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New research on equity from Harvard Business School faculty on issues including the pros and cons of recruiting friends and family members as investors, and how to replicate private equity with value investing.
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Equity Bank CEO James Mwangi: Transforming Lives with Access to Credit

Re: Caroline M. Elkins

James Mwangi, CEO of Equity Bank, has transformed lives and livelihoods throughout East and Central Africa by giving impoverished people access to banking accounts and micro loans. He’s been so successful that in 2020 Forbes coined the term “the Mwangi Model.” But can we really have both purpose and profit in a firm? Harvard Business School professor Caroline Elkins, who has spent decades studying Africa, explores how this model has become one that business leaders are seeking to replicate throughout the world in her case, “A Marshall Plan for Africa': James Mwangi and Equity Group Holdings.” As part of a new first-year MBA course at Harvard Business School, this case examines the central question: what is the social purpose of the firm?

The Best Person to Lead Your Company Doesn't Work There—Yet

by Rachel Layne

Recruiting new executive talent to revive portfolio companies has helped private equity funds outperform major stock indexes, says research by Paul Gompers. Why don't more public companies go beyond their senior executives when looking for top leaders?

The Color of Private Equity: Quantifying the Bias Black Investors Face

by Pamela Reynolds

Prejudice persists in private equity, despite efforts to expand racial diversity in finance. Research by Josh Lerner sizes up the fundraising challenges and performance double standards that Black and Hispanic investors confront while trying to support other ventures—often minority-owned businesses.

Short-Termism, Shareholder Payouts, and Investment in the EU

by Jesse M. Fried and Charles C.Y. Wang

Shareholder-driven “short-termism,” as evidenced by increasing payouts to shareholders, is said to impede long-term investment in EU public firms. But a deep dive into the data reveals a different story.

Private Equity and COVID-19

by Paul A. Gompers, Steven N. Kaplan, and Vladimir Mukharlyamov

Private equity investors are seeking new investments despite the pandemic. This study shows they are prioritizing revenue growth for value creation, giving larger equity stakes to management teams, and targeting somewhat lower returns.

Long-Run Returns to Impact Investing in Emerging Markets and Developing Economies

by Shawn Cole, Martin Melecky, Florian Mölders, and Tristan Reed

Examination of every equity investment made by the International Finance Corporation, one of the largest and longest-operating impact investors, shows this portfolio has outperformed the S&P 500 by 15 percent.

Do Private Equity Buyouts Get a Bad Rap?

by Michael Blanding

Elizabeth Warren calls private equity buyouts "Wall Street looting," but a recent study by Josh Lerner and colleagues shows they have both positive and negative impacts. Open for comment; 0 Comments.

The Economic Effects of Private Equity Buyouts

by Steven J. Davis, John Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner, and Javier Miranda

Private equity buyouts are a major financial enterprise that critics see as dominated by rent-seeking activities with little in the way of societal benefits. This study of 6,000 US buyouts between 1980 and 2013 finds that the real side effects of buyouts on target firms and their workers vary greatly by deal type and market conditions.

Core Earnings? New Data and Evidence

by Ethan Rouen, Eric So, and Charles C.Y. Wang

Using a novel dataset of earnings-related disclosures embedded in the 10-Ks, this paper shows how detailed financial statement analysis can produce a measure of core earnings that is more persistent than traditional earnings measures and forecasts future performance. Analysts and market participants are slow to appreciate the importance of transitory earnings.

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.

Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital

by Josh Lerner, Jason Mao, Antoinette Schoar, and Nan R. Zhang

Private equity vehicles that differ from the traditional structure have become a major portion of investors’ portfolios, especially over the past decade. This study identifies differences in performance across limited and general partners participating in such vehicles, as well as across the two broad classes of alternative vehicles.

How Much Does Your Boss Make? The Effects of Salary Comparisons

by Zoë B. Cullen and Ricardo Perez-Truglia

This study of more than 2,000 employees at a multibillion dollar firm explores how perceptions about peers’ and managers’ salaries affect employee behaviors and preferences for equity. Employees exhibit a high tolerance for inequality when job titles differ, which may explain why incentives are granted through promotions, and gender pay differences are most pronounced across positions.

Private Equity, Jobs, and Productivity: Reply to Ayash and Rastad

by Steven J. Davis, John Haltiwanger, Kyle Handley, Ron S. Jarmin, Josh Lerner, and Javier Miranda

In 2014, the authors published an influential analysis of private equity buyouts in the American Economic Review. Recently, economists Brian Ayash and Mahdi Rastad have challenged the accuracy of those findings. This new paper responds point by point to their critique, contending that it reflects a misunderstanding of the data and methodology behind the original study.

An Invitation to Market Design

by Scott Duke Kominers, Alexander Teytelboym, and Vincent P. Crawford

Effective market design can improve liquidity, efficiency, and equity in markets. This paper illustrates best practices in market design through three examples: the design of medical residency matching programs, a scrip system to allocate food donations to food banks, and the recent “Incentive Auction” that reallocated wireless spectrum from television broadcasters to telecoms.

Should Industry Competitors Cooperate More to Solve World Problems?

by Sean Silverthorne

George Serafeim has a theory that if industry competitors collaborated more, big world problems could start to be addressed. Is that even possible in a market economy? Open for comment; 0 Comments.

Private Equity and Financial Fragility During the Crisis

by Shai Bernstein, Josh Lerner, and Filippo Mezzanotti

Examining the activity of almost 500 private equity-backed companies during the 2008 financial crisis, this study finds that during a time in which capital formation dropped dramatically, PE-backed companies invested more aggressively than peer companies did. Results do not support the hypothesis that private equity contributed to the fragility of the economy during the recent financial crisis.

Equality and Equity in Compensation

by Jiayi Bao and Andy Wu

Why do some firms such as technology startups offer the same equity compensation packages to all new employees despite very different cash salaries? This paper presents evidence that workers dislike inequality in equity compensation more than salary compensation because of the perceived scarcity of equity.

Pay Now or Pay Later? The Economics within the Private Equity Partnership

by Victoria Ivashina and Josh Lerner

Partnerships are essential to the professional service and investment sectors. Yet the partnership structure raises issues including intergenerational continuity. This study of more than 700 private equity partnerships finds 1) the allocation of fund economics is typically weighted toward the founders of the firms, 2) the distributions of carried interest and ownership substantially affect the stability of the partnership, and 3) partners’ departures have a negative effect on private equity groups’ ability to raise additional funds.

Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

by Erik Stafford

This paper studies the asset selection of private equity investors and the risk and return properties of passive portfolios with similarly selected investments in publicly traded securities. Results indicate that sophisticated institutional investors appear to significantly overpay for the portfolio management services associated with private equity investments.

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.