Some public companies have groused that the Sarbanes-Oxley corporate-governance law has them thinking they ought to go private. Now some young companies say the same legislation is slowing their trip to stock market.
Citing additional costs and requirements stemming from the 2002 law -- which, among other things, requires chief executives to sign off on financial statements -- some of these companies are taking private-equity money rather than opting for a fast initial public offering of stock. While they are still aiming for an eventual IPO, the companies are taking extra time to make sure their houses are in order.
Thursday, March 31, 2005
Qwest Communications International Inc. prepared to launch a revised bid for MCI Inc., which this week agreed for a second time to be bought by Verizon Communications Inc. after Verizon sweetened its offer to roughly $7.5 billion.
New Scientist reports that cooperation among members of small groups is strongly encouraged not just by punishing cheaters but also by punishing those who don't punish cheaters. Even better, the reward centers in our brains appear to be stimulated by both actions.
Click here for the whole article.
Unfortunately, I haven't found this to be true in the classroom.
Click here for the whole piece.Below, the fruits of half an hour of excruciating conversation during office hours. In the interest of fairness, I present two readings of my pupil’s abysmal performance in my class:
At a school I previously taught at, the core finance class had the catalog number "FIN-330". We referred to some students (amongst ourselves) as "FIN-330 majors". One memorable student took it 4 or 5 times before eventually passing.
I used to tell students that one definition of insanity is "repeating an action that has always had the same result before, but expecting a different result this time". Unfortunately, a student who's failed the class once will typically be resistant to changing their approach. Hope is a wonderful thing, but it's a lousy way to manage grades.
The New Economist discusses an article by Andrew Leigh and Justin Wolfers titled Competing approaches to forecasting elections, that compares the usefulness of polls, economic models, and prediction markets using Australian data. From the paper:
While the evidence for economic voting has historically been weak for Australia, the 2004 election suggests an increasingly important role for these models. The performance of polls was quite uneven, and predictions both across pollsters, and through time, vary too much to be particularly useful. Betting markets provide an interesting contrast, and a slew of data from various betting agencies suggests a more reasonable degree of volatility, and useful forecasting performance both throughout the election cycle and across individual electorates.N.E concludes with some thoughts on the extent of informed trading in these markets. I've often wondered about that too, since professional politicos have such an information advantage over the average (relatively uninformed) trader. My suspicion is that (to the extent that informed trading occurs trading), the preferred venue would be Tradesports.com rather than on the Iowa Electrnic Markets, since (to my recollection) the volume of trade was much higher on Tradesports. However, I'm primarily a corporate finance guy, so I'd welcome comments from any microstructure folks.
Click here for the whole article.
Wednesday, March 30, 2005
Click here for the whole article.It's a funny question as a lead-in. Generally, when some other country has an "appetite" for something (like U.S. government bonds) that we make, we are not at risk but richer for it. There are some relative price shifts that have distributional consequences (like making U.S. exports relatively more expensive compared to foreign imports), but on the whole, the country is richer. For a variety of reasons, Asian central banks have been willing to not only hold U.S. debt but (via undervalued exchange rates) pay too much for it. At least initially, it's their problem, not ours.
So the real question, and the one that Nouriel and David seek to answer, is whether a potential loss in overseas appetites for U.S. government bonds will put the U.S. economy at risk.
Overall, the arguments in the WSJ article are exceptional. They (and Andrew's discussion) center around the question of how hard a shift in overseas investor appetites for U.S. bonds would affect interest rates (i.e. whether there would be a "hard" or "soft" landing). WhileI haven't looked extensively at the issue, I'm in the "soft landing" camp - it would be difficult for overseas investors to unwind large portfolio positions rapidly.
I don’t feel rich. In fact, I know a lot of people who are richer than I am. Many of them live in my street; some of them work in my department. But when I take the GlobalRichList test I come out well into the top 1 per cent of earners in the world. That’s right, well over 99 per cent of the world’s population earn less than I do. Matthew Yglesias wrote the other day about income distribution in the US and the psychological mechanisms that mean that people misperceive their own place in that distribution...
While we often hear people talking about the differences in wealth between the "rich" and the "poor" in America, there si more variation between countries than there is within America - even the poorest Americans would be in the top ranks on a worldwide basis. For example, an individual making $12,000 per year (roughly minimum wage) would be in the 87th percentile of the world income distribution, while an individual making $40,000 per year (not uncommon for a good student fresh out of finance program) would be in the top 3%.
Tuesday, March 29, 2005
Click here for the whole article.Pitfall No. 1: We don't know jack
I know that sounds harsh, but it's the truth. We cannot consistently predict the cash flows and their growth rates with any accuracy; the business environment is far too dynamic. Of course, we should try to make the best estimates we can. And that means being careful about our assumptions and predictions because we don't want to have the pitfalls of the equation work against us.
Most good students can grasp the mechanics of doing some type of valuation exercise (i.e an NPV calculation or an option-valuation problem) pretty easily. They just do a dozen or so problems and they're set. However, in most problems, the inputs (the cash flows, the discount rate, etc..) are given.
However, they real "money" (no pun intended) comes to those who can come up with the right inputs. Once that's done, there are always grunts who can crunch the numbers.
Monday, March 28, 2005
He goes on to mention other common stock market patterns. This would be a good piece to share with an investment class to spur discussions about whether simple trading strategies make sense in light of market efficiency.Putting the clocks forward isn’t just “totalitarianism at its most intrusive.” It’s also expensive. Lisa Kramer has estimated (in this pdf) that the UK stock market falls by an average of 0.4 per cent on days after the clocks go forward. If this pattern continues on Tuesday, investors will lose £6.2 billion. And we won’t get the money back when the clocks go back in the autumn. Ms Kramer has estimated that the market also falls after that happens.
Click here for the full article.
Click here for the entire article.Don Bodiker uses a popular file sharing program to swap music and other information over the internet. He also uses his computer to prepare his taxes.
He never thought the two had anything to do with each other, until he got a call. "I had no idea who he was or what he was. I just thought he was a typical telemarketer," Bodiker said of the call. "And he wanted to inform me that my tax returns were being posted out on the internet. I was very skeptical but he then proceeded to tell me some very specific details about my tax return."
On file sharing software (like Limewire), you define a folder or folders on your hard drive as shareable. Unfortunately, the default sharable folder has the same name that a popular personal tax preparation software uses to store your tax returns. As a result, many people end up inadvertantly making their tax returns (which contain their social security numbers).
The morals to this story:
- Be careful about what's in your shared folder
- Think twice before you use the default option on software installations.
- Make sure you know what's on your computer - it's possible that another family member has installed software that you're not aware of (particularly important if you have younger children).
Of course, the simple and obvious response to this answer is that market competition does not always lead to ideal outcomes. True. But the mistake here is comparing market outcomes to a theoretical ideal rather than the next best alternative. What is the next best alternative - or at least the alternative offered by critics of market outcomes? Government.
click here for the whole article.
The point is that you can't compare capitalism with imperfect actors to a government with perfect, all-wise actors. Given imperfect people, I'll take the checks and balances associated with competitive markets.
Question for class: order the following in terms of desirability (and support your answers):
- Capitalism with perfect people
- Capitalism with imperfect people
- Socialism with perfect people
- Socialism with imperfect people.
There's been a lot of discussion about a savings deficit in the United States. But recently, there have been several articles suggesting that the US...indeed, the entire world...now has a surplus of capital, and that this surplus is pulling down rates of return on investment. (In actuality, supply and demand of capital will always be equal, of course: the question is at what price level...in terms of returns on investment...the supply and demand curves will intersect.)
Floyd Norris makes the capital-surplus argument in The New York Times (3/25). As evidence, he makes these subsidiary arguments:
1)There are low rates of return on debt instruments, and long-term rates have proven to be "sticky"
2)Stock prices are high relative to underlying valuations
3)Countries defaulting on debt have been able to get away with it (he specifically mentions Argentina) implying reduced relative power on the part of owners of capital
4)Increasing management compensation levels, which he believes make the same point about relative power (in this case, of managers vs owners of capital)
These seem like good arguments, except for the last, which feels like a stretch. I'd also observe that many corporations are carrying considerable amounts of cash on their balance sheets, which they'd be unlikely to do if they were seeing lots of compelling opportunities for investment.
But on the other hand....
Click here for the whole article.
Sunday, March 27, 2005
Click here for the whole article.Investors are often thrilled when well-known outsiders come in as white knights to run a company. But a growing body of evidence suggests that a company will perform better over the long run when it is led by a relatively anonymous insider.
The article discusses some the results found by Jim Collins, in his book "Good To Great." A surprising number of companies that have moved from matching to outperforming the S&P 500 did so with CEOs that came from within its own ranks.
It explains that the hiring of an outsider CEO is a common respose to poor stock market performance. However, this performance is sometimes due to problems outside the CEO's control.
The article goes on to cite a recent scholarly piece by Ray Fisman, Matthew Rhodes-Kropf, and Rakesh Khurana, titled "Governance and C.E.O. Turnover." It demonstrates how insulating the board from stockholder pressure to fire the CEO and replace him with an outsidercan be beneficial. Here's the abstract:
This provides some support for Steve Bainbridge's theory of "director primacy", which argues that decisionmaking power should be vested in the board of directors.Shareholder delegation of the power to fire the CEO to the board of directors is central to corporate governance. While the board ideally acts as desired by shareholders, board entrenchment may insulate a poorly performing manager from shareholders agitating for her removal. The conventional 'costly firing' model of managerial entrenchment views this protection from shareholders as purely negative. Yet recent anecdotal evidence on managerial turnover suggests an alternative view of entrenchment: If shareholders misattribute poor performance to the CEO rather than to circumstance, then insulating management from the whims of shareholders may lead to better firing decisions. We propose that entrenchment has an inherent trade-off. We present a model that directly incorporates both sides of this trade-off, and generates a set of empirical predictions that we explore using recently collected data on governance statutes and on the dismissals of CEOs of large U.S. corporations. Our results demonstrate that governance is a very important mediating factor in the relationship between performance and firing. Furthermore, we find support for the 'misguided shareholder' view of entrenchment. Fundamentally this paper explores whether, in caving in to shareholder demands, boards act in the best interests of shareholders or simply respond to their whims: Do they do just do something, or do they do the right thing?
Update: welcome to all the folks stopping by from Professorbainbridge.com -- glad you're here.
Saturday, March 26, 2005
Profit has two pleasant characteristics. First is that profit attracts capital investment. If a company is making money, then more people are going to enter into the business. If the business of the company is saving the world, then the world will be saved all the faster. Second, profit tells you that you are actually helping people. Take, for example, the case of Christian missionaries who teach people how to read....the Bible. While the ability to read is surely a good thing, it's not clear that the people who now know how to read the Bible are better off. A primary tenet of profits in a free market is that everyone who trades is better off. Somebody who runs around a third world country teaching people how to use contraception because their country is overpopulated is not clearly doing them a favor.
Thomas Sowell has written at length on the role of profit. He says that "for profit" firms should be more correctly called "profit AND loss firms", because losses indicate that the resources employed in the business would better benefit society as a whole elsewhere.
Click here for the whole piece.
Mr. Lyons and other young adults may belong to the first check-free generation as they choose to handle transactions almost entirely by debit card, credit card and computer. The number of checks written in the United States peaked sometime in the mid-1990's; it has been falling precipitously for the last four years, according to the Federal Reserve. At the same time, the number of electronic payments has risen swiftly.
The article also is a good example of how technological change forces companies to reallocate resources - both within banks and without. It's a very nice piece for a financial markets and institutions class (for a segment on electornic payment systems).
Friday, March 25, 2005
Aretha arrived in the spring of 1967, courtesy of Jerry Wexler and Atlantic Records. Wexler signed Aretha to Atlantic in the fall of 1966. He sat Aretha at a piano and placed her in the midst of sympathetic musicians at the famed Muscle Shoals Studio in Muscle Shoals, Alabama. "I Never Loved a Man (the Way I Loved You)" was the result, and everyone involved knew that Aretha had found herself musically.
The session resumed in New York and included the recording of Otis Redding's "Respect," the song that broke Aretha nationally overnight. According to Peter Guralnick, Redding presciently told Wexler upon hearing Aretha's version of "Respect" for the first time: "I just lost my song. That girl took it away from me." Onstage at the Monterrey International Pop Festival later that year, he repeated: "The girl took that song away from me." If you heard the song in the spring of 1967, you remember: She took the song away from him.
Around these parts (D.C. area), I've heard all sorts of explanations as to why stratospheric local housing prices (despite stagnant rents) are justified. None of them take into account the fact that prices have risen as much or more in South Florida, New York, Boston, L.A., the Bay Area, etc., not to mention Sydney, London, Brussels, Rome, etc. Clearly, it's a liquidity-driven bubble, resulting from an easy money policy instituted by world central banks. The post-Russian bond market default of 1998 caused a monetary easing, which inflated prices of securities (a form of inflation); before that liquidity bubble could be completely undone, 9/11 caused a new easing, with the inflation going into real estate instead of securities. (If rising home prices were really housing demand-driven, as real estate bulls insist, rents would be rising along with housing prices.)
James Joyner at Outside the Beltway at gives us an idea as to what those prices are:
Housing in the DC area is ridiculously expensive. The 2600 square foot house that sells for $175,000 in Montgomery, Alabama would be $750,000 out in Loudoun County, Virginia and simply non-existent much closer in to D.C. without spending $500,000 to buy a property, knocking the place down, and spending another $400,000 to build it.
He compares the housing and tech-stock bubbles in the article.
Click here for the whole piece
A recent Baltiore Sun article noted that real estate in the Baltimore Washington corridor has appreciated as much as 80% since 2002 (based on sales of the same homes) in come of the more desirable counties.
Click here for the whole article (free link)At their best, blogs are an advertiser's dream: the diary-style Web sites that feature running commentary and reactions are tightly targeted niche markets where avant-garde enthusiasts regularly return to read, post and send in tips. Well-placed blog ads can boost a company's image as cutting-edge. Plus, they're inexpensive: $350 a week, for instance, for premium positioning on Mr. Denton's high-profile inside-Washington blog, Wonkette, which got 2.2 million "page views" last month, a measure of how many times a single visitor looks at one Web site page.
But many companies are wary of putting their brand on such a new and unpredictable medium. Most blogs are written by a lone author. They are typically unedited and include spirited responses from readers who can post comments at will. Some marketers fear blogs will criticize their products or ad campaigns. And, like all new blog readers, companies are just learning how to track what's being said on blogs and which ones might make a good fit for their ads.
As a result, advertising on blogs is still in the early stages. Although advertising on Web sites was a $9.6 billion business in the U.S. last year, according to Interactive Advertising Bureau there is little data to date on blog ad-spending. Blogads.com, a service that matches bloggers and advertisers, says its business has grown from 28 ads in September 2002 to 1,685 ads last month.
No one has offered to advertise here yet (sniff, honk).
How much difference do chief executives really make to a business? “A lot,” say shareholders in Prudential. They raised the price of the company by £580 million yesterday when they learned that Jonathan Bloomer was to be replaced as CEO by Mark Tucker.
If this judgment right, there's something very wrong about the market for chief executives; either Mr Bloomer was massively overpaid or Mr Tucker is grossly underpaid. But is it right? Of course, the Pru’s price fell sharply under Mr Bloomer’s watch. But how much of this is really his fault?
A proper answer to this question requires us to do two things. First, we must identify the Pru’s stock-specific returns. And then we must identify what proportion of these can be attributed to the chief executive.
Both steps are tricky.
Click here for the entire article.
In answering the question, he discusses the CAPM, systematic vs. ideosyncratic factors, behavioal finance, and market efficiency. Nicely done, with a lot of issues for classroom discussion.
I also got a big kick out of the terminology of corporate control: spinoffs, carveouts, white knights, greenmail, and so on.
The takeovoer battle for Fuji is a good example. As reported in an article in today's New York Times, it seems that Softbank may be playing the role of "white knight" for Fuji, and has bought up a significant stake in the company:
However, Softbank's motives are interesting.TOKYO, March 24 - An affiliate of Softbank of Japan emerged as the biggest shareholder in the Fuji Television Network on Thursday in a move apparently intended to fend off a possible takeover of Fuji by Livedoor, the Internet start-up.
The Softbank Investment Corporation acquired 14.67 percent of the voting rights in Fuji Television, Japan's largest private television network, by borrowing the shares from the Nippon Broadcasting System, a Fuji affiliate, the companies said in a statement Thursday.
Click here for the whole articleThe Softbank group has good reason to help Fuji defend itself from a hostile takeover by Livedoor: Softbank is the largest shareholder in Yahoo Japan, one of Livedoor's top rivals. Softbank also runs the country's second-largest broadband Internet service, after NTT, and has holdings in a host of Internet businesses. Softbank owns 39 percent of Softbank Investments.
Japan may be undergoing some of the same changes that Europe saw in past years. Hostile takeovers are extremely rare. According to the article, "public disputes are considered distasteful". Horie (who runs the hostile suitor Livedoor) is a college dropout, so there also seems to be some cultural/class ramifications to the maneuvering.
Thursday, March 24, 2005
Securities Litigation Watch (slw.issproxy.com) Finding investment returns
largely consists of two tasks, finding value and avoiding corruption. Both are
extremely difficult. Securities Litigation Watch, run by Bruce Carton, executive
director of ISS Securities Class Action Services and a former corporate lawyer,
provides a constant update into the latest scandals and investigations.
Another useful blog that he often links to is www.the10b-5daily.com run
by Lyle Roberts, lawyer for Wilson Sonsini. And for those CEOs out there, see
his latest entry: "Don't you hate it when your wife ignores your specific
'entreaties' that she not share inside information about your publicly traded
company with her brother, and gets sued by the SEC?"
Footnoted (www.footnoted.org) This is run by Michelle Leder, author of
Financial Fine Print: uncovering a company's true value, and does what it says -
it reads the footnotes of SEC filings, press releases and so on, and asks the
right questions about what is going on in the fine print. I really like it when
a post starts off: "Does anyone really believe it when a CEO says he wants to
spend more time with his family?" and then goes from there. A great site for
finding either shorting opportunities or at least stocks to avoid.
Click here for the whole article.
So, I'm not dead, I'm just traveling...
Click here for the link.
Wednesday, March 23, 2005
She then talks about how fuel hedging is common in the airline industry, but that the hedgers may be the one with higher cash flows. Hedgers in the airline industry will benefit from their foresight in one of two ways:
- They will have lower factor costs, and would therefore be could conceivably cut fares.
- Although not mentioned, if they don't cut fares, they will have greater cash flows, which could enable greater expansion.
There's been limited research in this area. However, one recent paper was presented at the last American Finance Association meeting, by Amrita Nain, titled The Strategic Motives for Corporate Risk Management. In short, she finds support for the notion that hedging decisions are based at least in part by the hedging decisions of other firms in the same industry. Click here for the working paper.
Click here for the whole piece.There are already plenty of services at Harvard that sharpen the differences between socioeconomic classes. Harvard Student Agency Cleaners, for example, lets some students pick up clean and neatly-folded clothes in crackling plastic bags. The less well-off among us, however, make semi-weekly journeys to the basement with bulging mesh laundry bags and quarters in hand. These differences extend to the social sphere as well—to final clubs composed predominately of wealthy young men, or to basic activities, like eating out, that some students cannot afford to enjoy. But while class differences are a fact of life—yes, there are both rich and poor people at Harvard—there is no reason to exacerbate these differences further with a room-cleaning service.
I find it hard to believe that students (at Harvard of all places) would be offended by the fact that some can afford maid service and some can't. Maybe this is my middle-class mill-town upbringing showing, but if we had a student on our dorm floor (decidedly non-Harvard state school) with maid service, we'd hang out in his room so that we could sit somewhere without worrying about catching a case of the creeping crud.
He then goes on to state some reasons why the PAM might not have been effective on positive grounds (including the possibility that participants might be state-monitored, the very high incentives of terrorists to send false signals, and the lack of a market in the underlying asset (the terrorist attack) on which the contracts are based).As Milton Friedman famously argued, positive economic analysis is designed to answer the question what is? with respect to economic development. It is concerned with understanding how the economic system has behaved in the past in order to predict how it will behave in the future. Normative economic analysis, in contrast, is designed to answer the question what ought to be? with respect to economic development. Therefore, it incorporates value judgments that are not necessarily grounded in the positive economic theories..
...Therefore, the debates over economic policy are often framed in terms of positive claims vs. normative claims that are difficult to reconcile, because one set of claims calls for empirical validation to ensure the policy works, while the other calls for ethical validation to ensure it is appropriate. Moreover, this framing is typically only implicit as the protagonists often have a difficult time differentiating the positive claims from the normative claims, thereby undermining their attempts at validation. Worse yet, many debates over the state’s economic policy are entirely based on competing normative claims that pit one ethical perspective against another ethical perspective, or one political philosophy against another political philosophy, with little or no recourse to positive theory and empirical evidence.
He finishes by recapping how the real nails in this idea's coffin came from normative arguments: that it was "morally offensive".
My sense is that arguments in the public sphere today about economic issues are much more likely to come from a normative perspective. I would also guess that the likelihood of a positive argument increases the more educated (particularly in business, economics, or logic) or politicially conservative the arguer is.
Click here for the whole article.
Tuesday, March 22, 2005
I would like to first note that some of these stories are controversial. Do they really involve derivatives? Or do the minds of people like myself and others see derivatives everywhere?He then traces derivatives transactions from Genesis 29 (the Story of Jacob and Rachel) through the major derivatives scandals of the early 1990's such as Proctor and Gamble, Orange County, etc...
Click here for the whole article.
This would be fun background for a derivatives/risk management course, or for a talk about derivatives to an audience of non-financial folks.
In The Courage of Misguided Convictions: The Trading Behavior of Individual Investors, Barber and Odean find that we are 50% more likely to sell a winner than a loser. Our tendency to avoid pain -- in this case, refusing to take a loss that already exists -- is just one psychological weakness that leads us to poor investing decisions.
Click here for the whole article.
She found that the degree to which the article had a positive impression was correlated with ALL of the following signs that the journalists involved knew what they were talking about:Click here for the entire article.
1. mentioning someone with firsthand knowledge
2. time since the media firestorm
3. article length
4. a news versus an opinion style
5. the periodical's prestige
6. the periodical's frequency
I think it's generally hard to find good commentary on economic matters in the popular press. Many reporters nowadays would benefit from a class or two in economics or finance.
Monday, March 21, 2005
Click here for the whole article.Suppose the tab is split not at each table but across the 100 diners that evening across all the tables. Now adding the $4 drink and dessert costs only 4¢. Splurging is easy to justify now. In fact you won’t just add a drink and dessert; you’ll upgrade to the steak and add a bottle of wine. Suppose you and everyone else each orders $40 worth of food. The tab for the entire restaurant will be $4000. Divided by the 100 diners, your bill comes to $40. Here is the irony. Like my neighbor at the theater, you’ll get your “fair share.” The stranger at the restaurant a few tables over pays for your meal, but you also help subsidize his. It all “evens out.” But this outcome is a disaster. When you dine alone, you spend $6. The extra $34 of steak and other treats are not worth it. But in competition with the others, you’ve chosen a meal far out of your price range whose enjoyment falls far short of its cost.
As we tell even our introductory finance students, a similar problem exists with CEOs of large publicly held corporations. IT's the classic Jensen & Meckling problem: they typically hold far less than 5% of the firm's outstanding common stock. So, while they get 100% of the beenfit from a perquisite (like a thick carpet in their office, expensive artwork on their walls, or a membership in the country club) they pay only a fraction of the cost. As a result, they overconsume. Rationally, we should anticipate this, and take steps to make sure that other mechanisms are in place to offset this.
Schiller mentioned several new possibilities for managing risk, including:
- Home Equity Insurance: The big monetary risk of a home nowadays is not fire, it is market movements. Shiller has founded a fund to offer securities that can be used to protect against home equity risk.
- Country Income Indices: Why not sell your country short, and buy the world, in order to reduce your country-associated financial risks?
- Longevity bonds: (whose payoff depend on the longevity of a large demographic group) to hedge against age-distribution-related risks.
When I teach financial markets, one of the unifying themes use is that new financial instruments are constantly being developed as a way of pricing, managing, and shifting risk. In addition, we talk about how the process of financial engineering has accelerated in recent years due to the increased availability of cheap computing power (I'm currently typing this on a $1200 laptop that would have exceeded the computing power of the typical mainframe in 1990). This has dramatically lowered the cost of (and increases the spread) of computationally intensive models.
Click here for a related post on how this has even change baseball.
- Economics is the study of trade-offs, of costs. It was, therefore, wholly natural for Larry Lindsey to discuss the costs of the Iraq war, and to be surprised when he attracted opprobrium: whoever thought wars were cheap? Politicians, of course, hate the idea of trade-offs and costs.
- Economists love counter-intuitive ideas. The two most successful theories in economics are probably comparative advantage and the invisible hand – things that don’t strike the layman as obvious. This leads to us stressing paradoxical notions – like the notion that outsourcing can be a good thing. Good politicians, by contrast, prefer sound-bites that corroborate the public’s prejudices.
Sunday, March 20, 2005
1) The Women's Huskies team is still in it.
2) They got beat by a good team, and it wasn't Duke.
3) They're a young team, so almost everyone will be back next year.
Time to shift from rooting for UConn to rooting against Duke (lot's of company there).
The piece does a pretty good job of laying out the agency problems involved: The same advisors that an acquirer (or target) uses on the pricing of a deal then writes a "fairness opinion" that the companies' directors use to protect themselves agains litiation; The bank that advises the target often also provides financing to the buyer (a practice known as "Staple financing"; There is typically little disclosure of the conflicts of interest or compensation invoilved.So maybe all is not fair in love and investment banking.
For the last several months, regulators have been on Wall Street's back about "fairness opinions," those conflict-ridden fig leaves that banks provide to clients to justify a proposed merger or acquisition. The National Association of Securities Dealers has just finished gathering comments from the public on how to change the practice and is expected to set new rules for fairness opinions soon, possibly in concert with the Securities and Exchange Commission.
Click here for the whole piece.
Saturday, March 19, 2005
Michael Lewis's book, Moneyball, is the story of an innovative manager who exploits an inefficiency in baseball's labor market over a prolonged period of time. We evaluate this claim by applying standard econometric procedures to data on player productivity and compensation from 1999 to 2004. These methods support Lewis's argument that the valuation of different skills was inefficient in the early part of this period, and that this was profitably exploited by managers with the ability to generate and interpret statistical knowledge. This knowledge became increasingly dispersed across baseball teams during this period. Consistent with Lewis's story and economic reasoning, the spread of this knowledge is associated with the market correcting the original mis-pricing.Click here for the downloadable version.
The parallel to financial markets is clear - an inefficient markets can be exploited at first by new "technology" (I use the term in the general sense to include hardware, software, and new methodologies like valuation models) . If there'is money to be made, the abnormal profits due to a mispricing dissappear over time. Once people know about the mispricing, it disappears.
You've gotta love when theory gets confirmed.
Friday, March 18, 2005
When individual transactions are very small, non-monetary costs dominate
Chris Anderson of Long Tail fame recently posed a question in a post on the economics of abundance: what happens when it costs almost nothing to produce and stock one more item?
One surprising result is that non-monetary costs dominate the transaction. Most of you are familiar with monetary costs - pay $0.99 to download a song from iTunes (or $0.10 from AllofMp3). However, as the monetary costs fall, the most important impediments to a transaction are non-monetary: search costs and psychic costs.
Here is the gruesome side of the Coase Theorem:
Toby is the cutest little bunny on the planet. Unfortunately, he will DIE on June 30th, 2005 if you don’t help. I rescued him several months ago. I found him under my porch, soaking wet, injured from what appeared to be an attack from an alley cat. I took him in, thinking he had no chance to live from his injuries, but miraculously, he recovered. I have since spent several months nursing him to health. Toby is a fighter, that’s for sure.
Unfortunately, on June 30th, 2005, Toby will die. I am going to eat him. I am going to take Toby to a butcher to have him slaughter this cute bunny. I will then prepare Toby for a midsummer feast. I have several recipes under consideration, which can be seen, with some pretty graphic images, under the recipe section.
I don’t want to eat Toby, he is my friend, and he has always been the most loving, adorable pet. However, God as my witness, I will devour this little guy unless I receive 50,000$ USD into my account from donations or purchase of merchandise. You can help this poor, helpless bunny’s cause by making donations through my verified PayPal account by clicking on any of the Donate buttons on this site, or by purchasing merchandise at the Savetoby.com online store.
Click here for the whole article.
I wonder: How much for just the recipes?
I think regular blog readers are generally more web-savvy than the average person. So, their first thought is often, "I wonder if this is for real?". Snopes.com Probably the best resource for hoax and scam checking. Click here for their take on the story
If your employer gives you access to a 401(k) plan, you should seriuously consider increasing your scontributions up to the point where your employer matches.
I'm always amazed at how legislators think (or fail to). If you change the costs and benefits of a given course of action (like being a publicly-listed corporation), you'll see changes in the number of people (or corporations) choosing that course of action.The Sarbanes-Oxley Act of 2002 added numerous costs to the burden of being a public company. The most onerous of these, requiring inside and outside assessment of internal controls, is only now affecting the costs of remaining a public company. After reviewing the reports of increased compliance costs for larger companies, this paper reports on the increasing numbers of companies choosing to terminate reporting under the securities laws, and focuses on the costs reported for those (generally smaller) companies that disclose their actual compliance costs.
We should have an economics literacy requirement for legislators. Somebody should pass a law!
But then, what would happen?
Despite the importance of outside directors and the considerable amount of time now required of them, directors' fees are not very high by the standards of people who generally take these positions—about $140,000 for the largest companies and a lot less for smaller ones. Perceived liability risk would not have to increase much to induce attractive boardroom recruits, such as chief executives of major public companies, to decline directorships.
Outside directors already overestimate the likelihood of out-of-pocket liability, and frequently cite the fear of liability as a reason not to serve. According to surveys we have conducted, even prior to the WorldCom and Enron settlements outside directors believed on average that out-of-pocket liability occurs in about 5 percent of shareholder suits. The actual number is far lower—only a few instances out of several thousand cases—but it is the perception of liability risk that affects directors' willingness to serve.
The WorldCom and Enron settlements will increase liability fears among outside directors. This would be a natural consequence of any high-visibility out-of-pocket payment. The perception of liability risk in the wake of WorldCom and Enron, however, is compounded by the political overtones associated with the lead plaintiffs' being public entities. Even if politics played no role in these cases, one can reasonably be concerned that political considerations unrelated to corporate governance will cause lead plaintiffs in the future to insist on personal payments by outside directors. Especially in light of the praise for the Enron and WorldCom settlements, others making litigation decisions on behalf of public entities may think "If Alan Hevesi made the outside directors pay in WorldCom, I'll look pretty bad if I don't do so as well."
click here for the whole article.
This a great example of the law of unintended consequences. I was recently reading (for the third time) a copy of Thomas Sowell's book Applied Economics: Thinking Past Stage One. In it, he recounts a story of his grad school days when one of his professors asked him what would happen in a given scenario. After his answer, the professor then asked, "then what would happen?" After more thought, Sowell gave his answer. Then, the professor asked, "And THEN what would happen?" It reminded me that actors in a system will always adjust their actions.
I was recently talking to a friend who serves on several boards. He mentioned that he's dropping off most of the boars he serves on because of this very issue.
Wednesday, March 16, 2005
As some of myou already know, the Unknown Son has been treated for Neuroblastoma for the last two years. He's doing extremely well, and might actually be cancer free at this point. However, as a part of the follow up to the treatment he's gotten, we go to Children's Hospital of Philadelphia (a truly amazing plac) every couple of months so he can get poked, prodded, and photographed. We're fortunate to have access to it - it's argualbly the top Neuroblastoma hospital in the world.
When I can get away, I'll put some things up.
Alex Tabarrok at Marginal Revolution gives this endorsement of Public Finance and Public Policy, the new textbook by Jonathan Gruber. He writes
Gruber is especially good at discussing empirical research. What is the effect, for example, of social security on private savings, on the living standards of the elderly, on the incentive to retire? What do we learn from the international evidence?
(Quick answers: Social security crowds out about 35 cents of private savings for every social security dollar. As a result, social security has reduced the eldery poverty rate although not quite as much as naive trends would suggest. Social security does reduce the labor force participation rates of the elderly but less so in the United States than in most European countries where there are huge disincentives for working beyond the normal retirement age. (Get the book or this powerpoint presentation for more details - note you need to view the PP in SlideShow mode to get the full effect.)
Gruber covers all the major programs - education, social security, unemployment insurance, Medicaid and Medicare, the tax system etc. - and in each case he carefully explains the institutional details and then he evaulates the empirical evidence focusing on the most telling pieces of evidence (rather than trying to cover everything that has ever been written as in a review paper).
Two other gems that are probably more accessible are Basic Economics: A Citizen's Guide to The Economy and Applied Economics: Thinking Beyond Stage One, both by Thomas Sowell. The first book gives an excellent guide to microeconomics, with almost no equations. The second book is chock full of examples of the "Law of Unintended Consequences". Sowell comes from the school of "teaching by stories", and is probably the best source for non-economists trying to understand the economist's way of thinking. His writing is a perfect example of Einstein's charge to "make things as simple as possible, but no simpler".
And for a final recommendation (if just for the name), Tyler Cowen at Marginal Revolution recommends Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, by Steve Levitt and Steven Dubner. It will hit the stores in early April.
Click here for the article.
Tuesday, March 15, 2005
Click here for the whole article.
- she was a "HORRABLE" teacher.
- Gives us test questions that she NEVER TOLD US HOW TO DO.
- Does not tell us what will be on the tests
- Expects us to study everything.
I think my grade in your course,___________________, should beA few personal favorites are:
changed from ______ to _______ for the following reasons:
I've been unable to link to a copy for some reason. If you want one, email me at email@example.com -- I can't claim authorship (it was floating around the internet while I was in grad school. If you have any additions. let me know (my email's also on the main page).
6. I'm on a varsity sports team and my tutor couldn't find a copy of your exam.
7. I didn't come to class and the person whose notes I used did not cover the material asked for on the exam.
13. You told us to be creative but you didn't tell us exactlyhow you wanted that done.
In brief, the director primacy model views the corporation as a vehicle by which the board of directors hires various factors of production. The board of directors thus is not a mere agent of the shareholders, but rather is a sui generis body - a sort of Platonic guardian - serving as the nexus of the various contracts making up the corporation. Director primacy thus claims that fiat - centralized decisionmaking - is the essential attribute of efficient corporate governance.
He goes on to discuss how the recent dethroning of AIG CEO Maurice Greenberg and elevation of Robert Iger to the top spot at Disney demonstrates how boards are increasinglyasserting their power.
Click here forthe whole post.
Of course, since the board acts as the agents of shareholders, there still exists a potential agency problem there. I'll be posting more on that in future posts.
Monday, March 14, 2005
Consistently well reasoned, chest-thumping free comentary is particularly hard to find. When it comes to Social Security, Andrew Samwick at Vox Baby is always worth the time. Bloggers could easily use his response to a reader's comments as an example of "best practice" - respectful and snark-free, well organized, and buttressed with plenty of facts. Well done.
Click here for the whole piece.
Friday, March 11, 2005
"Alton attorney Emert Wyss thought he could make money in a Madison County class action lawsuit, but he accidentally sued himself instead."
My first thought is "This is the punchline, but where's the joke?" This is followed closely by a memory of the old Monty Python skit where John Cleese is a wrestler (Colin Bumba Harris, I think) who fought three of himself...
Thursday, March 10, 2005
The fight for MCI hasn't just pitted Qwest against Verizon. It has set MCI's shareholders -- made up disproportionately of the fast-money, deal-playing, stock-flipping crowd -- against MCI's board, which claims to be interested in the "long term."
...After shareholders revolted, MCI's board relented and agreed to reassess the Qwest offer by March 17. In initially going with the Verizon offer, the board effectively was saying it knew more than the market. Over the long term, the board's actions said, the initially offered $24.60 from Qwest wasn't worth as much as the initially offered $20.75 from Verizon because MCI's overseers thought that shares of the heavily indebted, competitively constrained Qwest were too risky.
Click here for the whole article (note: online subscription required).
Under efficient markets theory, each bidder's stock' price is an accurate reflection of it's value, regardless of how long MCI's shareholders hold their shares. However, the board of MCI believes it knows better than the market. It talks about "long-term" shareholders versus those that want a fast return.
Of course, if markets are efficient, the current price reflects both the short and long term prospects.
An alternate story to explain MCI's board's preference for Verizon's offer is the existence of an agency problem with the board. If Qwest has riskier operations than Verizon, it could run up against the board's risk preferences (both their continued empoloyment and their reputations). Alternately, it could have negative consequences for other stakeholders of MCI, such as employees.
Questions for classroom discussion: Should MCI's board have accepted the Qwest offer? How likely is it that MCI's board has better information than the market regarding Qwest's value? Are there other reasons (i.e. agency problems) that could make the board prefer the Verizon offer? How would you interpret these rationales?
Wednesday, March 09, 2005
For those with better math chops, there's also Shimko's Finance in Continuous Time: A Primer. It's still fairly approachable (hey - it got me through grad school, so it can't be too hard.)
Click here for the whole post (and a link to the report).Reducing marginal income tax rates on entrepreneurs increases entrepreneurial entry, decreases exit from entrepreneurship, and lengthens the duration of entrepreneurial ventures.
On of the central themes in finance is that taxes matter. A lower marginal tax rate means that after tax payoffs increase. Not surprisingly, this shifts investor/entrepeneur behavior at the margin. Given the increasing importance of entrepreneurial activity as an engine of economic growth, this is pretty important as a policy issue.
Don't you love it when real world data supports what theory says?
What is the one piece of advice on paper writing that I should give to these Berkeley undergraduates?The ones coming in for advice aren't the ones who really need it. The ones coming in to talk to me about their papers are, broadly, in the top quarter of the papers we received.
MBIA, a financial services conglomerate that guarantees billions of dollars in bonds, said yesterday that it was restating its financial results for the last seven years because of improper accounting related to two insurance deals it struck in 1998.
The restatement, which amounted to a $54 million net reduction in profit over the period, is related to financial reinsurance agreements MBIA made with Converium Re, a reinsurer previously known as Zurich Reinsurance Centre.
MBIA said that the restatement would not have a material impact on its financial position. Nevertheless, the disclosure is significant, some analysts said, because it represents the first of what may be many such restatements at companies whose past insurance agreements are now under scrutiny by regulators.
Click here for the whole article.
The issue is a type of contract known as "finite insurance":
When used properly, finite insurance allows insurers or corporations to spread their risk of loss on an asset or business over time and also spread it to other insurers willing to take on more risk in exchange for premiums.
The biggest risk in such a contract emerges when an auditor concludes that it is not really insurance, in which risk is transferred from one party to another, but a financing arrangement in which premiums paid by the company buying the coverage are seen as a deposit or a loan. In such a case, the beneficial accounting treatment given to insurance premiums disappears.
Looks like the next wave of restatements is under way.
Tuesday, March 08, 2005
Federal and state investigators are looking at whether a transaction between Berkshire Hathaway's General Reinsurance Corp. and American International Group Inc. four years ago transferred sufficient risk to AIG to allow the company to account for it as an insurance policy, people familiar with the matter said.Click here for the whole article.
New York-based AIG booked the transaction at issue as insurance, the people said, a move that boosted its premium revenue by $500 million while also adding $500 million to its property-casualty claims reserves. Generally accepted accounting principles require insurance and reinsurance transactions to transfer "significant" risk from one party to another if either intends to account for the transaction as insurance; without significant risk transfer, such transactions must be accounted for as financing, under rules that are often less favorable.
I'm reminded of how much accounting chicanery requires the assistance of another party (in this case, General Re). Another example of "assisted maniputlation" ( requiring the assistance of a third party) is "channel stuffing", where a customer agrees to a sale far in advance of the normal period when it would take place, with delivery at a much later time. This allows the vendor to book the revenue in an earlier period. A classic example of channel stuffing would be the booking of sales of barbecue grills to stores in December, rather than in the spring when they normally would be sold.
Click here for the whole article. I just hope I make it before the meltdown. That way, I can argue for government funding...
As of March 2005, Professor Bill Parke is tracking 72 economics blogs at his Economics Roundtable. So we seem to be adding around 34 new economics-related sites to the blogosphere every year. This is clearly unsustainable and conclusive proof of the irrationality of bloggers! Some economics bloggers are even purchasing Google ads in a desperate scramble for market share.
Clearly government intervention is required to bring order to this sector of the blogosphere and prevent a blog boom-bust cycle from developing. As a solution, I propose the nationalisation of blogs, starting with John Quiggin, who can then educate us all on the merits of public ownership of the means of blogging.
Monday, March 07, 2005
want to find out? Click here.
As for my $.02, I suspect that right now somebody is writing that article for HBR, emphasizing the strategic role of corporate weblogs...
...perhaps even framing a continuum that stretches from one extreme, with those who use blogs to increase transparency and accountability with corporate stakeholders, to the other extreme, with those who use blogs for more opaque and deceptive ends.
Serious corporate marketing blogs that give away valuable content and/or provide a window into the operations of the company, along the lines of what LexBlog is already doing for law firms, seem to be approaching the tipping point beyond which growth will be parabolic.
The HBR article will be that tipping point for the corporate world, imho.
Now, believe it or not, as I clicked over to LexBlog to make sure I got Kevin O'Keefe's url right, what do you suppose I found as his most recent post?
I'm not of the "blogs are going to take over the world" mindset. To my mind, blogs are merely another way of getting info out over the internet. Having said that, they are changing the way that information is disseminated, and are mking it easier for smaller outlets to get a voice. The software available makes it easy for people to publish their information, and to link to other sources. In addition, if you're using an RSS aggregator, you can check an amazing number of sources in no time at all. For example, I use a free service called Bloglines. With it, I can monitor about 40 sites I regularly (or occasionally) check in about 5 minutes.
If you haven't already done so, check it out (and put me on your list).
Saturday, March 05, 2005
Well, not the same price in all cases. Before 6 p.m. is cheaper, there are numerous dollar theaters, and not all films allow for discount coupons. Nonetheless a multiplex will charge the same ($9.50 in my case) for the number one movie and for a flop. Nor is the price more expensive for Saturday night, or during the summer when demand is higher. Can any economic model predict these results?He provides eight possible reasons. Click here for the whole posting.
Here's one I never would have come up with - a movie ticket is a call option! See why at Voluntary Exchange.
Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.He also mentions that BH has a big stockpile of cash ($43 Billion), and that they resisted the temptation to spend it (negative-NPV projects, anyone?):
There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
I didn’t do that job very well last year. My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have. But I struck out. Additionally, I found very few attractive securities to buy. Berkshire therefore ended the year with $43 billion of cash equivalents, not a happy position. Charlie and I will work to translate some of this hoard into more interesting assets during 2005, though we can’t promise success.This provides a good setting for discussing the agency problems related to free cash flow, managers' incentives to build empires, and so on (like I've said before, I'm an agency/governance kind of guy - unlike Haley Joel Osment, I see agency problems everywhere).
Click here for the whole letter.
On day 1 in my advanced corporate course, we go over a case based on a takeover executed done by Berkshire Hathaway. As a part of it, we go through Buffett's investment philosophy and compare/contrast it to commonly held finance theory. In his various writings, Buffett repeatedly mentions "intrinsic value".
It's also pretty instructive for students to read Berkshire's "Owners' Manual (starting on page 73 of the 2004 annaul report).