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http://hbswk.hbs.edu/topics/finance.html[23-09-2013 23:12:00]
BROWSE BY: TOPIC Business History Entrepreneurship Finance Accounting & Control (75) Corporate Investment (20) Financial Regulation (52) Non-venture Financing (17) Personal Investing (32) Public Markets (21) Venture Financing (29) General Finance (79) Globalization Leadership & Management Marketing Operations Organizations Social Enterprise & Nonprofit Strategy All Topics
Finance
09 SEP 2013 WORKING PAPERS
The Disintermediation of Financial Markets: Direct Inv Equity

Lily Fang, Victoria Ivashina, and Josh Lerner
INDUSTRY GEOGRAPHY
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As numerous news stories document, interest on the part of institutiona undertaking direct investmentsand thus bypassing intermediariesap substantially. More generally, the impact of financial intermediation has considerable examination in the corporate finance literature. On the one should be able to overcome transaction cost and information problems be prone to agency conflicts that affect their performance. In this paper private equity, a setting in which disintermediation has become increas equity might appear to be a textbook case where the benefits from fina this case, specialized fundswould be substantial: not only are the tran associated with structuring these investments large, but substantial info surround the selection, monitoring, and nurturing of the investments, gi information advantages for specialized investors. Using proprietary data a set of institutions, both co-investments and direct investments, betwe authors find a sharp contrast between the performance of solo deals an deals. Outperformance of solo direct investments is due in part to their information advantages by investing locally and in settings where inform
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too great, as well as to their relative outperformance during market pea underperformance of coinvestments appears to be associated with the available for coinvestments. Read More
29 AUG 2013 WORKING PAPERS
X-CAPM: An Extrapolative Capital Asset Pricing Mod

Nicholas Barberis, Robin Greenwood, Lawrence Jin, and Andrei Shleifer
Many investors assume that stock prices will continue rising after they and will continue falling after they have previous fallen. This evidence, with the predictions of many of the models used to account for other fa stock market prices. Indeed, in most traditional models, expected return prices are high: in these models, stock prices are high when investors perceive less risk. In this paper, the authors present a new model of ag prices which attempts to both incorporate expectations held by a signif and address the evidence that other models have sought to explain. Th captures many features of actual returns and prices. Importantly, howe with survey evidence on investor expectations. This suggests that the s consistent with the facts about prices and returns and may be the key t Read More
Waves in Ship Prices and Investment

Robin Greenwood and Samuel Hanson
Dry bulk shipping is a highly volatile and cyclical industry in which earn returns on capital appear in waves. In this paper, the authors develop a capacity dynamics in which industry participants have trouble forecastin and fail to fully anticipate the effect that endogenous supply responses The authors estimate the model using data on earnings, secondhand p the dry bulk shipping industry between 1976 and 2011. Findings show and operating a ship are predictable and closely related to industry-wid High current ship earnings are associated with higher ship prices and h investment, but predict low future returns on capital. Conversely, high le a measure of industry disinvestment-forecast high returns. Read More
26 JUL 2013 WORKING PAPERS
Accountability of Independent Directors-Evidence fro Securities Litigation

Francois Brochet and Suraj Srinivasan
Shareholders have two publicly visible means for holding directors acco directors and they can vote against director re-election. This paper exa independent directors when firms experience litigation for corporate fina sample of securities class-action lawsuits from 1996 to 2010, the autho of the mechanisms that shareholders have to hold directors accountab they hold accountable. Results overall provide an empirical estimate of accountability that independent directors bear for corporate problems th class-action litigation. These findings are useful for independent directo of risk they face from litigation, shareholder voting, and departure from While the percentage of named directors is small compared with the ov directors, individual directors can weigh their risk differently. From a po findings provide insight on the role that investors play in holding directo corporate performance. Read More
01 JUL 2013 RESEARCH & IDEAS
Crowdfunding a Poor Investment?

Crowdfunding promises to democratize funding of startups. But is that thing? Entrepreneurial finance experts Josh Lerner, Ramana Nanda, an the promises and problems with the newest method for funding small b comment; 12 Comments posted.
11 JUN 2013 WORKING PAPERS
Measurement Errors of Expected Returns Proxies an of Capital

Charles C.Y. Wang
In accounting and finance the implied cost of equity capital (ICC)defi of return that equates the current stock price to discounted expected fu
increasingly popular class of proxies for the expected rate of equity retu intuitively appealing and have the potential to help researchers better u sectional variation in expected returns, much remain unknown about th measurement errors and how to correct for them; thus their use in regr be interpreted with caution. This paper studies the measurement errors popular implementation of ICCs developed by Gebhardt, Lee, and Swa paper finds that ICCs can have persistent measurement errors that are risk or growth characteristics, and thus produce spurious results in reg finds that ICC measurement errors are driven by not only analyst foreca functional form assumptions, suggesting that correcting for the former a resolve these measurement-error issues. Together, these findings emp complementing ICC regressions with realized returns to establish robus returns. Read More
Do Strict Capital Requirements Raise the Cost of Cap Regulation and the Low Risk Anomaly
Malcolm Baker and Jeffrey Wurgler
The instability of banks in the financial crisis of 2008 has stoked the en optimal capital requirements. One of the central concerns has long bee capital requirements affect banks' overall cost of capital, and therefore economic activity. In this paper, the authors estimate how leverage affe bank equity and the overall cost of capital in practice. They are especia potential interaction of capital requirements and the "low risk anomaly" That is, while stocks have on average earned higher returns than less corporate bonds, which in turn have earned more than Treasury bonds that the basic risk-return relationship within the stock market has histor inverted. Using a large sample of historical US data, the authors find th within banks may represent an unrecognized and possibly substantial d capital requirements. However, despite the fact that tightened capital re considerably increase the cost of capital and lending rates, with advers investment and growth, such requirements may well remain desirable w social benefits and costs are tallied up. Read More
29 MAY 2013 RESEARCH & IDEAS
Faculty Symposium Showcases Breadth of Research

Faculty present their latest research on the human tendency toward dis crowdsourcing to solve major scientific problems, and the impact of priv Open for comment; 3 Comments posted.
24 MAY 2013 WORKING PAPERS
Improving Store Liquidation

Nathan Craig and Ananth Raman
Store liquidation, defined as the time-constrained divestment of retail st sale of inventory, is a critical aspect of the retail industry for both defun Store liquidation is important for firms and investors, affecting everythin performance to how retailers are financed and how investors are comp liquidation is fundamental to innovation in the retail sector, since extrac stores and firms is a key step in the process of creative destruction. In introduce methods for increasing the efficiency of store liquidations ope disposition firms, and they thus extend management science technique problem that has not yet been addressed by the literature. These meth through a collaboration with GBG, a prominent liquidator, during the liq inventory. Read More
16 APR 2013 WORKING PAPERS
The Auditing Oligopoly and Lobbying on Accounting S

Abigail M. Allen, Karthik Ramanna, and Sugata Roychowdhury
The US auditing industry has been characterized as an oligopoly, which tightened from eight key players to four over the last 25 years. This tigh change the incentives of the surviving big auditors, with implications for economy. Motivated by the economic and public policy implications of t oligopoly, the authors of this paper investigate the changing relation be accounting standards. Accounting standards are a key input in the aud their effects on financial reporting, can impact capital allocation decisio Results show that the big auditors are more likely to identify decreased standards as the auditing oligopoly has tightened: This suggests that b
higher litigation and political costs from the increased visibility that acco oligopoly. The findings are also consistent with tighter oligopoly decrea the surviving firms to satisfy client preferences in accounting standards support the concern that tightening oligopoly has rendered the surviving fail." Read More
25 MAR 2013 RESEARCH & IDEAS
How Chapter 11 Saved the US Economy

In a relatively short time, much of the corporate debt that defaulted dur has been managed down and corporate profits have rebounded. Stuart power of Chapter 11 bankruptcy Open for comment; 5 Comments post
20 FEB 2013 RESEARCH & IDEAS
Big Deal: Reflections on the Megamerger of America

The proposed marriage between American Airlines and US Airways wo largest airline. Professors Rosabeth Moss Kanter and Stuart Gilson ref Open for comment; 0 Comments posted.
15 FEB 2013 WORKING PAPERS
Expectations of Returns and Expected Returns

Robin Greenwood and Andrei Shleifer
Much of modern asset pricing seeks to explain changes in stock marke theories of investors' time-varying required returns. Although researche considerable progress in developing proxies for expected returns, an im overlooked test of these theories is whether investors' expectations line This paper shows that they do not. Read More
Are the Big Four Audit Firms Too Big to Fail?

Although the number of audit firms has decreased over the past few de "Big Four" survivors have become too big to fail may be a stretch. Rese Karthik Ramanna and colleagues suggests instead that audit firms are taking risks. Open for comment; 13 Comments posted.
Dollar Funding and the Lending Behavior of Global B

Victoria Ivashina, David S. Scharfstein, and Jeremy C. Stein
A striking fact about international financial markets is the large share of intermediation done by non-US banks. The large footprint of global ban lending markets raises several important questions. This paper takes th banks in dollar loan markets as a given, and explores the consequence cyclical variation in credit supply across countries. In particular, the aut the ability of a foreign bank to raise dollar funding translate into change both in the US and in its home market. Overall, the authors identify a c shocks outside the US can affect the ability of American firms to borrow by foreign banks increases the supply of credit to US firms during norm prove to be a more fragile source of funding that transmits overseas sh economy. Read More
31 JAN 2013 WORKING PAPERS
Boardroom Centrality and Firm Performance

David F. Larcker, Eric C. So, and Charles C.Y. Wang
Economists and sociologists have long studied the influence of social n markets, political outcomes, and information diffusion. These networks interpersonal and inter-organizational support, influence, and informatio studies the boardroom network formed by shared directorates and exam having well-connected boards, finding that firms with the best-connecte earn substantially higher future excess returns and other advantages. R
Cost of Capital Dynamics Implied by Firm Fundamen

Matthew Lyle and Charles C.Y. Wang
Despite ample evidence that expected returns are time varying, there h empirical research on estimating the dynamics of firm-level expected re dynamics of firm-level expected returns is important, because it allows understanding of firm risk over time and can inform investors in tailorin match their desired investment horizons. Findings show that cost of ca highly persistent. The authors also demonstrate that the model produce expected returns that can predict future stock returns up to three years portfolio returns with near monotonicity. Aside from its practical contribu a budding finance and accounting literature that studies the properties dynamics. Read More
10 DEC 2012 WORKING PAPERS
Vulnerable Banks
Robin Greenwood, Augustin Landier, and David Thesmar
Since the beginning of the US financial crisis in 2007, regulators in the Europe have been frustrated by the difficulty in identifying the risk expo most levered financial institutions. Yet, at the time, it was unclear how s been used to make the financial system safer. This paper is an attempt which this information can be used to understand how deleveraging sc To do so the authors develop and test a model to analyze financial sec different configurations of leverage and risk exposure across banks. Th to the largest financial institutions in Europe, focusing on banks' exposu and using the model to evaluate a number of policy proposals to reduc analyzing the European banks in 2011, they show how a policy of targe distributed appropriately across the most systemic banks, can significa The approach in this paper fits into, and contributes to, a growing litera Read More
15 NOV 2012 RESEARCH & IDEAS
Funding the Design of Livable Cities
As a burgeoning global population migrates to the world's urban center livable cities that function with scarce natural resources. John Macomb connection between real estate financing and innovative design in the for comment; 4 Comments posted.
09 NOV 2012 WORKING PAPERS
Securities Litigation Risk for Foreign Companies Liste

Beiting Cheng, Suraj Srinivasan, and Gwen Yu
In the US, securities class action litigation provides investors with a me companies and managers accountable for violations of securities laws. incidence of securities class action litigation against foreign companies mechanism driving the litigation risk. Looking at more than 2,000 secur between 1996 and 2010, the authors find that significant litigation risk d issuers, but at rates considerably lower than for US companies. The au potential factors in lower litigation rates: 1) transaction costs and 2) the events such as accounting restatements, missing management forecas stock prices that are needed in a lawsuit context to allege intentional an disclosures on the part of managers. This suggests that while the effec securities laws is constrained by transaction costs, availability of high q reveals potential misconduct) can contribute to a well-functioning litigat firms listed in the US. Read More
Admitting Mistakes: Home Country Effect on the Relia Restatement Reporting

Suraj Srinivasan, Aida Sijamic Wahid, and Gwen Yu
The authors study restatements by foreign firms listed in the US, comp restatements by the foreign firms to that of domestic US firms, and exa country characteristics on the likelihood of the foreign firms restating the foreign firms list in the US, they become subject to the same accountin as US firms. However, results suggest that foreign firms listed in the US less than comparable US firms. This difference is not because the fore accounting quality but because of opportunistic avoidance of issuing a difference is driven primarily by firms originating from countries with we
findings imply that restatements are a less accurate measure of the ex problems in an international setting compared to US domestic firms. Re
Causes and Consequences of Linguistic Complexity Conference Calls

Francois Brochet, Patricia Naranjo, and Gwen Yu
Does the form in which financial information is presented have consequ markets? The authors examine the level of linguistic complexity of mor conference call transcripts from non-US firms between 2002 and 2010. linguistic complexity of calls varies with country-level factors such as la with firm characteristics. Firms with more linguistic complexity in their c less trading volume and price movement following the information relea results may be useful to foreign firms that wish to communicate with in and investors around the world may also find the results helpful since t push managers to speak in a less complex manner. This study is the fi conference calls in a cross-country setting. Read More
06 NOV 2012 VIEWS ON NEWS
Stop Talking About the Weather and Do Something: T Finance Sustainable Cities
How do we ensure that our cities are resilient in the face of inevitable f Hurricane Sandy? John Macomber offers three ways that the private se Open for comment; 6 Comments posted.
What Wall Street Doesnt Understand About Internati

Firms that correlate their international trading activity with the local ethn significantly outperform those that don't, according to new research by Christopher J. Malloy, and Umit G. Gurun. Open for comment; 4 Comm
24 OCT 2012 RESEARCH & IDEAS
Want People to Save More? Send a Text

What's the most effective way to encourage people to save their mone combination of peer pressure and text messages, according to new res Professor Dina D. Pomeranz. Open for comment; 6 Comments posted.
19 SEP 2012 RESEARCH & IDEAS
Book Excerpt: The Architecture of Innovation

In his new book, The Architecture of Innovation, Josh Lerner explores f fund R&D. This excerpt discusses the corporate venturing model and h make it successful. Open for comment; 1 Comment posted.
Funding Innovation: Is Your Firm Doing it Wrong?

Many companies are at a loss about how to fund innovation successfu Architecture of Innovation, Professor Josh Lerner starts with this advice Open for comment; 4 Comments posted.
Why Public Companies Underinvest in the Future

Private companies are much more focused on the long term when mak publicly owned counterparts. Which side has the right idea? New resea Professor Joan Farre-Mensa and colleagues. Open for comment; 3 Co
Liability Structure in Small-Scale Finance: Evidence f Experiment

Fenella Carpena, Shawn Cole, Jeremy Shapiro, and Bilal Zia
Microfinance has exploded in popularity and coverage in recent years, the large unmet demand for finance. But what is the optimal loan contra examines the relative merits of joint and individual liability contracts by contract structure on a group of borrowers who are willing to borrow wi group liability. Findings show that group liability structure significantly im rates. Overall, these results provide the first credible evidence that grou improve upon individual liability, particularly in ensuring repayment and discipline among clients. Read More
FIN Around the World: The Contribution of Financing Profitability

Russell Lundholm, George Serafeim, and Gwen Yu
A basic premise of financial economics is that financial markets aid the use. In a frictionless world, every firm's return on equity (ROE) would e equity capital. However, numerous frictions at the firm and country leve to vary considerably within and across countries. In this paper, the auth friction?the availability of domestic credit from banks?and investigate h availability of domestic credit across countries influences the resulting l net financing contribution to firms' return on equity. Results show that t credit in a country, the rate that trade credit and financial credit substitu how operating performance flows through to the financial performance, the relative size of the firm in its home economy. Read More
Incentivizing Calculated Risk-Taking: Evidence from a Commercial Bank Loan Officers

Shawn Cole, Martin Kanz, and Leora Klapper
Recent research presents convincing evidence that incentives rewardin
cause severe agency problems and increase credit risk, either by induc standards or by tempting loan officers to game approval cutoffs even w based on hard information. Yet to date there has been no evidence on based compensation can remedy these problems. In this paper, the au underwriting process of small-business loans in an emerging market, u experiments with experienced loan officers from commercial banks. Co implemented classes of incentive schemes, they find a strong and econ impact of monetary incentives on screening effort, risk-assessment, an originated loans. The experiments in this paper represent the first step to fully understand the loan underwriting process. Read More
20 AUG 2012 RESEARCH & IDEAS
The Acquirers
Associate Professor Matthew Rhodes-Kropf sets out to discover why p dominate some M&A waves while private equity firms win others. Open Comments posted.
Financial vs. Strategic Buyers

Marc Martos-Vila, Matthew Rhodes-Kropf, and Jarrad Harford
What drives either financial or strategic buyers to have a more dominan and acquisitions activity at different points in time? The question of com because the economic magnitude of this activity is so large, but also be power between financial vs. strategic acquirers changes the ownership alters the incentives and governance mechanisms that surround the ec economy. This paper explores how the possibility of misvalued debt ma merger activity and alter the balance between PE and strategic buyers. approach based on a model of private equity (PE) and strategic merge players in the model make value-maximizing decisions conditional on th suggest that the possibility of misvalued debt may have important impa investors, on who buys whom, and for default levels in the economy. R
Book Excerpt: The Future of Boards

In an excerpt from The Future of Boards, Professor Jay Lorsch discuss newly questioning their roles. Closed for comment; 0 Comments posted
The Future of Boards

In The Future of Boards: Meeting the Governance Challenges of the Tw Professor Jay Lorsch brings together experts to examine the state of b ahead, and what needs to change. Open for comment; 3 Comments po
Trade Credit and Taxes

Mihir A. Desai, C. Fritz Foley, James R. Hines, and Jr.
Economists have extensively analyzed the effects of taxation on many financial policy, including borrowing and dividend distributions. But the income taxes on trade credit practices have been much less understoo Desai, C. Fritz Foley, and James R. Hines, Jr. develops the idea that tr to reallocate capital in response to tax differences. Using detailed data of US multinational firms, the authors are able to observe affiliates of th different countries and therefore facing different corporate income tax r findings illustrate that firms use trade credit to reallocate capital from lo high tax jurisdictions to capitalize on tax-induced differences in pretax m capital. Their actions imply that tax rate differences across countries sig allocation within firms, depressing investment levels in high tax jurisdict differences between the productivity of capital deployed in different loca
Reaching for Yield in the Bond Market

Bo Becker and Victoria Ivashina
"Reaching for yield"investors' propensity to buy high yield assets with been identified as one of the core factors contributing to the buildup of financial crisis. Despite this potential importance, however, the way in w works and where it occurs is not well understood. Professors Bo Becke examine reaching for yield in the corporate bond market by looking amo companies, the largest institutional investor in this arena. Findings sugg yield may limit the effectiveness of capital regulation to a time-varying a Reaching for yield may also allow regulated entities to become riskier t legislators intend, and may impose distortions on the corporate credit s
Creating a Venture Ecosystem in Brazil: FINEPs INO

Ann Leamon and Josh Lerner
Since the mid-1990s, several groups in Brazil have been working on de venture capital ecosystem, largely to stimulate the establishment of inn help them gain access to capital. In 2000, the Brazilian government's A (Financiadora de Estudos e Projectos, or FINEP), with support from the Fund (MIF), unveiled INOVAR, a program to address these needs. In t INOVAR's debut, the program has had two iterations and has been rec for government efforts to stimulate a VC ecosystem. In this paper, Ann Lerner present a brief background on private equity in both Latin Amer explore the genesis of INOVAR (Innovation), the details of the program conclude with challenges to be addressed. Read More
Is a VC Partnership Greater Than the Sum of Its Part

Michael Ewens and Matthew Rhodes-Kropf
Venture capital investments are an important engine of innovation and extremely risky from an individual investor's point of view. Furthermore, differences in fund performance between top quartile and bottom quart The ability to consistently produce top performing investments implies t unique and time-invariant about venture capital firms. But to what exten attributes of performance a part of the firm's organizational capital or e capital of the people inside the firm? Michael Ewens and Matthew Rho
partner is extremely important. Additionally, results suggest that venture not much more than the sum of their partners. Partners are often signif each other, but "good" firms are those with a group of better partners. T maintained high performance across many funds may have simply bee quality partners rather than actually provide those partners with much i help. Read More
11 APR 2012 RESEARCH & IDEAS
The High Risks of Short-Term Management

A new study looks at the risks for companies and investors who are att results. Research by Harvard Business School's Francois Brochet, Mar Serafeim. Open for comment; 4 Comments posted.
20 MAR 2012 WORKING PAPERS
The Stock Selection and Performance of Buy-Side An

Boris Groysberg, Paul Healy, George Serafeim, Devin Shanthikumar, and Gui Yang
Important differences between buy- and sell-side analysts are likely to performance. While considerable research during the last twenty years performance of sell-side analysts (that is, analysts who work for broker banks, and independent research firms), much less is known about buy for institutional investors such as mutual funds, pension funds, and hed examines buy recommendation performance for analysts at a large, bu analysts at sell-side firms throughout the period of mid-1997 to 2004. T evidence of differences in the stocks recommended by the buy- and se buy-side firm analysts recommended stocks with stock return volatility average sell-side analyst, and market capitalizations almost seven time indicate that portfolio managers (buy-side analysts' clients) prefer that b less volatile and more liquid stocks. The study also finds that the buy-s recommendations are less optimistic than their sell-side counterparts, c analysts facing fewer conflicts of interest. This and future studies may side executives to allocate their financial and human resources more st
Causes and Consequences of Firm Disclosures of An Efforts

Paul Healy and George Serafeim
Academic research on corruption has typically focused on its macro ca While the country level is certainly important to understand, it is at the f questions remain unanswered. This study examines 480 of the world's ratings by Transparency International of firms' public disclosures of stra management systems for combatting corruption. Professors Paul Healy find that firm disclosures are related to enforcement and monitoring cos country enforcement, US listing, big four auditors, and prior enforceme also reflect industry and country corruption risks. Meanwhile the financi disclosure are more nuanced. Read More
16 JAN 2012 RESEARCH & IDEAS
Private Meetings of Public Companies Thwart Disclos

Despite a federal regulation, executives at public firms still spend a gre powwows with hedge fund managers. Eugene F. Soltes and David H. S such meetings give these investors unfair advantage. Open for comme
Are There Too Many Safe Securities? Securitization a for Information Production
Samuel G. Hanson and Adi Sunderam
Markets for near-riskless securities have suffered numerous shutdowns with the recent financial crisis the most prominent example. This sugge be a general characteristic of such markets, not just a one-time problem subprime mortgage crisis. Professors Samuel G. Hanson and Adi Sund infrastructure and organization of professional investors are in part dete securities offered by originators. Since robust infrastructure is a public g may be underprovided in the private market equilibrium. The individuall originators may lead to an infrastructure that is overly prone to disruptio Policies regulating originator capital structure decisions may help create
infrastructure. Closed for comment; 0 Comments posted.
What Impedes Oil and Gas Companies Transparenc

Paul Healy, Venkat Kuppuswamy, and and George Serafeim
Oil and gas companies face asset expropriations and corruption by fore many of the countries where they operate. In addition, most of these co multiple host countries. What determines their disclosure of business a transparency? Paul Healy, Venkat Kuppuswamy, and George Serafeim disclosure costs that oil and gas managers could potentially consider. B and the European Union are currently considering laws that would requ companies to disclose information about operations in host countries. R
The Impact of a Corporate Culture of Sustainability o Behavior and Performance

Robert G. Eccles, Ioannis Ioannou, and and George Serafeim
Robert G. Eccles, Ioannis Ioannou, and George Serafeim compared a companies, 90 of which they classify as High Sustainability firms and 9 firms, in order to examine issues of governance, culture, and performa year period show that High Sustainability firms dramatically outperforme ones in terms of both stock market and accounting measures. Howeve that this outperformance occurs only in the long term. Managers and in to gain a competitive advantage in the short term are unlikely to succee sustainability in their organization's strategy. Overall, the authors argue company policies reflect the underlying culture of the organization, whe social performance, in addition to financial performance, are important, forge a strong culture by making explicit the values and beliefs that und organization. Read More
14 OCT 2011 WORKING PAPERS
The Cost of Capital for Alternative Investments

Jakub W. Jurek and Erik Stafford
An accurate assessment of the cost of capital is fundamental to the eff throughout the economy. Alternative investments are investments made individual and institutional investors in private investment companies lik private equity funds. These investments are frequently combined with f risks that may be unappealing to the typical investor or that require flex investment funds may not provide. Often there is a real possibility of a invested capital. For this paper, Jakub W. Jurek and Erik Stafford study return for a risk-averse investor allocating capital to alternative investm risks borne by hedge fund investors are likely to be positive net supply unappealing to average investors, such that they may earn a premium assets. Read More
Market Competition, Government Efficiency, and Prof the World

Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu
Understanding whether and how corporate profitability mean reverts ac important for valuation purposes. This research by Paul M. Healy, Geo Srinivasan, and Gwen Yu suggests that firm performance persistence v Country product, capital, and to a lesser extent labor market competitio mean reversion of corporate profits. Corporate profitability exhibits faste countries with more competitive factor markets. In contrast, governmen the speed of mean reversion, but only when the level of market compe The findings are useful to practitioners and scholars interested in unde factors affect corporate profitability. Read More
Doing What the Parents Want? The Effect of the Loca Environment on the Investment Decisions of Multinat
Nemit O. Shroff, Rodrigo S. Verdi, and and Gwen Yu
As firms increase the scale of their global operations, monitoring opera

becomes increasingly challenging. Transparency in the external informa help multinational corporations monitor foreign subsidiaries and resolve problems. In this paper, researchers Nemit O. Shroff, Rodrigo S. Verdi foreign subsidiaries located in country-industries with more transparent environments are better able to translate local growth opportunities into More
Doomsday Coming for Catastrophic Risk Insurers?

Insurance "reinsurers" underwrite much of the catastrophic risk insuran against huge disasters natural and man-made. Problem is, says Profes reinsurers themselves are in danger of failing from a major catastrophic comment; 5 Comments posted.
Decoding Insider Information and Other Secrets of O

Associate Professors Lauren H. Cohen and Christopher J. Malloy study affect important decisions and, ultimately, how those connections help Their research shows that it's possible to make better stock picks simp two industry players went to the same college or university. What's mor congressional members share an alma mater can help predict the outc legislation on the Senate floor. Open for comment; 1 Comment posted.
The Globalization of Corporate Environmental Disclos Accountability or Greenwashing?

Christopher Marquis and Michael W. Toffel
Between 2005 and 2008, the world saw a dramatic increase in corpora reporting. Yet this transition toward greater transparency and accounta unevenly across countries and industries. Findings by professors Chris Michael W. Toffel provide the first systematic evidence of how the glob
movement affects corporations' environmental management practices. compliance strategies, for instance, is affected by specific corporate ch institutional context. This study contributes to a larger body of research social movements and environmental reporting. Read More
Non-Audit Services and Financial Reporting Quality: 1978-1980

Kevin Koh, Shivaram Rajgopal, and Suraj Srinivasan
What are the costs and benefits of auditors providing non-audit service authors investigate whether high non-audit services (NAS) fees relative associated with poor quality financial reporting. Associate Professor Su colleagues look specifically at a sample of S&P 500 firms during the ye authors thus provide an early history analysis of a long-standing regula fees create an economic dependence that causes the auditor to acquie in financial reporting, reducing the quality of the audit. This concern led to prohibit auditors from providing most consulting services. The author regulatory concerns, NAS are associated with better quality financial re management and higher earnings informativeness. Conclusions rely on features of the years 1978-80. Read More
The International Politics of IFRS Harmonization

Karthik Ramanna
Contrary to its staid image in popular culture, accounting has reigned a globalization over the last decade. As of 2010, about 100 countries, inc major economies, either have adopted a common set of accounting pri International Financial Reporting Standards, have initiated an IFRS har have in place a national strategy to respond to IFRS. In fact, the prolife is one of the most important developments in corporate governance tod case studies on Canada, China, and India, Assistant Professor Karthik similarities and differences in the international political dynamics that co responses to IFRS. His framework helps explain and predict countries' harmonization, as well as the potential structure and impact of IFRS in
Corporate Social Responsibility and Access to Financ

Beiting Cheng, Ioannis Ioannou, and George Serafeim
Corporate social responsibility may benefit society, but does it benefit t does, according to a new study that shows how CSR can make it easie financing for new projects. Research was conducted by George Serafe Harvard Business School and Ioannis Ioannou of the London Business
Poultry in Motion: A Study of International Trade Fina

Pol Antras and C. Fritz Foley
When engaging in international trade, exporters must decide which fina their transactions. Should they ask the importers to pay for goods befo shipment, ask them to pay after the goods have arrived at their destina some form of bank intermediation like a letter of credit? In this paper, P Foley investigate this question by analyzing detailed data on the activiti firm that exports frozen and refrigerated food products, primarily poultry $7 billion in sales to more than 140 countries over the 1996-2009 perio comprehensive information on the financing terms used in each transac
The First Deal: The Division of Founder Equity in New

Thomas F. Hellmann and Noam Wasserman
When starting a company, entrepreneurs must decide how to divide sh founders. The simplest way is to split the shares equally, which is what decide to do. But that may not be the fairest or most effective wayes some founders are doing more for the company than others. In this pap (University of British Columbia) and Noam Wasserman (Harvard Busin when and whether teams are likely to divide shares equally among all t whether such an equity split is good for the company. Read More
Accounting for Crises

Venky Nagar and Gwen Yu
A key endeavor of modern economic theory is to understand the cause shows empirically that currency investors are more likely to get spooke they have too much information. This finding accords well with global g argue that self-fulfilling panicsi.e., panics unrelated to fundamentals when the quality of public information available to investors is very high conducted by Venky Nagar (University of Michigan) and Gwen Yu (Har
23 MAY 2011 OP-ED
Leading and Lagging Countries in Contributing to a S

To determine the extent to which corporate and investor behavior is ch more sustainable society, researchers Robert Eccles and George Sera involving over 2,000 companies in 23 countries. One result: a ranking o degree to which their companies integrate environmental and social dis their financial disclosures. Open for comment; 11 Comments posted.
Mandatory IFRS Adoption and Financial Statement C

Francois Brochet, Alan Jagolinzer, and and Edward J. Riedl
In the past decade, many countries have adopted International Financia (IFRS) developed by the International Accounting Standards Board, wh economists to examine the benefits of the standards. This paper discus affects financial reporting comparabilitythat is, the properties of financ users to identify similarities or differences between the economics of di over any given period of time. Research was conducted by Francois Br Riedl of Harvard Business School, and Alan Jagolinzer of the Universit Read More
Building a Better Board

While corporate board members take their jobs more seriously than ev necessarily as helpful or effective as they could be, says HBS senior le Kaufman. He recently sat down with HBS Working Knowledge to discu be the biggest practical issues facing boards today. Open for comment
Top Executive Background and Financial Reporting C of Goodwill Impairment

Francois Brochet and Kyle Welch
In the management literature, some theories hold that corporate actions can be partially predicted by knowing the functional background of exec provide evidence on how CEOs and CFOs who were former investmen private equity/venture capital executives managed decisions around go (essentially goodwill charge-offs)a complex accounting choice involvi managerial discretion. Research by HBS professor Francois Brochet an Kyle Welch. Read More
The Consequences of Financial Innovation: A Counte Agenda

Josh Lerner and Peter Tufano
While financial innovation is often praised as a positive force for societa much of the blame for the recent global financial crisis. In this paper, H professors Josh Lerner and Peter Tufano explore financial innovation a from other types of innovation. Read More
Accounting Scholarship That Advances Professional Practice

Robert S. Kaplan
Accounting scholars generally do a fine job of analyzing how we proces they ought to spend more time looking at how that data is produced, sa School professor Robert S. Kaplan. In this paperin response to a new sought his adviceKaplan reminds young scholars that accounting is m discipline than an academic subject. To that end, he advises them not j students the common body of accounting knowledge, but also to advan knowledge by bridging the gap between scholarship and practice. Read
24 FEB 2011 OP-ED
Whats Governments Role in Regulating Home Purch

David S. Scharfstein
The Obama administration recently proposed housing finance reforms t Mae and Freddie Mac and bring private capital back to the mortgage m David Scharfstein and doctoral student Adi Sunderam put forth a propo and Freddie and ensure a more stable supply of housing finance. Read
A Behavioral Model of Demandable Deposits and Its Financial Regulation

Julio J. Rotemberg
Depositors are overconfident of their chances of recovering demandab In a recent research paper, professor Julio J. Rotemberg reviews vario regulations available to be imposed on financial institutionsminimum requirements, deposit insurance, and compulsory clawbacksto under can help protect investors. Read More
Leviathan as a Minority Shareholder: A Study of Equi the Brazilian National Development Bank (BNDES), 1
Sergio G. Lazzarini and Aldo Musacchio
There is a trend in many developing countries toward governments buy private companies. While there has been ample discussion on the wisd has been said about how governments can make such interventions wo aims to fill that void, using data from the Brazilian National Developmen Research was conducted by Sergio G. Lazzarini of the Insper Institute Research, and Aldo Musacchio of Harvard Business School. Read Mor
Lawful but Corrupt: Gaming and the Problem of Instit in the Private Sector
Malcolm S. Salter
In the business world, "gaming" refers to the act of subverting the inten technically breaking them--a skillful if unsavory way to achieve private School professor emeritus Malcolm S. Salter explores how gaming the institutional corruption, citing examples from Enron and early efforts by implementation of the Dodd-Frank financial reform act. Read More
A Brief Postwar History of US Consumer Finance

Andrea Ryan, Gunnar Trumbull, and Peter Tufano
The growth of the consumer finance sector after World War II provided options for Americans. These options led to a "do-it-yourself" approach and an increase in household risk taking. In this paper, Harvard Busine Gunnar Trumbull and Peter Tufano, along with former HBS research as discuss the major themes that dominated the expansive postwar sector factors that set the stage for the recent subprime mortgage crisis. Read
Activist Board Members Increase Firms Market Value

Board members nominated by activist investors presumably have one p status quo. Does that agenda create or diminish value of the firm in the New evidence offered by Harvard Business School professors Bo Beck Bergstresser, and Guhan Subramanian suggests financial markets valu Open for comment; 3 Comments posted.
Does Shareholder Proxy Access Improve Firm Value the Business Roundtable Challenge
Bo Becker, Daniel B. Bergstresser, and Guhan Subramanian
In August 2010, the Security and Exchange Commission announced a that would make it easier for investors to nominate new board member ones. It allowed shareholders to have their board candidates included i materials--if those shareholders had owned at least 3 percent of the fir the prior three years. On October 4, the SEC unexpectedly and indefin implementation of that rule, pending the outcome of a lawsuit aimed at paper gauges the significance of the proxy access rule by measuring w gained or lost market value on news of the delay. Research was condu Business School professors Bo Becker, Daniel Bergstresser, and Guha More
27 DEC 2010 RESEARCH & IDEAS
HBS Faculty on 2010s Biggest Business Developme

Three Harvard Business School professorsformer Medtronic chairma economist and entrepreneurship expert William Sahlman, and innovatio Rosabeth Moss Kanteroffer their thoughts on the most significant bus developments of 2010. Read More
14 DEC 2010 OP-ED
Tax US Companies to Spur Spending

With traditional monetary and fiscal policy instruments to stimulate the e exhausted, professor Mihir Desai offers a radical proposal: Use taxes to to spend a trillion dollars in cash. Open for comment; 9 Comments pos
Decoding Inside Information

Lauren Cohen, Christopher Malloy, and Lukasz Pomorski
Price setters and regulators face a difficult challenge in trying to unders activity of corporate insiders, especially when it comes to figuring out w good indicator of the firm's financial future. This National Bureau of Eco discusses how to distinguish "routine" trades (which predict virtually no firm's financial future) from "opportunistic" trades (which contain a grea power). Research was conducted by Harvard Business School professo Christopher Malloy and Lukasz Pomorski of the University of Toronto. R
Towards an Understanding of the Role of Standard S Setting

Abigail Allen and Karthik Ramanna
Accounting standards promulgated by the Financial Accounting Standa an important role in the development and maintenance of capital marke important to understand how these standards come to be. Prior researc effect of corporate lobbying on the development of FASB standards, bu the role of the FASB members themselves. Looking at these individuals 2007, Harvard Business School doctoral candidate Abigail M. Allen and Ramanna examine how board members' professional experience, lengt board, and political leanings influenced accounting standards. Read Mo
Reversing the Null: Regulation, Deregulation, and the

David Moss
Who's to blame for the recent financial crisis? To some extent, the faul economics, according to professor David Moss. In this paper, he argue on government failure in the second half of the 20th century led to the was always more when it came to regulation--which, in part, contribute end, he calls for a fundamental shift in academic research on the gove economy. Read More
Valuation When Cash Flow Forecasts Are Biased

Richard S. Ruback
The valuation of forecasted cash flows can be an inaccurate process, e forecasts are created by optimists who neglect to consider worst-case s Harvard Business School professor Richard S. Ruback has developed forecasted cash flow when the predictions are biased upward. Read Mo
The Landscape of Integrated Reporting: An E-Book

An e-book written by participants of a recent HBS workshop on integrat available. HBS Dean Nitin Nohria offers a forward. Read More
Payout Taxes and the Allocation of Investment

Bo Becker, Marcus Jacob, and Martin Jacob
The corporate payout that shareholders periodically receive--dividends shares--is subject to taxation in many countries. Such taxes make it ch investment out of retained earnings than from equity issues. Using tax over a 19-year period, this paper discusses whether these taxes have a behavior, and to what extent. Research was conducted by Bo Becker o
School, Marcus Jacob of the European Business School, and Martin Ja Beisheim School of Management. Read More
18 NOV 2010 VIEWS ON NEWS
GMs IPO: Back to the Future

General Motors reaches a milestone this week as it presents an initial p faculty discuss issues facing the automaker's revival. Read More
Network Effects in Countries Adoption of IFRS

Karthik Ramanna and Ewa Sletten
Between 2003 and 2008, 75 countries adopted, to various degrees, Int Reporting Standards (IFRS) developed by the International Accounting countries, including the United States and China, are currently engaged projects. Researchers Karthik Ramanna (Harvard Business School) and Sloan School of Management) report on the role that perceived networ convincing some countries to shift from local accounting standards to IF
12 NOV 2010 HBS FACULTY RESEARCH SYMPOSIUM: 2010
One Report: Integrated Reporting for a Sustainable S

What a company externally reports shapes how it behaves internally. T "What should companies report?" Read More
How Did Increased Competition Affect Credit Ratings

Bo Becker and Todd Milbourn
When Fitch Ratings took on Standard & Poor's and Moody's as an alte agency in the 1990s, there was a general assumption that the increase
to higher-quality corporate debt ratings from the incumbents. In fact, th declined during the 10-year study period, according to Harvard Busines and Washington University's Todd Milbourn. One possible cause: comp reputational incentives that drive ratings quality. Read More
HBS Workshop Encourages Corporate Reporting on and Social Sustainability

The concept of integrated reporting could help mend the lack of trust b public, Harvard Business School Dean Nitin Nohria tells attendees at a Closed for comment; 7 Comments posted.
Financing Risk and Bubbles of Innovation

Ramana Nanda and Matthew Rhodes-Kropf
While start-up firms are key to any technological revolution, they also r To that end, investors often provide limited capital in several careful sta in a firm before doling out another round of funding. However, these inv possibility that other investors won't provide follow-on funding, even wh remain sound. That's a big risk for individual investors who can't afford themselves, and whose investment will flounder if others don't invest, t professors Ramana Nanda and Matthew Rhodes-Kropf explores why fu fund the project at its next stage even if the fundamentals of the projec Read More
18 OCT 2010 LESSONS FROM THE CLASSROOM
Venture Capitals Disconnect with Clean Tech

Clean-tech start-ups depend on patience and public policy to thriveth funding don't apply. That's why Harvard Business School professor Jos an unusual recommendation to his entrepreneurship students: Spend a in a government job. Closed for comment; 18 Comments posted.
A Comparative-Advantage Approach to Government

Robin Greenwood, Samuel G. Hanson, and Jeremy C. Stein
Can the government do anything to discourage short-term borrowing by HBS Professor Robin Greenwood, Harvard University and Harvard Bus candidate Samuel Hanson, and Harvard University Professor Jeremy C government could actively influence the corporate sector's borrowing de own financing between T-bills and bonds. Read More
How Government can Discourage Private Sector Rel Term Debt

Robin Greenwood
Financial institutions have relied increasingly and excessively on shortthe overall system at risk. Should government step in? Harvard researc Samuel Hanson, and Jeremy C. Stein propose a "comparative advanta government to actively influence the corporate sector's borrowing decis
Crashes and Collateralized Lending

Jakub W. Jurek and Erik Stafford
This paper presents a framework for understanding the contribution of the cost of capital for a variety of different types of securities. The fram systematic crash risk exposure of different collateral types (equities, co tranches), and provides a simple mechanism for allocating the cost of b a financing intermediary and investor. Research was conducted by Jak Center for Finance, Princeton University) and Erik Stafford (Harvard Bu More
Does Mandatory IFRS Adoption Improve the Informat

Joanne Horton, George Serafeim, and Ioanna Serafeim
Created by the International Accounting Standards Board, the Internatio Standards (IFRS) comprise several principles designed to help public c transparency in their financial reports. But are they worth the hefty com with them? This paper investigates whether adopting the IFRS improve environment for firms in which the standards are legally required. Rese Joanne Horton at the London School of Economics, George Serafeim a School, and Ioanna Serafeim at the Greek Capital Market Commission
The Impact of Corporate Social Responsibility on Inve Recommendations

Ioannis Ioannou and George Serafeim
Security analysts are increasingly awarding more favorable ratings to fi socially responsible (CSR) strategies, according to this paper by Ioanni professor George Serafeim. Their work explores how CSR strategies ca in public equity markets through analyst recommendations. Read More
21 JUL 2010 VIEWS ON NEWS
HBS Faculty Debate Financial Reform Legislation

Harvard Business School professors Robert Steven Kaplan, David A. M Clayton S. Rose and Luis M. Viceira share their perspectives on the Do Reform and Consumer Protection Act, slated to be signed this week by Obama. Read More
02 JUL 2010 WHAT DO YOU THINK?
Is Profit as a Direct Goal Overrated?

Summing Up: The word profit provoked a wide range of issues and emotions among respondents, says Jim Heskett. It also launched debates, and many readers argued for measures of success other than profit. (Online forum has closed; next forum opens August 5.) Closed fo comment; 84 Comments posted.
Cyclicality of Credit Supply: Firm Level Evidence

Bo Becker and Victoria Ivashina
Bank lending falls in economic recessions. In particular, it shrank consi economic downturn. Does such cyclicality of bank lending reflect a dec to lend (the "loan supply" effect) or reduced demand for loans from firm effect)? The considerable attention that is given to banks' financial hea Reserve, Congress, and other branches of government is only warrante supply. Focusing on U.S. firms that raised new debt financing between professors Bo Becker and Victoria Ivashina demonstrate that many larg bond market when banks are in poor financial health. When times are get bank loans. Becker and Ivashina argue that the substitution betwee firm-level is a good economic proxy for the bank credit supply. Read M
An Unfair Advantage? Combining Banking with Priv Investing

Lily Fang, Victoria Ivashina, and Josh Lerner
Does the combination of banking and private equity investing endow ba information that allows them to identify good prospects and garner sup the combination bestow banks with an unfair ability to expand their bala benefits within the bank at the expense of the overall market and ultima INSEAD's Lily Fang and Harvard Business School professors Victoria I examined nearly 8,000 unique private equity transactions between 197 depth at the nature of the private equity investors, the structure of the i performance of the firms. Collectively, findings suggest that there are ri and private equity investing. The results are consistent with many of th
transactions articulated by policymakers. Read More
The Role of Institutional Development in the Prevalen Family Firms

Raphael Amit, Yuan Ding, Beln Villalonga, and Hua Zhang
Family firms dominate economic activity in most countries, and are sign other companies in their behavior, structural characteristics, and perfor explains the significant variation in the prevalence and value of family f The two leading explanations are legal investor protection and institutio cross-country studies are unable to rule out the alternative explanation what account for these differences. In contrast, China provides an exce addressing this question because it offers great variation in institutiona regions, yet the country as a whole shares cultural and social norms to legal and regulatory framework. In this paper, HBS professor Beln Vill study ownership data from a sample of nearly 1,500 publicly listed firms market. They conclude that institutional development plays a critical rol value of family firms, and that the differences observed across regions cultural factors. Read More
When Do Analysts Add Value? Evidence from Corpo

Emilie Rose Feldman, Stuart C. Gilson, and Beln Villalonga
The impact of financial analysts on capital market efficiency has been m academia and in practice. A large body of academic research finds tha important information intermediaries who contribute to the overall efficie Other research, however, has identified contexts in which the value of a relatively more limited, such as when analysts face possible conflicts of company or situation they are presented with is especially complex. St questions the informativeness of analyst recommendations in light of re paper, HBS doctoral graduate Emilie Rose Feldman and professors St Villalonga examine 1,793 analyst reports written at the time of corporat how much value analysts create as information intermediaries in this se an interesting context for this purpose because the degree of informatio
corporate insiders and investors is especially high. The paper is one of fine-grained detail on the quantity and types of analyses included in an
Does Diversification Create Value in the Presence of Financing Constraints? Evidence from the 2008-2009
Venkat Kuppuswamy and Beln Villalonga
The global financial crisis of 2008-2009 has led academics and practitio widely held beliefs about business and economics. One such belief rela corporate diversification. Popular views about diversification have swun the past half-century, from a generally positive view in the 1960s and 1 conglomerates were formed, to a generally negative view in the 1980s many such conglomerates were dismantled or at least fell out of the sto 2009, in the wake of the global financial crisis, a new view seems to be conglomerates are ready for a comeback. In this paper, HBS doctoral c Kuppuswamy and professor Beln Villalonga examine whether and wh become more valuable during the 2008-2009 financial crisis. They find the increase does not simply reflect changes in investor perceptions bu corporate finance and investment. Read More
Corporate Governance and Internal Capital Markets

Zacharias Sautner and Beln Villalonga
What is the impact of corporate ownership on corporate diversification a firms' internal capital markets? Corporate governance and internal capi topics closely intertwined in theoretical research; for example, agency p corporate governance mechanisms seek to mitigate in a variety of way every theory of inefficient internal capital markets. Yet surprisingly few looked into the actual link between corporate governance and internal c paper by University of Amsterdam professor Zacharias Sautner and HB Villalonga seeks to fill the gap by taking advantage of a natural experim change in Germany in 2002. The researchers provide direct evidence o governance structures on how markets work, as well as new evidence costs of ownership concentration. Read More
Agency Costs, Mispricing, and Ownership Structure

Sergey Chernenko, C. Fritz Foley and Robin Greenwood
Under what circumstances do firms access capital markets when the po is high? The prevailing view holds that controlling shareholders sell sha when internal capital is inadequate to fund attractive investment opport market efficiency in corporate finance has attracted considerable resea interaction of stock market mispricing with agency problems is not well doctoral graduate Sergey Chernenko and professors C. Fritz Foley and propose a new explanationbased on stock market mispricingfor wh shareholder raise outside equity, even when firms cannot commit not to shareholders. Read More
What Brazil Teaches About Investor Protection

Aldo Musacchio
When Brazil entered the 20th century, its companies were a model of t investor protections that government did not. Can our financial regulato history? HBS professor Aldo Musacchio shares insights from his new b
Just Say No to Wall Street: Putting A Stop to the Earn

Joseph Fuller and Michael C. Jensen
Over the last decade, companies have struggled to meet analysts' expe challenged the companies they covered to reach for unprecedented ea executives have often acquiesced to analysts' increasingly unrealistic p as a basis for setting goals for their organizations. As Monitor Group co and HBS professor emeritus Michael C. Jensen write, improving future Street and Wall Street and putting an end to the destructive "earnings and executives will require a new approach to disclosure based on a fe
engagement. (This article originally appeared in the Journal of Applied Winter 2002 issue.) Read More
The Consequences of Entrepreneurial Finance: A Re Discontinuity Analysis

William R. Kerr, Josh Lerner, and Antoinette Schoar
What difference do angel investors make for the success and growth o R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide address this crucial question in entrepreneurial finance, quantifying the angel investors make to the companies they fund. Angel investors as r received much less attention than venture capitalists, even though som these investors are as significant a force for high-potential start-up inve capitalists, and are even more significant as investors elsewhere. This importance of angel investments to the success and survival of entrepr offers an empirical foothold for analyzing many other important question finance. Read More
The Economic Crisis and Medical Care Usage

Annamaria Lusardi, Daniel Schneider, and Peter Tufano
The global economic crisis has taken a historic toll on national econom finances around the world. What is the impact of such large shocks on behavior, especially on their willingness to seek routine medical care? Annamaria Lusardi of Dartmouth College, Daniel Schneider of Princeto Tufano of Harvard Business School find strong evidence that the econo in job and wealth losseshas led to large reductions in the use of rout Specifically, more than a quarter of Americans reported reducing their between 5 and 12 percent of Canadian, French, German, and British re
Fiduciary Duties and Equity-Debtholder Conflicts

Bo Becker and Per Stromberg
Managerial decisions influence the distribution of value between differe to conflicting interests among financial claimants, such as holders of eq Lyonnais v. Pathe Communications bankruptcy ruling of 1991 before th case widely perceived to have created a new obligation for directors of firmsprovides an interesting opportunity to assess whether and how e affects firm behavior. HBS professor Bo Becker and Stockholm School Per Strmberg outline important changes in behavior after Credit Lyonn
Accountability and Control as Catalysts for Strategic E Exploitation: Field Study Results
Robert L. Simons
The need for organizations to both exploit current resources and explor central and long-standing theme in the literature of organizations. The that these two imperatives require very different structures and skills. E focus on efficiency and effectiveness in executing preset plans and pro requires the ability to step outside these routines by emphasizing exper and novelty. In this study, HBS professor Robert L. Simons focuses on two organization design variablesspan of control and span of accoun 102 field studies, he illustrates how these variables can be manipulated balance toward either exploration or exploitation in response to differen organizational contexts, and changing competitive environments. Read
Labor Regulations and European Private Equity

Ant Bozkaya and William R. Kerr
Recent theoretical models predict that countries with stricter labor polic innovative activities due to the higher worker turnover frequently assoc changing sectors. HBS visiting scholar Ant Bozkaya and HBS professo examine how differences in labor regulations across European countrie development of private equity markets, comprised of venture capital an
so doing, the researchers provide the first empirical evidence for this th the industry level in the entrepreneurial finance literature. They also ma contribution by demonstrating how jointly modeling the different policies insurance delivers more consistent results than their individual relations themselves. Read More
A Macroeconomic View of the Current Economy

David A. Moss
Concerned or confused by the economic environment? Take some less concepts from macroeconomics to get a better understanding of how th Q&A with HBS professor David A. Moss, author of A Concise Guide to Managers, Executives, and Students Need to Know. Read More
Private Equity and Industry Performance

Shai Bernstein, Josh Lerner, Morten Srensen, and Per Strmberg
In response to the global financial crisis that began in 2007, governmen rethinking their approach to regulating financial institutions. Among the have fallen under the gaze of regulators have been private equity (PE) open questions regarding the economic impact of PE funds, many of w definitively answered until the aftermath of the buyout boom of the mid assessed. HBS professor Josh Lerner and coauthors address one of th examining the impact of PE investments across 20 industries in 26 maj and 2007. In particular, they look at the relationship between the prese and the growth rates of productivity, employment, and capital formation
21 DEC 2009 VIEWS ON NEWS
Good Banks, Bad Banks, and Governments Role as

Government action to stem collapse of the U.S. financial system was c agrees professor Robert Pozen. But results include less competition an
taxpayers. A Q&A from the HBS Alumni Bulletin and book excerpt from More
Shareholders Need a Say on Pay

"Say on pay" legislation now under debate Washington D.C. can be a u shareholders to strengthen the link between CEO pay and performance golden parachutes, says Harvard Business School professor Fabrizio F how the collective involvement of multiple stakeholders could shape the compensation. Read More
Estimating the Effects of Large Shareholders Using a Instrument

Bo Becker, Henrik Cronqvist, and Rdiger Fahlenbrach
Are large shareholders good monitors of management? A public firm's extensive legal control rights in the corporation, but in practice much of to managers. In companies with small, dispersed shareholders, owners coordinate and exercise monitoring and control, leaving management w discretion. Large shareholders, howeverby concentrating a block of s single decision-makermay play a beneficial role in facilitating effectiv large shareholders are not without their costs. HBS professor Bo Becke and test a framework to quantify the impact of large owners (individual blockholders, not mutual funds or other institutions) on several key asp They show that such shareholders play an important role for corporate U.S. public firms, and can affect several firm policies. Read More
Stock Price Fragility

Robin Greenwood and David Thesmar
Does the composition of ownership of a financial asset influence future

Previous economic research has documented significant price effects o numerous settings, including retail demand for options, investor deman funds' flow-driven demand for stocks. This paper provides a methodolo are vulnerable to such investor demand shocks. The central idea is tha current owners of the asset face correlated liquidity shocksi.e., they b time. We call assets with a high concentration of owners who trade in t "fragile." A related concept is "co-fragility." Two assets are "co-fragile" correlated trading needs, even if the holdings of these owners do not d authors build measures of fragility for U.S. stocks between 1990 and 20 predictions, more fragile stocks are more volatile, and two co-fragile sto correlations among their stock returns. Read More
Specific Knowledge and Divisional Performance Mea

Michael C. Jensen and William H. Meckling
Performance measurement is one of the critical factors that determine organization behave. It includes subjective as well as objective assessm of both individuals and subunits of an organization such as divisions or the choice of the performance measures themselves, performance eva process of attaching value weights to the different measures to represe achievement on each dimension. This paper examines five common div measurement methods: cost centers, revenue centers, profit centers, in expense centers. The authors furnish the outlines of a theory that attem each of these five methods is likely to be the most efficient. Read More
Systemic Risk and the Refinancing Ratchet Effect

Amir E. Khandani, Andrew W. Lo, and Robert C. Merton
During periods of rising house prices, falling interest rates, and increas efficient refinancing markets, cash-out refinancing is like a ratchet, incr homeowner debt as real-estate values appreciate without the ability to debt by increments as real-estate values decline. This paper suggests housing and mortgage markets can arise quite naturally from the conflu apparently salutary economic trends. Using a numerical simulation of th
the researchers show that the ratchet effect is capable of generating th suffered by mortgage lenders during the financial crisis of 2007-2008. T important implications for risk management practices and regulatory ref
Financing Constraints and Entrepreneurship

William R. Kerr and Ramana Nanda
Financing constraints are one of the biggest concerns impacting potent the world. Given the important role that entrepreneurship is believed to economic growth, alleviating financing constraints for would-be entrepre important goal for policymakers worldwide. In this paper HBS professor Ramana Nanda review two major streams of research examining the re constraints for entrepreneurship. They then introduce a framework that perspective on these research streams, thereby highlighting some impo research and policy analysis in entrepreneurial finance. Read More
Banking Deregulations, Financing Constraints and Fi

William R. Kerr and Ramana Nanda
How do financing constraints on new start-ups affect the initial size of t bank debt comprises the majority of U.S. firm borrowings, new venture to local bank conditions due to their limited options for external finance banking sector can thus have important effects on entrepreneurship in professors William Kerr and Ramana Nanda explain, the 1970s through period of significant liberalization in the ability of banks to establish bra across state borders, either through new branches or through acquisitio annual employment data for every U.S. establishment from 1976 onwa examine how U.S. branch banking deregulations impacted the entry siz non-financial sector. This paper is closely related to their prior work exa deregulations impacted the rates of startup entry and exit in the non-fin More
The Height Tax, and Other New Ways to Think about

Matthew Weinzierl
The notion of levying higher taxes on tall peoplean idea offered large presents an ideal way to highlight the shortcomings of current tax polic better. Harvard Business School professor Matthew C. Weinzierl looks taxation. Read More
Information Risk and Fair Value: An Examination of E Bid-Ask Spreads

Edward J. Riedl and George Serafeim
What is the role of fair values in the current economic crisis? The interp riskthat is, uncertainty regarding valuation parameters for an underlyi reporting of financial instruments at fair value has been a subject of hig Finance theory suggests that information risk is reflected in firms' equit information asymmetry component of bid-ask spreads. HBS professor doctoral candidate George Serafeim test predictions for a sample of lar recent mandatory disclosures of financial instruments designated as fa which indicate progressively more illiquid and opaque financial instrume higher exposures to level 3 financial assets have both higher equity be spreads. Both results are consistent with higher levels of information ris capital, for these firms. Read More
Why Competition May Not Improve Credit Rating Age

Bo Becker
Competition usually creates better products and services. But when co among credit rating agencies, the result was less accurate ratings, acco professor Bo Becker and finance professor Todd Milbourn of Washingto In our Q&A, Becker discusses why users of ratings should exercise a l
The Impact of Private Equity Ownership on Portfolio F Tax Planning

Brad Badertscher, Sharon P. Katz, and Sonja Olhoft Rego
Although private firms are important components of the U.S. economy, remains largely unknown due to the lack of publicly available financial years, private equity (PE) firms have been broadly criticized based on t benefits enjoyed by their owners and managers. Editorials have inflame accusing PE firm owners and managers as having excessively low tax that the substantial wealth generated by PE firms can "pay for sophistic including the use of offshore investment companies based in tax haven contend that PE firms aggressively manage their tax liabilities and thos companies. This study investigates the latter contention. In particular, th whether private companies that are majority-owned by PE firms ("majo engage in more tax avoidance than other publicly traded and privately the first study to compare the tax practices of firms with different privat Read More
Optimal Taxation in Theory and Practice

N. Gregory Mankiw, Matthew Weinzierl, and Danny Yagan
Are developments in the theory of taxation improving tax policies aroun design of a tax system is a topic that has long fascinated economic the economic policymakers. This paper explores the interplay between tax identifies key lessons policymakers might take from the academic litera to be designed, and it discusses the extent to which these lessons are policy. The authors find that there has been considerable change in the taxation over the past several decadesalthough the two paths have b Overall, tax policy has moved in the directions suggested by theory alo even though the recommendations of theory along these dimensions ar Read More
The Optimal Taxation of Height: A Case Study of Util Redistribution

N. Gregory Mankiw and Matthew Weinzierl
A tax on height follows inexorably from a well-established empirical reg approach to the optimal design of tax policy. Many readers of this pape quickly embrace the idea of levying higher taxes on tall taxpayers. Inde the proposal, most people either recoil from it or are amused by it. Tha what makes tax policy so intriguing, according to N. Gregory Mankiw of Matthew Weinzierl of HBS. This paper addresses a classic problem: th income. A Utilitarian social planner would like to transfer resources from to low-ability individuals, but is constrained by the fact that he cannot d Taxing height helps the planner achieve redistribution efficiently becaus is an indicator of income-earning ability. Although readers might take th wayssome seeing it as a small, quirky contribution aimed to clarify th income taxation, others as a broader effort to challenge the entire litera results raise a fundamental question about the framework for optimal ta Vickrey and James Mirrlees won the 1996 Nobel Prize in Economics a centerpiece of modern public finance. Read More
Insider Trading Preceding Goodwill Impairments

Karl A. Muller, III, Monica Neamtiu, and Edward J. Riedl
Do insiders strategically sell their stock holdings prior to the accounting impairment losses? While a number of recent studies provide evidence to the announcement of earnings performance measures, a remaining information aggregated into reported earnings constitute the source of information. This study provides evidence of a specific reporting item, g about which insiders are able to strategically trade before its full discov and its recognition within the financial statements. Goodwill impairment sources of information for insiders to trade on for two reasons. First, the economically large, averaging 11.9 percent of the market value of equit period of 2002-2007. Second, managers likely have material private inf future cash flow estimates through their internal budgeting processes; a information advantage may be relatively long-lived due to goodwill imp may delay the accounting recognition of economic goodwill impairment
Buy Local? The Geography of Successful and Unsuc Capital Expansion

Henry Chen, Paul A. Gompers, Anna Kovner, and Josh Lerner
From Silicon Valley to Herzliya, Israel, venture capital firms are concen locations. More than half of the 1,000 venture capital offices listed in P Equity and Venture Capital Sources are located in just three metropolit Boston, and New York. More than 49 percent of the U.S.-based compa capital firms are located in these three cities. This paper examines the venture capital firms and the impact that venture capital firm geography outcomes. Findings are informative both to researchers in economic ge policymakers who seek to attract venture capital. Read More
Reputation and Competition: Evidence from the Cred

Bo Becker and Todd Milbourn
Credit ratings are a key aspect of the financial system. The quality of th sustained in part by the reputational concerns of rating agencies, whos no inherent interest in the quality of ratings. Competition in this industry and there have been calls for yet more competition. Whether competitio improve it is not yet clear. HBS professor Bo Becker and Washington U professor Todd Milbourn test these conflicting predictions in the ratings is more or less consistent with a reduction in credit rating quality as Fit presence. Their empirical findings suggest that the system will work be not too severe. These results have potential policy implications. Read M
Why Do Countries Adopt International Financial Repo

Karthik Ramanna and Ewa Sletten
Why do some countries adopt the European Union (EU)-based Internat
Standards (IFRS) when others do not? To expand our understanding o consequences of IFRS adoption on a global sample, HBS professor Ka Sloan School of Management coauthor Ewa Sletten studied variations to adopt these standards in more than a hundred non-EU countries. Un adoption decisions can provide insights into the benefits and costs of IF More
Elections and Discretionary Accruals: Evidence from

Karthik Ramanna and Sugata Roychowdhury
How does the political process affect accounting? During the 2004 U.S outsourcing of American jobs was a major campaign issue. Because ou be net profitable, the use of income-decreasing accruals would enable public scrutiny of both the firm and the political candidate over outsourc Karthik Ramanna and MIT Sloan School professor Sugata Roychowdhu choices made by outsourcing firms with links to U.S. congressional can elections, and specifically test for income-decreasing discretionary accr consistent with firms using earnings management to reduce both direct costs associated with causing embarrassment to affiliated political cand
Can a Continuously-Liquidating Tontine (or Mutual In Succeed where Immediate Annuities Have Floundere
Julio J. Rotemberg
The changeover from defined benefit to defined contributions retiremen States has created a vast group of individuals that faces (or will face) t using a lump sum of assets to provide consumption for a relatively long years. Up to this point, however, consumers appear not to have embra professor Julio J. Rotemberg suggests an alternative instrument that, li provides longevity insurance and postpones income until old age. In th Inheritance Fund (MIF), a pool is formed by having individuals of a part a mutual fund. The income from the underlying assets in the mutual fun fund so that the value of the shares in an individual's name (and possib these shares) grows over time. The basic idea behind the MIF is that th
members who die are liquidated, and the proceeds are then distributed members in proportion to the number of mutual fund shares that are cu Read More
Barriers to Household Risk Management: Evidence fr

Shawn Cole, Xavier Gin, Jeremy Tobacman, Petia Topalova, Robert Townsend, and Jame
Insurance markets are growing rapidly in developing countries. Despite markets, however, adoption to date has been relatively slow. Yet house exposed to movements in local weather; regional house prices; prices heating oil, and gasoline; and local, regional, and national income fluctu financial contracts simply do not exist to hedge these exposures, and w their use is not widespread. Why don't financial markets develop to hel these risks? Why don't more households participate when formal marke professor Shawn Cole and coauthors attempt to shed light on these qu participation in rural India in a rainfall risk-management product that pro monsoon rainfall. The results suggest that it may take a significant amo substantial marketing effortsto increase adoption of risk-managemen level. Read More
Money or Knowledge? What Drives Demand for Fina Emerging Markets?

Shawn Cole, Thomas Sampson, and Bilal Zia
Why is there apparently limited demand for financial services in emergi hand, low-income individuals may not want formal services when inform insurance markets function reasonably well, and the benefits of formal participation may not exceed the costs. On the other hand, limited finan barrier: If people are not familiar or comfortable with products, they will These two views carry significantly different implications for the develop markets around the world, and would suggest quite different policy dec and international organizations seeking to promote "financial deepening Cole and coauthors found that financial literacy education has no effect opening a bank savings account for the full population, although it does
the probability among those with low initial levels of financial literacy an education. In contrast, modest financial subsidies significantly increase that open a bank savings account within the subsequent two months. R
An Ounce of Prevention: The Power of Public Risk M Stabilizing the Financial System
David A. Moss
The present financial crisis should remind us that private financial instit cannot always be counted upon to manage risk optimally on their own. recognizes that the government has a critical role to playas the lende of last resortin times of crisis. But effective public risk management is times to protect consumers and investors and to help prevent financial the first place. According to HBS professor David Moss, the biggest thr system today is posed not by commercial banks (as in 1933), but rathe significant institutions (outside of commercial banking) that have the po avalanches. The threat posed by these financial institutions is only com unprecedented federal guarantees introduced in response to the curren pervasive moral hazard they spawn. Under the system that Moss propo institution would be too big to fail. Read More
Earnings Quality and Ownership Structure: The Role Sponsors

Sharon P. Katz
Although 99 percent of the companies operating in the United States a the American Institute of Certified Public Accountants, their accounting unknown due mainly to the lack of publicly available financial statemen professor Sharon P. Katz used a unique database of firms with privatel publicly held debt to examine how two different ownership structures-p and non-private equity sponsorship-affect firms' financial reporting prac performance, and stock returns in the years preceding and following th (IPO). Read More
Female Empowerment: Impact of a Commitment Sav Philippines

Nava Ashraf, Dean Karlan, and Wesley Yin
Does access to personal savings increase female decision-making pow The answer could be important for policymakers looking to increase fem professor Nava Ashraf and colleagues developed a commitment saving (Save, Earn, Enjoy Deposits) account with a small, rural bank in the Ph account requires that clients commit not to withdraw funds that are in th reach a goal date or amount, but it does not explicitly commit the client funds after opening the account. This working paper examines the imp savings product on both self-reported decision-making processes within subsequent household allocation of resources. Read More
Does Public Ownership of Equity Improve Earnings Q

Dan Givoly, Carla Hayn, and Sharon P. Katz
The quality of accounting information is influenced by an array of factor from the demand for such information for use in contractual arrangeme incentives and opportunities of management to manage the reported n demand for quality accounting information for contractual purposes and to adjust the reported earnings are likely to be influenced by whether th is privately held or publicly traded. This study examines the differential private equity and public equity firms in order to shed light on how pub affects the quality of firms' earnings. The research highlights how the p investors affects management's reporting behavior. Read More
Corporate Misgovernance at the World Bank

Ashwin Kaja and Eric Werker
This paper examines the politics of corporate governance at the world's committee, the World Bank's Board of Executive Directors, and expose design of the World Bank's decision-making structure. Any large public challenge of representation and management. Since all decisions cann members, founders often grant a more nimble body with decision-maki representatives on the decision-making body may face a temptation to their own wallet or narrow constituency rather than in the interests of th the Bank's two primary component institutionsthe International Bank Development (IBRD) and the International Development Association (ID $25 billion in loans and grants through some 300 development projects Where did it go? By exploring the political dynamics and corporate gov international appropriations committee, we not only learn about internat also the nature of the international system itself. Read More
The Investment Strategies of Sovereign Wealth Fund

Shai Bernstein, Josh Lerner, and Antoinette Schoar
The role of sovereign wealth funds (SWFs) in the global financial syste recognized in recent years, and many reports suggest that SWFs are o the geopolitical and strategic economic interests of their governments. by these fundsestimated to be $3.5 trillion in 2008have grown shar decade. Projections, while inherently tentative due to the uncertainties economic growth and commodity prices, suggest that they will be incre in the years to come. Despite this significant and growing role, financia devoted remarkably little attention to these funds. The lack of scrutiny to the deliberately low profile adopted by many SWFs, which makes sy challenging. Bernstein, Lerner, and Schoar analyze how SWFs vary in and performance across various geographies and governance structure results suggest that high levels of home investments by SWFs, particul involvement of political leaders, are associated with trend chasing and Read More
Gray Markets and Multinational Transfer Pricing

Romana L. Autrey and Francesco Bova
Gray market goods are brand-name products that are initially sold into then resold through unofficial channels into a different market. Gray ma transaction and search costs are low enough to allow products to "leak segment back into another. Examples of industries with active gray ma pharmaceuticals, automobiles, and electronics. Understandably, reactio encroachment are mixed. On the one hand, consumer advocates and g applauded the increasing role that gray markets have played in improv domestic goods. On the other hand, multinationals have decried the inc markets in the economy, with an estimated $40 billion in cannibalized s markets in the information technology sector alone. This study investig a multinational's internal transfers and the consequences of regulations transfer pricing. Read More
The Economics of Structured Finance

Joshua D. Coval, Jakub Jurek, and Erik Stafford
This paper investigates the spectacular rise and fall of structured financ Joshua Coval, Princeton professor Jakub Jurek, and HBS professor Er examining how the structured finance machinery works. They construct collateralized debt obligations (CDOs) that show how pooling and tranc assets permits credit enhancement of the senior claims. They then exp by rating agencies, examining, in particular, the parameter and modelin required to arrive at accurate ratings of structured finance products. Th assessment of what went wrong and the relative importance of rating a credulity, and perverse incentives and suspect behavior on the part of and borrowers. Read More
Securing Jobs or the New Protectionism? Taxing the Activities of Multinational Firms
Mihir A. Desai
Popular imagination often links two significant economic developments:
the foreign activities of American multinational firms over the last 15 ye economic insecurity, particularly among workers in certain sectors. The between these phenomena have led many to call for a reconsideration foreign investment. Increasing the tax burden on outbound investment b firms, it is claimed, offers the promise of alleviating domestic employme while also raising considerable revenue. HBS professor Mihir A. Desai trends, examining the economic determinants of outbound investment d synthesizing what is known about the relationship between domestic an Read More
Catering to Characteristics
Robin Greenwood and Samuel Hanson
Can patterns of corporate net stock issuance help identify times when such as industry, size, or book-to-market ratio, are mispriced? The auth that differences between the characteristics of issuers and repurchaser characteristic related stock returns. Consider the case in which analysts forecasting the returns of Google. The standard approach would be to characteristics (e.g., large, technology, non-dividend paying, etc) and a characteristics with an average return in the cross-section. The authors stocks with these characteristics are issuing stock, this bodes poorly fo even if Google is itself not issuing. This research by HBS professor Rob Harvard doctoral student Samuel Hanson has implications for studying performance of seasoned equity offerings (SEOs), initial public offering acquirers. Read More
Inflation Bets or Deflation Hedges? The Changing Ris Bonds

John Y. Campbell, Adi Sunderam, and Luis M. Viceira
Are nominal government bonds risky investments that investors must b are they safe investments, whose price movements are either inconseq beneficial to investors as hedges against other risks? U.S. Treasury bo as hedges during the financial crisis of 2008, but the opposite was true
early 1980's. John Y. Campbell, a Visiting Scholar at HBS, Harvard Ph Sunderam, and HBS professor Luis M. Viceira explore such changes o nominal government bonds. Read More
Podcast: Preventing Future Financial Failures

David A. Moss
Professor David Moss says we need ongoing federal regulation of the f significant" institutions whose demise could threaten financial stability.
Fear of Rejection? Tiered Certification and Transpare

Emmanuel Farhi, Josh Lerner, and Jean Tirole
The sub-prime crisis has thrown a harsh spotlight on the practices of s which provided too many complex securities that proved to ultimately h such as rating agencies, journals, standard setting bodies, and provide play an increasingly important role in the market economies. Yet as scr in the aftermath of the sub-prime crisis has shown, these organizations structures and may adopt problematic approaches. On an explicit level, agencies follow a well-defined process, whose end product is the publi on an objective analysis. But firms have been historically able to get ra disclose ratings that displease them. HBS professor Josh Lerner and c when certifiers might adopt more complex rating schemes, rather than scheme, and highlight that such nuanced schemes are more likely whe ratings are lower. In addition, these schemes are more common when to the revelation of information about their quality, and more impatient.
Risky Business with Structured Finance

How did the process of securitization transform trillions of dollars of risk that many considered to be a safe bet? HBS professors Joshua D. Cov
Princeton colleague Jakub Jurek, authors of a new paper, have ideas.
Smart Money: The Effect of Education, Cognitive Abi Literacy on Financial Market Participation
Shawn Cole and Gauri Kartini Shastry
(Previously titled "If You Are So Smart, Why Aren't You Rich? The Effe Financial Literacy and Cognitive Ability on Financial Market Participatio increasingly complex menu of financial product choices. The shift from defined contribution pension plans, and the growing importance of priva require individuals to choose the amount they save, as well as the mix invest. Yet, participation in financial markets is far from universal in the Moreover, researchers have only a limited understanding of what factor Cole and Shastry use a very large dataset new to the literature in orde determinants of financial market participation. They find that higher leve cognitive ability cause increased participationhowever, financial litera Read More
Market Reaction to the Adoption of IFRS in Europe

Christopher S. Armstrong, Mary E. Barth, Alan D. Jagolinzer, and Edward J. Riedl
How do investors in European firms react to a change in financial repo most European firms applied domestic accounting standards. The adop Financial Reporting Standards (IFRS) would result in the application of financial reporting standards within Europe, and between Europe and t that require or permit application of IFRS. However, modification of IFR regulators would result in European standards differing from those used thereby eliminating some potential convergence benefits. This study inv market reaction to 16 events associated with the adoption of IFRS in E researchers' findings are consistent with investors expecting the benefi adoption in Europe to exceed the expected costs. Read More
03 DEC 2008 WHAT DO YOU THINK?
Can Housing and Credit be Nudged Back to Health

Did human frailty cause this crisis? Several thinkers have come forward with a suggestion for improvements to fiscal policy that are based on fostering better decisions while preserving consumer choice, says HBS professor Jim Heskett. What should be done? What do you think? (Onl forum now closed. Next forum begins January 7.) Closed for comment; Comments posted.
The Litigation of Financial Innovations

Josh Lerner
The past 10 years have seen a profound change in the conditions unde innovations are pursued. Because patents fundamentally alter the way be used, assessing the impact of patenting is critical to understanding t innovation. Litigation is crucial to delineating the boundaries of patent a examines the litigation of such financial patents to gain insights into the innovation. This paper seeks to understand the litigation of financial inn patents have only recently been granted. Read More
Signaling Firm Performance Through Financial Statem An Analysis Using Special Items
Edward J. Riedl and Suraj Srinivasan
Do managers' presentation decisions within their financial statements re motivations (that is, revealing the underlying economics of the firm) or o (that is, attempts to bias perceptions of firm performance)? The authors choices to present special items (such as write-offs and restructuring ch income statement rather than aggregated in other line items with disclo footnotes. Prior research suggests that managers engage in opportunis presentation decisions, and that managers' presentation decisions on th affects users' judgments. The distinction also matters because current standards are likely to increase the occurrence of "nonrecurring" type c
items, such as fair value changes. Read More
Consequences of Voluntary and Mandatory Fair Valu Evidence Surrounding IFRS Adoption in the EU Real
Karl A. Muller, III, Edward J. Riedl, and Thorsten Sellhorn
The required adoption of International Financial Reporting Standards (I Union, effective January 1, 2005, resulted in a number of significant ch report their financial results. Mandatory IFRS adoption has been criticiz afforded under the standards and the encroachment of the fair value pa common accounting standards alone may not be sufficient to provide th accounting practices. This paper examines the causes and consequenc fair value disclosures for tangible long-lived assets. Insights may assist users in understanding the factors influencing firms' current and future may also interest U.S. standard setters and managers of the almost 25 real estate firms. Read More
02 OCT 2008 WHAT DO YOU THINK?
Workout vs. Bailout: Should Government Take Advantage of the Buffett Effect?
The depth of the global financial crisis is becoming clearer day by day, says HBS professor Jim Heskett. Respondents to this month's column offered creative solutions, and by and large resisted the temptation to venture into the realm of ideology. (Online forum now closed.) Closed f comment; 50 Comments posted.
29 SEP 2008 VIEWS ON NEWS
Financial Crisis Caution Urged by Faculty Panel

Jay Light, Robert C. Merton, David Moss, Nicolas Retsinas, Clayton Rose
Dean Jay O. Light and a group of Harvard Business School faculty exp
possible outcomes of the U.S. financial crisis at a recent "Turmoil on th More
New Framework for Measuring and Managing Macro Financial Stability

Dale F. Gray, Robert C. Merton, and Zvi Bodie
This paper proposes a set of leading indicators of macrofinancial distre policymakers and regulators in preparing for, mitigating, and maybe ev crisis. These early-warning indicators of crisis are based on modern co (CCA), which are successfully used today at the level of individual bank investors, and regulators. The authors' ultimate objective is to provide n governments and central banks manage financial sector risks. Read M
Secrets of the Academy: The Drivers of University En

Josh Lerner, Antoinette Schoar, and Jialan Wang
University endowments are important and interesting institutions both in community and society at large. They play a role in maintaining the aca many universities that rely heavily on income from their endowments. In can undermine a school's ability to provide academic services altogethe also received much attention recently for their superior investment retu institutional investors. In this study, the authors document the trends in endowment returns and investments in the United States between 1992
HBS Cases: Walking Away from a $3 Billion Deal

Managers of the ABRY Fund V were so successful they had investors additional $3 billion. But to invest that much would require trade-offs th chemistry that made the fund successful in the first place. Take the mo HBS Bulletin. Read More
30 JUL 2008 OP-ED
Why the U.S. Should Encourage FDI

American financial executives are courting foreign direct investors, part funds, for new investments. Should these investments draw increased s regulators? Harvard Business School professor Mihir Desai argues that work out in America's best financial interest. Read More
30 JUN 2008 RESEARCH & IDEAS
Rethinking Retirement Planning

Many of us are relying on defined contribution plans to help fund retirem Business School professor Robert C. Merton believes today's plans are what's next? A new way to look at the problem. Read More
Using Financial Innovation to Support Savers: From C Excitement

Peter Tufano and Daniel Schneider
This paper acknowledges the wide range of solutions to the problem of Families, and of particular interest to the authors, low-income families, purposes, including identifiable reasons such as education and retireme more broad, like rainy days or emergencies. Given societal pressures t the diversity among people, it is unlikely that there is a single solution t Yet a number of programs described by Tufano and Schneider have gr supporting household savings. Tufano and Schneider discuss each pro perspectives of would-be savers as well as from that of other key stake
Innovative Ways to Encourage Personal Savings

Peter Tufano
Saving money doesn't need to be so difficult. According to HBS profess most interesting ideasindeed the oldesttry to make savings a fun o As Tufano describes in this Q&A, different solutions appeal to different government policy, the private sector, and nonprofits can do. Read Mo
Accounting Information as Political Currency

Karthik Ramanna and Sugata Roychowdhury
The study of accounting and the political process has long been viewed cost hypothesis, the basic premise of which is that firms manage earnin first-order benefits (or avoid first-order costs) from regulators. This pape distinct, yet likely, complementary hypothesis: Firms manage reported e supply first-order benefits to regulators. Focusing on Democratic and R congressional races in 2004, Ramanna and Roychowdhury test whethe accounting information is in some circumstances akin to a political cont politicians: in other words, whether accounting information can be used The authors predict and find that identified corporate donors to candida races in 2004 managed information related to outsourcing, a hot-button Read More
Testing Strategy with Multiple Performance Measures Balanced Scorecard at Store24

Dennis Campbell, Srikant M. Datar, Susan L. Kulp, and V.G. Narayanan
To what extent do balanced scorecards provide useful information for t organization's strategy? Numerous case studies of balanced scorecard document their use in translating organizational strategies to objectives communicating strategic objectives to employees, evaluating the perfor and aligning the incentives of employees across business units and fun comparatively little research, however, on the potential learning and fee scorecards. Analyzing balanced scorecard data from Store24a privat
store retailer in New Englandduring the implementation of an innovat unsuccessful strategy, this study investigates whether, when, and how problems with the firm's strategy was captured in the multiple performa balanced scorecard. Read More
Connecting School Ties and Stock Recommendation

Lauren H. Cohen
School connections are an important yet underexplored way in which p revealed in prices in financial markets. As HBS professor Lauren H. Co discovered, school ties between equity analysts and topmanagement o analysts to earn returns of up to 5.4 percent on their stock recommend more in our Q&A. Read More
Accounting Information as Political Currency

Karthik Ramanna
Corporate donors that gave at least $10,000 to closely watched races i elections of 2004 were more likely to understate their earnings, say Ha Karthik Ramanna and MIT colleague Sugata Roychowdhury. Such "dow management" may have functioned as a political contribution. In this Q how accounting and politics influence each other. Read More
Organizational Design and Control across Multiple M of Franchising in the Convenience Store Industry
Dennis Campbell, Srikant M. Datar, and Tatiana Sandino
Chain organizations operate units that are typically dispersed across di and thus serve significantly different customer bases. Such "market-typ compromise the headquarters' ability to control its stores for two reason in local conditions make it difficult to monitor a store manager's behavio
ranging customer bases will have a harder time serving its customers a heavily on store managers' ability to adapt to local needs. This study id dispersion as a factor that is systematically related to firms' organizatio results may help managers and consultants who deal with control chal chain's geographic expansion into different markets. Read More
29 APR 2008 HBS CENTENNIAL COLLOQUIA REPORTS
Venture Capital
Professor Josh Lerner provides a summary report on the recently held colloquium on venture capital. Read More
Bank Accounting Standards in Mexico: A Laymans G 10 Years after the 1995 Bank Crisis
Gustavo A. Del Angel, Stephen Haber, and Aldo Musacchio
Mexico was the first emerging market compelled to reformulate the fina banks as a result of a financial crisis. In the last decade, Mexico has un internationalization of its banking industry. Today, more than 80 percen Mexican banks belongs to internationally active bank corporations. This demands more transparent regulation, including standardized accountin disclosure of information. The case of Mexico can therefore serve as a relevance of these changes, as well as of their scope and limitations. T clarify the nature and structure of the new accounting standards, and e affected financial statements and their interpretation. Read More
23 APR 2008 OP-ED
The Gap in the U.S. Treasury Recommendations

U.S. Treasury recommendations for strengthening the regulation of the good start but fall short, says Harvard Business School professor emer Here's his suggestion for bringing regulation into the 21st century. Read
09 APR 2008 HISTORY TEACHES
The Matchmaker of the Modern Economy

In the wake of World War II, Georges Doriot helped found the world's f firm, American Research and Development. Doriot (18991987) was al Harvard Business School for 40 years. Our book excerpt from Creative and the Birth of Venture Capital (HBS Press) describes how ARD first c investors and innovators. Read More
The Debate over Taxing Foreign Profits

Mihir A. Desai
Corporate tax policy has suddenly become a hot topic in the U.S., inclu whether current tax laws encourage American firms to outsource jobs t Harvard Business School professor Mihir Desai makes a case for exem taxes if proper safeguards are put in place. Read More
Bridge Building in Venture Capital-Backed Acquisition

Paul A. Gompers and Yuhai Xuan
The acquisition of new capabilities through the purchase of small ventu ups is a strategy that has been employed by many large technology firm Microsoft, Google, and EMC. Young venture capital-backed companies develop innovative technologies that can be exploited by existing techn value inherent in these start-ups is typically tied up in the intellectual pr that has been developed during the early stages of the company's life. acquire valuable intangible assets, however, is balanced by the difficult of the underlying assets. Unlike purchasing companies with substantial long track record of sales, the ability to fully assess the prospects of int to substantial asymmetric information and uncertainty. This paper explo limiting the asymmetric information that potentially plagues the acquisiti capital-backed companies. The results also shed light on the value that
to their portfolio companies as well as to companies in their venture ca
Sell Side School Ties

Lauren H. Cohen, Andrea Frazzini, and Christopher J. Malloy
Certain agents play key roles in revealing information into securities ma market, security analysts are among the most important. A large part of (perhaps the majority) is to research, produce, and disclose reports for companies' future prospects, and to translate their forecasts into stock Therefore, isolating how, or from whom, analysts obtain the information their recommendations is important. Do analysts gain comparative info through their social networksspecifically, their educational ties with se members of firms that they cover? This paper investigates ties between management of public firms, and the subsequent performance of their Read More
Long-Run Stockholder Consumption Risk and Asset

Christopher J. Malloy, Tobias J. Moskowitz, and Annette Vissing-Jrgensen
The long-run consumption risk of households that hold financial assets for asset pricing. The fact that stockholders are more sensitive to aggre movements helps explain why the consumption risk of stockholders del estimates. Understanding further why consumption growth, particularly responds slowly to news in asset returns will improve finance scholars' drives these long-run relations. HBS professor Malloy and his coauthor disaggregated measures of long-run consumption risks across stockho stockholders, and provide new evidence on the long-run properties of c its importance for asset pricing. Read More
Consumer Demand for Prize-Linked Savings: A Preli

Peter Tufano, Nick Maynard, and Jan-Emmanuel De Neve
Prize-linked savings (PLS) products are savings vehicles that may app savings and little interest in traditional savings products. PLS products the form of the chance to earn large prizes, rather than in more traditio dividend income or capital appreciation. The probability of winning is ty account balances, and the aggregate prize pool can be set to deliver m savers. Prize-linked assets are offered in over twenty countries around U.K., Sweden, South Africa, and many Latin American and Middle Eas not available in the United States, where state laws and federal regulat prize-linked programs problematic. This working paper provides a first PLS product in the United States. Read More
Laws vs. Contracts: Legal Origins, Shareholder Prote Ownership Concentration in Brazil, 1890-1950
Aldo Musacchio
The early development of large multidivisional corporations in Latin Am more than capable managers, new technologies, and large markets. Be was a market for capital in which entrepreneurs had to attract investors equity. This paper examines the investor protections included in corpor corporations in Brazil to attract investors in large numbers, thus genera concentration of ownership and control in large firms before 1910. The particularly interesting because, in Latin America before World War I, it largest equity market and largest number of traded companies. As HBS Musacchio shows, the considerable variation of investor protections ov level, and even at the company level, urges cautions against notions ab institutions, especially of legal traditions. Read More
The Small World of Investing: Board Connections and Returns

Lauren H. Cohen, Andrea Frazzini, and Christopher Malloy
How does information flow in security markets, and how do investors re
the context of information flow, social networks allow a piece of informa network often in predictable paths. HBS professors Lauren Cohen and along with University of Chicago colleague Andrea Frazzini, studied a t through social networks tied to educational institutions, examining the i mutual fund portfolio managers and senior officers of publicly traded co tested predictions on the portfolio allocations and returns earned by mu securities within and outside their networks. Read More
Attracting Flows by Attracting Big Clients: Conflicts of Mutual Fund Portfolio Choice
Lauren H. Cohen and Breno Schmidt
Retirement assets make up a large and growing percentage of the mut 2004, nearly 40 percent of all mutual fund assets were held by defined individual retirement accounts. This percentage is steadily increasing la retirement accounts represent the majority of new flows into non-mone With such a large and growing percentage of their assets coming from mutual funds are likely to be interested in securing these big clients. Th new channel through which mutual fund families can attract assets: by plan's trustee. HBS professor Lauren Cohen and colleague Breno Schm consistent with the trustee relationship affecting families' portfolio choic portfolio decisions, however, have the potential to be in conflict with the mutual funds have for their investors, and can impose potentially large
Cost of External Finance and Selection into Entrepre

Ramana Nanda
Entrepreneurs are, on average, significantly wealthier than people who employment. Research shows that entrepreneurs comprise fewer than in the United States but they hold 38 percent of household assets and net worth. This relationship between personal wealth and entrepreneur as evidence of market failure, meaning that talented but less wealthy in from entrepreneurship because they don't have sufficient wealth to fina Nanda studied how changes in the cost of external finance affected the
likelihood of individuals becoming entrepreneurs. He finds that market f a small fraction of the relationship between personal wealth and entrep economies such as the U.S. Read More
23 JAN 2008 OP-ED
A House Divided: Investment or Shelter?

For decades Americans viewed their homes as a safe harbor, a place t the last decade saw the rise of housing as an investment opportunity. W Harvard Business School professor Nicolas P. Retsinas, director of Har Housing Studies. Read More
04 OCT 2007 WHAT DO YOU THINK?
Has Managerial Capitalism Peaked?

Summing Up. Professor Jim Heskett considers his reader's comments o the growing imbalance between what John Bogle terms managerial capitalism and owners' capitalism. Closed for comment; 30 Comments posted.
Intra-Industry Foreign Direct Investment

Laura Alfaro and Andrew Charlton
One of the enduring puzzles for researchers on FDI has been the role "horizontal" and "vertical" FDI. Horizontal FDI tends to mean locating p customers and avoiding trade costs. Vertical FDI, on the other hand, re to take advantage of cross-border factor cost differences. A central cha been the absence of firm-level data to distinguish properly among the t for FDI. Alfaro and Charlton analyzed a new dataset, and in this paper characterization of the location, ownership, and activity of global multin Read More
Evidence on the Effects of Unverifiable Fair-Value Ac

Karthik Ramanna and Ross L. Watts
Since the late 1990s, the Financial Accounting Standards Board (FASB use of fair values in accounting. When such fair values are based on v they are less likely to be managed. However, in some FASB standards on managers' or appraisers' unverifiable subjective estimates. Agency t managers will take advantage of this unverifiability to manage financial extract rents. This paper considers a recent FASB standard known as on unverifiable fair-value estimates when accounting for acquired goodw research is to see whether firms are using this standard to manage the More
12 SEP 2007 VIEWS ON NEWS
Building Sandcastles: The Subprime Adventure

The early days of the subprime industry seemed to fulfill a market need became homeowners as a result. But rapidly escalating home prices m subprime foundation. HBS professor Nicolas P. Retsinas, who is also d University's Joint Center for Housing Studies, lays out what went wrong
Bond Risk, Bond Return Volatility, and the Term Stru Rates
Luis M. Viceira
This paper documents the existence of considerable variation over time correlation of Treasury bond returns with stock returns and with consum times in which bonds appear to be safe assets, while at other times the risky assets. The paper finds that time variation in bond risk is systema to the level and the slope of the yield curve. These are factors that prox general economic uncertainty, inflation risk, and the risk premium on bo
Global Currency Hedging

John Y. Campbell, Karine Serfaty-de Medeiros, and Luis M. Viceira
This article is forthcoming in the Journal of Finance. How much should currency exposure implicit in their international portfolios? Using a long exchange rates, stock returns, and bond returns that spans the period this paper studies the correlation of currency excess returns with stock returns. These correlations suggest the existence of a typology of curre the Swiss franc, and a portfolio simultaneously long U.S. dollars and sh negatively correlated with world equity markets and in this sense are "s currencies. Second, the Japanese yen and the British pound appear to with global equity markets. Third, the currencies of commodity producin Australia and Canada are positively correlated with world equity market that investors can minimize their equity risk by not hedging their expos currencies, and by hedging or overhedging their exposure to all other c shows that such a currency hedging policy dominates other popular he hedging, full hedging, or partial, uniform hedging across all currencies. uncorrelated or only mildly correlated with bonds, suggesting that intern should fully hedge their currency exposures. Read More
The Hedge Fund as Activist

Do hedge funds improve management of the companies they invest in? Harvard Business School professor Robin Greenwood and coauthor Mi in fact, hedge funds create shareholder value through anticipation of ch delivering it. Read More
Hedge Fund Investor Activism and Takeovers

Robin Greenwood and Michael Schor
Are hedge funds better than large institutional investors at identifying u locating potential acquirers for them, and removing opposition to a take
equipped to monitor management? While blockholding by large instituti funds and mutual fund investment companiesis widespread, there is these institutional shareholders are effective monitors of management o the capital structure increases firm value. When institutional blockholde on management, there is no evidence of their success. This working pa advantages and limits of hedge funds to manage these tasks. Greenwo characterization differs markedly from previous work on investor activis attribute high announcement returns to improvements in operational pe
15 AUG 2007 OP-ED
3 Steps to Reduce Financial System Risk

By using complex derivative products, banks are better able to manage transfer" technology is transferring risk to a new set of investors inexpe posing exposure problems for the international financial system as a wh Business School professor Mohamed El-Erian. Here's how to fix the pro
Economic Catastrophe Bonds

Joshua D. Coval, Jakub W. Jurek, and Erik Stafford
Pooling economic assets into large portfolios and tranching them into s claims has become a big business, generating record profits for both th and the agencies that rate these securities. This paper by business eco Jakub Jurek and HBS professors Joshua Coval and Erik Stafford inves risks of instruments created as a result of recent structured finance acti that senior collateralized debt obligation (CDO) tranches have significa risk exposures than their credit rating-matched, single-name counterpa command different risk premia. Read More
Contracting in the Self-reporting Economy

Romana L. Autrey and Richard Sansing
Intellectual property can be used by its owner directly, licensed to a thir royalty, or licensed to a third party for a variable royalty. The variable ro depends on self-reporting by the licensee, which in turn induces deman licensor. This research studies a setting with the following features: a p advantage on the part of the outside party that creates gains from licen constraint that prevents the licensee from owing more royalties than the licensing the intellectual property and prevents the licensor from captur surplus via a fixed royalty agreement; and accounting and auditing cost benefits of a variable royalty agreement. Read More
18 JUN 2007 OP-ED
Leveling the Executive Options Playing Field

Harvard Business School professor Mihir A. Desai recently presented te Senate subcommittee looking at the subject of executive stock options. reporting system" makes it difficult for investors and tax authorities to le Read More
Behavioral FinanceBenefiting from Irrational Invest

Do investors really behave rationally? Behavioral finance researchers M Joshua Coval don't think humans are such cold calculators. One proof: institutional investors often give in to inertia and hold on to shares in u therein lays opportunity for investment managers and firms. Read More
Growth and the Quality of Foreign Direct Investment:

Laura Alfaro and Andrew Charlton
Understanding the effect of foreign direct investment is important for tw informs foreign investment policy, and it has implications for the effect o investment flows on the process of economic development. While acad foreign direct investment as a homogenous capital flow, policymakers m
projects are better than others. In fact, national policies toward FDI see of FDI while regulating other types, reflecting a belief among policymak differ greatly in terms of the national benefits to be derived from them. Dublin to Beijing, for instance, have implemented complex FDI regimes nature of FDI projects attracted to their shores. Using a dataset on 29 c Charlton distinguished different qualities of FDI in order to examine the types of FDI and growth. Read More
All Eyes on Slovakias Flat Tax

Laura Alfaro, Vincent Dessain, and Ane Damgaard Jensen
The flat tax is an idea that's burst to life in post-communist Eastern and especially in Slovakia. But is the rest of the world ready? A new Harva on Slovakia's complex experience highlights many hurdles elsewhere, a Alfaro, Europe Research Center Director Vincent Dessain, and Resear Damgaard Jensen explain in this Q&A. Read More
Adding Time to Activity-Based Costing

Robert S. Kaplan
Determining a company's true costs and profitability has always been d advancements such as activity-based costing (ABC) have helped. In a Robert Kaplan and Acorn Systems' Steven Anderson offer a simplified driven ABC that leverages existing enterprise resource planning system
20 MAR 2007 VIEWS ON NEWS
Whats Behind Chinas Wild Stock Ride?

Li Jin
Podcast: The recent one-day plunge of 9 percent in China's stock mar weigh heavily on other markets around the world. What caused the fall? downs to come? Professor Li Jin discusses the unique characteristics t
stocks. Read More
14 MAR 2007 OP-ED
Governments Misguided Probe of Private Equity

The U.S Department of Justice has begun an inquiry into potentially an on the part of leading private equity firms. Professor Josh Lerner looks why this move carries the prospect of damaging what is actually an inc industry that creates much value. Read More
The New Real Estate

Real estate continues to defy revert-to-the-mean gravity to deliver hand investors. Professor Arthur I. Segel looks at the latest developments in considers several warning clouds that could darken the picture. Read M
Inexperienced Investors and Market Bubbles

Robin Greenwood
The evidence isn't conclusive, but new research from Harvard Busines younger fund managers may have contributed to the tech stock bubble Greenwood discusses the research paper, "Inexperienced Investors an mutual fund investors should keep in mind. Read More
Helping Low-Income Families Save More

Marketers are quite efficient at targeting potential customers when they tax-refund time. Professor Peter Tufano thinks tax time could also be p income families save more. Read More
12 FEB 2007 LESSONS FROM THE CLASSROOM
UpTick Brings Wall Street Pressure to Students

Money managers work in a stressful, competitive pressure cooker that' the safety of a business management classroom. That's why HBS profe Erik Stafford invented upTicka market simulation program that has st strategizing as they recreate classic market scenarios. Read More
The Business Press Is a Watchdog that Bites

Gregory S. Miller
When financial fraud is at stake, the press is a watchdog that bites mor says HBS professor Gregory S. Miller, an expert in financial communic press is on the case long before analysts or even the SEC. In this Q&A learned and what managers should keep in mind. Read More
Whats Behind the Private Equity Boom?

Podcast: On just one day in November, $52 billion worth of private equ announced, and more than $200 billion worth of deals have been agree deals include such major names as Qantas ($8.7 billion), Hertz ($15 bil ($ 18.7 billion). Are public markets being eclipsed? Are investors and e victimized? Professor Josh Lerner looks at historical trends and current perspective. Read More
Investors Hurt by Dual-Track Tax Reporting

What corporations report in profit to the IRS and what they report to sh
different numberssometimes wildly so. That's why the IRS and Secur Commission are proposing that companies publicly report taxes paid Desai thinks this is only a first step. Read More
The Money ConnectionUnderstanding VC Network

Venture capital firms often consider investments in companies located industries. How do they spot these opportunities and also reduce risk? networks, says Harvard Business School professor Toby Stuartand u work in VC is just now starting to be understood. Read More
Rich or Royal: What Do Founders Want?

Noam T. Wasserman
It's a fundamental tension many entrepreneurs face, the conflict betwee rich and wanting to keep control of their new company. Few can have Wasserman discusses his research into the motivations of entrepreneu invest in them. Read More
A New Framework for Analyzing and Managing Macr An Economy

Dale F. Gray, Robert C. Merton and Zvi Bodie
The vulnerability of a national economy to volatility in the global market commodities, and other assets has become a central concern of policy and investors everywhere. This paper describes a new framework for a exposure to macroeconomic risks based on the theory and practice of c analysis. (A contingent claim is any financial asset for which future pay of another asset.) In this framework, the sectors of a national economy interconnected portfolios of assets, liabilities, and guarantees that can b calls. The framework makes it transparent how risks are transferred ac
they can accumulate in the balance sheet of the public sector and ultim by the government. Read More
25 OCT 2006 VIEWS ON NEWS
Fixing Executive Options: The Veil of Ignorance

Who says you can't rewrite history? Dozens of companies have been c backdating options for top executives. But this is only part of the proble compensation packages, which often motivate top executives to act in rather than those of shareholders. Professors Mihir Desai and Joshua philosopher John Rawls for a solution: Reward the execs, but don't give More
Pricing Liquidity: The Quantity Structure of Immediac

George C. Chacko, Jakub W. Jurek, and Erik Stafford
Researchers and participants in the market for securities have long bee of transacting and the notion of liquidity as a performance measure of world capital markets, investors and corporations generally do not expe fundamental value. Rather, market participants face some degree of illi sacrifice price, trade size, or speed of execution, forcing them to transa fundamental value. The exact price of liquidity, however, is unknown. T option-based model of the price of liquidity via the pricing of limit order
The Success of Reverse Leveraged Buyouts

Josh Lerner
RLBOs have a bad rap, but Josh Lerner says the reputation is not dese 500 private equity-led IPOs over a 22-year period, Lerner and co-resea conclude that reverse leveraged buyouts in general outperformed other a whole. Quick flips, however, are another story. Read More
Optimal Value and Growth Tilts in Long-Horizon Port

Jakub W. Jurek and Luis M. Viceira
Long-term investors look for portfolio strategies that optimally trade off the immediate future, but over the long term. It is unrealistic to expect adopt an "invest and forget" strategy, but creating a portfolio strategy th allocations in response to changing risk premia, interest rates, and exp challenge in finance. Jurek and Viceira have devised a solution method implementation of dynamic portfolio choice models with realistically com opportunity sets. They have applied their method to study the role of va stocks in the portfolios of long-term investors, and have found that long want to tilt their portfolios away from value stocks despite the fact that t value stocks is larger than the average return on growth stocks (the so Their findings provide support for the idea that the superior performanc reflect simply that they are riskier than growth stocks at long horizons.
Corporate Governance and Networks: Bankers in the Networks of Brazil, Mexico, and the United States circ
Aldo Musacchio
Brazil today looks like a typical case in which business groups and clos companies and banks play an important role to overcome information a This was not always the case. To study how the development of financ the interaction between banks and corporations, Musacchio compared interlocking boards of directors between corporations and banks in Bra United States at the turn of the twentieth century. This paper and previ Musacchio's hypothesis that financial markets in Brazil were sustained framework that protected investors, enforced credit contracts, and prom disclosure of company accounts. The development of bond and stock m relatively good corporate governance practices in Brazil before 1930, m bankers less necessary. Read More
Reinventing the Dowdy Savings Bond

Families with low and moderate incomes have difficulty saving money bank accounts. To help these families plan for the future, professor Pet minor changes to the U.S. savings bonds program. Read More
What Companies Lose from Forced Disclosure

Romana L. Autrey
Increased corporate financial reporting may benefit many parties, but n companies themselves. New research from Harvard Business School p and coauthors looks at the relationship between executive performance Read More
The Competitive Advantage of Global Finance

Mihir A. Desai
Relatively few multinational companies truly understand or take advant finance. Professor Mihir A. Desai tackles the subject in a new book, Int Casebook. Heres a Q&A. Read More
Unlocking Your Investment Capital

Robert C. Merton
By reassessing risk exposure, many companies can create more equity investments, says Harvard Business School professor Robert C. Merton to the Finance Department. Read More
06 FEB 2006 VIEWS ON NEWS
The Trouble Behind Livedoor

Robin Greenwood
When Livedoor CEO Takafumi Horie was arrested last month, it shook underpinnings of Japan. Professor Robin Greenwood discusses what w that country's most-watched Internet companies. Read More
06 FEB 2006 WHAT DO YOU THINK?
Should CEOs of Public Companies Offer Earnings Guidance?

A small but growing chorus of public company CEOs is deciding not to provide quarterly earnings guidance. Is this a good or bad developmen for shareholders, investors, analysts, the marketplace, and the compan short- and long-term health? Closed for comment; 17 Comments poste
Financial Reporting Goes Global

Gregory S. Miller and V.G. Narayanan
Globalization is the key issue in determining the future of financial acco Gregory S. Miller. And as more countries consider adopting an internat standard, India is positioned to be a strong leader. Read More
Adam Smith, Behavioral Economist?

Nava Ashraf
Adam Smith is best known for The Wealth of Nations, but professor Na another of his works, The Theory of Moral Sentiments, presaged conte economics. Read More
Rebuilding Commercial Real Estate

The commercial real estate business is awash with money and opportu before the bubble pops? Read More
VCs Survey Post-Bubble Opportunities

At the annual Cyberposium conference held at Harvard Business Scho pondered what makes for winners and losers in the new VC landscape
The Best Place for Retirement Funds

Daniel Baird Bergstresser
Turns out location, location, location isnt just about real estate. Profess discusses his research on optimal asset location strategies. Read More
Reinventing Savings Bonds

Peter Tufano and Daniel Schneider
At one point in American history, savings bonds were an important tool assets and get ahead. While times have changed, this function of savin more important now, especially for the 41 million low- and moderate-inc households. Tufano and Schneider lay out a case for why savings bond to help millions of Americans build assets now. Read More
Time to Rethink the Corporate Tax System?

Mihir A. Desai
Corporations have turned tax obligations into profit centers, bringing int rationale for business taxes in the first place. Professor Mihir A. Desai the modern corporate tax structure and suggests possible remedies. Re
Float Manipulation and Stock Prices

Robin Greenwood
When a firm reduces the number of shares available to trade, so-called price of the stock is often driven up. The author uses a series of 2,000 Japan as an experiment to understand the consequences of float mani The conclusion: Stock prices are raised significantly when there are dif value of shares, investors are unable to sell short, and the number of o reduced. Read More
Four VCs on Evaluating Opportunities

Four venture capitalists explain to Harvard Business School professor M research associate Lauren Barley how they evaluate potential investme
A Cross-Sectional Analysis of the Excess Comoveme Returns

Robin Greenwood
This paper develops cross-sectional predictions from a model in which of stock returns comes from correlated demand shocks. The model is t index stocks and 1,458 non-index stocks for the years 1993 through 20 controlling for index membership, index overweighting is a significant d comovement of returns with index returns. Read More
The VC Quandary: Too Much Money

The VC money "overhang" continues as investors compete to get into a each year. How do smart venture firms approach the challenge? A repo Venture Capital & Private Equity Conference. Read More
Rethinking Activity-Based Costing

Activity-based accounting looks great in the classroom, but too often fa Harvard Business Review excerpt, HBS professor Robert S. Kaplan alo Anderson suggest a way around the obstacles. Read More
10 JAN 2005 WHAT DO YOU THINK?
Public Pension Reform: Does Mexico Have the Answer?

Mexico may have found a formula for avoiding most of the misfortunes that could arise when individuals invest their own funds. What's the righ way to support an aging workforce? And why is it that a conceptlifelong securitythat should bring comfort to all of us is so distasteful to address in public? Closed for comment; 10 Comments posted.
Professors Introduce Valuation Software

Paul M. Healy and Krishna G. Palepu
HBS professors Krishna Palepu and Paul Healy have developed a bus valuation software program, which is being sold to the public. Here is w executives should take a look. Read More
The Bias of Wall Street Analysts

Mark T. Bradshaw
Historically, stock analysts recommendations have been swayed by bu between the analysts employer and the target company, says Professo recent SEC reforms helped? Read More
Cash and the Woman-Owned Business

Female entrepreneurs often lack start-up cash. This excerpt from the b Hurdles, co-authored by HBS professor Myra M. Hart, explains what wo Read More
Real Estate: The Most Imperfect Asset

Arthur I. Segel
Real estate is the largest asset class in the worldand also the most im Business School professor Arthur Segel. He discusses trends toward in environmentalism, and globalization. Read More
New Challenges for Long-Term Investors

Luis M. Viceira
Risk-reward. Rising interest rates. Stocks or bonds. The long-term inve when setting asset allocation strategy, says HBS professor Luis M. Vice might not come with "conventional wisdom." Read More
02 AUG 2004 WHAT DO YOU THINK?
For Greater Transparency, Is Section 404 an Effectiv Response?

Section 404 of the Sarbanes-Oxley Act requires that managers certify t integrity of their internal controls for financial reporting. In the end, are shareholders getting their moneys worth? Are more costly amendment to come? Closed for comment; 15 Comments posted.
Analyst Disagreement, Forecast Bias and Stock Retu

Anna Scherbina
It is well documented that financial analysts' opinions are reflected in st Analysts often operate under incentives that are inconsistent with telling investors, who tend to be less sophisticated, may fail to make proper a nuanced of the resulting biases, some of which might be reflected in m the scope of market efficiency, Scherbina studied analysts' incentives, and their potential impact on market prices. Read More
Microfinance: A Way Out for the Poor

Microfinance is not a magic ticket out of poverty, but it can help both th as the loan giver, says Harvard Business Schools Michael Chu. Read
The Big Money for Big Projects

Benjamin C. Esty
This isn't your father's venture capital. Amusement parks, satellite netw HBS Professor Benjamin Esty studies financing of large projects. Q&A
When Reputation Trumps Regulation

Jordan I. Siegel
Foreign firms cross-listing on U.S. exchanges are learning that their big investors lies in a strong reputation. An interview with HBS professor J
European Private EquityStill a Teenager?

If the private equity industry has a life cycle, these are the teenage yea to panelists at the conference session on European private equity. Rea
01 DEC 2003 WHAT DO YOU THINK?
Is This the Twilight Era for the Managed Mutual Fund

Once a "safe bet," mutual funds are facing a rocky future as investmen managers come under fire for such mismanagement as arbitrage tradin These alleged double dealings will end up costing investors a bundle in the long run. Are we witnessing mutual funds' swan song? Closed for comment; 11 Comments posted.
03 NOV 2003 WHAT DO YOU THINK?
Can Investors Have Too Much Accounting Transparency?

The earnings of all publicly owned organizations may soon take a hit a the organizations comply with various provisions of the Sarbanes-Oxley Act and new FASB rules. Are these and perhaps other "cures" to the corporate scandals really worth the cost to investors? Closed for comment; 12 Comments posted.
Time-Driven Activity-Based Costing

Robert S. Kaplan and Steven R. Anderson
Activity-based costing (ABC) has become popular in business writing a (An example of an activity would be process customer complaints.) How baselines for activities, developing the model, and retesting the model o time-consuming and costly. Kaplan and Anderson developed improvem through what they call time-driven ABC. Time-driven ABC decreases th needed, and only requires estimates of two things: (1) the practical cap resources and their cost, and (2) unit times for performing transactiona
The Problem with Hedge Funds

Hedge funds are the New Big Thingand thats bad for the average in Quinn Mills. An excerpt from Wheel, Deal, and Steal. Read More
A Bold Proposal for Investment Reform

Paul M. Healy and Krishna G. Palepu
Do the markets need an investor's union? Should company audits be o exchanges? If you want to restore investor confidence, think radical ref Paul Healy and Krishna Palepu. Read More
Why Budgeting Kills Your Company

Why doesnt the budget process work? Read what experts say about n budgeting process, but whether your company should dispense with bu
More
Surveying the VC Landscape

Josh Lerner
In an e-mail Q&A, HBS professor Josh Lerner discusses issues includi private equity, buyout firms, Sarbanes-Oxley, and the role of VC on inn
Expensing Options Wont Hurt High Tech

Will expensing stock options harm the competitiveness of start-ups? No Robert S. Kaplan, and Robert C. Merton in this Harvard Business Revi
19 MAY 2003 LESSONS FROM THE CLASSROOM
Business Plan Winner Targets India Dropouts

Allen S. Grossman
Gyaana means "knowledge" in Sanskrita fitting name for a business percent dropout rate in India by offering microfinance loans to families.
03 MAR 2003 WHAT DO YOU THINK?
Are Conditions Right for the Next Accounting Scanda

Will risk-averse corporate audit committees' natural tendencies to enga the biggest accounting firms insure that the current accounting oligopol will become even stronger? Closed for comment; 12 Comments posted
Rating Fund Managers by the Company They Keep

Randolph B. Cohen and Joshua D. Coval
A new method for rating the performance of mutual fund managers loo performance, and more at where smart managers are investing. A Q&A School professor Randolph B. Cohen. Read More
Why Expensing Options Doesnt Solve the Problem

Stock options for executives have certainly been abused, but reforms re expense option grants on their financial statements don't solve the fund argues Harvard Business School professor William A. Sahlman. Read M
Most Accountants Arent CrooksWhy Good Audits

The Sarbanes-Oxley Act sets stiff penalties for auditors and executives Problem is, says Harvard Business School professor Max H. Bazerman most bad audits are the result of unconscious bias, not corruption. Here audit the auditors. Read More
Let the Buyer Beware Doesnt Protect Investors

"Let the buyer beware" is a poor warning for investors, says HBS profe this excerpt from his new book, Buy, Lie, and Sell High: How Investors the Internet Bubble, he offers a way to shape up the system. Plus: Auth
13 MAY 2002 OP-ED
A Cure for Enron-Style Audit Failures

In an opinion piece in the Financial Times, Harvard Business School pr argues for legislation to create an independent, self-regulatory organiza accounting firms. Enron, he says, is not an isolated incident. Read Mor
Profits and Prophets: The Role of Values in Investme

What are the tradeoffs of socially responsible investing? In a lively deb Amy Domini and a Harvard investment scholar, Samuel L. Hayes, expl versus amoral investing. Read More
01 APR 2002 WHAT DO YOU THINK?
Is This the Decade of the Investor?

Closed for comment; 4 Comments posted.
Are Assets Only for Americas Wealthy?

It's a crucial question: How can this country's poor build up their assets spiral of poverty? The challenge is to create asset-building programs th expanding into other financial services with higher return rates and gre big assist from technology, argues Harvard Business School professor
25 MAR 2002 LESSONS FROM THE CLASSROOM
Case Study: A Lesson in Private Venture Financing

Using a case discussion on Gray Security Services, Harvard Business professor Walter Kuemmerle highlights issues confronting entrepreneur interested in Africa. Read More
Wrap-up: Software, Telecom, and Recovery

How is the VC industry doing on its own and in partnership with softwa were just three topics discussed in special panel sessions at the recent highlights from those conversations. Read More
Venture Capital: Hot Markets and Current Industry Tr

Yes, the economy has soured. But that doesn't mean venture capitalist sidelines. VC panelists discuss what is hot (healthcare), what is not (wi life has changed (a lot). Read More
26 NOV 2001 OP-ED
Why Corporate Budgeting Needs To Be Fixed

Not to mince words, but corporate budgeting is a joke, argues HBS pro C. Jensen in this Harvard Business Review excerpt. The problem isn't w it's when budget targets are used to determine compensation. Read
Women Entrepreneurs Use Springboard for Funding

The Springboard Venture Capital Forum, held recently at Harvard Busi platform for twenty-three women entrepreneurs seeking heavy-duty fina
Venture Capital Goes Boomor Bust?

In The Money of Invention: How Venture Capital Creates New Wealth,
Gompers and Josh Lerner demystify the role VC plays in the economy. Q&A with the authors. Read More
Does Misery Love Companies? How Social Performa

Is there a relationship between a company's social performance and its HBS associate professor Joshua D. Margolis and University of Michiga Walsh make the connection in their latest working paper. PLUS: Margo
Tech Investment the Wise Way

Can elephants dance? Large companies are perceived to be less inclin technologies than start-ups. But HBS professor Henry Chesbrough and Richard S. Rosenbloom say look to your business modelnot the tech investment decisions. Read More
Not All M&As Are Alikeand That Matters

In this Harvard Business Review article, Professor Joseph L. Bower sh of his year-long study of M&A activity sponsored by HBS. Discover how acquisition strategies scenarios play outand his recommendations for
The Determinants of Corporate Venture Capital Succ

Corporate-sponsored venture capital funds do not have to fail. But as H Gompers and Josh Lerner explain, hybrid organizations such as Xerox face considerable challenges on the road to success. Read More
Networked Incubators: Hothouses of the New Econom

Are business incubators a fleeting phenomenon or a lasting way of brin fruition? Four HBS professors argue that one particular modelthe "ne most likely to endure. Read More
Big Deals: Financing Large-Scale Investments

Multimillion dollar start-ups are all over the news these days. But HBS Esty's research provides insight into a much bigger kind of venture, wit order of billions, rather than millions, of dollars. Read More
Value Maximization and Stakeholder Theory

Many managers, says HBS Professor Michael C. Jensen, are caught in desire to maximize the value of their companies and the demands of "s take into account the interests of all the stakeholders in a firm. The wa Jensen, lies in a new way of measuring value. Read More
Something Ventured, Something Gained: A European Capital

Read More
The State of the Markets

Technology is bringing about vast changes in worldwide financial mark improvements in efficiency, speed and economies of scale. But as tech continues to occur, attention must also be paid to changes in the role t industry leaders in a panel on "Technology and the Future of the Finan More
Stock Options Are Not All Created Equal

Stock options dominate the pay of top executives today, but are often p by those who grant them and those who receive them. In this excerpt f Harvard Business Review, HBS Professor Brian J. Hall describes three plans and the incentives and risks they entail. Read More
Keeping Track: Performance Measurement, Control &

Robert L. Simons
Read More
The Future of the Venture Capital Cycle

Despite many success stories and a rapid rise to prominence, the vent remains a mystery to most, and questions about its sustainability persis their pathbreaking book The Venture Capital Cycle, HBS Professors Pa Lerner look toward the future of this misunderstood financial intermedia
Where Main Street Meets Wall Street

Its phenomenal growth, based on its near-perfect fit with consumer nee made the mutual fund one of this century's big success stories. How is the Internet and 21st century change? HBS Professors Jay O. Light an alumni take a look at the state of the mutual fund industry 75 years afte Boston's financial district. Read More
Paid for Success: Options for Compensating CEOs

Read More
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