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 Financial Reporting and Control course in the MBA required curriculum.
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 is forthcoming in the Journal of Financial Economics, and it has been cited and discussed in The New York Times, in The Financial Times,on CBS Money Watch, and in other outlets of the financial press.
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.
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;
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;
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;
Causes and Consequences of Linguistic Complexity in Non-U.S. Firm Conference Calls
We examine the determinants and capital market consequences of linguistic complexity in conference calls held in English by non-U.S. firms. We find that linguistic complexity is positively associated with the language barrier in the firms' home country. Also, linguistic complexity in firms' conference calls affects the extent to which the capital market reacts to the information releases. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases, after controlling for the actual earnings news. Further, the capital market's response to linguistic complexity is more pronounced when there is greater implicit (as captured by the presence of foreign investors) or explicit (as captured by how actively analysts ask questions) demand for the English conference calls. This suggests that the form in which financial information is presented can impose additional processing costs by limiting investors' ability to interpret the reported financials.
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;
Doing What the Parents Want? The Effect of the Local Information Environment on the Investment Decisions of Multinational Corporations
This paper examines how the external information environment in which foreign subsidiaries operate affects investment decisions in multinational corporations. We hypothesize and find that foreign subsidiaries in country-industries with more transparent information environments better translate the local growth opportunities into investments. This result is consistent with the information environment helping MNCs monitor the subsidiary's investment decision. Cross-sectional tests show that the effect is larger when there is greater "distance" between the parent and the subsidiary. Our results suggest that the external information environment helps mitigate 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.
Keywords: Business Subsidiaries;
Cross-Cultural and Cross-Border Issues;
Multinational Firms and Management;
Market Competition, Government Efficiency, and Profitability Around the World
We examine how cross-country differences in product, capital, and labor market competition, and government efficiency affect the rate of mean reversion of corporate profitability. Using a sample of 42,337 unique firms from 49 countries, we find that corporate profitability mean reverts faster in countries where product and capital markets are more competitive. Moreover, holding constant product, capital, and labor market competition we find that profitability mean reverts faster in countries with less efficient governments. The findings suggest that country-level factors have an economically significant impact on the rate of corporate profitability mean reversion. The study has implications for forecasting profitability and equity valuation in a global context.
Government and Politics;
Forecasting and Prediction;
Accounting for Crises
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.
Forecasting and Prediction;
Nagar, Venky, and Gwen Yu. "Accounting for Crises.
" Harvard Business School Working Paper, No. 11–103, April 2011. (Revised October 2012.)
Lehman Brothers and Repo 105
Mikes, Anette, Gwen Yu, and Dominique Hamel. "Lehman Brothers and Repo 105.
" Harvard Business School Case 112-050, December 2011. (Revised from original October 2011 version.)
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, May 2011. (Revised from original March 2011 version.)
Accounting Standards and International Portfolio Holdings: Analysis of Cross-border Holdings Following Mandatory Adoption of IFRS
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: Financial Reporting;
Foreign Direct Investment;
Yu, Gwen. "Accounting Standards and International Portfolio Holdings: Analysis of Cross-border Holdings Following Mandatory Adoption of IFRS." Ph.D. diss., University of Michigan, 2010. (Winner of American Accounting Association. International Accounting Section. Outstanding Dissertation Award presented by American Accounting Association.)