Gwen Yu is an assistant professor of business administration in the Accounting and Management Unit at Harvard Business School. She teaches the Financial Reporting and Control course in the MBA required curriculum. Occasionally, she teaches in HBS’s Executive Education programs (“Strategic Financial Analysis for Business Evaluation”).
Her research focuses on how accounting information affects various real economic outcomes. Specifically, she is interested in how accounting standards and corporate disclosures influence capital allocation decisions of both managers and external investors. Professor Yu’s work has been published in prestigious academic and practitioner journals such as the Journal of Financial Economics, The Accounting Review, Review of Accounting Studies and the World Economic Review, and it has been cited and discussed in The New York Times, in The Financial Times, CBS Money Watch, The Wall Street Journal, and in other outlets of the financial press. She is on the Editorial board of The Accounting Review.
Professor Yu holds a Ph.D. in accounting from the University of Michigan, where she also earned a master’s degree in applied economics. Her undergraduate degree is from Yonsei University in Seoul. Before pursuing her graduate studies, she worked at McKinsey & Company and the global reinsurer Swiss Re.
Doing What the Parents Want?
We examine how the external information environment in which foreign subsidiaries operate affects the investment decisions of multinational corporations (MNCs). We hypothesize and find that the investment decisions of foreign subsidiaries in country-industries with more transparent information environments are more responsive to local growth opportunities than are those of foreign subsidiaries in country-industries with less transparent information environments. Further, this effect is larger when (i) there are greater cross-border frictions between the parent and subsidiary, and (ii) the parents are relatively more involved in their subsidiaries’ investment decision-making process. Our results suggest that the external information environment helps mitigate the agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.
Accounting for Crises
While neoclassical models suggest that improving the quality of financial information tightens the link between the realization of the information and the underlying fundamentals, models of recent crises suggest that higher information quality can generate multiplicity, divorcing the signals from the fundamentals. We provide one of the first tests of recent macro global-game crisis models, which show that the precision of public signals can coordinate crises (e.g., Angeletos and Werning 2006; Morris and Shin 2002, 2003). In these models, self-fulfilling crises (independent of poor fundamentals) can occur only when publicly disclosed signals of fundamentals have high precision; poor fundamentals are the sole driver of crises only in low-precision settings. We affirm this proposition for 41 currency crises by exploiting a key publicly-disclosed signal of fundamentals that drives financial markets — namely, accounting data. We find that accounting signals of fundamentals are stronger in-sample predictors of crises in low precision countries.
Earnings Call that get Lost in Translation
Does the form in which financial information is presented have consequences for the capital markets? The authors examine the level of linguistic complexity of more than 11,000 conference call transcripts from non-US firms between 2002 and 2010. Findings show that the linguistic complexity of calls varies with country-level factors such as language barriers, but also with firm characteristics. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases. Overall, these results may be useful to foreign firms that wish to communicate with investors globally. Analysts and investors around the world may also find the results helpful since they might be able to push managers to speak in a less complex manner. This study is the first to analyze conference calls in a cross-country setting. Key concepts include:
- Language barriers are a significant determinant of linguistic complexity in foreign firm's information disclosure.
- Linguistic complexity in information disclosures can be associated with lower information content, as measured by abnormal stock return volatility and trading volume.
- The effect is significant when there is greater (i) implicit (as captured by the presence of foreign investors) or (ii) explicit (as captured by how actively analysts ask questions) demand for the information disclosure.
Bridging the GAAPs
Inconsistencies in accounting treatment across countries are a major obstacle for global equity investment. Founded in 1985, HOLT is an equity valuation service provider that offers its clients (e.g., global equity investors) a consistent performance metrics from adjusting the financial information of equities in different countries. The first step in HOLT’s adjustment process is to adjust for the differences in the local accounting information in each country. HOLT then provides clients with a common performance metric used to guide global investment decisions. The case asks how HOLT brings value to their clients, and also raises the question as to the future role of such private service providers, especially given the use of IFRS, which arguably should bring harmonized accounting standards around the world.
Since 2005, many countries have been adopting International Financial Reporting Standards (IFRS) with the expectation that IFRS will allow apples to apples comparison across countries. Taking an example from HOLT, the case examines 1) the implication of inconsistent application of accounting practices for global equity valuation and 2) whether such inconsistencies will be eliminated after adoption of IFRS.
The case can be used for several purposes. First, it illustrates the need for adjustments in financial information for global equity valuation. Using the example of differences in Research and Development (R&D) treatments across countries, the case shows how inconsistencies in accounting treatments can lead to different valuation consequences. Second, the case examines the implication of IFRS adoption for global investments. The cases shows that inconsistencies continue to exist even after IFRS and in some cases are even exacerbated. Probing into the underlying causes, the case shows that such inconsistencies are not necessarily from the accounting principles per se, but driven by differences in how accounting standards are practiced. More broadly, the case highlights the incentives that drives the divergence in accounting practices and derives implications for global investment.
Accounting for Crises
We provide one of the first empirical evidence consistent with recent macro global-game crisis models, which show that the precision of public signals can coordinate crises (e.g., Angeletos and Werning, 2006; Morris and Shin, 2002, 2003). In these models, self-fulfilling crises (independent of poor fundamentals) can occur only when publicly disclosed signals of fundamentals have high precision; poor fundamentals are the sole driver of crises only in low precision settings. We find evidence consistent with this proposition for 68 currency and systemic banking crises in 17 countries from 1983 to 2005. We exploit a key publicly disclosed signal of fundamentals that drives financial markets, namely accounting data, and find that pre-crisis accounting signals of fundamentals are significantly lower only in low precision countries.
Forecasting and Prediction;
Forecasting and Prediction;
Information Environment and the Investment Decisions of Multinational Corporations
This paper examines how the external information environment in which foreign subsidiaries operate affects the investment decisions of multinational corporations (MNCs). We hypothesize and find that the investment decisions of foreign subsidiaries in country-industries with more transparent information environments are more responsive to local growth opportunities than are those of foreign subsidiaries in country-industries with less transparent information environments. Further, this effect is larger when (i) there are greater cross-border frictions between the parent and subsidiary, and (ii) the parents are relatively more involved in their subsidiaries' investment decision-making process. Our results suggest that the external information environment helps mitigate the agency problems that arise when firms expand their operations across borders. This paper contributes to the literature by showing that the external information environment helps MNCs mitigate information frictions within the firm.
financial reporting quality;
Multinational Firms and Management;
Decision Choices and Conditions;
Market Competition, Earnings Management, and Persistence in Accounting Profitability Around the World
We examine how cross-country differences in product, capital, and labor market competition, and earnings management affect mean reversion in accounting return on assets. Using a sample of 48,465 unique firms from 49 countries, we find that accounting returns mean revert faster in countries where there is more product and capital market competition, as predicted by economic theory. Country differences in labor market competition and earnings management are also related to mean reversion in accounting returns — but the relation varies with firm performance. Country labor competition increases mean reversion when unexpected returns are positive, but dampens it when unexpected returns are negative. Accounting returns in countries with higher earnings management mean revert more slowly for profitable firms and more rapidly for loss firms. Thus, earnings management incentives to slow or speed up mean reversion in accounting returns are accentuated in countries where there is a high propensity for earnings management. Overall, these findings suggest that country factors explain mean reversion in accounting returns and are therefore relevant for firm valuation.
Supply and Industry;
Government and Politics;
Globalized Markets and Industries;
The Return Experience of Hedge Fund Investors
Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn
The returns of hedge fund investors depend not only on the returns of the hedge funds they hold but also on the timing and magnitude of their capital flows in and out of the funds. We use dollar-weighted returns (a form of IRR) to assess the properties of actual investor returns on hedge funds and compare them to buy-and-hold fund returns. Our main finding is that annualized dollar-weighted returns are on the magnitude of 3% to 7% lower than corresponding buy-and-hold fund returns. Using factor models of risk and the estimated dollar-weighted performance gap, we find that the real alpha of hedge fund investors is close to zero. In absolute terms, dollar-weighted returns are reliably lower than the return on the S&P 500 index and are only marginally higher than the risk-free rate as of the end of 2008. The combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought.
Keywords: Investment Funds;
Accounting Standards and International Portfolio Holdings
Prior literature shows that investors under-invest in foreign firms due to information asymmetry problems. I posit that differences in local accounting standards are a source of the information asymmetry among investors. Using security-level holdings of international mutual funds, I find that harmonizing accounting standards (adoption of IFRS) increases foreign mutual fund holdings. Harmonizing accounting standards increases cross-border holdings 1) directly by reducing the information processing cost of foreign investors and 2) indirectly by reducing the effect of other barriers on cross-border investments such as geographic distance. Further analysis suggests that differences in the enforcement of the standards are sufficient to curb the benefits of accounting harmonization.
Keywords: International Accounting;
Securities Litigation Risk for Foreign Companies Listed in the U.S.
We study securities litigation risk faced by foreign firms listed on U.S. exchanges. We find that U.S. listed foreign companies experience securities class action lawsuits at about half the rate as do U.S. firms with similar levels of ex ante litigation risk. The lower rate appears to be driven partly by higher transaction costs in uncovering and pursuing litigation against foreign firms. However, once a lawsuit triggering event like an accounting restatement, missing management guidance, or a sharp stock price decline occurs, there is no difference in the litigation rates between a foreign and comparable U.S. firm. This suggests that effective enforcement of securities laws is constrained by transaction costs, and the availability of high quality information that reveals potential misconduct is an important determinant of a well-functioning litigation market for foreign firms listed in the U.S.
Keywords: Litigation Risk;
Risk and Uncertainty;
Globalized Firms and Management;
Lawsuits and Litigation;
Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting
We study the frequency of restatements by foreign firms listed on the U.S. exchanges. We find that the restatement rate by U.S. listed foreign firms is significantly lower than that of comparable U.S. firms and the difference depends on the home country characteristics of the foreign firm. Foreign firms from countries with a weak rule of law are less likely to restate than firms from strong rule of law countries are, despite companies from the weaker rule of law countries having higher levels of earnings management. After controlling for the materiality of the restatement, firms from weak rule of law countries are more likely to opt for less visible restatement disclosure methods. We interpret these findings as home country enforcement affecting firms' likelihood of reporting existing accounting irregularities. This suggests that for U.S. listed foreign firms, less frequent restatements can be a signal of opportunistic reporting rather than high quality earnings.
Keywords: Accounting restatements;
home country enforcement;
Globalized Firms and Management;
Cross-Cultural and Cross-Border Issues;
Capital Market Consequences of Linguistic Complexity in Conference Calls of Non-U.S. Firms
We examine how linguistic complexity affects the capital market reaction to information disclosures. We define linguistic complexity as the use of non-plain English stemming from language barriers. Using transcripts from the English-language conference calls of non-U.S. firms, we find that linguistic complexity is positively associated with the language barriers in the firms' home country. We then show that conference calls that are more linguistically complex show lower price movement, lower trading volume, and more dispersion in analyst forecasts following the calls. Further, the capital market's response to linguistic complexity is limited to firms for which there is greater demand for English-language conference calls. Our results highlight that when disclosure takes the form of verbal communication, the complexity in the narrative impacts the market reaction to the disclosure.
Capital market consequences;
Communication Intention and Meaning;
Outcome or Result;
Cross-Cultural and Cross-Border Issues;
FIN Around the World: The Contribution of Financing Activity to Profitability
We study how the availability of domestic credit influences the contribution that financing activities make to a firm's return on equity (ROE). Using a sample of 51,866 firms from 69 countries, we find that financing activities contribute more to a firm's ROE in countries with higher domestic credit. The higher contribution of financing activities is not driven by firms taking greater leverage in these countries, but by firms realizing a higher spread (i.e., a greater difference in operating performance and borrowing cost) when more domestic credit is available. Also, we find that firms partially substitute trade credit for financial credit, with large firms exhibiting the greatest rate of substitution. For small firms, the rate of substitution improves with the country's available domestic credit, while large firms are insensitive to this friction. The findings suggest that both country and firm-level factors have a significant impact on how financing activities contribute to corporate performance.
Keywords: Domestic Credit;
Return of Equity;
financial statement analysis;
Cost of Capital;
For-Profit Higher Education: University of Phoenix
For-Profit Higher Education: University of Phoenix
Lehman Brothers and Repo 105
Financial Services Industry;
Mikes, Anette, Gwen Yu, and Dominique Hamel. "Lehman Brothers and Repo 105".
Harvard Business School Case 112-050, October 2011. (Revised December 2011.)
Auditing in the Post-Sarbanes-Oxley World
Keywords: Accounting Audits;
China or the World? A Financial Reporting Strategy for Hong Kong's Capital Markets
Set in 2010, the case discusses the strategic directions Hong Kong could pursue, particularly vis-a-vis China, as it seeks to preserve its preeminence in the region. In 2010, the Hong Kong Exchange announced that it would allow listed Chinese companies to report using Chinese GAAP without reconciliation to IFRS The exchange was responding to the demands of its largely Chinese clientele and also coping with increased global competition to attract listings from Chinese companies. However, there were concerns around whether this change would undermine Hong Kong's position as a financial center in the long term. Hong Kong's position as a global financial powerhouse was due in part to its rigorous emphasis on compliance and enforcement; allowing companies to report under Chinese GAAP, the practice of which was highly variable, could compromise Hong Kong's high corporate governance standards.
Keywords: Governance Compliance;
Globalized Economies and Regions;
Bridging the GAAPs (TN)
Teaching Note for 111-114.
Bridging the GAAPs
Inconsistencies in accounting treatment across countries are a major obstacle for global equity investment. Adoption of a single accounting standard (IFRS) has been received with much excitement, where apples to apples comparison across countries will become easier. However, adopting a global accounting standard may not necessarily mean that financial reporting in all countries will become standardized. Taking an example from HOLT, a private sector that offers standardized data for global portfolio investment, the case examines i) HOLT's adjustment process for differences in local accounting standards and ii) how IFRS adoption could change HOLT's global valuation framework. The case offers an interesting setting to examine how harmonizing accounting standards can affect global equity valuation.
Keywords: Financial Reporting;
Globalized Markets and Industries;
Yu, Gwen. "Bridging the GAAPs".
Harvard Business School Case 111-114, March 2011. (Revised May 2011.) (Included in Harvard Business School's Premier Case Collection.)
Financial reporting quality and its consequences
Does reporting quality have real economic consequences? Professor Yu addresses this question in her research, which examines the channels through which reporting quality affects the behavior of economic agents, namely managers and investors. Her particular focus is on how changes in certain accounting regimes or in the reporting behavior of a firm influence the way different agents view the firm.
Professor Yu’s current research highlights three aspects of financial reporting and its consequences.
In light of the recent global push toward accounting harmonization, and particularly the adoption of International Financial Reporting Standards (IFRS), she has investigated accounting standards and cross-border holdings. She has found that reducing differences in accounting standards increases foreign holdings of international mutual funds by directly reducing the information processing cost of foreign investors. Even more important is her finding that harmonizing accounting standards reduces the effect of other private information barriers by making investors rely more on public information sources and less on private ones.
Professor Yu also examines the ability of accounting to predict major events, such as currency crises. While neoclassical models suggest that improving the quality of financial information tightens the link between the realization of the information and the underlying fundamentals, models of recent crises suggest that higher information quality can generate multiplicity, divorcing the signals from the fundamentals. In the first empirical study of its kind, Professor Yu has discovered that accounting signals predict crises only in countries with low accounting precision, suggesting that precise public signals can coordinate traders’ beliefs and therefore increase volatility and generate multiplicity.
The third avenue of Professor Yu’s research examines hedge fund returns. As these funds have grown larger, could they hamper their own ability to hedge risks and generate superior returns? By making the critical distinction between the returns of hedge funds themselves and the returns of investors in these funds, Professor Yu has found that, based on the specification and time period examined, investors’ annualized, dollar-weighted returns are 3 to 7 percent lower than those on corresponding buy-and-hold returns. The implication is that, after considering risk, hedge-fund investors’ returns are much lower than generally expected.
Awards & Honors
Gwen Yu: Received the 2011 Outstanding Dissertation Award from the International Section of the American Accounting Association for her 2010 dissertation, "Accounting Standards and International Portfolio Holdings: An Analysis of Mutual Fund Holdings Following Mandatory Adoption of IFRS."