Subprime Crisis and Fair-Value Accounting

Paul M. Healy; Krishna G. Palepu; George  Serafeim

Case | HBS Case Collection | October 2008 (Revised August 2009)

Subprime Crisis and Fair-Value Accounting

by Paul M. Healy, Krishna G. Palepu and George Serafeim

Abstract

This case examines the challenges in implementing fair value accounting for mortgage instruments, the role of accounting in the sub-prime crisis, and proposals for revising accounting standards given the crisis.

Keywords: Fair Value Accounting; Financial Crisis; Debt Securities; Mortgages; Standards;

Format: Print

26 pages

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Citation:

Healy, Paul M., Krishna G. Palepu, and George Serafeim. "Subprime Crisis and Fair-Value Accounting." Harvard Business School Case 109-031, October 2008. (Revised August 2009.)

In the face of accelerating climate change, investors are making capital allocations seeking to decarbonize portfolios by reducing the carbon emissions of their holdings. To understand the performance of portfolio decarbonization strategies and investor behavior towards decarbonization we construct decarbonization factors that go long low carbon intensity sectors, industries, or firms and short high carbon intensity. We consider several portfolio formation strategies and find strategies that lowered carbon emissions more aggressively performed better. Decarbonization factor returns are associated with contemporaneous institutional flows into the factors. Buying decarbonization factors when coincident flows are positive while selling when they are negative produces significantly positive alphas. Combining decarbonization factors that have positive contemporaneous flows would provide investors with significantly superior returns and continuous exposure to low carbon portfolios. The results are more pronounced in Europe relative to the US. Our results suggest that institutional investor flows contain information about anticipated fundamentals related to climate change developments.

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Subprime Crisis and Fair-Value Accounting

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Subprime Crisis and Fair-Value Accounting

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