The Origin of Business Practices
Authors: Itzhak Ben-David (Fisher College of Business)
Title: The Origin of Business Practices
Abstract: Business practices are typically simple and intuitive (e.g., valuation, debt management, compensation). I propose that these practices developed in an evolutionary process akin to competitive innovation process. Methods that are simple and intuitive are more likely to survive. First, they are less prone to overfitting and therefore robust across economic environments and applicable in new settings. Second, they are easy to communicate and hence are stickier and can be easily spread. Stickiness, however, may lead to suboptimal practices because switching is costly. The theory suggests a tradeoff between stickiness and optimality, and can explain puzzles in corporate finance (e.g., corporate leverage).