Finance: Corporate Investment

19 Results

 

Boardroom Centrality and Firm Performance

David F. Larcker, Eric C. So, and Charles C.Y. Wang

Economists and sociologists have long studied the influence of social 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

Matthew Lyle and Charles C.Y. Wang

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

Bo Becker and Victoria Ivashina

"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

Boris Groysberg, Paul Healy, George Serafeim, Devin Shanthikumar, and Gui Yang

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. Open for comment; 5 Comments posted.

The Cost of Capital for Alternative Investments

Jakub W. Jurek and Erik Stafford

An accurate assessment of the cost of capital is fundamental to the 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

Nemit O. Shroff, Rodrigo S. Verdi, and and Gwen Yu

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

Beiting Cheng, Ioannis Ioannou, and George Serafeim

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

Bo Becker, Marcus Jacob, and Martin Jacob

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

Paul M. Healy and Krishna G. Palepu

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