Banking Deregulations, Financing Constraints and Firm Entry Size
| Authors: | William R. Kerr and Ramana Nanda |
|---|---|
| Published: | September 11, 2009 |
| Paper Release Date: | July 2009 (revised October 2009) |
| Feature: | Working Papers |
How do financing constraints on new start-ups affect the initial size of these new firms? Since bank debt comprises the majority of U.S. firm borrowings, new ventures are especially sensitive to local bank conditions due to their limited options for external finance. Liberalization in the banking sector can thus have important effects on entrepreneurship in product markets. As HBS professors William Kerr and Ramana Nanda explain, the 1970s through the mid-1990s was a period of significant liberalization in the ability of banks to establish branches and to expand across state borders, either through new branches or through acquisitions. Using a database of annual employment data for every U.S. establishment from 1976 onward, Kerr and Nanda examine how U.S. branch banking deregulations impacted the entry size of new start-ups in the non-financial sector. This paper is closely related to their prior work examining how the deregulations impacted the rates of startup entry and exit in the non-financial sector.
Information Risk and Fair Value: An Examination of Equity Betas and Bid-Ask Spreads
| Authors: | Edward J. Riedl and George Serafeim |
|---|---|
| Published: | September 2, 2009 |
| Paper Release Date: | July 2009 |
| Feature: | Working Papers |
What is the role of fair values in the current economic crisis? The interplay between information risk—that is, uncertainty regarding valuation parameters for an underlying asset—and the reporting of financial instruments at fair value has been a subject of high-level policy debate. Finance theory suggests that information risk is reflected in firms' equity betas and the information asymmetry component of bid-ask spreads. HBS professor Edward Riedl and doctoral candidate George Serafeim test predictions for a sample of large U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Overall, banks with higher exposures to level 3 financial assets have both higher equity betas and higher bid-ask spreads. Both results are consistent with higher levels of information risk, and thus cost of capital, for these firms.
"Too Big To Fail": Reining In Large Financial Firms
| Published: | June 22, 2009 |
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| Feature: | Research & Ideas |
Four little words have cost U.S. taxpayers dearly in government bailouts of once-mighty Wall Street firms. Congress can put an end to such costly rescues, says HBS professor David A. Moss, and the Federal Reserve could be a super regulator, adds senior lecturer Robert C. Pozen. But will Congress enact the regulatory cure that is required? From the HBS Alumni Bulletin.
The Challenges of Investing in Science-Based Innovation
| Published: | June 1, 2009 |
|---|---|
| Feature: | Executive Education |
Smart science-based businesses view today's economic turmoil as an opportunity to stoke up research and innovation for long-term competitive advantage, says professor Vicki L. Sato. How about your business?
An Ounce of Prevention: The Power of Public Risk Management in Stabilizing the Financial System
| Author: | David A. Moss |
|---|---|
| Published: | May 4, 2009 |
| Paper Release Date: | January 2009 |
| Feature: | Working Papers |
The present financial crisis should remind us that private financial institutions and markets cannot always be counted upon to manage risk optimally on their own. Almost everyone now recognizes that the government has a critical role to play—as the lender, insurer, and spender of last resort—in times of crisis. But effective public risk management is also needed in normal times to protect consumers and investors and to help prevent financial crises from starting in the first place. According to HBS professor David Moss, the biggest threat to our financial system today is posed not by commercial banks (as in 1933), but rather by systemically significant institutions (outside of commercial banking) that have the potential to trigger financial avalanches. The threat posed by these financial institutions is only compounded by the unprecedented federal guarantees introduced in response to the current crisis and the pervasive moral hazard they spawn. Under the system that Moss proposes, no financial institution would be too big to fail.
What's Next for the Big Financial Brands
| Published: | May 4, 2009 |
|---|---|
| Feature: | Research & Ideas |
Some of the great financial brands such as Merrill Lynch built trust with customers over decades—but lost it in a matter of months. Harvard Business School marketing professor John Quelch explains where they went wrong, and what comes next.
The Contingent Nature of Public Policy and Growth Strategies in the Early Twentieth-Century U.S. Banking Industry
| Authors: | Christopher Marquis and Zhi Huang |
|---|---|
| Published: | April 1, 2009 |
| Paper Release Date: | August 2008 |
| Feature: | Working Papers |
The effects of public policy on organizations and economic activities have been widely observed. This line of research has contributed to organizational theory by showing the importance of state action for constructing economic systems, as well as firm structures and strategies. But there are a number of reasons why this perspective may in fact overemphasize the importance of public policy. This working paper, forthcoming as an article in the Academy of Management Journal, more fully investigates the contingent nature of the effects of policy on organizations, with the orienting premise that policy is just one of the external conditions that organizations face, and policy effects are more or less powerful to the extent that they are interactive with other elements of the environment. Specifically, the authors focus on how policy that regulated bank branching and other environmental factors affected—independently as well as interactively—the emergence and growth of large-scale firms in U.S. commercial banking from 1896 to 1978.
Podcast: Preventing Future Financial Failures
| Podcast with: | David A. Moss |
|---|---|
| Published: | February 26, 2009 |
| Feature: | Research & Ideas |
Professor David Moss says we need ongoing federal regulation of the few "systemically significant" institutions whose demise could threaten financial stability.
Risky Business with Structured Finance
| Published: | January 20, 2009 |
|---|---|
| Feature: | Research & Ideas |
How did the process of securitization transform trillions of dollars of risky assets into securities that many considered to be a safe bet? HBS professors Joshua D. Coval and Erik Stafford, with Princeton colleague Jakub Jurek, authors of a new paper, have ideas.
Published in 2008
Market Reaction to the Adoption of IFRS in Europe
| Authors: | Christopher S. Armstrong, Mary E. Barth, Alan D. Jagolinzer, and Edward J. Riedl |
|---|---|
| Published: | December 10, 2008 |
| Paper Release Date: | September 2008 |
| Feature: | Working Papers |
How do investors in European firms react to a change in financial reporting? Prior to 2005, most European firms applied domestic accounting standards. The adoption of International Financial Reporting Standards (IFRS) would result in the application of a common set of financial reporting standards within Europe, and between Europe and the many other countries that require or permit application of IFRS. However, modification of IFRS by European regulators would result in European standards differing from those used in other countries, thereby eliminating some potential convergence benefits. This study investigates the equity market reaction to 16 events associated with the adoption of IFRS in Europe. Overall, the researchers' findings are consistent with investors expecting the benefits associated with IFRS adoption in Europe to exceed the expected costs.
Fixing Market Failures or Fixing Elections? Agricultural Credit in India
| Author: | Shawn A. Cole |
|---|---|
| Published: | August 6, 2008 |
| Paper Release Date: | July 2008 |
| Feature: | Working Papers |
There are strong theoretical reasons to believe that politicians manipulate resources under their control to achieve electoral success. Yet, compelling examples of this manipulation are heretofore rarely documented in scholarly literature. Cole's paper presents evidence that government-owned banks in India serve the electoral interests of politicians. It also analyzes how resources are strategically distributed.
Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?
| Author: | Shawn A. Cole |
|---|---|
| Published: | July 22, 2008 |
| Paper Release Date: | July 2008 |
| Feature: | Working Papers |
Government ownership of banks, a common phenomenon, is among the most important policy tools used to influence financial development. But what is the actual effect of such ownership on the financial development of a country? This paper uses a policy experiment in India to evaluate the effect of government ownership of banks on development.
Rethinking Retirement Planning
| Published: | June 30, 2008 |
|---|---|
| Feature: | Research & Ideas |
Many of us are relying on defined contribution plans to help fund retirement. But Harvard Business School professor Robert C. Merton believes today's plans are not sustainable. So what's next? A new way to look at the problem.
Bank Structure and the Terms of Lending to Small Businesses
| Authors: | Rodrigo Canales and Ramana Nanda |
|---|---|
| Published: | June 24, 2008 |
| Paper Release Date: | June 2008 |
| Feature: | Working Papers |
Access to "soft information" and the greater sensitivity of decentralized banks to the local institutional environment can have both positive and negative consequences for small firms. Hence there may be a dark side to decentralized bank lending in certain instances. This paper argues that the same ability of decentralized banks to act on soft information also makes them more responsive to the local environment when setting terms of their loans. While this can be beneficial for small businesses in competitive markets, it also implies that the organizational structure of decentralized banks might allow them to better exploit their market power in concentrated banking markets by restricting credit or charging higher interest rates from small businesses.
Bank Accounting Standards in Mexico: A Layman's Guide to Changes 10 Years after the 1995 Bank Crisis
| Authors: | Gustavo A. Del Angel, Stephen Haber, and Aldo Musacchio |
|---|---|
| Published: | April 24, 2008 |
| Paper Release Date: | April 2008 |
| Feature: | Working Papers |
Mexico was the first emerging market compelled to reformulate the financial reporting of its banks as a result of a financial crisis. In the last decade, Mexico has undergone a process of internationalization of its banking industry. Today, more than 80 percent of the equity of Mexican banks belongs to internationally active bank corporations. This internationalization demands more transparent regulation, including standardized accounting rules and better disclosure of information. The case of Mexico can therefore serve as an example of the relevance of these changes, as well as of their scope and limitations. This paper attempts to clarify the nature and structure of the new accounting standards, and explains how they have affected financial statements and their interpretation.
The Gap in the U.S. Treasury Recommendations
| Published: | April 23, 2008 |
|---|---|
| Feature: | Op-Ed |
U.S. Treasury recommendations for strengthening the regulation of the financial system are a good start but fall short, says Harvard Business School professor emeritus Dwight B. Crane. Here's his suggestion for bringing regulation into the 21st century.
A House Divided: Investment or Shelter?
| Published: | January 23, 2008 |
|---|---|
| Feature: | Op-Ed |
For decades Americans viewed their homes as a safe harbor, a place to put down roots. But the last decade saw the rise of housing as an investment opportunity. What comes next? asks Harvard Business School professor Nicolas P. Retsinas, director of Harvard's Joint Center for Housing Studies.
Published in 2007
Building Sandcastles: The Subprime Adventure
| Published: | September 12, 2007 |
|---|---|
| Feature: | Views on News |
The early days of the subprime industry seemed to fulfill a market need—and millions of renters became homeowners as a result. But rapidly escalating home prices masked cracks in the subprime foundation. HBS professor Nicolas P. Retsinas, who is also director of Harvard University's Joint Center for Housing Studies, lays out what went wrong and why.
Hedge Fund Investor Activism and Takeovers
| Authors: | Robin Greenwood and Michael Schor |
|---|---|
| Published: | August 20, 2007 |
| Paper Release Date: | July 2007 |
| Feature: | Working Papers |
Are hedge funds better than large institutional investors at identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover? Are they best equipped to monitor management? While blockholding by large institutional investors—pension funds and mutual fund investment companies—is widespread, there is virtually no evidence that these institutional shareholders are effective monitors of management or that their presence in the capital structure increases firm value. When institutional blockholders make formal demands on management, there is no evidence of their success. This working paper outlines the advantages and limits of hedge funds to manage these tasks. Greenwood and Schor's characterization differs markedly from previous work on investor activism, which tends to attribute high announcement returns to improvements in operational performance.
3 Steps to Reduce Financial System Risk
| Published: | August 15, 2007 |
|---|---|
| Feature: | Op-Ed |
By using complex derivative products, banks are better able to manage risk. But this "credit risk transfer" technology is transferring risk to a new set of investors inexperienced in this arena and posing exposure problems for the international financial system as a whole, argues Harvard Business School professor Mohamed El-Erian. Here's how to fix the problem.
