Finance

Finance is a featured research topic at Harvard Business School.
 
Our intellectual roots are based in a long line of scholars from Robert Merton whose collaborative work on risk management and option pricing won him the Nobel Prize in Economics in 1997, to John Lintner who co-created the Capital Asset Pricing Model and made significant contributions to dividend policy, and Gordon Donaldson whose work helped shape the field of corporate finance. We strive to understand how managers and firms make value-enhancing decisions; and how financial institutions, markets, and instruments contribute to this process. Our approach to research is distinguished by its unique combination of theory, empirical analysis, mathematical modeling, and field observations at companies. 
  1. Patent Trolls

    We provide theoretical and empirical evidence on the evolution and impact of non-practicing entities (NPEs) in the intellectual property space. Heterogeneity in innovation, given a cost of commercialization, results in NPEs that choose to act as "patent trolls" that chase operating firms' innovations even if those innovations are not clearly infringing on the NPEs' patents. We support these predictions using a novel, large dataset of patents targeted by NPEs. We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks). Furthermore, NPEs target firm profits arising from exogenous cash shocks unrelated to the allegedly infringing patents. We next show that NPEs target firms irrespective of the closeness of those firms' patents to the NPEs', and that NPEs typically target firms that are busy with other (non-IP related) lawsuits or are likely to settle. Lastly, we show that NPE litigation has a negative real impact on the future innovative activity of targeted firms.

    Keywords: Patent trolls; NPEs; innovation; patents; Patents; Ethics; Lawsuits and Litigation; Innovation and Invention; Corporate Finance;

    Citation:

    Cohen, Lauren, Umit G. Gurun, and Scott Duke Kominers. "Patent Trolls." Harvard Business School Working Paper, No. 15-002, July 2014. View Details
  2. Financial Policy at Apple, 2013 (A)

    By the end of 2013, Apple had $137 billion dollars in cash and marketable securities. This case explores how companies can generate such large amounts of cash and how and if they should distribute it to shareholders, especially in the face of shareholder pressure. In the process, students are asked to undertake fundamental financial analyses, including ratio analysis, a financial forecast, and a cash distribution analysis.

    Keywords: Apple; Steve Jobs; forecast; Forecasting; Forecasting and Prediction; shareholder activism; share repurchase; dividends; Financial ratios; preferred shares; cash distribution; Corporate Finance; Borrowing and Debt; Financial Management; Financial Strategy; Technology Industry; Consumer Products Industry; United States; Republic of Ireland;

    Citation:

    Desai, Mihir A., and Elizabeth A. Meyer. "Financial Policy at Apple, 2013 (A)." Harvard Business School Case 214-085, June 2014. View Details
  3. Southeastern Asset Management Challenges Buyout at Dell

    In late 2012, Michael Dell wants to take Dell Inc., the company he founded, private. Mr. Dell believes that the successful company's transformation from a personal computer (PC) manufacturer to an enterprise solutions and services provider (ESS) is dependent on going private without the short-term results scrutiny public companies face. He and a private equity firm, Silver Lake Partners, have made an offer for the company, which Dell Inc.'s board has accepted. The deal requires the vote of a majority of shareholders. Southeastern Asset Management, an investment firm, and Dell Inc.'s second largest shareholder behind Mr. Dell strongly oppose the deal because the offer is well below what Southeastern believes is Dell Inc.'s intrinsic value. Southeastern, along with activist investor Carl Icahn, wage a campaign to defeat the go-private deal and propose a leveraged recapitalization as an alternative. On several occasions it appears that the deal will be voted down by shareholders, but rule changes made by Dell Inc.'s Board eventually pave the way for Mr. Dell to take the eponymous company private—for a price only slightly higher than the original bid. The case describes the reasons why Mr. Dell wants to take Dell Inc. private, why Southeastern and Icahn oppose the deal, the specifics of both the Dell/Silver Lake bid and of Southeastern's/Icahn's leveraged recapitalization proposals, and the events that took place.

    Keywords: Leveraged Buyout Transaction; leveraged buyouts; leveraged recapitalization; management buyout; Dell, Inc.; hedge fund; corporate accountability; corporate governance; corporate governance theory; valuation; valuation ratios; valuation methodologies; board of directors; boards of directors; Carl Icahn; computer industry; computer services industries; proxy contest; proxy battles; proxy fight; proxy advisor; Financial Accounting; financial analysis; Financial ratios; corporate finance; finance; Corporate Accountability; Corporate Governance; Corporate Finance; Computer Industry; United States;

    Citation:

    Healy, Paul, Suraj Srinivasan, and Aldo Sesia. "Southeastern Asset Management Challenges Buyout at Dell." Harvard Business School Case 114-015, June 2014. View Details
  4. Comparing the Cash Policies of Public and Private Firms

    I document that public U.S. firms hold twice as much cash as large privately held firms, a surprising finding that is robust to three alternative identification strategies: matching, within-firm variation, and instrumental variable. Public firms' greater access to capital accounts for about one-quarter of the difference. The remainder can be explained by differences in the extent to which public and private firms engage in market timing in response to misvaluation shocks. I show that the risk of misvaluation induces public firms to raise capital and accumulate cash reserves when they perceive their equity to be overvalued, resulting in greater demand for precautionary cash holdings.

    Keywords: finance; equity; Private companies; Corporate cash hoarding; Precautionary motives; Market timing; Share issuance; IPOs; Private Ownership; Cash; Market Timing; Corporate Finance; Public Ownership; United States;

    Citation:

    Farre-Mensa, Joan. "Comparing the Cash Policies of Public and Private Firms." Harvard Business School Working Paper, No. 14-095, April 2014. View Details
  5. Payout Policy

    We survey the literature on payout policy, with a particular emphasis on developments in the last two decades. Of the traditional motives of why firms pay out (agency, signaling, and taxes), the cross-sectional empirical evidence is most persuasive in favor of agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts were made over the last 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motives such as changes in compensation practices and management incentives are better able to explain the observed variation in payout patterns over time than the traditional motives. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm's larger financial ecosystem, with important implications for financing, investment, and risk management.

    Keywords: finance; investment; Finance;

    Citation:

    Farre-Mensa, Joan, Roni Michaely, and Martin Schmalz. "Payout Policy." Harvard Business School Working Paper, No. 14-096, April 2014. View Details
  6. Attracting Long-Term Investors Through Integrated Thinking and Reporting: A Clinical Study of a Biopharmaceutical Company

    Faced with a large percentage of investors that chase short-term returns, companies could benefit by attracting investors with longer-term horizons and incentives that are more consistent with the long-term strategy of the company. The managers of most companies take their investor base as a “given” that cannot be changed through their actions or words. Using the case of Shire, a biopharmaceutical company with a strong commitment to the goals of improving the safety of its products and the reliability of its supply chain, the authors of this article suggest that companies have the ability and the means to change their investor base in ways that are consistent with their strategy. One of the most promising ways of attracting such investors is integrated reporting, which provides companies with a means of credibly communicating the commitment of its top leadership to diffusing integrated thinking across the organization and to building strong relationships with important external stakeholders. In the case of Shire, both a commitment to integrated thinking and the adoption of integrated reporting appear to have helped the company attract longer-term investors, which in turn has strengthened management's confidence to carry out its strategy of stakeholder engagement and investment.

    Keywords: Investing; asset management; long-term investing; Short-termism; sustainability; integrated reporting; leadership; Leadership & Corporate Accountability; pharmaceutical industry; Pharmaceuticals; Leadership; Integrated Corporate Reporting; Investment; Business and Stakeholder Relations; Corporate Finance; Biotechnology Industry; Pharmaceutical Industry;

    Citation:

    Knauer, Andrew, and George Serafeim. "Attracting Long-Term Investors Through Integrated Thinking and Reporting: A Clinical Study of a Biopharmaceutical Company." Journal of Applied Corporate Finance 26, no. 2 (Spring 2014): 57–64. View Details
  7. Financial Repression in the European Sovereign Debt Crisis

    By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely to be a loan—i.e., the loan supply contracts—when local banks have purchased more domestic sovereign debt and when that debt is risky (as measured by CDS spreads). These effects are most pronounced in the period following the second Greek bailout in early 2010.

    Keywords: Credit Cycles; Sovereign debt; Financial Repression; Sovereign Finance; Greece;

    Citation:

    Ivashina, Victoria, and Bo Becker. "Financial Repression in the European Sovereign Debt Crisis." Working Paper, April 2014. View Details
  8. Managing Change at Axis Bank (A)

    Axis Bank is India's third largest private sector bank. In April 2009, Shikha Sharma, an outsider, was appointed as its CEO. She took over from a person who had overseen ten years of rapid growth at the bank. The selection of an outsider as the new CEO surprised many inside and outside the bank. Sharma changed the bank's hierarchical culture, strengthened the core team by appointing new talent where needed, sought to build its core processes and infrastructure, and filled several gaps in its business portfolio. Despite these changes, the stock market continues to undervalue Axis Bank compared with its chief rivals. In light of this, Axis Bank needs to figure out what more it needs to do to ensure that the market values the franchise correctly.

    Keywords: Change Management; Transformation; Organizational Culture; Organizational Change and Adaptation; Leadership Style; Leading Change; Valuation; Finance; Banks and Banking; Financial Services Industry; Banking Industry; India;

    Citation:

    Healy, Paul, and Rachna Tahilyani. "Managing Change at Axis Bank (A)." Harvard Business School Case 114-082, March 2014. View Details
  9. Savings in Transnational Households: A Field Experiment Among Migrants from El Salvador

    While remittance flows to developing countries are very large, it is unknown whether migrants desire more control over how remittances are used. This research uses a randomized field experiment to investigate the importance of migrant control over the use of remittances. In partnership with a Salvadoran bank, we offered US-based migrants from El Salvador bank accounts in their home country into which they could send remittances. We randomly varied migrant control over El Salvador-based savings by offering different types of accounts across treatment groups. Migrants offered the greatest degree of control over savings accumulated the most savings at the partner bank, compared to others offered less or no control over savings. Effects of this treatment on savings are concentrated among migrants who expressed demand for control over remittances in the baseline survey. We also find positive spillovers of our savings intervention in the form of increased savings at other banks (specifically, banks in the U.S.). We interpret the effects we find as arising from the joint effect of the bank account offers and the marketing pitch made to study participants by our project staff.

    Keywords: migration; remittances; intrahousehold allocation; savings; Immigration; Diasporas; International Finance; El Salvador;

    Citation:

    Ashraf, Nava, Diego Aycinena, Claudia Martinez A., and Dean Yang. "Savings in Transnational Households: A Field Experiment Among Migrants from El Salvador." NBER Working Paper Series, No. 20024, March 2014. (Review of Economics and Statistics, accepted.) View Details
  10. ISS A/S: The Buyout

    Provides the opportunity to value a leveraged buy-out; and to examine the nature and extent of a company's responsibilities to its bondholders. Here, the context is a "going private" transaction in Europe, where the financing plan called for the addition to the company's balance sheet of a significant amount of new debt and a reshaping of the capital structure. While leveraged buyouts had been used in Europe for several years, this was likely the first LBO done with a company that had publicly traded investment grade debt outstanding. The increased debt from the deal would increase the risk to the company and to the existing bonds, and the bonds' prices would fall significantly as a result. Students can use discounted cash flow techniques to value the LBO. They can then consider the wisdom of undertaking the LBO at the offered price, and work out a sensible debt schedule for the company. Students must also evaluate the effect of the transaction on the existing bonds, and understand the principles governing contractual duties (and how they differ from fiduciary obligations) towards bondholders (accounting for a business and social culture outside the United States) in order to determine the best course of action for the private equity buyers.

    Keywords: LBO; private equity; contracts; global business; international business; Finance; Ethics; Law; Service Industry; Europe;

    Citation:

    Rose, Clayton, Carsten Bienz, and Lucy White. "ISS A/S: The Buyout." Harvard Business School Case 214-027, February 2014. View Details
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