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 | HBS Working Paper Series | 2019
Macroeconomic Drivers of Bond and Equity Risks
John Y. Campbell, Carolin E. Pflueger and Luis M. Viceira
Our new model of consumption-based habit generates time-varying risk premia on bonds and stocks from loglinear, homoskedastic macroeconomic dynamics. Consumers' first-order condition for the real risk-free bond generates an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. We estimate that the correlation between inflation and the output gap switched from negative to positive in 2001. Higher inflation lowers real bond returns, and higher output raises stock returns, explaining why the bond-stock return correlation changed from positive to negative. In the model, risk premia amplify this change in bond-stock return comovement and are crucial for a quantitative explanation.
Keywords: consumption-based habit formation; consumption Euler equation; time-varying risk premia; inflation dynamics; bond-stock correlation; Risk and Uncertainty; Bonds; Macroeconomics;

Citation:
Campbell, John Y., Carolin E. Pflueger, and Luis M. Viceira. "Macroeconomic Drivers of Bond and Equity Risks." Harvard Business School Working Paper. (Revised May 2019. Harvard Business School Working Paper, No. 14-031, September 2013) View Details
Cite View Details SSRN Read Now Related
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
Cite View Details SSRN Related
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
Cite View Details Find at Harvard Read Now Related
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
Cite View Details Find at Harvard Read Now Related
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
Cite View Details Find at Harvard Related
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
Cite View Details SSRN Read Now Related

Recent Publications

Case | HBS Case Collection | December 2019
Forecasting ClimaCell
Joshua Lev Krieger, Christopher Stanton and James Barnett
A weather technology startup, ClimaCell considers the R＆D trade-offs and financing implications of pursuing a proposed contract with a major automobile maker, rather than continuing its focus on building a scalable, all-purpose weather prediction engine.
Keywords: Weather and Climate Change; Forecasting and Prediction; Technological Innovation; Research and Development; Finance; Cost vs Benefits; Decision Making; Strategy;

Citation:
Krieger, Joshua Lev, Christopher Stanton, and James Barnett. "Forecasting ClimaCell." Harvard Business School Case 820-044, December 2019. View Details
Cite View Details Educators Related
Working Paper | 2019
Impact Investing: A Theory of Financing Social Entrepreneurship
Benjamin N. Roth
I present a model of financing social enterprises to delineate the role of impact investors relative to “pure” philanthropists. I characterize the optimal scale and structure of a social enterprise when financed by grants, and when financed by investments. The analysis yields two heuristics to guide impact investors. First, investments allow a financier to discipline inefficient spending. Second, investments may enable a social enterprise to exploit new opportunities for profit, and may increase the enterprise’s scale relative to when grant financed. I quantify these heuristics for the case of Husk Power, a social enterprise that has received impact investment.
Keywords: impact investing; Social Entrepreneurship; Finance; Investment; Mathematical Methods;

Citation:
Roth, Benjamin N. "Impact Investing: A Theory of Financing Social Entrepreneurship." Working Paper, December 2019. View Details
Cite View Details Read Now Related
Case | HBS Case Collection | November 2019
DeepGreen and Polymetallic Nodules
Richard H.K. Vietor
The world has begun a “green transition” – a move to reduce carbon emissions. Part of this will entail a growing shift to electric vehicles. Huge amounts of metals – cobalt, nickel, copper – will be needed to supply electric vehicles. Mining these on land, however, is carbon intensive and immensely destructive of the natural environment. DeepGreen, in conjunction with Nauru, has been developing a mining system for polymetallic nodules that cover the ocean floor in the Clarion-Clipperton Fracture zone. This huge mineral resource – approximately 34 billion tons of metallic nodules – is regulated by the International Seabed Authority (of the United Nations). DeepGreen, perhaps the most advanced of several competitors, will eventually need more than $4 billion to develop the commercial mining system and specialized smelting facilities. The question is, can an entrepreneurial firm raise the necessary capital, succeed with the regulation and surmount the technical challenges that nodules impose?
Keywords: polymetallic nodules; seabed mining; entrepreneurial finance; Metals and Minerals; Mining; Entrepreneurship; Finance; Problems and Challenges;

Citation:
Vietor, Richard H.K. "DeepGreen and Polymetallic Nodules." Harvard Business School Case 720-016, November 2019. View Details
Cite View Details Educators Related
Case | HBS Case Collection | October 2019 (Revised December 2019)
BC Partners: Acuris
Victoria Ivashina and Terrence Shu
This case follows Nikos Stathopoulos, Managing Partner of BC Partners, as he and his team evaluate the potential sale of one of BC Partners’ portfolio companies, Acuris. Acuris was a global financial intelligence, news, and data company that had been acquired by BC Partners only three years prior. During that time, Stathopoulos and his team had been able to implement a variety of operational improvements and acquisitions which resulted in BC Partners receiving numerous offers for both full and partial sales of the company, at attractive multiples. But the BC Partners team felt there was still more gain to be realized from their value-add initiatives, and there were also several initiatives they had identified but not yet implemented. Stathopoulos had to decide: should they pursue a full sale, partial sale, or no sale at all?
Keywords: fund management; fund raising; Leveraged Buyout; buyout; portfolio management; operations improvement; exit; exit strategy; valuation ratios; Finance; Private Equity; Leveraged Buyouts; Operations; Performance Improvement; Acquisition; Valuation;

Citation:
Ivashina, Victoria, and Terrence Shu. "BC Partners: Acuris." Harvard Business School Case 220-041, October 2019. (Revised December 2019.) View Details
Cite View Details Educators Purchase Related
Case | HBS Case Collection | October 2019
Kaspi.kz IPO
Victoria Ivashina and Esel Çekin
This case follows Kaspi.kz, a private equity (Baring Vostok) co-owned retail bank in Central Asia that evolved into a fintech, payments and e-commerce company. It provides insights into private equity financing, portfolio company management, and initial public offering practices. In particular, the case focuses on (i) the bank’s journey from a traditional bank that serviced only corporations to an online platform, and (ii) the timing and process of preparation for an IPO. The management initially concentrated on profitability, but they soon shifted their emphasis to customer experience. The results were rewarding: Kaspi.kz became the number one player in online commerce, online payments, and consumer financing in Kazakhstan. The challenge of the IPO decisions is its timing: communicating the success of the fast transformation of the firm and its potential for further growth, especially in an emerging market like Kazakhstan, was far from trivial. From a business perspective, even a short delay of six months could potentially add millions of dollars to its value. Kaspi.kz’s private equity investor was interested in commencing a formal exit via an IPO, but the valuation was an important consideration. The case also provides a unique insight into financial fragility of the retail banking model, and how integration into an e-commerce platform interacts with the retail banking model.
Keywords: Finance; Private Equity; Initial Public Offering; Organizational Change and Adaptation; Central Asia;

Citation:
Ivashina, Victoria, and Esel Çekin. "Kaspi.kz IPO." Harvard Business School Case 220-007, October 2019. View Details
Cite View Details Educators Purchase Related
Working Paper | HBS Working Paper Series | 2019
Undisclosed Debt Sustainability
Laura Alfaro and Fabio Kanczuk
Over the past decade, non–Paris Club creditors, notably China, have become an important source of financing for low- and middle-income countries. In contrast with typical sovereign debt, these lending arrangements are not public, and other creditors have no information about their magnitude. We transform the traditional sovereign debt and default model to quantitatively study incomplete information arrangements and find they greatly reduce traditional/Paris Club creditors’ debt sustainability. Disclosure of nontraditional debt would imply significant welfare gains for the recipient countries but would reduce its sustainability. We discuss the implications of nontraditional lending on standard assumptions of sovereign debt models.
Keywords: Sovereign debt; transparency; sustainability; Sovereign Finance; Borrowing and Debt; Information; China;

Citation:
Alfaro, Laura, and Fabio Kanczuk. "Undisclosed Debt Sustainability." Harvard Business School Working Paper, No. 20-043, September 2019. View Details
Cite View Details Read Now Related
Case | HBS Case Collection | October 2019
Hony Capital and Jushi Group
Josh Lerner, Shai Bernstein and Ann Leamon
Hony Capital, a multi-billion dollar private equity firm based in China, is investing in a subsidiary of Jushi Group, a Chinese company that is one of the world’s largest fiberglass producers. The specific project will build a plant in the United States. In this case, students consider the value Hony can provide to Jushi, and must also determine how Hony will eventually exit the transaction, given the complexity around its structure.
Keywords: real estate; Investing; fundraising; manufacturing; Private Equity; Asset Management; Finance; Investment; Venture Capital; China; United States;

Citation:
Lerner, Josh, Shai Bernstein, and Ann Leamon. "Hony Capital and Jushi Group." Harvard Business School Case 820-040, October 2019. View Details
Cite View Details Educators Related
Case | HBS Case Collection | August 2019 (Revised October 2019)
Amandla Capital: Real Estate in Côte d‘Ivoire
John D. Macomber, Pippa Tubman Armerding and Dilyana Botha
This case describes Amandla Capital, a fledgling company in Cote d’Ivoire, facing three opportunities in the real estate and hospitality industries in Africa. It introduces students to several concepts: decision-making and cost-benefit analysis in real estate, corporate strategy selection, management of stakeholders with varied needs and levels of sophistication, conflicts of interest, and the basics of hospitality and hotel management industries.
Keywords: Small Business; Decision Making; Decision Choices and Conditions; Cost vs Benefits; Finance; Assets; Asset Management; Investment Portfolio; Investment Return; Project Finance; Relationships;

Citation:
Macomber, John D., Pippa Tubman Armerding, and Dilyana Botha. "Amandla Capital: Real Estate in Côte d‘Ivoire." Harvard Business School Case 220-029, August 2019. (Revised October 2019.) View Details
Cite View Details Educators Purchase Related
Case | HBS Case Collection | August 2019
ClearScore, 2018
John R. Wells and Benjamin Weinstock
In October 2017, Experian, one of the “Big Three” consumer credit reporting agencies in the United Kingdom made an offer to acquire ClearScore for a total consideration of £293 million. Founded by Justin Basini, Dan Cobley, and Nigel Morris in 2014, ClearScore was the UK’s first company to offer consumers full credit reports and scores for free. ClearScore had accumulated over 5 million customers since its launch on July 15, 2015, and was growing rapidly. In the final quarter of 2017, it was set to reach break-even and deliver £27 million in revenues for the year. Was this the time to sell?
Keywords: fintech; financial services; credit card; credit scores; Startup; start-up; Startup financing; startup marketing; ＂marketing analytics＂; regulation; lending; television advertising; entrepreneur; Entrepreneurial mindset; entrepreneurial ventures; entrepreneurs; global business; rapid growth stage; risk; net present value; testing; Testing strategy; geographies; Mergers ＆ Acquisitions; Finance; Strategy; Credit; Business Startups; Entrepreneurship; Expansion; Mergers and Acquisitions; Financial Services Industry; United Kingdom; South Africa;

Citation:
Wells, John R., and Benjamin Weinstock. "ClearScore, 2018." Harvard Business School Case 720-369, August 2019. View Details
Cite View Details Educators Related
Case | HBS Case Collection | August 2019
Legrand's Acquisition of Milestone
C. Fritz Foley and F. Katelynn Boland
In June 2017, Legrand, a global specialist in electrical and digital building infrastructure which was a serial acquirer, announced it had signed an agreement to buy Milestone AV Technologies, a leading designer and manufacturer of branded audio-video products. This case describes Legrand's approach to screening, pursuing, and integrating targets as well as the criteria used to evaluate if a deal is successful.
Keywords: Mergers ＆ Acquisitions; acquisition strategy; Mergers and Acquisitions; Management; Strategy; Corporate Finance; Electronics Industry; Europe; United States;

Citation:
Foley, C. Fritz, and F. Katelynn Boland. "Legrand's Acquisition of Milestone." Harvard Business School Case 220-028, August 2019. View Details
Cite View Details Educators Related

See all faculty publications on Finance »

Faculty & Research

Featured Works

Faculty

Seminars & Conferences

HBS Working Knowledge

Harvard Business Publishing