Gwen Yu

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 ReviewAmerican Economic Journal: MacroeconomicsReview 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.

Journal Articles

  1. Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

    We study the frequency of restatements by foreign firms listed on U.S. exchanges. We find that the restatement rate of U.S. listed foreign firms is significantly lower than that of comparable U.S. firms and that the difference depends on the firm's home country characteristics. Foreign firms from countries with a weak rule of law are less likely to restate than are firms from strong rule of law countries. While the lower rate of restatements can represent an absence of errors, it can also indicate a lack of detection and disclosure of errors and irregularities. We infer the magnitude of detection and disclosure by associating the frequency of restatements with the quality of the firm's internal reporting system. We find that only U.S. firms and foreign firms from strong rule of law countries show a positive association between restatement frequency and internal control weaknesses. Firms from weak rule of law countries show no significant association. We interpret these findings as home country enforcement affecting firms' likelihood of detecting and 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 a lack of accounting errors and irregularities.

    Keywords: Accounting restatements; earnings management; home country enforcement; Earnings Management; Globalized Firms and Management; Law; Financial Reporting; Financial Markets; Cross-Cultural and Cross-Border Issues;

    Citation:

    Srinivasan, Suraj, Aida Sijamic Wahid, and Gwen Yu. "Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting." Accounting Review (forthcoming). View Details
  2. Accounting Standards and International Portfolio Holdings

    Do differences in countries' accounting standards affect global investment decisions? We explore this question by examining how accounting distance, the difference in the accounting standards used in the investor's and the investee's countries, affects the asset allocation decisions of global mutual funds. We find that investors tend to underweight investees with greater accounting distance. 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) change due to IFRS adoption of the investee and (ii) change 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 cost on those less familiar with the reporting standards.

    Keywords: IFRS; home bias; cross-cultural/cross-border; information asymmetry; mutual funds; International Relations;

    Citation:

    Yu, Gwen, and Aida Sijamic Wahid. "Accounting Standards and International Portfolio Holdings." Accounting Review (forthcoming). (Winner of American Accounting Association. International Accounting Section. Outstanding Dissertation Award presented by American Accounting Association.) View Details
  3. 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.

    Keywords: accounting; Forecasting and Prediction; financial crisis; Financial Markets; Corporate Disclosure; game theory; Mathematical Methods; Corporate Disclosure; Mathematical Methods; Game Theory; Financial Markets; Forecasting and Prediction; Accounting; Financial Crisis;

    Citation:

    Nagar, Venky, and Gwen Yu. "Accounting for Crises." American Economic Journal: Macroeconomics (forthcoming). View Details
  4. 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.

    Keywords: investment; capital budgeting; Multinational firms; Cross-border frictions; Agency frictions; transparency; financial reporting quality; information quality; Information; Multinational Firms and Management; Decision Choices and Conditions; Investment;

    Citation:

    Shroff, Nemit O., Rodrigo S. Verdi, and Gwen Yu. "Information Environment and the Investment Decisions of Multinational Corporations." Accounting Review 89, no. 2 (March 2014). View Details
  5. 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.

    Keywords: Performance; Corporate performance; valuation; Equity Valuation; Persistence; competitive advantage; institutions; earnings management; labor market; capital markets; competition; Profit; Performance; Supply and Industry; Financial Statements; Government and Politics; Globalized Markets and Industries;

    Citation:

    Healy, Paul M., George Serafeim, Suraj Srinivasan, and Gwen Yu. "Market Competition, Earnings Management, and Persistence in Accounting Profitability Around the World." Review of Accounting Studies 19, no. 4 (December 2014): 1281–1308. View Details
  6. 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; Investment Return; Capital Markets; Market Timing; Currency;

    Citation:

    Dichev, Ilia, and Gwen Yu. "Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn." Journal of Financial Economics 100, no. 2 (May 2011): 248–263. View Details

Working Papers

  1. Friends with Close Ties: Asset or Liability? Evidence from the Investment Decisions of Mutual Funds in China

    When fund managers have close ties to their investees, it can facilitate efficient information sharing but can also increase the possibility of favoritism. Using the investment choices of mutual funds in China, we test whether funds with close ties to their investees make timelier investment decisions—i.e., they purchase (sell) prior to positive (negative) investee performance. We measure close ties using the education network between fund managers and managers of the investee firms. We find that having close ties to an investee leads to more timely investments only when the funds are closely monitored. For poorly monitored funds, we find that having close ties can lead to less timely investments. Further examination shows that the reduced timeliness of connected funds is driven by a reluctance to withdraw holdings prior to weak investee performance. We interpret this as agency conflicts from delegated portfolio management reducing the information sharing role of close ties and leading to collusion when the counter party is in need. The findings suggest that close ties lead to timely investment decisions only when the informed parties are free of agency conflicts.

    Keywords: social ties; Conflict of Interests; Asset Management; Investment Portfolio; Networks; Financial Services Industry; China;

    Citation:

    Gao, Xinzi, T.J. Wong, Lijun Xia, and Gwen Yu. "Friends with Close Ties: Asset or Liability? Evidence from the Investment Decisions of Mutual Funds in China." Harvard Business School Working Paper, No. 14-086, March 2014. View Details
  2. 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 take into account not only the propensity for foreign firms to commit violations of U.S. securities laws but also the costs that investors face when suing foreign firms. 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 attributable to higher transaction costs in uncovering and pursuing litigation against foreign firms. 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 evidence suggests that litigation risk of foreign firms is constrained by transaction costs, but the effect of transaction cost can be significantly reduced in the presence of quality information triggers that reveal potential misconduct of the firm.

    Keywords: Litigation Risk; Cross Listing; bonding; 10b-5; Securities Litigation; U.S.Listing; Class Action; Risk and Uncertainty; Debt Securities; Globalized Firms and Management; Ethics; Lawsuits and Litigation; United States;

    Citation:

    Cheng, Beiting, Suraj Srinivasan, and Gwen Yu. "Securities Litigation Risk for Foreign Companies Listed in the U.S." Harvard Business School Working Paper, No. 13-036, October 2012. (Revised March 2014.) View Details
  3. 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. Our results highlight that when disclosure takes the form of verbal communication, the complexity in the narrative impacts the market reaction to the disclosure.

    Keywords: complexity; Voluntary Disclosure; Capital market consequences; Non-plain English; Communication Intention and Meaning; Spoken Communication; Capital Markets; Complexity; Outcome or Result; Cross-Cultural and Cross-Border Issues;

    Citation:

    Brochet, Francois, Patricia L. Naranjo, and Gwen Yu. "Capital Market Consequences of Linguistic Complexity in Conference Calls of Non-U.S. Firms." Harvard Business School Working Paper, No. 13-033, October 2012. (Revised August 2013, March 2014.) View Details
  4. 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. However, the path from available credit to firm profitability varies significantly between small firms and large firms. More domestic credit allows small firms to increase their leverage ratio but has no effect on the leverage ratio of large firms, presumably because the smaller firms are the marginal borrowers. However, large firms still benefit more from domestic credit because they have higher leverage ratios to begin with, and countries with more available domestic credit have lower borrowing costs. Finally, we show that large increases in domestic credit are followed by significant increases in the financing contribution to ROE in the subsequent year. This is not true for large decreases in domestic credit suggesting that firms are able to access credit in other countries during a financial crisis.

    Keywords: Domestic Credit; Return of Equity; Corporate performance; financial statement analysis; Financial Statements; Valuation; Cost of Capital; Asset Pricing; Economic Growth;

    Citation:

    Lundholm, Russell, George Serafeim, and Gwen Yu. "FIN Around the World: The Contribution of Financing Activity to Profitability." Harvard Business School Working Paper, No. 13-011, July 2012. (Revised March 2014.) View Details

Cases and Teaching Materials

  1. Lehman Brothers and Repo 105

    The collapse of Lehman Brothers in 2008 was the largest bankruptcy in US history. The case examines the economics of the off-balance sheet transactions Lehman undertook prior to the collapse, and highlights the corporate governance challenges in situations where firms face capital market pressure and market downturns. In particular, the case examines the financial accounting, auditing and internal management control practices around the Repo 105 transactions, which had a significant effect on the leverage position of the company. Based on the findings of the bankruptcy examiner's report, the case focuses on the role that management, external auditors, and the audit committee played in what amounted to a significant control failure.

    Keywords: Accounting; Policy; Accounting Audits; Corporate Governance; Financial Instruments; Risk Management; Financial Services Industry;

    Citation:

    Mikes, Anette, Gwen Yu, and Dominique Hamel. "Lehman Brothers and Repo 105." Harvard Business School Case 112-050, October 2011. (Revised December 2013.) View Details
  2. 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; Global Range; Local Range; Competitive Strategy; Global Strategy; Globalized Economies and Regions; Financial Reporting; International Accounting; Hong Kong;

    Citation:

    Ramanna, Karthik, Gwen Yu, and G.A. Donovan. "China or the World? A Financial Reporting Strategy for Hong Kong's Capital Markets." Harvard Business School Case 112-035, September 2011. (Revised August 2013.) View Details
  3. 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; International Accounting; Private Equity; Investment; Globalized Markets and Industries; Information Management; Standards; Valuation;

    Citation:

    Yu, Gwen. "Bridging the GAAPs." Harvard Business School Case 111-114, March 2011. (Revised September 2014.) (Included in Harvard Business School's Premier Case Collection.) View Details