Managers of the ABRY Fund V were so successful they had investors waiting to pour in an additional $3 billion. But to invest that much would require trade-offs that could jeopardize the chemistry that made the fund successful in the first place. Take the money or walk away? From HBS Bulletin.
American financial executives are courting foreign direct investors, particularly sovereign wealth funds, for new investments. Should these investments draw increased scrutiny from U.S. regulators? Harvard Business School professor Mihir Desai argues that most of these deals work out in America's best financial interest.
Many of us are relying on defined contribution plans to help fund retirement. But Harvard Business School professor Robert C. Merton believes today's plans are not sustainable. So what's next? A new way to look at the problem.
This paper acknowledges the wide range of solutions to the problem of low family savings. Families, and of particular interest to the authors, low-income families, save for a wide variety of purposes, including identifiable reasons such as education and retirement and others that are more broad, like rainy days or emergencies. Given societal pressures to consume, and given the diversity among people, it is unlikely that there is a single solution to the savings problem. Yet a number of programs described by Tufano and Schneider have great promise in supporting household savings. Tufano and Schneider discuss each program from the perspectives of would-be savers as well as from that of other key stakeholders.
Saving money doesn't need to be so difficult. According to HBS professor Peter Tufano, "The most interesting ideas—indeed the oldest—try to make savings a fun or satisfying experience." As Tufano describes in this Q&A, different solutions appeal to different people. Here's what government policy, the private sector, and nonprofits can do.
The study of accounting and the political process has long been viewed through the political cost hypothesis, the basic premise of which is that firms manage earnings in order to extract first-order benefits (or avoid first-order costs) from regulators. This paper develops and tests a distinct, yet likely, complementary hypothesis: Firms manage reported earnings in order to supply first-order benefits to regulators. Focusing on Democratic and Republican candidates in congressional races in 2004, Ramanna and Roychowdhury test whether the management of accounting information is in some circumstances akin to a political contribution from firms to politicians: in other words, whether accounting information can be used as political currency. The authors predict and find that identified corporate donors to candidates in closely watched races in 2004 managed information related to outsourcing, a hot-button issue in those races.
To what extent do balanced scorecards provide useful information for testing and validating an organization's strategy? Numerous case studies of balanced scorecard implementations document their use in translating organizational strategies to objectives and measures, communicating strategic objectives to employees, evaluating the performance of business units, and aligning the incentives of employees across business units and functions. There has been comparatively little research, however, on the potential learning and feedback role of balanced scorecards. Analyzing balanced scorecard data from Store24—a privately held convenience store retailer in New England—during the implementation of an innovative but ultimately unsuccessful strategy, this study investigates whether, when, and how information about problems with the firm's strategy was captured in the multiple performance measures of its balanced scorecard.
School connections are an important yet underexplored way in which private information is revealed in prices in financial markets. As HBS professor Lauren H. Cohen and colleagues discovered, school ties between equity analysts and top management of public companies led analysts to earn returns of up to 5.4 percent on their stock recommendations. Cohen explains more in our Q&A.
Corporate donors that gave at least $10,000 to closely watched races in the U.S. congressional elections of 2004 were more likely to understate their earnings, say Harvard Business School's Karthik Ramanna and MIT colleague Sugata Roychowdhury. Such "downward earnings management" may have functioned as a political contribution. In this Q&A, Ramanna explains how accounting and politics influence each other.
Chain organizations operate units that are typically dispersed across different types of markets, and thus serve significantly different customer bases. Such "market-type dispersion" is likely to compromise the headquarters' ability to control its stores for two reasons: Relative differences in local conditions make it difficult to monitor a store manager's behavior, and a chain with wide-ranging customer bases will have a harder time serving its customers and will need to rely more heavily on store managers' ability to adapt to local needs. This study identifies market-type dispersion as a factor that is systematically related to firms' organizational design choices. The results may help managers and consultants who deal with control challenges related to a chain's geographic expansion into different markets.
Professor Josh Lerner provides a summary report on the recently held HBS Centennial colloquium on venture capital.
Mexico was the first emerging market compelled to reformulate the financial reporting of its banks as a result of a financial crisis. In the last decade, Mexico has undergone a process of internationalization of its banking industry. Today, more than 80 percent of the equity of Mexican banks belongs to internationally active bank corporations. This internationalization demands more transparent regulation, including standardized accounting rules and better disclosure of information. The case of Mexico can therefore serve as an example of the relevance of these changes, as well as of their scope and limitations. This paper attempts to clarify the nature and structure of the new accounting standards, and explains how they have affected financial statements and their interpretation.
U.S. Treasury recommendations for strengthening the regulation of the financial system are a good start but fall short, says Harvard Business School professor emeritus Dwight B. Crane. Here's his suggestion for bringing regulation into the 21st century.
In the wake of World War II, Georges Doriot helped found the world's first public venture capital firm, American Research and Development. Doriot (1899–1987) was also a professor at Harvard Business School for 40 years. Our book excerpt from Creative Capital: Georges Doriot and the Birth of Venture Capital (HBS Press) describes how ARD first came to "marry" investors and innovators.
Corporate tax policy has suddenly become a hot topic in the U.S. presidential debate, including the issue of whether tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor Mihir Desai makes a case for exempting foreign profit from taxes if proper safeguards are put in place.
The acquisition of new capabilities through the purchase of small venture capital-backed start-ups is a strategy that has been employed by many large technology firms including Cisco, Microsoft, Google, and EMC. Young venture capital-backed companies, for their part, often develop innovative technologies that can be exploited by existing technology companies. The value inherent in these start-ups is typically tied up in the intellectual property or human capital that has been developed during the early stages of the company's life. The opportunity to acquire valuable intangible assets, however, is balanced by the difficulty in assessing the value of the underlying assets. Unlike purchasing companies with substantial operating profits and a long track record of sales, the ability to fully assess the prospects of intangible assets is subject to substantial asymmetric information and uncertainty. This paper explores mechanisms for limiting the asymmetric information that potentially plagues the acquisition of young venture capital-backed companies. The results also shed light on the value that venture capitalists add to their portfolio companies as well as to companies in their venture capital network.
Certain agents play key roles in revealing information into securities markets. In the equities market, security analysts are among the most important. A large part of an analyst's job (perhaps the majority) is to research, produce, and disclose reports forecasting aspects of companies' future prospects, and to translate their forecasts into stock recommendations. Therefore, isolating how, or from whom, analysts obtain the information they use to produce their recommendations is important. Do analysts gain comparative information advantages through their social networks—specifically, their educational ties with senior officers and board members of firms that they cover? This paper investigates ties between sell-side analysts and management of public firms, and the subsequent performance of their stock recommendations.
The long-run consumption risk of households that hold financial assets is particularly relevant for asset pricing. The fact that stockholders are more sensitive to aggregate consumption movements helps explain why the consumption risk of stockholders delivers lower risk aversion estimates. Understanding further why consumption growth, particularly that of stockholders, responds slowly to news in asset returns will improve finance scholars' understanding of what drives these long-run relations. HBS professor Malloy and his coauthors examine more disaggregated measures of long-run consumption risks across stockholders and non-stockholders, and provide new evidence on the long-run properties of consumption growth and its importance for asset pricing.
Prize-linked savings (PLS) products are savings vehicles that may appeal to people with little savings and little interest in traditional savings products. PLS products offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation. The probability of winning is typically determined by account balances, and the aggregate prize pool can be set to deliver market returns to all savers. Prize-linked assets are offered in over twenty countries around the world—including the U.K., Sweden, South Africa, and many Latin American and Middle Eastern countries—but are not available in the United States, where state laws and federal regulations make the offering of prize-linked programs problematic. This working paper provides a first look into demand for a PLS product in the United States.
The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. The case of Brazil is particularly interesting because, in Latin America before World War I, it boasted the second-largest equity market and largest number of traded companies. As HBS professor Aldo Musacchio shows, the considerable variation of investor protections over time at the country level, and even at the company level, urges cautions against notions about the persistency of institutions, especially of legal traditions.
