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. How to Pay for Health Care

    Michael E. Porter and Robert S. Kaplan

    The United States stands at a crossroads in how to pay for health care. Fee for service, the dominant model in the United States and many other countries, is now widely recognized as perhaps the biggest obstacle to improving health care delivery. A battle is currently raging, outside of the public eye, between the advocates of two radically different payment approaches: capitation and bundled payments. The stakes are high, and the outcome will define the shape of the health care system for many years to come, for better or for worse. In this article, the authors argue that although capitation may deliver modest savings in the short run, it brings significant risks and will fail to fundamentally change the trajectory of a broken system. The bundled payment model, in contrast, triggers competition between providers to create value where it matters—at the individual patient level—and puts health care on the right path. The authors provide robust proof-of-concept examples of bundled payment initiatives in the United States and abroad, address the challenges of transitioning to bundled payments, and respond to critics' concerns about obstacles to implementation.

    Keywords: Health Care and Treatment; Finance; Health Industry; United States;

    Citation:

    Porter, Michael E., and Robert S. Kaplan. "How to Pay for Health Care." Harvard Business Review 94, nos. 7-8 (July–August 2016): 88–100. View Details
  2. Local Currency Sovereign Risk

    Wenxin Du and Jesse Schreger

    We introduce a new measure of emerging market sovereign credit risk: the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross-currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency–denominated debt, local currency credit spreads have lower means, lower cross-country correlations, and lower sensitivity to global risk factors. We discuss several major sources of credit-spread differentials, including positively correlated credit and currency risk, selective default, capital controls, and various financial market frictions.

    Keywords: Risk and Uncertainty; Sovereign Finance; Currency; Emerging Markets;

    Citation:

    Du, Wenxin, and Jesse Schreger. "Local Currency Sovereign Risk." Journal of Finance 71, no. 3 (June 2016): 1027–1070. View Details
  3. The Costs of Sovereign Default: Evidence from Argentina

    Jesse Schreger and Benjamin Hebert

    We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. We find that a 10% increase in the probability of default causes a 6% decline in the value of Argentine equities and a 1% depreciation of a measure of the exchange rate. We examine the channels through which a sovereign default may affect the economy.

    Keywords: Sovereign Finance; Argentina;

    Citation:

    Schreger, Jesse, and Benjamin Hebert. "The Costs of Sovereign Default: Evidence from Argentina." NBER Working Paper Series, No. 22270, May 2016. View Details
  4. Risk Neglect in Equity Markets

    Malcolm Baker

    The link between measures of risk and return within the equity market has been very weak over the past 47 years: in the United States, returns on high-risk stocks have cumulatively fallen short of the returns on low-risk stocks, during a period when the equity market as a whole experienced high returns relative to Treasury bills. In the spirit of Fischer Black’s 1993 article “Beta and Return,” published in this journal, the author takes seriously the idea that this evidence reflects a risk anomaly—a mispricing of risk for behavioral and institutional reasons—and revisits the associated implications for investing and corporate finance, examining asset allocation, high leverage in financial firms, low leverage in industrial firms, private equity, venture capital, and bank capital regulation along the way. Many of these implications fit nicely with Black’s original conjectures, and the author highlights refinements and additions to the original list.

    Keywords: Asset allocation; Equity Investment; Behavioral Finance; Private Equity;

    Citation:

    Baker, Malcolm. "Risk Neglect in Equity Markets." Journal of Portfolio Management 42, no. 3 (Spring 2016): 12–25. View Details
  5. Doctor My Eyes: The Acquisition of Bausch & Lomb by Warburg Pincus (A)

    Nori Gerardo Lietz

    In early 2010, senior partners at Warburg Pincus met to review a report on Bausch & Lomb Incorporated, the firm's largest investment at the time. Warburg Pincus had led a group of investors in acquiring Bauch & Lomb on October 26, 2007, taking the company private and becoming its largest and controlling shareholder. Since the acquisition, there had been significant progress at Bausch & Lomb through changes in senior leadership and in its business model. But, shortly after the second anniversary of the investment, the senior partners were beginning to question whether the depth and pace of change was enough. They had some tough decisions to make.

    Keywords: private equity; health care; Mergers & Acquisitions; governance; buyout; Private Equity; Finance; Mergers and Acquisitions; Health Industry; Consumer Products Industry; Pharmaceutical Industry; United States;

    Citation:

    Lietz, Nori Gerardo. "Doctor My Eyes: The Acquisition of Bausch & Lomb by Warburg Pincus (A)." Harvard Business School Case 216-021, April 2016. (Revised July 2016.) View Details
  6. JPMorgan Chase after the Financial Crisis: What is the optimal scope of the largest bank in the U.S.?

    David Collis and Ashley Hartman

    When Jamie Dimon took over as CEO of JPMorgan Chase & Co. (JPMorgan Chase) in 2005 he reaffirmed the commitment to pursue a "Universal Bank" strategy—providing a full range of products and services to both retail and wholesale clients. Yet the merits of the universal bank had long been disputed. After 2008, the Financial Crisis and subsequent Great Recession damaged many global and domestic financial services firms. While the Government bailed out universal banks and monoline financial institutions alike, both governments and public clamored for action against banks they deemed "too big to fail." Regulators around the world stepped in to increase capital requirements while the U.S. government passed the Dodd-Frank bill, which improved transparency and accountability, and, with the Volcker Rule, limited banks' ability to pursue proprietary trading. In response, many financial institutions reduced their scope and reshaped their portfolios.
    In this context, JPMorgan Chase, the largest bank in the U.S. by assets since 2011, which had successfully weathered the financial crisis in part due to the benefits of diversification, emerged with a "fortress balance sheet" and an improved position in the banking league tables. Nevertheless, the bank faced pressure from many directions, including large civil fines to settle, analysts' arguments about its "conglomerate discount," and regulation that penalized size, interconnectedness and complexity. Despite the pressure, Jamie Dimon remained vocal in advocating for the value of a broad scope, large scale financial services firm. However, questions remained about the optimal scope of the bank, and how JPMorgan Chase could best allocate resources across its diverse lines of business in the face of new regulations designed to limit size and complexity.

    Keywords: corporate strategy; scope; financial crisis; banking industry; financial services industry; Regulatory Reforms; Universal Banking; Synergy; optimization; Simplification; diversification; Finance; Strategy; Business Strategy; Consolidation; Corporate Strategy; Diversification; Banking Industry;

    Citation:

    Collis, David, and Ashley Hartman. "JPMorgan Chase after the Financial Crisis: What is the optimal scope of the largest bank in the U.S.?" Harvard Business School Case 716-448, March 2016. (Revised May 2016.) View Details
  7. Michael Milken: The Junk Bond King

    Tom Nicholas and Matthew G. Preble

    Michael Milken, an investment banker who dominated the junk bond market in the 1980s, was sentenced to jail in 1990 after pleading guilty to a number of securities and tax related felonies. In the preceding decade, Milken had helped usher in a new wave of leveraged buy outs (LBOs) and greatly changed the structure of corporate America. By the late 1980s though, Milken and junk bonds became more heavily scrutinized, and Milken was eventually implicated in a number of felonious acts. Even after his admission of guilt, however, observers remained divided on what Milken's true impact had been. Was he simply a misunderstood financial innovator who democratized access to capital? Or was he driven purely by greed and by nefarious personal financial motives?

    Keywords: junk bonds; high-yield bonds; financial innovation; shareholder value; Bonds; Capital; Capital Structure; Cost of Capital; Crime and Corruption; Entrepreneurship; Ethics; Finance; Investment Banking; Leveraged Buyouts; Mergers and Acquisitions; Ownership; Private Equity; Restructuring; United States;

    Citation:

    Nicholas, Tom, and Matthew G. Preble. "Michael Milken: The Junk Bond King." Harvard Business School Case 816-050, March 2016. View Details
  8. Debt and Democracy: The New York Constitutional Convention of 1846

    David Moss and Dean Grodzins

    On September 23, 1846, delegates to New York State's constitutional convention prepared to vote on a proposal that its principal proponent, Michael Hoffman, conceded would be “a serious change in our form of government.” The proposal would place tight restrictions on state debt, which had increased sharply over the previous eight years. Anti-debt reformers had long agitated for such an amendment. The version presented to the convention in 1846 would place a cap on state debt of one million dollars, which could only be exceeded for two reasons: if lawmakers faced an extraordinary emergency, such as an invasion or insurrection, or—alternatively—if they (1) contracted the additional debt for a specific purpose, (2) enacted an associated tax sufficient to pay off the additional debt within 18 years, and (3) obtained approval for the tax from a majority of voters in a state-wide referendum. Critics denounced the idea of a debt-restriction amendment as unnecessary, unworkable, and subversive of republican government; they also objected that it would reverse three decades of state policy regarding “public improvements,” dating back to 1817, when New York undertook the celebrated Erie Canal. Yet popular support for a constitutional restriction on state borrowing appeared to be rising. Now, at last, the convention was about to vote on the proposal.

    Keywords: Sovereign Finance; Governance; Laws and Statutes; Government and Politics;

    Citation:

    Moss, David, and Dean Grodzins. "Debt and Democracy: The New York Constitutional Convention of 1846." Harvard Business School Case 716-049, February 2016. View Details
  9. How to Turn Around a Country

    Paul Kazarian and George Serafeim

    Change is hard. Especially trying to change an entire country and its public sector that consists of more than 650,000 employees and has an annual budget of approximately 80 billion euros. This is the case of Greece, once the fastest-growing eurozone country, which has experienced devastating value destruction in the past seven years because of bad management.

    Keywords: Greece; Europe; European Union; turnaround; accounting; accountability; economic growth; leadership; Change; Sovereign Finance; Leadership; Corporate Accountability; Public Sector; Accounting; Economic Growth; Change; European Union; Greece;

    Citation:

    Kazarian, Paul, and George Serafeim. "How to Turn Around a Country." Kathimerini (January 19, 2016). View Details
  10. Introduction: New Perspectives on Corporate Capital Structure

    Viral Acharya, Heitor Almeida and Malcolm Baker

    The National Bureau of Economic Research held a symposium titled "New Perspectives on Corporate Capital Structures" on April 5–6, 2013 in Cambridge, Massachusetts. In its call for the submission of theoretical and empirical papers for the symposium, the NBER noted that the global financial crisis of 2007–2008 and its aftermath have focused attention on the growing use of leverage by financial intermediaries and on the evolving structure of corporate debt markets—and given rise to new questions about the private and social costs and benefits of leverage and, in particular, the role of leverage in affecting the likelihood and extent of systemic financial distress. On the other hand, rising levels of cash on hand at many non-financial firms have highlighted a "low-leverage puzzle" and raised questions about the implications of cash holdings for corporate investment and economic growth.

    Keywords: Capital Structure; Economic Growth; Financial Crisis; Corporate Finance;

    Citation:

    Acharya, Viral, Heitor Almeida, and Malcolm Baker. "Introduction: New Perspectives on Corporate Capital Structure." Journal of Financial Economics 118, no. 3 (December 2015): 551–552. View Details
  11.  
See all faculty publications on Finance »