Today's Quote

I just heard this quote (attributed to Hubert Humphrey):

"The right to be heard does not automatically include the right to be taken seriously."

Maybe I could put it on my syllabi from now on (after tenure, of course).

Blogging B-School Deans

There aren't a lot of blogs run by business school faculty. Up until now, I didn't know of any that were run by business school deans. Well, not any longer.

BizDeansTalk is a new blog run by deans from two top business schools: Paul Danos of Dartmouth (USA) and Santiago Iniguez of the Instituto de Impresa (Spain). I'm looking forward to hearing their thoughts on the directions that b-schools are heading.

I've got a pretty good idea as to what goes on "in the trenches". However, it's always nice to get the "view from 20,000 feet".

Hat tip to Cyberlibris for the link.

Stock Splits:Do You Want That Pizza Cut Into Six Or Eight Slices?

Who cares if a stock splits? From one perspective, a stock split is like Yogi Berra's response when asked how he wanted his pizza served:

"You better cut the pizza in four pieces because I'm not hungry enough to eat six."

From this perspective, a stock split makes the slices smaller, but there are more slices. Financial economists have studied why companies do stock splits at least since Fama, Fisher, Jensen, and Rolle's 1976 paper. FFJR found that increases in split-stock prices reversed if the splitting company didn't raise dividends in the period following the split.

The Motley Fool gets the story right in this piece titled "Buying Stock Around Splits":

Is it better to buy a company before or after it splits? That's like asking, 'Should I eat this peanut butter and jelly sandwich before or after mom cuts it in half?'"

...The real reason to smile at a split announcement is because it signals that management is bullish. Companies are not likely to split their stock if they expect the price to go down.

Of course, there are other reasons given why splits might increase shareholder wealth. One commonly cited reason is that by moving prices per share into a lower range, the company becomes more attractive to individual investors (as opposed to institutions). In a recent piece, Dhar, Goetzmann, and Zhu find that:

A higher fraction of post-split trades are made by less sophisticated investors, as individual investors increase and professional investors reduce their aggregate buying activity following stock splits. This behavior supports the common practitioners' belief that stock splits help attract new investors and improve stock liquidity.

Two Primers on Financial Statements

Balance Sheet. Income Statement. Statement of Cash Flows.

For most non-business people, these are about as easily understood as the Mongolian language (or your average politician).

The Motley Fool has made its name by breaking down financial information for the masses. Theitr latest article, "Cracking the Accounting Code" provides a very nice, relatively jargon-free guide to financial statements. It even describes what on a statement of cash flows.

If you want more information (or another perspective), IBM has put together a series of tutorials for their stockholders. Two that are worth reading are their guide to financial statements and guide to annual reports. -- both are written with the financial novice in mind.

Credit Derivatives and Systemic Risk (from the WSJ)

Today's Wall Street Journal has a very interesting piece on the increase in systemic risk over the last few years. It discusses how systemic risk has increased over time as a result of several factors like the increased popularity of hedge funds and derivatives (particularly credit derivatives):

...The Counterparty Risk Management Group II is a revival of a group that was formed in 1999, following the implosion of hedge fund Long-Term Capital Management, to consider risks in the financial system.

The group, under its chairman E. Gerald Corrigan, reconvened several months ago, spurred into action by the rise of hedge funds and the increasingly complex nature of trading and risk-taking in the markets. Gyrations in the credit markets earlier this year have heightened interest in the group's work.

"Credit is at the core of what they are looking at," says Bradley Ziff, head of the hedge-fund practice at consultancy Mercer Oliver Wyman, who worked closely with the group. "And all that has happened in the credit markets in May vindicates their concerns. Credit products have dramatically changed the marketplace."

The most compelling evidence of that transformation came in mid-May, when a ratings downgrade of General Motors Corp. corporate debt roiled both the corporate-credit and various derivatives markets. The large, unanticipated moves in these markets led to trading losses both among funds and the dealers with whom they trade. Even though the markets recovered quickly, that episode raised concerns about the risk involved when so many players engage in similar trading strategies and positions become hard to close out without a massive move in prices.

Click here for the whole thing (online subscription required).

Tutoring For Big Bucks

According to this article on Bloomberg, some SAT tutors make almost $700 per hour!

Inspirica's only "master" tutor, Donald Viscardi, costs $525 an hour. Advantage Testing Inc. in New York charges $685 for its best tutors. And a top tutor with the Princeton Review can cost as much as $300 an hour...

...Students who can't afford a tutor usually buy preparation guides such as the "The Official SAT Study Guide: For the New SAT'' for $14.

My first thought was that I'm in the wrong business.

Since finance theory says that there's "no free lunch", I thought about it a bit more. Then I realized that I'd have to put up with the kind of parents that would be willing to pay this much for tutoring. I have friends that teach at "elite" universities with tuition well north of $35,000 per year. Their students are pretty high-maintenance, and the students' parents are not shy about making demands for their little darlings.

Hat tip to Joanne Jacobs for the link.

Rankings of Eonomics Blogs (from Newmark's Door)

Newmark's Door has a very thorough and well done Ranking of economics blogs.

It's worth checking out where your faviorite blog is.

And no, I'm not on it. Ah well...

Becker and Posner On Corporate Social Responsibility

Gary Becker and Richard Posner at the Becker-Posner Blog are answering the question "Do Corporations Have a Social Responsibility Beyond Stockholder Value?". T

Becker's answer:

...My answer is "no", although maximizing value, meeting contracts, and obeying laws help achieve many of the goals by those claiming corporations should be "socially responsible" by taking care of the environment, considering the effects of their behavior on other stakeholders, and contributing to good causes. Still, laws and contracts, and individual use of their own resources, rather than corporate behavior, should be the way to implement various social goals.

Posner adds:

I agree with almost everything that Becker says, but will suggest a few qualifications. I can think of one situation in which "pure" charitable donations by corporations, i.e., donations that do not increase profitability, could benefit shareholders. Assuming that most shareholders make some charitable donations, they might want the corporations they invest in to make modest charitable donations on the theory that a corporation will have more information about what are worthwhile charitable enterprises than an individual does. For example, charities differ greatly in the amount of money that they spend on their own administration, including salaries and perquisites for the employees of the charity, relative to the amount they give to the actual objects of charity. Presumably corporations are in a better position to determine which charities are efficient than individuals are; if so, then shareholders may impliedly consent to some amount of charitable giving by their corporations. But not much. The reason is that one person's charity is another person's deviltry: a shareholder who is opposed to abortion on religious grounds would be offended if his corporation contributed to Planned Parenthood. The practical significance of this point is that corporations avoid controversial charities, so that the issue of implied consent becomes whether the shareholder would like his corporation to make a modest contribution to some set of uncontroversial charities.

For the whole piece(s), click here and here.

Ben and Jerry's is a perfect example of Posner's comment that "one person's charity is related to another person's deviltry". If you want to spark some good classroom discussion of these issues, Michael Schill has case titled Ben & Jerry's Homemade that's based in large part on this issue. The link takes you to the abstract on SSRN, and you can download it by clicking on the link at the bottom of the page. It's pretty "low-tech" and doesn't require much in the way of finance sophistication, so it would even be good for a low-level undergraduate class. .

New Additions to The Blogroll

It's been a while, since I updated the Blogroll. Here are the latest additions:

The Big Picture

EconBrowser

Feld Thoughts

The Finance RoundTable

The Freakonomics Blog

Knowledge Problem

Hypothetical Bias

Ideoblog

Jacqueline Mackie Paisley Passey

Check them, and let me know what you think. If you have any additional recommendations for sites to add, drop me a line.

Smart Economist.com

Check out SmartEconomist.com. It's a very interesting site that is attempting to provide easy-to-read summaries of current research being done in a wide variety of econ and finance-related areas. Their summaries are relatively "tech-speak" free", and break down the major findings of the papers nicely. At present, they don't have summaries for that many papers up yet, but the few that I read were pretty much right on target.

Hat tip to Hypothetical Bias for the link. Although a very new blog, HB seems like one worth watching (and adding to your RSS reader).