- 22 Jul 2016
- Working Paper Summaries
Who Pays for White-Collar Crime?
Punishments of white-collar crime are systematically related to perpetrator, transaction, and company characteristics. This variation is consistent with executives determining appropriate punishments by an economic analysis of costs and benefits. Even so, senior male executives receive lighter punishments than female peers, for example. These and other variations suggest that not all decisions about punishment are taken with shareholders’ interests in mind: The self-interest of host company executives is also an important consideration.
- 19 Jul 2016
- First Look
July 19, 2016
What happens to white-collar criminals? ... The real story behind Kodak’s fade ... Has Walmart reached the end of its run?
- 21 Mar 2016
- Working Paper Summaries
Voluntary, Self-Regulatory, and Mandatory Disclosure of Oil and Gas Company Payments to Foreign Governments
Throughout its history the oil and gas industry has been vulnerable to expropriation and corruption. To this day, oil and gas firms provide very limited voluntary disclosure on payments to host governments, and that pattern has not changed materially over time. This paper shows that industry-level self-regulation may be effective in enhancing transparency when individual firms are reluctant to voluntarily disclose payments.
- 24 Nov 2014
- Research & Ideas
Corrupting Silence: Companies Must Speak Up Against Bribes
Does corruption really pay? Paul Healy finds that corruption may not be as lucrative—or as unavoidable—as it may seem. Open for comment; 0 Comments.
- 19 Mar 2014
- Working Paper Summaries
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. Key concepts include: Broker votes facilitate a set of implicit contractual relationships between sell-side brokers, their affiliated analysts, and their buy-side clients. These voluntary contracting arrangements help to resolve inter- and intra-firm coordination problems. Broker votes may represent real efforts by buy-side clients to reward analysts for providing information that is difficult to reward through contemporaneous trading in analysts' covered stocks. Broker votes influence resource allocation within brokerage divisions, aligning analysts' incentives with their clients' objectives and hence the brokerage firm. Closed for comment; 0 Comments.
- 20 Mar 2012
- Working Paper Summaries
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. Key concepts include: The failure to find that buy-side research out-performs that of sell-side analysts raises questions about whether investment firms should continue to rely on their own research rather than using research from sell-side analysts. Buy-side firms' analysts issued recommendations for companies with lower stock return volatility and larger market capitalizations than typical sell-side firms. Buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst (0.42% versus 0.95%), and market capitalizations almost seven times larger ($9.1 billion versus $1.3 billion). For stocks covered by both buy- and sell-side analysts, there were no differences in the buy recommendations' performance. Resolving whether buy-side research creates value is highly relevant to managers at buy-side firms who are faced with the challenge of allocating limited research resources. Closed for comment; 0 Comments.
- 09 Mar 2012
- Working Paper Summaries
Causes and Consequences of Firm Disclosures of Anticorruption Efforts
Academic research on corruption has typically focused on its macro causes and consequences. While the country level is certainly important to understand, it is at the firm level where many questions remain unanswered. This study examines 480 of the world's largest companies, using ratings by Transparency International of firms' public disclosures of strategy, policies, and management systems for combatting corruption. Professors Paul Healy and George Serafeim find that firm disclosures are related to enforcement and monitoring costs, such as home country enforcement, US listing, big four auditors, and prior enforcement actions. Disclosures also reflect industry and country corruption risks. Meanwhile the financial implications of fighting disclosure are more nuanced. Key concepts include: While firm-level research on corruption is still at the formative stage, findings suggest that disclosure is more than cheap talk. Firms with high disclosure on their anticorruption efforts are committed to fighting corruption. The policies and enforcement actions reflected in their disclosures help to protect their public reputation and profitability, but at the cost of slower sales growth in high corruption risk markets. Firms with abnormally low disclosure have roughly 15 percent higher sales growth in corrupt country markets than their high disclosure peers. But this higher growth is accompanied by lower profit margins and return on equity. Firms with abnormally high anticorruption ratings have a lower frequency of subsequent allegations of corruption in the media, suggesting that disclosures reflect their commitment to fighting corruption. Future research could examine (among other issues) what factors, other than monitoring/enforcement costs and risk exposures, explain the differences in firms' level of disclosure and commitment to fight corruption. Closed for comment; 0 Comments.
- 06 Dec 2011
- Working Paper Summaries
What Impedes Oil and Gas Companies’ Transparency?
Oil and gas companies face asset expropriations and corruption by foreign governments in many of the countries where they operate. In addition, most of these companies operate in multiple host countries. What determines their disclosure of business activities and hence transparency? Paul Healy, Venkat Kuppuswamy, and George Serafeim examine three forms of disclosure costs that oil and gas managers could potentially consider. Both the US government and the European Union are currently considering laws that would require oil and gas companies to disclose information about operations in host countries. Key concepts include: Competitive risks are an important factor underlying differences in oil and gas firms' disclosure ratings across the host countries in which they operate. Requiring disclosure of payments to foreign governments is unlikely to increase proprietary costs for oil and gas companies. Mandating disclosures about the performance of oil and gas companies in host countries, however, is likely to increase proprietary costs, particularly risk of expropriations and costs related to product market competition. Companies that are coming from more corrupt home countries tend to be less transparent about their payments to host country governments. Closed for comment; 0 Comments.
- 21 Nov 2011
- Lessons from the Classroom
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. Key concepts include: Leading a financial firm is very different from leading any other kind of institution, requiring deep skills in a multitude of areas. Financial firms make expensive bets on top talent, but often make hiring decisions without enough deliberation. Risk management, strategy for growth, and competing in emerging markets are especially critical for financial firms to get right. Open for comment; 0 Comments.
- 13 Oct 2011
- Working Paper Summaries
Market Competition, Government Efficiency, and Profitability Around the World
Understanding whether and how corporate profitability mean reverts across countries is important for valuation purposes. This research by Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu suggests that firm performance persistence varies systematically. Country product, capital, and to a lesser extent labor market competition all affect the rate of mean reversion of corporate profits. Corporate profitability exhibits faster mean reversion in countries with more competitive factor markets. In contrast, government efficiency decreases the speed of mean reversion, but only when the level of market competition is held constant. The findings are useful to practitioners and scholars interested in understanding how country factors affect corporate profitability. Key concepts include: There is predictable variation in mean reversion in corporate performance across countries. At a practical level, valuation exercises can benefit from considering country as well as traditional firm and industry factors in settling on the speed with which superior or inferior profits are likely to mean revert. Different level of performance persistence in each country will affect firm-value through valuation multiples. Closed for comment; 0 Comments.
- 10 Jan 2005
- Research & Ideas
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. Closed for comment; 0 Comments.
- 08 Sep 2003
- Research & Ideas
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. Closed for comment; 0 Comments.
- 20 Jan 2003
- Research & Ideas
Fixing Corporate Governance: A Roundtable Discussion at Harvard Business School
Bad business practices on a huge scale have made corporate governance Topic A of late. In a roundtable discussion, Harvard Business School professors Krishna Palepu, Jay Lorsch, Rosabeth Moss Kanter, Nancy Koehn, Brian Hall, and Paul Healy explore guidelines for change. Closed for comment; 0 Comments.
Will Demand for Women Executives Finally Shrink the Gender Pay Gap?
Women in senior management have more negotiation power than they think in today's labor market, says research by Paul Healy and Boris Groysberg. Is it time for more women to seek better opportunities and bigger pay?