Financial Services

119 Results

 

Housing Collateral, Credit Constraints, and Entrepreneurship-Evidence from a Mortgage Reform

One of the strongest findings in studies of entrepreneurship is the clear positive correlation between personal wealth and the propensity to engage in entrepreneurship. One study, for example, has shown that entrepreneurs comprise just under 9 percent of households in the United States, but hold about 40 percent of total net worth. The most common explanation for this correlation is that credit constraints pose an important barrier to entry for less wealthy individuals. However, others have questioned the degree to which financing constraints are barriers to entrepreneurship, particularly in advanced economies where firms have adequate access to capital. In this paper, the authors consider a unique mortgage reform in Denmark to study how increasing access to credit through the unlocking of housing collateral for personal loans had an impact on entrepreneurship. Findings show that the reform affected the ability to draw on debt backed by home equity. However, despite the positive and statistically significant effect of relaxing credit constraints on entrepreneurship, the magnitudes are small. Furthermore, an important reason for the small magnitude was that the marginal business founded by those who benefited from the reform was of lower quality, where the new entrants failed within two years of entry. Overall, the results paint a more nuanced picture of the extent to which financing constraints are important in settings with well-developed credit markets, and the role that home equity can play in alleviating these. Read More

New Treasury Rules Help Long-Retirement Planning

As life expectancy expands, seniors face a new threat: outliving their retirement savings. Robert Pozen says new Treasury rules will encourage purchase of "longevity annuities" that provide income into the 80s and 90s. Closed for comment; 0 Comments posted.

Apple Pay’s Technology Adoption Problem

Apple wants to convert your iPhone into a digital wallet with Apple Pay. Professors Benjamin Edelman and Willy Shih assess its chances for success and wonder if consumers have a compelling reason to make the switch. Closed for comment; 12 Comments posted.

Online Banks Fill Funding Needs for Small Business

In the final column on small business lending, Karen Mills is optimistic that the rise of alternative online banks can fund entrepreneurial business growth. Open for comment; 1 Comment posted.

The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game

Small businesses are core to US economic competitiveness. Not only do they employ half of the nation's private sector workforce--about 120 million people--but also since 1995 they have created approximately two‐thirds of the net new jobs in the country. Yet in recent years, small businesses have been slow to recover from the recession and credit crisis that hit them especially hard. This lag has prompted the question, "Is there a credit gap in small business lending?" In this paper the authors compile and analyze the current state of access to bank capital for small business from the best available sources. The authors explore both the cyclical impact of the recession on small business and access to credit, and several structural issues that impede the full recovery of bank credit markets for smaller loans. They argue that the online banking market is likely to continue to grow, disrupting traditional ways of lending to small businesses. This will create both opportunities and risks for policymakers and regulators. Read More

Why Small-Business Lending Is Not Recovering

Lending to small businesses has not returned to levels seen before the financial crisis. Karen Mills, former head of the US Small Business Administration, explains the reasons and why the situation is not likely to improve anytime soon. Open for comment; 6 Comments posted.

Corporate Financial Policies in Misvalued Credit Markets

The potential for overvaluation to impact firm decision-making is a potent idea with a long history in economic scholarship from foundational works to modern day texts. However, virtually all work on this idea has considered the potential for equity overvaluation to have an impact. The impact of bond market overvaluation on firm policies has thus far received little attention. This limited focus on potential debt market overvaluation is surprising given its size and importance to the economy: the US corporate bond market comprised $7.7 trillion in assets in 2011. The authors begin to fill the gap in scholarship by introducing the idea that mistakes made by the rating agencies should be correlated with bond pricing mistakes. They then examine the correlation in bond rating mistakes with the issuance decisions of firms as well as their cash holding, investment, and acquisition decisions. Findings include evidence that firms take advantage of inaccuracies by issuing more debt and increasing leverage. The result goes beyond a wealth transfer and has real investment implications: approximately 75 percent of the debt issuance funds increased capital expenditures and cash acquisitions. Read More

The Use of Broker Votes to Reward Brokerage Firms’ and Their Analysts’ Research Activities

Broker votes are one of the most pervasive yet least understood reporting practices on Wall Street. The votes are essentially ratings of the value of brokers' investment research services. These ratings are produced by institutional investors (the "buy side") and solicited by broker dealers (the "sell side"). Little research to date, however, has examined the determinants of broker votes, their consequences, and their economic function. In this paper the authors use data gathered from a mid-sized investment bank for the years 2004 to 2007 in order to study how broker votes are related to institutional investors' commission payments and analysts' client services and compensation. Results overall suggest that broker votes help to facilitate implicit contractual relationships between sell-side brokers, their affiliated analysts, and their buy-side clients. Broker votes are neither mere popularity contests nor a simple reflection of trading in analysts' covered stocks. Instead, they appear to be a key component of the investment research industry's contracting technology, acting as the nexus for a set of relationships between sell-side brokers, their affiliated analysts, and their buy-side clients. The findings thus deepen our understanding of how information is exchanged on Wall Street and help to explain why the practice of collecting and aggregating client votes—a costly internal reporting procedure—has stood the test of time and has been replicated across countless sell-side research departments. Read More

Companies Detangle from Legacy Pensions

Although new defined benefit plans are rare, many firms must still fund commitments to retirees. Luis M. Viceira looks at the pension landscape and the recent emergence of insurance companies as potential saviors. Open for comment; 4 Comments posted.

Companies Choreograph Earnings Calls to Hide Bad News

Data from thousands of Wall Street earnings conference calls suggests that many companies hide bad performance news by calling only on positive analysts, according to new research by Lauren Cohen and Christopher Malloy. Open for comment; 3 Comments posted.

What Shapes the Gatekeepers? Evidence from Global Supply Chain Auditors

Private gatekeepers, from credit rating agencies to supply-chain auditors, are supposed to provide unbiased, objective assessments of companies' internal operations, and such private assessments play a central role in contemporary regulatory regimes. While the impartiality of gatekeeping organizations has come into question over the past decade, little is known about what drives the decisions of the individual accountants, auditors, analysts, and attorneys who work at these organizations. Using data from a private, third-party social auditing firm that assesses global supply chain factories' adherence to corporate codes of conduct governing workplace conditions, this study reveals that external auditors' findings are shaped by a combination of economic incentives and social factors. The study highlights opportunities to design and staff audits to maximize their impartiality and credibility. Read More

Lehman Brothers Plus Five: Have We Learned from Our Mistakes?

Is the US financial system in better shape today than it was five years ago? Finance professors Victoria Ivashina, David Scharfstein, and Arthur Segel see real progress—but also missed opportunities and more challenges. Closed for comment; 2 Comments posted.

Teaching Climate Change to Skeptics

The Business and Environment Initiative at Harvard Business School aims to shift the debate about climate change from a political discussion to a practical conversation about risk and reward. Closed for comment; 36 Comments posted.

Crowdfunding a Poor Investment?

Crowdfunding promises to democratize funding of startups. But is that necessarily a good thing? Entrepreneurial finance experts Josh Lerner, Ramana Nanda, and Michael J. Roberts on the promises and problems with the newest method for funding small businesses. Closed for comment; 12 Comments posted.

Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly

The instability of banks in the financial crisis of 2008 has stoked the enduring debate about optimal capital requirements. One of the central concerns has long been the possibility that capital requirements affect banks' overall cost of capital, and therefore lending rates and economic activity. In this paper, the authors estimate how leverage affects the risk and cost of bank equity and the overall cost of capital in practice. They are especially motivated by the potential interaction of capital requirements and the "low risk anomaly" within the stock market: That is, while stocks have on average earned higher returns than less risky asset classes like corporate bonds, which in turn have earned more than Treasury bonds, it is less appreciated that the basic risk-return relationship within the stock market has historically been flat-if not inverted. Using a large sample of historical US data, the authors find that the low risk anomaly within banks may represent an unrecognized and possibly substantial downside of heightened capital requirements. However, despite the fact that tightened capital requirements may considerably increase the cost of capital and lending rates, with adverse implications for investment and growth, such requirements may well remain desirable when all other private and social benefits and costs are tallied up. Read More

How Chapter 11 Saved the US Economy

In a relatively short time, much of the corporate debt that defaulted during the US financial crisis has been managed down and corporate profits have rebounded. Stuart C. Gilson reviews the power of Chapter 11 bankruptcy Closed for comment; 5 Comments posted.

In Strange Company: The Puzzle of Private Investment in State-Controlled Firms

Why do "mixed corporations" exist? In which conditions could they become efficient organizational forms? In this paper, the authors argue that the effectiveness of mixed enterprise depends on a hybrid governance structure combining elements of private ownership with public checks-and- balances against uncertain governmental interference. This is a delicate equilibrium to obtain and one not without challenges. Exploring the promise and perils of this approach by looking at the recent experience of a sample of national oil companies (NOCs)-Brazil's Petrobras, Norway's Statoil, and Mexico's Pemex-the authors suggest that from the perspective of a social planner, the coexistence of minority private investors with state actors can generate improvements in operational and financial performance. From the perspective of private shareholders, there are risks that can be outweighed by some of the advantages of state-owned enterprises. Three different factors explain private investor interest. These are 1) the existence of countervailing privileges from partnering with the government, 2) the resort to improved corporate governance and legal constraints that limit the opportunity for political abuse, and 3) ex ante price discounting. Read More

Lean Strategy Not Just for Start-Ups

Established companies often experience innovation stagnation. The fix, says Intuit founder Scott Cook, is for these companies to adopt a lean start-up model. Closed for comment; 7 Comments posted.

Expectations of Returns and Expected Returns

Much of modern asset pricing seeks to explain changes in stock market valuations using theories of investors' time-varying required returns. Although researchers have achieved considerable progress in developing proxies for expected returns, an important but often overlooked test of these theories is whether investors' expectations line up with these proxies. 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 decades, concerns that the "Big Four" survivors have become too big to fail may be a stretch. Research by professor Karthik Ramanna and colleagues suggests instead that audit firms are more concerned about taking risks. Closed for comment; 13 Comments posted.

Dollar Funding and the Lending Behavior of Global Banks

A striking fact about international financial markets is the large share of dollar-denominated intermediation done by non-US banks. The large footprint of global banks in dollar funding and lending markets raises several important questions. This paper takes the presence of global banks in dollar loan markets as a given, and explores the consequences of this arrangement for cyclical variation in credit supply across countries. In particular, the authors show how shocks to the ability of a foreign bank to raise dollar funding translate into changes in its lending behavior, both in the US and in its home market. Overall, the authors identify a channel through which shocks outside the US can affect the ability of American firms to borrow. Although dollar lending by foreign banks increases the supply of credit to US firms during normal times, it may also prove to be a more fragile source of funding that transmits overseas shocks to the US economy. Read More

Vulnerable Banks

Since the beginning of the US financial crisis in 2007, regulators in the United States and Europe have been frustrated by the difficulty in identifying the risk exposures at the largest and most levered financial institutions. Yet, at the time, it was unclear how such data might have been used to make the financial system safer. This paper is an attempt to show simple ways in which this information can be used to understand how deleveraging scenarios could play out. To do so the authors develop and test a model to analyze financial sector stability under different configurations of leverage and risk exposure across banks. They then apply the model to the largest financial institutions in Europe, focusing on banks' exposure to sovereign bonds and using the model to evaluate a number of policy proposals to reduce systemic risk. When analyzing the European banks in 2011, they show how a policy of targeted equity injections, if distributed appropriately across the most systemic banks, can significantly reduce systemic risk. The approach in this paper fits into, and contributes to, a growing literature on systemic risk. Read More

Want People to Save More? Send a Text

What's the most effective way to encourage people to save their money? The answer lies in a combination of peer pressure and text messages, according to new research by Assistant Professor Dina D. Pomeranz. Open for comment; 6 Comments posted.

The Immigrants Who Built America’s Financial System

In The Founders and Finance, Harvard Business School business historian Thomas McCraw lays out in fascinating detail how immigrants Alexander Hamilton and Albert Gallatin became essential to the nation's survival. Open for comment; 6 Comments posted.

The Acquirers

Associate Professor Matthew Rhodes-Kropf sets out to discover why public companies dominate some M&A waves while private equity firms win others. Open for comment; 3 Comments posted.

When Good Incentives Lead to Bad Decisions

New research by Associate Professor Shawn A. Cole, Martin Kanz, and Leora Klapper explores how various compensation incentives affect lending decisions among bank loan officers. They find that incentives have the power to change not only how we make decisions, but how we perceive reality. Closed for comment; 10 Comments posted.

Should CEOs Worry About ‘Too Big to Succeed?’

Summing Up Is there a right size for a company? Jim Heskett's readers ponder his question: Can companies become too big to succeed? Open for comment; 20 Comments posted.

HBS Cases: A Startup Takes On the Credit Ratings Giants

Moody's, Fitch, and Standard & Poor's dominated the credit ratings industry for decades. Could the recession weaken their hold? Professor Bo Becker discusses his case on super startup Kroll. Open for comment; 4 Comments posted.

The High Risks of Short-Term Management

A new study looks at the risks for companies and investors who are attracted to short-term results. Research by Harvard Business School's Francois Brochet, Maria Loumioti, and George Serafeim. Closed for comment; 4 Comments posted.

Once a Castle, Home is Now a Debtors’ Prison

Forget the notion of the home as "castle." Twenty-two percent of Americans owe more on their mortgages than the value of their homes. Nicolas P. Retsinas offers ideas for how these "debtors' prisons" can be turned into productive housing. Closed for comment; 10 Comments posted.

The New Challenge of Leading Financial Firms

Running a financial organization, never easy to begin with, has quickly become one of the most difficult leadership challenges that an executive can undertake, requiring mastery of talent management, change management, and ethics. An interview with Professor Boris Groysberg, who teaches a new HBS Executive Education program on the subject with Professor Paul M. Healy. Open for comment; 13 Comments posted.

How ‘Hybrid’ Nonprofits Can Stay on Mission

As nonprofits add more for-profit elements to their business models, they can suffer mission drift. Associate Professor Julie Battilana says hybrid organizations can stay on target if they focus on two factors: the employees they hire and the way they socialize those employees. Closed for comment; 14 Comments posted.

Doomsday Coming for Catastrophic Risk Insurers?

Insurance "reinsurers" underwrite much of the catastrophic risk insurance taken out to protect against huge disasters natural and man-made. Problem is, says Professor Kenneth A. Froot, reinsurers themselves are in danger of failing from a major catastrophic event. Open for comment; 5 Comments posted.

Decoding Insider Information and Other Secrets of Old School Chums

Associate Professors Lauren H. Cohen and Christopher J. Malloy study how social connections affect important decisions and, ultimately, how those connections help shape the economy. Their research shows that it's possible to make better stock picks simply by knowing whether two industry players went to the same college or university. What's more, knowing whether two congressional members share an alma mater can help predict the outcome of pending legislation on the Senate floor. Open for comment; 1 Comment posted.

What Loyalty? High-End Customers are First to Flee

Companies offering top-drawer customer service might have a nasty surprise awaiting them when a new competitor comes to town. Their best customers might be the first to defect. Research by Harvard Business School's Ryan W. Buell, Dennis Campbell, and Frances X. Frei. Closed for comment; 24 Comments posted.

Keeping Credit Flowing to Consumers in Need

Regulators and policymakers are debating the best ways to revamp our damaged system of consumer and housing finance. The problem: turning the regulatory spigot too tightly could shut off the flow of needed credit to millions of lower-income Americans. A discussion with professor Nicolas P. Retsinas. Open for comment; 4 Comments posted.

What’s Government’s Role in Regulating Home Purchase Financing?

The Obama administration recently proposed housing finance reforms to wind down Fannie Mae and Freddie Mac and bring private capital back to the mortgage markets. HBS professor David Scharfstein and doctoral student Adi Sunderam put forth a proposal to replace Fannie and Freddie and ensure a more stable supply of housing finance. Read More

A Behavioral Model of Demandable Deposits and Its Implications for Financial Regulation

Depositors are overconfident of their chances of recovering demandable deposits in a bank run. In a recent research paper, professor Julio J. Rotemberg reviews various government regulations available to be imposed on financial institutions—minimum capital levels, asset requirements, deposit insurance, and compulsory clawbacks—to understand how much they can help protect investors. Read More

Decoding Inside Information

Price setters and regulators face a difficult challenge in trying to understand the stock trading activity of corporate insiders, especially when it comes to figuring out whether the activity is a good indicator of the firm's financial future. This National Bureau of Economic Research paper discusses how to distinguish "routine" trades (which predict virtually no information about a firm's financial future) from "opportunistic" trades (which contain a great deal of predictive power). Research was conducted by Harvard Business School professors Lauren Cohen and Christopher Malloy and Lukasz Pomorski of the University of Toronto. Read More

Why Do We Chase Stars?

Summing Up: Is it wise for companies to recruit "star" performers? Discussing the book "Chasing Stars", Jim Heskett's readers support the idea that talent is portable between employers and that women are better at it than men. (Next Forum opens December 2) Closed for comment; 46 Comments posted.

How Did Increased Competition Affect Credit Ratings?

When Fitch Ratings took on Standard & Poor's and Moody's as an alternative credit rating agency in the 1990s, there was a general assumption that the increased competition would lead to higher-quality corporate debt ratings from the incumbents. In fact, their ratings quality declined during the 10-year study period, according to Harvard Business School's Bo Becker and Washington University's Todd Milbourn. One possible cause: competition weakens reputational incentives that drive ratings quality. Read More

How Government can Discourage Private Sector Reliance on Short-Term Debt

Financial institutions have relied increasingly and excessively on short-term financing--putting the overall system at risk. Should government step in? Harvard researchers Robin Greenwood, Samuel Hanson, and Jeremy C. Stein propose a "comparative advantage approach" that allows government to actively influence the corporate sector's borrowing decisions. Read More

Crashes and Collateralized Lending

This paper presents a framework for understanding the contribution of systematic crash risk to the cost of capital for a variety of different types of securities. The framework isolates the systematic crash risk exposure of different collateral types (equities, corporate bonds, and CDO tranches), and provides a simple mechanism for allocating the cost of bearing this risk between a financing intermediary and investor. Research was conducted by Jakub W. Jurek (Bendheim Center for Finance, Princeton University) and Erik Stafford (Harvard Business School). Read More

What Brazil Teaches About Investor Protection

When Brazil entered the 20th century, its companies were a model of transparency and offered investor protections that government did not. Can our financial regulators learn a lesson from history? HBS professor Aldo Musacchio shares insights from his new book. Read More

Just Say No to Wall Street: Putting A Stop to the Earnings Game

Over the last decade, companies have struggled to meet analysts' expectations. Analysts have challenged the companies they covered to reach for unprecedented earnings growth, and executives have often acquiesced to analysts' increasingly unrealistic projections, adopting them as a basis for setting goals for their organizations. As Monitor Group cofounder Joseph Fuller and HBS professor emeritus Michael C. Jensen write, improving future relations between Main Street and Wall Street and putting an end to the destructive "earnings game" between analysts and executives will require a new approach to disclosure based on a few simple rules of engagement. (This article originally appeared in the Journal of Applied Corporate Finance in the Winter 2002 issue.) Read More

Good Banks, Bad Banks, and Government’s Role as Fixer

Government action to stem collapse of the U.S. financial system was certainly warranted, agrees professor Robert Pozen. But results include less competition and increased risk to taxpayers. A Q&A from the HBS Alumni Bulletin and book excerpt from Too Big to Save? Read More

Shareholders Need a Say on Pay

"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. Read More

HBS Begins Teaching Consumer Finance

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. Read More

Why Competition May Not Improve Credit Rating Agencies

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. Read More

Reputation and Competition: Evidence from the Credit Rating Industry

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. Read More

“Too Big To Fail”: Reining In Large Financial Firms

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. Read More

What Does Slower Economic Growth Really Mean?

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.) Closed for comment; 44 Comments posted.

Can a Continuously-Liquidating Tontine (or Mutual Inheritance Fund) Succeed where Immediate Annuities Have Floundered?

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. Read More

Money or Knowledge? What Drives Demand for Financial Services in Emerging Markets?

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. Read More

An Ounce of Prevention: The Power of Public Risk Management in Stabilizing the Financial System

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. Read More

What’s Next for the Big Financial Brands

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. Read More

Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors

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). Read More

Female Empowerment: Impact of a Commitment Savings Product in the Philippines

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. Read More

The Investment Strategies of Sovereign Wealth Funds

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. Read More

Credit is Not the Bogey

"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. Read More

Risky Business with Structured Finance

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. Read More

Smart Money: The Effect of Education, Cognitive Ability, and Financial Literacy on Financial Market Participation

(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. Read More

Financial Crisis Caution Urged by Faculty Panel

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. Read More

HBS Cases: Walking Away from a $3 Billion Deal

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. Read More

How Female Stars Succeed in New Jobs

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. Read More

Rethinking Retirement Planning

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. Read More

Using Financial Innovation to Support Savers: From Coercion to Excitement

This paper acknowledges the wide range of solutions to the problem of low family savings. Families, and of particular interest to the authors, low-income families, save for a wide variety of purposes, including identifiable reasons such as education and retirement and others that are more broad, like rainy days or emergencies. Given societal pressures to consume, and given the diversity among people, it is unlikely that there is a single solution to the savings problem. Yet a number of programs described by Tufano and Schneider have great promise in supporting household savings. Tufano and Schneider discuss each program from the perspectives of would-be savers as well as from that of other key stakeholders. Read More

Innovative Ways to Encourage Personal Savings

Saving money doesn't need to be so difficult. According to HBS professor Peter Tufano, "The most interesting ideas—indeed the oldest—try to make savings a fun or satisfying experience." As Tufano describes in this Q&A, different solutions appeal to different people. Here's what government policy, the private sector, and nonprofits can do. Read More

Connecting School Ties and Stock Recommendations

School connections are an important yet underexplored way in which private information is revealed in prices in financial markets. As HBS professor Lauren H. Cohen and colleagues discovered, school ties between equity analysts and top management of public companies led analysts to earn returns of up to 5.4 percent on their stock recommendations. Cohen explains more in our Q&A. Read More

The Gap in the U.S. Treasury Recommendations

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. Read More

Where Does it Go? Spending by the Financially Constrained

Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates. Read More

Sell Side School Ties

Certain agents play key roles in revealing information into securities markets. In the equities market, security analysts are among the most important. A large part of an analyst's job (perhaps the majority) is to research, produce, and disclose reports forecasting aspects of companies' future prospects, and to translate their forecasts into stock recommendations. Therefore, isolating how, or from whom, analysts obtain the information they use to produce their recommendations is important. Do analysts gain comparative information advantages through their social networks—specifically, their educational ties with senior officers and board members of firms that they cover? This paper investigates ties between sell-side analysts and management of public firms, and the subsequent performance of their stock recommendations. Read More

Long-Run Stockholder Consumption Risk and Asset Returns

The long-run consumption risk of households that hold financial assets is particularly relevant for asset pricing. The fact that stockholders are more sensitive to aggregate consumption movements helps explain why the consumption risk of stockholders delivers lower risk aversion estimates. Understanding further why consumption growth, particularly that of stockholders, responds slowly to news in asset returns will improve finance scholars' understanding of what drives these long-run relations. HBS professor Malloy and his coauthors examine more disaggregated measures of long-run consumption risks across stockholders and non-stockholders, and provide new evidence on the long-run properties of consumption growth and its importance for asset pricing. Read More

Consumer Demand for Prize-Linked Savings: A Preliminary Analysis

Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. Prize-linked assets are offered in over twenty countries around the world—including the U.K., Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States. Read More

The Small World of Investing: Board Connections and Mutual Fund Returns

How does information flow in security markets, and how do investors receive information? In the context of information flow, social networks allow a piece of information to flow along a network often in predictable paths. HBS professors Lauren Cohen and Christopher Malloy, along with University of Chicago colleague Andrea Frazzini, studied a type of dissemination through social networks tied to educational institutions, examining the information flow between mutual fund portfolio managers and senior officers of publicly traded companies. They then tested predictions on the portfolio allocations and returns earned by mutual fund managers on securities within and outside their networks. Read More

Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice

Retirement assets make up a large and growing percentage of the mutual fund universe. In 2004, nearly 40 percent of all mutual fund assets were held by defined contribution plans and individual retirement accounts. This percentage is steadily increasing largely because these retirement accounts represent the majority of new flows into non-money market mutual funds. With such a large and growing percentage of their assets coming from retirement accounts, mutual funds are likely to be interested in securing these big clients. This paper examines a new channel through which mutual fund families can attract assets: by becoming a 401(k) plan's trustee. HBS professor Lauren Cohen and colleague Breno Schmidt provide evidence consistent with the trustee relationship affecting families' portfolio choice decisions. These portfolio decisions, however, have the potential to be in conflict with the fiduciary responsibility mutual funds have for their investors, and can impose potentially large costs. Read More

Global Currency Hedging

This article is forthcoming in the Journal of Finance. How much should investors hedge the currency exposure implicit in their international portfolios? Using a long sample of foreign exchange rates, stock returns, and bond returns that spans the period between 1975 and 2005, this paper studies the correlation of currency excess returns with stock returns and bond returns. These correlations suggest the existence of a typology of currencies. First, the euro, the Swiss franc, and a portfolio simultaneously long U.S. dollars and short Canadian dollars are negatively correlated with world equity markets and in this sense are "safe" or "reserve" currencies. Second, the Japanese yen and the British pound appear to be only mildly correlated with global equity markets. Third, the currencies of commodity producing countries such as Australia and Canada are positively correlated with world equity markets. These results suggest that investors can minimize their equity risk by not hedging their exposure to reserve currencies, and by hedging or overhedging their exposure to all other currencies. The paper shows that such a currency hedging policy dominates other popular hedging policies such as no hedging, full hedging, or partial, uniform hedging across all currencies. All currencies are uncorrelated or only mildly correlated with bonds, suggesting that international bond investors should fully hedge their currency exposures. Read More

3 Steps to Reduce Financial System Risk

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. Read More

Economic Catastrophe Bonds

Pooling economic assets into large portfolios and tranching them into sequential cash-flow claims has become a big business, generating record profits for both the Wall Street originators and the agencies that rate these securities. This paper by business economics doctoral student Jakub Jurek and HBS professors Joshua Coval and Erik Stafford investigates the pricing and risks of instruments created as a result of recent structured finance activities. It demonstrates that senior collateralized debt obligation (CDO) tranches have significantly different systematic risk exposures than their credit rating-matched, single-name counterparts, and should therefore command different risk premia. Read More

The Key to Managing Stars? Think Team

Stars don't shine alone. As Harvard Business School's Boris Groysberg and Linda-Eling Lee reveal in new research, it is imperative that top performers as well as their managers take into account the quality of colleagues. Groysberg and Lee explain the implications for star mobility and retention in this Q&A. Read More

Inexperienced Investors and Market Bubbles

The evidence isn't conclusive, but new research from Harvard Business School suggests younger fund managers may have contributed to the tech stock bubble. Professor Robin Greenwood discusses the research paper, "Inexperienced Investors and Bubbles," and what 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 have money—that is, at tax-refund time. Professor Peter Tufano thinks tax time could also be perfect for helping low-income families save more. Read More

Reinventing the Dowdy Savings Bond

Families with low and moderate incomes have difficulty saving money—many can't even open bank accounts. To help these families plan for the future, professor Peter Tufano proposes minor changes to the U.S. savings bonds program. Read More

What Companies Lose from Forced Disclosure

Increased corporate financial reporting may benefit many parties, but not necessarily the companies themselves. New research from Harvard Business School professor Romana Autrey and coauthors looks at the relationship between executive performance and public disclosure. Read More

The Competitive Advantage of Global Finance

Relatively few multinational companies truly understand or take advantage of international finance. Professor Mihir A. Desai tackles the subject in a new book, International Finance: A Casebook. Here’s a Q&A. Read More

Unlocking Your Investment Capital

By reassessing risk exposure, many companies can create more equity capacity to fund investments, says Harvard Business School professor Robert C. Merton. Just don't leave it up to the Finance Department. Read More

Are Company Founders Underpaid?

Company founders have a tough time convincing their boards to increase compensation, says HBS professor Noam Wasserman. He discusses his research into "founder frustration" areas. Read More

The Trouble Behind Livedoor

When Livedoor CEO Takafumi Horie was arrested last month, it shook the economic underpinnings of Japan. Professor Robin Greenwood discusses what went wrong with one of that country's most-watched Internet companies. Read More

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 development for shareholders, investors, analysts, the marketplace, and the company’s short- and long-term health? Closed for comment; 17 Comments posted.

Financial Reporting Goes Global

Globalization is the key issue in determining the future of financial accounting, says professor Gregory S. Miller. And as more countries consider adopting an international accounting standard, India is positioned to be a strong leader. Read More

VCs Survey Post-Bubble Opportunities

At the annual Cyberposium conference held at Harvard Business School, venture capitalists pondered what makes for winners and losers in the new VC landscape. Read More

Reinventing Savings Bonds

At one point in American history, savings bonds were an important tool families used to build assets and get ahead. While times have changed, this function of savings bonds may be even more important now, especially for the 41 million low- and moderate-income American households. Tufano and Schneider lay out a case for why savings bonds should be reimagined to help millions of Americans build assets now. Read More

The Power of Stars: Do Stars Drive Success in Creative Industries?

The importance of star power is evident in creative industries from music and film to fashion and architecture. Star actors are paid millions of dollars, but is star talent critical to product success? What determines the value of stars? In the context of the movie business, Elberse calculated the returns in a study comparing 1,200 casting announcements on trading behavior in a simulated and real stock market setting. In a separate study, she also looked at the stars' impact on expected revenues. Read More

Float Manipulation and Stock Prices

When a firm reduces the number of shares available to trade, so-called float manipulation, the price of the stock is often driven up. The author uses a series of 2,000 stock split events in Japan as an experiment to understand the consequences of float manipulation for stock prices. The conclusion: Stock prices are raised significantly when there are differing opinions about the value of shares, investors are unable to sell short, and the number of outstanding shares is reduced. Read More

A Cross-Sectional Analysis of the Excess Comovement of Stock Returns

This paper develops cross-sectional predictions from a model in which the excess comovement of stock returns comes from correlated demand shocks. The model is tested on 298 Nikkei index stocks and 1,458 non-index stocks for the years 1993 through 2003. The study finds that controlling for index membership, index overweighting is a significant determinant of the 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 small number of deals each year. How do smart venture firms approach the challenge? A report from the 11th Annual Venture Capital & Private Equity Conference. Read More

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 right way to support an aging workforce? And why is it that a concept—life-long security—that should bring comfort to all of us is so distasteful to address in public? Closed for comment; 10 Comments posted.

The Bias of Wall Street Analysts

Historically, stock analysts’ recommendations have been swayed by business relationships between the analyst’s employer and the target company, says Professor Mark Bradshaw. Have recent SEC reforms helped? Read More

Bringing History into International Business

International Business scholars often talk about history, but rarely take it seriously. The first generation of International Business scholars placed a high priority on evolutionary and historical perspectives and methodology, but little work these days grapples with the history of International Business or uses historical data to explore an issue. Jones and Khanna discuss new avenues for researching business groups in history and in contemporary emerging markets, resource-based and path-dependent theories of the firm, and foreign direct investment and development over time. Read More

The IPS Property

This paper is about discrete-choice and econometric models. The "invariant proportion of substitution," or IPS, property comes into play when, for example, a consumer faces a choice among three laptop computers with slightly different attributes. How will improvements to one laptop's attributes affect how the consumer chooses to substitute one alternative for another? Steenburgh looked at probabilities based on assumptions about consumers' utility-maximizing behavior. Read More

Analyst Disagreement, Forecast Bias and Stock Returns

It is well documented that financial analysts' opinions are reflected in stock prices. The problem: Analysts often operate under incentives that are inconsistent with telling the truth. Retail investors, who tend to be less sophisticated, may fail to make proper adjustments for the more nuanced of the resulting biases, some of which might be reflected in market prices. To study the scope of market efficiency, Scherbina studied analysts' incentives, resulting forecast biases, and their potential impact on market prices. Read More

The Big Money for Big Projects

This isn't your father's venture capital. Amusement parks, satellite networks, oil fields, toll roads: HBS Professor Benjamin Esty studies financing of large projects. Q&A Read More

European Private Equity—Still a Teenager?

If the private equity industry has a life cycle, these are the teenage years for Europe, according to panelists at the conference session on European private equity. Read More

Time-Driven Activity-Based Costing

Activity-based costing (ABC) has become popular in business writing and management circles. (An example of an activity would be process customer complaints.) However, calculating baselines for activities, developing the model, and retesting the model once it is implemented is time-consuming and costly. Kaplan and Anderson developed improvements in the process through what they call time-driven ABC. Time-driven ABC decreases the amount of data needed, and only requires estimates of two things: (1) the practical capacity of committed resources and their cost, and (2) unit times for performing transactional activities. Read More

A Bold Proposal for Investment Reform

Do the markets need an investor's union? Should company audits be overseen by stock exchanges? If you want to restore investor confidence, think radical reforms, say professors Paul Healy and Krishna Palepu. Read More

Surveying the VC Landscape

In an e-mail Q&A, HBS professor Josh Lerner discusses issues including transparency and private equity, buyout firms, Sarbanes-Oxley, and the role of VC on innovation. Read More

Business Plan Winner Targets India Dropouts

Gyaana means "knowledge" in Sanskrit—a fitting name for a business that aims to fight the 50 percent dropout rate in India by offering microfinance loans to families. Read More

How Bank of America Turned Branches into Service-Development Laboratories

In this Harvard Business Review excerpt, HBS professor Stefan Thomke describes how Bank of America applies a systematic R&D process to create services. Read More

What It Takes to Restore Trust in Business

What’s still wrong with American business? Start with pervasive conflicts of interest and the limits of enforcement. Read More

Are Conditions Right for the Next Accounting Scandal?

Will risk-averse corporate audit committees' natural tendencies to engage the biggest accounting firms insure that the current accounting oligopoly will become even stronger? Closed for comment; 12 Comments posted.

Setting the Stage: A Young Scholar at HBS

Rohit Daniel Wadhwani, the Harvard-Newcomen Fellow in Business History for the 2002-03 academic year, discusses his research work and his experiences as a Fellow at Harvard Business School in this interview with Laura Linard. Read More

Most Accountants Aren’t Crooks—Why Good Audits Go Bad

The Sarbanes-Oxley Act sets stiff penalties for auditors and executives who commit fraud. Problem is, says Harvard Business School professor Max H. Bazerman and his collaborators, most bad audits are the result of unconscious bias, not corruption. Here's a new look at how to audit the auditors. Read More

Wrap-up: Software, Telecom, and Recovery

How is the VC industry doing on its own and in partnership with software and telecoms? These were just three topics discussed in special panel sessions at the recent conference. Here, a few highlights from those conversations. Read More

Angels Face the Innovator’s Dilemma

According to HBS professor Clayton M. Christensen, the venture capital industry—like computers, telephony, and brokerage before it—is susceptible to the same forces that have waylaid many seemingly invincible players. What that means, said the author of the influential bestseller The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, is that the time is ripe for the right people to create new, disruptive forms of financing. Read More

Calling All Managers: How to Build a Better Call Center

Once viewed simply as low-cost channels for resolving customer concerns, call centers are increasingly seen as powerful service delivery mechanisms and even as generators of revenue. Research by HBS Professor Frances X. Frei and her colleagues Ann Evenson and Patrick T. Harker of the Wharton School points toward new ways of making them work. Read More

The Future of the Venture Capital Cycle

Despite many success stories and a rapid rise to prominence, the venture capital industry remains a mystery to most, and questions about its sustainability persist. In this excerpt from their pathbreaking book The Venture Capital Cycle, HBS Professors Paul Gompers and Josh Lerner look toward the future of this misunderstood financial intermediary. Read More

Where Main Street Meets Wall Street

Its phenomenal growth, based on its near-perfect fit with consumer needs and aspirations, has made the mutual fund one of this century's big success stories. How is it adapting to the age of the Internet and 21st century change? HBS Professors Jay O. Light and Peter Tufano and three alumni take a look at the state of the mutual fund industry 75 years after its beginnings in Boston's financial district. Read More