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.

Featured Works

Working Paper | 2016
Playing Favorites: How Firms Prevent the Revelation of Bad News
Lauren Cohen, Dong Lou and Christopher J. Malloy
We explore a subtle but important mechanism through which firms can control information flow to the markets. We find that firms that “cast” their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. A long-short portfolio that exploits this differential firm behavior earns abnormal returns of up to 149 basis points per month, or almost 18 percent per year. We find similar evidence in an international sample of earnings call transcripts from the UK, Canada, France, and Japan. Firms with higher discretionary accruals, firms that barely meet/exceed earnings expectations, and firms (and their executives) that are about to issue equity, sell shares, and exercise options, are all significantly more likely to cast their earnings calls.
Keywords: Information; Strategy; Ethics;

Citation:
Cohen, Lauren, Dong Lou, and Christopher J. Malloy. "Playing Favorites: How Firms Prevent the Revelation of Bad News." Working Paper, October 2016. (Winner of 2014 Crowell Memorial Prize For the best paper on quantitative investing, PanAgora Asset Management, Inc. 2014.) View Details
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Article | American Economic Review: Papers and Proceedings | May 2014
Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment
Shawn A. Cole, Daniel Stein and Jeremy Tobacman
This paper estimates how experimentally-manipulated experiences with a novel financial product, rainfall index insurance, affect subsequent insurance demand. Using a seven-year panel, we develop three main findings. First, recent experience matters for demand, consistent with overinference from small samples. Second, spillovers also matter, in the sense that the recent payout experience of village co-residents affects insurance demand about as much as one's own recent payout experience. Third, the spillover effect decays as time passes while the effect of one's own experience does not. We discuss implications of this analysis for commercial sustainability of this complicated but promising risk management technology.

Citation:
Cole, Shawn A., Daniel Stein, and Jeremy Tobacman. "Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment." American Economic Review: Papers and Proceedings 104, no. 5 (May 2014): 284–290. View Details
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Article | Review of Financial Studies | 2014
Expectations of Returns and Expected Returns
Robin Greenwood and Andrei Shleifer
We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. The evidence is not consistent with rational expectations representative investor models of returns.
Keywords: Performance Expectations; Investment Return;

Citation:
Greenwood, Robin, and Andrei Shleifer. "Expectations of Returns and Expected Returns." Review of Financial Studies 27, no. 3 (March 2014): 714–746. (Internet Appendix Here.) View Details
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Article | Journal of Financial Economics | August 2014
Mortgage Convexity
Samuel G. Hanson
Most home mortgages in the United States are fixed-rate loans with an embedded prepayment option. When long-term rates decline, the effective duration of mortgage-backed securities (MBS) falls due to heightened refinancing expectations. I show that these changes in MBS duration function as large-scale shocks to the quantity of interest rate risk that must be borne by professional bond investors. I develop a simple model in which the risk tolerance of bond investors is limited in the short run, so these fluctuations in MBS duration generate significant variation in bond risk premia. Specifically, bond risk premia are high when aggregate MBS duration is high. The model offers an explanation for why long-term rates could appear to be excessively sensitive to movements in short rates and explains how changes in MBS duration act as a positive-feedback mechanism that amplifies interest rate volatility. I find strong support for these predictions in the time series of US government bond returns.
Keywords: Mortgages; Interest Rates; Volatility;

Citation:
Hanson, Samuel G. "Mortgage Convexity." Journal of Financial Economics 113, no. 2 (August 2014): 270–299. (Internet Appendix Here.) View Details
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Working Paper | 2014
Financial Repression in the European Sovereign Debt Crisis
Bo Becker and Victoria Ivashina
By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely to be a loan—i.e., the loan supply contracts—when local banks have purchased more domestic sovereign debt and when that debt is risky (as measured by CDS spreads). These effects are most pronounced in the period following the second Greek bailout in early 2010.
Keywords: Credit Cycles; Sovereign debt; Financial Repression; Sovereign Finance; Greece;

Citation:
Becker, Bo, and Victoria Ivashina. "Financial Repression in the European Sovereign Debt Crisis." Working Paper, April 2014. View Details
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Recent Publications

Working Paper | HBS Working Paper Series | 2020
Accounting for Product Impact in the Consumer Finance Industry
George Serafeim and Katie Trinh
We apply the product impact measurement framework of the Impact-Weighted Accounts Initiative (IWAI) in two competitor credit card providers within the consumer finance industry. We design a monetization methodology that allows us to calculate monetary impact estimates on cardholder access to credit, affordability for merchants, financial health, and recyclability, among other factors. Our results indicate substantial differences in the impact that competitors have through their products. These differences demonstrate how impact reflects corporate strategy and informs decision-making on industry-specific areas.
Keywords: Product Innovation; Impact; impact investing; impact measurement; ESG; ESG (environmental, social, governance) performance; ESG (environmental, social, governance) performance; ESG ratings; social corporate responsibility; corporate social responsibility; social impact; consumer finance; financial services; Financial inclusion; Product; Product Design; Product Positioning; Society; Corporate Social Responsibility and Impact; Personal Finance; Credit Cards; Financial Services Industry;

Citation:
Serafeim, George, and Katie Trinh. "Accounting for Product Impact in the Consumer Finance Industry." Harvard Business School Working Paper, No. 21-061, November 2020. View Details
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Case | HBS Case Collection | November 2020
Roll-Ups and Surprise Billing: Collisions at the Intersection of Private Equity and Patient Care
Trevor Fetter and Kira Seiger
This case describes the increasing investment by private equity (PE) firms in patient care and other healthcare services. The case focuses on investments in physician staffing firms and roll-up strategy investments in physician practice management (PPM). Included in the case is discussion of the practice of surprise billing, i.e., when staffing firms and insurance companies fail to reach agreement on adequate reimbursement for physician services, resulting in patients’ being responsible for paying the entire bill. The case includes material on the debate over whether surprise billing is part of a deliberate strategy on the part of the staffing companies and their PE owners. The case also includes discussion of PE firms’ fiduciary duty to generate returns for their LPs and how that might affect the cost of care to patients and insurers.
Keywords: Business Ventures; Acquisition; Mergers and Acquisitions; Business Model; Change; Disruption; Fluctuation; Trends; Customers; Customer Value and Value Chain; Ethics; Fairness; Finance; Equity; Insurance; Private Equity; Geography; Geographic Scope; Health; Health Care and Treatment; Markets; Demand and Consumers; Supply and Industry; Industry Structures; Ownership; Ownership Type; Private Ownership; Relationships; Agency Theory; Business and Community Relations; Business and Shareholder Relations; Business and Stakeholder Relations; Networks; Strategy; Competition; Consolidation; Expansion; Integration; Horizontal Integration; Vertical Integration; Value; Value Creation; Health Industry; Insurance Industry; United States;

Citation:
Fetter, Trevor, and Kira Seiger. "Roll-Ups and Surprise Billing: Collisions at the Intersection of Private Equity and Patient Care." Harvard Business School Case 321-049, November 2020. View Details
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Working Paper | HBS Working Paper Series | 2020
'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt
Grant E. Donnelly, Cait Lamberton, Stephen Bush, Zoe Chance and Michael I. Norton
Many consumers struggle to repay their credit card debt, in part because paying small portions of large bills often feels fruitless. We introduce a novel credit card payment option—repayment-by-purchase—and examine its influence on both the amount consumers’ repay and their perception of progress toward reducing their debt. With typical repayment, consumers simply enter the amount they wish to pay toward their total balance—often the minimum required payment. With repayment-by-purchase, in contrast, consumers can select specific purchases (e.g., a coffee at Starbucks, a utility bill) that they wish to repay, and make payments specifically directed toward “eliminating” these purchases. Five studies reveal that repayment-by-purchase increases awareness of what is being repaid, which increases perceptions of progress toward reducing debt, which in turn encourages higher repayment. In a large field experiment, credit card customers who were given the opportunity to allocate their payment toward specific purchase categories paid 12.18% more toward their debt balance than a control group. These findings advance our practical understanding of how consumers can be encouraged to pay more toward credit card debt and offer conceptual insight into how both increased awareness and perceived goal progress enhance consumer motivation to get out of debt.
Keywords: consumer debt; goal pursuit; goal progress; financial decison-making; Personal Finance; Credit Cards; Borrowing and Debt; Goals and Objectives; Motivation and Incentives; Decision Making;

Citation:
Donnelly, Grant E., Cait Lamberton, Stephen Bush, Zoe Chance, and Michael I. Norton. "'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt." Harvard Business School Working Paper, No. 21-060, November 2020. View Details
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Case | HBS Case Collection | November 2020
Truebird—An AlleyCorp Venture
Shikhar Ghosh and Shweta Bagai
In December 2018, Kevin Ryan and Wendy Tsu faced an important decision – to finalize the CEO candidate for Truebird, an innovative, automated coffee café concept. Like many of AlleyCorp and Ryan’s companies, Truebird started with the observation of an unmet need – an inability to get good coffee at a reasonable price without a wait. Ryan’s track record as a serial entrepreneur included companies such as MongoDB, Gilt Groupe, Zola, and Business Insider. The commonality across AlleyCorp’s diverse businesses was a systematic process to ideation, led by Wendy Tsu, and an emphasis on the early Co-founder/CEO. Over the years, Ryan had refined his process of identifying the most appropriate person to serve as CEO. Two strong candidates had been shortlisted for the CEO position at Truebird. Unlike traditional approaches that used the reference check as a safety net, Ryan and Tsu considered reference check interviews as a stronger indicator of on-the-job performance. How should they structure a reference check process that would allow a complete understanding of each candidate? What questions should they ask when they found people who had worked with, or for, each of the candidates?
Keywords: Startup; hiring; staffing; recruiting; Business Ventures; Finance; Leadership; Management Skills; Management Teams; Jobs and Positions; Job Interviews; Human Resources; Recruitment; Selection and Staffing; Technology Industry; Food and Beverage Industry; United States;

Citation:
Ghosh, Shikhar, and Shweta Bagai. "Truebird—An AlleyCorp Venture." Harvard Business School Case 821-030, November 2020. View Details
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Working Paper | 2020
Financing the Litigation Arms Race
Samuel Antill and Steven R. Grenadier
Using a continuous-time model of litigation, we show that the increasingly popular practice of third-party litigation financing has ambiguous welfare implications. A defendant and a plaintiff bargain over a settlement payment. The defendant takes costly actions to avoid deadweight losses associated with large transfers to the plaintiff. Litigation financing bolsters the plaintiff, leading to larger deadweight losses. However, by endogenously deterring the defendant from taking costly actions, litigation financing can nonetheless improve the joint surplus of the plaintiff and the defendant. In contrast to popular opinion, litigation financing does not necessarily encourage high-risk frivolous lawsuits.
Keywords: litigation financing; dynamic bargaining; real options; Law; Finance; Lawsuits and Litigation;

Citation:
Antill, Samuel, and Steven R. Grenadier. "Financing the Litigation Arms Race." Working Paper, November 2020. View Details
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Case | HBS Case Collection | October 2020 (Revised October 2020)
AfricInvest: A Pan-African Investment Platform
Victoria Ivashina and Youssef Abdel Aal
The case is set in December 2018, when Ziad Oueslati, co-managing director and co-founder of AfricInvest, a leading pan-African private equity firm headquartered in Tunisia, was reflecting on the future direction of his firm. AfricInvest started as a traditional small and mid-cap private equity fund, but over the years had expanded into multiple adjoined investment strategies. At the end of 2018, the team saw an opportunity in the venture capital (VC) space, but while some were adamant about the need to raise a VC fund, others were reluctant to add yet another strategy to AfricInvest's diverse investment strategies. The case presents a detailed insight into AfricInvest's journey from a $10 million Tunisian fund, to becoming a prominent regional player operating throughout the African continent with $1.5 billion of assets under management. Among other issues related to the firm’s growth, the case provides insights into the challenges of operating in such a wide and varied geography as the African continent. The case also offers details on their multiple investment strategies, ranging from small-cap SME focused funds, to sector-specific funds, cross-border funds, and private credit. The case explores the synergies and challenges associated with such a wide-reaching investment platform. This is described against the backdrop of the collapse of Abraaj, a leading emerging market private equity firm, in a scandal that shook the investment community in the region. The case also touches upon the role of development finance institutions (DFIs) as investors in emerging markets and the challenges of defining and measuring impact investing. The opportunity of launching a pan-African VC fund in the context of the recent collapse of Abraaj brings to the forefront several strategic questions for AfricInvest’s co-founders: Should they keep expanding into new strategies, or would it be better to roll back their existing ones to focus only on their flagship private equity funds? Were the synergies and opportunities that came from being a platform enough to offset the risks, or was their focus being spread too thin by operating numerous diverse strategies?
Keywords: Finance; Private Equity; Venture Capital; Strategy; Governance; Financial Services Industry; Tunisia; Africa; Middle East;

Citation:
Ivashina, Victoria, and Youssef Abdel Aal. "AfricInvest: A Pan-African Investment Platform." Harvard Business School Case 221-037, October 2020. (Revised October 2020.) View Details
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Working Paper | HBS Working Paper Series | 2020
Income Volatility Increases Financial Impatience
Colin West, A.V. Whillans and Sanford DeVoe
Using a multi-method approach, we investigate whether income volatility is associated with financial impatience—the preference to receive a small sum of money immediately over a larger sum of money later. We find that experiencing more income volatility—including a higher frequency of either income dips or spikes – is associated with greater financial impatience. Using longitudinal data on biannual income, Study 1 demonstrates that this effect operates above and beyond individual differences in income risk preferences and wealth. Study 2 conceptually replicates these correlational findings with recent month-to-month income volatility and finds that this effect occurs primarily among people who report having little control over their finances. Using a longitudinal field experimental with low-income working women, Study 3 tests for a causal effect of an externally-induced spike in monthly income on changes in financial impatience. In a pre-post test experimental design, participants randomly assigned to receive cash transfers amounting to a median monthly income spike of 29% exhibit significantly greater financial impatience compared to a control condition in which participants receive no cash transfers. We conclude by discussing the implications of these findings for employers and policymakers.
Keywords: income volatility; compensation; impatience; time preferences; Income; Personal Finance; Behavior; Demographics; Policy;

Citation:
West, Colin, A.V. Whillans, and Sanford DeVoe. "Income Volatility Increases Financial Impatience." Harvard Business School Working Paper, No. 21-053, October 2020. View Details
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Case | HBS Case Collection | September 2020
Building India's 2.0: PayNearby
Lauren Cohen and Spencer C. N. Hagist
Headquartered in Mumbai, India, FinTech startup Nearby Technologies has seen its flagship brand, PayNearby, rapidly flourish across most of its target market within just four years. The unprecedented success of its payment app, which allows users to access banking services and send money throughout the country from the comfort of their local grocer, has meant success not just for CEO Anand Kumar Bajaj. It has given the massively underbanked population a new lease on financial inclusion. However, as the company celebrates the milestone of covering six times as many locations as brick-and-mortar bank branches in the country, Bajaj looks on to the company’s growing obstacles beyond 2020. PayNearby’s wide spread means that the company lives and dies on a mere five basis points, and their competitors now number over 200. If Bajaj is to continue the success of his young company, and to continue serving the people who have come to depend on his service for their livelihoods, he will have to see that the thin “pizza-dough” strategy he has implemented can rise with a suite of new services. Failing to do so will spell the eventual demise of his vision. What will those services will be? How will Bajaj able to secure his company’s long-term niche against the hordes of competitors who are now rising at the hands of the same type of innovation his own company had employed?
Keywords: fintech; developing markets; payments; Finance; Entrepreneurship; Banking Industry; India;

Citation:
Cohen, Lauren, and Spencer C. N. Hagist. "Building India's 2.0: PayNearby." Harvard Business School Case 221-027, September 2020. View Details
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Case | HBS Case Collection | September 2020
Catalys Pacific
Joshua Lev Krieger
In 2019, BT Slingsby founds Catalys Pacific, the first biotech “venture creation” fund in Tokyo. After convincing some of the biggest Japanese pharmaceutical firms to invest, BT hopes the fund can make a big splash and transform biotechnology innovation in Japan. After examining hundreds of potential investment opportunities, his team must decide which deals to pursue first. How can Catalys Pacific establish a positive investment track record while galvanizing an entire innovation ecosystem? To achieve its vision, the Catalys Pacific team must use its experience in the Japanese pharmaceutical industry to identify promising deals, while navigating corporate politics and potential cultural roadblocks.
Keywords: Pharmaceutical Companies; biotech; health care; entrepreneur; venture capital; innovation; international business; entrepreneurial finance; strategy; Entrepreneurship; Finance; Innovation Strategy; Venture Capital; Strategy; Cultural Entrepreneurship; Pharmaceutical Industry; Biotechnology Industry; Tokyo;

Citation:
Krieger, Joshua Lev. "Catalys Pacific." Harvard Business School Case 821-035, September 2020. View Details
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Case | HBS Case Collection | September 2020
Eaton Corporation: Portfolio Transformation and The Cost of Capital
Benjamin C. Esty, E. Scott Mayfield and Daniel Fisher
In 2000, Eaton Corporation was a broadly diversified industrial conglomerate. But its strategy was evolving and its focus was narrowing around “power management” and more recently on “intelligent power,” the use of digitally enabled products and services designed to enhance efficiency and reliability. To implement this transition, Eaton had acquired more than 70 companies and divested another 50. Such active portfolio management required Eaton to regularly assess the prospects of each business unit—the profit and growth potential—and to explore opportunities to enhance its capabilities through acquisitions. In January 2020, Eaton got an offer from Danfoss, a Danish conglomerate, to buy its hydraulics business for $3.3 billion. Recently appointed CEO Craig Arnold must decide whether this deal makes sense strategically and financially. In particular, he must decide if $3.3 billion is a fair price for the firm’s hydraulics business.
Keywords: Mergers and Acquisitions; Business Conglomerates; Business Divisions; Cost of Capital; Corporate Finance; Value; Valuation; Industrial Products Industry; United States; Denmark; Republic of Ireland;

Citation:
Esty, Benjamin C., E. Scott Mayfield, and Daniel Fisher. "Eaton Corporation: Portfolio Transformation and The Cost of Capital." Harvard Business School Case 221-006, September 2020. View Details
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