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New research on general accounting from Harvard Business School faculty on issues including accounting principles, practices, and theory, and on regulations and policy.
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How Companies Can Increase Market Rewards for Sustainability Efforts

by Rachel Layne

There is a connection between public sentiment about a company and how the market rewards its corporate social performance, according to George Serafeim. Is your company undervalued? Open for comment; Comment(s) posted.

Lazy Prices

by Lauren Cohen, Christopher J. Malloy, and Quoc Nguyen

The most comprehensive information windows that firms provide to the markets—in the form of their mandated annual and quarterly filings—have changed dramatically over time, becoming significantly longer and more complex. When firms break from their routine phrasing and content, this action contains rich information for future firm stock returns and outcomes.

How Cost Accounting is Improving Healthcare in Rural Haiti

by Carmen Nobel

The cost of healthcare in rural Haiti was found to vary widely, even inside the same health organization. A pioneering cost accounting system co-developed by Robert Kaplan was called in to determine the cause. Open for comment; Comment(s) posted.

The Real Exchange Rate, Innovation and Productivity

by Laura Alfaro, Alejandro Cuñat, Harald Fadinger, and Yanping Liu

Addressing debates on the effects of real exchange rate (RER) movements on the economy, this study examines manufacturing firm-level effects of medium-term fluctuations, in particular firm-level productivity across a wide range of countries. RER changes have different impacts depending on the export and import orientation of regions and the prevalence of credit constraints. Effects are non-linear and asymmetric, suggesting that the link between RER changes and macroeconomic performance might be much more nuanced than usually thought.

Stock Price Synchronicity and Material Sustainability Information

by Jody Grewal, Clarissa Hauptmann, and George Serafeim

This paper seeks to understand and provide evidence on the characteristics of emerging accounting standards for sustainability information. Given that a large number of institutional investors seek sustainability data and have committed to using it, it is increasingly important to develop a robust accounting infrastructure for the reporting of such information.

Why and How Investors Use ESG Information: Evidence from a Global Survey

by Amir Amel-Zadeh and George Serafeim

Survey data from more than 400 senior investment professionals provides insights into why and how investors use environmental, social, and governance (ESG) information as well as the challenges in using this information. This study also documents what investors believe will be important ESG styles in the future.

Behind Apple's Tax Situation, an Unprecedented Financial Policy

Re: Mihir A. Desai

The European Union recently hit Apple with a $14.5 billion tax bill, but that’s hardly the first or worst financial challenge the technology giant has faced. Mihir Desai explains the financial wiring behind the inventors of the iPhone. Open for comment; Comment(s) posted.

Retail Execs Underplay Current Performance to Investors--but Why?

by Dina Gerdeman

In quarterly earnings calls with investors and analysts, some retail managers may underplay how their companies are actually performing, according to recent research by Kenneth Froot and colleagues. Open for comment; Comment(s) posted.

Applications of Fractional Response Model to the Study of Bounded Dependent Variables in Accounting Research

by Susanna Gallani, Ranjani Krishnan & Jeffrey M. Wooldridge

This paper discusses key features of the fractional response mode developed by economists Leslie E. Papke and Jeffrey M. Wooldridge.

Market Reaction to Mandatory Nonfinancial Disclosure

by Jyothika Grewal, Edward J. Riedl & George Serafeim

How does the equity market respond to the adoption of mandatory nonfinancial disclosure? Research by George Serafeim and colleagues.

The Real Duty of the Board of Directors

by Robert G. Eccles & Tim Youmans

Robert G. Eccles and Tim Youmans argue that a board's primary duty is not to the shareholders, but to the corporation itself. Open for comment; Comment(s) posted.

Banks’ Risk Exposures

by Juliane Begenau

Since the financial crisis, there has been renewed interest in documenting how much risk financial institutions are exposed to. This paper shares the important goal of that scholarship: to come up with a method that summarizes banks' positions in a meaningful way so that it will inform the theoretical modeling of these institutions and offer insights for policy decisions. Specifically, the paper measures banks' exposures to macroeconomic risk through their fixed income positions by representing those positions in terms of simple factor portfolios. Factor portfolios provide measures of exposure that are easy to interpret and compare across positions. The results help elucidate the evolution of bank risk taking over the last 20 years. Closed for comment; 0 Comment(s) posted.

Accounting Data, Market Values, and the Cross Section of Expected Returns World

by Charles C.Y. Wang

Over the past 30 years, the central question in asset pricing is understanding what drives the variation in expected returns. Despite its importance, empirical research in this area has remained problematic because the key variable, expected returns, is not observable. This paper promotes an accounting-fundamentals-based approach to estimating expected returns. It contributes to the stream of empirical studies devoted to developing the estimation of, and understanding the behavior of, expected returns. It also provides a practical tool that can be used to analyze investment choices in international equity contexts. Closed for comment; 0 Comment(s) posted.

Implied Materiality and Material Disclosures of Credit Ratings

by Robert G. Eccles & Tim Youmans

Materiality—a concept at the core of financial, sustainability, and integrated reporting—means the "reportability" of economic, environmental, social, and governance (risk) issues. Using the lens of materiality, the authors of this paper examine principles underlying the methodologies and business models of credit reporting agencies (CRAs), finding that CRAs have potential governance shortcomings that need to be addressed by the boards of the CRAs themselves. The governance remedies recommended here aim to restore credit rating institutions to their historic role in the proper functioning of the global capital markets. Closed for comment; 0 Comment(s) posted.

Auditor Lobbying on Accounting Standards

by Abigail M. Allen, Karthik Ramanna & Sugata Roychowdhury

Understanding the political process that leads to accounting standards may provide insights into both their procedural legitimacy and how they will eventually be used. In a study of the role of major auditors in the accounting standard-setting process, the authors provide a systematic characterization of auditors' changing incentives. They also examine how those incentives influence auditor lobbying across nearly every financial reporting standard issued from 1973 through 2006. Overall, results suggest that the auditors' own incentives play a prominent role in their lobbying activities for the rules of U.S. GAAP (Generally Accepted Accounting Principles). Closed for comment; 0 Comment(s) posted.

The Rise and Fall of Demand for Securitizations

by Sergey Chernenko, Samuel G. Hanson & Adi Sunderam

At the heart of the recent financial crisis were nontraditional securitizations, especially collateralized debt obligations and private-label mortgage-backed securities backed by nonprime loans. Demand for these securities helped feed the housing boom during the early and mid-2000s, while rapid declines in their prices during 2007 and 2008 generated large losses for financial intermediaries, ultimately imperiling their soundness and triggering a full-blown crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on insurers' and mutual funds' holdings of both traditional and nontraditional securitizations, this paper begins to shed light on the economic forces that drove the demand for securitizations before and during the crisis. Among the findings, variation across securitization types and investors is key to understanding the crisis. Beliefs appear to have been an important driver of mutual fund holdings of nontraditional securitizations. Results also underscore the importance of optimal liquidity management in the context of fire sales. Key concepts include: Inexperienced mutual fund managers invested significantly more in these products than experienced managers. Beliefs-shaped by past firsthand experiences-played an important role. Managers who had suffered through the market dislocations of 1998 invested substantially less in nontraditional securitizations than those who had not. For insurance companies, incentives appear to have played an important role, though the nature of the relevant incentive conflict seems to have varied across small and larger insurance firms. Closed for comment; 0 Comment(s) posted.

International Trade, Multinational Activity, and Corporate Finance

by C. Fritz Foley & Kalina Manova

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. Key concepts include: The ability to access financial capital to pay fixed and variable costs affects choices firms make regarding export entry and operations, and, as a consequence, influence aggregate trade patterns. Multinationals may use internal capital markets to pay for fixed costs, address managerial moral hazard, and exploit differences in access to capital across countries. As a result, financial frictions shape multinational decisions regarding production location, integration, and corporate governance. Closed for comment; 0 Comment(s) posted.

Crony Capitalism, American Style: What Are We Talking About Here?

by Malcolm S. Salter

In essence, crony capitalism conveys a shared point of view-sometimes stretching to collusion-among industries, their regulators, and Congress. The result is business-friendly policies and investments that serve private interests at the expense of the public interest. In this research paper, the author's goal is to add precision and nuance to our understanding of this form of corruption. He does so first by exploring definitions of crony capitalism. He then outlines the toolkit of crony capitalism including 1) campaign contributions to elected officials, 2) heavy lobbying of Congress and rule-writing agencies, and 3) a revolving door between government service and the private sector. The paper next describes the costs of cronyism and concludes with innovative ideas for curbing the excesses of crony capitalism. As the author notes, thorny problems remain: for example, the fact that "the public interest" in matters involving subsidies, tax preferences, and legislative loopholes is often difficult to discern and agree on. Key concepts include: The line between corrupt cronyism and legitimate bargaining among self-interested parties in the halls of government may be blurry. Although the costs to taxpayers of direct and even indirect subsidies can be measured, quantifying the cost of violations of the principle of equal treatment by government, the distortion of market mechanisms, and the undermining of public trust in government and business is vastly more difficult. The US has a long history of attempted campaign finance reform, which is critical to curbing crony capitalism. In the absence of meaningful reform, one corrupting feature of federal campaigns has not changed. Today 85 percent of funding for congressional campaigns comes from large contributors-mainly wealthy individuals and corporations. Among other necessary reforms, we need to take seriously the need to minimize trust-destroying conflicts of interest in Congress and privileged access by influential business interests to Congress and regulatory agencies. In the absence of such reform, the many benefits of the espoused system of democratic capitalism cannot endure. Closed for comment; 0 Comment(s) posted.

Managing the Family Business: Survival’s Secret Sauce

The secret sauce for surviving from generation to generation, says family-business expert John Davis, has three main ingredients: growth, talent and unity. Open for comment; 2 Comment(s) posted.

Corporate and Integrated Reporting: A Functional Perspective

by Robert Eccles & George Serafeim

Corporate reporting plays two functions. The first is an "information function" that enables counterparties, such as investors, employees, customers, and regulators, to enter into an exchange of goods and services under specific terms. Companies also benefit from the information function by comparing their performance against peers, thereby informing internal resource allocation decisions. The second is a "transformation function," the result of a company engaging with stakeholders to get their input on the company's resource allocation decisions. The authors argue that integrated reporting is more likely to perform effectively these two functions than separate financial and sustainability reporting. Moreover, as the authors argue, these two functions vary in terms of how important the role of regulation is. Regulation and standard setting is likely to improve the information function but could well impede the transformation function. If regulation is too prescriptive and "rules-based," the risk is that integrated reporting becomes more of a compliance exercise. Key concepts include: Investors need a better understanding of how companies are managing the relationships between financial and nonfinancial performance. Separate financial and sustainability reports are no longer adequate for performing either the information function or the transformation function. Companies need integrated reporting in order to make sure that their corporate reporting process effectively performs the information and transformation functions. Closed for comment; 0 Comment(s) posted.