First Look

Abstract—Do private equity firms contribute to financial fragility during economic crises? We find that during the 2008 financial crisis, PE-backed companies increased investments relative to their peers, while also experiencing greater equity and debt inflows. The effects are stronger among financially constrained companies and those whose private equity investors had more resources at the onset of the crisis. PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54253

Abstract—In a survey of the NEJM Catalyst Insights Council in July 2018, 42% of respondents say they think value-based reimbursement models will be the primary revenue model for U.S. health care. Indeed, this transition is already happening. Respondents report that a quarter of reimbursement at their organizations is based on value, on average. While three-quarters of their revenue remains fee-for-service, we see a remarkable change to a reimbursement system that was static for decades. In particular, survey respondents’ organizations are pursuing two value-based strategies: accountable care organizations, which often use capitated payments, and bundled payments. Nearly half (46%) of respondents say value-based contracts significantly improve the quality of care, and another 42% say value-based contracts significantly lower the cost of care. The survey identifies the leading barriers to implementing value-based reimbursement models. Infrastructure requirements, including information technology (indicated by 42% of respondents), and changing regulation/policy (34%) are the top two. There is strong consensus on the broad metrics that are most important for measuring value-based care. Outcome measures top the list, with 60% of respondents saying they are extremely important. This survey suggests that many in health care see value-based reimbursement as a real solution to the nation’s current health care crisis.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=55281

Abstract—No abstract available.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=55279

Abstract—This study examines whether rating agencies assign more stringent and accurate rating adjustments for issuers with higher default risk and whether this leads to adjustments that are more relevant to financial markets. We expect that rating agencies will make more informative adjustments to limit their reputation risk for issuers with a higher likelihood of default—an event that can reveal the quality of assigned ratings. For all issuers, we find that adjustments are more stringent and accurate as issuers' default risk grows. We also find that the relevance of adjustments increases with issuers' default risk, as evidenced by adjustments being more predictive of issuer default and offering yields and an increased market reaction to adjustment changes. For defaulting issuers, especially those with a higher pre-failure default risk, we find that adjustments grow more stringent and accurate in the months leading up to default and better predict lender default recovery rates.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=52018

Abstract—We examine the influence of peer firms on trade credit policies of listed firms in the United States. We posit and find evidence that firms mimic their peers in formulating trade credit policies. The findings are more pronounced for firms in highly competitive product markets. Our results also show that firms not only mimic peers in similar circumstances, but they also mimic their more and/or less successful peer firms. These within-group and bidirectional effects highlight the importance of trade credit as a competitive tool in the product markets. Our results are robust to different methods of selecting peers, sampling, different proxies and estimation techniques.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=55265

Abstract—This study examines how a corporate legal structure may affect borrowing costs. Corporate legal structure refers to the legal fragmentation of a firm into multiple, separately incorporated entities. This fragmentation is bound to be a factor when lenders determine the pricing of debt and design of contract terms because they can enter into legally enforceable agreements only with specific legal entities. Using a sample of bank loans issued to U.S. parent companies, I find that a more complex corporate legal structure is associated with higher loan spreads. The findings are robust to several firm and loan characteristics and are incremental to the effects of other forms of organizational structure, namely business and geographic diversification. I also find that the level of debt at subsidiaries affects the parent company's borrowing costs. However, the subsidiary debt does not moderate the relationship between legal structure and borrowing costs. Evidence suggests that this is, at least partly, explained by recovery costs. There is also some evidence that a corporate legal structure affects the design of the debt contracts.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=52016

Owner Jeff Vinik and top management of the NHL Tampa Bay Lightning are reviewing their strategy and progress in achieving their goals of brand-building and community commitment. Strategic philanthropy is unusual in sport. Tampa Bay is historically a non-traditional hockey market. The case has substantial comparative team and league data.

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Since its founding in 2004, Facebook has built a phenomenally successful business at global scale to become the fifth most valuable public company in the world. The revelation of Cambridge Analytica events in March 2018, where 78 million users' information was leaked in a 2016 U.S. election cycle, exposed a breach of trust/privacy among its user community. In the past, growth at any costs appeared to be the de facto strategy. Now many voices such as regulators, advertisers, ethicists, shareholders and users argued for a more responsible approach to addressing their concerns. Mark Zuckerberg (CEO/Chair/Founder) and Sheryl Sandberg (COO) mapped out their six-point plan to address this existential threat. Could they continue to grow and rectify the breach of trust/privacy? Did other stakeholders have some greater responsibility too? In addition to issues of privacy and trust, there is a growing chorus of concern about “content moderation”—not for the easy topics like spam or copyright material—but for the hard things revolving around political points of view, hate speech, polarizing perspectives, etc. How will Facebook strike the balance between free speech and corrosive content across billions of users and dozens of languages? Are they the arbiters of truth/censorship in the digital world?

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