Monday, July 31, 2006

This Week's Carnival of The Capitalists

This week's COTC is up at Selling To Small Business. As usual, there are a lot of posts. But, since I'm still digging through the boxes (let's just say that the movers had a VERY creative system for labeling), I'll just mention two this time around: Searchlight Crusade on Loan Cosigners in Real Estate - A Lot of Risk For Not Much Gain, and Steve Bainbridge on Duties of Directors of an Insolvent Corporation.

Again, these are just my preferences - yours may be different, so look around. There's always a wide variety of things at the COTC.

Sunday, July 30, 2006

Are Deal Makers On Wall Street Leaking Secrets? (from the WSJ)

In the July 28 WSJ, an article asks whether larger deals (particularly those involving hedge funds and private equity groups) are more prone to pre-deal information leaks:
As the boom in corporate takeovers continues, unusual trading in obscure investments or via offshore accounts is raising concerns about insider trading.

Suspicious trading patterns -- including increased activity and well-timed bets -- have cropped up in several companies' securities in advance of news of their involvement in big transactions, suggesting Wall Street's deal-making machine may be leaking confidential information.

The list includes deals both mammoth and modest: the just-announced $21 billion leveraged buyout of hospital operator HCA Inc.; the $1.7 billion buyout of Petco Animal Supplies Inc.; the $2.6 billion sale of Maverick Tube Corp. to Tenaris SA; and Anadarko Petroleum Corp.'s $21 billion offer for both Kerr-McGee Corp. and Western Gas Resources Inc.

Some of the trading is in a corner of the financial markets that hardly existed during past takeover waves, which featured questionable trades mainly in plain-vanilla stocks, bonds and options. In advance of the HCA deal, there was a notable uptick in trading in financial contracts tied to HCA's bonds -- derivatives known as credit-default swaps.

Read the whole thing here (online subscription required).

It seems plausible that there could be an increase in "leakage"for larger deals. Bigger transactions are more likely to be done by (big surprise here) consortiums with larger numbers of firms. In addition, recent deals are taking longer to be consummated than in years past, which further increases the likelihood of leaks.

It might make for an interesting study (for any academics listening) to see if there's more stock price runup, spikes in trading volume, and/or abnormal options-related activity surrounding deals with a greater number of players and/or private equity/hedge fund involvement.

IPOs as a Predictor of Future Market Returns

Mark Hulbert of the NY Times discusses some recent research by Jay Ritter, who is far and away the most well respected academic currently studying IPOs. Ritter finds a correlation between IPO pricing and future market-wide returns:
Worldwide in June, more companies withdrew or postponed their initial public offerings than in any other month since March 2001, according to Dealogic, a firm based in London that monitors the new-issue market. That March 2001 trough came less than halfway through the 2000-2 bear market, leading many investors to worry that the current gloom in the new-issues market is a harbinger of much lower prices for stocks.

But the stock market'’s continuing decline in the months after the March 2001 I.P.O. bust was probably an anomaly, says Jay R. Ritter, a finance professor at the University of Florida who specializes in I.P.O. research.

An analysis of initial offerings market since 1980 suggests that, all else being equal over the next 12 months, the market between now and the summer of 2007 is likely to produce above-average returns.

Read the whole thing here.

It was difficult to find good data on the percentage of firms withdrawing IPOs back to the 80s. So what Ritter did instead is calculate the percentage of firms successfully going public in a given month with a final price below the midpoint of their offering range. He then related this percentage to subsequent stock market returns.

The basic logic behind the supposed relationship is that withdrawals of IPOs (or those that come in priced at the low end of their range) leads subsequent IPOs by other firms to be conservatively priced. A lot of low priced IPOs could serve as the impetus for subsequent higher market wide returns.

The relationship between the fraction of IPOs priced below midpoint and subseqeuent market returns is statistically significant at the 5% level (this means that association between the two variables would show up at these levels by random chance less than 5% of the time). So, it meets the cutoff statisticians typically use to determine whether it's significant.

Whether or not you can make money trading on it, who knows?

Note: Barry Ritholtz at the Big Picture has some interesting thoughts on the matter.

HT: Abnormal Returns.

Saturday, July 29, 2006

Welcome to Another Finance Prof Blogger

Since there are so few of us around, I thought I'd mention the newest addition to the rolls of finance professor blogs -- The Finance Blog, run by Peter Went, a finance prof at Bucknell University.

Stop over and give it a look, and add it to your feed reader.

Saturday Linkfest

The last week I've only had a few minutes here and there to get online. So, I've mostly been marking interesting item for later use to keep my bloglines account from exploding out of control. Since my home is presently a mess, I figured I could at least do some cleaning out of my account. So, from the finance/business side of the blogosphere:
Abnormal Returns talks about the problems with benchmarking and "Radical Diversification "

Equity Private has another great analogy - this time between Narcotrafficing and Private Equity. And the Debt Bitch puts in another memorable appearance here (always worth reading).

Jack Sielieski of the Accounting Observer tells companies to Stop Giving Earnings Guidance.

The always-worth-a-read James Hamilton at Econbrowser has a primer on the the expectations hypothesis and its relationship to the yield curve. I wish I could explain things half as well as him.

Dan Melson at Searchlight Crusade discusses Zero Cost Loans, Good Faith Estimates, and Truth In Lending And APRs.
And from the non-business side of things:
Floyd Landis was accused of doping following his Tour-de France win. Lynne Kiesling provides some statistical commentary on these tests.

Alex Tabarrok of Marginal Revolution gives us the market for butts.

From the Onion: Professor Pressured To Sleep With Student For Good Course Evaluation.
Ah - I feel much better now.

Settling In To The New House and Neighborhood

We'll be unpacking boxes for quite a while -- I counted over 100, along with about 30-40 plastic bins. The Unknown In-Laws came over and stayed the night (the kids already refer to the guest bedroom as "Grandma and Grampa's room) to help with the unpacking, and will be coming over again next week. So, we made a pretty good dent in things - kitchen's done, and a lot of the kid's bedrooms. But we'll be unpacking for the next month or so, I'm sure.

We love our development. It's on a cul-de-sac with only 30 houses total, so there's little traffic. Since the development is only 2 years old, there are no cliques because everyone's new to the neighborhood. Best of all for the Unknown Wife and Unknown Kids, there's about a dozen children below the age of 12, and a number of elementary teachers and stay-at-home moms. So, there's lots going on during the day.

Even though we only moved in on Monday, Unknown Wife and Unknown kids have already gone to the neighbors once for a "Water Fun" afternoon (two wading pools, a slip-and-slide, and 6 other kids) and a Movie Night with about ten other kids and a few of the parents. And the Unknown Wife has been invited to join the neighborhood ladies group (the "Birchwood Babes"). She doesn't have any other information about the group except that it involves regular nights out and Margaritas, but that seems like a good start.

I realize it's still the honeymoon phase, but all in all, it feels like we've moved to Shangri la.

Tuesday, July 25, 2006

It's Official - We've Moved!

It's official - we've moved.

There was a bit more fun and games with the mover, but we're in our new house. It's amazing how many things we take for granted - like towel racks or TOILET PAPER HOLDERS. It's a new house, so I have lots of "Tim The Tool Man" things to do.

Luckily, there's a Home Depot a 15 minute ride away (they're going to get to know me very well). So, it's off to spend more money.

I've got a Faculty meeting later today. We're meeting with candidates for the Dean's slot for my college. But now I have a 2 mile commute, so it' s easy getting in and out.

While I'm there at the University, I'll do the Human Resources Dance and fill out about a pound of paperwork.

More to come later. We won't get wireless connected in our house for about a week, so posting may be sporadic. At great personal sacrifice, I'm currently blogging from a local coffeehouse (it is a college town, after all) with a wireless hotspot.

Sunday, July 23, 2006

Landis Wins The Tour de France

Contratulations to Floyd Landis for winning the Tour. And he did it with one of the most amazing performances I've ever seen.

First he fell behind the leader by 8:08 in Stage 16 on Wednesday. Then he proceeded to totally crush the field the next day by over 7 minutes and made up all but 30 seconds. And then put himself ahead in the next to last day's time trial. And all with an arthritic hip he'll have to have replaced after teh Tour.

I used to be a 60-70 mile a week runner back in high school and college, so I understand a bit about endurance sports (and about arthritic joints - a knee in my case). But these cyclists are incredible -- over four hours on a bike through the Alps, and then they sprint at the end. And this is not just once, but every day for 3 weeks.


Saturday, July 22, 2006

Murphy Was An Optimist

Murphy's Law states that "Anything that can go wrong, will go wrong, at the worst possible time"

The corollary of Murphy's Law is "Murphy was an optimist."

My faith in Murphy's Law has once again been confirmed. At 2:00 Thursday afternoon, the movers informed me that they had too small a truck, and would have to leave a number of the large pieces of furniture until they could get back with another (small) truck -- ON SUNDAY.

Unfortunately, the buyers of the house planned on moving in on Friday afternoon. The end result (after much "conversation" with the mover) was that I went to a truck rental place and rented a truck for 4 days (I don't move into the new house until Monday).

I have a pretty good chance that the movers will end up paying all or part of the rental, but even if I end up eating the whole cost, it's minimal (about $600).

But, we got it done, and the closing went smoothly. So, we're now officially homeless until our closing on Monday. Once house down, and one to go!

Look at the bright side - at least we're not in Las Vegas.

Wednesday, July 19, 2006

It's Moving Day

Better late than never, I guess -- the movers arrived at 8:30 in the evening. Ah well, as long as they're the ones that have to work into the wee hours. They pack everything tonight, and load the truck tomorrow. At 1:00 the cleaning crew arrives (yes, the Unknown Household believes in outsourcing - we prefer to pay people to pack, haul, and clean).

The Unknown Wife and Unknown Kids leave tomorrow to stay with new place, while I stick around for the cleaning and the closing of the Unknown House (version 1.0) on Friday.

Then it's a weekend to goof around, and we close on (and move into) the Unknown House (version 2.0) on Monday.

But I'm a believer in Murphy's Law, so I'll keep my fingers crossed...

Tuesday, July 18, 2006

Can You Make Money Trading Against Jim Cramer?

Jim Cramer of the CNBC show Mad Money is one of the most well known personalities in the investment world. Few people who know him are indifferent about him - either you love him or hate him.

But love him or hate him, he does have a lot of viewers (somewhere between 350,000 and 400,000 at last count). With all those viewers, what effect does a Cramer "buy" recommendation have on a stock's price? Professors Engelberg, Sasseville, and Williams of Northwestern University recently posted a study on SSRN that provides some answers:
  • For the smallest quartile of recommended stocks, average cumulative abnormal overnight is 5.19% (and 1.96% for the overall sample)
  • The returns on these stocks completely reverse within 12 trading days.
  • Recommended stocks have abnormally high trading volume, buy-sell imbalance, and short sales on the day following the recommendation
  • The adverse selection component of the bid-ask spread falls significantly following the recommendation (note: this means that tit's less likely that the market maker is facing traders with inside information)
  • There's a price run-up the day of the recommendation (this is surprising, since the show is recorded, and doesn't air until 30 minutes after the market's closing).
Read the whole thing here.

The most likely interpretation of these patterns is that you have a lot of uninformed traders buying stocks the next day after Cramer recommends them, and they push the stock's price above it's fundamental value. Arbitrageurs are aware of this pattern and start short selling the stock at the same time. Over a fairly short period of time (12 days), their trades drive the stock's prices back down to their "pre-Cramer recommendation" levels.

Note: the authors caution that this might not be a tradeable strategy for a number of reasons. One important reason is the dynamic nature of information about anomalies - as people discover them and publish papers about them, rational players start trading based on the information. This in turn ends up driving future profits from the strategy down to zero.

But all in all, a very interesting paper, and a great example of an apparent market inefficiency.

HT: Marginal Revolution

In case you're interested, here's a study that reports on Cramer's track record over the longer term.

Note: If you're new to Financial Rounds , welcome. I hope you look around a bit -- if you want to find out more about the blog, check out the Frequently Asked Questions (FAQ) page. And if your want to subscribe to our RSS feed, there are links on the sidebar.

Monday, July 17, 2006

Post 9-11 Options Grants

According to this weekend's Wall Street Journal, there were an usual number of stock options grants made immediately following 9-11:
A review of Standard & Poor's ExecuComp data for 1,800 leading companies indicates that from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants. The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999 and 2003.

Ninety-one companies that didn't regularly grant stock options in September did so in the first two weeks of trading after the terror attack. Their grants were concentrated around Sept. 21, when the market reached its post-attack low. They were worth about $325 million when granted, based on a standard method of valuing stock options.

Read the whole thing here (online subscription required).

The story raises some interesting issues: were the executives taking advantage of shareholders and "profiting from the tragedy"? I'd say not -- if markets are reasonably efficient, the stock prices were "fair". In some ways, it's similar to the increase in insider purchases following the 1987 market crash.

A number of prominent bloggers have weighed in on the issue:

Barry Ritholz at The Big Picture has some harsh (and, in my opinion, overheated, words to describe the executives:
What the more recent group of execs did is probably legal. It certainly isn't ethical, and it reveals them to be "lacking in moral turpitude rectitude." I wonder if there's a morals clause in any of their employment contracts.

What a pathetic group of weasels. Brain cancer is too good for these shitheads. They -- and their lapdog Boards of Directors -- should all be fired.

And Steve Bainbridge takes the other side:
First, virtually all stock options are subject to multi-year vesting requirements. Executives would not make a dime on the stock options until the options were exercised years after they were granted. Second, executives would only profit from stock options if their company's stock price eventually recovered. Granting executives stock options under the circumstances thus can be seen as a way of incenting the executives to work especially hard post-9/11.
For this one, I'd tend to agree with the good Professor.

What's Involved In Getting a Ph.D. In Finance?

This seems to be take your readers to work week -- in my last few pieces, I've discussed the teaching and research sides of a finance professor's job and where data for research projects comes from. So, this time, I thought I'd take a step back and talk about what is involved in getting a Ph.D. in finance.

The biggest misconception is that the Ph.D. is something akin to a "super MBA". In reality, the MBA and Ph.D. programs are almost totally different animals. The MBA is geared towards practitioners. In contrast, the Ph.D. is primarily intended as training to be a researcher. So, the natures of the programs (and therefore their approaches) are distinctly different from each other.

Some doctoral programs require an MBA before entry, but quite a few don't (like the Unknown Alma Mater). In fact, the best preparation for getting a finance Ph.D. isn't an MBA - an MS in Finance, an MS in Econ, or a masters in math, engineering, or physics (there's a LOT of math involved at this level) would probably prepare you better.

In terms of admittance standards, you'll need a GMAT score in the mid-to-upper 700s to be even considered for admittance at top schools, and even lower ranked schools will probably look for a GMAT well above 600. As a benchmark, I went to a solid "2nd tier" program, and my classmates all had GMATs of between 700 and 760. Of the two component parts of the GMAT, the math score is the more important than the verbal one, and most schools look for someone at the 90th percentile (for lower ranked schools) or better. At top schools, almost everyone has GMAT math scores in the top 1 or 2%.

Probably the best way to describe a Ph.D. level curriculum is to start at the end and work backwards. The final step in getting a Ph.D. is to write a dissertation, which is an original piece of research. In finance, dissertations usually run between 65 pages (the shortest I've seen) and 150 pages. The dissertation is supervised by one person (called the chair of the dissertation committee), and must also be approved by a committee of 3-4 other faculty members. There's a love-hate relationship between Ph.D. students and their dissertation chairs, because a good chair constantly asks the student for "more" - more analysis, better writing, more literature review, etc... Because of this, the dissertation is probably the most exhaustingly thorough piece of research most Ph.D.s will do in their lifes.

Working backwards, to be able to do original research in a dissertation, you must be familiar with what's already been done on the research question you're asking. The main way a student gets this familiarity is through "seminars", which are the backbone of a doctoral program. Seminars are much more self-directed that a typical textbook/instructional class. In a seminar, you may read anywhere between 25 and 100 journal articles during the course of the semester (one of my professors covered almost 120 articles in a 10 week quarter, which was a brutal pace). For example, in a typical 3 hour seminar week, you typically cover anywhere from 3-8 articles. If the article is a theory piece, it will have a good deal of math (calculus, partial differential equations, real analysis, or linear algebra), and if it's an empirical piece, there will be a good deal of statistics (more math).

In an undergrad or MBA course, the professor usually presents the material. However, in a doctoral seminar, the papers get presented by the students. Each week, one or more students walks the rest of the group through the article (or articles) to be covered, and the professor asks questions (usually from the sidelines). In many of the seminars, you're also expected to produce a small research piece as part of the seminar. In addition to giving you hands-on experience doing research, one of these small seminar research projects often becomes the basis for an eventual dissertation.

There are a number of different ways to organize the seminar sequence, but typical seminar topics might include Finance Theory, Corporate Finance, Investments, Derivatives, Markets and Institutions, and Empirical Methods.

Most students don't have the skill set necessary to handle the seminars right off the bat, so the first year (or in my program, about the first 1 1/2 years) is devoted to "foundational" classes. In the case of the program I attended, this involved classes in microeconomic theory (much of finance is nothing more than applied microeconomics), statistics, linear algebra, real analysis, and econometrics.

Since I worked you through the sequence backwards, here's how it looks going forward (with approximate time ranges). Again, this is based on my program, and others might differ:
  • Foundational classes - 1-1/2 years
  • Seminars - 1-2 years
  • Dissertation - variable, but usually 1-2 years.
Adding it up, the typical time to complete the doctorate is about 4-5 years. The fastest I've seen it done at my school was a little over 3 years, and the slowest is about 8 years.

Note: If you're new to Financial Rounds , welcome. I hope you look around a bit -- if you want to find out more about the blog, check out the Frequently Asked Questions (FAQ) page. And if your want to subscribe to our RSS feed, there are links on the sidebar.

New Study: Options Backdating is Much More Widespread Than Previously Thought

Eric Lie and Randall Heron just uploaded a new study on the backdating issue. They find that backdating is much more prevalent than previously thought. Here's the abstract:
We estimate that 18.9% of unscheduled, at-the-money option grants to top executives during the period 1996-2005 were backdated or otherwise manipulated. The fraction is 23.0% before the new two-day filing requirement took effect on August 29, 2002, and 10.0% afterward. For the minority of grants that are not filed within the required two-day window, the fraction backdated remains as high as 19.9%. We further find a higher frequency of backdating among tech firms, small firms, and firms with high stock price volatility. In addition, firms that use smaller (non-big-five) auditing firms are more likely to file their grants late. Finally, at the firm level, we estimate that 29.2% of firms manipulated grants to top executives at some point between 1996 and 2005.

You can read the whole thing here.

These numbers are pretty mind boggling, and should get a lot of press. If they're right, between a fifth and a quarter of all option grants were backdated in the period before the 2002 tighter reporting requirements came into play. I haven't fully digested their methodology yet, but it looks like the numbers in the abstract are (if anything) conservative.

Note: If you're new to this topic, I've written a short primer on backdating and springloading, here.

This Week's Carnival of The Capitalists

It's Monday, so it must be Carnival Day. This week's COTC is up at Anyletter. Since the Unknown Household is up to our you-know-whats with moving related things, I'll only highlight three:
You may have heard about the guy who traded a red paper clip for a house. Leslie Carbone at LeslieCarbone tells us about it in One Red Paper Clip and the Power of the Market.

The always-worth-a-read Dan Melson at Searchlight Crusade tells us our options When The Appraisal Is Below The Purchase Price for Real Estate

Finally, FMF at Free Money Finance presents a no-brainer way to Earn 20%, Guaranteed
As always, browse around. There's a lot of interesting things to read at a Carnival.

Saturday, July 15, 2006

Where Do You Get Data For Research?

After my recent post on academic research, one of my readers asked
"Where do you get the data for most of your studies? Do you use the same sources most of the time, or is it different depending on the study?"
That's are a couple of great questions. The answer to your second question is "Yes". There's a lot of variety in the types of data that finance researchers use in their studies. Not surprisingly, the data used depends on the research questions you're trying to answer. For example, if you work in a narrowly defined area, your research projects could easily end up using the same data again and again.

Some studies use commonly available data sources, some use hand-collected data, and some use both. There are quite a few "standard" data sets that accounting and finance academic researchers use on a regular basis (while the two fields are different in many ways, there's a lot of overlap between finance and financial accounting). Some of the most common data sets include:
  • The Center For Research In Securities Prices (a.k.a. "CRSP") data compiled by the University of Chicago, which has daily price, distribution, volume, and return data for over 5,000 publicly traded stocks back to the 60s;
  • Standard and Poor's COMPUSTAT database of annual and quarterly financial statement data;
  • Thomson Financial's Institutional Brokers Estimates (IBES) database of historical individual and consensus analyst forecasts.
  • Thomson's other databases covering merger and acquisition and securities issue transactions, insider trades, institutional holdings, and bankruptcies;
  • The TAQ (NYSE Trade and Quoting Database) of intraday stock transaction (i.e. trade and quotation) data ;
There are also quite a few others. I've used (or am currently using ) all of the above except the TAQ data in one project of another (the TAQ data is used mostly by in market microstructure research, and I'm a corporate finance guy).

The advantage to data sources that are on computer-readable media is that they can be "sliced and diced" in multiple ways if you're a good enough programmer. This makes it possible to do large scale studies of things like which factors determine the market reactions to insider trades or whether cap-weighted or fundamental-weighted indexes provide better risk-adjusted returns. Some studies, in fact, use only computer-ready data. Not surprisingly, the people who do these kinds of studies are usually either pretty good programmers themselves (usually in SAS, C, or some other package or language), or have graduate students that can grind the data for them.

But like anything else, this (relative) ease of access makes it harder to find truly interesting new ideas that merely use these data sources. So, many other studies also use hand-collected data (this is particularly true in corporate finance research). The hand collection of data can be a long and tedious process , but it has some real advantages.

For example, I am working with a graduate student on the relationship between corporate governance and the success of a certain type of corporate decision. Before we can do any analysis, he first has to gather and code (yes, I'm management, and he's operations) board, ownership, and compensation data on about 500-600 transactions. This will involve him spending about 150-200 hours reading through corporate proxy statements to determine firms' board composition, ownership structure, and compensation structures (that's where this data is typically found).

Once we have the governance data, we can get the analyst, financial statement, and stock market data from the above mentioned databases through programming.

Gathering this type of data is a long and tedious process. But that also has its advantages. This cost of data acquisition serves makes for a significant barrier to entry, which makes it difficult for anyone else to easily replicate our idea. So, if we play our cards right, we could conceivably get 2-3 (or even more) papers out of the data set before anyone else gets something similar. In fact, the data will also form the basis for his dissertation, and he will probably end up expanding it (and using it to examine other issues) for the next couple of years.

Tuesday, July 11, 2006

What Does A Finance Professor Do All Day? - Part 2 (Research)

In my previous post, I talked about teaching for a finance professor. This one covers the "research" side of the job.

First, let me start by explaining what research actually entails. The following description is based on research from a finance prof's perspective. It's probably similar for other business disciplines, and may be very different for others.

For empiricists like myself, a research project always starts with a question, like "how does the makeup of the board affect a firm's performance?", or "do firms back date their options?" The next step is to gather some data, run a number of statistical tests, write up the results, and then send the paper off to a journal. The whole process can be pretty time consuming, since you often don't know what you'll need to do until you're in the thick of it (new research is, by definition, untrod territory).

While it sounds pretty technical (and it can be), at it's heart, a research study is just a story about how something in the field of finance works. In a well written piece, everything points towards the story that the author is trying to tell. In fact you can look at the tables of statistical results as being part of the story. To do this well can take quite a bit of work. One of the pieces I worked on went through about twenty rewrites before we got it just the way we wanted. I'd have to say that the multiple rewrites where you're trying to find just the right way to express something are probably the most difficult parts of the process, but when it works, it's pretty gratifying. With all this, it's not uncommon for a study to take over a year from the inital idea until there's a finished manuscript.

At this point, the manuscrpit is sent off to a "refereed" journal. To this point, the article is under your control. Once it's sent out, you start answering to other people. Once the article is received by the journal, the editor of the journal sends it out to one or more reviewers (called "referees") who either accept it on the spot (which almost never happens), tell the author that it's worthless and to go away (like the French Knights in Monty Python), or give the author a list of concerns to address and questions to answer, and a chance to revise it and resubmit it (note- it's not uncommon for it to take a couple of months to get a review back from a journal, since referees (present company included) are known to take their time in writing reports).

If you're lucky enough to receive a "revise and resubmit", you try to address any concerns the referee and/or editor have (this can take anywhere from a few weeks to a couple of months) and then resubmit the now revised version to the same journal (at which time it goes back to the referees for either an acceptance, a rejection, or another revise and resubmit). This can go on for several rounds (I know of one at the Journal of Finance that went 5 rounds).

Often the paper is rejected (either up front or after several rounds) at the first journal you send it to. At this point you submit it to another journal, and so on. Between gathering data, analyzing it, polishing the writing, and dealing the (possibly) multiple rounds of referee comments at several journals, this entire process can take quite some time. It's not uncommon for a couple of years to go by between the time a project is started and the time it's eventually published. In fact, a colleague just told me she got a piece published that she started in 1990, and had sent to 6 different journals over the years. Now THAT's determination.

In order to get tenure, an assistant professor has to publish a certain number of articles in refereed journals whether he's at a teaching or research school. The general rule seems to be that you need somewhere between 4 and 7 publications in 5-6 years years at "acceptable" journals to get tenure. The big difference between teaching and research schools is the quality of journals you must publish in to get tenure.

In the field of finance, most would agree that the top journals include the Journal of Finance, The Journal of Financial Economics, the Review of Financial Studies, and (although there's some disagreement on this one), the Journal of Financial and Quantitative Analysis. These journals generally have acceptance rates that are significantly less than 10%.

To get tenure at a research school, you pretty much have to have a top-tier publication (and often, several). At lower tier schools, it's often possible to get tenure without a top tier publication, but even some teaching schools require a top-tier publication for tenure.

In my previous post about teaching, I mentioned that if all I had to do was teach, it's be a pretty easy gig. But from what I've seen, assistant professors at research schools all work pretty long hours. Because of the long lead time required to get a piece through the reviewing process, to get 4-6 publications in respectable journals in 5 years usually means completing 10 or more studies in their first 4 years. So, most new research school faculty spend a good 50+ hours a week working (and in many cases, 60-70+ hours). This usually eases off significantly after the first few years, but one of my advisors told me that the worst job he knew was being an untenured assistant professor at a research school.

He also said that the BEST job in the world was being a tenured full professor at a research school, but that's a topic for another day.

Note: If you're new to Financial Rounds , welcome. I hope you look around a bit -- if you want to find out more about the blog, check out the Frequently Asked Questions (FAQ) page. And if your want to subscribe to our RSS feed, there are links on the sidebar.

Monday, July 10, 2006

What Does A Finance Professor Do All Day? - Part 1 (Teaching)

Based on conversations I've had with friends (all three of them, so it didn't take long), the average non-academic has almost no idea what a college professor's job is like. Most people think a professor's job is all about teaching (and getting summers off). Some have heard the phrase "publish or perish", so they know there's writing in there somewhere. But most people have only a vague idea at best about what a professor actually does.

So, I thought I'd spend a little time describing just what an academic's job is all about. Unlike most jobs, a typical academic's life differs based on the seasons - somebody once said that the best three reasons to be a teacher are "June, July, and August". But I'll save summers for later, and start with what goes on during the school year. This installment will be about the teaching part of my job, and I'll cover other parts in later installments.

A "typical" academic's life varies quite a bit depending on the type of institution he's at. The biggest difference is between "research" and "teaching" schools. There's also a big difference between the finance discipline and others (like the humanities or the sciences), but since I'm most familiar with my own little corner of academia (i.e. finance and business), that's where I'll focus.

There are two main differences between teaching and research schools: the normal teaching load and the expectations of the amount of research (i.e. publishing) you'll have to do to get tenure. A finance professor at a typical research school teaches a "2/2" load - that is, 2 classes in the fall, and two in the spring. For most schools, this means two or three "preps" a year (i.e. you might teach two or three different classes in a given year). If you're lucky enough, you may get two sections of the same class each semester (i.e. one prep for the semester), and sometimes you're lucky enough to teach the same class each time (i.e. four sections of the same class each year). This is pretty rare, and happens mostly when you're teaching the introductory class (andoften at a large university), since there are multiple sections offered each semester, and many of the senior faculty don't want to teach intro.

At some of the top schools, a professor would teach 3 classes a year (either 1/2 or 3/0). In contrast, at a teaching school, he would teach at least 6 courses a year, and often more (I have some friends that teach a 4/4 load, and faculty in the humanities sometimes teach even more). As a benchmark, the first school I taught at out of grad school had a 2/2 load, my most recent position came with a 3/3 load, and my new job will have a 2/2 load.

While it might not seem like much (a 2/2 load works out to 6 hours a week in the classroom), there's also preparatory time outside the class. This can run quite a bit for a "new prep" (a class you haven't taught before), and varies a lot by the type of class. For example, in the introductory/principles course, once they've taught it a few times, an experienced teacher can pretty much glance at their notes 10 minutes before class, grab their transparencies (or PowerPoint slides) and a dry-erase market (for the whiteboard) and they're good to go. On the other hand, for my case course, even though I've taught it a half-dozen times, I still need a minimum of 3-5 hours of prep time a week.

At most schools, a new professor gets a reduced course load for the first year or two. This is mostly to help them get set up and rolling on their research agenda. For example, at my alma mater, the typical teaching load is 2/2, but new assistant professors get a 1 course reduction (i.e. to a 2/1) for the first couple of years. Then, starting in year 3, they revert to a 2/2/ l0ad.

It's also possible to get a course reduction (also called a "course release") for taking on additional duties. For example, at my latest school, teaching a doctoral level course gave you a course release (since it takes so much longer to prep for a course like this). In addition, you also get a course release (or two) if you're in an administrative position. I have several friends who are chairs of their respective department (the chair is the academic equivalent of a the mid-level manager), and they typically get a one or two course release per semester. And they earn it, since a good chair has to do a lot of work.

If you focus only on the teaching part of the job, being a professor seems like a pretty cushy gig. And if all I had to do was teach 3 classes a semester, life would be pretty easy. I like teaching, because I get to talk about things that I find very interesting, and I have the challenge of trying to "infect" others with my enthusiasm. I'm also a naturally goofy extrovert, so it's a good fit for me.

But, the research side of things is what really differentiates an academic's job from most others. This is where most untenured academics (and a lot of tenured ones who are at "research" schools) spend the lion's share of their time and energy. And truth be told, if I wasn't doing research, I'd probably get bored.

So, I'll talk a bit about research in my next piece.

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Good Advice on Negotiating

Negotiating effectively is one of the most high-payoff (and least appreciated) skills you can learn. And it definitely IS learnable. Over 15 years ago I bought a tape series on the topic, and it saved me well over $2,000 on the purchase price of a car, and several hundred more on a computer. Since then, I try to read new material on the topic whenever I can.

JLP at AllFinancialmatters has a link to Harvey Mackay's 25 Lessons on Negotiating. They're all worth reading, but here are the ones I particularly liked:
3. The biggest tool in any negotiation is the willingness to get up and walk away from the table without a deal.

13. There is no such thing as a "final offer."

14. Try to let the other person speak first.

22. People don't plan to fail, they fail to plan. Top negotiators debrief themselves. They keep a book about themselves and their opponents. You never know when that information may be gold.

And my personal favorite is Mackay's Moral 25: When a person with money meets a person with experience, the person with the experience ends up with the money and the person with the money ends up with the experience.
Read the whole list here.

I've figured out that far more things are negotiable than we'd ever imagine, and that negotiations take place all around us every day (at work, with customers, and with our families) without us even realizing it.

Although I've plugged it before, the absolute BEST book on negotiating I've ever read is Roger Dawson's Secrets of Power Negotiating. I particularly liked it because it has a "top down" approach to the topic -- it starts with an overview and some basic principles, and then goes into specifics.

And since it's now in paperback, it's cheap, too. And it'll pay you back many times over.

Saturday, July 08, 2006

A Primer on "Spring-Loading" and "Back-Dating" Options

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The last few weeks have seen a large number of stories of companies who have "back dated" executive stock options. For those of you who've been living in a cave (or simply weren't all that familiar with options), an executive stock option give the executive the right to purchase (i.e. "call") the underlying stock at a fixed price (referred to as the the "exercise" or "strike" price) at some predetermined point in the future. The exercise price is typically set at or near the stock price at the time the option is issued or granted.

Thanks to research by Eric Lie (the link brings you to one of his web pages where he explains the issues), we now suspect that many firms have been "backdating", or playing around with the timing of their options. In backdating, the company issues options and set their grant date prior to the actual issue date so that it falls on the date where the company's stock was at the lowest point in some recent interval. To see why this is important, consider the following scenario:
  • Acme Corp issues options to it's CEO, Willy Kiyohtay today when the stock price is $50 per share.
  • However, during the last month, Acme's stock has dropped as low as $44 per share (on June 21).
  • So, Acme "back-dates" the options to 6/21 (i.e. it makes the date of the option grant 6/21 instead of 7/7).
  • As a result, the options now have an exercise price of $44 (the price on the date they were supposedly "issued") instead of the $50 exercise price they would have had if Acme had played it straight up.
  • So, instead of Willy K having a contract that gives him the ability to purchase shares at $50, he has now has the right to purchase shares at $44.
This doesn't mean that the options are worth $6 more if issued at an exercise price of $44 than they would be if issued at an exercise price of $50. This is because executive stock options typically aren't exercisable for some time (anywhere between 1 and 5 years). In order for the options to be profitable, the stock price would have to be higher than the exercise price after the vesting period. But, the back dating means that 1) there's a greater chance that the option will be "in the money" (i.e. the stock price will exceed the exercise price), and 2) The profit (the difference between the stock price and the exercise price) will be greater in all cases where the option is in the money.

O.K. that covers back-dating. Now, let's move on to the concept of "spring-loading". Think of springloading as the "forward looking" close cousin of back-dating. In back-dating, the grant date (and therefore, the exercise price) is manipulated based on price patterns in the stock in the recent past. In contrast, spring-loading is a "forward-looking" strategy. In spring-loading, a company times its option grants so that they occur just before a "good-news" announcement that they know about but others don't. So, a spring-loaded option would end up with an exercise price that reflects the stock price before the announcement, and will end up immediately "in the money" following the stock price increase from the announcement.

Here's an example: assume that the company's stock is currently $50 per share. However, the company executives know that the company has just gotten FDA approval for a new drug that will reverse pattern baldness, cure erecticle dysfunction, make you lose 20 pounds, and refinance your mortgage all in one fell swoop (the company researchers had been internet spammers in a previous life). So, the executives issue stock options in the period sometime before the announcement of the approval is made. Since options granted have an exercise price that's equal to the stock price at the time of issue, the options will therefore have an exercise price of $50. But, once the announcement is made, the stock price might move to $55 or $60 or (based on the market for cures of hair loss, "performance issues", and low-interest mortgages), even higher. If the stock price went to $60, for example, the options would be in the money to the tune of $10.

So, while the concept (and the end result is similar), back-dating creates an in-the-money option by looking backward to manipulate the exercise price, and spring loading does it by looking forward and taking advantage of positive information that hasn't yet been revealed to the general public. Of course, an option could be both spring-loaded and back dated. In the example above, the company both spring-load and back date the options by issuing the options before the approval announcement while setting the grant date to some point in the recent past.

For a good piece in today's Wall Street Journal article on spring-loading, click here (note online subscription required), and for some general information on options, click here.

Isn't finance fun?

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Friday, July 07, 2006

The Epitome of Style and Grace

Unknown Wife tells me, "UP, there's a small wasp nest by the garage door. Could you get it?"

So, I get the wasp spray and give it a shot. A few wasps come flying out, I take two quick steps back, and trip backwards over my own two feet.

End result: I land on my butt and wrench my back. And all Unknown Daughter (age 5) registers is that "Daddy said a bad word."

That's why they make those words (and ibuprofen).

Mark Cuban's Is Up And Running

Back in June, Dallas Mavericks owner Mark Cuban announced that he was planning a venture that will combine investigative journalism and investing. According to this Businessweek Online story: will focus on investigative journalism, seeking to find unsavory companies and share the tales behind their malfeasance, Carey says. The stories will take an "anti-fraud, pro-investor” point of view and will likely steer away from the '“he-said, she-said'” approach of much contemporary journalism."
Apparently, Cuban will attempt to profit from the information he uncovers by shorting the stocks prior to unveiling the stories. At the time of Cuban's announcement, there were a lot of questions as to whether this approach was legal or amounted to insider trading (for a law professor's analysis of the issue, see Larry Ribstein's TCS story here).

To make a long story short (no pun intended), Cuban's new site is up and running and has it's first post. No investigative journalism yet (it's more of a generic piece that doesn't mention any specific companies), but I'll keep an eye on the site.

From an academic standpoint, it's an interesting idea, and could raise some interesting issues. First off, I'm curious to see what the site will add over and above the information already in Second, I wonder if Cuban will disclose his positions AND the dates he took them (highly unlikely, but I can hope, can't I?). This would make for a good case study on the actual payoff to information gathering, and would add a lot of credibility to the site. Finally, I wonder what effect the publishing of the stories will have on the trading volume (and bid-ask spreads) in the stocks covered.

Stay tuned.

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Thursday, July 06, 2006

Interesting Paper on Votes in Director Elections

It's been a while since I highlighted an academic paper, but this one is very interesting. Boards of directors are probably the primary focus of current corporate governance research. There are numerous papers that focus on board composition, board size, the effect of poor corporate performance on board composition, and the effect of board composition on subsequent corporate performance. However, there's been relatively little work done on the director election process. Now there is.

Jay Cai, Jacqueline Garner, and Ralph Walkling (all at Drexel University) just posted a piece to SSRN titled "Electing Directors". Here's the abstract:
The election of directors is arguably the most fundamental aspect of corporate governance, yet little empirical analysis of this issue exists. The objective of this research is to examine the determinants and efficacy of director elections using a large sample of post-SOX elections. Our tests provide strong support for the firm performance, director performance and shareholder rights hypotheses and limited support for the efficacy hypothesis. Specifically, we document that shareholders express their dissatisfaction with governance and with the poor performance of their firms and directors through their votes. However, shareholder votes result in only minor changes to performance and governance of firms and are not associated with reputational effects to directors. These results provide important benchmarks for the current debate about reform of the election and voting process
Read the whole thing here.

They do a very nice job, and have some interesting results. They find that shareholders do change their voting patterns in response to poorer firm performance or perceptions that the directors are not acting in their (shareholders') best interests:
  • Directors at poorer-performing firms receive fewer votes;
  • Directors with poorer attendance records get fewer votes;
  • "Busy" directors (those holding more seats on other boards) receive fewer votes;
  • Independent outside directors receive higher votes, as do those recommended by ISS.
However, it's all relative. The typical director receives in the mid-90% range of the votes, and even in the lowest vote category, directors receive over 92% of the votes.

So, in summary they find that most directors that get put up for election do get the overwhelming majority of the votes, and that while there are variations, they're not that significant in magnitude. However, they do provide some very important benchmarks for future research. Well done.

Wednesday, July 05, 2006

Ken Lay Dies of Heart Attack

According to the Houston Chronicle, Ken Lay has died from a heart attack in Colorado.

List of Companies Under Scrutiny For Options Backdating

The Wall Street Journal just updated their list of companies that are being looked at by either the SEC or the Justice Department for "options timing" issues.

The table list about 60 companies at present, with a short summary of the issues or recent news stories for each company. It's worth a quick look, as there are quite a few big names on there.

Most companies on the list are being looked at by both the DOJ and the SEC, and I'm sure there are many more to come.

Dilbert Illustrates Contracting Difficulties Under Asymmetric Information

We have a similar problem each semester when we have students fill out evaluations of their professors (but the bargaining's not as explicit).

HT: Alex Tabarrok at Marginal Revolution

Tuesday, July 04, 2006

This Week's Carnival Of The Capitalists

The Independence Day COTC is up at My Money Forest. Because of the holiday, there are fewer submissions than usual, but there were a few that caught my eye. Here they are:
With all the media attention lately, it wouldn't be a COTC without a post on options backdating, so Sox First gives us Options Scams: Timing is Everything

Searchlight Crusade goes into the ins and outs of buying distressed propoerties in Foreclosures: A Good Investment?

Gongol gives us Traffic Rankings for Major Business and Economics Websites. It's a nice way of putting website traffic in perspective.

Finally, Ask Uncle Bill discusses pensions in Pensions - The Not So Good Old Days
As usual, look around. There's always lots of interesting stuff at a Carnival.

Statistical Rapping

If you're one of those rare few who both likes rap music AND has your statistical geek on, you might get a kick out of this - statz rappers. Looks like some grad students had WAAAY too much time on their hands.

That line sticks in your head: "Got your difference on the top, and your error on the bottom."

If I could only do this for my finance classes.

HT: Mungowits End

Sunday, July 02, 2006

Great Site on the Declaration of Independence

For those of you who want a bit more information about the Declaration of Independence, has a great collection of resources including:
All in all, it's well worth a read. Now a neighbor and I have to go out and buy more fireworks for our celebration. Once we move we'll be in a state where it's much harder to get pyrotechnics, and this is the last Independence Day with our good friends in our current neighborhood. So we're going out with a bang (yeah, it's a weak pun, so sue me).

Saturday, July 01, 2006

Bush Sings U2

I meet with a group of about 8-10 guys from my church at 6:30 every Saturday morning (it's the only time we can meet without taking time from our families). It's an interesting bunch -- they're mostly successful ( but not all), mature Guys (with a Big "G") with a great deal of openness and very, very strange senses of humor. My Saturday mornings with the PallBearer's Club will be one of the biggest things I'll miss after the move.

For some reason, the band U2 comes up in conversation on a regular basis. So, this video clip's for them:

Sunday Bloody Sunday.