Ethan Rouen is an assistant professor of business administration in the Accounting and Management Unit, where he teaches the elective course Reimagining Capitalism.
His current research interest focuses on understanding what gives rise to income inequality and how best to measure inequality to develop better strategies for addressing this issue. In 2018, he was awarded the Best Dissertation Award from the Financial Accounting and Reporting Section of the American Accounting Association. In 2017, he was awarded the Deloitte Foundation Wildman Medal from the American Accounting Association for recent research that has had the greatest impact on the practice of accounting. His research has been published in The Accounting Review, Management Science, andReview of Accounting Studies, and his journalism and opinion articles have appeared in the Boston Globe,HuffPo, The Hill, CEOWORLD Magazine, and Fortune.com, among others. He appears frequently in national and international media outlets, discussing income inequality and issues related to corporate taxes.
Professor Rouen earned a BA in history and English from the University of Wisconsin-Madison, and an MS in journalism at Columbia University Graduate School of Journalism. From Columbia Business School, he received an MBA in finance and accounting, an M.Phil. in accounting, and a PhD in accounting.
We investigate the relation between the growth in corporate profits and the overall U.S. economy, focusing on the impact of the U.S. corporate tax regime on this relation. We document that the growth of corporate profits, on average, has outpaced the growth of the economy, and this disconnect increases as the difference between the corporate income tax rate of the U.S. and the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.
I develop measures of firm-level pay disparity and examine their relation to firm performance. Using comprehensive compensation data for a large sample of firms, I find no statistically significant relation between the ratio of CEO-to-mean employee compensation and performance. I next create empirical models that allow me to separate the components of CEO and employee compensation explained by economic factors from those that are not and use these models to estimate explained and unexplained pay disparity. After validating my estimate of unexplained pay disparity as a proxy for pay fairness, I find robust evidence of a negative (positive) relation between unexplained (explained) pay disparity and future firm performance.
Using a novel dataset that comprehensively classifies the quantitative disclosures in firms' 10-Ks, we show that disclosures of income-statement items stemming from ancillary business activities or transitory shocks are frequent and economically significant, and increasingly so over time. Adjusting GAAP earnings to exclude these items creates a measure of core earnings that effectively distinguishes between the persistent and transitory components of GAAP earnings and that forecasts future performance. Analysts and market participants are slow to impound the implications of these items. Trading strategies that exploit cross-sectional differences in firms' non-core earnings produce abnormal returns of approximately 8% per year.
Suresh Nallareddy, Ethan Rouen and Juan Carlos Suárez Serrato
This paper studies the effects of corporate tax changes on income inequality. Using state corporate tax rate changes as a setting, we show that cutting state corporate tax rates leads to increases in income inequality. This result is robust to using regression and matching approaches, and to controlling for a host of potential confounders. Contrary to the effects of tax cuts, we find no effects of tax increases on income inequality at the state level. We then use data from the IRS Statistics of Income to explore the mechanism behind the rise in income inequality. We find tax cuts lead to higher reported capital income and a decrease in wage and salary income. These effects are concentrated among top earners, and we find no effects for those reporting less than $200,000 in income. This result provides evidence that one mechanism for the relation between tax cuts and inequality is that wealthy individuals shift their income to reduce taxes while others do not. Finally, we explore the effects of corporate tax cuts on capital investment using data from the Annual Survey of Manufactures. We find that tax cuts lead to an increase in real investment, suggesting a trade-off between investment and inequality at the state level. This paper studies the effects of corporate tax changes on income inequality. Using state corporate tax rate changes as a setting, we show that cutting state corporate tax rates leads to increases in income inequality. This result is robust to using regression and matching approaches, and to controlling for a host of potential confounders. Contrary to the effects of tax cuts, we find no effects of tax increases on income inequality at the state level. We then use data from the IRS Statistics of Income to explore the mechanism behind the rise in income inequality. We find tax cuts lead to higher reported capital income and a decrease in wage and salary income. These effects are concentrated among top earners, and we find no effects for those reporting less than $200,000 in income. This result provides evidence that one mechanism for the relation between tax cuts and inequality is that wealthy individuals shift their income to reduce taxes while others do not. Finally, we explore the effects of corporate tax cuts on capital investment using data from the Annual Survey of Manufactures. We find that tax cuts lead to an increase in real investment, suggesting a trade-off between investment and inequality at the state level.
This paper offers guidance and shares collective wisdom for accounting Ph.D. students who will be entering the academic job market. It is divided into two sections. The first offers subjective advice on the dissertation process—from choosing a topic to surviving the inevitable self-doubt—from my personal experience and the experiences of other former job candidates. The second section focuses mainly on factual components of the job market, providing details that will be useful to candidates before they begin the search. It concludes with subjective advice on how to make the job hunt more enjoyable. Both sections are organized chronologically and attempt to be comprehensive, beginning with choosing a dissertation topic and adviser, and concluding with the decision to accept an offer.
We investigate the relation between the growth in corporate profits and the overall U.S. economy, focusing on the impact of the U.S. corporate tax regime on this relation. We document that the growth of corporate profits, on average, has outpaced the growth of the economy, and this disconnect increases as the difference between the corporate income tax rate of the U.S. and the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.
I develop measures of firm-level pay disparity and examine their relation to firm accounting performance. Using comprehensive compensation data for a large sample of firms, I find no statistically significant relation between the ratio of CEO-to-mean employee compensation and performance. I next create empirical models that allow me to separate the components of CEO and employee compensation explained by economic factors from those that are not and use these models to estimate explained and unexplained pay disparity. After validating my estimate of unexplained pay disparity as a proxy for pay fairness, I find robust evidence of a negative (positive) relation between unexplained (explained) pay disparity and future firm performance. Additional tests show that the negative relation between unexplained disparity and firm performance is driven by firms where both the CEO is overpaid and employees are underpaid and is more pronounced for firms with weak corporate governance and high employee turnover.
Tiffany Pham taught herself to code and created a technology platform, Mogul, with the goal of providing girls and women around the world with information and opportunities. After several years Mogul had reached more than 146 million women around the world and had measurable outcomes in increasing the diversity of talent pipelines for major Fortune 500 companies that served as its clients. The case explores Pham’s journey in building Mogul and the idea of moving into other business lines, such as media or venture capital, making Mogul not just a place for people to connect but also a global brand.
Serafeim, George, Ethan Rouen, and Sarah Gazzaniga. "Redefining Mogul." Harvard Business School Case 120-043, March 2020. (Revised May 2020.)
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Serafeim, George, Ethan Rouen, and David Freiberg. "SK Group: Social Progress Credits." Harvard Business School Teaching Plan 120-112, May 2020.
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SK Group was one of the largest companies South Korea. A family-run conglomerate consisting of around 120 subsidiaries and employing more than 100,000, SK was tightly knit into the fabric of Korean society. SK viewed their future success as contingent upon the strength of the societal ecosystem in which they operated. As such, the company had a long history of philanthropic giving. However, SK questioned if their donations were producing the desired impact, as many of the societal issues they, and the rest of Korean society, sought to address were not improving. In order to create a new system of generating social value, SK established the Social Progress Credit (SPC) initiative. The SPC initiative designed a measurement methodology that was used to measure the social value created by social enterprises – firms whose mission was to generate social value in conjunction with generating sustainable financial returns. Additionally, the SPC initiative provided monetary incentives to social enterprises in proportion to the social value generated by participating social enterprises. Looking to the future, SK envisioned a marketplace in which SPC’s were traded among investors and credits were priced by the market. Initial results of the SPC initiative were positive, showing positive growth in social value created and financial stability of social enterprises. How then could SK convince other public and private organizations to adopt the SPC model and promote social value? Moreover, how could SK convince mainstream capital markets to make investments into society enterprises on the basis of the social value creation? More importantly, was this attempt to enrich and grow the ecosystem of social value creation making a difference?
Liz O’Sullivan, an employee at a fast-growing technology company called Clarifi, had a moral dilemma: She disagreed with Clarifi’s decision to sell its image-recognition technology to the U.S. Department of Defense for possible use in weaponized drones. This case examines her career to this point and the potential ways in which she can address her concerns. The CEO has been receptive to her ideas, but there is little chance he will cancel the contract. She can either continue to advocate internally, or she can quit. If she quits, she wonders whether she should leak the details of the contract—and her decision to quit—to the media. The case contrasts her dilemma—in the voice-loyalty-exit framework—with that of Jack Poulson, a senior Google employee who quit the company in protest over Google's decision to build a censored search engine for the Chinese market.
Di Maggio, Marco, Ethan Rouen, and George Serafeim. "Facebook's Libra: The Privatization of Money?" Harvard Business School Teaching Note 220-048, December 2019.
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Rouen, Ethan, and Akari Furukawa. "Income Inequity and Income Inequality." Harvard Business School Background Note 120-062, December 2019. (Revised March 2020.)
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TJX Companies reported a CEO pay ratio of 1,596-to-1 in 2019, leaving board chair Carol Meyrowitz with a host of questions about whether, and how, she could take action to address concerns raised by having one of the highest pay ratios in the S&P 500. As a retail company, TJX had 270,000 employees, many making about $10 an hour. On the other hand, CEO Ernie Hermann made $19 million in 2019 as he successfully steered the company through the tumultuous retail environment. Meant to be read in tandem with the research note “Income Inequity and Income Inequality,” this case examines the current disclosures companies make related to income inequality and asks whether they are sufficient or how they can be improved. This discussion around disclosure also provides opportunities to examine the role of the firm in creating income inequality and how the firm should balance its obligations to shareholders and employees when those obligations may be in conflict. Lastly, the case and note address the CEO pay setting process to give students an understanding of how pay is determined.
Rouen, Ethan, and Susanna Gallani. "Tapping Growth at Lord Hobo PowerPoint Supplement." Harvard Business School PowerPoint Supplement 120-708, October 2019.
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Rouen, Ethan, and Susanna Gallani. "Tapping Growth at Lord Hobo Brewing Company Spreadsheet Supplement (Instructor)." Harvard Business School Spreadsheet Supplement 120-707, October 2019.
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Rouen, Ethan, and Susanna Gallani. "Tapping Growth at Lord Hobo Brewing Company Spreadsheet Supplement (Student)." Harvard Business School Spreadsheet Supplement 120-706, October 2019.
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Rouen, Ethan, and Susanna Gallani. "Tapping Growth at Lord Hobo Brewing Company." Harvard Business School Teaching Note 120-023, September 2019.
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JUST Capital is a nonprofit organization that seeks to make public companies more "just" by measuring and ranking their overall impact on society, based on the priorities most important to the average American. This case examines JUST’s strategy for influencing corporate behavior in the broader context of contemporary concerns about Capitalism. The case explores the extent to which Capitalism is broken, whether JUST Capital's performance evaluation rubric is relevant to corporate managers, and whether its strategies for exerting influence are likely to be effective in improving corporate behavior.
Lord Hobo Brewing Company accounts for its inventory process as it prepares to create its first set of professional financial statements for investors.
Rouen, Ethan, and Suraj Srinivasan. "JOE & THE JUICE Crosses the Atlantic (with video links)." Harvard Business School Teaching Note 118-075, March 2018.
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As JOE & THE JUICE began its rapid U.S. expansion in 2017, its founder and CEO, Kaspar Basse, fretted about how he could keep his employees feeling like they were doing meaningful work. Founded in 2001, JOE & THE JUICE had always focused on making healthy juices, banning prepackaged or processed foods, and providing meaningful work for front-line food services employees. To instill employees with a sense of ownership, JOE & THE JUICE had developed a transparent promotion and compensation scheme, a rigid training program, and an explicit promise to promote only from within (the CFO was 31-years-old and had spent a decade working at the company). On the other hand, employees were encouraged to make the juice bars their homes. There were no required uniforms or scripts on how to interact with customers. This strategy had led to great success in Europe. In a decade, JOE & THE JUICE had spread across the continent and was immensely profitable. But as it moved into the United States and prepared for a potential IPO, the company began struggling to retain talent and worried about how it could successfully import its internal culture while maintaining its rapid growth.
