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. Eastman Kodak Company: Restructuring a Melting Ice Cube

    Stuart C. Gilson, John D. Dionne and Sarah L. Abbott

    In May 2013, senior managers of GSO Capital Partners, an $80 billion credit-oriented investment firm owned by The Blackstone Group, are considering what to do next with their investment in the senior secured debt of Eastman Kodak Company. Once a great company and an icon of American business, Kodak had fallen on desperately hard economic times as its traditional business of manufacturing cameras and photographic film had all but disappeared with the rise of digital photography, causing its annual revenues to plummet from $13 billion to $6 billion, and its stock price to fall by 95%, between 2003 and 2011. Having taken various positions in Kodak's debt during the previous four years, GSO is now faced with a major decision. Under the company's recently proposed plan of reorganization, secured creditors were to be given 85% of the company's common stock, but unsecured creditors objected to the plan. Now, six months later, GSO has brought an amended plan to the table, under which it would commit to backstop a $406 million equity rights offering that would be made directly to all the unsecured creditors. This offer might bring the objecting creditors on board, but could also require an additional large capital commitment by GSO, which was already heavily invested in a highly troubled business that many viewed as a "melting ice cube."

    Keywords: Restructuring; Finance; Strategy; Investment; United States;

    Citation:

    Gilson, Stuart C., John D. Dionne, and Sarah L. Abbott. "Eastman Kodak Company: Restructuring a Melting Ice Cube." Harvard Business School Case 216-006, August 2015. View Details
  2. A Comparative-Advantage Approach to Government Debt Maturity

    Robin Greenwood, Samuel G. Hanson and Jeremy C. Stein

    We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of short-term, money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk and, hence, should aim to partially crowd out the private sector's use of short-term debt.

    Keywords: Sovereign Finance; Debt Securities;

    Citation:

    Greenwood, Robin, Samuel G. Hanson, and Jeremy C. Stein. "A Comparative-Advantage Approach to Government Debt Maturity." Journal of Finance 70, no. 4 (August 2015): 1683–1722. (Internet Appendix Here.) View Details
  3. Dollar Funding and the Lending Behavior of Global Banks

    Victoria Ivashina, David S. Scharfstein and Jeremy C. Stein

    A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing the funding provided to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.

    Keywords: banks; global banks; credit supply; dollar funding; International Finance; Banks and Banking; Banking Industry;

    Citation:

    Ivashina, Victoria, David S. Scharfstein, and Jeremy C. Stein. "Dollar Funding and the Lending Behavior of Global Banks." Quarterly Journal of Economics 130, no. 3 (August 2015): 1241–1281. View Details
  4. The Valuation and Financing of Lady M Confections

    Mihir A. Desai and Elizabeth A. Meyer

    This case explores the decision-making process that small, private businesses must undertake when considering an expansion and when selling equity to outside investors. In the process, students are asked to complete two exercises: a break-even analysis and a valuation exercise.

    Keywords: lady m; bakery; foodservice industry; valuation; Breakeven analysis; restaurant industry; Forecasting; forecast; financial analysis; Borrowing and Debt; Corporate Finance; Equity; Financial Management; Financial Strategy; Finance; Food; Valuation; Food and Beverage Industry; New York (city, NY);

    Citation:

    Desai, Mihir A., and Elizabeth A. Meyer. "The Valuation and Financing of Lady M Confections." Harvard Business School Case 215-047, June 2015. View Details
  5. Venture Republic, 2011

    W. Carl Kester and Mayuka Yamazaki

    In December 2011, the founders of Venture Republic, a Japanese developer and operator of on-line search engines for shopping and travel, faced a decison about whether or not to take the company private in a management buyout transaction just three years after an initial public offering in Japan. To arrive at a suitable recommendation, students must value the enterprise at a time when its growth was just beginning to accelerate following the financial crisis; determine an appropriate capital structure and loan package for the company; and establish a viable management buyout process (MBO) in which potential conflicts of interest between the buying owner-managers and the selling shareholders can be appropriately managed. The advantages and disadvantages of public versus private ownership are also a focal point of this case study.

    Keywords: management buyout; MBO; valuation methodologies; Financing and Lloans; financing decisions; conflicts of interest; governance; Japan; search engines; going private; Valuation; Financing and Loans; Finance; Conflict of Interests; Corporate Governance; Web Services Industry; Japan;

    Citation:

    Kester, W. Carl, and Mayuka Yamazaki. "Venture Republic, 2011." Harvard Business School Case 215-076, May 2015. View Details
  6. West Coast Chill

    William A. Sahlman, Robert F. White and Stephanie Puzio

    The fall of 2010 marked the 20th year that Mitchell Joseph, a fourth generation beverage executive, serial entrepreneur, and the founder of the Joseph Company (the "Company"), had been working on developing the technology for a self-chilling can. Mitchell was at an impasse and had some important decisions to make. The latest versions of the self-chilling can technology (Phase 2 and 3) were showing encouraging progress, cooling liquid in aluminum cans by approximately 30°F in less than three minutes. He was sure that this product performance would make the can attractive to beverage companies around the world.

    Keywords: entrepreneurial finance; entrepreneurship; finance; Entrepreneurship; Finance; Food and Beverage Industry; United States;

    Citation:

    Sahlman, William A., Robert F. White, and Stephanie Puzio. "West Coast Chill." Harvard Business School Multimedia/Video Case 815-704, March 2015. View Details
  7. Price Dynamics in Partially Segmented Markets

    Robin Greenwood, Samuel Gregory Hanson and Gordon Y. Liao

    We develop a dynamic model of financial markets in which capital moves quickly within a given asset class, but more slowly across markets for different asset classes. In our model, most investors specialize in a single asset class such as government bonds, corporate bonds, or equities. However, a smaller number of generalist investors can flexibly allocate capital across markets, albeit only gradually. Short-run demand curves for individual asset classes are steeply downward-sloping and prices of risk in one market may be temporarily disconnected from those in others. Over the long-run, capital flows across the boundaries of asset classes and prices of risk are more closely aligned. Nonetheless, different markets are not perfectly integrated even in the long run because cross-market arbitrageur is risky. Using this framework, we show how supply shocks in one asset class are transmitted over time to other asset classes and how specialist and generalist investors trade in response. While prices of a given asset class initially overreact to a supply shock in that market, under plausible conditions, prices underreact in related markets. We explore several applications, including the design and impact of central bank asset purchase programs, and the role of corporate issuance in promoting market integration.

    Keywords: Capital Markets; Asset Pricing; Behavioral Finance;

    Citation:

    Greenwood, Robin, Samuel Gregory Hanson, and Gordon Y. Liao. "Price Dynamics in Partially Segmented Markets." Working Paper, March 2015. View Details
  8. Longbow Capital Partners

    Malcolm Baker, Samuel G. Hanson and James Weber

    Longbow Capital Partners is a value-oriented long/short hedge fund focused on stocks in the energy sector. In January 2011, Longbow had invested in NiSource, a Fortune 500 company that owns a diverse portfolio of regulated energy businesses. In late 2014, Longbow was deciding whether or not to maintain its position in NiSource. To make this decision, students must perform a discounted dividend analysis to determine the fundamental value of NiSource's stock. Students are also asked to perform a sum-of-the-parts analysis to assess the implications of NiSource's recent proposal to pursue a tax-advantaged spin-off of its pipeline business.

    Keywords: value investing; investment strategy; dividend yield; intrinsic value; dividend discount model; Master Limited Partnership; hedge fund; Energy Industry; regulation; utilities; Finance; Financial Services Industry; United States;

    Citation:

    Baker, Malcolm, Samuel G. Hanson, and James Weber. "Longbow Capital Partners." Harvard Business School Case 215-026, February 2015. View Details
  9. Corporate Investment and Stock Market Listing: A Puzzle?

    John Asker, Joan Farre-Mensa and Alexander Ljungqvist

    We investigate whether short-termism distorts the investment decisions of stock market listed firms. To do so, we compare the investment behavior of observably similar public and private firms using a new data source on private U.S. firms, assuming for identification that closely held private firms are subject to fewer short-termist pressures. Our results show that compared to private firms, public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news. These findings are consistent with the notion that short-termist pressures distort investment decisions.

    Keywords: Private Ownership; Public Ownership; Corporate Finance;

    Citation:

    Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist. "Corporate Investment and Stock Market Listing: A Puzzle?" Review of Financial Studies 28, no. 2 (February 2015): 342–390. View Details
  10. Financing Payouts

    Joan Farre-Mensa, Roni Michaely and Martin Schmalz

    Despite the obvious interest in payout policy, no paper to date has systematically analyzed how payouts are funded, perhaps because the answer might have appeared just too obvious: payouts are funded with free cash flow—at least over long enough time periods. In stark contrast to this commonly held view, we find that firms rely on the capital markets to finance a third of aggregate payouts, mainly with debt but also with equity. Such "financed payouts" are widespread, persistent, prevalent both among dividend-paying and repurchasing firms, and large in magnitude. Standard interpretations of agency or signaling theories are unable to explain this behavior. We argue, however, that our findings are consistent with a reinterpretation of ideas related to agency conflicts and a holistic view of corporate financial strategy that examines payout and capital structure decisions jointly.

    Keywords: Payout policy; financing decisions; debt issues; equity issues; capital structure; Capital Structure; Decision Making; Financing and Loans; Corporate Finance;

    Citation:

    Farre-Mensa, Joan, Roni Michaely, and Martin Schmalz. "Financing Payouts." Harvard Business School Working Paper, No. 15-049, December 2014. View Details
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