Finance: Corporate Investment

26 Results

 

International Trade, Multinational Activity, and Corporate Finance

This article surveys research at the intersection of international economics and corporate finance. Recent research illustrates how international trade and multinational activity are affected by the credit constraints firms face and by firms' ability to make use of internal capital markets. Differences in access to financial capital explain variation in trade participation at the country, industry, and firm level. Firms need to fund fixed and variable costs of cross-border transactions, and these transactions often tie up capital for longer periods of time than domestic transactions and involve distinct risks. Credit constraints also play a role in determining which firms choose to conduct operations in multiple countries and what kinds of activities they perform in different jurisdictions. Through their internal capital markets, multinational firms can raise funding in one location and deploy it elsewhere. Internally available financial capital gives multinationals an advantage over purely domestic firms in some circumstances. Financial considerations often shape the extent to which multinationals generate spillovers for local firms. Read More

Activist Directors: Determinants and Consequences

Hedge fund activism has become a significant phenomenon in recent years. Compared to traditional shareholder activists, for instance, hedge fund activists have been making a broader range of demands and adopting a wider range of tactics to have those demands met. Given the importance that the demand for board positions has in the activist game plan, the authors of this paper examine hedge fund activism through cases where candidates sponsored by the activists become directors of the target companies. Findings show that activist directors appear to be associated with significant strategic and operational changes in target firms. The study also shows evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment. The estimated effects are generally greater when activists obtain board representation, consistent with board representation being an important mechanism for bringing about the kinds of changes that activists often demand. Read More

Comparing the Cash Policies of Public and Private Firms

Industrial firms listed on stock markets in the United States held $1.5 trillion in cash at the end of 2011. Many commentators and policymakers observed that this so-called "dead money" might be one reason behind the sluggish performance of the United States and other developed economies since the Great Recession. But evidence on such cash-hoarding behavior is limited to listed (or 'public') firms, which account for a relatively small part of the US economy. Do private firms also hold large cash balances? Using a rich panel of over 200,000 non-SEC-filing private US firms, the author finds that the average public firm holds twice as much cash as the average large private firm over the 2002-2011 period. Results are most consistent with the hypothesis that differences in the extent to which public and private firms engage in market timing are a key driver of public firms' higher demand for cash, as the risk of misvaluation induces public firms to raise capital and accumulate precautionary cash reserves when they perceive their equity to be overvalued. Consistent with this hypothesis, the author finds that the cash difference between public and private firms is larger in industries with a higher prevalence of misvaluation shocks. In addition, public firms in these industries tend to save a larger fraction of their equity issuance proceeds than private firms, particularly in times when they have reasons to believe that their equity is overvalued. 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.

HBS Cases: What Warren Buffett Saw in Newspapers

When Warren Buffett made a bid for troubled Media General's newspapers, analysts wondered whether the legendary investor had lost his fastball. Hardly, as Benjamin Esty's case reveals. Closed for comment; 3 Comments posted.

Do Measures of Financial Constraints Measure Financial Constraints?

A core question in corporate finance is how financial constraints affect firm behavior. To answer this question we need a way to identify constrained firms with reasonable accuracy. Since the financial constraints that a firm faces are not directly observable, scholars have tended to rely on indirect proxies-such as having a credit rating or paying dividends-or on one of three popular indices based on linear combinations of observable firm characteristics such as size, age, or leverage (the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices). In this paper the authors ask: How well do these measures of financial constraints identify firms that are plausibly financially constrained? The short answer is: not well at all. The authors develop three different tests that show that public firms classified as constrained have no trouble raising debt when their demand for debt increases, are unaffected by changes in the supply of bank loans, and engage in paying out the proceeds of equity issues to their shareholders ("equity recycling"). Results imply that popular measures of financial constraints tend to identify as constrained subsets of firms that differ from the general firm population of public firms on a number of dimensions, but not in their ability to raise external funding. Importantly, the tests developed by the authors can be used to systematically test the extent to which any measure of financial constraints does capture constraints. Read More

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

Boardroom Centrality and Firm Performance

Economists and sociologists have long studied the influence of social networks on labor markets, political outcomes, and information diffusion. These networks serve as a conduit for interpersonal and inter-organizational support, influence, and information flow. This paper studies the boardroom network formed by shared directorates and examines the implications of having well-connected boards, finding that firms with the best-connected boards on average earn substantially higher future excess returns and other advantages. Read More

Cost of Capital Dynamics Implied by Firm Fundamentals

Despite ample evidence that expected returns are time varying, there has been relatively little empirical research on estimating the dynamics of firm-level expected returns. Capturing the dynamics of firm-level expected returns is important, because it allows for a better understanding of firm risk over time and can inform investors in tailoring their portfolios to match their desired investment horizons. Findings show that cost of capital is time varying and highly persistent. The authors also demonstrate that the model produces empirical proxies of expected returns that can predict future stock returns up to three years into the future and sorts portfolio returns with near monotonicity. Aside from its practical contributions, this paper adds to a budding finance and accounting literature that studies the properties of expected return dynamics. Read More

Book Excerpt: “The Architecture of Innovation”

In his new book, The Architecture of Innovation, Josh Lerner explores flaws in how corporations fund R&D. This excerpt discusses the corporate venturing model and how incentive schemes make it successful. Open for comment; 1 Comment posted.

Why Public Companies Underinvest in the Future

Private companies are much more focused on the long term when making deals than their publicly owned counterparts. Which side has the right idea? New research from Assistant Professor Joan Farre-Mensa and colleagues. Open for comment; 3 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.

Reaching for Yield in the Bond Market

"Reaching for yield"—investors' propensity to buy high yield assets without regard for risk—has been identified as one of the core factors contributing to the buildup of credit that preceded the financial crisis. Despite this potential importance, however, the way in which reaching for yield works and where it occurs is not well understood. Professors Bo Becker and Victoria Ivashina examine reaching for yield in the corporate bond market by looking among insurance companies, the largest institutional investor in this arena. Findings suggest that reaching for yield may limit the effectiveness of capital regulation to a time-varying and unpredictable extent. Reaching for yield may also allow regulated entities to become riskier than regulators and legislators intend, and may impose distortions on the corporate credit supply. Read More

The Stock Selection and Performance of Buy-Side Analysts

Important differences between buy- and sell-side analysts are likely to affect their behavior and performance. While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds). This paper examines buy recommendation performance for analysts at a large, buy-side firm relative to analysts at sell-side firms throughout the period of mid-1997 to 2004. The researchers find evidence of differences in the stocks recommended by the buy- and sell-side analysts. The buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts' clients) prefer that buy-side analysts cover less volatile and more liquid stocks. The study also finds that the buy-side firm analysts' stock recommendations are less optimistic than their sell-side counterparts, consistent with buy-side analysts facing fewer conflicts of interest. This and future studies may help sell-side and buy-side executives to allocate their financial and human resources more strategically. Read More

Private Meetings of Public Companies Thwart Disclosure Rules

Despite a federal regulation, executives at public firms still spend a great deal of time in private powwows with hedge fund managers. Eugene F. Soltes and David H. Solomon suggest that such meetings give these investors unfair advantage. Closed for comment; 5 Comments posted.

The Cost of Capital for Alternative Investments

An accurate assessment of the cost of capital is fundamental to the efficient allocation of capital throughout the economy. Alternative investments are investments made by sophisticated individual and institutional investors in private investment companies like hedge funds and private equity funds. These investments are frequently combined with financial leverage to bear risks that may be unappealing to the typical investor or that require flexibility that public investment funds may not provide. Often there is a real possibility of a complete loss of invested capital. For this paper, Jakub W. Jurek and Erik Stafford study the required rate of return for a risk-averse investor allocating capital to alternative investments. They argue that the risks borne by hedge fund investors are likely to be positive net supply risks that are unappealing to average investors, such that they may earn a premium relative to traditional assets. Read More

Doing What the Parents Want? The Effect of the Local Information Environment on the Investment Decisions of Multinational Corporations

As firms increase the scale of their global operations, monitoring operations across borders becomes increasingly challenging. Transparency in the external information environment can help multinational corporations monitor foreign subsidiaries and resolve internal agency problems. In this paper, researchers Nemit O. Shroff, Rodrigo S. Verdi, and Gwen Yu find that foreign subsidiaries located in country-industries with more transparent information environments are better able to translate local growth opportunities into investments. Read More

Corporate Social Responsibility and Access to Finance

Corporate social responsibility may benefit society, but does it benefit the corporation? Indeed it does, according to a new study that shows how CSR can make it easier for firms to secure financing for new projects. Research was conducted by George Serafeim and Beiting Cheng of Harvard Business School and Ioannis Ioannou of the London Business School. Read More

Payout Taxes and the Allocation of Investment

The corporate payout that shareholders periodically receive--dividends or repurchases of shares--is subject to taxation in many countries. Such taxes make it cheaper to finance investment out of retained earnings than from equity issues. Using tax data from 25 countries over a 19-year period, this paper discusses whether these taxes have a direct effect on investor behavior, and to what extent. Research was conducted by Bo Becker of Harvard Business School, Marcus Jacob of the European Business School, and Martin Jacob of the Otto Beisheim School of Management. Read More

Why the U.S. Should Encourage FDI

American financial executives are courting foreign direct investors, particularly sovereign wealth funds, for new investments. Should these investments draw increased scrutiny from U.S. regulators? Harvard Business School professor Mihir Desai argues that most of these deals work out in America's best financial interest. Read More

Behavioral Finance—Benefiting from Irrational Investors

Do investors really behave rationally? Behavioral finance researchers Malcolm Baker and Joshua Coval don't think humans are such cold calculators. One proof: Individual and even institutional investors often give in to inertia and hold on to shares in unwanted stock. And therein lays opportunity for investment managers and firms. Read More

Rebuilding Commercial Real Estate

The commercial real estate business is awash with money and opportunity. Is this the calm before the bubble pops? Read More

Professors Introduce Valuation Software

HBS professors Krishna Palepu and Paul Healy have developed a business analysis and valuation software program, which is being sold to the public. Here is why investors and executives should take a look. Read More

Profits and Prophets: The Role of Values in Investment

What are the tradeoffs of socially responsible investing? In a lively debate, social fund manager Amy Domini and a Harvard investment scholar, Samuel L. Hayes, explore the margins of moral versus amoral investing. Read More

Tech Investment the Wise Way

Can elephants dance? Large companies are perceived to be less inclined to invest in new technologies than start-ups. But HBS professor Henry Chesbrough and Professor Emeritus Richard S. Rosenbloom say look to your business model—not the technology itself—to judge investment decisions. Read More

The Determinants of Corporate Venture Capital Success

Corporate-sponsored venture capital funds do not have to fail. But as HBS professors Paul Gompers and Josh Lerner explain, hybrid organizations such as Xerox Technology Ventures face considerable challenges on the road to success. Read More