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Monday, February 28, 2005

You never write, you never call...

The Chronicle of Higher Education regularly runs a series called "Chronicle Careers". It covers (not surprisingly), the hiring, promotion, and tenure processes. One of the hardest parts of job-seeking is the waiting. Here's a good (and short piece) on why and how you should handle it.

Question: I recently had several interviews at the annual convention in my field. Here I am a few weeks later, waiting to hear from those who interviewed me. What is the normal timetable for this type of thing? What should I do in the meantime? I'm going crazy waiting to hear from someone.

Question: I had what I considered to be a very successful campus interview about two weeks ago. I haven't heard anything. Is this typical? Is it appropriate for me to contact the institution, or would doing so decrease my chances of receiving an offer?

Click here for the whole article.

A good question on treasury stock and distributions

I came across this at Catallarchy a while back (but I didn't have a blog at the time, so I'll reference it now). There are a couple of good questions for a corporate finance class:

On the table in front of me sits an unsealed, transparent envelope. The envelope is labelled as follows :

This Envelope and Its Contents are the Entire Assets of the Public Stock Company Known as The Transparent Envelope Company, or TEC.

In my possession I have a stock certificate for 1 (one) share of TEC.

In the envelope, there are two $5 Federal Reserve Notes and a stock certificate for 1 (one) share of TEC, identical to my own.

No other TEC stock certificates exist in any form, anywhere.

Across the table from me sits my brother, who has neither stock nor money.

Question #1 – What total price and price per share would a third party buyer be willing and required to pay for the entire company, assuming that he were willing to accept no gain or loss?

Question #2 – There are four possible distinct distributions of a single item in the envelope to either my brother or myself, i.e. a $5 Federal Reserve Note or a stock certificate for 1 (one) share of TEC. For each of the four possible distinct combinations of item and recipient, determine the change in the total price for the entire company that would result and label each particular combination with what it could be called if it were a real transaction of a real public stock company.

a. $5 FRN to me –
b. $5 FRN to my brother –
c. Stock certificate to me –
d. Stock certificate to my brother –

There are some good responses in the comments to the original post.

Opportunity Costs, Renting vs. Buying, and Bad Economic Reasoning

Bill Cholensky over at Cattalarchy has a good example for explaining opportunity costs. He begins

It sometimes amazes me what passes for economic common sense. My pet peeve is the oft-repeated “throwing money away on rent” argument. It’s often followed by something like “You could be putting that money towards equity!”

The idea that one is wasting money by paying rent is absurd. Has no one heard of Opportunity Cost? Buying a given house might be a good investment, but living in that house isn’t necessarily a good idea. A good investment is a good investment. A good place for one to live might be somewhere else. They don’t necessarily coincide.

Click here for the whole piece.

Saturday, February 26, 2005

Crooked Timber: Adjustable rate mortgages

Jack Quiggin over at Crooked Timber has an interesting piece on fixed-vs. adjustable rate mortgages. He points out that the refinancing option associated with a fixed-rate loan gives a put option to the borrower. However, a commenter to the post notes that there's a fixed cost to the option (much like a premium, although it arises from refinancing-related fees rather than an explicit up front cost).

Options Trading Around Takeovers

Almost every week, I see a news article about unusual option trading volume for a company that's subject to a takeover rumor. A good number of studies have examined informed trading around takeovers. While some have examined whether informed trading takes place by looking at legal insider trading (from SEC form 3 and 4 filings), a better strategy for informed traders would be to use the options market. The Financial Accounting Blog highlights another example of takeover-related unusual options volume with this story from MSNBC about options trading around the takeover of Gillette by P&G:

Well before the investing public learned of the $57 billion takeover of Gillette by Procter & Gamble, traders apparently got wind of the deal: Options-trading volume in both companies spiked more than fourfold on Jan. 27, before news of the marriage was announced.

The action, which led to one-day profits of more than 500% on some of those trades, has raised more than a few eyebrows on Wall Street.
One interesting question is whether the increased trading comes from speculators who got wind of the transaction (the "word on the street") or from corporate insiders who had more specific knowledge of the deal terms. If it's the first, traders would simply buy long-term at the money options. If it's the second, their knowledge of the deal terms would allow them to select the option contract that would allow them maximum profits from using their private knowledge. Arnold, Nail, and Bos (2000) have a paper on the SSRN, Speculation or Insider Trading: Informed Trading In Options Markets Preceding Tender Offer Announcements that examines this very issue:

In our sample of 305 cash tender offers occurring between 1993 and 1998, we find evidence that the options market has become the preferred trading venue for informed traders. Given this result, we analyze individual call option contracts for those tender offer targets with traded options, identifying the one optimal insider contract which maximizes the returns to insiders with perfect knowledge of a pending tender offer. This analysis allows us to test the competing market anticipation and insider trading theories of pre-bid stock price and volume run-ups using the trading patterns of options which should be preferred by insiders and those preferred by speculators. Our individual contract analysis is consistent with both theories as we find trading in both insider-preferred and speculator-preferred contracts drives aggregate call option volume run-ups. However, heavy trading in the optimal insider contract occurs on heavy volume days for all contracts. These results support the notion of Easley, O'Hara, and Srinivas (1998) that a substitution effect exists whereby informed traders prefer to trade in options markets when possible and that insiders will hide their trades within those of speculators.

Suggested Citation
Arnold, Tom, Erwin, Gayle R., Nail, Lance A. and Bos, Ted, "Speculation or Insider Trading: Informed Trading in Options Markets Preceding Tender Offer Announcements" (May 2000). http://ssrn.com/abstract=234797

It's worth a read. Based on their data, profits like those mentioned in the MSNBC article aren't unusual - the mean return on call option purchases over the tender offer period is 455% (over 14 times the average profits on insider stock purchases).

Wednesday, February 23, 2005

Hiring in Academia

The hiring process can be extremely confusing for a Ph.D. candidate in the job market for the first time. I know I didn't have any clue as to what went on behind the scenes. Here, Michael Drout at Wormtalk and Slugspeak pulls back the curtain on the process for the humanities (he's an English Prof at Wheaton in Massachusetts).

One of the big points he makes is that one or two faculty members can scotch a person's application in the early stages. It might be resurrected at a later stage, but only "might". Here's the lesson: academia is a relatively small village. Be a jerk at a conference, or step on the wrong toes, and it could end up biting you later on the you-know-what.

University Presidents as CEOs

There are a lot of parallels between Lawrence Summers at Harvard and Constantine Papadakis at Drexel: Both have strong personalities (more like a CEO of a company than like the traditional academic); both are trying to bring more of a business management style to the running of a university; both favor a more vertical management style.

Not surprisingly, they both regularly bump antlers with the faculty at their institutions. Today's Wall Street Journal runs a page 1 story titled "
How Dr. Papadakis Runs a University Like a Company" (subscription required for online access) on Papadakis' recent history at Drexel. As a business school professor, I don't have as much problem with his emphasis on marketing and the bottom line. However, there are a lot of faculty that seem to have problems with both his style and his general philosophy.

He's clearly done a great job at what I think is a university president's main job - he's brought in a lot of money. Of course, as a finance professor, I believe most problems can be alleviated with more money (or maybe the converse - most problems are made worse with a lack of money). I've got several friends at Drexel's B-school, and they're pretty happy with him so far. Of course, they're also Finance folks, so they share many of my biases.

This illustrates a previous point - a strong leader will invariably tick some people off. Unfortunately, academics are generally not risk takers (the tenure setting discourages it). So, we say we want visionaries and change agents, and then get mad at these same people when they try to do what we hire them for.

Sunday, February 20, 2005

SEC Requests Accounting Data From Oil Firms

From the Wall Street Journal (online subscription required):

The Securities and Exchange Commission, fresh from scrutinizing how oil and natural-gas companies book their reserves, is requesting that oil companies divulge more in their accounting for exploratory drilling and other operations.

Finance majors often ask what they can do to make themselves more marketable. I almost always encourage them to take more accounting classes. For many of them, they'll start off in a position that requires them to use accounting data as inputs in some way (credit and collections, reporting, financial analysis, etc...). However, a typical curriculum only requires them to take one or two accounting courses. So, as end users, they often have little sense beyond the very basics as to the subtleties of how financial statements are constructed.

Summers Clashes With Faculty

Lawrence Summers is clashing once again with the Harvard Faculty. This time it's over his recent at comments an NBER conference on work-force diversity. Last year, he caught some heat over his clash with Cornel West of Harvard's African Studies program.

Being a university president must be one of the most frustrating jobs in the world. While the majority of academics are healthy people who genuinely want the best for their schools, academia has more than a few people with enormous egos (ya think?) and personal fiefdoms to protect. If a university president stands for anything, he or she will inevitably step on someone's toes.

Here's a link to the article.


Arnold Kling tells us why the issue is important.

Friday, February 18, 2005

Research Manic-Depression

Like everyone else, I sometimes gripe about my job. Time for a look inside my world. Sometimes I think being a researcher is like being a manic depressive. Before you accuse me of being flippant (about academia) or insensitive (since I mentioned manic-depression), let me demonstrate with an example from the last month or so:

  1. My colleagues and I come up with a pretty good research idea. It's not groundbreaking (after, not many are), but it sounds like a good one: it extends a relatively recent article in a top journal, our results should be publishable at some level no matter what we find (i.e. we don't live or die based on which side of the null hypothesis we come out on), and it's doable in a reasonable time frame. So, we get a bit excited.
  2. We spent about a month talking it over and doing (at least we thought) a fairly thorough literature review. So far, so good. We get more excited.
  3. We find a working paper that looks like what we're doing. We get depressed.
  4. After a closer read of the working paper in step #3, we realize that it doesn't hurt our case, but instead actually helps it. We get excited again.
  5. A week later, we find another (but different) working paper (go back to step #3). We get depressed.
  6. Once again, we figure out it's really not a competitor piece after all (step #4).
  7. And so on, and so forth.
But even on a bad day, being a pointy headed academic is still better than most jobs. We get to spend a good part of our time actually thinking about things that interest us, and they pay us pretty well. Of course, I'm locally (or even globally) non-satiated in money, so don't tell the administrators who pay us.

Even Money Says Spitzer Gets Into The Game Next

American Express Financial Advisors has long positioned itself as providing "financial planning" rather than just hawking products (full disclosure: I worked for American Express in the early 1980s when it was known as Investors Diversified Services).

However, it looks like they might just not be as independent as they claimed. According to an article in today's Wall Street Journal (subscription required) , American Express has just been accused by the New Hampshire Bureau of Securities Regulation of skewing their investment recommendations towards their own in-house funds.

The article talks about the incentives given by American Express to its advisors to push their own funds. As Captain Renault would say in Cassablanca "Frankly, I'm shocked -- simply shocked!"

Anyone want to bet on how long it takes Spitzer to pile on?

Insider trading, Neglected Firms, and Market efficiency

Wednesday's Wall Street Journal carried a short piece titled "Insiders Buy Ignored Biotech Cerus" (subscription required for online access). It described how some investment funds use insider trading patterns as a tool for stock selection. The central idea was that insider trades make a better indicator for "neglected" stocks (those with few or no analysts covering them).

It's a good piece to focus discussion on efficient markets, asymmetric information and signaling, and the role of analysts as information producers.

Thursday, February 17, 2005

What Really Happens at The FOMC

Thanks to Jim Mahar at Financeprofessor.Com for finding this article on what really happens at the Federal Open Market Committee meeting. It's a good look at how the meetings actually go -from a talk at U of Tennessee-Martin by Fed Governor Susan Schmidt Bias. For the full talk, go to this link.

If you teach markets or money and banking, it's an easy read - well written and chock full of real-world stuff.

A Sarbanes Oxley Blog - What Will they Think of Next??

I just came across this blog dedicated to the Sarbanes Oxley bill. It's at www.insidesarbanesoxley.com. Looks like a good resource, and has a pretty good collection of links.

Monday, February 14, 2005

A Review of Sarbanes Oxley

Financeprofessor.com recently highlighted this article in Financial Engineering Today titled "Sox It To Them.

It first lists many of the new requirements under the law, such as increased auditor independence, bans on auditors doing certain types of other work for audit clients, CEO & CFO certification of financial reports, accelerated reporting of insider trades, and so on.

However, the most interesting part of the article is its questioning of the commonly held belief that SOX imposed excessive implementation costs on companies.

There is some evidence that going-private transactions increased in the post-SOX period. For example, see this piece by Engel, Hayes, and Wang, titled"The Sarbanes-Oxley Act and Going Private Transactions."

This week's Carnival of the Capitalists

This week's Carnival of the Capitalists is up. For those who've never seen it, it's definitely worth a look - a weekly roundup of posts on a WIDE variety of business related topics. This week's sections looks at investments, economics, management, marketing, business education, Social Security, the 'net, and taxes.

Verizon and MCI

Looks like I'm merger-blogging again.

The consolidation of the telecommunications industry continues. The Wall Street Journal (along with just about everyone else) just announced MCI's acceptance of Verizon's $6.8 Billion offer. According to several accounts, At least a few MCI executives preferred Verizon's offer over a slightly larger one by Qwest Communications ($7.3 billion ) because of Verizon's stronger financial position.

The acquisition of MCI is kind of ironic, since it was (way back in the day) one of the first to bring independent competition to the long distance market in the wake of the AT&T breakup.

Now, the industry is undergoing more change with challenges from cell-phone providers and even internet phone service from technologies like VOIP.

In any event, it looks like we'll be talking in class about mergers again - medium of payments, the role of the board in multiple bidder contests, the likelihood of synergies, managers' vs. shareholders' preferences, and so on.

Sunday, February 13, 2005

Resources for the Classroom

Here are a few helpful resources that I use a lot in the classroom:

  • Yahoo Finance: a great site for stock market information and news
  • TradeSports: a site that makes markets in Arrow-Debreu securities based on an amazing array of events, from election outcomes to whether or not Osama Bin Laden gets captured by a certain date. It's similar to the Iowa Electronic Markets, but also lets you view a good part of the order book. Great for talking about market microstructure.
  • ProfessorJournal.com: want to use more current business news into your classroom but don't want to spend the time doing the reading necessary to keep up? They make it easy. Make sure to sign up for the Educators Reviews. They email you three articles each week with summaries and a set of questions to use in the classroom (a searchable database too). Best of all, it's free.
Let me know if you have other handy resources. I'll eventually put up a permanent list.

Takeover Targets

Last week we were talking about takeovers in my advanced corporate finance class. Eventually the discussion came around to how to spot takeover targets. Here's an article in the February 3rd Wall Street Journal (subscription required) titled How To Cash In on The M&A Boom. One characteristic of takeover targets it mentions is a low enterprise value relative to EBITDA. According to the article, this could indicate an undervalued company, but also makes it more likely that the acquirer would be able to service the financing for the acquisition.

Of course, if markets are efficient, the target is really not a bargain. It's a good (and short) piece to use in a discussion about valuation and efficient markets, and about using naive valuation rules.

Welcome to my corner of the Blogosphere

Hi all! I figured I'd start out with a short post that explains what FinancialRounds is all about, and why you might want to come back from time to time:
  • First, it's a "team blog", which means that it will (eventually) have a number of people who post material to the site.
  • Second, it's a window into the world of academics from the perspective of business school faculty who (primarily) teach finance - both undergraduate and graduate
  • Finally, it's intended as a resource for finance faculty who want to bring the "real world" into the classroom. As it evolves, it will have links to current events and recent research that can be discussed in the classroom.
As for me, I'm an (untenured, but hopefully not for long) assistant professor who teaches primarily corporate finance. I graduated with my "plumbers' licence" (Ph.D. to those not in the guild) in the late 1990's. For now, since I'm untenured, I'll keep myself anonymous except to my close friends.

If you want to see what I aspire to, check out Jim Mahar's FinanceProfessor.com or The Professor of the Vines, also known as Steve Bainbridge at Professorbainbridge.com. Of course, the master at this is Glenn Reynolds at Instapundit I think he must get about 4 hours of sleep a night (or type really, really fast).

Hope to see you soon.