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Finance

Finance

    • May 2014
    • Article

    Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment

    By: 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.

    • May 2014
    • Article

    Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment

    By: 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...

    • 2014
    • Article

    Expectations of Returns and Expected Returns

    By: 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.

    • 2014
    • Article

    Expectations of Returns and Expected Returns

    By: 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...

    • August 2014
    • Article

    Mortgage Convexity

    By: 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.

    • August 2014
    • Article

    Mortgage Convexity

    By: 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...

    • 2014
    • Working Paper

    Financial Repression in the European Sovereign Debt Crisis

    By: 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.

    • 2014
    • Working Paper

    Financial Repression in the European Sovereign Debt Crisis

    By: 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...

Faculty Unit

The Finance Unit produces research addressing issues of present and future importance to managers, regulators, and policy-makers.
Finance Unit

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.

Faculty Unit

The Finance Unit produces research addressing issues of present and future importance to managers, regulators, and policy-makers.

Finance Unit

Recent Publications

Revenue Collapses and the Consumption of Small Business Owners in the COVID-19 Pandemic

By: Olivia S. Kim, Jonathan A. Parker and Antoinette Schoar
  • August 2025 |
  • Article |
  • Journal of Financial Economics
Using financial account data linking small businesses to their owner households, we examine how business owners’ consumption responded to changes in business revenues during the COVID-19 crisis. In the first two months following the National Emergency, business revenues declined by 40 percent, largely driven by national factors rather than local infection rates or policies. However, the pass-through of revenue losses to owner consumption was limited: each dollar of revenue loss resulted in only a 1.6-cent decline in consumption. This muted pass-through persisted through 2021, even after the introduction of COVID-19 vaccines. Our findings suggest that federal subsidies and pandemic-induced reductions in spending opportunities explain the limited impact.
Keywords: Revenue; Small Business; Health Pandemics; Spending; Consumer Behavior
Citation
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Kim, Olivia S., Jonathan A. Parker, and Antoinette Schoar. "Revenue Collapses and the Consumption of Small Business Owners in the COVID-19 Pandemic." Art. 104079. Journal of Financial Economics 170 (August 2025).

What Board-level Control Mechanisms Changed in Banks Following the 2008 Financial Crisis? A Descriptive Study

By: Shelly Li, Shivram Rajgopal, Suraj Srinivasan and Yu Ting Forester Wong
  • June 2025 |
  • Article |
  • Accounting, Organizations and Society
Following the 2008 financial crisis, the Financial Crisis Inquiry Commission (FCIC) identified major shortcomings in bank board governance, contributing to systemic risk management failures. This study adapts a management control framework and empirically examines changes in board-level “process control” and “input control” mechanisms in 95 large U.S. bank holding companies (2000–2015) and contrasts these with 1,452 nonbanks. Our findings indicate that most post-2008 improvements occurred in "process controls," e.g. Chief Risk Officer (CRO) appointments increased from 53% pre-crisis to 91% post-crisis, with significantly more banks establishing a dedicated risk committee and identifying the committee responsible for reputation management. We also find progress in "input control” related to domain knowledge with an increase of 16% in new bank directors with prior risk management experience, and significant increase in directors with other relevant domain knowledge. We observed limited or no change in control mechanisms related to improving the board members’ ability to voice different perspectives or commit more time to their role. Our results show that improvements in certain types of controls seem to have taken precedence over others which have implications for explaining and implementing changes in corporate governance and control mechanisms.
Keywords: Board Of Directors; Management Control; Governing and Advisory Boards; Governance Controls; Risk Management; Change Management; Banks and Banking; Financial Crisis
Citation
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Li, Shelly, Shivram Rajgopal, Suraj Srinivasan, and Yu Ting Forester Wong. "What Board-level Control Mechanisms Changed in Banks Following the 2008 Financial Crisis? A Descriptive Study." Art. 101596. Accounting, Organizations and Society 114 (June 2025).

Dynamic Competition for Customer Memberships

By: Cristian Chica, Julian Jimenez-Cardenas and Jorge Tamayo
  • Summer 2025 |
  • Article |
  • Journal of Economics & Management Strategy
A competitive two-period membership (subscription) market is analyzed. Two symmetric firms charge a “membership” fee that allows consumers to buy products or services at a given unit price for both periods. Firms can choose between long- or short-term memberships. When firms employ long-term membership, they have incentives to prevent their old customers from being poached by competitors, and to price-discriminate with their membership fee and unit price regarding customer purchase behavior. In contrast, with short-term membership, they do not discriminate between new and old customers with their unit price but only with their membership fees. Overall, the number of consumers poached is smaller with long-term memberships, but the equilibrium profits are higher when firms offer short-term memberships. Moreover, short-term membership is a Nash equilibrium.
Keywords: Competitive Price Discrimination; Membership; Dynamic Competition; Competition; Price; Consumer Behavior; Business Model
Citation
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Chica, Cristian, Julian Jimenez-Cardenas, and Jorge Tamayo. "Dynamic Competition for Customer Memberships." Journal of Economics & Management Strategy 34, no. 2 (Summer 2025): 525–556.

Social Security and Trends in Wealth Inequality

By: Sylvain Catherine, Max Miller and Natasha Sarin
  • June 2025 |
  • Article |
  • Journal of Finance
Recent influential work finds large increases in inequality in the U.S. based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper shows that top wealth shares have not changed much over the last three decades when Social Security is properly accounted for. This is because Social Security wealth increased substantially from $7.2 trillion in 1989 to $40.6 trillion in 2019 and now represents nearly 50% of the wealth of the bottom 90% of the wealth distribution. This finding is robust to potential changes to taxes and benefits in response to system financing concerns.
Keywords: Wealth; Equality and Inequality; Taxation; Insurance; Welfare
Citation
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Catherine, Sylvain, Max Miller, and Natasha Sarin. "Social Security and Trends in Wealth Inequality." Journal of Finance 80, no. 3 (June 2025): 1497–1531.

Data-driven Technologies and Local Information Advantages in Small Business Lending

By: Wilbur Chen, Jung Koo Kang and Aditya Mohan
  • 2025 |
  • Working Paper |
  • Faculty Research
We investigate whether banks' adoption of data-driven technologies influences competitive dynamics in local small business lending by diminishing the information advantages traditionally held by local banks. Using local newspaper closures as an adverse shock to the local information available to non-local banks, we show that banks with higher local market concentration increase their share of small business loans in their local counties after these closures. However, these information advantages gradually diminish after cloud platforms—a key data-driven technology infrastructure—are widely implemented. We find that local banks' information advantages disappear in counties where they compete against banks that heavily invest in these technologies: those with greater AI-related human capital, AI patents, or web analytics technologies. We further support our findings by instrumenting banks' AI-related hiring activity with their proximity to AI research institutions. Overall, our results suggest that data-driven technologies can reduce local banks' information advantages and reshape the competitive landscape in local lending markets.
Keywords: Data-driven Technologies; Local Information Advantages; Local Banks; Relationship Lending; Small Business Loans; Small Business; Local Range; Financing and Loans; Banks and Banking; Analytics and Data Science; Banking Industry
Citation
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Related
Chen, Wilbur, Jung Koo Kang, and Aditya Mohan. "Data-driven Technologies and Local Information Advantages in Small Business Lending." Harvard Business School Working Paper, No. 25-057, May 2025.

RTX’s Lifetime Income Strategy: Shaping the Future of Retirement

By: Daniel Green, Luis M. Viceira and Sarah Mehta
  • May 2025 |
  • Case |
  • Faculty Research
Set in 2024, this case explores the Lifetime Income Strategy (LIS), a novel retirement product launched by aerospace and defense company RTX in 2012. Aiming to embed the security of a traditional pension within a 401(k) plan, the LIS allowed participants to secure a portion of their retirement savings, entitling them to a guaranteed monthly lifetime income. The strategy preserved the ability to grow the assets and therefore the guaranteed income, and the ability to withdraw funds at any time (while taking a corresponding reduction in income). By 2024, the LIS held assets worth $7 billion on behalf of 117,000 participants, but just 12% of eligible retirees had elected to begin receiving their income benefit. The case finds two RTX leaders, Robin Diamonte and Ken Levine, debating what might be driving participants’ low uptake and considering strategies for improvement.
Keywords: Finance; Human Resources; Innovation and Invention; Jobs and Positions; Labor; Personal Development and Career; Society; Aerospace Industry; Financial Services Industry; Insurance Industry; United States; Virginia
Citation
Educators
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Green, Daniel, Luis M. Viceira, and Sarah Mehta. "RTX’s Lifetime Income Strategy: Shaping the Future of Retirement." Harvard Business School Case 225-016, May 2025.

Humana Commits to Value-Based Care

By: V.G. Narayanan, Henry Eyring and David Lane
  • May 2025 (Revised May 2025) |
  • Case |
  • Faculty Research
In late 2023, CEO Bruce Broussard reviewed health insurer Humana’s transformation into a value-based care ecosystem. Under its CenterWell brand, the several millions of members in Humana Medicare Advantage plans now had access to Humana-provided primary care, home care, behavioral health, and mail order pharmacy services. Innovative partnerships with private equity firms had helped finance the acquisition and operations of key CenterWell assets. Broussard and his top team now convened to review the merits of a potential acquisition of a large group of primary care clinics. The discussion centered on how best to build further on and integrate Humana’s successes to date in value-based care delivery.
Keywords: Business Model; Business Units; Financing and Loans; Innovation Strategy; Growth and Development Strategy; Service Operations; Health Industry; United States
Citation
Educators
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Narayanan, V.G., Henry Eyring, and David Lane. "Humana Commits to Value-Based Care." Harvard Business School Case 125-013, May 2025. (Revised May 2025.)

The Limits of Insurance Demand and the Growing Protection Gap

By: Parinitha Sastry, Tess Scharlemann, Ishita Sen and Ana-Maria Tenekedjieva
  • 2025 |
  • Working Paper |
  • Faculty Research
In a world with rising risk, how much are U.S. households willing to pay for homeowners insurance, and what does their demand imply for the future of insurance markets? We provide the first estimates of household willingness to pay for homeowners insurance and the drivers of household insurance demand elasticities by exploiting quasi-exogenous regulatory shocks to insurance pricing. We utilize newly available individual-level data on homeowners insurance contracts covering the entire United States for over a decade, with rich information on mortgage contracts, property characteristics, and climate exposures. We document pervasive under-insurance, particularly among the most financially vulnerable households. We find that even at actuarially fair premiums, households’ willingness to pay is below expected losses, and demand remains elastic—results that are inconsistent with the textbook models of insurance demand. Financial constraints are a key force: constrained households reduce coverage as premiums rise, while unconstrained households borrow more to maintain insurance coverage. Exogenous increases in the cost of credit also reduce coverage demand. These results raise the concern that financial constraints reduce willingness to pay for insurance even below the actuarially fair price required for insurers to remain solvent, suggesting that the market may disappear for the most constrained, financially vulnerable households. If prices were to continue growing at historical rates moving forward, our estimates imply that between 17% to 31% of households would hit binding LTV constraints and be forced to reduce coverage substantially, meaning insurance markets may shrink even as losses from natural disasters rise.
Keywords: Climate Change; Risk and Uncertainty; Insurance; Personal Finance; Consumer Behavior; Mortgages
Citation
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Sastry, Parinitha, Tess Scharlemann, Ishita Sen, and Ana-Maria Tenekedjieva. "The Limits of Insurance Demand and the Growing Protection Gap." Harvard Business School Working Paper, No. 25-054, February 2025.

Bank Financing of Global Supply Chains

By: Laura Alfaro, Mariya Brussevich, Camelia Minoiu and Andrea Presbitero
  • 2025 |
  • Working Paper |
  • Faculty Research
Finding new international suppliers is costly, so most importers source inputs from a single country. We examine the role of banks in mitigating trade search costs during the 2018–2019 U.S.-China trade tensions. We match data on shipments to U.S. ports with the U.S. credit register to analyze trade and bank credit relationships at the bank-firm level. We show that importers of tariff-hit products from China were more likely to exit relationships with Chinese suppliers and to find new suppliers in other Asian countries. To finance their geographic diversification, tariff-hit firms increased credit demand, drawing on bank credit lines and taking out loans at higher rates. Banks offering specialized trade finance services to Asian markets eased both financial and information frictions. Tariff-hit firms with specialized banks borrowed at lower rates and were 15 pps more likely and 3 months faster to establish new supplier relationships than firms with other banks. We estimate the cost of searching for suppliers at $1.9 million (or 5% of annual sales revenue) for the average U.S. importer.
Keywords: Financial Institutions; International Finance; Trade; Credit; United States; Asia
Citation
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Alfaro, Laura, Mariya Brussevich, Camelia Minoiu, and Andrea Presbitero. "Bank Financing of Global Supply Chains." NBER Working Paper Series, No. 33754, May 2025.

The Micro-Family Office: Aamir Rehman

By: Lauren Cohen and Sophia Pan
  • May 2025 |
  • Case |
  • Faculty Research
With a successful career and strong academic credentials, Aamir Rehman sought to design a life grounded in autonomy. For him, this meant serving on boards, continuing his professorship, and ensuring a secure and comfortable life for his family. While he didn’t possess a billionaire’s fortune, Rehman had accumulated a net asset value of $8.6 million—an amount he believed was more than sufficient to support his family’s lifestyle, especially as he and his partner continued working in their own professional roles. Rather than outsourcing full control to a private bank or wealth advisor, Rehman established what he referred to as a “Micro-Family Office.” Through this model, he hired part-time professionals to help design and oversee his investment strategy, allowing for personalized oversight without the cost and scale of a traditional family office. As he refined this structure, Rehman noticed that few of his peers (many of whom shared similar career paths) had taken this approach. That prompted a broader question: Was this model replicable and sustainable for others in his position? And more critically, could it withstand economic uncertainty and evolving family needs over time?
Keywords: Family Office; Organization Design; Family And Friends; Family; Balance; Stability; Trends And Opportunities; Wealth Management; Family Business; Investment; Financial Strategy; Personal Finance; Investment Portfolio; Private Equity; Organizational Design; Family and Family Relationships; Happiness; Satisfaction; Balance and Stability; Human Capital; Compensation and Benefits; Economy; Trends; Business Model; New Jersey; United States
Citation
Educators
Related
Cohen, Lauren, and Sophia Pan. "The Micro-Family Office: Aamir Rehman." Harvard Business School Case 225-089, May 2025.
More Publications

Faculty

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Paul A. Gompers
William A. Sahlman
Robert S. Kaplan
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Laura Alfaro
Benjamin C. Esty
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W. Carl Kester
George Serafeim
Stuart C. Gilson
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    • 15 Oct 2024

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Harvard Business Publishing

    • May 14, 2024
    • Article

    One Way to Help Employees Build Emergency Savings

    By: Timothy Flacke and Peter Tufano
    • May 2025
    • Case

    RTX’s Lifetime Income Strategy: Shaping the Future of Retirement

    By: Daniel Green, Luis M. Viceira and Sarah Mehta
    • 2017
    • Book

    HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company

    By: Richard S. Ruback and Royce Yudkoff
→More Harvard Business Publishing
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