Assistant Professor of Business Administration
Gwen Yu is an assistant professor of business administration in the accounting and management unit at Harvard Business School. She teaches the second year MBA “Business Analysis and Valuation” class and occasionally, in HBS’s Executive Education programs (“Strategic Financial Analysis for Business Evaluation”). Previously, Gwen taught the first-year M.B.A. course “Financial Reporting and Control.”
Gwen’s research focuses on the role of information frictions in the global economy. Globalization has led to a series of events that lowered information barriers around the world. Despite the falling communication costs, firms continue to face information problems when they expand abroad. Gwen’s research investigates the cross-border frictions that cause differences in information quality to persistent around the world. She also examines how these differences have real effects on various economic outcomes.
Her work dissects the underlying drivers of cross-border information frictions. She identifies three sources of information frictions (i.e., formal barriers, informal barriers, and innate barriers) and examines how each barrier affects various economic outcomes. Also, her work delves into settings (e.g., cross-listing) where firms attempt to overcome these cross border frictions and examines the challenges therein. The common theme throughout her work is that simply reducing formal barriers, such as rules and regulations, does not necessarily lead to harmonized information quality across countries. This is because transparency is a complex outcome of numerous institutions that shape the information environment. Thus, simply transplanting the rules of one country to another may not be the most efficient way to achieve global integration.
Another area of work is the globalization process of emerging countries such as China. The rapid, yet controlled, globalization process of China offers an interesting laboratory setting for examining how countries can better leverage their local institutions in this process. In a series of papers and cases, she argues that successful globalization can be achieved not only by overcoming but also by exploiting the differences in its local institutions. Her findings have implications for local regulators, investors, and managers, who are at a crossroads in designing a new economic system that will shape one of the world’s largest and fastest growing economies.
Gwen’s work has been published in academic and practitioner journals such as the Journal of Financial Economics,The Accounting Review, American Economic Journal: Macroeconomics, Review of Accounting Studies and the World Financial 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.
Gwen 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.
Accounting Standards and International Portfolio Holdings
A long stream of literature shows that investors significantly underweight foreign investments, a phenomenon referred to as home bias, which is consistently observed across different classes of investments and types of investors. One common explanation for the underweighting of foreign equities is that additional information costs exist when investing abroad. However, less attention has been given to the exact information sources that lead to such information processing costs. In this paper, we ask whether differences in countries’ accounting standards affect investors’ global investment decisions. We argue that the information processing costs stemming from differences in local accounting standards provide one explanation for the equity home-bias puzzle.
We find that investors tend to underweight firms with greater accounting distance. Also, reducing accounting distance via mandatory IFRS adoption leads to less underinvestment by foreign investors. Using the mandatory adoption of International Financial Reporting Standards (IFRS) as an event that changed the accounting standards of various country-pairs, we examine how two sources of changes in accounting distance – (i) changes due to IFRS adoption of the investee and (ii) changes due to IFRS adoption in the investor’s country – affect global portfolio allocation decisions. We find that the tendency to underinvest in investees with greater accounting distance significantly weakens when accounting distance is reduced either from an investee’s IFRS adoption or from IFRS adoption in the investor’s country. The latter finding holds despite the fact that IFRS adoption in the investor’s country had no impact on the accounting standards under which the investee firms present their financial information; the only change is in the investor’s familiarity with these standards. This suggests that differences in accounting standards affect investor demand by imposing greater information-processing costs on those less familiar with the reporting standards.
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.
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.
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.