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. MyTime

    Juliane Begenau and Robin Greenwood

    Ethan Anderson, the CEO of San Francisco-based e-commerce company MyTime, must decide on the company's growth strategy. MyTime’s first product was a website and mobile app that offered consumers a convenient way to book appointments with local merchants throughout the United States. Student must assess the company's growth strategy and develop a model to value a prospective customer to the company's website.

    Keywords: Customer valuation; discounted cash flow; software; valuation; valuation methodologies; subscriber models; Financial Management; Corporate Finance; Information Technology Industry; North and Central America;

    Citation:

    Begenau, Juliane, and Robin Greenwood. "MyTime." Harvard Business School Case 217-026, September 2016. View Details
  2. Financial Services at Falabella (A)

    C. Fritz Foley and Agustin M. Hurtado

    In 2010, the board and senior management team of Falabella, a leading retailer with operations throughout Latin America, faced choices about what to do with its financial services division. More than 4.5 million customers had CMR credit cards that could be used in Falabella stores, and Banco Falabella competed with other banks by offering personal banking services. The case covers many of the key questions the leaders of the firm faced, including whether to allow credit card holders to use their cards for purchases outside of Falabella stores, whether to develop personal banking services further, and whether to make substantial changes to the strategy or to exit the business.

    Keywords: Consumer credit; financial management; corporate strategy; financial institutions; Personal Finance; Financial Management; Financial Strategy; Corporate Strategy; Banking Industry; Retail Industry; Latin America; Chile; Argentina; Colombia; Peru;

    Citation:

    Foley, C. Fritz, and Agustin M. Hurtado. "Financial Services at Falabella (A)." Harvard Business School Case 217-016, September 2016. View Details
  3. Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy

    Wenxin Du, Carolin E. Pflueger and Jesse Schreger

    Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption-smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency.

    Keywords: Sovereign Finance;

    Citation:

    Du, Wenxin, Carolin E. Pflueger, and Jesse Schreger. "Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy." NBER Working Paper Series, No. 22592, September 2016. View Details
  4. Blue D Pharmaceuticals

    Kevin Schulman, Emma Rasiel and Suresh Balu

    Susan Durham has just been hired as the Chief Financial Officer of Blue Devil Pharmaceuticals (BDP). Her charge is to understand the optimal pathway for the development of a novel molecule, BDP-1, to understand the cost of drug development, the market opportunity, and the optimal financing strategy for the development of this technology. The case includes a unique simulation model that examines key unknowns in making this assessment including the volatility in the financial markets, volatility in in-licensing markets. Financial strategies include: go-alone, partner with a pharmaceutical company, receive financing from a private equity firm, or there is an option to sell the molecule. Students can see how uncertainty in the development and financing strategy can impact the value of the firm to shareholders.

    Keywords: finance; entrepreneurship; Finance; Entrepreneurship;

    Citation:

    Schulman, Kevin, Emma Rasiel, and Suresh Balu. "Blue D Pharmaceuticals." Harvard Business School Case 317-014, July 2016. View Details
  5. 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
  6. The Role of Real Estate in Endowment Portfolios: The Case of Christ Church College

    David Chambers, Elroy Dimson, Arthur I Segel and Eva Steiner

    The case centers on Christ Church's Treasurer, James Lawrie, who is contemplating his options for investing a portion of the College's endowment in real estate. Approximately 1/3 of the total $690 million endowment was allocated towards real estate, much higher than the typical 4% allocation by his American counterparts. Differing from many U.S. endowments, real estate has remained a vital part of the Christ Church endowment since its founding in the mid-16th century. The College began with significant real estate holdings originally received from Henry VIII, which seeded the College's endowment. In the early 1980s, real estate represented 70% of the endowment's holdings and from 2002 to 2015, Christ Church's direct investments returned c.10% annually. Lawrie contemplates the future role of real estate in the College's portfolio, assesses the performance of the "U.S. Endowment Model," and compares Christ Church's performance against others as he weighs a variety of investment strategies including redevelopment, land sales, specialist funds, pooling capital with the other Oxford Colleges, and taking on more debt considering the once-in-a-generational low interest rates.

    Keywords: real estate; Endowment Management; endowments; United Kingdom; Oxford; portfolio allocation; Higher Education; Investment Portfolio; Property; Corporate Finance; Financial Services Industry; United Kingdom;

    Citation:

    Chambers, David, Elroy Dimson, Arthur I Segel, and Eva Steiner. "The Role of Real Estate in Endowment Portfolios: The Case of Christ Church College." Harvard Business School Case 216-086, June 2016. View Details
  7. Fiscal Rules and Sovereign Default

    Laura Alfaro and Fabio Kanczuk

    We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default modified to incorporate quasi-hyperbolic preferences. For reasons of political economy or aggregation of citizens’ preferences, government preferences are present biased, resulting in an over accumulation of debt. Calibrating this parameter with values in the literature, the model can reproduce debt levels and frequency of default typical of emerging markets even if the household impatience parameter is calibrated to local interest rates. A quantitative exercise calibrated to Brazil finds welfare gains of the optimal fiscal policy to be economically substantial, and the optimal rule to not entail a countercyclical fiscal policy. A simple debt rule that limits the maximum amount of debt is analyzed and compared to a simple deficit rule that limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule yields welfare gains virtually equal to the optimal rule.

    Keywords: Sovereign debt; hyperbolic discounting; fiscal rules; Sovereign Finance;

    Citation:

    Alfaro, Laura, and Fabio Kanczuk. "Fiscal Rules and Sovereign Default." Harvard Business School Working Paper, No. 16-134, June 2016. (Revised August 2016.) View Details
  8. 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
  9. 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
  10. 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
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