Saturday, September 30, 2006

Snakes On A Birthday Party

The Unknown Wife hung the moon for the Unknown Son's 8th birthday party yesterday.

We took about a dozen of his friends to a nearby place run by a marine biologist from Unknown University. They had tanks with all kinds of crabs, guppy sharks, iguanas, and assorted disgusting looking creatures. Just perfect for an eight year old boy.

The two highlights of his day were:

1) Petting a small (about 18 inches long) shark (it subsequently almost jumped out of the tank, to the kids delight), and

2) Having a 35 lb boa constrictor draped across his shoulders.

This was followed by (of course) pizza, cake and ice cream.

He said it was "the best birthday ever."

Thursday, September 28, 2006

Friday Link Dump

It's been a busy Friday - I taught a class this morning and saw an excellent presentation in the afternoon on investments in private equity. The paper presented examined the different types of parties (public pension funds, endowments, private pension funds, etc...) that invest in various types of Private Equity funds (i.e. buyout. early-stage VC or late-stage VC). Its main result was that there are significant differences in the ability of different cohorts of investors to make good choices (even within a given asset class). And the presenter did an outstanding job -- it's always fun to see a real professional at work.

And since he came to our campus for the visit, we got a free meal out of it at the university club (and my mouth felt good enough following my surgery that I could enjoy it).

So, today's Link Dump is a bit late (and a bit sparse). But better late than never. So without further ado: provides a good example of the earnings inflation technique known as "channel stuffing" reports that bondholders have sued Wendy's over the spinoff of their Tim Horton's Unit. The bondholders claim the spinoff will increase the riskiness of the remaining firm, to their detriment. It's a good example to use in class to illustrate the "shareholder-bondholder agency problem."

Dealbook reposts on recent activities of some well-known activist investors.

David Andrew Taylor brings a very nice (and low-tech) explanation of why an inverted yield curve means that bond investors are predicting a recession.

Geoff Gannon at Seeking Alpha gives some background on the Dow. To paraphrase Inigo Montoya, "I don't think that Index is what you think it is."

The New York Times tells us Kobi Alexander isn't pleased with his accommodations in "U.S. Fugitive in Options Case Displeased By His African Jail." Apparently it's not up to "Club Fed" U.S. White -collar crime lodgings standards.
And now, it's off to another birthday party for the Unknown Son. We did the in-family party yesterday, but today's involves the neighborhood kids and his classmates.

And it's off-site, so we don't have to clean up. So everyone's happy.

Who are My Picks For the Nobel Prize in Economics

Now that the Vicodin has kicked in, I have some time to post a bit. If I'm feeling o.k., I should probably really be working on academic stuff, but this way I can see just how lucid I am before I go back to writing on the current academic project. After I'm done, l'll put it down for a bit, read my latest Terry Pratchett novel, and then come back to see if I made any sense (or at least, as much as I usually do).

In any event, speculation seems to be heating up for who will get the next Nobel Prize in economics. I'll cast my vote for Eugene Fama of the University of Chicago for his earlier work on market efficiency (and later work on size and market-book effects which seem to contradict his earlier work). If he gets the nod, there's a good chance that his coauthor Kenneth French would share it with him.

A second choice would be The U of Chicago's Richard Thaler for his work in advancing the field of behavioral economics. Since we read several of all three authors' papers in grad school, I'd be happy with any of them (but my favorite would be for Fama to get it).

After typing this, I realize that the pain meds have slightly altered my fine muscle control - I keep hitting the wrong keys. Ah well - that's what spell check (and editing) are for.

Update: I rechecked this piece after a nap (and after a bit more of the anesthesia had worn off). Man on man - I made a lot of errors.

Update (10/3): Welcome to all the folks stopping by from Dealbreaker. com -- if you want a little history behind Financial Rounds, check out the FAQ page.

Wednesday, September 27, 2006

Thursday Link Dump- The Wisdom Tooth Edition

Today I get to have a severely impacted wisdom tooth removed - one of the few things I enjoy less than college-wide faculty meetings (at least I can bring hot coffee and papers to grade to the meetings).

On the other hand (What did you expect? I'm trained as an economist, so there's ALWAYS an "other hand"), they do give me some very nice pharmaceuticals to help me cope with the discomfort. So, I will likely not be blogging much today, and if I do, it might not be very lucid (and no comments about my usual level of lucidity).

So, here's the day's Link Dump):
All About Alpha highlights a paper that attempts to “debunk” several myths about active management.

Abnormal Returns discusses how there might be insufficient alpha to go around.

Equity Private is yawning over Amaranth.

Chuck Jaffe of Marketwatch highlights some new actively managed ETF offerings, including one based on insider trading patterns.

On Seeking Alpha, Geoff Considine shows how using P/E ratios to screen ETFs doesn't make much sense. He makes some good points about how P/E ratios capture both growth and risk (and the two dimensions are hard to disentangle).

Dan Melson at Searchlight Crusade brings the 411 on buying real estate with 0% down.

Lastly, there were a couple of good Wall Street Journal Articles (online subscription required). In the first, we get the latest episode of "Where's Kobi?" It turns out that they found Kobi Alexander (Comverse Technologies CEO) in Namibia. And he's facing extradition.

In the second article, "Some ETFs start in Europe" we find out that the lighter lighter regulatory burden in Europe has shifted some ETF originatiooverseasrs (kind of like a play opening in New Haven and only later getting to Broadway).

Finally, in this week's "efficient markets aren't" story, the WSJ brings asks "Does Stock By Any Other Name Smell As Sweet?"-- They discuss recent research in the behaviorafinancece vein that indicates that the ease of remembering a company's ticker symbol is associated with its stock market performance. There's also a pretty good picture I'll have to find a way to use in my class somehow.
Off to the dentist (groan), and time to be thankful for the wonders of modern pharmacology. In the old days I'd have to make do with a scotch and soda (or two), and this is much more efficient.

Update: it wasn't too bad. The actual extraction took about 45 minutes, and I didn't recall a bit once the Verced kicked in. The jaw's sore, but the vicodine seems to be handling that o.k. (except I just failed to enter the verification word 3x to post this).

Anyone like to give odds on whether I make it to my 11:00 lecture tomorrow?

Tuesday, September 26, 2006

Wednesday Link Dump

Not much to link to today, since I'm doing the Link Dump a bit early this time:
From Michael Oxley of Sarbanes Oxley fame believes that changes will be forthcoming in SOX in the near future that will make it less burdensome for small companies. Personally, I'll take a "wait and see" approach, since my experience is that regulators seldom make regulations LESS burdensome.

From yesterday's Online Wall Street Journal, "Merger Trend Sweeping Big Exchanges Cascades Toward 'Interdealer Brokers'"

Abnormal Returns has a great analogy - it compares the evolution of the ease with which investors can get market returns (i.e. with index funds and ETFs) over time with the ease in getting a meal at a high-end restaurant.

Spitzer is at it again - he just sued mutual fund house J&W Seligman. The thought of him as governor of New York just bothers me.

Craig Newmark at Newmark's Door links to this excellent list of logical fallacies.
Time for another cuppa Joe and then off to class. I actually do one of my favorite topics today: active vs. passive management, fund fees and index funds.

This Week's Carnival of The Capitalists

I'm a bit late in the announcing, but this week's COTC is up at Crossroads Dispatches. My three picks of of the week are:
Dave Porter at Pacesetter Mortgage Blog asks and answers the question What Do Mortgage Underwriters DO?

Free Money Finance shows how mutual fund fees can cost far more than you think., and advises people to buy index funds.

Dan Melman of Searchlight Crusade talks about loans on modular houses.
Enjoy, and look around when you've read these. There's always lots of good stuff at a Carnival.

Tuesday Link Dump

There's lots of interesting stuff since yesterday both in the Mainstream Media and in the Blogosphere. Some of it is actually useful - I realized it was tome to refinance my mortgage (after all, I've been in the house for almost 3 months already. Herr are the latest tidbits:
First, on the lighter side: Did Bin Laden die from eating tainted spinach? Maybe it was a CIA Plot. And one blogger is trying to engage in what can only be called Elmo Arbitrage. discusses how a cooling off in the housing market has resulted in a decrease in the rate on the benchmark Treasury rate. After reading it. I just did my refinance on my house (saved about $1,500 a year). For all you finance and econ faculty out there, the piece has a lot Oof good material for illustrating the Fed, interest rates, and inflation.

There's been a bit of insider-trading related news: Dealbook reports on the not-guilty plea by former hedge fund manager Hilary Shane, who allegedly shorted shares just prior to a private offering by Compudyne. And Marketwatch tells us that the SEC is planning to ramp up enforcement of insider trading in concert with self-regulatory organizations like the NASD and NYSE.

Bloomberg News reports on the increase in FBI investigations related to corporate fraud in general and options backdating in particular.

Political Calculations is finally getting around to putting up an index to all the online tools they've created.

Dan Melson at Searchlight Crusade asks (and answers) the question "Should Negative Amortization Loans Be Banned?"

The Daily Options Report talks about changes in automatic exercise provisions for slightly in-the-money options.

Marketwatch.Com reports on how the SEC is revamping Edgar (their online system for looking up filing information). I was just using it about an hour ago, and it can definitely use a more user-friendly system.

And last, but not least, Jim Mahar at discusses financial risk management (specifically, fuel hedging by airlines).
Back to work: I've got data to torture and the English language to mangle (that's called "writing papers, for you non-academics...)

Monday, September 25, 2006

50,000 Hits For Financial Rounds

I just looked at my sitemeter, and Financial Rounds received its 50,000th hit sometime this afternoon. I'm pleased and humbled.

Thanks to all of you who've stopped by (and even more, came back) over the last 19 months or so.

When I started this thing (on a whim) in February of 2005 I never imagined I'd have so many visitors. I realize I'm a relatively small fry in the grand scheme of things, but I'm extremely happy with these results.

Monday Link Dump

It's another new week at Unknown University, and I have a quiz to give my class in about an hour. So, without further ado, here's the latest link dump: speculates on whether the recent Amaranth failure will affect institutional demand for hedge funds.

Saturday's Wall Street Journal (online subscription required) reports on a possible trend towards less levered LBOs (maybe Equity Private can come up with a new name for these transactions). discusses an article by Venkataram and Besseembinder in the Journal of Financial Economics. It shows that the increased transparency in the bond markets resulting from the implementation of the Trace system has cost bond traders about $1 billion in profits over the last year.

Calculated Risk points to a very interesting BusinessWeek article on mortgage buybacks titled Bad Blood Over Bad Loans.

The always interesting Greg Mankiw illustrates the concept of "framing" with an article from the Wall Street Journal. As always, read his comments section, too. discusses the increased in the recent number of stock buybacks, along with some good discussion of the implications for investors.

Finally, today's Wall Street Journal reports on some of the costs associated with starting (and maintaining) an algorithmic trading system.
Ah well, enough bloggery for now. My Bloglines account is now empty, and the large coffee I had before coming to the office just hit my third brain cell.

So it must be time to get to work.

Sunday, September 24, 2006

Ideas - The Memento Edition

Here's a cartoon from a short while back from Piled Higher and Deeper.

It used to happen to me a lot more when I had a 45 minute commute to my office. All too often I'd have what seemed to be a great insight (or come up with a great turn of a phrase) in my car, and by the time I got to my office, I'd be drawing blanks.

That's why I've started keeping a small tape recorder with me. I'm no Guy Pearce, but I realize that I've got so much stuff going on that I can't depend on my memory anymore. And you never know when a good idea will hit you.

Saturday, September 23, 2006

Saturday Link Dump

Unknown Daughter and Unknown Wife are going away for an overnight with Unknown Niece and Unknown Sister-In-Law. So, it's a boy's couple of days for the Lad and I. I'm putting in a couple of hours at the office while the rest of my family is at my daughter's soccer game, so I thought I'd post a few things for your reading pleasure.
Tim Harford's Dear Economist columns are now available online here, with an RSS feed here. Browse through some of his back columns - he's one of the best comenters out there when it comes to applying economic principles to just about anything you can imagine (and a few you can't).

Calculated Risk reports on the implied probabilities that the Fed will either pause in their increases or even cut rates in December - they're increasing.

Truth On The Market adds his $0.02 to the back-and-forth on options backdating in the blogosphere. He's also got links to previous posts by others. links to this violent (but funny, in a sick kind of way) online procrastination tool. You've been warned...
I'll probably post more later. After Unknown Son and I do some Guy Things, we'll probably go to my office for a bit -- I'll use my laptop, and he'll use my computer. He's got a lot of internet games he likes to play and I've got two 19'' monitors on my office system.

And yes, we're a couple of nerds. Not that there's anything wrong with that.

Thursday, September 21, 2006

Friday Link Dump

As we close out yet another week, I'm still buried. So, here are the links for today.
DealBook reports on a study that shows that so-called private equity flips (i.e. taking a firm private and then bringing it back to public status in a short period) fails to much shareholder value.

In another article, Dealbook reports on how private equity has created a lot of job opportunities for CFOs. tells us how much of the focus on corporate governance is misplaced -- agency costs aren't the be-all and end-all they're made out to be.

Larry Ribstein at Ideoblog points out the first article on Backdating by law profs (there've been quite a few by finance folks).

From the WSJ -- my addiction just got more expensive (by $0.05 a dose). Ah well, I'll still get my StarCrack.
Enough for now - back to work.

Update (9/24): Somehow, I must have hit the wrong button - I inadvertantly saved this as a draft rather than publishing it. So, the links are a few days out of date. I must need more coffee.

Thursday Link Dump

Here's the latest Link Dump:
DealBook comments on the growing popularity of the “buyout-hunting game” (i.e. predicting which firms are likely to be the next targets of P-E firms)

CXO Advisory Group reviews a study that compares "behavioral finance" run mutual funds to good old fashioned, value funds.

Here's the latest FOMC press release. The main news: no rate increases for now, since the housing market is tanking and inflation seems likely to slow down in the near term. asks the question "Can Sarbanes-Oxley 404 Be Fixed?"

In other Sarbox news, The Financial Times has an opinion piece by the Chief Executive of the London Stock Exchange. She argues that the loss of U.S. IPO listing business to the LSE is due to the fact that it's simply a better exchange.

The Wall Street Journal (online subscription required) just published its annual ranking of MBA programs.

Statistical Modeling, Causal Inference, and Social Science reports on a paper by Alan Gerber and Neil Malhotra on the bias in journals towards papers that report "statistically significant" results.

Finally, Sound Money Tips has some good advice on saving money on toy purchases. I particularly liked the link provided for buying used toys.
Enough for now- time to get back to my "real" job. I've got referee reports to write and data to torture.

Piled Higher And Deeper Explains The Scientific Method

One of my favorite quotes is "In theory, there's no difference between theory and practice; In practice, there is."

Piled Higher and Deeper illustrates it in this cartoon (note: if you can't read it, click on the picture for a larger version in a separate window).

Not that anyone I know would ever do something like this...

Wednesday, September 20, 2006

Wednesday Link Dump

Like I mentioned before, a lot of my blogging for the time being might be of the "link dump" variety , where I merely put up links to interesting (to me) pieces I've come across. This way I can keep my bloglines account from overflowing, send you some food for thought, and not overload myself. So, without further ado, here's the latest dump:
The SEC just issued clarifications on how companies should account for options backdating. The New York Times reports on it here, with the usual good commentary by Jack Siesilski at The AAO Weblog here. And if you want a quick primer on the topic, I've written one here.

ProfessorBainbridge talks about a recent report indicating that there's high levels of insider trading.

Joe Carter has his latest in the Yak Shaving Razor up at Evangelical Outpost. I'm impressed by the range of stuff he finds.

Finally, there were a couple of good Wall Street Journal (online subscription required) articles lately that might be of interest to finance faculty. In one, they report on Ford Suspending Its Dividends - a good piece for all of you if you're currently discussing dividends, signaling, or restructuring in class.

Another WSJ piece discuss how regulators are looking at whether banks and brokerage houses are enforcing margin requirements for hedge fund clients.

Economist's View on publication bias
Enough bloggery for now -- back to preparing for class. Appropriately enough, we're discussing margin requirements today.

Monday, September 18, 2006

Monday Link Dump

I'm still trying to get ahead in my new classes, so I might not be doing much blogging (other than "link dumps) in the next couple of days. So, here's the Monday Edition: discusses how activist hedge funds are finding fewer opportunities these days.

The New York Times lists which 4-year colleges have the worst graduation rates. I have a buddy who teaches at one to them, so I'll have to send the piece to him to see how much grief he's caught from it.

The Wall Street Journal (note: online subscription required) shows that it's not necessary to have an Ivy-League degree to be a CEO of a top company. In fact, only about 10% do.

Flexo at Consumerism Commentary has a link to a Kiplingers article on how to find financial advice (for a fee) online.

Power Prof at Just Tenured shares her resolutions for the new academic year.

This week's Carnival of Personal Finance is up at Free Money Finance, the Carnival of Investing is up at Consumerism Commentary, and this week's Carnival of the Capitalists is up (kind of) at
Hopefully, regularly scheduled bloggery will resume in a day or two. At least this way, you'll see some articles you might have missed (and my feed reader won't end up overflowing).

Tuesday, September 12, 2006

Wednesday Link Dump

What with getting up to speed on my new classes and the usual beginning of semester "big ball-o-crazy", I've been a bit pressed for time. So instead of posting at length, I thought I'd just put some links up to interesting stuff I've recently come across:
The AAO Weblog links to a great article on titled "Is Spring-Loading Wrong? " It contains a phrase (at least to me)--“bullet-dodging.” This refers to the phenomenon where a firm delays the granting of options until after bad news has been revealed.

Barry Ritholtz of The Big Picture refers to brokers of exotic mortgage as "the new boiler rooms." In case you don't understand the reference, rent this movie.

Evangelical Outpost has their latest in their continuing Yak Shaving Razor series.

Vikas Bajaj from the New York Times reports on this interesting (to me, at least) combination of facts: default rates on mortgages are rising, but they're more popular than ever with investors.

And finally, from the Wall Street Journal (online subscription required), Peter McKay reports on recent insider trading indicators. He notes that the ratio of insider sales to insider purchases at large-cap companies is low by historical standards - a bullish indicator.
This should be enough to keep y'all busy. Enjoy.

Saturday, September 09, 2006

Opening The Class: The "First Day"

It's the beginning of a new semester, so I've been thinking about how I should open my new classes.

Over the years, I've changed what I do for a typical "first class". When I first started teaching, I would go through the syllabus in great detail. After that (if there was time), I'd get into the material. I was never really comfortable with that approach, because it alsways seemed to suck the life out of the class. But that's what everyone around me was doing, so I figured I might as well too (insert comment about lemmings here).

But a couple of years back, I read this short piece by Robert Bruner (now Dean of UVA's Darden School of Business) titled "Opening a Course." Here's the abstract:
Professor C. Roland Christensen, once remarked that the management of beginnings and endings was among the most important, but least appreciated, professional skills. Professors are trained to focus on the substantive middle, the beef, as it were, in the intellectual burger. All too often the buns must fend for themselves. Such neglect can be costly. A faulty start to a course can create a legacy that will haunt the instructor for the rest of the course, or worse. A bad beginning makes a bad ending said Euripides. The reality is that first impressions are hugely important within the classroom. How can one get a course launched well? Several instructors shared ideas with me; their comments addressed a variety of aims and tactics.
You can read the whole thing on SSRN here. It's only a couple of pages, and well worth the time

Probably the best advice I got from the piece was that the first class
  • Should be high energy
  • Have some substance
  • Give an overview of the course
  • Set some expectations
As for how the "openings" of my new classes went, I was able to start my "traditional" class pretty well (see previous entry). Unfortunately, for my student manged investment fund class, it didn't go well - I was exhausted from my son getting me up repeatedly the night before (and the class meets at night, to boot), and a bit unfocused. So, hopefully I can salvage it next week and do a bit of a reset.

I may actually apologize to the class for being out of sorts. If nothing else, it'll surprise them...

First Impressions of the New Semester

The first week of classes at Unknown University (v2.0) is now (as Monty Python would have said) "Now of interest only to historians." Here are some first impressions:
  • In the first class meeting the students were a bit non-responsive, but it's often that way the first day of the fall semester (I call it the "Damn! Summer's over! I'm depressed" effect). Don't worry, my students, your teachers feel it too. I covered the first chapter and all the administrative BS in a 50 minute class, so they might have been in a bit of shock. In the 2nd meeting, I must have called on (or had volunteers from) over 15 out of the 35 students in the class. So, I think the expectations have been set, and things are off to a good start.
  • Our first faculty meeting lasted only 25 minutes, so there seems to be good leadership at least in that area. Since we have a new dean, no one knows how he'll match up in the either areas, but time will tell.

  • The vast majority of the faculty here seems to be pretty easy going. They've decided to do happy hour twice a month on Friday afternoons - another very good sign.
Overall, I'd give it a seven or eight on a ten point scale. Not perfect, but not too shabby.

I still have to finish my syllabus for the second course. Since it meets the first time this coming Monday night, I'll probably get it done sometime around Monday afternoon. At Unknown University (v2.0), we believe in "just in time syllabi". Once that class has met, I can relax a bit and get back to all the research I've been neglecting.

Stay tuned.

Thursday, September 07, 2006

Faculty Meeting Dialogue Structure.

Profgrrrrl found something to keep her occupied during faculty meetings. In this piece, she breaks down the "normal" dialogue that takes place in faculty meeting all over the country.

Does this mean she'll end up taking the minutes of the meetings? If she did, I'm sure they'd read a lot better than the ones I usually see.

I think I'll make a faculty meeting bingo card out of it. We have our first college-wide one of the semester today.

HT: Mike Munger by way of Craig NewmarkUpdate:

I was very pleasantly surprised - the college of business faculty meeting was over in only 25 minutes. I hope it's trend that'll continue, but I doubt it.

Wednesday, September 06, 2006

How NOT to Study For The CFA

The season is starting for CFA prep courses - Level 1 is in December. Since I'll be teaching in the CFA program this fall (and Spring), I thought this little piece was pretty funny. Think of it as the payback for not getting ahead on things like studying:
...And then the next question- do I use the %-of-completion method or the installment sales method? How could I possibly know that? I stand up quickly and knock my Redbull all over my Book 3 Study Notes. I start to cry. I can’t stop. That’s the book with all the FSA stuff in it. I’ve wasted the past 3 months of my life studying and not retaining anything and now I have spilled redbull all over my FSA Study Notes. My roommate found me 3 hours later passed out drunk, shredded pieces of Book 3 and my practice exam lying all around me.**”
Read the whole thing here.

And stock up on the Red Bull just in case...

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.

Tuesday, September 05, 2006

Giving The Kids A Classical Education (Rubber Cockroach Edition)

We do our best in the Unknown Household to give the Unknown kids a classical education -- Bugs Bunny, Tom and Jerry, Popeye, and (as soon as I get the DVD) The Three Stooges.

They're still getting the hang of practical jokes. But I'm trying to do my part.

Tonight Unknown Son, Unknown Daughter, and I planted a LARGE (and very realistic) rubber cockroach in the middle of the kitchen floor. Unknown Wife was blissfully aware, talking on the phone with her mother, with her back to us. The kids peeked around the corner and were barely able to keep quiet as they waited for things to unfold.

Unknown Wife didn't disappoint. The scream was priceless, and made the kids' night. Looks like they'll have something to tell their new friends in school tomorrow (today was the first day).

Like I said, a classical education.

Don't Say These Things If You Want Sympathy From Your Professor

Professor Steve Dutch (U of Wisconsin - Green Bay) offers a list of some things you might not want to say to your professor if you expect ANY sympathy. Think of it as a TOP TEN list with a few bonus items:
  1. This Course Covered Too Much Material...
  2. The Expected Grade Just for Coming to Class is a B
  3. I Disagreed With the Professor's Stand on ----
  4. Some Topics in Class Weren't on the Exams
  5. Do You Give Out a Study Guide?
  6. I Studied for Hours
  7. I Know The Material - I Just Don't Do Well on Exams
  8. I Don't Have Time For All This (...but you don't understand - I have a job.)
  9. Students Are Customers
  10. Do I Need to Know This?
  11. There Was Too Much Memorization
  12. This Course Wasn't Relevant
  13. Exams Don't Reflect Real Life
  14. I Paid Good Money for This Course and I Deserve a Good Grade
  15. All I Want Is The Diploma
Read the whole thing here.

The full piece has a lot of comments after each line that explain WHY they're not particularly good things to say. All in all, it gives a pretty good picture of your professors' mindsets.

Since classes just started (and I'm at a new school), this looks like a pretty good candidate for the first thing I put up on my door.

HT: Newmark's Door

This Week's Carnival of The Capitalists

This week's COTC is up at The Business of America is Business, compliments of our host Professor Starling Hunter. He's hosting for the second time in a month (talk about a glutton for punishment). He's got a great format for this week's Carnival - he starts with the question each article answers. As usual, here are my picks of the week:
Dan Melson of Searchlight Crusade answers the question Why Is There Money in Fixer Properties?

Debt Free provides The Three Strategies to Maximize Your Financial Success.
Here's the usual disclaimer: My tastes are probably different from yours. So look around - There's always lots of good stuff at a Carnival.

Monday, September 04, 2006

Ben Stein Punts One on Management Buyouts

I almost always enjoy reading whatever Ben Stein's writes - he's an old school kind of guy who generally hits most nails he aims at right on the head. But I got a kick out of his recent New York Times piece where he rails against the injustice of Management Buyouts (MBOs). Unfortunately, the reason I got a kick out of it is that his arguments are both over the top and incredibly off base.

He mentions MBOs in the same breath as segregation and housing discrimination, and says that " every standard I can see, they are yet another sad sign of how our corporate trustees have lost their moral compass."

Read the full piece here (Note: online subscription required)

The basic premise behind his screed (and I think it's an appropriate word) is that it's wrong for management to use their private information to buy up corporate assets on the cheap.

I have at least a couple of problems with his analysis:

First, what evidence I've seen on MBOs seems to show that the stockholders of the parent company make out about as well when a division is taken private in an MBO as they do when the division is sold to a third party (i.e. in an arms-length asset sale). So, managers on average seem to offer shareholders the same deal as they would have gotten elsewhere.

Second, I think Stein is guilty of "cherry picking." He may not be aware of it, but his cases are most likely not a representative sample. He gives some examples of MBOs where the management made a huge profit. However, the appropriate metric would be the returns for ALL MBOs, not just the successful ones.

Third, even if MBOs on average are extremely successful, the managers doing them bear a huge amount of risk. They typically take large equity stakes in these firms, and therefore end up holding an extremely undiversified position. If the MBO fails, they stand to lose what often represents a major portion of their personal wealth. And as we all know (at least, if we've taken an introductory finance class), bearing higher risk should be compensated by a higher expected return, or people won't take the risk.

Finally, in MBOs, managers typically pay a premium above the current perceived value of the division. And the shareholders APPROVE the deals (or at least the board of directors does). A evidence, the abnormal return to the firms selling the division are positive in most cases (and are statistically quite significant). If managers are making such a killing, it should show up in the returns to the parent company. It doesn't. And if it' such a good deal for the managers, why doesn't another firm swoop down and outbid them?

All in all, a disappointing piece, and not up to Stein's usual standards.

Oh well, everyone has an occasional off day. He does so many things so well that I guess he's due for one, too.

Update: For further commentary on the topic, be sure to read what Equity Private (Going Private) and Larry Ribstein (Ideoblog) have to say.

As usual, they say it better than me (damn!)

New (To Me, at Least) Corporate Governance Blog

I've just added a new blog to the blogroll - Institutional Shareholders Services (ISS) Corporate Governance Blog.

ISS is one of the major players in the corporate governance world. They're best known for their role in advising shareholders in the proxy process, but also have their fingers in a lot of other corporate governance-related pies. They've been blogging since February of this year, and have a lot of interesting stuff up there. Give them a look (I've already found some good stuff for my classes).

Saturday, September 02, 2006

The Economics of Oral Sex

Sorry, I just couldn't resist. Tim Harford (author of The Undercover Economist) has a great way of applying the principles of economics to topics you'd never expect. In his latest Slate column, he uses economics to explain the recent rise in oral sex among teenagers:
Now, there is no shortage of explanations: Perhaps everyone just thought that if it was good enough for Bill Clinton and Monica Lewinsky, it was good enough for them. But an economic explanation would instead start with the premise that this is a response to changing incentives.
Read the whole thing here.

And you thought econonomics was boring.

HT: Alex Tabarrok at Marginal Revolution.

Friday, September 01, 2006

Summer Is Dwindling

The last days of summer are dwindling away. I spent most of the day taking care of writing my syllabi for the fall term (we don't start classes until next Wednesday, so there's still time). I have two "new preps" (i.e. classes I haven't taught before). Unfortunately, one of the classes I'm teaching has two sections (I take one, and another faculty takes the other), so there are co-ordinations issues. In other words, we have to agree on a common syllabus. So, everything takes longer.

I knocked off work at 3 and drove the 10 minutes to get home. The neighborhood had a talent show, and about a dozen young kids (all under showed 12) strutted their stuff their stuff -- everything from Country Karaoke to a coronet solo to "Irish Dancing" (the Unknown Daughter) to joke telling (the Unknown Son).

Kind of a nice ending to the summer (they start school Tuesday).

And yes, I do live in a neighborhood that's straight out of Leave It To Beaver land.