and i are al-
0:95 26:93ô most equal, leads to š 1. Then we see that debt
0:9964 43:00ô financing will be beneficial for most investors.
1 45:08ô Income from equity capital, namely dividends and
1:07 800:19ô capital gains, is subject to income tax at a fraction
of ã ã0.4. By contrast, interest income is fully
Table 1 shows that the values for the critical in- taxed. Interest income amounting to the safe haven
come tax rate iâ vary between 3.14ô and 800.19ô is also fully taxable, while the excess is subject to
(see Appendix A2). For ã 1.07 we receive an tax to a fraction of ã0.4. The lower taxation
extremely high critical income tax rate that again of dividends and capital gains on the shareholder
indicates that debt financing is always beneficial. level compared to interest income usually over-
If we determine critical income tax rates for higher compensates their non-deductibility on the corpo-
values of the critical tax rate may change its sign rate level. Nevertheless, debt capital often is more
and even become negative. A negative critical in- advantageous than equity capital because income
come tax rate is not easy to interpret. A closer look from equity capital, i.e. accumulated capital gains,
at these scenarios clarifies that the basic mech- is usually higher than interest income. Differenti-
anisms at work do not change. In line with the ating equation (19) with respect to we obtain the
result for ã 1.07 the resulting (negative) criti- @ â
derivative @ i which is always positive:
cal tax rate again implies that debt financing is
generally favorable.
If > 0.9964, the critical tax rate is higher than @ iâ 187,571
(20) ã > 0:
the top tax rate of 43ô. In these cases an equilib- @ ä2,544 á 2,268 å2
rium is not possible for the underlying tax system.
Then, investors will always prefer to provide a loan An increase in causes a higher taxation of capital
instead of equity to the corporation leading to the gains and consequently a higher taxation of equi-
highest possible net profit Π . ty capital. Hence, the relative advantage of debt
If < 0.9288 the critical income tax rate is lower capital increases compared to equity capital.
than the minimum tax rate of 23ô. In these cases
all investors provide equity capital.
154
3.2.2 Tax rates capital:
A rise in the corporate tax rate has two counteract- @ iâ á1.27 ± 108
(21) ã 2 < 0:
ing effects. On the one hand, the tax advantage of @ 4,000 à 96,000 á 39,472
debt capital (tax shield) at the corporate level in- This result, which seems surprising at first glance,
creases and so does the relative advantage of debt can be explained as follows: we have already shown
capital (see Buettner, Overesch, Schreiber, and that companies do not distribute profits in this
Wamser 2006: 11, who come to the same conclu- model framework. Instead, payments for equity
sion in the case of financing a German corporation capital are always realized as capital gains. If the
owned by foreign shareholders). Equity capital is taxable fraction of dividends is increased, this leads
more burdened by a higher tax rate, as dividends to a higher taxation of interest payments from thin
are not tax-deductible on the corporate level. On capitalization that have to be requalified as hidden
the other hand, the factor decreases because the distribution of profits. Therefore, an increase in
corporate internal after-tax yield iä1 á c á a å de- implies a higher taxation of debt capital.
clines. A decrease in leads, as shown above, to an Correspondingly, an isolated increase in the tax-
increasing relative advantage of equity capital. In able fraction of capital gains leads to a higher
Italy the tax-shield effect always dominates, caus- taxation of equity capital and an increasing rela-
ing an overall increasing advantage of debt capital. tive advantage of debt capital. The critical income
Mathematically this result becomes obvious in that tax rate rises when increasing :
@ â
the derivative @ ic is always positive.
@ iâ 1.30 ± 108
A change in the corporate tax rate has a relatively (22) ã > 0:
@ ä42,400 á 98,680 å2
low impact on the investor's financing decision.
Assuming a holding period of, e.g., n ã 10 years, Focussing on a change in both the taxable fraction
a decrease in the tax rate from 33ô to 10ô leads of dividends and capital gains ( ã ), we obtain
to changes in the critical income tax rate of 9 @ iâ á1.27 ± 108 à 1.3 ± 108
(23) ã 2 R 0:
percentage points. By contrast, an increase in the @ 4,000 à 1,000 æ9.6 á 9.9 ç
corporate tax rate to 50ô raises the critical tax
The derivative is positive or negative depending on
rates by 6 percentage points. @ â
Varying the IRAP tax rate has no tax-shield effect the factor . Figure 1 shows that the derivative @ i
because interest payments are not deductible un- is zero if ã0.9728. A negative derivative arises
der this tax. A change in the IRAP tax rate only if is smaller than 0.9728. Then, equity capital
amends the factor such that the relative advan-â becomes more attractive. The effect from higher
@
tage of equity capital increases. The derivative @ ai taxation of dividends that leads to an increased
is always negative. E.g., assuming a holding period advantage of equity capital is higher than the effect
of 10 years a rise in the tax rate from currently from higher taxation of capital gains that causes
4.25ô to 10ô decreases the critical income tax rate an increased advantage of debt capital.
@ â
from 12.57ô to 3.11ô. The derivative @ i is positive if >0.9728. In these
cases the relative advantage of debt capital in-
creases. The effect of the higher taxation of capital
3.2.3 Taxable fraction of dividends and gains overcompensates the effect of the higher div-
capital gains idend taxation because a high value of the factor
In Italy dividends and capital gains are subject to additionally causes a higher taxation of equity
tax at the same fraction ã ã0.4. In this section capital.
we analyze the effects of an isolated change in
the taxable fraction of dividends and the taxable
3.2.4 Fraction of considered debt
fraction of capital gains , respectively. We also
investigate the influence of a change in the taxable At present all interest payments to substantial
fraction of both dividends and capital gains. A rise shareholders are subject to Italian thin capitaliza-
in the taxable fraction of dividends leads to a tion rules. Therefore, the parameter has been set
decrease in critical income tax rate and therefore equal to 1. Lowering the fraction leads to a rise in
an increase in the relative advantage of equity the critical income tax rate and hence an increas-
155
@ â of the safe haven. An increasing multiple E and

Figure
1: Derivative @ i for various in the
consequently an increasing safe haven H leads to
general
0.25
model (Italy)
a decreasing corporate tax because the amount

∂τ i* of deductible interest payments increases. At the

0.15
∂γ same time the income tax increases because the ad-
0 θ ditionally deductible interest payments are taxed
0.2 0.4 0.6 0.8 1
to the full amount whereas hidden distributions
-2 are only subject to tax at the fraction ã0.4. The
effect on the corporate level always dominates.
-4
Therefore, the relative advantage of debt capital
compared to equity capital increases with rising
E. If the permitted ratio of debt to equity capi-
-6
tal is increased, e.g., from 4 to 20, debt capital
may be twenty times the equity capital contributed
by one shareholder while a change in the criti-
____ Derivative
∂τ *i
for various θ in the general model (Italy) cal income tax rate amounts to a maximum of 17
∂γ
percentage points.
ing relative advantage of debt capital compared to 3.2.6 Results

equity capital:
We are able to show that except for the gross profit
â
@ Π and the interest rate i all model parameters have
(24) i
ã á5.4 ± 109 à 1.3 ± 109

@ an influence on the investors' financing decisions.
± 102,400 á 60,000 á 26,272 Whereas the influence of the corporate tax rate,

-2 the IRAP tax rate, the taxable fraction of dividends,
á 13,200 < 0:
capital gains, and interest is low, the factor , the
This effect is true because the interest payments fraction of considered debt, and the multiple E
which are subject to thin capitalization and requal- exert a high influence on financing decisions. As
ified as hidden distributions of profit decrease, as is mainly driven by the relation of the corporate tax
does the corporate tax. A reduction in the fraction rate to the individual income tax rate, obviously
of considered debt has a relatively high influence the tax rate difference determines the financing
on the critical income tax rate. A reduction from decision significantly if capital gains are taxable. A
ã 1 to ã 0.01 would lead to a rise in the critical closer look clarifies that can significantly change
income tax rate of up to 32 percentage points. the critical income tax rate whereas a change in the
corporate tax rate cannot. E.g., if the corporate tax
rate rises, two partial effects on the critical income
3.2.5 Other model parameters
tax can occur. One effect is an increase in the critical
Assuming a decrease in the taxable fraction of income tax rate because of an increasing tax shield
interest of " ã 1 to values with " < 1, we obtain a from debt financing. Simultaneously the critical
rise in the critical income tax rate. The derivative income tax rate is reduced because of a decrease in
@ iâ
@" is always negative. This effect in turn increases the factor . Consequently, the overall effect of a
the relative advantage of debt capital because a rise in the corporate tax rate on the critical income
lower taxable fraction of interest implies a lower tax rate determined by these two opposing partial
taxation of debt capital. effects is small. Only the influence of the taxable
The influence of the permitted ratio of debt to fraction of dividends seems counterintuitive as a
equity capital and of the amount of equity cap- rise in the taxable fraction of dividends causes a
ital E can be analyzed simultaneously since both rise in the attractiveness of equity capital.
variables only affect the safe haven H ã i E. The Given the Italian tax policy with capital gains tax-
multiple E denotes the maximum amount of debt ation, the underlying thin capitalization rule with
capital that a substantial shareholder can provide a given permitted debt-to-equity ratio is typically
to the corporation while tapping the full potential not irrelevant with respect to capital structure de-
156
cisions. Here, financing decisions mainly depend profits. This regulation only holds if the share-
on the corporate-income tax rate differential and holder's capital commitment is long term and if
therefore the parameter . Consequently, the tax the tax allowance of e 250,000 of interest on debt
scale is an important driver of the financing deci- is exceeded. The permitted ratio of debt to eq-
sion. The treasury needs to know the distribution uity capital is 1.5:1 (section 8a para 1 no. 2 of
of investors across tax classes to forecast whether the German Corporate Tax Code). As only interest
it is likely that the majority of investors will tend payments for long-term debt are subject to this
to provide debt instead of equity capital under the regulation, the parameter represents the fraction
thin capitalization rules. of long-term debt in Germany. The tax allowance
We find that changes in some model parameters (section 8a para 1 of the German Corporate Tax
have a higher impact on the critical income tax Code) of e 250,000 of interest is assumed to be
rates than changes in other parameters. This dif- exceeded.
ference in sensitivity is due to the functional form In addition to the corporate tax the German local
of the net profit. business tax has to be taken into account on the
Several countries have implemented more complex corporate level. This tax treats equity and debt dif-
thin capitalizations rules. Against this background ferently. To integrate effects of the local business
and the results mentioned above, it is worthwhile tax into the model further assumptions are neces-
to find out whether we obtain corresponding or sary. Corporate income as defined in the German
deviating results under more specified rules and to Corporate Tax Code is the basis for determining
what extent the characteristics of the underlying the local business tax base F (section 7 sentence 1
tax system determine the effects. We take Germany of the German Local Business Tax Code). Since the
and Belgium as examples and perform an analysis local business tax itself is an operating expense, it
in the following sections. is deductible from its own tax base. We consider
this deductibility by introducing an effective local
business tax rate a (see Appendix A1). Further-
more, amongst the various tax base adjustments
4 Complex thin capitalization
listed in section 8 of the German Local Business
rules (Germany) Tax Code, only the addition of 50ô of the interest
4.1 Critical income tax rate payments for long-term debt (section 8 no. 1 of
In this section we integrate the German thin cap- the German Local Business Tax Code) is consid-
italization rules according to section 8a of the ered in the model. Splitting debt into long-term
German Corporate Tax Code as amended by the and short-term debt indirectly introduces a time
Korb II tax reform act (section 8a of the German dimension into the model. Although we develop a
Corporate Tax Code as amended by the Korb II static model that by definition does not account for
tax reform act dated Dec. 22, 2003, BGBl. I 2003: timing effects, a differentiation between long-term
2841 et seq.) into the model. This rule that was and short-term debt is necessary to distinguish be-
introduced in 2004 has been reformed by the Ger- tween different types of interest for local business
man business tax reform act 2008 where it was tax and thin capitalization purposes. Nevertheless,
substituted by an interest barrier (section 4h of the the model remains static. Reductions according to
Income Tax Code and section 8a of the German section 9 of the German Local Business Tax Code
Corporate Tax Code as amended by the German are not considered at all. The fraction of the in-
Business Reform dated Aug. 14, 2007, BGBl. I terest that is long-term debt (section 8 no. 1 of
2007: 1913 et seq., 1927 et seq.). Section 8a is an the German Local Business Tax Code) is denoted
example of a complex thin capitalization rule char- by ∈ ä0,1ç. If ã 0, section 8a of the German
acterized by a given permitted debt-equity capital Corporate Tax Code does not apply. Hence, the
ratio. addition of interest payments for long-term debt is
Under this debt-equity-ratio-based thin capitaliza- equal to 0.5 Id .
tion rule, interest on debt capital that a corporation Dividends, hidden distributions, and capital gains
receives from a shareholder with a shareholding are subject to the same income tax rate i ã iI ã
of more than 25ô, under certain circumstances, iD ã iG .
has to be requalified as a hidden distribution of Taking into account the local business tax, the net
157

profit Π is equal to (see Maÿbaum and Sureth à Cä1 á å à 0.5 E

a
2008 for a more detailed analysis of the influence h
of the German section 8a thin capitalization rule à c Cä1 á å à E
on capital structure decisions) #-1
i
á Cä1 á å à 0.5 E áC :
h i
(25) Π ã Π á a Π á i Cä1 á å á 0.5 i E a
| {z }
Ta
h 4.2 Sensitivity analysis
á c Π á i Cä1 á å á i E
As in the general model, the gross profit Π and
i
á a Π á i Cä1 á å á 0.5 i E the interest rate i have no influence on the critical
| {z } income tax rate and therefore on investors' finan-
Tc
h i cing decisions. The other model parameters exert
á i " i C ä1 á å à i E an influence on the critical income tax rate. The
h i degree of sensitivity of the critical tax rate towards
á i DàiC ái E variation in the different parameters varies signifi-
cantly. Therefore, we highlight the most important
h
á i Π á a Π á i Cä1 á å
value drivers.
á 0.5 i E

á Π á i Cä1 á å á i E
c
4.2.1 Time and growth factor for capital
gains
á a Π á iDCä1 á å á 0.5 i E

To analyze the influence of the factor all other

i
áD á i C :
| {z } model parameters remain constant. We assume
Ti
cã 25ô; imax ã 42ô; a ã 16.28ô;
To identify the optimal dividend policy, equation
C ã e 100,000; E ã e 1,000;
(25) has to be differentiated with respect to D:
ã ã 0.5; ã 1.5; " ã 1; i ã 6ô; ã 1.
@Π
(26) ã i ä á å ã 0:
@D We obtain the effective local business tax rate
We see that the investor is only indifferent towards a by considering the average collection rate of
dividend policy in two cases, namely if the income h ã 389ô (Federal Statistical Office 2007) and a
tax rate i ã 0 or if the factor ã . This is the same taxable business value of m ã 5ô. As the permitted
result we obtained for Italy (see section 3.1 and ratio of debt to equity capital is 1.5:1, the parameter
Appendix A2). Beyond these cases full retention is is equal to 1.5. The fraction of long-term debt is
always the optimal dividend policy. represented by the parameter . Under income
To obtain the optimal capital structure equation tax law earned interest is fully taxable (section 20
(25) has to be differentiated with respect to Dâ ã 0 para 1 no. 7 of the Income Tax Code), therefore
to C and it has to be set to zero. As a result we get " is equal to 1. The distributed profits D, hidden
the critical income tax rate iâ , distributions, and capital gains are subject to the
" half-income system and thus only 50ô of this
â type of capital income is taxable, i.e. ã ã
(27) i ã a Cä1 á å à 0.5 E

0.5 (section 20 para 1 no. 1 in conjunction with
section 3 no. 40 d) of the Income Tax Code, see
à Cä1 á å à E

c
# Appendix A1).
The investor receives total interest I of e 6,000.
á Cä1 á å à 0.5 E ±

a
Within the safe haven interest of I d ã H ã e 90 is
" tax-deductible at the corporate level.
" Cä1 á å à E à ä C á Eå Inserting the assumptions the critical income tax

rate as a function of is
â 466.575
(28) i ã :
50,750 á 49,766.71
158
Table 2 shows the critical income tax rates for in comparison to debt capital than in Italy. Only
different values of the factor (see Appendix A2). if > 0.9986 is debt capital more attractive in
Germany than in Italy.
Table 2: Critical income tax rates for
various in Germany Figure 2: Critical income tax rates for
â various

in Germany and Italy
i
0:01 0:93ô
τ i*
0:25 1:22ô 50%
50%
0:5 1:80ô 45%
0:75 3:48ô 40%

40%
0:95725 15:00ô 35%
30%
30%
0:99845 42:00ô
25%
1 47:45ô
20%
20%
1:015 197:04ô 15%
10%
10%
We see that the values for the critical income 5%
0
0%
tax rate vary between 0.93ô and 197.04ô. If the 0.2 0.4 0.6 0.8 1
θ
factor is higher than 0.99845, the critical income
tax rate is higher than the top tax rate of 42ô. ____ Critical income tax rates for various θ under general thin
capitalization rules (Italy)
In these cases, debt capital is advantageous for all
----- Critical income tax rates for various θ under specified thin
shareholders. If is lower than 0.95725, the critical capitalization rules (Germany)
income tax rate is lower than the minimum income
tax rate of 15ô and all investors will provide equity
capital. Only if 0.95725‹ ‹ 0.99845, it depends Debt capital is usually less attractive in Germany
on the investors' marginal tax rate as to whether than in Italy, because debt capital is more severely
debt or equity capital is favorable (section 3.2.1). burdened due to the addition of a fraction of the
For ã 1.015 we receive an extremely high criti- interest payments for long-term debt for local busi-
cal income tax rate that again indicates that debt ness tax purposes and the lower permitted ratio of
financing is always beneficial. If we determine crit- debt to equity capital. If the factor increases
ical income tax rates for higher values of the crit- this implies a higher effective taxation of capital
ical tax rate may change its sign and even become gains and consequently a reduced attractiveness
negative (see section 3.2.1 for an interpretation of of equity capital in both Italy and Germany. As
these effects). the nominal taxation of capital gains is lower in
@ â
We obtain the derivative @ i by differentiating Italy than in Germany, equity capital becomes less
equation (27) with respect to and inserting the as- unattractive in Italy than in Germany.
sumptions. As in the general model this derivative
is also positive in Germany. Therefore, an increas- 4.2.2 Tax rates
ing leads to an increasing relative advantage of A rise in the corporate tax rate c incurs an in-
debt capital compared to equity capital (section creasing critical income tax rate and therefore an
3.2.1). increasing advantage of debt capital over equity
capital. This result is in line with the result we
@ iâ 23,220 obtained for Italy (section 3.2.2).
(29) ã > 0:
@ ä50,750 á 49,766.71 å2 By contrast, an increase in the local business tax
rate a decreases the critical income tax rate and
In Figure 2 we compare the German and Italian therefore leads to an increasing relative tax advan-
critical income tax rates. We see that the German tage of equity capital. In this case the tax shield
tax rates are usually lower than the Italian tax rates. effect invoking a higher advantage of debt cap-
Only if is higher than 0.9986 are the German tax ital is lower than the opposing effect caused by
rates higher than the Italian. This implies that in the negative impact of rising a on , because in
Germany equity capital is usually more attractive Germany the fraction of interest payments that is
159
tax-deductible with respect to the local business influence of the taxable fraction of dividends and
tax is lower than for corporate tax purposes. capital gains on the critical income tax rate and
Assuming a holding period of n ã 10 years ex- therefore on investors' financing decisions.
emplifies that a decrease in the corporate tax rate
from 25ô to 10ô leads to a reduction in the critical 4.2.4 Fraction of considered debt
income tax rate of only 0.7 percentage points, a
corresponding increase in the corporate tax rate Assuming a change in the fraction of considered
to an increase of only 0.5 percentage points. Sim- debt we obtain the following derivative:
ilarly, changes in the local business tax rate also
â
only have a low influence on the critical income @
(33) i
ã -1.86508 ± 109 à 1.8605 ± 109

tax rate. Assuming a decrease in the local business @
± 100,750 á 50,000

tax to 10ô raises the critical income tax rate by
0.2 percentage points, an increase to 30ô results á 31,162 á 18,605
-2
< 0:
in a change in the critical income tax rate of 0.3
percentage points.
In Germany only long-term debt capital is subject
to the thin capitalization rules of section 8a of
4.2.3 Taxable fraction of dividends and the German Corporate Tax Code. Therefore, the
capital gains investor can influence the parameter by pro-
As in Italy, in Germany dividends and capital gains viding long-term or short-term debt, respectively.
are subject to the same taxable fraction ã . Lowering the fraction of long-term debt leads to
An exclusive rise in the taxable fraction of divi- an increasing relative advantage of debt capital
dends , as in Italy, lowers the critical income tax compared to equity capital.
rate and therefore increases the relative advantage
of equity capital (section 3.2.3): 4.2.5 Other model parameters
Considering changes in the taxable fraction of in-
@ iâ -4.60 ± 107
(30) ã < 0: terest " and the multiple of the permitted ratio of
@ ä1,500 à 98,500 á 49,767 å2 debt to equity capital and the amount of equity
capital E we obtain the same influences as in
Analyzing c.p. an increased capital gains taxation, Italy (section 3.2.5).
i.e. an increase in , we obtain the following deriva- A decrease in the taxable fraction " of interest
tive that is, as in Italy, always positive (section leads to an increasing relative advantage of debt
3.2.3): @ â
capital. The first derivative @"i is always negative.
Considering a rise in the multiple E we obtain a
@ iâ 4.64 ± 107
(31) ã > 0: higher relative attractiveness of debt capital.
@ ä50,750 á 99,533 å2
4.2.6 Results
A change in the taxable fraction of both dividends
and capital gains leads to a derivative that is, To study the influence of the German thin capi-
depending on the factor , positive, negative or talization rules on financing decisions we had to
zero: extend the general model to include the local busi-
ness tax. This tax is quite different from the Italian
@ iâ -4.6 ± 107 à 4.64 ± 107 IRAP as the resulting tax burden depends on the
(32) ã R 0:
@ ä1,500 à 98,500 á 99,533 å2 investor's financing decision. In spite of the intro-
duction of this tax we obtain very similar results
The derivative is positive if is higher than 0.9896, for both Germany and Italy. We can show that in
negative if is lower than 0.9896, and equal to both countries the gross profit and the interest rate
zero if is 0.9896. For Italy we obtain a similar do not influence the investors' financing decisions,
value of ã 0.9728. Hence, the integration of the whereas changes in the other model parameters
local business tax and the different values of the exert the same influences in both countries. A
model parameters do not substantially affect the change in the German local business tax rate has a
160
less severe influence on the critical income tax rate individual assessment in section 5.2. We only con-
than a change in the Italian IRAP tax rate because sider the case that the investor chooses to include
interest payments are not tax-deductible under an both interest and dividends into assessment. For
IRAP. For this reason a variation of the IRAP tax reasons of transparency we do not model mixed
rate does not invoke a tax shield. scenarios.
Capital gains are not subject to tax, therefore
iG ã 0 (Offermanns 2006: 76). In a first step
5 Complex thin capitalization we assume that capital gains are also subject to
rules (Belgium) the withholding tax of 25ô. This assumption en-
After having considered the Italian and German ables us to isolate the effects of the introduction
thin capitalization rules we now analyze the in- of a capital gains tax. Hence, we assume that iG ã
fluence of another debt-equity-ratio-based rule, 25ô.
namely the Belgian regulation on shareholders'
financing decisions which was introduced in 1997. 5.1 Withholding tax
In Belgium interest payments are requalified as 5.1.1 Critical income tax rate
hidden distribution of profits and therefore treated
as dividends if the permitted ratio of debt to equity Considering the withholding tax we assume
capital of 1:1 is exceeded. The Belgian thin capi-
iD ã iG ã 25ô; iI ã 15ô.
talization rules are applicable to all shareholders.
A minimum shareholding is not necessary. The We obtain the following net profit Π
thin capitalization rules include all loans that a
shareholder provides the corporation (Offermanns

(34) Π ã Π á Π á i Cä1 á å á i E á in E
c
2006: 73). | {z }
A notional interest deduction for equity capital Tc
is granted to corporations. Thus, the Belgian sys-

á 0.15 " i C ä1 á å à i E
tem applies an Allowance for Corporate Equity h i
(ACE) device which was intended to account for á 0.25 D à i C á i E
the distinction of interest payments to external
á 0.25 Π á c Π á i Cä1 á å

providers of capital compared to those from as-
sociated members of corporations. Introducing an
ái E á in E á D á i C :

ACE was regarded as a step towards a more neu-
tral tax system and towards improving Belgium as
| {z }
Ti
an investment location (Gerard 2006: 156). The
deduction is based on the book value of the com- By differentiating equation (34) with respect to the
pany's equity. It is calculated by multiplying the dividends D the following dividend policy turns
equity by a fixed percentage determined by the out to be optimal:
government. For 2007 the percentage is equal to
in ã 3.442ô. The notional interest rate is set by @Π
the government on the basis of the interest rate (35) ã á ã 0:
@D
on 10-year government bonds (Cowley, Gutiérrez,
Kesti, and Soo 2008: 91). The investor is only indifferent towards the div-
In contrast to Italy and Germany, additional taxes idend policy if ã . As capital gains are not
a are not levied on the corporate level. subject to tax in Belgium at present, we receive
Dividends and interest income are subject to a ã 0. The condition only holds if ã 0, namely
withholding tax of iD ã 25ô and iI ã 15ô re- if dividends are not subject to tax. Since dividends
spectively (Offermanns 2006: 78). Alternatively, are fully taxable in Belgium, hence ã 1 and in-
the investor can choose to include dividends and difference to the dividend policy is not possible at
interest income into their individual assessment if present. Instead full retention is always the opti-
this leads to a lower taxation. In this case iD ã iI . mal dividend policy. Because capital gains are not
In the following we analyze both cases, the sce- subject to tax whereas dividends are, full retention
nario with withholding tax in section 5.1 and with always leads to the highest net profit.
161
Taking account of the withholding tax the income holder level interest payments up to the safe haven
tax rate is no longer a function of the tax base are subject to the withholding tax rate of 15ô while
but exogenously given, because iI ã 15ô and the excess is subject to the withholding tax of 25ô.
â
iD ã iG ã 25ô. Thus, a critical income tax rate i Consequently, interest payments amounting to the
cannot be determined. The optimal capital struc- safe haven are possibly taxed lower than payments
ture decision does not depend on the investor's for equity capital. But interest payments that ex-
marginal income tax rate but only on the values of ceed the safe haven are taxed considerably higher
the other model parameters. (33ô corporate tax plus 25ô withholding tax).
Since we assume the safe haven always to be ex-
5.1.2 Sensitivity analysis ceeded and since Belgium has a very low safe
haven, interest payments are always taxed higher
In the following we analyze the influence of selected than capital gains.
model parameters on the investor's financing de- As in Italy and Germany, a variation of the gross
cisions. profit and the interest rate has no influence on the
For the basic scenario we assume financing decisions. The same is true for changes
ã 33ô; imax ã 50ô; in ã 3.442ô; i ã 6ô; in the notional interest rate.
c
C ã e 100,000; E ã e 1,000; Π ã e 10,000; As long as capital gains are not subject to tax, i.e.
ã 1; ã 0; ã 1; " ã 1; ã 1. ã 0, a change in the time and growth factor for
capital gains has no influence on the investor's
Corporations with a tax base up to e 322,500 are financing decisions. If capital gains are not tax-
subject to a progressive tax scale. Corporations exempt, i.e. > 0, a variation of influences the
with a higher tax base are subject to a tax rate of investor's financing decisions. Since capital gains
33ô (Offermanns 2006: 65, see Appendix A1). We are subject to tax at , a change in the factor has
assume that the tax base exceeds e 322,500. The the same influence on the financing decisions as a
shareholders are subject to a progressive income change in the taxable fraction .
tax scale. The top tax rate imax to the amount of As in Italy and Germany, an increasing corporate
50ô is imposed if the tax base exceeds e 31,700 tax rate leads basically to an increasing relative ad-
(Offermanns 2006: 77, see Appendix A1). vantage of debt capital compared to equity capital
Dividends, interest payments, and hidden distribu- (section 3.2.2). The increasing relative advantage
tions are subject to income tax to the full amount, of debt capital is very low, due to the notional in-
hence " ã ã 1. Capital gains are tax-exempt, terest deduction for payments for equity capital. As
hence ã 0. The thin capitalization rules are ap- c ∈ [0,1] an irrelevance of the financing decision
plicable for all loans provided by shareholders, i.e. or even an advantage of debt capital cannot occur
ã 1. The permitted ratio of debt capital to equity in Belgium.
capital is 1:1, i.e. ã 1. Investigating the effects of an isolated decreasing
Inserting the assumptions into equation (34) we taxable fraction of dividends we find a rising attrac-
obtain a net profit of e 6,711 in the case of equity tiveness of debt capital (section 3.2.3). The investor
financing and a net profit of e 5,237 in the case of is only indifferent towards debt and equity capital
debt financing. The investors will therefore decide if ã -0.00038. As ∈ [0,1] a change in the tax-
to provide equity capital instead of debt capital. ation of dividends does not change the financing
Payments for equity financing are only taxed with decision. Equity capital is always advantageous.
corporate tax at 33ô. In line with notional interest The introduction of a capital gains taxation, while
deduction, a notional amount of interest can be assuming that dividends are subject to tax to the
deducted from the corporate tax base. The pay- full amount, i.e. ã 1, leads to an increased relative
ments for equity are not taxed on the shareholder advantage of debt capital (section 3.2.3). Neverthe-
level because full retention is the optimal dividend less, debt capital would become advantageous only
policy and capital gains are tax-exempt. for negative -values. As ∈ [0,1], equity capital is
Interest payments are tax-deductible on the corpo- always advantageous.
rate level up to the safe haven. Those that exceed In Italy and Germany, a change in the taxable
the safe haven are non-deductible and therefore fraction of both dividends and capital gains ( ã
subject to corporate tax of 33ô. On the share- ) leads, depending on the value of the factor
162
, to a change in the relative advantage of debt capital will be preferred if > 58 or E > 104,000.
over equity capital (section 3.2.3). In Belgium, a
change in these parameters does not change the 5.1.3 Results
shareholder's financing decision. A decreasing
Considering the Belgian thin capitalization rules in
and leads to an increasing relative advantage
the light of the withholding tax option, the finan-
of debt capital, but an advantage of debt capital
cing decision, unlike in Italy and Germany, does
towards equity capital can only occur for negative
not depend on the investor's marginal income tax
values of and .
rate but only on the other model parameters. Vary-
A decrease in the fraction of considered debt from
ing different model parameters leads to similar
presently ã 1 to < 1 reduces the drawback of
financing decision patterns as under the Italian-
debt over equity caused by the thin capitalization
type and German-type rules. Whereas in Italy and
rule (section 3.2.5). If ã 0.4242 the investor is
Germany capital structure irrelevance is gener-
indifferent towards debt and equity financing. If
ally possible when assuming currently codified
the tax law is modified accordingly, which is rather
tax rates and debt-to-equity ratio, providing eq-
unlikely, the net profit is identical for both debt and
uity capital is always favorable in Belgium because
equity financing. Only if the fraction of considered
capital gains are exempt from taxation, thin cap-
debt is lower than 0.4242 do we find an advantage
italization rules discriminate debt financing and
of debt financing because then, net profit increases
a notional interest deduction on equity capital is
with an increasing gearing rate.
granted. Although an ACE often is regarded as a
A tax reform changing directly to alleviate in-
means to provide tax neutrality, in Belgium this
terest deduction restrictions is very unlikely to be
neutrality property has been undermined by intro-
discussed. It is more likely that thin capitalization
ducing a thin capitalization rule, which obviously
rules are alleviated by restricting their applica-
exacerbates the discrimination of debt capital (Ger-
tion to long-term debt as is the case in Germany,
ard 2006: 156).
for instance. If the Belgian government only re-
ferred to interest payments on long-term debt in
their modified thin capitalization rules, a fraction 5.2 Assessment
of long-term debt of 42.42ô would be equal to a 5.2.1 Critical income tax rate
fraction of ã 0.4242. In this case, the investor The shareholder can optionally include dividends
can benefit from debt financing if their interest into the individual tax assessment. In this case
on long-term debt does not exceed 42.42ô of the dividends and interest are not subject to the with-
interest on short-term debt. holding tax of 25ô or 15ô but to the shareholder's
Given that interest payments are subject to tax to individual income tax rate. Hence, the option to
the full amount, namely " ã 1, a decrease in the include dividends or interest in the assessment is
taxable fraction " leads to an increasing relative only reasonable for shareholders with an income
advantage of debt capital. Concentrating on the tax rate less than 25ô and 15ô respectively. For
influence of a change in " on the financing decision, simplicity we only consider the case that the choice
we find that the investor is indifferent towards debt to include income in the assessment is beneficial
and equity financing if " ã -164. Since " ∈ [0,1] for both dividends and interest.
in fact an indifference cannot arise. Instead, the If dividends and interest income are included in
investor will always prefer to provide equity capital. the assessment, all sources of income are subject
In contrast to Italy and Germany a change in the to the same income tax rate. Therefore, we have
permitted ratio of debt to equity capital and in
the amount of equity capital E cannot be analyzed iD ã iI ã iG ã i.
jointly, because a change in equity capital not
only influences the safe haven H ã i E, but also The net profit is thus equal to
the notional interest deduction in E. Assuming an
increasing or an increasing E we obtain a rising (36) Π ã Π á cΠ á i Cä1 á å á i E á in E
relative advantage of debt capital (section 3.2.5). | {z }
Tc
Capital structure irrelevance arises if is increased
to 58 or if debt capital is increased to 104,000. Debt
163

á i " i C ä1 á å à i E sponds to that obtained for the withholding tax
h i (section 5.1.2).
á i DàiC ái E A variation of the factor has no influence on
the critical income tax rate because capital gains
á i Π á c Π á i Cä1 á å

are tax-exempt. Only if > 0 will a change in the
factor affect the investor's financing decisions. In

ái E á in E á D á i C :

| {z } these cases a change in this factor influences the
Ti financing decisions in the same way as a change in
the taxable fraction of capital gains does.
We obtain the same optimal dividend policy as In line with the results for the other countries,
for Italy and for Germany. The investor is only we obtain a rising critical income tax rate and an
indifferent towards debt and equity financing if increased relative advantage of debt capital if we
i ã 0, namely if they have no taxable income, or assume a rising corporate tax rate (section 3.2.2).
if ã (section 3.1). Otherwise full retention is Varying the taxable fraction of dividends while
always the optimal dividend policy. assuming that capital gains are tax-free leads to a
We obtain the following critical income tax rate by negative derivative. We find that lowering causes
differentiating equation (36) with respect to C: a rising advantage of debt capital (section 3.2.3):
h i
(37) â
i ã c Cä1 á å à E @ iâ -117,612
(39) ã 2 < 0:
h @ 60 à 5,940
± " Cä1 á å à E à ä C á Eå

i-1 We obtain critical income tax rates higher than

à Cä1 á å à E á C :

c
15ô and therefore an attractiveness of the with-
holding tax for interest income over the individual
5.2.2 Sensitivity Analysis assessment for < 0.0121.
Just like in the other countries the gross profit and Assuming a taxation of capital gains, i.e. > 0, and
the interest rates do not influence the investor's a taxation of dividends to the full amount, i.e. ã1,
financing decisions. The other model parameters we obtain the following positive first derivative:
influence the critical income tax rate and therefore
the financing decisions. @ iâ 118,408
(40) ã 2 > 0:
We assume @ 6,000 á 5,980
c ã33ô; imax ã15ô; in ã3.442ô; i=6ô;
C ã e 100,000; E ã e 1,000; ã1; As expected, implementing a capital gains tax in-
ã0; "=1; ã1; ã1. vokes a higher relative advantage of debt capital
(section 3.2.3). The effect of a rising on the critical
The top tax rate imax is equal to 15ô because only income tax rate is very low. We obtain critical in-
shareholders with an income tax rate of less than come tax rates of over 15ô only for very high capital
15ô will decide to include dividends and interest gains taxes with only hypothetical relevance ( >
income in their individual assessment. Inserting 0.98124).
the assumptions into equation (37) we obtain A change in the taxable fraction of both dividends
and capital gains ( ã ) leads to the following
â
(38) i ã 0.33ô: derivative that is a function of the value of the
factor and may take positive or negative values:
All investors have a marginal income tax rate that
is higher than the critical income tax rate. To con- @ iâ -117,612 à 118,408
(41) ã 2 R 0:
clude for all investors we have to abstract from @ 60 à 5,940 á 5,980
the typically rather small group of investors with a
marginal income tax rate between zero and 0.33ô. If > 0.993, the partial derivative is positive. If
Therefore, all investors prefer to provide equity < 0.993, it is negative.
capital instead of debt capital. This result corre-
164
As in the previously analyzed countries a decreas- 6 Conclusions and future research

ing fraction of considered debt leads to an in- From a tax planner's point of view, it is often
creased critical income tax rate that implies an in- attractive to choose debt over equity financing.
creasing advantage of debt capital (section 3.2.5). Nevertheless, corporations issue shares as well as
@ â
The derivative @ i is always negative. Lowering the debt, raising the question on possible causes. As
fraction of considered debt from 1 to 0.5 leads to individual tax planning has led to an increase in
a rise in the critical income tax rate from 0.33ô to debt financing of corporations, many countries
16.83ô. Lowering to 0.25 leads to iâ ã 25.08ô. have introduced thin capitalization rules to secure
If ã 0.5, the investor therefore will decide in their tax revenues. These thin capitalization rules
favor of the withholding tax for interest income. If might explain why corporations still issue both
ã 0.25, they will prefer the withholding tax for debt and equity.
dividends. Against this background we investigate how such
Decreasing the taxable fraction of interest " we find regulations affect the capital structure decisions
a rise in the relative advantage of debt capital. The of stockholders of corporations. We examine gen-
@ â
partial derivative @"i is always negative. eral thin capitalization rules and more specific
A rise in the permitted ratio of debt to equity and complex examples of regulations to restrict
capital or the amount of equity capital E leads shareholder financing as to their impact on financ-
to an increase in the relative advantage of debt ing decisions of shareholders of corporations. The
@ â @ â general case is exemplified by the Italian rules of
capital. The first derivatives @ i and @ Ei are always
positive (section 3.2.5). To obtain a critical tax rate the 2007 tax law and the more specific regulations
of more than 15ô the permitted ratio of debt to are illustrated by the examples of the German and
equity capital has to be increased to 46:1 or debt Belgian thin capitalization rules of the 2007 tax
capital has to be increased to e 46,000. law. The selected rules can be regarded as repre-
sentative examples of many countries' thin capital-
5.2.3 Results ization rules that are characterized by a permitted
debt-to-equity ratio. As a corresponding regulation
Assuming assessment is attractive for investors, exists in several countries, the knowledge gained
their financing decisions depend, as in Italy and in our study can be used as the basis for follow-up
Germany, on their marginal income tax rate. The empirical studies on the impact of thin capitaliza-
different model parameters exert an influence on tion rules on capital structure decisions in these
the decision that corresponds to the one identi- countries.
fied for the other countries. As in the case of the Furthermore, as the financing behavior of in-
withholding tax, equity capital is always beneficial vestors is crucial for designing thin capitalization
when considering currently codified tax rates and rules and as the influence of thin capitalization
debt-to-equity-capital ratio because capital gains rules depends heavily on a lot of other tax param-
are exempt from taxation and a notional inter- eters (corporate tax rate, taxable fraction of div-
est deduction is granted for equity capital. If the idends and capital gains, permitted ratio of debt
thin capitalization rule was abolished we would to equity capital) it is important for the treasury
obtain a critical income tax rate that is equal to the to know how these rules interact. Our results help
corporate tax rate. This result is in line with the the treasury to implement a rule that contributes
neutrality property of an ACE tax and implies that, to their given political aim in a given tax setting.
given the assumption of a perfect capital market, Taking into account the relevant tax rates and the
we lose capital structure irrelevance as soon as the codified debt-equity ratio we find similar results
income tax rate differs from the corporate tax rate. for Italy and Germany. In particular, a so-called
The analysis of the Belgian tax system clarifies that, Miller equilibrium is possible when the difference
given a neutral corporate tax, the political aim to of the corporate tax rate and the individual in-
foster equity financing and prevent a drain of tax come tax rate is relatively low and when the pro-
revenues due to debt financing, a thin capitaliza- vided debt comprises a small fraction of considered
tion rule with a given permitted debt-to-equity debt. The fraction of considered debt is presently
ratio may help to achieve this aim irrespective of only limited under the German-type rule because
the investors' income tax rates.
165
there only long-term debt is taken into account. 2007: 1913 et seq., 1927 et seq.), in principle in-
In Belgium equity capital always incorporates an terest payable is deductible up to an amount that
advantage considering current tax rates and the corresponds to the interest earned by the company.
current debt-to-equity-capital ratio because even The residual interest payable can be deducted from
though Belgium has introduced a supposedly neu- the tax base up to an amount of 30ô of the residual
tral ACE tax debt capital is discriminated by a thin profit, plus depreciation and interest expenses and
capitalization rule. This result holds in the case of less interest income. Interest expenses that remain
both withholding tax and assessment. non-deductible according to this regulation have
Investigating changes in the model parameters we to be carried forward and, subject to the same con-
obtain similar results for all underlying tax sys- ditions, increase interest expenses in subsequent
tems. In particular, varying the fraction of consid- financial years. In this regard, the non-deductible
ered debt as well as the ratio of corporate tax rate interest expenses are not classified as hidden dis-
and income tax rate and the permitted ratio of debt tribution of profit. Hence, on the shareholder level
to equity capital have a substantial impact on the they are treated as interest income. The tax al-
critical income tax rate and make a Miller equi- lowance up to which the regulation is not applied
librium possible. Among these parameters, only amounts to e 3,000,000. With respect to the in-
the permitted ratio of debt to equity capital and terest barrier, initially only statements about the
the tax rates can be influenced by the legislator. tendency can be made.
The remaining parameters can be changed by the On the corporate level debt capital is advantageous,
taxpayers themselves. because interest payments are at least partially tax-
There is a broad range of issues that should be deductible, whereas dividends and capital gains
addressed in future research. Although the present are not. In contrast, on the shareholder level in-
analysis only focuses on individual shareholders, terest income is fully taxable and subject to the
corporate shareholders can easily be integrated shareholder's individual income tax rate (see Ap-
into the model by changing the denotation ``in- pendix A1). A withholding tax amounting to 25ô
come tax'' to ``corporate tax'' on the shareholder is on principle levied on dividends and capital
level and changing the values of the taxable fraction gains (see Kiesewetter and Lachmund 2004 who
of dividends and capital gains in the sensitiv- investigate and demonstrate the effects of a final
ity analysis. As thin capitalization rules, especially withholding tax on the capital structure of enter-
in Europe, are applicable to both domestic and prises with the help of investment appraisal and
foreign investors, for simplicity we focus only on who design, based on the achieved results, a with-
domestic shareholders. An extension of the model holding tax that is independent of the financing
with respect to international investors is possible. form). The shareholder can also choose to include
Effects on financing decisions arising from interna- dividends and capital gains in their assessment. A
tional tax base or tax rate differentials are captured substantial shareholder with a holding of at least
in our sensitivity analysis in sections 3.2, 4.2, 5.1.2 25ô can additionally choose a shareholder relief
and 5.2.2. The basic results remain the same in system for dividends and capital gains. In this
the international context. In the case of different case they are subject to the shareholder's individ-
interpretations of income (dividend or interest in- ual income tax rate, but only taxed at a fraction
come) that has been requalified as dividends under of 60ô. The shareholder relief system is always
a thin capitalization rule we have to fall back on a advantageous unless the shareholder exhibits an
single-case analysis. General results can no longer individual income tax rate of 42ô. To sum up, div-
be deduced. idends and capital gains are usually lower taxed on
In 2008 both Germany and Italy (see Marino and the shareholder level than interest income. Hence,
Russo 2008 for an overview of the new Italian capital structure irrelevance is possible since the
regulation) changed their thin capitalization rules lower taxation of income from equity on the share-
and implemented an interest barrier. Under Ger- holder level counteracts the lower taxation of in-
many's 2008 business tax reform (section 4h of the come from interest on the company level caused
Income Tax Code and section 8a of the German by the (partial) deductibility of interest payments.
Corporate Tax Code as amended by the German If the capital company incurs losses over a longer
Business Reform dated Aug. 14, 2007, BGBl. I period and interest payments hence cannot be de-
166
ducted in the same period, the attractiveness of relief system.

equity financing compared to debt financing in-
creases. In the extreme case, if interest on debt From 2009 on a withholding tax amounting to
cannot be deducted at all, equity financing always 25ô is on principle levied on dividends and capital
generates the highest net profit. gains. The withholding tax is not applicable to a
To gain more precise results for Germany a quan- shareholding of at least 10ô (see section 32d of the
titative analysis including all items of Germany's Income Tax Code for an overview of the taxation
2008 Tax Reform Act is necessary. Furthermore, of income from equity capital).
an analysis of the new Italian thin capitalization
rules and a comparison of the results of the German Italy
and Italian regulation is reasonable. We relegate
this issue to future research. We consider Italy's thin capitalization rule in 2007.
For now, our analysis highlights that for com- For an overview of this regulation see, for example,
panies in countries with thin capitalization rules Gusmeroli and Russo (2004). This regulation was
and a permitted debt-equity ratio, debt financing introduced in 2004. In 2008 Italy replaced its
can typically be tax-optimized by shareholders. former rules with a regulation similar to the new
However, under certain circumstances the capital German interest barrier. See Marino and Russo
structure can become irrelevant. (2008) for an overview of this new regime.
A2: Supplementary information on the

Appendix analysis
A1: Supplementary information on the We assume that the thin capitalization rule ap-
national tax laws plies to all shareholders and thus to all investors.
The thin capitalization rule is for example appli-
Belgium cable to all shareholders in Belgium and Spain. In
many other countries, including Germany, Italy,
The Belgian thin capitalization rule was introduced
the Netherlands and Portugal, thin capitalization
in 1997 and is still in force.
rules only apply to what are known as substantial
shareholders. These are shareholders with a given
Belgium raises a surcharge of 3ô of the corporate
minimum shareholding. Loans from third parties
tax. We neglect this surcharge.
and non-substantial shareholders can easily be in-
tegrated into the model. As interest payments to
Belgium raises local surcharges on the income tax.
third parties and to non-substantial shareholders
We neglect these local surcharges.
do not induce a thin capitalization treatment, these
extensions do not yield any new insights for our
Germany
analysis.
The German thin capitalization rule was intro-
duced in 2004. It has been reformed by the German We assume that a fraction of debt is subject to the
business tax reform act 2008 where it was sub- thin capitalization rule. In Germany the regulation
stituted by an interest barrier. only applies to interest paid on long-term debt.
Other countries apply the regulation to all interest
From 2008 on the local business tax is not de- payments to specific shareholders.
ductible as an operating expense anymore.
The values in Table 1 neglect that the factor
The half-income system was abolished in 2009 should be endogenously determined. As the influ-
and replaced by a final flat tax on capital income of ence of iâ on cannot be derived analytically we
25ô. A modified shareholder relief system is only have to fall back on simulation. To point out that
applicable to capital income from corporate shares the resulting changes in our results are very small
held as business assets. Substantial shareholders we have performed an iterative simulation. By it-
with a shareholding of at least 25ô can choose eration we can account for the interdependency
between the withholding tax and the shareholder of iâ and . We find that the resulting critical tax
167
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rate Debt Capacity, Division of Research, Graduate School of
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Alexandra Maÿbaum is doctoral student and re-
Marino, Tancredi and Massimiliano Russo (2008): Italian
search assistant at the Chair of Business Administration,
Restyling of Interest Deduction Rules: the Amendments of
the Italian Finance Bill for 2008, Intertax, 36 (5): 204-210. esp. Business Taxation at the University of Paderborn.
She received her diploma degree in Business Adminis-
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European Tax Handbook 2006, International Bureau of Fiscal
Documentation, Amsterdam: 63-82.
169
Lutz Kruschwitz, Andreas Löffler

Lutz Kruschwitz, Department of Banking and Finance, Freie Universität Berlin, E-Mail: lutz.kruschwitz@googlemail.com
Andreas Löffler, Department of Finance and Investment, Universität Paderborn, E-Mail: andreas.loeffler@googlemail.com
Abstract
The traditional literature on the CAPM assumes that investor's tax payments simply vanish from the
model. This assumption is not at all consistent with the actual behavior of the Treasury. The theory
of general equilibrium states that an interest rate rf ã 0 will not affect prices if taxes are introduced.
We show that this result can be extended to the CAPM if the tax payments are redistributed among
investors.
Keywords: CAPM, Tax-CAPM, equilibrium, taxes, CARA utility
Manuscript received June 13, 2009, accepted by Rainer Niemann (Accounting) November 10,
2009.
1 Presentation of the Problem live on an island which once a year is ravaged by

The standard CAPM is a neoclassical equilibrium pirates who relieve them of taxes, which they will
model based on some simplifying assumptions (see never see again.
Sharpe 1964, Lintner 1965, and Mossin 1966). In This circumstance is hardly compatible with an
particular, it relies on the assumption that in- equilibrium model. Rather, it would appear more
vestors base their decisions on the expected value appropriate to assume that the tax authorities re-
and variance of cash flows with no taxes being invest their revenue in the form of transfer pay-
collected. ments. These include unemployment insurance,
Brennan (1970) was the first to model taxes within pension funds, compulsory health insurance, de-
a CAPM. His work was the foundation of numerous velopment aid etc.
further contributions. Whereas Brennan analyzed In a recent paper Eikseth and Lindset (2009) con-
a proportional tax, Litzenberger and Ramaswamy sider the redistribution of taxes. Surprisingly, they
(1979) and Litzenberger and Ramaswamy (1980) do not report on any effects on the equilibrium se-
looked at a progressive tax. As early as in the 1990s curity prices. Authors dealing with scientific topics
Koenig (1990) applied Brennan's model to the tax of public finance have also made such assump-
system that was valid in Germany at that time. tions (see, e.g., Konrad 1991 p. 167, Buchholz and
More recent analyses taking current German tax Konrad 2000 p. 87). or at least point out that the
regulations into account have been provided by model analysis responds very sensitively depend-
Wiese (2004), Jonas, Loeffler, and Wiese (2004), ing on which redistribution system is assumed
Wiese (2006a), Wiese (2006b), Rapp and Schwetz- (see, e.g., Stiglitz 1972 or Rapp and Schwetzler
ler (2007) and Wiese (2007). 2008). Konrad analyzes a model where the dif-
It should be emphasized that all these models were ference between cash flows and opportunity costs
single period models in which the investors base is taxed, whereas in our model cash flow minus
their decisions on the - criterion while assuming depreciation forms the tax base. Konrad de facto
risk aversion. When taking a closer look at how looks at a Johansson-Samuelson tax. Seen in this
taxes are modeled, a circumstance emerges that so light, our model is closer to the existing national
far has gone unnoticed. At the end of the period tax codes. Rapp and Schwetzler look at a binomial
the Treasury collects taxes which are not returned model where at t ã 1 exactly two states are pos-
to the taxpayers. For a drastic illustration of this sible. In this model investors trade on two stock
model's peculiarity let us imagine that investors markets that are not connected to each other. The
redistribution is given by a random variable. It
171
turns out that the specific form of redistribution which an investor holds at a specific time t ã 0. The
has an important impact on the asset's prices. In payment of the portfolio X then reads as follows:
our model the uncertainty is much more general N
since we allow for multiple states of nature.
X
(2) X0 à Xn Y
en :
If one then takes into account that the revenue of nã1
the tax authorities is allocated to investors accord-
ing to a specific rule, then this will impact on the The amount of the optimal risk-free asset is X0i . Ac-
optimal portfolio and hence on equilibrium prices. cordingly, X i designates the (optimal) risky port-
We must assume that the tax CAPM equations folio of investor i, whereby this portfolio is a N-
derived by Brennan and others are questionable, dimensional vector with entries X1i to XNi .
at least to the extent that they are based on the The vector E includes the N expected values of the
unrealistic assumption that the tax revenue van- payments of the risky assets. The corresponding
ishes. In the next two sections we wish to show covariance matrix is Ω with the dimensions N ¦ N.
that the equilibrium prices in the CAPM remain Hence the expected value of the portfolio äX0i ; X i å
unchanged, provided one of the following two re- is X0i à X i ± E. The variance is äX i åT ± Ω ± X i .
quirements is met: The investors' initial endowment äX̄0i ; X̄ i å consists
of the risky asset and a share of the riskless asset.
• The risk-free interest rate vanishes. For every risky share there is one unit in total; the
riskless asset is given in zero net supply, hence
• Investors have - utility functions with con-
I I
stant absolute risk aversion.
X̄0i ã 0; X̄ni ã 1 än > 0å:
X X
(3)
iã1 iã1
We are able to provide convincing intuitions for
both conclusions. We designate the sum of the risky initial endow-
ments as the market portfolio M.
The price of a portfolio X is described by the symbol
2 The Model päXå. Hence the budget restriction of an investor
The CAPM is a two-period model, represented by reads as follows: päX0i å à päX i å ã päX̄0i å à päX̄ i å.
today (time 0) and tomorrow (time 1). The future There is no arbitrage in the equilibrium. Therefore,
is uncertain. We examine I investors i ã 1; : : : ; I the prices are linear. Consequently, there is a vector
who trade on a capital market and have individual p which implies that
- utility functions
(4) ∀X päXå ã p ± X:
i
(1) Uä ; 2
å
Vector p is not necessarily positive as we are dealing
with prices of the basic assets rather than state
depending on expectation and variance of securi-
prices.
ties' payments. Utility functions like this can be ex-
We assume that the tax authorities collect a tax
plained through independent axioms for the pref-
on the investors' income. The valuation basis is
erences (see Loeffler 1996b). These utility func-
the difference resulting from the return flows of
tions are strictly monotonically increasing in the
the optimal portfolio and the capital endowment.
first variable (expected value ) and strictly mono-
Risky and riskless entries are subject to the same
tonically decreasing in the second variable (vari-
linear tax rate . Therefore, the i-th investor' tax
ance 2 ). Moreover, they are quasi-concave, which
debts amount to
means that the answers of the individual maxi-
mization problems are always unique. N
!
Ti ã X i á päX i å à Xni Y
en á päX i å ã
X
There are n ã 0; : : : ; N assets with cash flows of Y
en (5) 0 0
at a specific time t ã 1. These cash flows consist nã1
N
both of dividends and capital gains. The 0-th asset
!
X0i päX̄0i å Xni Y i
X
is the risk-free asset and pays a unit in the next ã á à en á päX̄ å :
nã1
period; all other assets are uncertain. Portfolio X
consists of these N à 1 assets, whereby the n-th As opposed to Brennan (1970) in our model divi-
entry Xn designates the number of the n-th asset dends, capital gains and interest are taxed differ-
172
ently. Whether our results will survive with a richer Due to the law of Walras it is sufficient under
tax system remains to be seen. market clearance to take into account only the
PI
The total tax revenues iã1 T i are redistributed to risky assets. If an equilibrium exists there, then an
the investors according to a certain rule. The i-th equilibrium also exists for riskless assets.
investor receives the share !i of the entire revenue Let us now take a glance at the individual util-
from taxes, whereby the equation ity maximization problem. We know the expected
I value and the variance in the assets' cash flows.
!i ã 1 The typical maximization problem appears in the
X
(6)
iã1 following form:
applies. Evidently the shares !i are then determin-
N
"
istic. If the distribution parameters are accepted i
X0i à X iY
X
(7) max U en á
as random variables, then any equilibrium could X0i ;X i
nã1
be explained. We know that a certain total amount N
!
X0i päX̄0i å Xni Y i
X
can be distributed to the investors. If we then wish á á à en á päX̄ å
to attain a special income distribution, we select nã1
!
the !i in precisely such a way that in each environ- I N
i
X0j päX̄0j å Xnj Y j
X X
à! á à en á päX̄ å  ;
mental condition and depending on the payment
jã1 nã1
of the initial endowment, the required financial  
N I X
N
means can be either allocated to the investors
Xni Y i
Xnj Y
2
X X
ä1 á å en à! en  :
or taken away. This counteracts the distribution nã1 jã1 nã1
mechanism, however.
An equilibrium is characterized by two conditions: The argument of the variance function can be sim-
Each investor maximizes their individual utility plified because the risk-free asset and the price of
and the markets are cleared. In our model there is the portfolio are irrelevant. Taking into account
another problem which we wish to point out: Based that the return flow of the riskless asset has been
on our assumptions the activity of one investor normalized to the value 1 and based on equation
has, due to the tax returns, an impact on the (4), the budget constraint of the i-th market par-
optimization problem of all other investors. ticipant can be written out as follows:
It would, therefore, be conceivable that investors
take the initiative and form coalitions which might X0i
initially lead to fictitious equilibria that could at- (8) ã päX̄0i å à päX̄ i å á p ± X i :
1 à rf
tain stability only on the basis of these tax re-
turns. Such equilibria are discussed in the liter- We can simplify the problem since we know the
ature as ``sunspot equilibrium'' (see, for instance expected value and the covariance matrix. If we
Shell (forthcoming)). We wish to rule out such additionally take into account that both
equilibria and therefore assume that -- provided
the investor has the profit of his utility -- he will I I
X j ã 1 and X0j ã 0
X X
take a decision that is optimal for the other in- (9)
vestors, hence avoiding sunspot equilibria. jã1 jã1
Definition 2.1 An equilibrium is described by must apply for the equilibrium, the optimization
a price vector p and a demand quantity problem can be rewritten in the form:
äX0i ; X i åiã1;:::;I with the following two character-
istics:
(10) max U i X0i à X i ± E á
1. Demand äX0i ; X i å maximizes the utility for in- X0i ;X i
vestor i, provided the allocation of all other
á X0i á päX̄0i å à äX i ± E á päX̄ i åå à
investors is optimal (see equation (13)).
à!i äE á på ± 1 ;
2. Total demand corresponds to the complete
T
initial endowment of all investors (market

i i i i
ä1 á åX à ! ± Ω ± ä1 á åX à ! :
clearance).
173
Finally we will proceed to solve the side condition in the CAPM can be found in Hens, Laitenberger,
(8) for X0i and plug it into the function to be and Loeffler (2002). Bottazzi, Hens, and Loeffler
maximized. This will result in (1998) show that the CAPM typically possesses
many equilibria. Hence it is possible that various
equilibria with different prices can exist at tax rates
(11) max U i ä1 à rf å päX̄0i å à päX̄ i å á X i ± p à
Xi of > 0 or even ã 0. We will show that at least
one of the possible equilibria must have the price
h
à X i ± E á ä1 à rf å päX̄0i å à päX̄ i å á X i ± p á
i vector p.
ápäX̄0i å à X i ± E á päX̄ i å à !i äE á på ± 1; The result of the theorem is intuitive. A risk-

i i
T
i i
less interest rate of zero is effectively equivalent
ä1 á åX à ! ± Ω ± ä1 á åX à ! : to interest-corrected profit taxation (see Wenger
1983). For a considerable time it has been known
The first-order conditions read as follows: that this tax is investment-neutral and therefore
has no influence on the prices of goods in the
(12) U i E á ä1 à rf å ± p á E á ä1 à rf å ± p à

equilibrium. Thus this result does not come as a
surprise, and it is independent of the particular

à 2ä1 á åU i 2 Ω ± ä1 á åX i à !i ã 0 :
redistribution system.
After cancellations of 1 á the result will be Proof:
We take the first-order conditions according to (13)
(13) U i E á ä1 à rf å ± p à

and set the interest rate to zero. As a result we have

à 2U i 2 Ω ± ä1 á åX i à !i ã 0 ;
(16) U i äE á på à 2U i 2 Ω ± ä1 á åX i à !i ã 0 ;
whereby the arguments of the utility functions
and the utility function arguments are simplified
(expected value and variance) are provided by
to

(14) äXå ã ä1 à rf å päX̄0i å à päX̄ i å á X i ± p à (17) äXå ã päX̄0i å à päX̄ i åà
h T
àX i ±E á ä1 à rf å päX̄0i å à päX̄ i å á X i ± p

à ä1 á åX i à !i ± äE á på;
i T
ápäX̄0i å à X i ± E á päX̄ i å à !i äE á på ± 1

(18) 2
äXå ã ä1 á åX i à !i ± Ω±

and ± ä1 á åX i à !i :
T
(15) 2
äXå ã ä1 á åX i à !i ± Ω± On the basis of this maximization condition it
becomes evident that every equilibrium with a tax
± ä1 á åX i à !i : rate > 0 has a corresponding equilibrium with
the tax rate ã 0 possessing the same prices for
Equation (13) is the starting point for our next risky assets. We assume that the allocation äX0i ; X i å
considerations. and the price vector p describe an equilibrium for
> 0. Moreover, if we define
2.1 Vanishing Risk-free Rate
Proposition 2.1 (vanishing risk-free inter- (19) ∀n > 0 Zni ñã Xni ä1 á å à !i and
est rate) The risk-free interest rate is zero. Z0i ñã päX̄0i å à päX̄ å á Z i ± p
i
We look at an equilibrium p and äX0i ; X i åiã1:::;I
at the tax rate of > 0. We then deal with an we can show that this allocation leads to an equilib-
allocation äZ0i ; Z i åiã1;:::;I from (20) whereby p and rium when the price vector p remains unchanged,
this allocation also constitute an equilibrium at a provided ã 0. In particular we must verify the
tax rate of ã 0. following:
Please note that we do not show the uniqueness 1. The aggregate demand is identical to the ag-
of equilibrium prices. Statements on uniqueness gregate supply (market clearance).
174
2. Investor i is able to acquire the portfolio äZ0i ; Z i å The function features constant absolute risk aver-
with an optimal utility for themselves. sion when the quotient Si is not dependent on
the expected value , but rather dependent on the
Based on the law of Walras we can restrict our variance 2 (see proposition 3 in Lajeri-Chaherli
considerations to the market for risky assets. All and Nielsen 1993 or property 5 in Meyer 1987).
markets for risky financial assets are cleared be-
cause we assume Proposition 2.2 (CARA utility function) The
I I
investors have functions with constant absolute
(20) ∀n > 0
X
Znj ã
X
ää1 á åXni à !i å ã 1: risk aversion. Moreover, p and äX0i ; X i åiã1:::;I con-
jã1 jã1
stitute an equilibrium for the tax rate > 0. Then
we have an allocation äZ0i ; Z i åiã1;:::;I as in (29) in
It is obvious that investor i abides by their budget such a way that p and this allocation constitute
constraint. We therefore only need to verify that an equilibrium for the tax rate ã 0.
this portfolio maximizes their individual utility.
For this purpose we assume that portfolio X i is This result, too, is easily explained intuitively. In
optimal. It then fulfills the first-order condition the case of constant absolute risk aversion the
at > 0 according to equation (16). To validate optimal supply of risky assets remains constant
whether portfolio Z i is optimal -- in the event that when the investor's income is subject to changes
the tax rate vanishes -- we let this portfolio take the (no income effects). Hence the income tax has no
place of X i in the equation (16) and also employ influence on the risky portion of the optimal portfo-
ã 0. As a result we receive lio, since the risky assets are taxed proportionally
and the redistribution affects the endowment of
(21) U i äE á på à 2U i 2 Ω ± äZ i å ã 0 the risk-free assets. If, however, the optimal risky
assets are identical to a situation without taxes,
with the new arguments we conclude from the law of Walras that also the
T optimal risk-free assets must be in an equilibrium.
(22) äZå ã päX̄0i å à päX̄ i å à Z i ± äE á på; Proof:
T Due to rf > 0 we now have p0 < 1. The adequate
(23) 2
äZå ã Z i ± Ω ± Z i : conversion of the first-order condition (13) gives
us
This equation is in fact fulfilled for Z i ã ä1 á åX i à
Ui p

!i by means of construction. This is what we

i i
(25) E á á 2Ω ± ä1 á åX à ! ã 0:
intended to show. Ui 2 p0
Konrad (1991) found a neutrality result that seems
After aggregation through all investors and by tak-
comparable to our theorem. In fact his result differs
ing the market clearance into account we will ob-
in an important aspect from our model. Konrad
tain
allows opportunity costs to be deducted from the
tax base. This is a tax first advocated by Johansson I
p X Ui
and Samuelson (taxation of economic gain). Our (26) Eá ã 2 Ω ± 1:
p0 U i
model is much closer to the tax systems currently
2
iã1
in place in most countries. At a constant risk aversion quotients are only de-
pendent on the variance
2.2 CARA Utility Functions T
The literature typically discusses the concept of (27) ä1 á åX i à !i ± Ω ± ä1 á åX i à !i :
absolute risk aversion within the scope of the ex-
pected utility theory. However, it can also be de- To prove that the tax rate has no influence on the
fined within - utility functions. For this purpose prices of risky assets, we will -- under Walras' law
let us take a look at the quotient -- concentrate on the risky assets and assume that
the allocation äX i åiã1;:::;I and the price vector p con-
Ui stitute an equilibrium. Then for these allocations
(24) Si ñã :
Ui 2 and a tax rate of > 0 the first-order conditions
175
in compliance with (25) have been met for every For such an example we examine just one sin-
investor. Hereby we are dealing with the quotients gle risky asset and two investors. One of the two
Ui decision-makers owns a risky asset; the other owns
Ui 2
at the position
nothing. The matrix Ω degenerates to the variance
T of the risky asset; for simplicity the matrix is set
(28) 2
äXå ã ä1 á åX i à !i ± Ω± to 1. As a consequence E and p are numbers.
The utility function for both investors is identical

± ä1 á åX i à !i :
and should be
Now we deal with the case without taxes. Let the
(31) Uä ; 2
åã :
equilibrated allocation be designated as äZ i åiã1;:::;I . 1à 2
The first-order condition must be fulfilled for this It is strictly quasi-concave and thus satisfies the
allocation as well and this time ã 0 applies. requirements needed for a unique solution of the
However, the tax rate only appears in the argument maximization calculation. Starting from (13) the
of the condition. We now select FOC for every investor is as follows:
(29) Z i ñã ä1 á åX i à !i ;
E á ä1 à rf åp
and as a result equation (25) applies trivially. The (32) 0ã á
1 à 2
budget constraints are met, because the risk-free

á 2 ä1 á åX i à !i :
asset is selected precisely in such a way that one ä1 à 2 å2
can purchase the risk-free portfolio. The market Simplifying and inserting the arguments for and
will continue to be cleared since (considering that the initial endowment of risk-
I I
free asset is zero) leads us to
Zi ã ä1 á åX i à !i ã 1:
X X
(30)
iã1 iã1
2
i i
(33) E á ä1 à rf åp 1 à ä1 á åX à ! ã

We have thus attained an equilibrium at the price
p.
h
ã 2 ä1 á åX i à !i ä1 à rf ä1 á ååpäX̄ i å à
At the beginning of this section we referred to the i
concept of absolute risk aversion (CARA) that is àä1 á åX i ± äE á ä1 à rf åpå à !i äE á på :
typically used with expected utility. The literature
on CARA is manifold (see, e.g., Meyer 1987). Char- We substitute Z i ñã ä1 á åX i à !i and formulate
acteristics of relative risk aversion within expected the equation as follows:
utility are discussed, e.g., in Katz (1983), Briys and
1 à rf ä1 á å

Eeckhoudt (1985), and Hey (1985). The case of (34) 0 ã äZ i å2 à 2Z i päX̄ i å à
E á ä1 à rf åp
relative risk aversion is also intensely discussed.
rf p

Going back to Mehra and Prescott (1985) it is à! i
á1:
usually stated that constant relative risk aversion E á ä1 à rf åp
(CRRA) is a reasonable assumption. Sinn (1989, This is a quadratic equation with the unknown Z i
p. 162) has concluded, that CRRA are the only util- which can be solved. The solution is dependent on
ity functions that are compatible with empirical the initial endowment. One of the investors owns a
results of psychological experiments. Therefore, share (i.e. päX̄ i å ã p), the other owns nothing (i.e.
one could justifiably ask why we do not apply päX̄ i å ã 0).
CRRA-functions here. The answer is simply that
within the - 2 calculus there are no functions Investor with one share as initial endow-
with a constant relative risk aversion (for a proof ment
see Loeffler 1996a p. 32 f.). The solution of the equation reads
2.3 Two Further Examples 1 à rf ä1 á å à rf !1

(35) Z1 ã á pŠ
If we want to generate the result according to which E á ä1 à rf åp
prices are dependent on the tax rate, then the risk- s
2
1 à rf ä1 á å à !1 rf

free interest rate may not vanish and there may be Š p à 1:
no CARA utility functions. E á ä1 à rf åp
176
Investor without a share as initial endow- for the first investor and
ment
(39) 0 ã E á ä1 à rf åp à Ω ä1 á åX 2 à !2
The solution of the equation reads
1 à rf ä1 á å à p rf !2 for the second one. Additionally, X 1 àX 2 ã 1 must

(36) Z2 ã á Š hold in equilibrium. From these three equations
E á ä1 à rf åp
ä1 à rf åp á E
s
2
1 à rf ä1 á å à p rf !2 (40) ã !2

Š à 1: Ω 2á
E á ä1 à rf åp
can be concluded by some simple rearrangement.
As a consequence of the market clearance and Obviously, the price depends on the tax rate.
!1 à!2 ã 1 and after the addition of both portfolios
and some rearrangement, the following results:
(37) E à 1 à rf ä1 á å ã
3 Conclusion
q 2 Authors contributing to the tax CAPM discussion
ã Š ä1 à rf ä1 á å à !1 rf åp à äE á ä1 à rf åpå2
q usually neglect the fact that the Treasury typically
Š
2
1 à rf ä1 á å à p rf !2 à äE á ä1 à rf åpå2 : redistributes the tax revenues that were collected
from investors. Whereas this may be acceptable
For the event of a uniform distribution of tax for a partial model, it is certainly unacceptable for
revenue !i ã 12 we have determined a numerical a total model. Surprisingly, this aspect has been
solution, as shown in the table below. The other overlooked by a large number of authors. Based
parameters are rf ã 5 ô, E ã 2. Although two on a total model that contained the redistribu-
solutions result, one of them leads straight to a tion we can show that equilibrium security prices
return of 5 ô for the risky assets and is therefore are not affected by taxation, if either the riskless
economically meaningless. It is evident that the rate vanishes or investors show constant absolute
price is contingent on the tax rate. In our model all risk aversion. Both results can be explained by
Table 1: Contingency of equilibrium price p economic reasoning. However, neither vanishing
on the tax rate interest rates nor CARA utility functions are re-
p alistic cases. Since there seems to be no way to
extend our results beyond those two special cases,
0ô 0:7497
we conclude as a rule that taxes do have an impact
10 ô 0:7515
on security prices in the CAPM as a rule. Further
20 ô 0:7532
research should try to reveal whether this impact
30 ô 0:7550
is substantial or negligible.
40 ô 0:7567
50 ô 0:7585
60 ô 0:7603 References
70 ô 0:7620
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80 ô 0:7638 (1998): Market Demand Functions in the Capital Asset Pricing
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Brennan, Michael J. (1970): Taxes, Market Valuation and Cor-
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sion in Comparative Statics: Comment, American Economic
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assume that there is only one risky asset. Ω, p, and Steuern, in: Wolfgang Buchholz and Alois Oberhauser (eds.):
E degenerate to real numbers. Furthermore, we Probleme der Besteuerung, 3, Duncker î Humblot: Berlin,
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investor 2 is fully taxed ( 2 ã ). Both investors Asset Pricing and Heterogeneous Taxes, Journal of Banking
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CAPM mit deutscher Einkommensteuer, Die Wirtschaftprü- Nachsteuer-CAPM?, Working Paper, Ludwig-Maximilians-
fung, 57 (17): 898-906. Universität: München.
Katz, Eliakim (1983): Relative Risk Aversion in Comparative Wiese, Jörg (2006a): Das Nachsteuer-CAPM im Mehrprodukt-
Statics, American Economic Review, 73 (3): 452-453. kontext, FinanzBetrieb, 2006 (8): 242-248.
König, Rolf J. (1990): Ausschüttungsverhalten von Aktienge- Wiese, Jörg (2006b): Komponenten des Zinsfuÿes in Un-
sellschaften, Besteuerung und Kapitalmarktgleichgewicht, ternehmensbewertungskalkülen: Theoretische Grundlage und
Steuer- und Wirtschaftsverlag: Hamburg. Konsistenz, Lang: Frankfurt/Main.
Konrad, Kai A. (1991): Risk Taking and Taxation in Complete Wiese, Jörg (2007): Unternehmensbewertung und Abgel-
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sion and Prudence, Working Paper, INSEAD. Biographies
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Konsumtion: Eine gleichgewichtstheoretische Untersuchung,
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Econometrica, 34 (4): 768-783. terests include decision theory, equilibrium theory
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178
VHB-JOURQUAL2: Method, Results, and Implications of the German
Academic Association for Business Research's Journal Ranking
Ulf Schrader, Thorsten Hennig-Thurau
VHB-JOURQUAL2: Method, Results, and

Implications of the German Academic Asso-
ciation for Business Research's Journal
Ranking
Ulf Schrader, Institute of Vocational Education and Work Studies, Division of Work Studies: Economy and Sustainable Consumption, Technical
University of Berlin, Germany, E-Mail: schrader@tu-berlin.de
Thorsten Hennig-Thurau, Department of Marketing and Media Research, Bauhaus-University of Weimar, Germany, and Faculty of Management,
Cass Business School, City University London, E-Mail: tht@medien.uni-weimar.de
Abstract
VHB-JOURQUAL represents the official journal ranking of the German Academic Association for Business
Research. Since its introduction in 2003, the ranking has become the most influential journal evaluation
approach in German-speaking countries, impacting several key managerial decisions of German, Aus-
trian, and Swiss business schools. This article reports the methodological approach of the ranking’s second
edition. It also presents the main results and additional analyses on the validity of the rating and the un-
derlying decision processes of the respondents. Selected implications for researchers and higher-education
institutions are discussed.
Keywords: Journal ranking, rating, impact factors, VHB-JOURQUAL
This article was commissioned by the Editor-in-Chief and went through the review process. Manuscript
received September 10, 2009, accepted by Sönke Albers (Editor-in-chief) November 9, 2009.
1 Introduction evaluating the scientific performance of business

VHB-JOURQUAL represents the official journal scholars in Austria, Germany and the German-
ranking of the German Academic Association for speaking part of Switzerland (Schrader and Hennig-
Business Research (Verband der Hochschullehrer Thurau 2007). 59 % of the respondents assessed
für Betriebswirtschaftslehre – VHB). It rates and VHB-JOURQUAL as “good” or “very good”, while
ranks international and German-language academic only 9 % held a negative attitude toward the rank-
journals which are considered relevant for German- ing. VHB-JOURQUAL is of special importance for
speaking business researchers based on the quality the formal post-doctoral assessment in German-
assessments of VHB members who comprise more speaking countries – the so-called “Habilitation,” a
than 90% of all professors and researchers with a traditional requirement for obtaining a full profes-
Ph.D. in business administration at German, Aus- sorship – and the appointment of full professors; in
trian, and Swiss universities. Since its initial publi- each case, 54 % of the respondents judged the rank-
cation in 2003 (Hennig-Thurau, Walsh, and ing being of “high” or “very high” relevance for their
Schrader 2004), the ranking has become the most institutions. Other areas for which VHB-
prominent business research-journal ranking in JOURQUAL is considered to have substantial rele-
German-speaking countries. vance include the hiring and evaluation of assistant
The results of an online survey of VHB members in professors (“Junior-Professoren”), research per-
2007 (n = 489) give evidence that VHB-JOUR- formance evaluations (with a possible impact on
QUAL is widely accepted and broadly used for budget allocation), and the evaluation of the rapidly
180
growing number of cumulative doctoral disserta- nity’s version of dollar voting by consumers for
tions. goods and services” (Laband and Piette 1994a: 641).
VHB-JOURQUAL is considered a major driver of Similar to the way economic theory considers pay-
the radical transformation of the German business- ment at the cash desk as the result of a quality as-
administration community into a much more re- sessment by consumers, a citation-based ranking
search-focused and internationally active academic treats a citation as a proof of perceived quality.
discipline (Homburg 2008). In an environment However, there are two major caveats to this ap-
which Simon (1993) described as a “black hole” – proach, particularly when audiences are interested
with German-speaking business scholars absorbing in the scientific quality of a journal (e.g., Schulze,
their international colleagues’ findings, but giving Warning, and Wiermann 2008):
nothing back to the international community – ,
• Quality vs. impact. Citations are not objective
VHB-JOURQUAL offered for the first time a com-
indicators for an article’s scientific quality. The
parison of the scientific quality of articles published
decision to accept a submitted article, making it
in German-language journals with those published
available for citations, is subjective and not only
in international journals. As the ranking provided
determined by scientific quality (Blank 1991;
strong evidence that the quality of even the best
Frey and Rost 2008; Laband and Piette 1994b;
German-language journals is perceived to be sub-
Starbuck 2004), and authors’ decision to cite an
stantially lower than the quality of leading interna-
article is, in addition to quality, also influenced
tional journals, VHB-JOURQUAL has since then
by the article’s type and topic (e.g., state-of-the-
become a strong motivating force for German schol-
art review), its shortcomings as well as citation
ars to publish their best work internationally and
cartel memberships (e.g., Fabel and Heße
enter “global competition”.
1999). Thus, citation indexes do not measure
This article describes the methodology of VHB-
the scientific quality but rather the impact of a
JOURQUAL and reports specific features and key
journal. The ISI Journal Citation Reports ranks
results of the second edition of the ranking (VHB-
a journal according to its “impact factor”, not to
JOURQUAL2), which is based on a survey con-
a quality index. Impact and scientific quality
ducted among VHB members in 2008. We also
should not be treated as synonyms since the
investigate the ranking’s validity and provide con-
empirical correlations between them can be
cluding remarks on the benefits and limitations of
weak or even negative in some cases (e.g., Maier
VHB-JOURQUAL.
2006; Schlinghoff and Backes-Gellner 2002).
• Data availability. Citation data can only be
2 Background: Survey-based vs. obtained from a limited number of sources and
citation based journal-rankings is not available for a substantial number of
There are two basic approaches for conducting aca- journals. The market-dominating provider of
demic-journal rankings: citation-based rankings interdisciplinary citation indexes is Thomson
(e.g., Azar and Brock 2008; Ritzberger 2008; Vieira Reuters with the Social Science Citation Index
2008) and survey-based rankings (e.g., Bräuninger (SSCI), the Science Citation Index-Expanded
and Haucap 2002; Hennig-Thurau, Walsh, and (SCI-X), the Arts & Humanities Citation Index
Schrader 2004). Hybrid rankings, as a third ranking (A&HCI), the Conference Proceedings Citation
type, combine both approaches (e.g., Franke and Index - Science (CPCI-S), and the Conference
Schreier 2008; Schulze, Warning, and Wiermann Proceedings Citation Index Social - Science &
2008). We will compare the different approaches in Humanities (CPCI-SSH), constituting the “ISI
terms of strengths and weaknesses and explain how Web of Knowledge.” Elsevier introduced the
VHB-JOURQUAL addresses them. competing database Scopus in 2004, with
Citation-based journal rankings such as the ISI limited market penetration so far. For business
Journal Citation Reports are often considered “ob- researchers, the most important index is the
jective” (e.g., Ritzberger 2008). Here, the ranking SSCI with its business, business/finance, and
position of a journal depends on the number of management categories, which – as reported
citations the papers in the journal receive. The idea later in the section on ranking validation –
behind it is that citations are “the scientific commu- cover only about 20 % of the journals
181
considered relevant for business scholars and danger of overstraining by a highly customized
included in VHB-JOURQUAL2, with only one online survey design. Specifically, all journals
German-language journal being represented are assigned to business sub-disciplines (e.g.,
there (BFuP – Betriebswirtschaftliche For- accounting, finance), and respondents are asked
schung und Praxis). Considering all SSCI cate- to evaluate only journal titles relevant for their
gories and other indexes mentioned above, specific sub-discipline.
these numbers will be only slightly higher • Strategic answers. Opponents of the survey-
(Clermont and Schmitz 2008; Dyckhoff and based approach argue that researchers not
Schmitz 2007). In 2009, the ISI covered in total always evaluate journals according to their
nine and Scopus 12 German-language journals actual quality perception, but rather in a way
ranked in VHB-JOURQUAL2, which have that is best for them (e.g., Schulze, Warning,
predominantly low ratings (Clermont 2009). and Wiermann 2008). Specifically, given that
Consequently, in German-speaking countries journal rankings can influence careers, scholars
citation-based rankings are hardly able to will have an interest that the journals they
measure publication productivity of business publish in or serve for as editors or reviewers
scholars (Albers 2009; Dilger 2000). are highly ranked; something which they can
influence through their own ratings. As the
Survey-based rankings also face limitations. How-
incentive for such strategic answers strongly
ever, these obstacles appear less systematic and
depends on the individual researcher’s impact
strongly depend on the mode of data collection and
on a journal’s rating, VHB-JOURQUAL only
analysis when compared to those of citation-based
considers journals with at least ten individual
rankings. Major threats to the validity of survey-
ratings. Moreover, ratings in VHB-JOUR-
based rankings include the following issues:1
QUAL2 are not anonymous – each respondent
• Sample. Respondents from whose assessments had to use a unique ID and agree that his data
survey-based rankings are constructed are not could be linked to his personal information by
always suited for assessing the scientific quality the authors of this study. This should reduce the
of academic journals. VHB-JOURQUAL aims to motivation for strategic answers, since evident
overcome this potential threat by including only over- or underrating may become overt to the
VHB members who, at a minimum, hold a post- VHB-JOURQUAL authors. In addition, outlier
doctoral position, with the majority being full judgments were systematically removed as will
professors. VHB-JOURQUAL also requires be explained later in more detail.
active readership of a journal to rate its quality
Finally, hybrid rankings combine data from expert
(it first asks the respondents to indicate which
surveys and citation indices. This extends the num-
journals they have recently read and only in a
ber of journals and bases the evaluation on a
second step asks respondents to evaluate those
broader foundation. However, the hybrid approach
journals only) and uses an expertise factor to
does not heal limitations inherent in the sources
account for the respondents’ differing levels of
which serve as necessary inputs such as missing
expertise (see also Heischmidt and Gordon
citation data for German-language journals.
1993; Extejt and Smith 1990).
• Too few or too many journals. Survey-based
rankings are often forced to limit the number of
3 Measuring journal quality in
included journals to avoid overstraining VHB-JOURQUAL
respondents. VHB-JOURQUAL assures com- Survey-based rankings usually solely focus on the
pleteness of relevant journals by using a overall quality of the articles that are published by a
multistage process starting with the Journal certain journal. In VHB-JOURQUAL, we conceptu-
Quality List by Anne-Wil Harzing (for VHB- alize overall scientific quality of a journal as being
JOURQUAL2: Harzing 2007), limiting the defined by two quality dimensions which are meas-
ured separately, namely the quality of the articles
published in a journal (article quality) and the qual-
1 Please note that additional information on the VHB-JOUR- ity of the review process of the journal (review qual-
QUAL2 methodology is provided later in this article. ity). Both quality dimensions are treated as forma-
182
tive indicators of overall journal quality (for a simi- scale from 1 = ‘very low’ to 10 = ‘very
lar approach, see Rossiter 2002). Our distinction high’),
between article and review quality draws from qual- RQJ,i : Review quality of journal J as perceived
ity literature in related fields such as service man- by respondent i (on a 10-point scale from
1 = ‘very low’ to 10 = ‘very high’),
agement, which has often been used as a template
nJ,AQ : Number of respondents who have evalu-
for higher-education research (e.g., Hennig-Thurau, ated the article quality of journal J,
Langer, and Hansen 2001). nJ,RQ : Number of respondents who have evalu-
Service research distinguishes between outcome- ated the review quality of journal J,
related quality aspects and those aspects which are Ei : Weighting factor for the expertise of re-
related to the process of the service production as spondent i,
dimensions of overall (perceived) service quality aJ, bJ : Weighting factors for journal J, with aJ +
(e.g., Brady and Cronin 2001). While article quality bJ = 1.
serves as the equivalent of outcome quality in the Article quality is measured with the item “I consider
context of academic-knowledge generation, review the scientific standard of articles published in this
quality refers to the process of how articles (and journal to be … [Please indicate a number between 1
their authors) are treated by the respective journal. = ‘extremely low’ und 10 = ‘extremely high’]”. The
In that sense, article and review quality measure original German wording of this item is: “Das wis-
different dimensions of academic-knowledge gen- senschaftliche Niveau der in dieser Zeitschrift veröf-
eration. Not all academics (as “customers”) experi- fentlichten Artikel halte ich für…[Bitte Zahl zwi-
ence both quality dimensions; while article quality schen 1 = ‘extrem gering’ und 10 = ‘extrem hoch’
can be assessed by all readers of a journal’s articles angeben].“ The item is evaluated by respondents
(including those who had only limited contact with a who have read at least one new article in the respec-
journal), the assessment of review quality requires tive journal in the last five years (VHB-JOUR
deeper experiences and insight into a journal’s in- QUAL2: 2003-2007).
ternal processes. The inclusion of review quality not Review quality is measured with the item “The sci-
only helps to capture scientific quality in a more entific quality of the review process is … [Please
comprehensive way, but also adds dynamics and indicate a number between 1 = ‘extremely low’ und
flexibility, as changes in the review process will be 10 = ‘extremely high’]”. The original German wor-
experienced much faster than their manifestation in ding of the item is: “Die wissenschaftliche Qualität
printed articles. des Review-Prozesses ist…[Bitte Zahl zwischen 1 =
The VHB-JOURQUAL index, on which the rating ‘extrem gering’ und 10 = ‘extrem hoch’ angeben].“
and ranking of journals is based, combines the two The scientific quality of the review process is defined
quality dimensions of article quality and review as “standards for submissions requested by review-
quality in a weighted additive composition (see ers and/or editors” (in German: “die Ansprüche, die
equation 1). Both quality dimensions are measured Gutachter und/oder Schriftleiter bzw. Editoren an
with single items which is an adequate procedure eingereichte Beiträge stellen”). Review quality is
for expert surveys with formative measures, as is the rated only by those who have either submitted at
case with VHB-JOURQUAL (Rossiter 2002). least one paper within the last five years or know the
review process as reviewers or editors of the journal.
In VHB-JOURQUAL1 only authors who had sub-
mitted papers were allowed to evaluate the review
process. Also letting reviewers and editors evaluate
(1) review quality leads to a higher number of review-
process evaluations and reduces the likelihood that
ratings and rankings are mainly or only based on
article-quality assessments.
We weight the formative indicators of article quality
with JQIJ : VHB-JOURQUAL index value of
journal J (10-point scale from 1 = and review quality equal (both aJ and bJ = 0.5),
‘very low’ to 10 = ‘very high’), assuming both play the same role for determining
AQJ,i : Scientific quality of articles in journal J as overall scientific quality of a journal. However, to
perceived by respondent i (on a 10-point account for the limited number of review evalua-
183
tions for several journals and the loss in reliability with the three indicators’ impact on overall exper-
associated with a small sample size for the review- tise not being independent.
quality indicator, we adjusted the weights for article While the journal ranking results directly from the
and review quality if the number of review quality different VHB-JOURQUAL index values, the rating
assessments fell short of a certain threshold. Equa- assigned to an index value requires a categorization.
tion 2 lists the adjustments in weighting the two VHB-JOURQUAL sorts journals into rating catego-
quality criteria for different numbers of ratings of a ries based on their index values, using absolute
journal’s review quality. If no respondent has rated numbers as thresholds for defining the categories
a journal’s review process, the weight for b becomes for the lack of a more objective categorization. Table
0 and (since aJ = 1 – bJ) the overall JOURQUAL 1 lists the six rating categories ranging for A+ to E
rating is solely based on the article-quality indicator and the respective VHB-JOURQUAL scores.
(with aJ = 1).
bJ = 0 for nJ ,RQ = 0  Table 1: Thresholds for Rating Categories
 
bJ = 0.1 for nJ ,RQ = 1 
VHB-JOURQUAL VHB-JOURQUAL
b  Rating Category Index Value
= 0.2 for nJ , RQ = 2
bJ = f (nJ , RQ ), with  
J
(2) A+ 9 ≤ JQIJ
bJ = 0.3 for 3 ≤ nJ ,RQ < 5 
  A 8 ≤ JQIJ < 9
bJ = 0.4 for 5 ≤ nJ , RQ < 10 B 7 ≤ JQIJ < 8
b = 0.5 for nJ , RQ ≥ 10 
 J  C 6 ≤ JQIJ < 7
D 5 ≤ JQIJ < 6
Expertise is included in the calculation of the VHB- E JQIJ < 5
JOURQUAL2 overall quality score as a weighting
factor since we expect a positive correlation between
the expertise of a respondent and the validity of her
4 Survey and sample of VHB-
or his assessment. We argue that scholars who have
published in a variety of journals, and particularly in JOURQUAL2
leading international journals, will be better able to The VHB-JOURQUAL2 survey was conducted from
judge the quality of articles and review processes February to April 2008. Every VHB member with a
than colleagues who lack that experience. Specifi- registered email address (N = 1,555) received an
cally, we operationalize expertise by three indica- invitation email from the VHB chairmen and the
tors: (a) the number of different journals a respon- authors of the study which contained a unique link
dent has published in during the last five years; (b) to an online questionnaire. Every participant went
the number of publications in high-quality journals through the highly individualized survey procedure
(defined as journals with an unweighted VHB- depending on his or her specific research fields,
JOURQUAL index value ≥ 7) during the last five reading habits, submission activities and reviewer
years; and (c) the international experience gathered or editor positions. 1,011 respondents started the
by publications in English-language high-quality evaluation process (response rate of 65 %), about
journals during the last five years. For the first two 600 fully completed the questionnaire. Many re-
indicators the raw values are transformed to scales spondents who “dropped out” had actually pro-
ranging from 1 to 2; for indicator (c) respondents ceeded through major parts of the survey. We in-
with at least one international high-quality journal cluded all responses in our calculations regardless of
publication receive a 2, all others a 1. The three indi- technical completion.
cators are multiplied and then rescaled to an exper- The questionnaire included a total of 1,633 journals.
tise scale ranging from 1 to 5. As a consequence, the In addition to academic journals in a narrow sense,
evaluations of the respondents scoring with the the list also comprises yearbooks and proceedings
highest expertise are weighted five times higher with a homogeneous review process. This is due to
than the assessments of the respondents with the the observation that in some business sub-
lowest expertise. We prefer a multiplicative function disciplines (such as information systems) refereed
of expertise over an additive one, as we argue that conference proceedings fulfill similar tasks than
academic expertise builds up in a non-linear way, actual journals. The list of journals for VHB-
184
JOURQUAL2 was selected in a multi-step process. confidence interval; thus, the risk of overrating
First, we synchronized the VHB-JOURQUAL1 jour- seems to be lower than the risk of underrating.
nal list with the established Harzing-List of busi-
ness-administration journals (Harzing 2007). Sec- 5 VHB-JOURQUAL2 results
ond, we assigned the journals to different business
sub-disciplines which strongly overlapped with the 5.1 General Results
16 sections of the VHB (“Wissenschaftliche Kom- 742 journals received more than 10 ratings in VHB-
missionen”; e.g., finance and banking, taxation, JOURQUAL2; journals which received less than 10
international management). Third, in a joint effort ratings were excluded to assure a sufficient level of
with all chairpersons of the VHB sections, we added reliability (Web-Appendix 1 contains the alphabeti-
new or previously overlooked journals, eliminated cal list of all 742 journals).2 As VHB-JOURQUAL2
those which have ceased publication and adjusted aims at business scholars, we only included journals
the categorization. Forth, we invited all VHB mem- in the ranking which – in addition to being read by
bers to complete the journal list and asked them to at least 10 respondents – could be assigned to at
indicate which journals they actually read in an least one sub-discipline of business administration
online pre-survey (n = 489). The final list then in- (e.g., accounting, marketing) or whose review proc-
cluded all journals which were either indicated by at ess was evaluated by a minimum of 5 respondents.
least two respondents in the pre-survey or evaluated 666 journals met at least one of these criteria and
by at least five respondents in VHB-JOURQUAL1. were subsequently included in the VHB-
Journals which did not meet one of these require- JOURQUAL2 journal ranking.
ments were excluded as we expected them not to Figure 1 shows the distribution of VHB-JOUR-
receive the minimum number of ten evaluations in QUAL2 (JQ2) ratings for all 666 journals for the
the main survey required for the inclusion in the overall VHB-JOURQUAL2 index value as well as
final ranking. the two quality dimensions and lists descriptive
To reduce the number of strategic answers, we lim- information. The mean of the overall JQ2 score is
ited the anonymity of the study by informing the 6.22, equal to a C-rating.
participants in the invitation mail that the authors Figure 2 displays the distributions for the quality
of the study would be able to assign every rating to weighting parameters and the respondent expertise
the individual respondent. Also, indicating the parameter. The weighting factor for the two quality
number of submissions to and publications in a criteria varied between 0 and 0.5, with an average
journal was not sufficient; respondents also had to weighting for the review process of .24 (standard
name respective papers’ short titles. This informa- deviation = .18).
tion was used to assure a valid calculation of expert As can be seen in Figure 3, the expertise factor for
factors and that review processes are only evaluated the respondents has a mean value of 1.36 (standard
by respondents who have actually experienced them deviation = .58) and is positively skewed (the forth
within the period of observation. While we are quartile ranges from 1.74 to 5), that is, relatively few
aware that these measures cannot completely re- researchers have very high expertise scores. This is
move all kinds of strategic behavior, they certainly consistent with the finding of Dyckhoff and Schmitz
increased the psychological barriers to behave in
such a way.
To further improve the quality of our data, we ex-
cluded outlier ratings when calculating the VHB-
JOURQUAL2 ratings, as we assumed outliers to be 2 Please note that this number differs from the initial results pub-
based on misunderstandings or strategic misevalu- lished on the VHB website as we deleted journals which were
ations. Specifically, for each journal, we kept all duplications of other journals with slightly different names or had
ceased publication before the time frame considered in this rank-
responses within the 99 % confidence interval (two- ing; we thank Robert Hofmeister from the Thurgau Institute of
sided) for both dimensions of quality (i.e. article and Economics at University of Konstanz for his valuable input. For
duplicated journals, the evaluation scores were merged on an in-
review quality) and deleted those responses outside dividual respondent level; if more than one journal version was
the confidence interval. This procedure resulted in rated by a respondent, the mean of his or her ratings for the re-
the removal of a total of 315 individual ratings. spective journal was considered. As a result of this merging proc-
ess, the scores for these journals can differ from those originally
About 90 % of these deleted ratings were below the reported on the VHB website.
185
Figure 1: Distribution of Journal-Quality Measures in the Sample and Descriptive Statistics
Overall JQ2 Index Value Article Quality Review Quality

Frequency
yc
n
e
u
q
er
F
Mean = 6.22 SD = 1.50 n = 666 Mean = 6.16 SD = 1.48 n = 666 Mean = 6.51 SD = 1.91 n = 530
(2007) that about two out of three German profes- port the unweighted quality assessments for each
sors had no international refereed publication be- journal.
tween 1990 and 2004; something which has Within the top ten journals are four marketing and
changed only recently (Homburg 2008). Figure 3 three finance journals, with the Journal of Finance
also shows the distribution of the three expertise being listed as the number one journal. Administra-
indicators. tive Science Quarterly, ranked fourth, has the high-
est JQ2 index value of all general management
Figure 2: Distribution of Quality Weighting
journals. 14 Journals (= 2 %) are rated A+, 50 (= 8
%) are rated A, 152 (= 23 %) are rated B, 186 (= 28
Weighting Review Process %) are rated C, 143 (= 22 %) are rated D, and 121 (=
18 %) are rated E. The best German-language jour-
nal is the B-rated Wirtschaftsinformatik (since
2009 also available in English as Business & Infor-
yc mation Systems Engineering) ranked 169, followed
Frequency
n by Schmalenbachs Zeitschrift für betriebswirt-

e
u schaftliche Forschung (zfbf) ranked 177.
q
er
F Considering the changes from JQ1 to JQ2, the rat-
ings on average have decreased. Taking into account
only those 326 Journals which were included in
both rankings, the mean score for the overall quality
has fallen from 6.86 to 6.22; 275 journals (or 84 %)
Mean = 0.24 SD = .18 n = 666 received a lower and only 51 a higher quality as-
sessment than five years ago. This indicates that
respondents have not systematically overrated their
Table 2 lists the A+ and A ranked journals according preferred journals, but displayed a critical attitude
to their overall quality index value and provides in general. This attitude might be the result of a
additional information on the assessments of the growing sensitivity among VHB members with re-
VHB-JOURQUAL quality dimensions and changes gard to academic journal quality; a trend which has
between JQ1 and JQ2. The full list of all ranked certainly been strengthened by the increasing num-
journals is reported in Web-Appendix 2. In addition ber of VHB members which have experienced inter-
to the expertise-weighted index values, we also re- national journal review processes.
186
Figure 3: Distribution of Respondent Expertise Parameters in the Sample and Descriptive

Statistics
The results also reveal that the double blind review- had already a below average rating in JQ1.
ing process has become a condition sine qua non for Table 3 lists the best-rated journals for 16 business-
a high-quality journal among VHB members, fol- administration sub-disciplines; the disciplines were
lowing international standards. The journals with selected based on the VHB sections structure. The
the highest decrease (by percentage) in quality ra- table also reveals to which extent the journal-quality
ting did not employ a rigorous review process dur- ratings are affected by judgments of researchers
ing the last five years (Appendix 3 lists the journals who do not belong to a specific sub-discipline. In
and their respective changes since JQ1). Most of the other words: Does the “core audience” of a journal
journals with a high decrease in quality perception judge its quality differently than other scholars?
187
Table 2: A+ and A ranked Journals in VHB-JOURQUAL2

JQ2 Change JQ2 Change
JQ2
rating in % index in % w Mean Mean Weight
Rank Journal ISSN index SD AQ SD RQ n AQ n RQ
cate- JQ2 vs. value vs uw AQ RQ of RQ
value
gory JQ1 uw JQ2
1 Journal of Finance 0022-1082 A+ 9.80 1.86 9.79 0.14 9.80 0.52 9.79 0.43 108 5 0.4
2 American Economic Review 0002-8282 A+ 9.75 1.42 9.68 0.68 9.67 0.83 9.87 0.50 121 8 0.4
3 Review of Financial Studies 0893-9454 A+ 9.48 2.32 9.46 0.16 9.38 1.05 9.71 0.49 41 4 0.3
4 Administrative Science Quarterly 0001-8392 A+ 9.48 1.74 9.44 0.38 9.21 1.07 9.75 0.44 249 11 0.5
5 Journal of Marketing 0022-2429 A+ 9.46 -0.85 9.43 0.27 9.49 0.77 9.43 0.97 122 22 0.5
6 Journal of Consumer Research 0093-5301 A+ 9.44 0.49 9.34 1.04 9.12 1.10 9.91 0.29 75 6 0.4
7 Journal of Financial Economics 0304-405X A+ 9.43 -1.10 9.39 0.39 9.67 0.64 8.47 0.58 60 2 0.2
8 Information Systems Research 1047-7047 A+ 9.42 6.74 9.41 0.14 9.28 0.96 9.75 0.47 36 4 0.3
9 Journal of Marketing Research 0022-2437 A+ 9.34 -4.10 9.28 0.62 9.49 0.89 9.18 1.28 99 13 0.5
10 Marketing Science 0732-2399 A+ 9.29 -4.60 9.30 -0.11 9.51 0.79 9.07 1.39 78 12 0.5
11 Management Science 0025-1909 A+ 9.20 -0.97 9.17 0.36 9.30 0.93 9.11 1.15 330 47 0.5
12 Operations Research 0030-364X A+ 9.19 4.59 9.16 0.24 8.79 1.43 9.77 0.43 61 9 0.4
13 Academy of Management Journal 0001-4273 A+ 9.08 -0.83 8.97 1.23 8.86 1.29 9.29 1.15 289 41 0.5
14 Academy of Management Review 0363-7425 A+ 9.07 5.96 8.99 0.85 8.65 1.33 9.48 1.05 266 17 0.5
Journal of Financial and Quantitative

15 0022-1090 A 8.95 0.72 8.70 2.77 8.98 0.86 8.88 1.37 58 4 0.3
Analysis
RAND Journal of Economics (for-
16 0741-6261 A 8.93 -2.49 8.91 0.23 8.90 1.00 8.98 0.94 70 7 0.4
merly: Bell Journal of Economics)
17 Mathematical Programming 0025-5610 A 8.92 3.96 8.88 0.52 8.80 1.62 10.00 16 1 0.1
188
Table 2 continued: A+ and A ranked Journals in VHB-JOURQUAL2

JQ2
value
gory JQ1 uw JQ2
18 Organization Science 1047-7039 A 8.90 0.11 8.89 0.11 8.84 1.13 8.95 1.10 92 11 0.5
19 Journal of Accounting and Economics 0165-4101 A 8.89 0.83 8.66 2.49 9.16 1.03 7.80 2.17 62 2 0.2
20 MIS Quarterly 0276-7783 A 8.84 n.a. 8.78 0.64 8.62 1.56 9.34 0.78 73 4 0.3
Journal of International Business

21 0047-2506 A 8.81 2.15 8.71 1.11 8.89 1.02 8.73 1.46 64 17 0.5
Studies JIBS
22 Review of Accounting Studies 1380-6653 A 8.79 -0.89 8.75 0.52 8.59 1.19 9.09 1.12 51 6 0.4
23 Accounting Review 0001-4826 A 8.78 1.27 8.68 1.19 8.82 1.35 8.69 1.47 79 3 0.3
24 Journal of Labor Economics 0734-306X A 8.71 n.a. 8.66 0.66 8.74 0.97 8.64 0.52 20 3 0.3
25 Journal of Risk and Insurance 0022-4367 A 8.62 n.a. 8.36 3.04 8.20 1.52 9.61 0.84 23 4 0.3
26 Transportation Science 0041-1655 A 8.60 0.94 8.51 1.05 8.40 1.09 8.90 0.77 37 7 0.4
Journal of the Academy of Marketing
27 0092-0703 A 8.50 -4.29 8.45 0.61 8.38 1.08 8.63 0.91 78 12 0.5
Science
Proceedings of the International
28 Conference on Information Systems A 8.48 n.a. 8.41 0.86 8.39 1.12 8.57 0.95 53 31 0.5
(ICIS)
29 Journal of Industrial Ecology 1088-1980 A 8.47 n.a. 8.52 -0.50 8.02 1.34 9.53 0.97 12 3 0.3
SIAM Journal on Computing (Society

30 for Industrial and Applied Mathemat- 0097-5397 A 8.46 n.a. 8.45 0.01 8.46 1.25 11 0 0.0
ics)
31 Strategic Management Journal 0143-2095 A 8.41 -5.64 8.37 0.54 8.67 1.31 8.16 1.86 233 26 0.5
32 Research Policy 0048-7333 A 8.41 10.46 8.40 0.13 8.37 1.12 8.46 1.01 76 20 0.5
33 Journal of Service Research 1094-6705 A 8.40 0.02 8.22 2.06 8.00 1.32 8.99 1.47 71 7 0.4
189

JQ2
value
gory JQ1 uw JQ2
34 Journal of Business Venturing 0883-9026 A 8.38 5.13 8.30 0.86 8.17 1.26 8.58 1.38 69 16 0.5
Voluntas. International Journal of

35 Voluntary and Nonprofit Organiza- 0957-8765 A 8.36 n.a. 8.16 2.46 8.30 1.05 8.52 0.56 12 3 0.3
tions
36 Journal of Applied Psychology 0021-9010 A 8.33 -7.05 8.39 -0.67 8.30 1.44 8.41 1.38 94 4 0.3
Accounting, Organizations and Soci-

37 0361-3682 A 8.33 n.a. 8.46 -1.53 8.60 1.57 7.94 0.97 64 6 0.4
ety
Journal of Management Information
38 0742-1222 A 8.32 n.a. 8.29 0.36 8.04 1.21 9.42 0.59 29 2 0.2
Systems
Production and Operations Manage-
39 1059-1478 A 8.32 13.48 8.24 0.87 7.83 1.53 8.81 1.00 50 11 0.5
ment
40 Economic Journal 0013-0133 A 8.29 -1.93 8.16 1.55 8.44 1.21 7.00 0.00 34 1 0.1
41 Journal of Industrial Economics 0022-1821 A 8.24 n.a. 8.21 0.38 8.04 1.35 8.69 1.36 54 3 0.3
42 Discrete Applied Mathematics 0166-218X A 8.24 n.a. 8.45 -2.61 7.51 1.48 9.33 0.93 11 5 0.4
43 Health Care Management Science 1386-9620 A 8.23 n.a. 8.31 -0.94 8.07 1.02 8.49 0.53 17 5 0.4
Journal of Economic Behavior and

44 0167-2681 A 8.22 -8.56 8.20 0.30 8.19 1.13 8.29 0.50 39 3 0.3
Organization
Journal of the European Economic
45 1542-4766 A 8.20 n.a. 8.07 1.58 8.20 0.88 15 0 0.0
Association
Entrepreneurship: Theory and Prac-
46 1042-2587 A 8.18 20.68 8.07 1.35 7.66 1.72 8.70 0.62 56 12 0.5
tice
Journal of Economics and Manage-
47 1058-6407 A 8.17 -7.63 8.05 1.52 7.87 1.49 8.62 1.04 51 9 0.4
ment Strategy
International Journal of Research in
48 0167-8116 A 8.17 -8.10 8.05 1.46 8.07 1.30 8.26 1.18 75 19 0.5
Marketing
49 Philosophy of Science 0031-8248 A 8.16 n.a. 8.15 0.08 8.16 0.94 13 0 0.0
190

JQ2
value
gory JQ1 uw JQ2
50 IIE Transactions 0740-817X A 8.12 -0.75 8.09 0.33 7.93 1.12 8.31 0.92 36 11 0.5
Organizational Behavior and Human

51 0749-5978 A 8.12 -4.97 7.98 1.70 8.14 1.17 8.00 0.00 27 1 0.1
Decision Processes
52 Journal of Retailing 0022-4359 A 8.12 n.a. 8.08 0.49 8.20 1.24 8.00 1.76 75 5 0.4
Journal of Product Innovation Man-

53 0737-6782 A 8.12 2.45 8.11 0.11 7.76 1.23 8.47 0.73 74 16 0.5
agement
OR Spectrum (formerly: OR Spek-
54 0171-6468 A 8.10 -0.33 8.09 0.14 7.99 1.21 8.21 1.22 83 43 0.5
trum)
55 Journal of Health Economics 0167-6296 A 8.10 n.a. 8.13 -0.34 8.10 1.68 16 0 0.0
European Journal of Operational
56 0377-2217 A 8.09 -2.36 8.17 -0.90 8.21 1.27 7.98 1.52 79 46 0.5
Research EJOR
Contemporary Accounting Research/
57 0823-9150 A 8.08 n.a. 8.07 0.05 8.28 1.43 7.59 2.30 61 3 0.3
Recherche Comptable Contemporaine
58 Management Accounting Research 1044-5005 A 8.07 -7.91 8.02 0.65 7.88 1.43 8.36 0.80 57 9 0.4
Review of Finance (formerly: Euro-
59 1572-3097 A 8.06 2.71 8.04 0.29 7.78 0.96 8.48 1.33 38 8 0.4
pean Finance Review)
60 Journal of Scheduling 1094-6136 A 8.05 n.a. 8.15 -1.20 7.86 1.46 8.34 1.55 25 6 0.4
61 Journal of Banking and Finance 0378-4266 A 8.05 -1.68 7.89 1.98 8.08 1.18 8.01 1.23 72 14 0.5
62 Journal of Accounting Research 0021-8456 A 8.03 -12.15 7.96 0.93 9.03 1.12 4.03 1.15 77 2 0.2
63 International Journal of Game Theory 0020-7276 A 8.02 -4.03 8.00 0.21 8.02 1.82 12 0 0.0
64 Review of Derivatives Research 1380-6645 A 8.01 n.a. 7.95 0.80 7.87 0.73 8.34 0.85 11 4 0.3
Notes: uw = unweighted; w = weighted; AQ = article quality; RQ = review quality; n = number of evaluators; n.a. = not applicable because the journal was not ranked in VHB-JOURQUAL1.
191
Table 3: Top 10 Journals for Different Sub-disciplines

General Management*
Rating JQ2
Mean Mean
Journal catego- index
AQ RQ
ry value
Administrative Science Quarterly A+ 9.48 9.21 9.75
Management Science A+ 9.20 9.30 9.11
Academy of Management Journal A+ 9.08 8.86 9.29
Academy of Management Review A+ 9.07 8.65 9.48
Strategic Management Journal A 8.41 8.67 8.16

Journal of Economics and Management
A 8.17 7.87 8.62
Strategy
Organization Studies B 7.99 7.70 8.28
Journal of Management B 7.85 7.33 8.37
Journal of Management Studies B 7.55 7.33 7.78

International Journal of Industrial Or-
B 7.51 7.31 7.80
ganization
Accounting and Auditing

Rating JQ2 Mean Mean
Mean Mean n SM n SM
Journal catego- index AQ only RQ only
AQ RQ for AQ for RQ
ry value SM SM
A 8.95 8.98 8.88 8.64 n.a. 16 0
Analysis
Journal of Accounting and Economics A 8.89 9.16 7.80 9.30 9.00 45 1
Review of Accounting Studies A 8.79 8.59 9.09 8.65 9.09 39 6
Accounting Review A 8.78 8.82 8.69 8.85 8.61 56 2
Accounting, Organizations and Society A 8.33 8.60 7.94 8.71 7.82 45 5

Contemporary Accounting Research/
A 8.08 8.28 7.59 8.41 9.10 45 2
Recherche Comptable Contemporaine
Management Accounting Research A 8.07 7.88 8.36 8.05 8.36 42 9
Journal of Accounting Research A 8.03 9.03 4.03 9.11 5.00 56 1

Journal of Business Finance and Account-
B 7.94 8.13 7.76 8.21 8.74 30 7
ing
Auditing: A Journal of Practice and The-
B 7.93 7.70 10.00 7.63 10 19 1
ory
Banking and Finance

Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Journal of Finance A+ 9.80 9.80 9.79 9.92 10.00 42 3
Review of Financial Studies A+ 9.48 9.38 9.71 9.48 10.00 28 2
Journal of Financial Economics A+ 9.43 9.67 8.47 9.67 8.00 35 1

A 8.95 8.98 8.88 9.00 8.84 37 3
Analysis
Review of Finance (formerly: European
A 8.06 7.78 8.48 7.83 8.86 25 7
Finance Review)
192
Table 3 continued: Top 10 Journals for Different Sub-disciplines

Banking and Finance
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Journal of Banking and Finance A 8.05 8.08 8.01 8.06 8.01 39 11
Review of Derivatives Research A 8.01 7.87 8.34 7.84 8.14 9 3

Journal of Business Finance and Account-
B 7.94 8.13 7.76 8.53 7.39 18 8
ing
Mathematical Finance B 7.90 7.90 n.a. 7.67 n.a. 15 0
Journal of Financial Markets B 7.73 7.28 9.51 7.07 9.51 20 2
Business Information Systems

Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Information Systems Research A+ 9.42 9.28 9.75 9.18 10.00 28 2
Mathematical Programming A 8.92 8.80 10.00 9.47 10.00 4 1
MIS Quarterly A 8.84 8.62 9.34 8.88 9.48 44 2

Proceedings of the International Confer-
A 8.48 8.39 8.57 8.38 8.65 37 22
ence on Information Systems (ICIS)
SIAM Journal on Computing (Society for
A 8.46 8.46 n.a. 8.06 n.a. 5 0
Industrial and Applied Mathematics)
Journal of Management Information
A 8.32 8.04 9.42 8.02 10.00 18 1
Systems
Information Systems Journal B 7.98 7.76 8.49 7.75 8.00 16 1
Journal of the Association for Information
B 7.96 7.72 8.52 7.53 8.42 26 2
Systems (JAIS)
INFORMS Journal on Computing (for-
B 7.91 7.54 8.46 7.61 8.66 16 3
merly: ORSA Journal on Computing)
Journal of Strategic Information Systems B 7.87 7.47 8.81 7.32 9.00 12 1
Corporate Taxation
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
European Accounting Review B 7.65 7.30 8.00 7.30 n.a. 15 0
National Tax Journal B 7.64 7.60 8.00 7.48 8.00 16 1
FinanzArchiv B 7.44 7.54 7.22 8.62 8.89 24 2

Journal of the American Taxation Associa-
B 7.28 6.98 10.00 7.08 10.00 10 1
tion
Steuer und Wirtschaft B 7.20 7.20 7.20 8.29 8.12 27 12
Journal of International Accounting
C 6.77 6.77 n.a. 7.39 n.a. 8 0
Auditing and Taxation
Journal of Taxation C 6.23 6.23 n.a. 6.27 n.a. 16 0
Fiscal Studies C 6.19 6.19 n.a. 7.18 n.a. 9 0
Canadian Tax Journal C 6.08 6.09 6.00 6.77 6.00 9 1
Internationales Steuerrecht D 5.99 5.56 6.65 5.88 6.65 28 8
193

Environmental Management
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Journal of Industrial Ecology A 8.47 8.02 9.53 7.91 10.00 11 2
Business Ethics Quarterly (BEQ) B 7.88 7.54 9.25 7.25 10.00 8 1
Ecological Economics B 7.63 8.04 4.00 8.18 4.00 12 1
Business Strategy and the Environment B 7.57 7.47 7.73 7.73 7.73 13 6
Zeitschrift für Umweltpolitik und Umwelt-
B 7.05 6.91 7.39 6.73 7.39 11 4
recht
Journal of Business Ethics C 6.92 7.09 6.66 6.18 5.15 10 3
Journal of Environmental Economics and
C 6.67 6.67 n.a. 7.69 n.a. 5 0
Management
International Journal of Innovation and
C 6.50 6.45 7.00 7.06 7.00 4 1
Sustainable Development
Journal of Cleaner Production C 6.16 6.23 6.04 6.39 6.04 13 5
Journal of Macromarketing C 6.05 5.73 7.34 7.00 n.a. 2 0
Higher Education Management

Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Management Learning B 7.05 6.95 7.48 7.00 n.a. 1 0
Academy of Management Learning and
C 6.92 6.30 9.40 4.00 n.a. 1 0
Education
Higher Education C 6.05 5.84 8.00 6.52 8.00 3 1
Research in Higher Education D 5.99 5.99 n.a. 6.46 n.a. 4 0
Journal of Marketing Education D 5.35 5.39 5.00 6.00 n.a. 1 0
Chronicle of Higher Education E 4.90 4.90 n.a. 5.29 n.a. 6 0

Hochschulmanagement. Zeitschrift für die
Leitung, Entwicklung und Selbstverwal-
E 4.45 4.20 5.03 5.49 5.99 2 2
tung von Hochschulen und Wissen-
schaftseinrichtungen
Das Hochschulwesen E 3.58 3.58 n.a. 3.09 n.a. 6 0
Forschung & Lehre E 3.29 3.02 3.94 2.61 1.00 12 1
DUZ. Deutsche Universitäts-Zeitung E 2.32 2.32 n.a. 2.35 n.a. 10 0
Human Resources and

Organization
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Organization Science A 8.90 8.84 8.95 8.72 8.84 66 9
Journal of International Business Studies
A 8.81 8.89 8.73 9.18 9.39 31 9
JIBS
Journal of Labor Economics A 8.71 8.74 8.64 8.62 8.49 13 2
Journal of Applied Psychology A 8.33 8.30 8.41 8.83 8.08 37 3
194

Human Resources and
Organization
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Journal of Economic Behavior and Or-
A 8.22 8.19 8.29 8.15 n.a. 20 0
ganization
Organizational Behavior and Human
A 8.12 8.14 8.00 8.17 9.00 14 1
Decision Processes
Journal of Law, Economics, and Organiza-
B 7.93 8.01 7.62 7.82 9.00 16 1
tion
Research in the Sociology of Organizations B 7.93 7.81 9.00 7.85 n.a. 18 0
Organizational Behaviour and Human
B 7.85 7.85 n.a. 7.92 n.a. 14 0
Performance
Human Relations B 7.85 7.66 8.03 7.71 7.60 52 8
International Management
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Journal of International Business Studies
A 8.81 8.89 8.73 9.32 9.33 32 11
JIBS
Journal of International Management B 7.59 7.50 7.72 7.60 7.85 16 5
Journal of International Marketing B 7.57 7.49 7.70 7.94 8.12 17 6

Journal of World Business (formerly:
B 7.39 7.28 7.54 7.13 7.44 22 4
Columbia Journal of World Business)
International Economic Review B 7.35 7.27 8 5.12 n.a. 5 0
International Business Review B 7.09 6.78 7.57 7.17 7.84 25 6
Management International Review MIR C 6.86 6.46 7.25 7.27 7.95 41 22

European Journal of International Man-
C 6.44 6.27 8.00 6.15 8.00 18 1
agement
International Journal of Cross Cultural
C 6.36 6.28 7.00 6.29 7.00 15 1
Management
Cross-Cultural Research C 6.35 6.35 n.a. 6.53 n.a. 6 0
Logistics
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Transportation Science A 8.60 8.40 8.90 8.41 9.08 25 6
Discrete Applied Mathematics A 8.24 7.51 9.33 7.39 8.80 7 3
Naval Research Logistics B 7.75 7.96 7.43 7.86 7.43 33 5

Transportation Research Part B: Meth-
B 7.70 8.00 5.00 7.94 5.00 17 1
odological
Journal of Business Logistics B 7.60 6.89 9.24 6.79 9.24 26 4
Journal of Supply Chain Management
(formerly: International Journal of Pur- B 7.49 6.67 8.71 6.53 8.71 24 6
chasing and Materials Management)
International Journal of Physical Distribu-
B 7.41 7.03 7.80 6.94 7.80 34 10
tion and Logistics Management
195

Logistics
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Transportation Research Part A: Policy
B 7.40 7.40 n.a. 7.10 n.a. 11 0
and Practice
Transportation Research Part E: Logistics
and Transportation Review (formerly: B 7.33 7.42 7.00 7.24 7.00 16 2
Logistics and Transportation Review)
International Journal of Logistics: Re-
C 6.87 6.48 7.80 6.38 7.80 18 3
search and Applications
Management of Technology and

Innovation
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Research Policy A 8.41 8.37 8.46 8.53 8.38 38 16
Journal of Business Venturing A 8.38 8.17 8.58 8.54 8.73 36 11
Entrepreneurship: Theory and Practice A 8.18 7.66 8.70 8.04 8.65 27 8

Journal of Product Innovation Manage-
A 8.12 7.76 8.47 8.34 8.50 37 15
ment
IEEE Transactions on Engineering Man-
B 7.76 7.16 8.36 7.24 7.99 30 7
agement
Journal of Small Business Management
B 7.30 7.27 7.34 7.47 n.a. 15 0
(JSBM)
Strategic Entrepreneurship Journal B 7.15 7.15 n.a. 7.15 n.a. 15 0
Technological Forecasting and Social
B 7.04 7.38 4.00 7.07 n.a. 8 0
Change
International Journal of Technology
C 6.96 6.76 7.16 6.95 7.19 32 14
Management
Industrial and Corporate Change C 6.94 7.37 5.96 7.58 7.00 16 1
Marketing
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Journal of Marketing A+ 9.46 9.49 9.43 9.60 9.38 75 18
Journal of Consumer Research A+ 9.44 9.12 9.91 9.30 9.87 56 4
Journal of Marketing Research A+ 9.34 9.49 9.18 9.59 9.34 69 11
Marketing Science A+ 9.29 9.51 9.07 9.67 9.20 54 10

Journal of the Academy of Marketing
A 8.50 8.38 8.63 8.49 8.93 55 9
Science
Journal of Service Research A 8.40 8.00 8.99 8.26 9.24 41 6
International Journal of Research in
A 8.17 8.07 8.26 8.37 8.32 55 16
Marketing
Journal of Retailing A 8.12 8.20 8.00 8.33 8.00 61 5
Journal of Product Innovation Manage-
A 8.12 7.76 8.47 7.72 8.63 34 9
ment
Marketing Letters B 7.85 7.73 8.04 8.04 7.92 49 8
196

Operations Research
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Information Systems Research A+ 9.42 9.28 9.75 8.29 n.a. 3 0
Operations Research A+ 9.19 8.79 9.77 8.94 9.75 37 8
Mathematical Programming A 8.92 8.80 10.00 8.93 10.00 11 1
MIS Quarterly A 8.84 8.62 9.34 7.28 n.a. 13 0
Transportation Science A 8.60 8.40 8.90 8.43 8.98 26 6

SIAM Journal on Computing (Society for
A 8.46 8.46 n.a. 9.05 n.a. 7 0
Industrial and Applied Mathematics)
IIE Transactions A 8.12 7.93 8.31 8.22 8.37 24 10
OR Spectrum (formerly: OR Spektrum) A 8.10 7.99 8.21 8.34 8.47 43 31

European Journal of Operational Re-
A 8.09 8.21 7.98 8.53 8.23 42 33
search EJOR
Philosophy of Science**
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Research Policy A 8.41 8.37 8.46 8.19 8.34 9 2
Philosophy of Science A 8.16 8.16 n.a. 8.36 n.a. 8 0
Theory and Decision B 7.75 8.23 6.64 8.56 4.00 5 1

Academy of Management Learning and
C 6.92 6.30 9.40 5.87 n.a. 12 0
Education
Production Management
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
MIS Quarterly A 8.84 8.62 9.34 7.46 n.a. 13 0
Production and Operations Management A 8.32 7.83 8.81 7.87 8.48 41 8
IIE Transactions A 8.12 7.93 8.31 8.20 8.37 27 10
Journal of Operations Management B 7.84 7.61 8.17 7.48 7.71 30 6

Manufacturing and Service Operations
B 7.72 8.46 4.75 8.27 4.75 21 2
Management
International Journal of Production Eco-
B 7.55 7.62 7.47 7.76 7.67 45 25
nomics
International Journal of Production Re-
B 7.54 7.59 7.49 7.82 7.68 41 19
search
Journal of Supply Chain Management
(formerly: International Journal of Pur- B 7.49 6.67 8.71 6.07 9.00 21 1
chasing and Materials Management)
International Journal of Physical Distribu-
B 7.41 7.03 7.80 6.75 7.65 25 4
tion and Logistics Management
197

Public- and Non-Profit
Management
Mean Mean n SM n SM
AQ RQ for AQ for RQ
ry value SM SM
Voluntas. International Journal of Volun-
A 8.36 8.30 8.52 8.04 8.69 8 2
tary and Nonprofit Organizations
Journal of Accounting and Public Policy B 7.77 7.81 7.60 7.70 n.a. 5 0
Nonprofit and Voluntary Sector Quarterly B 7.65 7.65 n.a. 7.95 n.a. 9 0
Journal of Public Policy and Marketing B 7.59 7.37 8.48 7.43 n.a. 4 0
Public Administration B 7.56 7.21 8.97 7.59 8.97 9 2
System Dynamics Review B 7.47 7.34 7.76 9.50 n.a. 2 0
Nonprofit Management and Leadership B 7.23 7.15 8.00 7.65 n.a. 10 0

Journal of Non Profit and Public Sector
B 7.00 7.00 n.a. 7.24 n.a. 7 0
Marketing
International Journal of Nonprofit and
C 6.74 6.60 8.00 6.55 8.00 7 1
Voluntary Sector Marketing
Zeitschrift für öffentliche und gemeinwirt-
C 6.25 6.45 5.95 6.43 6.04 16 6
schaftliche Unternehmen
Notes: AQ = article quality; RQ = review quality; n = number of evaluators; SM = section members.
* No general management section exists within the VHB; ** Less than 10 journals with n ≥ 10 are considered as falling into this cate-
gory
As can be seen, differences between quality ratings Management Review). Those journals which re-
are usually very limited. Specifically, for the journals ceive higher review ratings than article ratings,
listed in Table 3, total ratings and those based on however, seem to have difficulties to fully transfer
section members correlate with r = .91 (p < .01, n = the quality of their review process into their final
133) in the case of article quality and with r = .92 (p product, the published articles. An alternative ex-
< .01, n = 96) for review quality. The average ratings planation might be that these journals have in-
are slightly higher for the section members (7.85 vs. creased the quality of their review through proce-
7.57 for article quality; 8.30 vs. 8.08 for review- dural changes only recently, but the change has not
process quality), but the difference is not significant reached the majority of the journals’ readership yet,
for any of the two quality indicators. since article-related ratings can be expected to be
In our model, we assume that article quality and more resistant to change than review ratings.
review quality define the overall scientific quality of
an academic journal. Both constitute different, but 5.2 Respondent-level Determinants of
related dimensions of quality, as a high-quality Quality Assessments
process will usually go hand in hand with high out- To learn which variables explain the interpersonal
come quality; something which is also reflected by a differences in journal-quality ratings and to shed
correlation of r = .75 between the two quality di- more light on the unobserved heterogeneity which
mensions. The merit of measuring quality via the underlies the aggregated results, we conducted an
two dimensions becomes apparent when studying additional post-hoc analysis. We focused on the
those journals for which both quality criteria differ three most prominent German-language business-
substantially. Table 4 lists those journals whose research journals, namely Die Betriebswirtschaft –
articles and review standards are perceived most DBW, Zeitschrift für Betriebswirtschaft – ZfB,
differently by the respondents. Schmalenbachs Zeitschrift für betriebswirtschaftli-
Among the journals whose articles receive better che Forschung – zfbf (Macharzina, Wolf, and Rohn
quality ratings than the review process are some 2004; Schlinghoff and Backes-Gellner 2002). This
which are explicitly positioned as “transfer” jour- selection offers two main advantages: these journals
nals, linking scientific insights with managerial (a) are read by a large number of respondents, and
audiences (e.g., Harvard Business Manager, Sloan they (b) contain articles from different subdisci-
198
Table 4: Strongest Differences between Article and Review Quality

Absolute Difference between
Journal Article Quality and Review Article-Quality Rating
Quality
Highest positive differences
Zeitschrift für angewandte Umweltforschung 2.63 5.22
European Journal of Information Systems 1.65 7.15
Zeitschrift für das gesamte Kreditwesen 1.55 4.01
Journal of Financial Intermediation 1.50 8.28
International Transactions in Operational Research 1.47 6.29
Sloan Management Review 1.47 6.03
Corporate Ownership and Control 1.47 5.96
Harvard Business Manager 1.38 4.08
Journal of Empirical Finance 1.18 7.44
Betriebswirtschaftliche Blätter 1.17 3.27
Highest negative differences

Journal of Supply Chain Management (formerly: Interna-
-2.04 6.67
tional Journal of Purchasing and Materials Management)
Venture Capital: An International Journal of Entrepreneu-
-1.98 5.61
rial Finance
Der Markt. Zeitschrift für Absatzwirtschaft und Marketing -1.91 3.74
NeuroPsychoEconomics -1.84 5.90
Discrete Applied Mathematics -1.82 7.51
Managing Service Quality -1.80 5.43

Academy of Management Perspectives (formerly: Academy
-1.66 5.81
of Management Executive)
Decision Sciences -1.66 6.97
Tagungsbände der Konferenz Modellierung betrieblicher
-1.65 5.14
Informationssysteme (MOBIS)
International Journal of Management Reviews IJMR -1.47 5.59
Note: Only journals with n ≥ 5 for review quality were considered for this analysis.
plines of business administration, attracting a highly gender as demographic characteristics. The regres-
diverse readership. sion results are reported in Table 5.
We conducted OLS regressions for each of the three The results show a substantial amount of overlap
journals, with the perceived article quality serving as between the three journals; a correlation analysis
dependent variable. As independent variables, we with the standardized regression coefficients as
included the individual respondent’s expertise fac- cases exhibits correlations of r = .66 (DBW/zfbf), r =
tor, his or her affiliation with the 16 VHB sections .68 (DBW/ZfB), and r = .84 (zfbf/ZfB). Consistent-
which represent business-administration sub- ly, corporate taxation researchers tend to rate the
disciplines (scholars can be affiliated with multiple German business-administration journals higher
sections), the respondent’s status as a board mem- than scholars from other sub-disciplines; the same
ber of the respective journal, his or her academic is true for accounting scholars. These findings might
status (i.e. full professor or not), as well as age and be attributed to the fact that in both sub-disciplines
199
Table 5: Determinants of Journal-Quality Ratings
Variable DBW ZfB zfbf

Expertise factor -.157** -.090* -.034
Membership in VHB sections:
Accounting and Auditing .106* .123** .160**
Banking and Finance .046 -.008 .050
Business Information Systems .049 .056 .002
Corporate Taxation .129** .185** .159**
Environmental Management .083 .008 .006
Higher Education .027 .017 .017
Human Resources .041 -.028 -.070
International Management .023 -.009 .010
Logistics -.080 -.033 -.051
Management of Technology and Innovation -.007 .002 .010
Marketing .125* .066 .087
Operations Research -.141** -.068 -.084
Organization .055 -.016 -.063
Philosophy of Science .026 -.003 .018
Production Management .013 .221** .105
Public Management .118** .063 .095*
Age .037 .081 .101*
Gender (1 = female, 2 = male) .004 -.015 -.069
Full professor rank -.126** -.109* -.072
Board membership .058 .047 -.031
R2 .148 .124 .126
R2 adjusted .111 .088 .088
Note: All parameter are standardized regression coefficients; ** p < .01, *p < .05.
the domestic legal framework plays a crucial role, so ses of international journals – a major facet of re-
that research in these fields will have a stronger search expertise – tends to heighten the researcher’s
focus on national issues. Consequently, the relative comparison standard, resulting in lower evaluations
importance of the domestic scientific community for German business-administration journals. Also,
and of its German-language journals might be established scholars tend to hold a more critical
higher than in other disciplines. As the top domestic attitude – ratings of full professors tend to be lower
journals are the best possible publication outlets for for the German business-administration journals,
these researchers, competition for publication space with the effect being significant again for two of the
and article quality might also be relatively higher. three journals.
Furthermore, we see that scholars with higher levels
of research expertise tend to rate the German- 6 Validation of VHB-JOURQUAL2
language general business-administration journals To test the reliability and validity of VHB-
lower; the effect is significant for two of the three JOURQUAL2, we compare its results with a num-
journals. Obviously, experience with review proces- ber of other international ratings: the first edition of
200
VHB-JOURQUAL from 2003 (i.e. VHB-JOUR- JOURQUAL2 and the ISI Impact Factors is r = .57
QUAL1), the 2008 ISI Journal Citation Impact Fac- (p < .01); it is slightly higher (r = .59) when quad-
tors (ISI Impact Factors), the British Association of ratic scores are used to account for the skewed dis-
Business Schools Academic Journal Quality Guide tribution of the ISI Impact Factors. In addition to
from 2009 (ABS09), the French Centre National de being significant and substantial, these correlations
la Recherche Scientifique ranking from 2008 are also substantially lower than the one between
(CNR08), and the Dutch Erasmus Research Insti- VHB-JOURQUAL2 and VHB-JOURQUAL1, which
tute of Management Journals Listing from 2006 is in line with our theoretical arguments.
(EJL06). With the exception of the ISI Impact Fac- Finally, when comparing the VHB-JOURQUAL2
tors (due to copyright issues), all these rankings are ratings with the international journal rankings listed
included in the Harzing list (Harzing 2009) and – above, we ran pairwise comparisons and deter-
for the journals ranked in VHB-JOURQUAL2 – also mined the correlation between VHB-JOUQUAL2
in Web-Appendix 2 of this paper. and each ranking. When doing this, we included all
The comparison with VHB-JOURQUAL1 allows us journals which are considered in VHB-JOUR-
to assess the reliability of the results, as the method QUAL2 and the respective comparison ranking (n =
and population for both rankings is very similar. 329 for ABS09; n = 233 for CNR08; n = 207 for
Although differences will result from changes in EJL06). In each case the correlation is strong and
journal quality over time and perception changes, significant (p < .01) with r = .64 for ABS09, r = .70
they should be of a somewhat limited size. VHB- for CNR08, and r = .56 for EJL06. It is again consis-
JOURQUAL1 itself has been successfully validated tent with our arguments that the correlation be-
in comparison with leading international survey- tween VHB-JOURQUAL2 and EJL06 is relatively
based journal rankings (Hennig-Thurau, Walsh, weaker than between VHB-JOURQUAL2 and the
and Schrader 2004). For the 666 business- two other rankings, as EJL06 is partly based on
administration journals in VHB-JOURQUAL2, we citations.
collected the VHB-JOURQUAL1 index values of In summary, we interpret these results as strong
journals in the final ranking (nJ ≥ 10). Data was support for VHB-JOURQUAL2’s reliability and vali-
available for 326 journals from VHB-JOURQUAL1. dity.
We find that the correlation is significant and sub-
stantial, with r = .94 (p < .01).
7 Discussion, Implications, and
Regarding the comparison between VHB-JOUR-
QUAL2 and the ISI Impact Factors, it is important Future Research Perspectives
to see that both ratings measure related, but distinct
constructs. While VHB-JOURQUAL2 explicitly 7.1 Discussion and Implications
focuses on the scientific quality of a journal, ISI This article reports the results of VHB-JOUR-
Impact Factors are an established measure which QUAL2, a survey-based ranking of 666 business-
reflects the degree to which a journal’s articles are administration journals, and details the underlying
read and actively cited by researchers. Since high- methodology. In addition to presenting the results
quality articles are on average more likely to be cited for the different journals, we provide empirical evi-
by scholars than low-quality ones (e.g., Hult, Rei- dence for the ranking’s reliability and validity. Thus,
mann, and Schilke 2009), a significant correlation we have confidence that VHB-JOURQUAL2 is a
between the two rankings can be expected. How- sound instrument to evaluate the journal-publishing
ever, due to the conceptual differences between the achievements of business researchers. As such, we
two constructs, the correlation between VHB- believe that the major contribution of this ranking is
JOURQUAL2 and the ISI Impact Factors should be its ability to reduce the level of arbitrariness and the
weaker than the correlation between the two ver- importance of non-performance-related network
sions of VHB-JOURQUAL. We collected the impact characteristics (such as “academic provenance”)
factors from the ISI Journal Citation Report Edition from key decisions made at universities – some-
2008 (Thomson Reuters 2009) for the disciplines thing which will benefit both universities and good
business, business/finance, and management. Data scholars.
was available for 137 journals listed in VHB-JOUR- As its predecessor, VHB-JOURQUAL2 carries the
QUAL2. We find that the correlation between VHB- potential to stimulate business researchers in Ger-
201
many, Austria, and Switzerland to compete with VHB-JOURQUAL results and academic-journal use
colleagues from around the world for publication by German managers with a PhD. In addition to
space in leading international journals, which are different journal evaluations, powerful measure-
highlighted in this ranking. By doing this, VHB- ment tools for books, teaching, or university man-
JOURQUAL2 might further raise the level of global agement achievements would be valuable to avoid
competitiveness of the German-speaking business- the threat of one-dimensional university professors
administration community, a trend which we al- (Frey 2007).
ready see as a result of the existence of VHB- However, VHB-JOURQUAL should not be blamed
JOURQUAL1 (Homburg 2008). Furthermore, we for its occasional misuse. It undisputedly covers a
hope that the ranking will also help to make schol- key facet of scholars’ professional performance by
ars’ intellectual achievements much easier to com- providing a reliable and valid estimate of the scien-
municate to colleagues, department heads, deans, tific quality of a business researcher’s journal arti-
and rectors, a precondition for getting adequate cles. It should be treated as such, no more, but also
rewards for such achievements. no less.
Nevertheless, we believe that the results reported
here have to be treated with great care. We have 7.2 Future Research Perspectives
ambiguous feelings when we read job postings for While the current state of VHB-JOURQUAL pro-
full professorships which say that the „scientific vides an established tool for research-performance
performance is mainly evaluated by number and evaluation, it also raises questions which should be
quality of scientific publications in international considered as opportunities for future research.
journals according to the VHB-JOURQUAL Rank- Regarding the VHB-JOURQUAL methodology, it is
ing” (like the University of Siegen in 2008, own obvious that some elements are based on pragmatic
translation). Although this indicates that VHB- considerations and might be considered arbitrary, at
JOURQUAL indeed influences the community (and least to a certain extent. So we encourage future
that we have reached an objective we had when we research to identify more theoretically and/or em-
once initiated it), we see the danger that the impor- pirically justifiable approaches for the following
tance of the VHB-JOURQUAL ranking might be aspects of VHB-JOURQUAL and compare their
carried to excess. The scientific performance – not results with the current ranking:
to say the overall performance – of an academic Definition and labeling of rating categories: In-
must not be solely judged on the basis of a single stead of measuring quality on a non-labeled 10-
criterion, that is, a scholar’s top journal publications point scale and assigning the categories ex-post, the
according to VHB-JOURQUAL. As Albers (2009: respondent might be asked to use the category la-
361) states, “we should be aware that any ranking bels themselves. While this was not possible in the
can only provide a small piece of the overall per- first edition of the ranking (and perhaps might have
formance picture”. Business researchers have to be raised substantial problems even when collecting
careful not to over-emphasize the part of the picture data for the second edition), the category labels are
which is measurable by ratings and rankings today, now widely established among German-speaking
since the result would be counterproductive for the business scholars. Alternatively, an empirical ap-
whole profession (Adler and Harzing 2009). As a proach using empirical distributions might be cho-
consequence, we see a strong need for additional sen to assign rating categories, which reduces the
rankings of scholarly performances. Alternative danger that journals fall directly below the threshold
ratings that measure business researchers’ contribu- between two categories.
tions in journal articles might use VHB-JOURQUAL Selection, weighting, and composition of indicators
as a comprehensive and powerful source for inte- for the expertise factor: Regarding respondents’
grating survey-based and citation-based approaches expertise, two relevant questions refer to the dimen-
into hybrid rankings; other rankings might want to sions of expertise and their composition: Should
emphasize a journal’s reputation or its importance other factors than those currently represented by
for knowledge transfer. The discrepancy between the expertise construct be considered when measur-
scientific quality and relevance for business managing expertise? And is the current multiplicative
ers has been shown by Oesterle (2006), who re- composition optimal – and how would a different
ported a significant negative correlation between combination of expert dimensions affect the results?
202
However, the current results show that the impact nals more positively than researchers from other
of the expertise factor should not be overrated, as business areas.
expertise-weighted results and unweighted results It is inevitable that the need for justification and
do not differ substantially for most journals. adequate foundation of a journal ranking increases
Weighting of article and review quality: The cur- with its importance. Thus, we see the success of
rent version of VHB-JOURQUAL posits that article VHB-JOURQUAL as an obligation for its improve-
and review quality are of equal importance for con- ment. However, the potential trade-off between
structing the overall quality score of a journal (with optimization and comparability of different JOUR-
adjustments if only a small number of judgments QUAL editions needs careful considerations.
exists for review quality). An alternative approach
would be to empirically determine the relevance (or Acknowledgments
factor weights) of the two quality dimensions. For Both authors contributed equally to this article. We
example, conjoint measurement approaches can thank the BuR reviewers; the board of the VHB,
support (or reject) our decision for weighting of particularly its former chairman Sönke Albers and
both determinants equal. Also, the weight correc- its current chairman Alfred Wagenhofer, for exten-
tion for the review quality dimension in the case of sive valuable input to our study; Paul Marx for pro-
limited review-related judgments might be ques- gramming the online questionnaire and his help
tioned and potentially improved. Especially the with the data handling; and all participating schol-
potentially strong effect of low numbers of review ars for their investments in terms of time and effort,
quality ratings which differs substantially from the which has been essential for the success of this pro-
usually much higher number of article ratings would ject. We also thank numerous colleagues for provid-
deserve additional thought; maybe it would be ad- ing informational and motivational support. Last
vantageous to treat review assessments as outliers but not least, Uschi Hansen mentored our initial
in such a case. At the same time, theoretical or em- idea for this ranking several years ago – thank you!
pirical arguments would be valuable to demonstrate
Web-Appendix 1:
the superiority of alternative approaches.
List of all Journals Rated in VHB-JOURQUAL2 in
Minimum number of article-quality evaluations:
Alphabetical Order
While the current version of VHB-JOURQUAL
considers a minimum number of 10 ratings as the Web-Appendix 2:
threshold for the inclusion of a journal, future re- VHB-JOURQUAL2 Ranking of Business Research
search might address whether this number is ade- Journals
quate to guarantee sufficient reliability or if lower
numbers are possible – or a higher number re- Web-Appendix 3:
quired. Changes of JQ Index Values from VHB-JOUR-
In addition, future studies would be welcome which QUAL1 to VHB-JOURQUAL2
provide insight why most of the highest-ranked
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Harzing, Anne-Wil (ed.) (2009): Journal Quality List, 34th ed., 3 schaftslehre in Deutschland, Zeitschrift für Betriebswirtschaft,
July 2009, www.harzing.com/jql.htm (Access Date: 2009-08-28). Special Issue 9/1993: 73–84.
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(2001): Modeling and Managing Student Loyalty: An Approach 2008, http://admin-apps.isiknowledge.com/JCR/JCR (with li-
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zenforschung: Deutsche Universitäten im Zielkonflikt?, in: Tech- sumer policy, sustainability marketing, and business ethics.
nische Universität Bergakademie Freiberg (ed.): Zukunft deut-
scher Universitäten: Standpunkte und Perspektiven, Gabler: Thorsten Hennig-Thurau is Professor of Marketing and
Wiesbaden, 31–60. Media Research at Bauhaus-University of Weimar and Research
Professor in Management at Cass Business School, City University
Hult, G. Tomas M., Martin Reimann, and Oliver Schilke (2009): London. His main research interests are service management,
Worldwide Faculty Perceptions of Marketing Journals: Rankings, media management, and customer relationship management.
204
Cost Sharing under Uncertainty: An Algorithmic Approach to
Cooperative Interval-Valued Games
Alf Kimms, Julia Drechsel
Cost Sharing under Uncertainty: An

Algorithmic Approach to Cooperative
Interval-Valued Games
Alf Kimms, Mercator School of Management, University of Duisburg-Essen, Germany, E-mail: alf.kimms@uni-due.de
Julia Drechsel, Mercator School of Management, University of Duisburg-Essen, Germany, E-mail: julia.drechsel@uni-due.de
Abstract
Recently, Branzei, Dimitrov, and Tijs (2003) introduced cooperative interval-valued games. Among
other insights, the notion of an interval core has been coined and proposed as a solution concept for
interval-valued games. In this paper we will present a general mathematical programming algorithm
which can be applied to find an element in the interval core. As an example, we discuss lot sizing
with uncertain demand to provide an application for interval-valued games and to demonstrate how
interval core elements can be computed. Also, we reveal that pitfalls exist if interval core elements are
computed in a straightforward manner by considering the interval borders separately.
Keywords: cooperative game theory, core, interval-valued games, mathematical programming,

lot-sizing
Manuscript received June 22, 2009, accepted by Karl Inderfurth (Operations î Information
Systems) November 17, 2009.
1 A Primer on Cooperative
X
i ‹ cäSå for all S ⊂ N; S 6ã ∅é:
Interval-Valued Games i∈S
Branzei, Dimitrov, and Tijs (2003) have studied
In the classical literature a cooperative game is bankruptcy situations and introduced cooperative
defined by a pair äN; cå where N ã è1; : : : ; né is an interval-valued games in this context. Interval-
index set of players and c ñ 2N → IR is a charac- valued games can be seen as a means to handle
teristic function which assigns to every coalition uncertain outcomes. A theory of interval-valued
S ∈ 2N a value cäSå (with cä∅å ã 0). Let us assume games was developed by Alparslan-Gök, Branzei,
that c is a cost function (``the lower the better''), and Tijs (2008a, 2008b) as well as by Alparslan-
but in settings where c is a benefit function the fol- Gök, Miquel, and Tijs (2009). See also Branzei,
lowing material can be straightforwardly adapted. Tijs, and Alparslan-Gök (2008) for a survey. A
A solution of the cooperative game (with transfer- cooperative interval-valued game is defined by a
able utilities) is a distribution of the cost shares, pair äN; cI å where N is an index set of players as
i.e. a cost allocation i ∈ IR for every player i ∈ N. before, and cI ñ 2N → IäIRå is a characteristic (cost)
One of the most prominent solution concepts was function which assigns to every coalition S ∈ 2N a
introduced by Gillies (1959) and is known as the closed interval cI äSå ã æcI äSåò c̄I äSåç (with cI ä∅å ã
core. The concept of the core defines cost alloca- æ0ò 0ç) where IäIRå is the set of all closed intervals in
tions which are efficient and coalitionally rational IR. It is easy to see that classical cooperative games
(stable). Formally, the set of core allocations can are a special case of cooperative interval-valued
be specified as follows: games where cI äSå ã c̄I äSå for all coalitions S ⊆
N. It should also be remarked that vector-valued
ä1å CäN; cå ã è ∈ IRn |
X
i ã cäNå and games (see Fernandez, Hinojosa, and Puerto 2002)
i∈N
are somewhat different to interval-valued games.
To define a core variant that applies to interval-
206
valued games, the following notation turns out to of interval-valued games and the interval core. An
be helpful. The sum of two intervals I ã æIò Īç and interval-valued game can be specified by a triple
J ã æJò J̄ç is defined to be I à J ã æI à Jò Ī à J̄ç. äN; cI ; c̄I å where the notation has the same meaning
The interval I is called weakly better than interval as above. Two sets of extreme cost allocations can
J (I J or J I), iff I ‹ J and Ī ‹ J̄. then be defined as
Alparslan-Gök, Branzei, and Tijs (2008a) define
the interval core of a cooperative interval-valued
game as follows: ä3å C I äN; cI å
ä2å C I äN; cI å ã è ∈ IRn | ã cI äNå and
X
i
ã èäI1 ; : : : ; In å ∈ IäIRån | Ii ã cI äNå i∈N

X
‹ cI äSå for all S ⊂ N; S 6ã ∅é

X
i∈N i
Ii cI äSå for all S ⊂ N; S 6ã ∅é: i∈S

X
and
i∈S and
These authors, however, do not provide an algo- ä4å C̄ I äN; c̄I å
rithm to compute a core element of interval-valued
ã è ∈ IRn | ã c̄I äNå and
X
games. i
i∈N
Now we have introduced the theoretical back-
‹ c̄I äSå for all S ⊂ N; S 6ã ∅é:
X
ground that is necessary for understanding our i
approach. Our contribution is an algorithm which i∈S
can be used to compute an interval core element.
Besides this, we discuss pitfalls when implement-
If we choose äI 1 ; : : : ; I n å ∈ C I äN; cå and äĪ1 ; : : : ;
ing a more simple procedure based on an already
Īn å ∈ C̄ I äN; cå then it follows immediately from
known algorithm for core element computation
the definitions of cI , Ii and C I äN; cI å that äæI 1 ò Ī1 ç;
in cases of independent determination of interval
: : : ; æI n ò Īn çå ∈ C I äN; cI å --- the reverse is true as
borders. The rest of the paper is structured as fol-
well. C I äN; cI å and C̄ I äN; c̄I å define the cores of the
lows. In Section 2 we specify the straightforward
cooperative games äN; cI å and äN; c̄I å, respectively.
procedure with separate interval border determi-
This is along the lines of Remark 3.1 in the paper
nation that aims to find an element in the interval
by Alparslan-Gök, Branzei, and Tijs (2008a), who
core (or detects that the interval core is empty).
state that the time complexity of algorithms for the
Section 3 introduces a lot-sizing problem with un-
computation of elements of the interval core is the
certain demand as an example for interval-valued
same as the time complexity of related algorithms
games. Section 4 reveals that some odd situations
for computing elements of the core of a traditional
may occur if the straightforward approach is ap-
game. This suggests that an element in the interval
plied and left and right interval borders are used
core can be easily computed if one can compute an
independently to compute interval core elements.
element in the core.
Thus, a modification of the proposed algorithm
The procedure of Drechsel and Kimms (2007) can
will be presented to avoid such problems. A com-
be applied to find core elements for the games
putational study in Section 5 demonstrates that
äN; cI å and äN; c̄I å separately. To be self-contained,
this modified algorithm is necessary in many cases
this procedure will be reviewed briefly. To ease the
and can indeed be successfully applied. Concluding
notation, assume that a core element of a game
remarks in Section 6 finish the paper.
äN; cå shall be computed. The definition of the core
specifies a constraint-satisfaction problem where
the number of constraints is in the order of 2n .
2 Computing Interval Core Hence, Drechsel and Kimms (2007) suggested to
Elements run a row-generation procedure.
To compute an element in the interval core, we The master problem is a linear program of the
will make use of a procedure by Drechsel and following form where S is a (small) subset of
Kimms (2007) which computes a core element. coalitions for which the core defining inequality
This procedure is employed as a subroutine. To is explicitly taken into account.
see how this works we start with a reformulation
207
Master problem MPäSå: 3 An Application:

Lot-Sizing with Uncertain
ä5å min v
Demand
s.t.
X 3.1 The Wagner-Whitin Problem
ä6å i ã cäNå
The starting point of our example is a well-known
i∈N
X lot-sizing problem which was introduced by Wag-
ä7å i á v ‹ cäSå S∈S ner and Whitin (1958) and which can be described
i∈S
as follows: A single decision maker has to make
order decisions for a single item. Given a planning
ä8å i ∈ IR i∈N horizon of T time periods, a demand dt in period
ä9å vŒ0 t has to be met without backlogging and without
shortages. In order to meet the demand in period t
The iterative row-generation procedure can be out-
one may place an order in t or before. If the order
lined as follows:
is placed before, the ordered items must be stored
1. Define a small initial set S, e.g. S ã èè1é; : : : ; in inventory. If a fixed cost st is incurred whenever
ènéé. an order is placed in period t and a unit holding
cost ht is charged for every item in stock at the
2. Solve the linear program MPäSå optimally. end of period t, then we face the classical trade-off
between saving fixed costs versus saving holding
3. If v > 0 then stop. The game instance has an
costs --- a lot-sizing problem occurs. In addition to
empty core.
that a unit ordering cost pt may be incurred for
4. Otherwise, find a coalition S0 6∈ S (S0 6ã ∅) each item being ordered. The decision to be made
such that i∈S0 i > cäS0 å. Since S0 may not be
P is qt , the quantity to be ordered in period t. De-
unique, we suggest looking for a coalition S0 pending on the order quantities and the demand
that violates the core defining inequality most we have Invt units of the item in stock at the end of
(i.e. i∈S0 i á cäS0 å is maximized) --- subprob-
P a period t (Inv0 is the initial stock --- a given value).
ˆ å.
lem SPä To formulate a mixed-integer program a further
decision variable xt may be used to indicate if an
ˆ å
5. If no such coalition S0 can be found (SPä order is placed in period t or not, and a parameter
has a non-positive optimum objective function M which represents a large number may be used
value) then stop. The current values i define for technical reasons, as we see below:
a core allocation. T
X
ä10å min äst xt à ht Invt à pt qt å
6. Otherwise, update S ã S ∪ èS0 é. Return to Step tã1
2. s.t.
The subproblem to be solved in Step 4 of the ä11å Invt ã Invtá1 à qt á dt t ã 1; : : : ; T
algorithm is the only problem-specific part in this ä12å qt ‹ Mxt t ã 1; : : : ; T
approach. In a subsequent section we will provide ä13å qt ; Invt Œ 0 t ã 1; : : : ; T
the details of it by means of a specific application.
ä14å xt ∈ è0; 1é t ã 1; : : : ; T
It should be noted that this procedure finds a
rather arbitrary element in the core (if the core
is not empty). Drechsel and Kimms (2007) have The objective (10) is to minimize the sum of fixed
discussed several modifications to the procedure and quantity-dependent ordering costs and hold-
which yield core elements that can be considered ing costs. The inventory balance (11) states that
as more fair than an arbitrary core element. For the at the end of a period we have in stock what was
sake of simplicity, we will not repeat these modifi- there at the beginning of the period plus what was
cations here, but we would like to emphasize that ordered in that period minus period demand. If
these modifications can be straightforwardly inte- the order quantity is positive in period t then the
grated into the context of interval-valued games if indicator variable xt must be set to one as stated
desired. by (12). The domain of the decision variables is
208
specified in (13) and (14). Note that due to Invt Œ 0 and less total computation time than other selec-
all demand must be fulfilled right on time. tion rules.
It should be emphasized that the proposed row-
3.2 A Cooperative Lot-Sizing Problem generation approach to compute a core element
Cooperative versions of the Wagner-Whitin-related is very general and can be applied whenever the
problem where several players (the set N) may act characteristic function is implicitly given, i.e. char-
together have been studied by Chen and Zhang acteristic function values result from an optimiza-
(2007), Drechsel and Kimms (2007), Guardiola, tion problem. Drechsel and Kimms (2008), for
Meca, and Puerto (2006), and Van den Heuvel, instance, have shown that for much more complex
Borm, and Hamers (2007). A model formulation lot-sizing situations with capacity constraints and
closely related to the single-player model shown transshipments among the players basically the
above can be given, simply by replacing the de- very same approach is applicable. Only the sub-
mand value dt with the total demand of all players problem needs to be reformulated, because this is
dt äNå ã i∈N dit where dit denotes the demand
P the problem-specific part of the algorithm. How to
of player i in period t. The characteristic function formulate such subproblems for different applica-
value cäSå for S ⊆ N is defined to be the optimum tions cannot be specified in general, but it requires
objective function value (10) using dt äSå as the no more skills than formulating the underlying
demand in (11). optimization problem as a mathematical program.
As shown by Drechsel and Kimms (2007) one can As a side remark, it should be emphasized that
apply the row-generation procedure for finding a many operations management planning problems
core element in the game äN; cå to handle instances have to be solved repeatedly with a rolling hori-
with up to 150 players. The subproblem that has to zon. Lot sizing is one example. Our example is
be solved in Step 4 of the procedure is the following therefore stylized by ignoring (uncertain demand)
optimization problem. data beyond the period T and we admit that our
focus is confined to interval-valued data. We also
ˆ å:
Subproblem SPä do not consider the possibility to condition future
lot-sizing decisions on realized past demands like
in stochastic dynamic optimization procedures. To
!
X
ä15å max áo à i zi the best of our knowledge, such simplifying as-
i∈N
sumptions are also made by all authors who have
s.t.
X considered cost sharing based on multi-period op-
ä16å Invt ã Invtá1 à qt á dit zi t ã 1; : : : ; T timization problems. Hence, one should be aware
i∈N of the fact that dynamic settings where uncertainty
ä17å qt ‹ Mxt t ã 1; : : : ; T is not revealed at once and the consequences on
T
X cost sharing have not been studied yet.
ä18å oã äst xt à ht Invt à pt qt å
tã1
ä19å qt ; Invt Œ 0 t ã 1; : : : ; T 3.3 Cooperative Lot-Sizing with
ä20å xt ∈ è0; 1é t ã 1; : : : ; T Uncertain Demand
ä21å zi ∈ è0; 1é i∈N A source for uncertainty in a lot-sizing problem
ä22å oŒ0 is the demand of a player. Let us assume that for
each player i the demand in a certain period is
Note that a coalition S0 to be considered in the specified by an interval ædit ò d̄it ç instead of a single
master problem is found if the optimum objective number dit . Consequently, the total demand dt äNå
function value of the subproblem is positive. S0 is in a period t falls into the interval ædt äNåò d̄t äNåç ã
defined by the values of the zi variables (zi ã 1 indi- æ i∈N dit ò i∈N d̄it ç. From these interval borders
P P
cates i ∈ S0 ) and cäS0 å ã o. Note also that Drechsel we can derive characteristic functions cI and c̄I
and Kimms (2007) have tested other subproblem by inserting dt äSå and d̄t äSå, respectively, into (11)
formulations, and that selecting a coalition S0 by for S ⊆ N. With this in mind, we can compute
means of subproblem SPä ˆ å turned out to require an element in the interval core as described in a
fewer iterations of the row-generation procedure previous section.
209
4 Phenomena of Interval Cores value need not be in the core if the game is not
concave (see Shapley 1971).
4.1 ``Pay Less for More''
As a consequence of the phenomenon we may
As some researchers have pointed out already (see,
observe intervals Ii ã æI i ò Īi ç with I i > Īi . This,
e.g., Young 1985), core allocations are not mono-
by the way, is not valid for lot-sizing problems
tonic. This effect causes some problems in the
only, but to all kinds of applications, because the
context of interval cores as we will show by means
non-monotonicity of core allocations is problem
of an example. Consider an example with n ã 3 and
independent.
T ã 6. Let the demand be dit ã 10 and d̄it ã 15,
respectively, for all i and t. Suppose the following
cost data: holding cost coefficients ht ã 5 for all 4.2 Pitfalls
t, setup cost coefficients st ã 100 for all t, and It seems to be plausible to interpret an element
production cost coefficients pt ã 1 for all t. The from the interval core as a promise to the players
characteristic functions cI and c̄I are provided in such that if äI1 ; : : : ; In å ∈ C I äN; cI å is chosen in
Table 1. advance, an ex post (i.e. after the uncertainty has
been resolved) core cost allocation with i ∈ Ii
Table 1: The Characteristic Functions of can be found, because the two extreme scenarios
the Interval-Valued Game have been considered to define the interval core.
S ∅ è1é è2é è3é Hence, the problem of finding a core element ex
I
c äSå 0 510 510 510 post seems to be of the following form:
c̄I äSå 0 615 615 615
ä23å C|äI1 ;:::;In å äN; cå
S è1; 2é è1; 3é è2; 3é è1; 2; 3é
ã è ∈ IRn |
X X
cI äSå 720 720 720 780 i ã cäNå and i ‹
i∈N i∈S
c̄I äSå 780 780 780 870
cäSå for all S ⊂ N; S 6ã ∅ and i ∈ Ii é:
Apparently, we have c̄I äSå Œ cI äSå in this exam-

Note that this interpretation is meaningful iff the
ple. This, by the way, is always true for lot-sizing
underlying (ex post) characteristic function c is
problems (with non-negative cost data), because
monotone over the interval defined by cI and co-
additional demand cannot decrease the (total)
incides with cI and c̄I at the interval borders. This
cost to fulfill the demand. Since the character-
interpretation, however, is wrong as we will show
istic functions c̄I and cI define core cost allo-
be means of the example from Subsection 4.1.
cations i äc̄I å and i äcI å, respectively, we would
Recall that in the example the following intervals
expect that i äc̄I å Œ i äcI å is true for all players
were computed: I1 ã æ210ò 165ç, I2 ã æ510ò 615ç,
i. In other words, we would expect that increas-
and I3 ã æ60; 90ç. Assume that ex post the follow-
ing the demand of a player does not lead to a
ing demand data can be observed: d1t ã 15 for all
lower cost assignment, i.e. the principle of mono-
t, d2t ã 10 for all t, and d3t ã 15 for all t. As we
tonicity holds. But this is not true in general. For
can see from Table 1, this leads to cäè1éå ã 615,
example, äcI å ã ä210; 510; 60å is a core cost al-
cäè2éå ã 510, and cäè3éå ã 615. The cost of the
location for the game äN; cI å. On the other hand,
grand coalition is cäè1; 2; 3éå ã 840. The defini-
äc̄I å ã ä165; 615; 90å is a core cost allocation for
tion of C|äI1 ;:::;In å äN; cå requires 2 ã 510. Hence,
the game äN; c̄I å. As we can see, a lower cost share
1 à 3 ã 840 á 510 ã 330. But this is not possi-
would be assigned to player 1 (165 instead of 210)
ble, because of 1 ‹ 210 and 3 ‹ 90. Hence, the
although his demand increased from 10 to 15 in
described approach leads to unreasonable results.
every period.
Young (1985) has discussed the issue of mono-
tonicity and showed that the Shapley value is 4.3 A Proper Definition of
the unique symmetric allocation procedure that Interval-Valued Cores
is (strongly) monotonic. But using the Shapley To avoid such problems with interval cores, we
value as an interval border is not consistent with need proper intervals, i.e. we need to compute in-
the idea of the interval core, because the Shapley terval borders i äcI å and i äc̄I å such that i äcI å ‹
210
I
i äc̄ å
comes out. Such a result can be reached 6. Return to Step 2.
be computing the values i äcI å and i äc̄I å simul-
taneously by solving a modified master problem Recall the numerical example from Section 4.1. The
MP I äS; S̄å: presented algorithm yields the following allocation
in the interval-valued core: äcI å ã ä210; 60; 510å
ä24å min v à v̄ and äcI å ã ä210; 90; 570å.
s.t.
I
ã cI äNå 5 Computational Study
X
ä25å i äc å
i∈N
To test the proposed algorithm from Section 4.3
we have implemented it with AMPL/CPLEX ver-
I
á v ‹ cI äSå
X
ä26å i äc å S∈S sion 10.0.0 on an Intel Celeron PC with 2 GHz.
i∈S We used random instances taken from Test Bed 1
I
ã c̄I äNå in Drechsel and Kimms (2007) to define the game
X
ä27å i äc̄ å
i∈N äN; cI å: random integers were drawn with uniform
I distribution from certain intervals (dit ∈ æ0; 20ç,
á v̄ ‹ c̄I äSå
X
ä28å i äc̄ å S ∈ S̄
i∈S
st ∈ æ0; 200ç, ht ∈ æ0; 10ç, and pt ∈ æ0; 15ç),
I I T ã 6, and n ∈ è5; 10; 15; 20; 25; 30é. For each
ä29å i äc å ‹ i äc̄ å i∈N
number of players, a total of 15 random instances
I I
ä30å i äc å; i äc̄ å ∈ IR i∈N was constructed which gives a total of 6 ¦ 15 ã 90
ä31å v; v̄ Œ 0 instances. These instances are provided as an elec-
tronic companion to this paper as part of the online
This master problem can be solved by the iterative version.1 The files are in ASCII format and can be
row-generation algorithm as follows: used by the commercial software CPLEX. The game
1. Define small initial sets S and S̄, e.g. S ã S̄ ã äN; c̄I å was constructed by copying the parameter
èè1é; : : : ; ènéé. values from the corresponding game äN; cI å. Only
demand values were chosen differently in the fol-
2. Solve the linear program MP I äS; S̄å optimally. lowing way. Suppose dit is the chosen demand in
the corresponding game äN; cI å. The demand dit
3. If v à v̄ > 0 then stop. The game instance has for the game äN; c̄I å is a random integer drawn
an empty interval core. with uniform distribution from ædit ; 20ç.
4. Otherwise: The average number of iterations (as well as the
minimum/maximum number of iterations over 15
(a) Find a coalition S0 6∈ S (S0 6ã ∅) such that random instances) for the algorithm can be seen
I I 0 0
in Table 2. The table presents the results regarding
i∈S0 i äc å > c äS å. Since S may not be
P
unique, we suggest looking for a coalition number of iterations for the two subproblems SP ˆ
S0 that violates the core defining inequality ¯ˆ
and SP that are part of Step 4 of the algorithm.
most (i.e. i∈S0 i äcI åácI äS0 å is maximized) The numbers differ for most of the instances --- of
P
--- subproblem SPä ˆ äcI åå. Update S ã S ∪ course, the bigger number also denotes the total
èS0 é, if such a coalition S0 was found. number of needed iterations. Note that in the worst
case the number of iterations could have been in
(b) Find a coalition S̄0 6∈ S̄ (S̄0 6ã ∅) such that
I I the order of 2n which practically never happens
i∈S̄0 i äc̄ å > c̄ äS̄ å. Since S̄ may not be
0 0
P
from our experience. The maximum computational
unique, we suggest looking for a coalition
time (measured in CPU-seconds) to determine an
S̄0 that violates the core defining inequality
element in the interval-valued core was less than a
most (i.e. i∈S̄0 i äc̄I åác̄I äS̄0 å is maximized)
P
¯ minute for all instances n ‹ 20 and not more than
--- subproblem SPä ˆ äc̄I åå. Update S̄ ã S̄ ∪
five minutes for the larger instances.
èS̄0 é, if such a coalition S̄0 was found. To compare the computational burden with the
straightforward approach from Section 2 --- the
5. If neither S0 nor S̄0 can be found then stop.
The current values i äcI å and i äc̄I å define an
interval core element. 1 See www.business-research.org.
211
Table 2: The Number of Iterations 6 Conclusions

Required to Find an Interval Core Element
In recent years a new class of cooperative games,
n 5 10 15 namely interval-valued games, has been invented
ˆ 4.87 20.47 146.27 to handle situations with an uncertain outcome.
SP
(4/7) (14/40) (25/293) The range of the outcome is specified by a closed
4.73 21.27 146.27 interval. A theory for interval-valued games has
¯
ˆ
SP been developed and solution concepts from classi-
(4/6) (12/60) (16/293)
cal cooperative game theory have been adapted to
n 20 25 30 this new setting. The core which is one of the most
ˆ 406.73 1044.60 1043.53 prominent solution concepts in classical coopera-
SP
(110/1036) (165/2364) (30/3946) tive game theory evolved to become the interval
¯ 403.80 1039.80 1054.53 core.
ˆ
SP
(110/1037) (165/2360) ( 30/3941) Remark 3.1 in a paper by Alparslan-Gök, Branzei,
and Tijs (2008a) states that the time complexity
of algorithms for computing elements of interval
one which may lead to the problems discussed in cores equals the time complexity of corresponding
Section 4.2 --- we also provide the average num- algorithms for computing core elements in a tradi-
ber of iterations of the straightforward approach tional game. This statement suggests to compute
in Table 3. As one can see the straightforward an element in the interval core by making use of a
approach terminates much faster on average (the procedure to find a core element. However, such an
run-time effort was less than one minute for each algorithm has not been provided by these authors.
instance). Hence it might be worthwhile to run Our contribution is to provide a general mathemat-
the straightforward approach first and test if the ical programming approach which can be used to
computed interval borders indeed show the odd compute an element in the interval core by making
behaviour discussed in Section 4.2. If this is not use of a procedure to find core elements proposed
the case, then we have found an interval core ele- by Drechsel and Kimms (2007) as a subroutine.
ment. Otherwise, we need to run the algorithm The approach is general, because the character-
from Section 4.3 which is necessary in most cases istic function values which define the lower and
as we can see in Table 4. Table 4 shows the number upper bounds of the outcome interval may result
of instances in the test bed (a total of 15 instances from solving general optimization problems. We
per value of n) where the algorithm from Section 2 have demonstrated that interval-valued games are
yields an improper interval for at least one player. a consequence of uncertain parameter values of
the optimization problem where the uncertainty
Table 3: The Average Number of Iterations of these parameter values is specified by inter-
Required by the Straightforward Approach vals. With the aid of a lot-sizing example we have
from Section 2 demonstrated the applicability of our approach by
n 5 10 15 means of a small computational study.
I
äN; c å 4.0 10.5 15.3 In addition to providing an algorithm we have
äN; c̄I å 4.0 9.3 14.0 also contributed to the discussion of interval cores
by pointing to a pitfall. A phenomenon known as
n 20 25 30
non-monotonicity exists, i.e. players may be better
äN; cI å 61.8 29.5 50.0 off in a cooperation, if their standalone situation
äN; c̄I å 19.0 24.4 29.0 is getting worse (in terms of objective function
values). In the lot-sizing example, for instance,
we have demonstrated that a player with more
Table 4: The Number of Instances where demand than before (increasing costs) may receive
the Algorithm from Section 2 Yields a lower cost share than before. A straightforward
Improper Intervals interpretation of an interval core element in the
n 5 10 15 20 25 30 sense of cost limits that will be assigned to certain
14 13 12 4 11 11 players is not possible if the interval core element is
212
not selected with care. To get out of this problem, Biographies

we proposed a modified algorithm which yields
Alf Kimms studied computer science and busi-
an element from the interval core without such
ness administration at the University of Kiel. He
deficits.
received his Ph.D. in business administration from
the University of Kiel in 1996 with a thesis on
7 Acknowledgement multi-level lot sizing and scheduling under the
supervision of Prof. Dr. Andreas Drexl, and he
We thank Rodica Branzei for her comments on an
earned his postdoctoral lecturer qualification from
early version of this paper.
the same university in 2001 with a thesis on fi-
nancial objectives for managing projects. In 2001
References he became full professor at the Technical Univer-
sity of Freiberg and held the chair of production
Alparslan-Gök, Sirma Z., Rodica Branzei, and Stef H. Tijs
(2008a): Cores and Stable Sets for Interval-Valued Games,
and logistics. In 2006 he was appointed as a full
Working Paper, SSRN. professor at the University of Duisburg-Essen to
Alparslan-Gök, Sirma Z., Rodica Branzei, and Stef H. Tijs hold the chair of logistics and traffic management.
(2008b): Convex Interval Games, Working Paper, SSRN. Professor Kimms has received several best-paper
Alparslan-Gök, Sirma Z., Sylvia Miquel, and Stef H. Tijs (2009): awards.
Cooperation under Interval Uncertainty, Mathematical Meth-
ods of Operation Research, 69 (1): 99-109. Julia Drechsel studied industrial engineering at
Branzei, Rodica, Dinko Dimitrov, and Stef H. Tijs (2003): the Technical University of Freiberg. She received
Shapley-like Values for Interval Bankruptcy Games, Economics several prizes for her diploma thesis on task force
Bulletin, 3 (9): 1-8.
deployment. From 2005 to 2009 she was a Ph.D.
Branzei, Rodica, Stef H. Tijs, and Sirma Z. Alparslan-Gök student under the supervision of Professor Kimms
(2008): Cooperative Interval Games: A Survey, Working Paper,
http://www.3.iam.metu.edu.tr/iam/images/8/80/survey.pdf working at the University of Duisburg-Essen. Her
(Access Date: 2009-12-03). research focus is on Supply Chain Management.
Chen, Xin and Jiawei Zhang (2007): Duality Approches to Since 2009 she has been working for the company
Economic Lot-Sizing Games, Working Paper, SSRN. Bayer Technology Services GmbH.
Drechsel, Julia and Alf Kimms (2007): Computing Core Alloca-
tions in Cooperative Games with an Application to Procurement
Problems, Working Paper, University of Duisburg-Essen.
Drechsel, Julia and Alf Kimms (2008): Solutions and Fair Cost
Allocations for Cooperative Lot Sizing with Transshipments
and Scarce Capacities, Working Paper, University of Duisburg-
Essen.
Fernandez, Francisco R. , Miguel A. Hinojosa, and Justo Puerto
(2002), Core Solutions in Vector-Valued Games, Journal of
Optimization Theory and Applications, 112 (2): 331-360.
Gillies, Donald B. (1959): Solutions to General Non-Zero-Sum
Games, in: Albert W. Tucker and R. Duncan Luce (eds.): Contri-
butions to the Theory of Games 4, Princeton University Press:
Princeton, 47-85.
Guardiola, Luis A. , Ana Meca, and Justo Puerto (2006): Co-
ordination in Periodic Review Inventory Situations, Working
Paper, Universidad Miguel Hernández de Elche.
Shapley, Lloyd S. (1971): Cores of Convex Games, International
Journal of Game Theory, 1 (1): 11-26.
Van den Heuvel, Wilco, Peter Borm, and Herbert Hamers
(2007): Economic Lot-Sizing Games, European Journal of
Operational Research, 176 (2): 1117-1130.
Wagner, Harvey M. and Thomson M. Whitin (1958): Dynamic
Version of the Economic Lot Size Model, Management Science,
5 (1): 89-96.
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Games, International Journal of Game Theory, 14 (2): 65-72.
213
The Role of Ambidexterity in Marketing Strategy Implementation:
Resolving the Exploration-Exploitation Dilemma
Christiane Prange, Bodo B. Schlegelmilch
The Role of Ambidexterity in Marketing

Strategy Implementation: Resolving the
Exploration-Exploitation Dilemma
Christiane Prange, EM Lyon Business School, France, E-Mail: prange@em-lyon.com
Bodo B. Schlegelmilch, WU Wien, Austria, and Leeds University Business School, UK, E-Mail: bodo.schlegelmilch@wu-wien.ac.at
Abstract
Formulating consistent marketing strategies is a difficult task, but successfully implementing them is even
more challenging. This is even more pertinent as marketing strategies quite often incorporate inherent
conflicts between major breakthroughs and consolidation. Consequently, marketers need to balance ex-
ploratory and exploitative strategies. However, the literature lacks concrete insights for marketing man-
agers as to how exploratory and exploitative strategies can be best combined. This paper addresses this is-
sue by introducing a framework of multiple types of ambidexterity. Based on qualitative research, tools
and procedures are identified to overcome marketing dilemmas and support strategy implementation by
drawing on ambidextrous designs.
Keywords: marketing dilemmas, marketing strategy implementation, exploration, exploitation, ambidex-

terity
Manuscript received November 19, 2008, accepted by Adamantios Diamantopoulos (Marketing), Novem-
ber 11, 2009.
1 Introduction Despite the growing interest among researchers and

Marketers are faced with a dilemma: they are ex- the pressing need of practitioners, there is a dearth
pected to consolidate their existing business while of research that investigates the implementation of
simultaneously finding new opportunities. They are conflicting marketing strategies. The handful of ex-
torn between exploitation and exploration, or be- isting studies to date has broadly focused on the
tween alignment and innovation. Thus, implement- marketing strategy formulation-implementation
ing the right strategy is often difficult. Business de- link (Bonoma 1984; Crespedes 1991; Walker and
velopment may be eager to sell new products that Rueckert 1987; White, Conand, and Echambadi
have not yet completed the research process. R&D 2003) with only tangential reference to theoretically
may develop new product ideas, but fail to commer- derived implementation guidelines. Consequently,
cialize them (Souder and Chakrabarti 1978; Griffin the literature suffers from several limitations. First,
and Hauser 1996). Firms are market-driven while previous research has either focused on isolated fac-
market-driving firms are more conducive to innova- tors in support of strategy implementation or has
tions (Kumar 1997; Jaworski, Kohli, and Sahay highlighted rather complex frameworks (Li, Guohui,
2000). And as if these tensions were not enough, and Eppler 2008) with holistic studies using simple
marketing managers are also challenged to act lo- categorizations of various factors without theoretical
cally but integrate globally, and to pursue differen- integration (Noble and Mokwa 1999). Second, re-
tiation but obverse low-cost strategies (Ghoshal and search has largely overlooked the various roles of
Bartlett 1994; Porter 1996; Tushman and O'Reilly managers and employees in the strategy implemen-
1996). tation process (Hart and Banbury 1994). This lack of
an organization-wide perspective is noteworthy
215
given the importance of functional interactions for “Chief Marketing Officer’s Dilemma” (McEwen
implementation success (Chimhanzi and Morgan 2008) is further reinforced by striving for customer
2005). Finally, the majority of implementation stud- engagement, which depends on both communicat-
ies has acknowledged that the changing content of ing and delivering the brand promise. While the
strategy holds few clear implications and has conse- first half of the input factors (communicating brand
quently emphasized the necessity for managers to promise via advertising and marketing) is easily
continuously redefine tasks and communicate them controlled, the second half depends on employee
throughout the organization (Shashittal and Wile- engagement (delivering upon brand promise via
mon 1996). Notwithstanding the quest for ongoing employees and operations). Combining both is
adaptability of both strategy formulation and im- likely to increase profitability (McEwen 2008).
plementation processes, studies that focus on in- These examples underscore the existence of con-
trinsic tradeoffs in marketing strategies are rare. flicting marketing strategies which poses a dilemma
These limitations present the starting point for our for marketing managers and require a balance use
research and can be best illustrated with reference of tools, procedures, resource endowments, struc-
to the more content-oriented marketing literature tures, and supportive contexts. While the marketing
where tradeoffs abound. For instance, customer sat- literature has provided us with a wealth of sugges-
isfaction has become one of the unquestioned linch- tions as to how single elements in the implementa-
pins to success in marketing (e.g. Gale 1992) and it tion process can be optimized or which frameworks
has been suggested to combine service activities to use, the question of how tradeoffs between differ-
with increasing sales efforts. However, doing so si- ent strategies can be overcome in the implementa-
multaneously is often problematic as customer ser- tion process has been largely ignored. One exception
vice staff feels uncomfortable with the twin role of is the seminal work by Kyriakopoulos and Moorman
selling products while serving the customer (Akşin (2004) and its extension by Menuc and Auh (2008),
and Harker 1999; Evans, Arnold, and Grant 1999). who point to the role of market orientation in inte-
While requests have been formulated to integrate grating ‘marketing exploitation strategies’ and ‘mar-
internal structures, processes, goals and rewards to keting exploration strategies’. The former refers to
properly support the desired role behavior of cus- strategies that primarily involve improving and re-
tomer contact personnel (Schneider and Bowen fining current skills and procedures associated with
1995), fine-grained insight on how this could be existing marketing strategies, including current
done is lacking. segments, positioning, distribution, and other mar-
A related dilemma is the tension in new product de- keting mix strategies. Marketing exploration, on the
velopment: Incremental product improvements other hand, “relates to strategies that primarily in-
typically arise from small changes where return are volve challenging prior approaches to interfacing
certain, risks are low, and where products exhibit with the market, such as a new segmentation, new
little deviation from customers’ current experience. positioning, new products, or new channels” (Kyria-
However, innovating incrementally may blind firms kopoulos and Moorman 2004: 221).
towards technology and product category leaps This research follows the exploration vs. exploita-
(O’Reilly and Tushman 2004). This may lead to tion paradigm and explicitly adopts an implementa-
what Leonard-Barton (1992) calls the “capability- tion focus, which redefines marketing strategy im-
rigidity paradox”. An excessive focus on gradual plementation as the capability to translate intrinsi-
product improvement may imply technological ex- cally conflicting demands into designs and toolsets
haustion in the market in which firms compete for that help to overcome marketing dilemmas. Draw-
developing new products (Lee and Ryu 2002). ing principally on the management literature, we
Eventually, firms need to incorporate both incre- focus on how marketers rely on structural and tem-
mental and radical approaches to new product de- poral solutions to solve implementation problems.
velopment into their strategy. We refer to the notion of ‘ambidexterity’ which
A last example relates to conflicting requirements originally relates to “the power of using two hands
for chief marketing officers who are supposed to alike” (Oxford English Dictionary). The concept has
have creative flair as well as financial know-how first been applied to managerial contradictions by
(Quelch 2005), which is reflected in such different Duncan (1976) and has meanwhile entered various
tasks as marketing controlling, and advertising. The streams of research, like the strategic management
216
literature on alignment versus adaptability (Gibson contrast, ‘exploitation’ describes the refinement and
and Birkinshaw 2004), the operations management extension of existing competencies, technologies,
literature on flexibility versus efficiency (Adler, and paradigms, exhibiting returns that are positive,
Goldoftas, and Levine 1999) or the innovation man- proximate, and predictable. Keeping with the basic
agement literature on radical versus incremental, idea of March, most subsequent studies have fo-
innovation (Tushman and O’Reilly 1994; Danneels cused on the organization or the business unit as the
2002; O’Reilly and Tushman 2004). Strikingly, the respective level of analysis (March 1991; O’Reilly
marketing arena has largely ignored this promising and Tushman 2004, 2007; Lavie and Rosenkopf
stream of research. 2006). However, terms have been used somewhat
Against this backdrop, this paper has three objec- sloppily, invoking a variety of associated concepts to
tives: First, it is among the first to apply the con- convey the nature of exploration and exploitation.
cepts of exploration, exploitation, and ambidexterity For instance, exploitation has been associated with
to the implementation of marketing strategies. Sec- operational efficiency, control, and reliability (Por-
ond, it analyzes different categories for implement- ter 1996; Deming 1981; Juran and Gryna 1988).
ing ambidexterity and suggests how various types Similar confusion exists when exploration is differ-
may be best coordinated. In doing so, it provides entially described as involving innovation, risk tak-
novel insight as previous studies have only very ing, invention, new capability building, etc. (Benner
rarely analyzed different types of ambidexterity in a and Tushman 2003). As interest grew further, ex-
single study. Third, it offers a multi-level and tem- ploration and exploitation became widely popular
poral framework that synthesizes previous research phrases, capturing the fundamental tension in vir-
on ambidexterity and prepares the ground for some tually any domain of organizational adaptation
promising research avenues in marketing. The rest (McGrath 2001). A related discussion of organiza-
of the paper is structured as follows: In the next sec- tional learning processes also questions whether
tion, we provide a brief review of the literature on companies should engage in different types of inno-
exploration and exploitation, which we will apply as vation in order to maximize their outputs (He and
a conceptual lens to redefine marketing dilemmas. Wong 2004; Jansen, Van den Bosch, and Volberda
Subsequently, we describe variants of ambidexterity 2005). While a variety of innovation types is clearly
which have been suggested to balance the dual seen as important, mixing them has often been con-
processes of exploration and exploitation. This leads sidered difficult – equally difficult as the combina-
to our revised framework of ambidexterity, which tion of seemingly contradictory marketing strate-
we use to empirically investigate tools and proce- gies. This has also been the customary tenet of
dures to support the implementation of seemingly strategists who argued that mixing low-cost and dif-
conflicting marketing strategies. We present the re- ferentiation strategies is likely to result in lock in or
search design, findings from four cases and discuss “stuck-in-the-middle” positions (Porter 1980: 41)
the results of our analysis. Finally, we identify some with “firms that are not particularly excellent at any
avenues for future research and managerial implica- thing” (Miller and Friesen 1986: 42). However, from
tions. a strategic perspective, the strict opposition has
been relieved as both Porter (1996) and others think
that it is possible to “play the spread” (Day 1989).
2 The Role of Ambidexterity as a
Further input into the dynamic interplay of conflict-
Framework for Solving Marke- ing strategies comes from the punctuated equilib-
ting Dilemmas rium model of change (Adner and Levinthal 2002)
Most marketing dilemmas can be reframed by which describes different interacting modes of
adopting the exploration versus exploitation lens change and depicts organizations as evolving
(March 1991) that has attracted a large number of through long periods of stability (equilibrium peri-
researchers in diverse fields of research (Birkinshaw ods) punctuated by relatively short outbursts of
and Gibson 2004; He and Wong 2004; Benner and fundamental change (revolutionary periods). Re-
Tushman 2003; Jansen, Van den Bosch, and Vol- searchers have suggested that firms following this
berda 2005; Greve 2007). ‘Exploration’ refers to ex- pattern are more successful (Miller and Friesen
perimentation with new alternatives, having returns 1984) because they balance reactions to both inertial
that are uncertain, distant, and often negative. In and disruptive forces. Indeed, temporal cycling be-
217
tween long periods of exploitation and short bursts gelkow and Levinthal 2003). Contrary to other stud-
of exploitation has been identified as a viable bal- ies, we explicitly use the notion of ‘punctuated am-
ancing mechanism that may be both logical and bidexterity’ as a sequential approach to balancing
practical (Brown and Eisenhardt 1997; Gupta, contradictory marketing strategies. Thus, our un-
Smith, and Shalley 2006). derstanding is closer to He and Wong’s (2004: 483-
While early studies within the exploration versus 484) research which defines ambidexterity in rela-
exploitation paradigm tell us that the two are rather tion to technological innovation: “We extend the ex-
exclusive, more recent research has emphasized the ploration versus exploitation construct to define
simultaneousness of exploitative and exploratory …two generic dimensions (1) an explorative innova-
activities and their joint impact on performance (He tion dimension to denote […] activities aimed at en-
and Wong 2004; Auh and Menguc 2005; Rothaer- tering new product-market domains, and (2) an ex-
mel and Deeds 2004). Indeed, initial suggestions ploitative innovation dimension to denote […] ac-
have been made to structurally separate exploitation tivities aimed at improving existing market posi-
and exploration within different business units in tions.” Here the authors keep their definition open
order to increase organizational performance (Dun- to include both temporal and sequential coordina-
can 1976). In addition, punctuated equilibrium the- tion mechanisms.
ory convinces us that both types are inseparable and While different variants of ambidexterity have been
lead to performance enhancements if pursued al- discussed in the literature, we know relatively little
ternately, i.e. via temporal separation (i.e. Gersick about the systematic nature of implementing ambi-
1991). dexterity in an organization, and our ability to in-
Paradoxes or dilemmas have long been discussed in terpret the differences between various forms from
the literature (Thompson 1967; Burns and Stalker a rigorous theoretical vantage point is limited.
1961), However, it is only recently that the concept Therefore, we build on existing research in strategic
of the ‘ambidextrous organization’ (Lewis 2000; management and organization theory to develop a
Tushman and O'Reilly 1996; Katila and Ahuja novel framework based around the dimensions of
2000; Birkinshaw and Gibson 2004; Raisch and coordination level and coordination logic by which
Birkinshaw 2008) provided first insights into coex- different approaches to strategy implementation are
istence and interdependencies of potentially con- highlighted.
flicting objectives. While the term ambidexterity has The first of these dimensions, namely the level of
been used in different contexts, it has largely dealt coordination, has a well-established tradition in the
with the twin concept of exploration versus exploita- organization theory literature (Klein, Dansereau,
tion in management-related studies (March 1991; and Hall 1994). Here, we refer to the levels of the
Levinthal and March 1993; Danneels 2002; Benner individual and the organization and follow the quest
and Tushman 2003; Jansen, Van den Bosch, and by Simek (2009) to investigate multiple levels of
Volberda 2005). ambidexterity. As for the organizational level, we
Here, we introduce the idea of ambidexterity as a consider ambidexterity a result of splitting the re-
conceptual framework for implementing inherently sponsibilities for different types of activities between
contradictory marketing strategies. In the literature, business units. Thus, while decision-making re-
one of the common definitions of ambidexterity remains within the organizational or corporate level,
lates to the “pursuit of both exploration and exploi- the implementation of ambidexterity occurs within
tation via loosely coupled and differentiated sub- business units with differentially allocated strategy
units or individuals, each of which specializes in ei- variants. We further refer to the individual level, be-
ther exploration or exploitation” (Gupta, Smith, and cause the individual employee impacts different
Shalley 2006: 693). For our purposes, this defini- strategies (Birkinshaw and Gibson 2004) and their
tion is somewhat imprecise as ambidexterity can be implementation success. The second dimension,
understood as both, simultaneous or sequential bal- namely the distinction between simultaneity and
ance. Typically, the former is captured in traditional sequence, contrasts the original ambidexterity con-
definitions of ambidexterity while the latter is sug- cept with that of temporal separation, i.e. punctu-
gested by punctuated equilibrium theory (Tusman ated ambidexterity where organizations balance the
and Romanelli 1994; Gersick 1991; Burgelman pursuit of different marketing strategies over time.
2002) or temporal sequence approaches (e.g. Sig- By integrating these dimensions, it is possible to
218
identify four generic types of ambidexterity which natively, structural separation can be achieved by
facilitate the implementation of contradictory mar- separating functions of a multi-product firm or by
keting strategies (Figure 1). We discuss each of these creating functions with a particular orientation. For
variants in turn, and show how they relate back to instance, R&D is more oriented towards exploration
prior research. while production units normally focus on exploita-
tion. Related to the overall balance of strategies, the
Figure 1: Variants of Ambidexterity most common tenet has been to structurally sepa-
rate business units: some with a focus on explor-
ative innovation and others specializing in exploita-
tive innovation (e.g. Ambos and Schlegelmilch
2005; Floyd and Lane 2000; Volberda 1998;
O’Reilly and Tushman 2004; Benner and Tushman
2003). For instance, structural separation is under-
taken by most large software companies which ex-
ternalize specialist teams to develop revolutionary
codes in distinct locations.
With respect to implementation issues, structural
separation is not without limits (Birkinshaw and
Gibson 2004; Adler, Godolftas, and Levine 1999).
Separation can lead to isolation of particular units
as innovative ideas will not be transferred and inte-
grated across the company. Where new product de-
velopment is outsourced, idea transfer and integra-
2.1 Structural Ambidexterity tion issues appear to be particularly pertinent. Fur-
Marketing strategists have typically resolved the ther, due to the nature of its static approach of allo-
tension between exploration and exploitation by cating contradictory tasks, units may loose their in-
separating them in two different parts of the firm centives and turn inert over time. On the other
(e.g., marketing vs. sales; marketing vs. R&D; mar- hand, exploitation-oriented structures may lack
keting vs. service). The first idea of structural sepa- creative outbursts, which may also result in inertia.
ration is influenced by Duncan who argued that Because of the inherent difficulties that arise from
companies need to put in place ‘dual structures’ in balancing exploration and exploitation, it has been
order to manage conflicting demands (Duncan suggested to adopt a longitudinal perspective where
1976). For instance, R&D and business development a unit’s focus changes over time.
are given responsibility for new product develop-
ment while the core business units focus on align- 2.2 Punctuated Ambidexterity
ment and exploitation. In this vein, McDonough Organizations may also disentangle different strate-
and Leifer (1983) suggested that organizations use gic marketing tasks by separating them over time.
several structures simultaneously because the chal- Major emphasis is placed on organizational units
lenges they face are so dramatically different that that focus on one type of strategy one day, and on a
they cannot be managed within one organizational different set of innovations at another point in time
unit. Similarly, Christensen and Raynor (2003) (Brown and Eisenhardt 1997; Puranam, Singh, and
proposed that established companies could pursue a Zollo 2006). Thus, organizations temporally sepa-
disruptive innovation only in a separate business rate between exploration and exploitation. For in-
unit. Taking this further, Carson (2007) discusses stance, the same decision unit may use a mechanis-
the scope and required control mechanisms for out- tic structure for making routine decisions and then
sourcing new product development entirely – an ex- shift to an organic structure for making non-routine
treme form of structural separation. decisions.
Empirical research has further identified that struc- In the case of product development, temporal fluc-
tural separation usually occurs at different levels of tuations may be best suited to cope with changes in
the firm, e.g., between headquarters and subsidiar- technological jumps or breakthroughs which are
ies or global teams and centres of excellence. Alter- likely to interpenetrate long periods of incremental
219
product development. In this situation, a whole unit between conflicting demands. For instance, market-
adapts to the requirement of specific contingencies. ing managers decide whether they engage in new
Similarly, Siggelkow and Levinthal (2003) suggest business development, service or sales activities, e.g.
that units switch over time by adopting more sepa- by involving customers with a need for ongoing in-
rated organizational design at one time and more cremental product development. Here, the contex-
integrated ones at another. These designs may dif- tual variant remains a set of stimuli that motivate
ferentially relate to information transfer and knowl- marketing managers to act in a certain way.
edge generation and, thus, have an impact on new Previous research has acknowledged the role of
product development rates. managers in enabling and developing conditions for
Occasionally, units or teams move from sales to ser- ambidexterity (Gibson and Birkinshaw 2004; Smith
vice function or change from research-driven to and Tushman 2005; Lubatkin, Simek, Lin, and
commercial orientations. For instance, the RBC Fi- Veiga 2006). Building predominantly on a leader-
nancial Group in Canada is the largest bank as ship approach, studies have documented the impor-
measured by assets and market capitalization and tance of contextual leadership that helps to balance
one of North America’s leading diversified financial requirements posed by contradictory activities and,
services. In order to become more competitive, RBC consequently, sustains business unit performance
realized that some of their units had to become (Osborn, Hunt, and Jauch 2002). Among scattered
more market-oriented. Management started a proc- insights there is consensus on a few mechanisms
ess whereby, over time, employees sensed that the that help to support contextual ambidexterity. For
culture was fundamentally changing. Their ideas example, Tushman and O’Reilly (1997) argue that it
were given due consideration, and they were being is driven by internal processes that enable managers
rewarded for market-oriented activities (Dobni to handle large amounts of information and deci-
2006). One of the advantages of these shifts is that it sion alternatives to deal with conflicts. Carmeli and
prevented corporate units from turning inert. It also Haleyi (2009) suggest that managers should make
increased inter-departmental communication which active use of conflicts rather than avoiding them. As
has been identified as vital for successful strategy a consequence, behavioral complexity, i.e., the ca-
implementation (Forman and Argenti 2005). How- pacity to adopt multiple leadership roles and change
ever, there are also certain drawbacks, for instance, between them in selective contexts, is seen as pri-
the ability to fluidly change organizational attributes mordial (Lubatkin, Simek, Lin, and Veiga 2006).
and managerial approaches, with respect to strate- Most of the previous guidelines seem intuitively
gic success criteria and incentive systems. simple, but little has been said about their concrete
implementation. As Mom (2007) remarks, there is
2.3 Contextual Ambidexterity clearly a lack of conceptually and empirically vali-
The organizational literature also suggests that am- dated understanding about exploration and explora-
bidexterity emerges when leaders in a business unit tion at the managerial level of analysis. This is sur-
develop a supportive context. The resulting type of prising given the promising potential of related lit-
contextual ambidexterity, which was formally intro- eratures on organizational learning and top man-
duced by Birkinshaw and Gibson (2004), is seen as agement research. Furthermore, none of the exist-
the behavioral capacity to simultaneously demon- ing work has yet related to marketing tasks. Switch-
strate alignment and adaptability (Lubatkin, Simek, ing between different contextual requirements
Lin, and Veiga 2006; Mom 2007; Carmeli and seems indeed difficult as managers lack the ability
Halevi 2009; Guettel and Konlechner 2009). In- of integrating exploitation into their mindset.
deed, contextual ambidexterity differs markedly Hence, they have to be substituted in order to pur-
from structural ambidexterity because it is “…a dual sue consolidation or exploitation strategies. This is
capacity … woven into the fabric of an organization captured within the last cell of peripatric ambidex-
on the individual level”. Instead of focusing on dual terity.
structures or on changing tasks for business units,
organizations reconcile conflicting demands by 2.4 Peripatric Ambidexterity
building a set of processes, systems or contexts that While the previous types of separation are well an-
enable and encourage individual employees to make chored in the existing literature on ambidexterity,
their own judgement as to how to divide their time no explicit reference has yet been made to coordi-
220
nating marketing strategies by exchanging the top change behaviors. Once they surpass a critical size,
management or founding team. For this variant, we only a few managers from the original founding
initiate the notion of ‘peripatric ambidexterity’, a team are normally able to manage the shift. As sug-
term borrowed from genetics. This specifies the gested in situational leadership theories, it is much
formation of a new species through during evolution easier to find the manager and identify situational
and is often tied to the idea of a founder who devel- fit (Fiedler 1967). Thus, a firm needs to exchange its
ops a new population within an isolated niche (Mayr top management if it intends to implement a drastic
1942). In the business world we can find some change in corporate strategy.
analogies which emphasize the substitution of one In summary, the description of the four variants of
‘species’ by another. Take the example of Nissan and ambidexterity has shown that each of them is a suit-
Renault, now headed by Carlos Ghoshn. The man- able solution for not only balancing exploration and
ager has instilled a vision of innovative and explora- exploitation within an organization, but also for
tory leadership at the two companies that his prede- solving concrete marketing dilemmas by imple-
cessors failed to achieve. However, people presently menting ambidextrous designs. Table 1 summarizes
ask whether he might be better off in the saviour the major insights from the literature, highlights se-
rather than the consolidator and incremental lected marketing dilemmas and implementation
adapter role. Thus, management may again have to categories, and presents the few existing insights on
change or evolve further. Similarly, when Goodyear the practice of ambidexterity. As these insights are
was confronted by Michelin’s introduction of the ra- largely anecdotal, our study is largely exploratory
dial tire, Goodyear’s senior management team first (Churchill and Iacobucci 2005; Srnka and Koeszegi
focused on the existing product and avoided radical 2007) and investigates implementation categories
challenge. When they finally introduced the radial in more detail.
tire, Goodyear completely shifted from bias-ply tires
to radicals. This strategic shift at Goodyear led to the
3 Research Design
creation of a new senior management team (Virany,
The findings presented below are part of a larger re-
Tushman, and Romanelli 1992; Smith and Tush-
search project on ambidextrous innovation in global
man 2005).
firms. In the first (and ongoing) stage of the project,
The literature on leadership covers this phenome-
we have conducted 50 interviews in Germany, Aus-
non with reference to the ‘human trait of ambidex-
tria, France, The Netherlands, Switzerland, and the
terity’ (Lubatkin, Simek, Lin, and Veiga 2006). Fur-
UK. Industry sectors included banking, engineering,
ther insight comes from research on founding teams
automotive, information technology, consulting, fast
and their prior affiliations which are presumed to
moving consumer goods, and biochemistry. In the
shape new firm behaviors (Beckman 2006). Execu-
second stage, we purposefully re-contacted four
tive behavior is supposed to be driven by past in-
firms (Patton 1990), Apple, Deutsche Bank,
sights and experiences. Thus, previous career ex-
Deloitte, and Celltech (UCB), and conducted in-
periences shape the range of action that is available
depth interviews to focus more specifically on how
to formulate and implement strategies, i.e., engage
diverse marketing strategies can be best imple-
in either explorative or exploitative behavior
mented by using ambidextrous designs. More de-
(Boeker 1997; Kraatz and Moore 2002). While a va-
tailed information on the research design can be
riety of perspectives stimulates exploration, a singu-
found in the appendix.
lar company affiliation is likely to improve existing
routines and consolidate existing capabilities.
The size of the firm may play another important role 4 Presentation of Findings
for choosing peripatric ambidexterity. While large We start the presentation of findings by reporting
firms with a variety of business units are likely to the results of our content-analysis per firm (Miles
pursue both exploration and exploitation, an entre- and Huberman 1984). The structure of each case
preneurial firm exists as a single business unit. presentation begins with a short overview of the
Thus, the choice of a homogeneous team defines the firm and major conflicts or dilemmas. We discuss
corporate orientation to strategy variants. Contrary relevant implementation categories of ambidextrous
to punctuated ambidexterity, the peripatric version designs in detail and illustrate how they support the
posits that it is difficult for individuals or teams to combination of controversial marketing strategies.
221
Table 1: Major Approaches to Ambidexterity, Selected Marketing Dilemmas, and

Implementation Criteria
Structural Punctuated Ambi- Contextual Ambidex- Peripatric Ambi-
Ambidexterity dexterity terity dexterity
Major Studies Duncan (1976); O’Reilly Punctuated equilib- Gibson and Birkinshaw Genetics (Mayr,
and Tushman (2004); rium (Gersick 1991; (2004); Smith and 1942)
Tushman and O’Reilly Tusman and Ro- Tushman (2005); Leadership research
(1997) manelli 1994; Burgel- Lubatkin, Simek, Lin,
man 2002) Burns (1978), Bass
Jansen, Van den Bosch, and Veiga (2006); Mom
(1985)
and Volberda (2009) Temporal separation (2007); Carmeli and
(Siggelkow and Levin- Halevi (2009)
thal 2003)
Definition of Ambidex- ”Ambidexterity refers to “Temporal cycling be- “Contextual ambidexte- “Change towards a
terity the synchronous pursuit tween long periods of rity is the behavioral ca- new evolutionary
of both exploration and exploitation and short pacity to simultaneously period of the firm
exploitation via loosely bursts of exploration” demonstrate alignment which is inextricably
coupled and differenti- Gupta, Smith, and and adaptability across linked to a CEO or
ated subunits or indi- Shalley 2006: 693) an entire business unit” Top Management
viduals, each of which (Gibson and Birkinshaw Team” (inspired by
specializes in either ex- 2004: 209) Mayr, 1942)
ploration or exploita-
tion.” (Gupta, Smith,
and Shalley 2006: 698)
Description Dual structures, differ- Single units, shifting Individuals in business Top Management
ent units focus on dif- focus over time, i.e. units, who decide on Team / CEO focuses
ferent types of activities concentrating sequen- which type of activity on one particular
or challenges tially on different types they want to focus type of strategy at a
of marketing given time
Contribution of Ambi- Combination of brands Disruptive technology Short-term balance of Sales-driven vs. con-
dexterity Framework to and products which changes versus incre- existing and new mar- solidation driven
Resolving Marketing may otherwise canni- mental product inno- keting trajectories marketing; emotion-
Dilemma balize each other; tar- vation (e.g. Google with indi- nal versus informa-
geting of incompatible (e.g. Siemens VDO has, vidual responsibility for tive marketing (e.g.
customer segments (e.g. at a point in time, ac- radical product innova- consolidation of Ger-
Deutsche Bank vs. counted for 90% of all tion and adjustment) man Metallgesell-
Maxblue Investment innovations) schaft by Kajo Neun-
Platform; SAP Soft- kirchen or Renault/
ware Development ) Nissan with Carlos
Ghoshn)
Implementation of Am- Strong autonomy; Focus on specialized Behavioral complexity No explicit studies as
bidextrous Designs cross-unit relationships skills closely tied to the (Hambrick and Mason construct has not yet
(Raisch 2008); integra- requirements of one 1994) been used in the lit-
tion through teams and activity or period. Organizational context erature
organizational mecha- Change management (Ghoshal and Bartlett,
nisms (Jansen, Tempe- 1994), Culture (Ne-
laar, Van den Bosch, manich and Vera 2009)
and Volberda (2009),
Selected Implementa-  Structural variables: company’s marketing function, control systems, policy directives (Bonoma and
tion Categories from the Crittenden 1988); formal firm structure and networks of informal communications (Franckwick,
(Marketing) Strategy Ward, Hutt, and Reingen 1994);
Literature  Behavioral variables: skills, resource allocation, ability to develop informal structures (Bonoma and
Crittenden 1988);
 Interpersonal processes: strategic consensus and autonomy, leadership and implementation styles,
communication (Noble and Mokwa 1999), shared understanding (Woolridge and Floyd 1989);
 Individual-level processes: cognition, organizational roles, commitment (Noble and Mokwa 1999);
 Managerial levers: goals, organizational structure, leadership, communications, incentives (Noble
1999)
222
We continue with a discussion of commonalities When launching structural separation, one of the
across cases and compare findings with relevant in- major challenges of the new subsidiary was to intro-
sights from the literature. duce new customer and service experiences and
market them differently. However, this new market-
4.1 Q110 - Deutsche Bank der Zukunft: ing approach needed to be compatible with a tradi-
Structural Ambidexterity tionally conservative approach to banking and fi-
Deutsche Bank, with headquarters in Frankfurt/- nancial services. Ambitiously formulated (B2), “The
Germany, is one of the leading financial institutions objective was to win all private customers for our
with some 80,000 employees in more than 72 coun- subsidiary.” Thus, within the overall conglomerate
tries. With a large presence in Europe, the Americas, of Deutsche Bank, it was clearly decided that Q110
Asia Pacific and the emerging markets, the bank of- was to act beyond traditional structures supporting
fers financial products and services for corporate a context of creativity. While the structural separa-
and institutional clients along with private and tion of the unit was one issue, from a corporate per-
business clients. In 2005, having faced hugely nega- spective, it was even more important to integrate
tive customer satisfaction and retention rates, espe- different marketing strategies and underlying value
cially with outsourcing its online subsidiary, systems as both, Q110 and more exploitative sub-
Deutsche Bank24, the company decided to break sidiaries were to coexist under the umbrella of
new grounds. Driven by the Private Client and Asset Deutsche Bank AG. The activities launched by
Management division (PCAM) and its subdivision Deutsche Bank to implement structural ambidexter-
Private & Business Clients (PBC), which provides ity can be described in terms of the nine implemen-
private individuals and small to medium-sized tation categories (see Table A.2 in the Appendix).
businesses with a full range of traditional banking Goal-setting is an important aspect of a firm’s im-
products, the company decided to launch a new in- plementation process and clear objectives should be
novative subsidiary in the city centre of Berlin, communicated (Noble 1999). At the stage of imple-
Germany. The creation of “Q110 - Deutsche Bank of menting Q110, the formulation of strategic objec-
the Future”, as it is referred to, was largely market- tives was in line with the exploratory function of the
ing-driven and (originally) had the sole purpose of unit, e.g., its overachieving goal of customer devel-
bringing customer satisfaction rates to new heights. opment and whole-hearted dedication to customer
Q110 is tangibly different from corporate headquar- satisfaction. The implementation literature also em-
ters and other subsidiaries as it draws inspiration phasizes that without knowledge of the strategic vi-
from unusual ideas and strikes out new paths – of- sion, functions would not be able to implement a
ten involving innovative technology. Right from its marketing strategy within a broader context (Noble
inception, the subsidiary was created as a translu- 1999). Initially, there were no immediate financial
cent building, integrating shops, service offerings, a constraints, which would have been imposed on a
lounge for relaxation and some 1260 square meters more exploitative unit. In this sense, achieving am-
for interaction. No counters are allowed to interfere bidexterity created paradoxical situations because
with the boundary-free interior design and the open the short-term efficiency and control focus of head-
spirit of the unit’s team. As one interviewee (B3) put quarter-dominated subsidiaries was at odds with
it: “Each time we create an encounter, we do so ex- the long-term experiential focus of Q110 (see also
actly in the way the customer prefers it….this could Floyd and Lane 2000).
be a coffee in the lounge, a product show on one of In terms of structure, strategy implementation is
the oversized TV screens, a guided tour ….or, if the often difficult when units are unequally affected or
customer prefers, a quiet room. And even more, the represented, e.g., when one unit is considered more
customer does not necessarily come here to de- important than the other. However, separating Q110
mand a banking service, but rather because he as a different unit from corporate headquarters was
likes the atmosphere or looks for inspiration and not seen as a major issue (B5: “We all work for
design products.” Thus, the centre is characterized Deutsche Bank, we do not talk about Q110 to our
by customer orientation, proximity and approach- customers.”) While structural separation was driven
ability, which also includes opening hours beyond by the top management, with people working in
the expected. clearly distinct locations, employees’ mindsets were
not completely detached from other units. In part
223
this is due to the overall spirit and vision Deutsche here. What they require is more a certain attitude
Bank integrates in the different units. Further, an and willingness to learn than a formal education.
ongoing communication process with colleagues of However, this has changed a bit in the meantime
other units reflects the typical work flow when as- and I think everybody now builds on an appren-
signments and clients are handed over. Formal ticeship with Deutsche Bank”). The diversity in em-
meetings are complemented by informal communi- ployee background and culture was seen as one re-
cation, especially when the objective is serving the quirement to increase behavioral complexity. This is
customer better (B6:”When there is a customer, vital in a context that incorporates all sorts of service
and even if we do not have the time, we talk to our offerings beyond the typical banking products.
colleagues and we try to constantly be in touch to The case of Deutsche Bank was initially selected to
see who has some availabilities… we normally find investigate structural ambidexterity, which occurs
a solution”). on several levels of the firm. For instance, it was the
Incentives systems are important tools in imple- driving element to distinguish both between corpo-
menting strategy and include both monetary and rate divisions and between sub-divisions like Private
non-monetary rewards (Walker, Churchill, and and Business Clients (PBC) and Asset and Wealth
Ford 1977). Within Q110 no special financial incen- Management (AWM). In several geographic re-
tives were put in place (e.g. B4: “We do not receive gions, AWM is placed in attractive locations and
any bonus payments simply because we work for buildings clearly distant from the PBC functions.
Q110…even though the work is quite different and Spatial/geographical separation also presented the
we have long working hours, including even Sat- founding principle for Q110 in Berlin, which was
urdays.”) However, what was clearly mentioned dislocated from the corporate functions in Frank-
were immaterial incentives arising both from the furt/Main. However, like a ‘nested design’, Q110
team atmosphere and, most prominently, from fu- does not only serve as an example of structural
ture career perspectives (e.g. B3: “…many people, separation, but is also built on contextual ambidex-
after they left Q110 have continued their manage- terity and, to a minor degree, incorporates elements
ment career somewhere else within Deutsche Bank. of punctuated ambidexterity (see further explana-
Having worked for Q110 is apparently seen as a tion in the cross-case discussion).
preparation for major career jumps”). Apart from
being an individual incentive, the promotion of peo- 4.2 Deloitte Consulting: Contextual
ple into other units serves a means of integration Ambidexterity
and transferring exploratory knowledge to exploita- In 1995, the partners of Deloitte Touche Tohmatsu
tive units. voted to create Deloitte & Touche Consulting Group
The organizational context, e.g. the systems and (later Deloitte Consulting) which, after creation,
processes that define the context for ambidexterity remained part of the overall Deloitte group. By inte-
is strongly related to individual empowerment grating skills from across the firm, Deloitte answers
through leadership. This reflects the criteria of dis- clients' demands for single-source solutions. Glob-
cipline and stretch as illustrated by Ghoshal and ally, Deloitte is present in over 130 countries and
Bartlett (1994), who propose that employees volun- employs more than 90,000 people. Consulting ser-
tarily strive to meet expectations. But more impor- vices are focused on three main areas: Strategy &
tantly, organizational stretch induces them to strive Operations, Technology Advisory Services, and
for more, rather than less ambitious goals. While Human Capital Advisory Services. In terms of reve-
employees work in a structurally separated context, nues, the company achieved $6.3 billion in 2008.
it is these criteria that facilitate contextually ambi- The need for ambidextrous designs was driven by
dextrous behaviors within their explorative unit. It several developments within the consulting indus-
seems as if this has been an objective from the be- try, most notably customer demand, information
ginning as recruiting policies did not only focus on technology, changing regulation, and increased
exploration-oriented people but on diversity. For competition. These trends confronted managers
instance, a formal banking education was not part of with the challenge to increasingly focus on both ex-
the predominant catalogue of criteria. (B3: “I was ploration and exploitation activities. Within Deloitte
first a carpenter, then I had a traineeship with the Consulting, this challenge is most prevalent on the
bank, did several things in between and now I am partner and manager level (D1: “The partner role is
224
naturally one of developing the business, but you offering global services adjusted to local contexts.
also have to capitalize on your existing abilities and This requires that managers individually adjust be-
current projects, and this is precisely the difficulty haviors to national clients while representing a
– doing two things that do not quite go well to- global firm. The succinct balance arises from con-
gether’”). Indeed, it is clearly expected that partners tinuous adaptation and re-adaptation.
conduct both exploitative (e.g. striving for cost- In doing so, continuous learning is one of the major
efficiency) and explorative activities (anticipating competences of the firm which does not only affect
industry changes) to deal with current and future the managerial level but transcends the organiza-
requirements of the firm. As front-line experts, they tion. Thus, all employees are actively encouraged to
are so close to customers and their specialized ex- develop, improve, and refine in-depth knowledge
perience makes them ambassadors of their com- pertaining to a certain market segment, country,
pany’s services. At the same time, they need to ex- culture, product, service, or internal process which
tend previously successful projects and procedures is anchored in the organizational context and sup-
with seemingly minor modifications to fit the new ported by suitable structures. The organizational
clients. In the firm, roughly 30% of the work time is context can be described according to the four ele-
dedicated to new developments and research, while ments of discipline, stretch, support, and trust
the dominant focus remains on working with the (Bartlett and Ghoshal 1994). Within Deloitte, disci-
client. However, managers and partners have lee- pline is already reflected in the recruiting process
way in deciding upon their current focus. Ambidex- where the firm is being committed to being trans-
trous challenges also occur in the capability-based parent about the progress toward global goals, both
marketing approach of the firm. In building trust for employees and the firm. Member firms, partners
with clients and potential employees, knowledge and employees are all united in the effort to collec-
and competence are seen as major drivers. This im- tively achieve these goals and help turn a shared vi-
plies that both existing competencies need to be sion into results. The development of the vision in-
nurtured, while new knowledge is required to signal corporates ‘stretch’ so as to inspire people with the
cutting-edge technical expertise. abilities to organize themselves and move upwards.
In order to implement these challenges, a variety of With regard to more exploratory activities, the value
implementation instruments was used. On a strate- system emphasized diversity from which a broader
gic level, the overall goals of the firm do not change variety of new inputs is believed to emerge. As a ba-
while it continuously reorients itself towards market sic prerequisite, employees are recruited according
demands. Growth is certainly an issue and the firm to criteria such as openness, ability to learn and re-
tries to proportionally manage growth while expect- lationship skills with clients. Internally, these skills
ing profitability rates to rise accordingly. This im- are constantly challenged and stretched to facilitate
plies a multi-market approach (D4: “It also depends optimum careers (D4: “I always try to see the po-
on the location, some are exciting in terms of firms tential of people, I listen intensively, challenge
coming into the country, others are more estab- them… help them, and discuss options with them”).
lished; you definitely do not want to be limited to In addition, the career path is open to focus more on
local markets especially if you look at markets that technical expertise or managerial skills where peo-
are definitely going to grow […] but this requires ple can change the percentages and requirements of
flexible adaptation”). explorative versus exploitative behavior. These
When this type of flexible adaptation has been suc- moves are actively supported by the management
cessfully achieved, “every individual in a unit can which lends access to resources and interchange.
deliver to existing clients … but at the same time Finally, the element of trust plays a particular im-
every individual is on the lookout for changes in the portant role not only within the firm, but also in re-
task environment, and acts accordingly. This is po- lation to its clients. Trust is seen as the selection cri-
tentially a more sustainable business model … be- teria that facilitates relationship building and long-
cause it facilitates the adaptation of an entire busi- term developments. This is also reflected in the
ness unit, not just the separate units or functions firm’s approach to culture which takes on open and
responsible for new business development” (Gibson supportive stance and focuses on the idea that de-
and Birkinshaw 2004: 211). Within Deloitte, this is velopment is a voluntary act (D1:”People want to
reflected in their ‘multiple market approach’, i.e., learn. If we want to change something we need to
225
explain it to them so that they see the benefits and Initially, management support in developing a
can decide themselves which way to follow”). Cul- shared culture and language across the firm was one
turally-driven knowledge development initiatives of the major facilitators (McNamara and Baden-
serve this purpose of interpersonal support and ex- Fuller 1999; Dodgson 1991). Emphasizing the need
change as they are normally integrated into daily for exploration originated from an ongoing crisis at
operations and customer needs. the end of the 1980s when the biology unit had been
In summary, the example of contextual ambidexter- the major source of revenues. At that time, it was
ity shows that soft implementation factors dominate largely based on the exploitation of academic
the balance of marketing strategies. This is in line knowledge. On the therapeutics side, exploitation
with an understanding of knowledge management did not achieve sustainable revenues, and change
and capability development as voluntary actions would have to overcome the inert culture and an
transcending different levels of the firm. over-reliance on existing knowledge. External re-
quirements from stakeholders demanded new di-
4.3 Celltech: Punctuated Ambidexterity rections and new capabilities had to be developed in
The origin of Celltech, one of the largest biopharma- order to focus on explorative product development
ceutical companies in Europe, dates back to the year rather than on technical excellence. One of the ma-
1980, when investment funds were obtained to jor associated challenges of putting these opposing
build up a strong foundation around diagnostics, strategies into place resulted in ‘unlearning’ old be-
nutritional and contract business followed by thera- haviors. This was seen as difficult because efforts
peutics in the late eighties. Celltech can be viewed as and risks in switching from one capability to an-
having four basic historical periods, which link to other can be substantial while necessary to substan-
the balance of exploration and exploitation. First, tiate marketing activities. Celltech managed to do
the two different strands of biologics and therapeu- this by applying several managerial techniques
tics were meant to subsidize each other. Between which we present with reference to our category
1990 and 1992, the future was seen in the develop- scheme:
ment of innovative drugs, thus in expanding ex- In terms of corporate goals, the changes within
ploratory innovation of the therapeutics unit. In the Celltech were driven by external market contingen-
third period between 1992 and 1996, resources were cies. Celltech’s corporate strategy has been adapted
equally distributed to both units, while at the same over its 11 years of existence and the firm’s man-
time fostering a strategy of external collaboration. agement has defined respective ‘tipping points’
In this period, business units reaped off the benefits which characterized the shifts from more explor-
from exploiting their existing knowledge via cash ative to exploitative periods and vice versa (Dodg-
milestone payments from their collaborators with- son 1991). For instance, the choice of the new thera-
out selling a full interest in the downstream prop- peutics focus was driven by a new leadership efforts
erty rights. Finally, in 1996 the biologics division (Clit: ”It came from the top. Of course, there were
was sold. From now on, the unique focus of the managers further down but the way we were go-
therapeutics unit changed from exploitation to ex- ing to organize ourselves came from David Blox-
ploration and the success of this strategy was evi- ham (Director of Research)”; McNamara and Ba-
denced in a 25% increase in share prices in 1998. den-Fuller 1999: 7). Essentially, the company’s
However, there were difficult challenges associated strategy has changed from being a research com-
with the unit’s shift between exploitative and ex- pany to a manufacturing company to a fully inte-
plorative strategies. Viewed across extended periods grated biopharmaceutical company developing,
of time, balance was achieved by maintaining three manufacturing and marketing drugs. Implementing
explorative (discovery of new drugs, phase one clini- these changes in the skill base, associated changes in
cal trials, development of collaborative capability) strategy and learning processes needed to be dif-
and two exploitative activities (phase two and three fused throughout the units.
clinical trials, management of prestige alliances, The internal learning process was largely influenced
which facilitate access to world-class capabilities). by soft implementation criteria, such as culture,
The resulting question is how Celltech managed to communications, and leadership styles: When the
induce and maintain this balance. unit changed from a discipline and technology-
based capability to explorative therapeutics, chem-
226
ists were thrust together with biologist leading to Scientist was created for those people wishing to
differences in understanding. Disciplines that had concentrate on developing scientific expertise,
previously worked in isolation now had to converse rather than undertaking management responsibili-
and train each other in the basics of their discipline. ties (Dodgson 2001: 146).
(C1: ”It was quite amazing. Formerly, you were a Taken collectively, the move from exploitation to
specialist in your field... you still continued to be exploration was considered risky, but the unit’s suc-
one but the new task was move out of the box and cess helped the organization to survive and grow.
increase interdepartmental knowledge sharing”). One of the major lessons learned was the fact that
An understanding of the language and mindset of the company did not only require a change in scien-
each other facilitated a deeper understanding. Trig- tific, but also in managerial capabilities in order to
gers for innovative solutions were set off through succeed. These relied predominantly on knowledge-
this process of developing a shared understanding sharing skills. Further, systems were put in place to
at the level of bench scientists. The firm’s organiza- ensure the long-term balance between exploration
tional culture or ’social fabric’ played a major role in and exploitation by inserting discovery projects into
determining the speed of learning a new explorative the life-cycles of knowledge exploitation. This
approach to innovation (Brown and Dugoid 1991). helped to prevent exploration being driven out by
Indeed, particular attention was paid to managing exploitation which has often been mentioned as one
exploration for new knowledge. This involved in- of the major dangers (McNamara and Baden-Fuller
formal interaction mechanisms as staff was located 1999). In terms of the organizational context, sev-
in close proximity and the layout of the building was eral monitoring procedures were implemented to
specifically designed to facilitate interactions. Sup- guarantee the ongoing success of the new strategic
ported by more formal mechanisms, like quarterly orientation. In 2004, Celltech was acquired by UCB
reviews, the team was forced to constantly interact while Celltech’s innovation stance within the larger
with the senior management in order to formulate group remained the same.
realistic forecasts and have new ideas bubbling up.
In terms of recruitment, changes were supported by
broadening the existing skill-base (Clit: ”The new 4.4 Apple Computer and Peripatric
people faced the informal and social club of the Ambidexterity
old.. it took time to integrate them but the process In 1976, Apple was founded by Steve Jobs and Steve
of learning to work together created a new knowl- Wosniak. Within several months, they had pro-
edge base and capability within the firm”; McNa- duced 200 computers. Jobs made it Apple’s mission
mara and Baden-Fuller 1999: 11). While employees to bring easy-to-use computers to the market. In
previously used to work in functional teams, they 1978, the company launched the Apple II that
were now required to launch projects by tapping dif- sparked a computing revolution that drove the PC
fering functional expertise within one group. Thus, industry to $1 billion in annual sales in less than
diversity of knowledge and the combination of ex- three years. Apple quickly became the industry
pertise was deliberately used as a driver of knowl- leader and, in 1980, launched a successful IPO. The
edge development. Staff from different disciplines competitive position changed in 1980, when IBM
was hired to support the formation of new team entered the PC market and Apple’s market share
structures and infuse the unit with new resources. continued to drop. In 1985, Apple removed Jobs
The required roles and skills reflected the predomi- from his operational role and handed over to John
nant mindset of the unit at specific points in time, Sculley, a former Pepsi executive. Under Sculley,
while a major focus was placed on extensive training Apple worked to drive costs down and sustain prof-
support to increase expert knowledge. This was tied itability. However, in a lacklustre period during
to individualized incentive systems which rewarded 1989-1997 Apple was nearly written off but it had an
enthusiasm and commitment, whereby, the com- impressive and dynamic comeback after Jobs re-
pany had considerable flexibility in its employment joined the company in 1998. The restructuring ef-
system to allow for this. While expert knowledge forts continued. Between 2003 and 2008, sales
remained the central recruiting criterion, it was multiplied to $24 billion and it topped Fortune´s
immediately complemented by extensive training. 500 companies in terms of total return to share-
To reward expert knowledge, the role of Principal holders in 2003-2008 with a 94% return as well as
227
during the period of 1998-2008 with a 51% return explorative forward-looking management style.
(Morris 2008: 68). Human agency, in terms of a different personality,
One thing that makes the firm special is Steve Jobs, was seen as the primordial means to execute a
the co-founder and CEO of Apple, who has always change (consolidation) in the firm’s strategy. How-
been a persuasive and charismatic evangelist for the ever, once Jobs left the company, Apple became so
company. (A4: “No, by no means is Steve Jobs a marginal in the computer industry and losing so
normal boss. He is in the firm, the spirit is alive, much money that analysts debated whether it would
and he is always present”). While Jobs has power- implode or be sold. Jobs, who returned to Apple in
fully put forward the growth of the firm, an indus- 1997 after years of exile, was still attracted to devices
try-wide sales slump towards the end of 1984 that define new categories, rather than compete in
caused deterioration in Jobs' working relationship large, pre-existing industries. His comeback was
with then CEO John Sculley. By the end of May seen as Apple’s desperate attempt to survive one of
1985, following an internal power struggle and an its worst phases and the company again needed a
announcement of significant layoffs, Jobs was charismatic leader who would revive its fortunes
ousted before making a triumphant return in 1997. (A4: “The years in which he was not there were ok,
But why has the rise and fall of Apple been so closely we still had a huge hype but he was missing. When
linked to the innovation-driven leadership style of he came back in 1998, we again had all the atten-
Steve Jobs? And why did the company temporarily tion“). And since Jobs himself has proved unrivalled
have to get rid of him in order to consolidate in the art of managing disruption, he was again able
operations? One of the major explanations builds on to take Apple to new heights. In doing so, he built on
his personality. his ability to get his employees so motivated that
Jobs has always been driven by the energy to change they maniacally achieved goals or created
the world with exciting new products. Fundamen- technology far beyond what they thought was
tally, the design and development of the Macintosh possible.
in 1984, Apple’s flagship product, is an emblem of The story of how Jobs built the Apple empire, how
Job´s entrepreneurial spirit that characterized and why he was thrown out of it and the reasons
Apple in its garage-shop days. Driven by explorative behind his return to Apple is essentially the story of
innovation strategies, Jobs unleashed the creativity an entrepreneur and a firm’s peripatric ambid-
of highly individualistic and talented soft- and exterity – a prominent corporate marketing strategy
hardware designers. He infused the development tied to a single person. It shows that a leader’s
team with a renegade spirit, often shouting the personality influences a company and indeed a
battle cry, “It’s better to be a pirate than join the fundamental change can only be achieved once the
Navy” (Sculley and Byrne 1987: 147). Indeed, the leader is dismissed – or resurrected. (A4: “There
pirate metaphor was more real than fiction as Jobs, will be a big bang when he is no longer there…what
as well as his frenetic work schedule of 48-hours of is obvious, the brand is tied to him, it is crazy how
straight programming and breaks with pineapple- one person drives this firm”).
topped pizza generated a sense of shared respon- In terms of implementing the current strategy,
sibility and togetherness. several elements were observed. Fundamentally, the
However, while the new product generated firm is driven by the charisma and inspiration of
publicity, company morale was low. Apple had one person, even though the top management has a
become a company that was too preoccupied with proper function in the actual operations. But the
management and groups rather than with inspiring role of a (this) CEO is one of the fundamental driv-
new products. Jobs’ personal success gave way to a ers for firm strategy. Building on his charisma, em-
professional nemesis as his leadership and inno- ployees are inspired to work for the firm rather than
vation style did not fit any longer to the company’s by being attracted by impressive financial bonus
immediate requirements. Executing a shift in stra- systems. The company has a very hierarchic struc-
tegy from exploration to exploitation was seen as a ture (A4: “You may check back with London (the
challenge for top executives. While competitive European headquarters) but then, quite quickly,
demands from the external environment left no you are in the US”) which also implies that deci-
manœuvering space, the firm’s internal social struc- sions are often checked and double-checked rather
tures, roles, and norms were still influenced by an than spontaneously implemented by competent
228
managers. Various control systems are in place and 5 Discussion

often employees rather try to play it safe. In terms of For every firm it is essential to achieve both growth
communications, the company has an explicit non- and profitability which often hinges upon the suc-
disclosure policy and even internally, cross- cessful implementation of marketing strategies. This
functional communication is often limited, some- includes the combination of exploratory and ex-
times by design, sometimes by default. In critical ploitative activities. A focus on one of these tasks
areas, knowledge transfer is inhibited by different may be easy but combining and balancing them
locations (structural separation) in others, simply by poses a major challenge. Addressing the question of
a lack of engagement into inter-departmental com- how this dilemma could be solved, this study con-
munication (A5: You won’t believe it but there are tributes to the emerging literature of ambidextrous
many areas where access is restricted and you designs and investigates them through the lens of a
have no idea what people are doing, you have no marketing perspective. The discussion of four dif-
idea what the company is heading at”). ferent types of ambidexterity has illustrated an in-
It seems like these management principles match creasing number of studies that deals with struc-
certain employee characteristics. People working for tural, contextual, and punctuated ambidexterity. In
the firm have been describes as all “being somewhat addition, we have introduced a fourth type of peri-
crazy”, A4) and the firm’s recruiting policy might patric ambidexterity that has so far not been dealt
already include a self-selection process as to which with in the literature. While there has recently been
people apply for a job. Once in the business, people an increasing interest into the issue of ambidexter-
either conform to the vision of the firm (that of ity, insights into how ambidextrous designs can be
Steve Job) or leave. For those who have been doing implemented in order to solve marketing dilemmas
the job for a while, it is still astonishing how much are largely lacking. In addition to specific findings
they feel the daily presence of the firm leader (A5: from each of our case firms, several commonalities
While it looks good, it is not the touch and feel to have emerged that extend the previous literature on
make everybody happy ... it is rather tough be- ambidexterity.
cause you feel obliged to function, and I say ‘func- In the case of structural ambidexterity, the decision
tion’ because sometimes you just have to do what to coordinate different activities across organiza-
you are being told. But somehow, it is strange, you tional units has been identified as an important step
do everything for a glimpse of attention”). The du- (O’Reilly and Tushman 2005). For Deutsche Bank
ality of micro-management and charismatic inspira- this was an essential move forward to develop a new
tion provides some of the driving forces for the im- business approach outside the confines of corporate
plementation of explorative activities. While this hierarchies. This solution has also been suggested
strategy has proven successful over the past, the when executives apply paradoxical cognitions
firm may require exploitative moves. However, with (Smith and Tushman 2005) to frame exploration vs.
such a strong person-dominated culture and strat- exploration tensions, e.g. traditional values vs. ex-
egy, the decisive question is whether the firm is able citement in banking, and consequently actions in
to change. One of the major concerns is that a new the firm. However, separating units is only one side
CEO might change the overall orientation of the of the coin and successfully managing an explorative
firm and, thereby, destroy what makes it special. or exploitative unit does not provide insight into
In summary, the four cases provide insights into how value generated in this unit can be transferred
how marketers could coordinate different strategies back to other units or even corporate headquarters.
by implementing ambidextrous designs. All cases While one of the advantages of structural ambidex-
started from different contexts and highlighted dif- terity is that it creates “pragmatic boundaries” (Car-
ferent implementation criteria. While each firm lile 2004) which safeguards conflicting activities,
applied specific implementation tools and proce- our findings suggest that employees working in
dures, there are several commonalities across cases, separate units realize the potential paradox of ex-
which we discuss with reference to the relevant ploration and exploitation but do not necessarily see
literature. them as constraints. For instance, Q110 employees
capitalize on their specific status, but integrate and
reintegrate values and experiences of the different
229
units by regular exchanges and potential career into more exploitation-oriented units. In the case of
moves. Thus, while structural ambidexterity was Celltech, diluting exploitative constraints and pro-
used to kick-start exploratory innovation in bank- gressing to exploration was also based on career op-
ing, contextually ambidextrous individuals were tions and diversified recruiting.
seen as a necessary condition to maintain the spe- In the case of Apple, more formal communication
cific status of the subsidiary. structures dominate. What is communicated largely
Against conventional insight which focuses on the ties to the vision which drives the overall marketing
top management as integrators (O’Reilly and Tush- approach, and has spill-over effects to structures
man 2004; Smith and Tushman 2005; Lubatkin, and leadership principles. Most implementation pa-
Simek, Lin, and Veiga 2006), Deutsche Bank ap- rameters are tied to the dominant orientation and
plies a ‘nested design’. On the (inter)personal level, implementation success becomes a matter of both
it relies on informal knowledge flows and the re- communication quality and quantity. For instance,
cruitment of contextually ambidextrous people. Apple deliberately minimizes communication flows
While selected mechanisms like senior team inte- between hardware and software developers (struc-
gration or cross-functional interfaces have been dis- tural separation) and strategic communication
cussed, the more informal integration mechanisms channels are dominated from the top. This is
should not be underestimated (Jansen, Tempelaar, equally manifested in the external non-disclose pol-
Van den Bosch, and Volberda 2009). In addition to icy as well as limited interdepartmental communi-
formal and often pre-established integration cation. While it is important that visions are com-
mechanisms, informal procedures refer to emergent municated to rationalize both exploratory and ex-
social properties that influence the way employees ploitative innovation (Jansen, Van den Bosch, and
exchange knowledge across boundaries (Tsai 2002). Volberda 2006), in the peripatric version of ambi-
In the case of Deutsche Bank, both formal and in- dexterity, one type of strategy at a specific time is
formal communication channels complement each emphasized. In order to implement explorative
other, information barriers between units are low, marketing strategies the dominant vision is also re-
and knowledge exchange is driven by individuals. flected in recruiting practices. These focus on intrin-
In comparing structural and contextual ambidexter- sically motivated people who share the approach
ity, the former allocates conflicting tasks to different and are ‘fanatics’ by themselves. While other ambi-
units, but misses the value creating component if dextrous designs may fail in this constellation, here
subsequent integration is not sufficiently ensured. the dominance of a top innovator and explorer pro-
Hence, the interplay between structural and contex- vides the glue that welds everything together.
tual ambidexterity provided a basic means to sup- This is in stark contrast to contextual ambidexterity
port knowledge transfer from exploratory to ex- (Deloitte Consulting), which integrates an openness
ploitative units. People with the ability to behave of mind into value systems and promotes flexibility
differently in the same context (i.e. contextually in deriving at customer-centric work with high satis-
ambidextrous managers) or those who are able to faction rates. While value systems are inspiring, the
switch contexts (which may drive the shift of whole continuity of the business requires that strategy is
teams towards explorative or exploitative functions, flexibly adapted (even though this is unlikely to oc-
i.e. punctuated ambidexterity) can be seen as vital cur in the form of dramatic jumps). In turn, it re-
agents of balancing conflicting marketing strategies. quires managerial mindsets that are equally open to
For these capabilities and their efficient allocation conflicting options of exploration and exploitation,
across the boundaries of structurally separated especially when acting in an international context.
units, the organization needs to provide career in- Recent insights in this typical international market-
centives to support contextually sensitive managers. ing dilemma have been discussed with reference to
This leads to continuously creating new combina- the notion of strategic ambidexterity. This captures
tions of exploratory and exploitative marketing the trade-off between a multiple pro-growth vs. a
strategies at other levels of the firm (Sirmon, Hitt, focused pro-profit strategy (Han 2007) where the
and Ireland 2007). This is what both Deutsche Bank former favours multinational marketing and the lat-
and also Celltech did. In promoting former Q110 ter standardized market operations.
employees into higher management positions they In comparing contextual and punctuated ambidex-
transferred a creative customer and marketing focus terity from a knowledge development and recruiting
230
perspective, several insights emerge. Both can be to rely on specialist knowledge to promote and im-
explained with reference to the dynamic capability plement one type of strategy without engaging em-
view (Teece, Pisano, and Shuen 1997) which has re- ployees into too many cognitive paradoxes (Smith
cently been extended to include marketing dynamic and Tushman 2005). This is not to say that learning
capabilities (MDCs), i.e. “the responsiveness and does not play a role in a peripatric orientation, but
efficiency of cross-functional business processes for companies need the brightest technological people
creating and delivering customer value in response and often leave soft-skills development to individual
to market changes” (Fang and Zou 2009: 3). MDCs initiatives.
are required because the ability to create and deliver In summary, both within and across-case discus-
superior customer value through efficient and fast- sions have highlighted different implementation in-
responding marketing processes has become one of struments which can be applied to solve marketing
the major sources of competitive advantage to firms dilemmas. These insights may be used for formulat-
(Day 1994). It is the customer focus which makes ing further challenges for research.
MDCs particularly relevant for this research as it
distinguishes MDCs from other dynamic capabili- 6 Implications for Further Re-
ties. In the case of Deloitte, MDCs are specifically search and Marketing Practice
related to customer relationship building via trust Implications for further research can be derived
and capability development which focuses on multi- from both the limitations and the contributions of
context and multi-client adaptability. This is in line this study. The limitations of this research can be
with what Bartlett and Ghoshal’s (1989) focus on divided into three categories. First, in exploratory
integrating recruitment and selection, training and research small numbers of cases are acceptable, but
career path management as ways of stimulating a investigating additional and more varied cases is
company to become globally integrated and locally likely to yield promising insights. Second, with the
responsive at the same time. In contrast, Celltech’s choice of Apple and Celltech, we presented two ex-
capability development is rather product-based amples focused on (the move towards) explorative
(drug development) and process-based (learning to strategy while insights into the opposite direction
collaborate) where expert competences need to be would also be useful. Third, in investigating imple-
translated into core technologies and cutting edge mentation categories, we relied on a mix of existing
offerings. categories from the marketing strategy and ambi-
The differences between variations of ambidexterity dexterity literature. However, both streams of re-
is also reflected in the recruiting approaches, which search have not yet reached a stage of consolidated
focus either on generalist and client-compatible atti- insights which is evidenced by the heterogeneity of
tudes (contextual ambidexterity) or in-depth spe- approaches and elements (Li, Guohui, and Eppler
cialist knowledge (punctuated ambidexterity) or on 2008). One of the immediate consequences in this
both to be allocated to different units (structural research relates to initially low inter-rater reliability
ambidexterity). A specialist focus is required when percentages due to overlapping categories. Thus,
firms transgress through certain stages, and special- further research may start from redefining catego-
ist knowledge provides psychological safety (Ne- ries based on empirical insights.
manich and Vera 2009). However, both the Celltech Our results demonstrate that knowledge of ambi-
case and the literature suggest that strategy imple- dextrous designs, associated tools and procedures is
mentation is improved through flexibly inserting a prominent requirement when companies want to
new and disconnected knowledge into the firm solve their marketing dilemmas. Each of the four
which challenge the existing resource base (Guettel ambidextrous designs facilitates the solution of dif-
and Konlechner 2009). This is especially important ferent marketing dilemmas and requires a different,
when firms experience core technology changes partly overlapping, set of implementation factors.
which require the speedy acquisition of new knowl- These relate both to the personal and the organiza-
edge without rendering previous expert knowledge tional level and warrant further attention (Table 2).
superfluous. Here, complementing specialists’ Further, studies should not only investigate the im-
knowledge by ongoing learning routines which ad- plementation of one of the four types of ambidexter-
just the corporate knowledge base has proved use- ity in isolation but focus on their dynamic interplay
ful. In comparison, peripatric ambidexterity is likely both within organizations and over time.
231
Table 2: Summary and Research Implications

Marketing Driver of Ambi- Implementation Implementation
dexterity Personal Level Organizational Level
Structural ambidexterity  New business approach out-  Integration through infor-  Transversal careers across
side stagnating core busi- mal knowledge flows units
ness  Recruiting of contextually  Top management provides
 Conflicting values of mar- ambidextrous people vision and goals but grants
keting message (e.g. excite- autonomy in procedures
ment vs. tradition)
Peripatric ambidexterity  Personality-driven product  Recruiting focus explora-  Clear guidelines on work
and marketing approach tion-oriented people procedures
 Desired spill-over effects  Intrinsic motivation drivers  Limited cross-functional
(person – organization - interfaces (in critical areas)
brand)
Contextual ambidexterity  Market approach  High motivated to learn and  Career development with
 Marketing dynamic capa- quickly adjust to new con- leeway for technical and
bilities tingencies managerial careers
 Trust as essential personal  Managerial support
and interpersonal compe- throughout business proc-
tence esses, task assignments, ca-
reer perspective
Punctuated  Core technology changes  Expert knowledge  Effective linkages between
ambidexterity (product substitutions)  Willingness to engage in teams through shared cul-
 Core competence-based learning and knowledge ture
marketing sharing in addition to ex-  Multi-functional project or-
pert status ganization
In addition, attention should also be paid to situa- ambidexterity might be called for. Finally, senior
tions when firms adopt temporal models of ambi- marketing managers will have to give their brand
dexterity as they are required to optimize the fit be- managers sufficient latitude to strike the fine bal-
tween internal design parameters and constantly ance between the introduction of new products and
changing external contingencies. Research may be the extension of existing products. Thus, creating
further inspired by configuration theories (Miller the right environment for contextual ambidexterity
and Friesen 1984) which discuss the interplay be- would be the order of the day.
tween these two types of parameters. It would also However, as this study has illustrated, rather than
be particularly important to analyze whether the use focusing on isolated marketing dilemmas, managers
of different types of ambidexterity is conducive to will most likely require a more integrated approach.
explaining underlying differences in terms of per- Thus, meeting the multi-layered challenges of suc-
formance. cessful marketing, they are likely to implement dif-
For marketing practitioners, an understanding of ferent types of ambidexterity in the firm. Fulfilling
the four types of ambidexterity and the associated singular requirements may be relatively easy and
implementation tools provides a basis for finding previous research has extensively dealt with the du-
systematic solutions to several common marketing alism of exploration and exploitation strategies, but
dilemmas. This could imply the tension between as Raisch (2008: 484) urges us “further insights are
marketing established or conventional products and needed about the specific contexts [of ambidextrous
emerging new products which may be resolved by designs], which factors contribute to their successful
structural ambidexterity. Conflicts between a zeal- implementation, and what outcomes are likely to
ous business development and a sluggish R&D may result from their use.” This implies that understand-
point towards the need for a better synchronisation ing the compatibility of implementation instru-
through punctuated ambidexterity. In contrast, if ments becomes a vital part in pursuing balanced
senior management finds its company too research marketing strategies.
driven but lacking in commercialisation, a new mar-
keting director may offer a solution, i.e., peripatric
232
7 Conclusions sequently, our analysis of Celltech is literature-

This study is among the first that adopts a market- based and complemented by a few selected inter-
ing lens to investigating ambidexterity. We contrib- view insights. In the case of Apple we encountered
ute to both previous research and managerial prac- further challenges, which we did not fully realize in
tice as to how firms in general - and marketing the first round. Due to a corporate non-disclosure
management in particular - may manage and organ- policy it was difficult to obtain more fine-tuned in-
ize the dual pursuit of exploratory and exploitative formation. We, therefore, included external partners
strategies. Even though a few existing studies have and former employees. In addition, we used projec-
investigated selected types of ambidexterity, we are tive techniques in the interview process. Projective
currently unaware of any research that includes the or third person techniques are used when the re-
notion of peripatric ambidexterity and further dis- quired information cannot be accurately obtained
cusses the interplay of four different balancing by direct methods (or directly concerned interview
mechanisms. Our findings illustrate that firms use partners). They are also highly recommended in ex-
these mechanisms by drawing on a variety of im- ploratory research to provide significant insights
plementation elements. In changing or extending (Webb 1992). As qualitative analysis and interpreta-
their marketing orientation, managers need to be tion of projective techniques are no different from
well aware of the complementary and potentially the procedures for qualitative research in general,
conflicting use of implementation designs. we continue the analysis phase in the same way as
for direct interviewing.
In sum, in the second round we conducted 20 inter-
Appendix - Details of Methodological views, by applying three complementary methods:
Approach traditional interviews based on semi-structured
Each of the four firms, Celltech, Apple, Deloitte, and questionnaires, literature-based case analysis, and
Deutsche Bank, was approached to provide addi- interviews based on projective techniques. All inter-
tional data on the specific ambidexterity type it views lasted, on average 90 minutes. When contact-
scored most prominently in the first round, i.e., ing interview partners, all participants were in-
Deutsche Bank for structural ambidexterity, formed that the study was primarily about balanc-
Deloitte for contextual ambidexterity, Apple for pe- ing difficult marketing-related tasks and conflicts,
ripatric ambidexterity, and Celltech for punctuated and how to communicate and market these chal-
ambidexterity. However, during interviews, new lenges both internally and externally. The term
evidence for different types of ambidexterity was “ambidexterity” was not mentioned initially as pre-
found, which gave rise to further analysis. vious experience indicates that the majority of man-
When (re)contacting these firms and respective in- agers has not yet encountered the notion of ambi-
terview partners, we encountered a differential will- dexterity even though most managers use what the
ingness to answer further detailed questions. While literature has identified as ‘ambidextrous coordina-
interviews with Deutsche Bank and Deloitte were tion designs’. This discrepancy is a pertinent issue as
continued with semi-structured questionnaires, managers often use different words than research-
both Celltech and Apple required a change in the ers and a shared meaning is required before advanc-
interview approach. Celltech is a company, which ing with the issue (Astley and Zammuto 1992).
was acquired by UCB in 2004 and no longer exists In addition to interview data, available material
in its original form. In the first round, interviews in- both from the public press, company reports and
volved broader aspects of innovation and strategy; existing previous research was included for data tri-
but the focus of this second round-investigation re- angulation (Jick 1979). Resulting insights illustrate
lates to very specific developments in the past, and our theoretical perspective and describe the chal-
suitable interview partners that experienced Cell- lenges associated with implementing each type of
tech’s strategy changes were difficult to find. How- ambidexterity. In order to prepare data for analysis,
ever, we decided to maintain the firm as it is one of interviews were audio-taped, transcribed and, when
the typical classic cases of punctuated ambidexterity necessary, translated into English. Full transcripts
(equilibrium), which is well documented in the case of interviews were prepared and, subsequently,
literature (e.g. McNamara and Baden-Fuller 1999; abridged to capture the data directly relevant to our
McNamara, Baden-Fuller, and Howell 1999). Con- research topic. We assigned code numbers to each
233
interview per firm (A1, A2, etc. for Apple, B1, B2 etc. those mentioned for ambidextrous strategies. We
for Deutsche Bank, C1, C2, etc. for Celltech, and D1, decided to define main categories (9) and main-
D2, etc. for Deloitte), which later facilitated the tained sub-categories (24) whenever this seemed
identification of interview quotes and multiple men- useful to support subsequent coding (Srnka and
tions. In the categorization process, nine major Koeszegi 2007). In the coding process, we assigned
categories emerged. Assigning categories was based interview statements to categories. Statements or
on a deductive-inductive procedure which combines “sense units” (Bubert, Gadner, and Richards 2004)
the advantages of reliability (with criteria derived have been identified as the best basis for coding and
from theory) and those of validity (which suggest an analysis. We independently categorized the 127
inductive development that captures the essence of statements, which we identified in the interviews,
the phenomenon) (Druckman and Hopmann into the nine categories illustrated in the strategy
2002). We started with categories from the imple- and ambidexterity implementation literature (see
mentation literature and complemented them with Table A.1 for an example of the coding process).
Table A.1: Coding Example
Definition – Main Category Coding: Firm/Interview No.-Category-Subcategory: Sense unit
with key words in italics
Goals: current and future objectives (financial and strategic) of A3-G(oals)-St(rategic Vision): Sense unit: “[…] and when you are
the firm, both corporate and business unit level; vision of the asked to judge on the future; what you can always say is that there
firm, vision of CEO, firm development will be something new, there is constant innovation,… the firm is
constantly re-inventing itself and this is how it defines its strategy.”
Organizational Context: formal guidelines, controls, monitor- B3-O(rganizational)Context-Au(tonomy): Sense unit: “You know,
ing, daily work context that affects motivation, organization of there are constraining and supporting factors but we work here be-
work environment cause we like the context; we organize our work largely by ourselves,
.. Sense unit: we kind of create our own environment so that eve-
rybody can work according to the best of his abilities and for the
maximum benefit of Q110…”
As one of the criteria for “good” science is based ting. Referring back to the strategy implementa-
inter-subjectivity through multiple person in- tion literature did, indeed, provide evidence that
volvement, we independently engaged two people these categories have often been diluted (Li, Guo-
in the process of allocating statements to the nine hui, and Eppler 2008). After in-depth discussion,
major categories identified in the literature. The we increased agreement and were able to allocate
researchers initially achieved an agreement of all statements to nine categories. The resulting
65% which is not very high. Major differences oc- categories and subcategories are summarized in
curred in the categories leadership style vs. com- Table A.2 which also depicts the number of men-
munications and behavior complexity vs. recrui- tions per category and some illustrative quotes.
Table A.2: Implementation Categories, Subcategories, and Interview Examples

Implementation Litera- Subcategories Illustrations
Categories (num- ture Re-
ber of mentions) ferences
Goals Noble  Corporate A4: ”There is always the run after the next hype, you feel the drive and you
(1999) goals know what, when Steve was away, it was different“
(11x)  Unit goals B2: “The concept [Q110] was established with a long-term perspective in
 Strategic mind, but of course it is subject to change. This is pretty clear when we want
vision to fill the notion ‘bank of the future’ with life…what is important is new client
generation and we have roughly 50% higher rates than other subsidiaries;
our client focus in clearly king“
Clit: ”It came from the top. Of course, there were managers further down
but the way we were going to organize ourselves came from David Bloxham
(Director of Research)”; (McNamara et al. 1999: 7)
234
Table A.2 continued: Implementation Categories, Subcategories, and Interview Examples

D2: “We always have very clear and challenging objective and we keep them
high… but , actually our strategy is not changing dramatically but the envi-
ronment is and we need to update our knowledge”
Structures Govinda-  Organization A1: “We have several clearly defined structural devices, e.g. international
rajan structures sales and all the financial functions are coordinated in Cork… but even here,
(12x) (1988)  Team struc- there are regional structures, even though with few hierarchies… and very
Drazin and ture quickly you are in the US”
Howard  Integration B8: “We have two teams which deal with customers in a different way. First,
(1984) there is the Forum Team, which is the first contact for everybody. These
people are moving freely in the area. Then, we have the Client Team, which
is responsible for fixed meetings, and for coordination subsequent meet-
ings.”
C2: “It was very fluid…you were in contact with almost everybody…in the
old times, you went to work and you had your three colleagues, that was it..”
D1: “Of course we have clear structures, but it depends on the level, and it is
more that you facilitate exchange than imposing constraints.”
Leadership Style Gupta and  Support A4: “He clearly is the great motivator…when you listen to his public
Govinda-  Motivation speeches, and even more, when you meet him internally, the vision is alive, it
(14x) rajan  Empathy lives, and he is by no means a normal boss”
(1984) A4: “It is crazy how one person drives this firm…you are always expecting
him to introduce the next hype and you discuss it in your team with your
colleagues and you also think about new ideas”
B7: “You know, we all work here because we wanted to; if we work long
hours, this does not really matter because we are motivated, we believe we
are doing an exciting job here, and what’s most important…we like it”
Clit: “New management entered the firm but was cautious at first, galvaniz-
ing the commitment of a key group of scientists and administrators prior to
announce a change in strategy” (McNamara and Baden-Fuller, 1999: 304)
D4: “I always try to see the potential of people, I listen intensively, challenge
them… help them, and discuss options with them”
Communications Westley  Informal A2: “You get to know what is important for your work but sometimes I
(1990) communica- would like to be more involved. Also, you hear different things from different
(21x) Rapert, tion people as if they do not communicate with each other”
Velliquet-  Formal B8: „It is important that you do not only focus on your own things but also
te, and communica- show responsibility towards each other and act to support the customer best.
tion
Garretson This requires that you, kind of anticipate what others will do but also that
(2002) you constantly communicate“
C1:”There were so many diverse opinions, people looked at the world differ-
ently…we were constantly in the process of negotiation, you know this was
everywhere, we did not rely on any official communications channels…but of
course, there was also information coming from the boss”
D4: ”Much is based on trust. I try to communicate clearly and build a rela-
tionship. It is like with external clients. Once they work with you they know
they can trust us and we help them. It is sometimes that these relationships
are more important than the knowledge because others also have this
knowledge”
Incentives Walker,  Financial A1: “Formal financial incentives are very rare…this was different earlier, but
Churchill,  Immaterial today, you have to launch a big bang. But you work in this company and
(9x) and Ford quite often you feel this is an incentive…”
(1977) B3: ”There is no differences in financial rewards, this is pretty much the
same across all subsidiaries.. B3: “…many people, after they left Q110 have
continued their management career somewhere else within Deutsche Bank.
Having worked for Q110 is apparently seen as a preparation for major career
jumps”
235

C2: ”We had very formal appraisal systems and there was an additional in-
centive system with quarterly bonus awards for exceptional contributions.”
D2: “You can imagine that incentives are attractive and we expect a lot. In
the long run, it will be your overall performance that brings you to partner
level and, apart from everything else, this is well rewarded”
Culture Nemanich  Team spirit A5: “You find many people here late in the night who discuss and experi-
and Vera  Openness ment with colleagues…it is there that you develop the best ideas”
(16x) (2009) B1: ”We have a strong team spirit and we help each other even if this is
sometimes difficult … especially if you look at the large area here. But it is
clear that we try to permanently be in touch, this also relates to communica-
tions between teams and between bankers and shop employees and – you
know, even though the latter are not bankers, they are employed by DB, we
have no typical shop in the shop principle here”
Clit: “We created a culture of flexibility. For instance, one principle is the
sanctioning of scientists spending up to 10 percent of their time on individ-
ual projects…We want them the use their knowledge in a direction uncon-
strained by project requirements” (McNamara, Baden-Fuller, and Howell
1999: 12)
D3: “We have a very open culture, where we are critical and challenge each
other. We are interested in what people and their potential to contribute,
and this is what we permanently encourage”
Organizational Bartlett  Autonomy A1: “It’s simply that you can do what you like most. People hang around late
Context and Gho-  Guidelines / hours and discuss the newest gadgets, others go early or work from home…
shal Control you can really influence your own work environment”
(11x) (1994);  Managerial A1: “There are very clear and strict guidelines and you normally check with
Jaworski Support your boss and make sure he agrees”
and McIn- B2: “Of course, there were guidelines but they used to be much stronger ...
nis (1989) Today, there are many things we can largely decide on our own and quite
often only briefly check back with the HQ. In fact, is has happened that ideas
developed from the HQ did not work at all in our subsidiary”
B4: “People who work here have a good feeling for what works and what it is
that customers like”
Clit: ”You manage the projects by objectives and milestones.. You have reg-
ular quarterly reviews, after all, we are a small company so you can monitor
things reasonably closely”. (McNamara, Baden-Fuller, and Howell 1999: 10).
D3: “We have, and need to have financial objectives, which means you
should really spend your time on billable hours with the client. But the natu-
ral context allows for time to do research, and you are not far away from
your clients when you develop something because we listen to clients and
involve them in research”
Behavioral Com- Sproull  Role Behav- A5: “While people seem to have huge leeway in what they do, I have the
plexity and Hof- ior feeling that there are serious constraints in how flexibly they can really act”
meister  Flexibility B3” We need to be flexible here, we incorporate different roles, from event
(17x) (1986)  Commitment manager to conservative banker. We need to adjust to our clients because
client satisfaction is key”
B5 “every employee is not only banker but always something like a customer
relationship manager, a PR specialist, in short someone who thinks out of
the box. You need to sell not only banking service but also kitchen accesso-
ries and concert tickets and you need to live this!!”
C1: ”It was quite amazing. Formerly, you were a specialist in your field.. you
still continued to be one but the new task was to move out of the box and
increase interdepartmental knowledge sharing”
D1: “People travel from London to Spain to Portugal, all within one week.
They communicate fluently in these languages and shift between cultures. Of
course, you also have this in client relations. For some consultants, it is cer-
tainly less challenging to spend more time on office work”
236

Recruiting Pearce and  Personality A4: “It’s not a normal firm, they are all fanatics. Even our bankers are not
Robinson  Education normal bankers. You have to be a special type of person here and you need
(16x) (2005)  Learning to like it. Perhaps, this is already a self-selection criterion in the recruitment
Skills process…”
B4: “Criteria for recruiting are fairly simple: openness, a basic interest in the
job, you use of body language. Probably, there is a self-selection process,
people come here because they want to work here, later on they receive
trainings and coaching.”
Clit:”…simultaneously, 35 medical chemists were brought into the firm.
This new blood not only provided key skills needed to implement the new
strategy, but also a group of people who could stimulate and challenge”
(Dodgson, 2001: 144)
D4: “Individual objectives and career perspectives can change and then we
discuss new options.. and there often is an option to change careers in the
firm, like from managerial aspirations to technical expertise…so we are basi-
cally looking for open-minded people who can communicate well and who
also have the personality to stand in front of the client”
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88-93. sor of International Marketing and Strategy at EM Lyon Busi-
ness School in France. After several years in industry and man-
Sproull, Lee S. and Kay R. Hofmeister (1986): Thinking about agement consulting she returned to academia and obtained her
Implementation, Journal of Management, 12: 43-60. Ph.D. from Geneva University. Switzerland. She held both
Srnka, Katharina J. and Sabine T. Koeszegi (2007): From teaching and research positions with the Open University and
Words to Numbers: How to Transform Qualitative Data into the University of Liverpool in the UK, the Vienna University of
Meaningful Quantitative Results, Schmalenbach Business Review, Economics and Business Administration in Austria as well as
59: 29-57. visiting assignments in several Asian and European countries.
Teece, David, Gary Pisano, and Amy Shuen (1997): Dynamic Bodo B. Schlegelmilch, M.Sc., Ph.D., D.Litt., is Dean of the
Capabilities and Strategic Management, Strategic Management WU Executive Academy and Professor of International Market-
Journal, 18: 509-533. ing and Management at the Vienna University of Economics
and Business Administration (WU) and at Leeds University
Thompson James D. (1967): Organizations in Action: Social Sci- Business School. He is also a Fellow of the Chartered Institute
ences Bases of Administrative Theory, McGraw Hill: New York. of Marketing and Adjunct Professor of International Business
Tsai, Wenpin (2002): Social structure of ‘coopetition’ within a Studies at the University of Minnesota, Carlson School of Man-
multiunit organization: Coordination, competition, and intra- agement and at Kingston University, London, UK.
240
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Volume2 Issue2 December 2009 Final

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Accounting | Finance | Management | Marketing | Operations and Information Systems

Operations and Information Systems

Effects of Ownership on Hospital Efficiency in Germany

Authors contributing to the tax CAPM discussion usually

Accounting | Finance | Management | Marketing | Operations and Information Systems

Effects of Ownership on Hospital Efficiency in

1 Introduction reimbursement system, which was based on per-

PRIVATE-FP 0.619 0.170

PRIVATE-NP 106.5 80.7 Three model specifications served as a sensitivity

Table 3: Variable definitions and descriptive statistics for second-stage analysis*

Variable name Definition Mean SD

PUBLIC 0.402 0.247

PRIVATE-NP 0.283 0.187

PRIVATE-FP 0.355 0.229

BEDS Number of beds per hospital 330.3 279.3

PUBLIC 417.7 418.6

PRIVATE-NP 272.4 161.7

PRIVATE-FP 231.2 199.8

PUBLIC 0.178 0.382

PRIVATE-NP 0.139 0.346

PRIVATE-FP 0.332 0.471

PUBLIC 0.856 0.351

PRIVATE-NP 0.791 0.406

PRIVATE-FP 0.525 0.500

PUBLIC 0.065 0.115

PRIVATE-NP 0.063 0.134

PRIVATE-FP 0.091 0.243

TEACH Ratio of apprenticeship training positions 0.269 0.426

PUBLIC 0.302 0.518

PRIVATE-NP 0.274 0.355

PRIVATE-FP 0.150 0.355

Figure 1: DEA efficiency scores and quality-adjusted DEA efficiency scores

0 .2 .4 .6 .8 1 0 500 1000 1500 2000

Figure 2: Histogram with hospital density versus market concentration

may be well advised to change their acquisition Acknowledgements

Appendix 1: Correlation matrix for the input and output variables

3 - MEDTECH 0.971 0.915 1

4 - ADMIN 0.950 0.893 0.940 1

5 - OTHER 0.870 0.890 0.872 0.874 1

6 - SUPPLIES 0.960 0.909 0.951 0.907 0.835 1

7 - INPATIENT 0.911 0.948 0.856 0.841 0.821 0.862 1

8 - 1-MORTALITY 0.084 0.067 0.088 0.073 0.074 0.093 0.075 1

Appendix 2: Correlation matrix for the organizational and environmental variables

3 - EAST 0.359 0.101 1

4 - AMBULATORY 0.041 0.162 -0.072 1

5 - HIRED BEDS -0.041 -0.197 -0.168 -0.081 1

6 - TEACH 0.001 0.134 -0.060 0.018 -0.077 1

7 - CONVERSION 0.062 0.003 0.040 -0.035 -0.042 0.043 1

Appendix 3: Regression results for each model - full model specification

PRIVATE-FP served as reference category

PSEUDO-R² 0.146 0.161 0.157

Appendix 4: Regression results – modification of the number of periods useda

PRIVATE-FP served as reference category

Appendix 4 continued: Regression results – modification of the number of periods useda

Appendix 4 continued: Regression results – modification of the number of periods useda

Appendix 4 continued: Regression results – modification of the number of periods useda

YEAR 2003 0.017 0.006 2.750 0.006

PSEUDO-R² 0.161 0.136 0.142 0.142

Appendix 5: Regression results - modification in terms of hospital sizea

PRIVATE-FP served as reference category

Appendix 5 continued: Regression results - modification in terms of hospital sizea

Appendix 5 continued: Regression results - modification in terms of hospital sizea

Appendix 5 continued: Regression results - modification in terms of hospital sizea

PSEUDO-R² 0.188 0.161 0.158 0.206