Shareholders Need a Say on Pay
| Published: | November 2, 2009 |
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| Feature: | Research & Ideas |
"Say on pay" legislation now under debate Washington D.C. can be a useful tool for shareholders to strengthen the link between CEO pay and performance when it comes to golden parachutes, says Harvard Business School professor Fabrizio Ferri. Here's a look at how the collective involvement of multiple stakeholders could shape the future of executive compensation.
HBS Begins Teaching Consumer Finance
| Q&A with: | Peter Tufano |
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| Published: | October 28, 2009 |
| Feature: | Lessons from the Classroom |
Last spring HBS became the first top-ranked U.S. business school to offer a course in consumer finance. Professor Peter Tufano talks about the course and his determination to make consumer finance a broadly accepted academic pursuit. From the HBS Alumni Bulletin.
Why Competition May Not Improve Credit Rating Agencies
| Q&A with: | Bo Becker |
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| Published: | August 31, 2009 |
| Feature: | Research & Ideas |
Competition usually creates better products and services. But when competition increased among credit rating agencies, the result was less accurate ratings, according to a study by HBS professor Bo Becker and finance professor Todd Milbourn of Washington University in St Louis. In our Q&A, Becker discusses why users of ratings should exercise a little caution.
Reputation and Competition: Evidence from the Credit Rating Industry
| Authors: | Bo Becker and Todd Milbourn |
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| Published: | July 22, 2009 |
| Paper Release Date: | October 2008 |
| Feature: | Working Papers |
Credit ratings are a key aspect of the financial system. The quality of these ratings is certainly sustained in part by the reputational concerns of rating agencies, whose paying customers have no inherent interest in the quality of ratings. Competition in this industry has been increasing, and there have been calls for yet more competition. Whether competition will reduce quality or improve it is not yet clear. HBS professor Bo Becker and Washington University in St. Louis professor Todd Milbourn test these conflicting predictions in the ratings industry. Their evidence is more or less consistent with a reduction in credit rating quality as Fitch increased its market presence. Their empirical findings suggest that the system will work better when competition is not too severe. These results have potential policy implications.
"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.
What Does Slower Economic Growth Really Mean?
| Published: | June 5, 2009 |
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| Feature: | What Do YOU Think? |
| Forum: | closed | 44 Comments posted |
Respondents to this month's column by HBS professor Jim Heskett came close to general agreement on the proposition that economic growth is not measured properly by GDP, calling for new indicators. Jim sums up. (Online forum now closed. Next forum begins July 6.)
Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed where Immediate Annuities Have Floundered?
| Author: | Julio J. Rotemberg |
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| Published: | June 4, 2009 |
| Paper Release Date: | April 2009 |
| Feature: | Working Papers |
The changeover from defined benefit to defined contributions retirement plans in the United States has created a vast group of individuals that faces (or will face) the difficult problem of using a lump sum of assets to provide consumption for a relatively long but uncertain number of years. Up to this point, however, consumers appear not to have embraced annuitization. HBS professor Julio J. Rotemberg suggests an alternative instrument that, like immediate annuities, provides longevity insurance and postpones income until old age. In the proposed Mutual Inheritance Fund (MIF), a pool is formed by having individuals of a particular age buy shares in a mutual fund. The income from the underlying assets in the mutual fund is reinvested in the fund so that the value of the shares in an individual's name (and possibly also the number of these shares) grows over time. The basic idea behind the MIF is that the shares of pool members who die are liquidated, and the proceeds are then distributed in cash to the remaining members in proportion to the number of mutual fund shares that are currently in their name.
Money or Knowledge? What Drives Demand for Financial Services in Emerging Markets?
| Authors: | Shawn Cole, Thomas Sampson, and Bilal Zia |
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| Published: | May 15, 2009 |
| Paper Release Date: | April 2009 (revised October 2009) |
| Feature: | Working Papers |
Why is there apparently limited demand for financial services in emerging markets? On the one hand, low-income individuals may not want formal services when informal savings, credit, and insurance markets function reasonably well, and the benefits of formal financial market participation may not exceed the costs. On the other hand, limited financial literacy could be the barrier: If people are not familiar or comfortable with products, they will not demand them. These two views carry significantly different implications for the development of financial markets around the world, and would suggest quite different policy decisions by governments and international organizations seeking to promote "financial deepening." HBS professor Shawn Cole and coauthors found that financial literacy education has no effect on the probability of opening a bank savings account for the full population, although it does significantly increase the probability among those with low initial levels of financial literacy and low levels of education. In contrast, modest financial subsidies significantly increase the share of households that open a bank savings account within the subsequent two months.
An Ounce of Prevention: The Power of Public Risk Management in Stabilizing the Financial System
| Author: | David A. Moss |
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| 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 |
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| 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.
Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors
| Author: | Sharon P. Katz |
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| Published: | April 30, 2009 |
| Paper Release Date: | March 2009 |
| Feature: | Working Papers |
Although 99 percent of the companies operating in the United States are private, according to the American Institute of Certified Public Accountants, their accounting practices remain largely unknown due mainly to the lack of publicly available financial statements. In this study, HBS professor Sharon P. Katz used a unique database of firms with privately held equity and publicly held debt to examine how two different ownership structures-private equity sponsorship and non-private equity sponsorship-affect firms' financial reporting practices, financial performance, and stock returns in the years preceding and following the initial public offering (IPO).
Female Empowerment: Impact of a Commitment Savings Product in the Philippines
| Authors: | Nava Ashraf, Dean Karlan, and Wesley Yin |
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| Published: | April 29, 2009 |
| Paper Release Date: | March 2009 |
| Feature: | Working Papers |
Does access to personal savings increase female decision-making power in the household? The answer could be important for policymakers looking to increase female empowerment. HBS professor Nava Ashraf and colleagues developed a commitment savings product called a SEED (Save, Earn, Enjoy Deposits) account with a small, rural bank in the Philippines. The SEED account requires that clients commit not to withdraw funds that are in the account until they reach a goal date or amount, but it does not explicitly commit the client to continue depositing funds after opening the account. This working paper examines the impact of the commitment savings product on both self-reported decision-making processes within the household and the subsequent household allocation of resources.
The Investment Strategies of Sovereign Wealth Funds
| Authors: | Shai Bernstein, Josh Lerner, and Antoinette Schoar |
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| Published: | April 17, 2009 |
| Paper Release Date: | March 2009 |
| Feature: | Working Papers |
The role of sovereign wealth funds (SWFs) in the global financial system has been increasingly recognized in recent years, and many reports suggest that SWFs are often employed to further the geopolitical and strategic economic interests of their governments. The resources controlled by these funds—estimated to be $3.5 trillion in 2008—have grown sharply over the past decade. Projections, while inherently tentative due to the uncertainties about the future path of economic growth and commodity prices, suggest that they will be increasingly important actors in the years to come. Despite this significant and growing role, financial economists have devoted remarkably little attention to these funds. The lack of scrutiny must be largely attributed to the deliberately low profile adopted by many SWFs, which makes systematic analysis challenging. Bernstein, Lerner, and Schoar analyze how SWFs vary in their investment styles and performance across various geographies and governance structures. Taken as a whole, results suggest that high levels of home investments by SWFs, particularly those with the active involvement of political leaders, are associated with trend chasing and worse performance.
Credit is Not the Bogey
| Published: | March 4, 2009 |
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| Feature: | Op-Ed |
"As we attempt to jump-start the economy of 2009, we should recognize both the risks and the advantages inherent in a robust credit industry," write HBS lecturer Nicolas P. Retsinas and Eric S. Belsky. The director and executive director, respectively, of Harvard University's Joint Center for Housing Studies, they offer a prescription for making credit neither too easy nor too hard to get.
Risky Business with Structured Finance
| Published: | January 20, 2009 |
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| 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.
Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation
| Authors: | Shawn Cole and Gauri Kartini Shastry |
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| Published: | January 14, 2009 |
| Paper Release Date: | December 2008, revised February 2009 |
| Feature: | Working Papers |
(Previously titled "If You Are So Smart, Why Aren't You Rich? The Effects of Education, Financial Literacy and Cognitive Ability on Financial Market Participation.") Individuals face an increasingly complex menu of financial product choices. The shift from defined benefit to defined contribution pension plans, and the growing importance of private retirement accounts, require individuals to choose the amount they save, as well as the mix of assets in which they invest. Yet, participation in financial markets is far from universal in the United States. Moreover, researchers have only a limited understanding of what factors cause participation. Cole and Shastry use a very large dataset new to the literature in order to study the important determinants of financial market participation. They find that higher levels of education and cognitive ability cause increased participation—however, financial literacy education does not.
Published in 2008
Financial Crisis Caution Urged by Faculty Panel
| Q&A with: | Jay Light, Robert C. Merton, David Moss, Nicolas Retsinas, Clayton Rose |
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| Published: | September 29, 2008 |
| Feature: | Views on News |
Dean Jay O. Light and a group of Harvard Business School faculty explored the origins and possible outcomes of the U.S. financial crisis at a recent "Turmoil on the Street" panel.
HBS Cases: Walking Away from a $3 Billion Deal
| Published: | August 25, 2008 |
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| Feature: | Research & Ideas |
Managers of the ABRY Fund V were so successful they had investors waiting to pour in an additional $3 billion. But to invest that much would require trade-offs that could jeopardize the chemistry that made the fund successful in the first place. Take the money or walk away? From HBS Bulletin.
How Female Stars Succeed in New Jobs
| Q&A with: | Boris Groysberg |
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| Published: | August 4, 2008 |
| Feature: | Research & Ideas |
Women who are star performers on Wall Street tend to fare better than men after changing jobs. Why? According to HBS professor Boris Groysberg, star women place greater emphasis than men on external business relationships, and conduct better research on potential employers. Plus: Businesswomen are asked to share career experiences.
Rethinking Retirement Planning
| Published: | June 30, 2008 |
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| 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.
