Baby Got WACC

For those of you who aren't business school geeks, WACC stands for Weighted Average Cost of Capital. It's the rate of return investor would require to invest in a project that represents the average risk of a company's assets. It's a major topic in corporate finance, and also one of the drier and more technical ones.

Not any more. Every year, the Columbia Business School MBA students poduce the Business Schol Follies. This year, Sir Banks-A-Lot brings a hilarious spoof of the rap song Baby Got Back in Baby Got WACC.

HT: Dealbook

Back From EFA And Back To Work

I'm back from the Eastern Finance Association (EFA) Meeting, and (as usual) have more things to do than time to do them in the last week of the semester. There are papers to grade, exams to write, classes to wrap up, and a major presentation this week that still needs a lot of work.

The EFA conference comes at an inconvenient time - right at the end of the semester. But it's still good to get away for a few days. This particular conference is always good - after a few years, you end up knowing most of the regulars involved, and it's fun catching up with old friends (and making new ones). I saw a couple of good presentations, presented some work of my own, and discussed another paper. And I even spent a few hours working with coauthors on a research project. It seems fitting, since we got the idea in the bar (after a few beers) at last year's conference. It should be done pretty quickly, since one of the coauthors goes up for tenure in a year. So there will be a lot of incentive to work fast. As my advisor was foond of saying, "I don't work well under deadlines. But without them, I don't work at all."

So, with all the stuff on my plate for this week, blogging might be light for a few days. And on that note, back to work.

At EFA In The Big Easy

I'm at the Eastern Finance Association annual meeting in New Orleans for the next few days, so blogging will be light. I presented my paper yesterday and did my discussant's duties, and meet with coauthors in about a half hour.

After that, it's off to see a few more papers and then sightseeing with some friends.


Man, I love conferences - seeing a lot of other research, interesting locations to see (some times) and catching up with old friends. It's one of the best parts of this job.

Virginia Tech Shooting

There's not much anyone can say either to the survivors of the Virginia Tech shooting or to the parents of the victims. But let's keep them in our prayers.

Then go and give your kids (and your friends) a hug.

Death By PowerPoint

Ah! Another Monday in the hopper. Only three more weeks of classes left. Can you tell I've had enough of this semester?

At least I'm getting closer to being ready for my conference. I've just about finished my quiz for Friday's class (on efficient markets and performance measurement), I've downloaded the paper I'm discussing, and I'm about halfway through with my presentation.

One of the things I've learned about conference presentations is "less is more." In this conference, we have about 15-20 minutes for presentations, and I go last out of 4 papers in my session. So, if history repeats itself, someone before me (either a presenter or a discussant) will go WAY over time. So, I'll limit my presentation to 8-9 slides at most, and no tables (only bullet points for my results).

On that note, here's a short and very funny video on how NOT to do a Powerpoint presentation (HT: Presentation Zen).

Sunday Link Dump - More on PE and Hedge Funds

The semester continues its march to the last day of classes (I have a total of 7 teaching days left until finals). So, I'm in my office on a Sunday getting ready for the final push. I leave for the Eastern Finance Association Meetings in New Orleans Wednesday after class, so I have to get a bit ahead of things (I still haven't written my quiz for my sub, or finished my presentation, or even started on my discussants comments).

So while I toil away, here are three links (again, on hedge funds and PE firms - I seem to be in a rut) to keep you busy:

All About Alpha interviews Tom Schneeweis of UMASS on hedge funds, alpha, and risk. Here's the money quote: "I really do believe that most hedge fund managers want to believe they are wizards. When in reality, all they are doing is accepting certain types of risk. "

According to this Fortune magazine article on the distribution of PE firms, the majority of PE funds are well under$1 Billion in size - in fact, the average fund (once the top ten are excluded) has an average size of $180 million, if you don't count the top 10 firms.

Here's an overview of hedge funds (in PDF format), compliments of Michael Covel.

Enough blogging - my grading beckons.

Questions From Ph.D. Students - Present and Future

I started Financial Rounds over two years ago mostly as an experiment, and as a way to keep track of all the good stuff I came across while wasting time on the Net. It's been fun, has made me some good friends, has helped me keep up to date with the "real" world", and has given me some laughs.

But one unexpected and very pleasant outcome has been the number of emails I've gotten from students considering a Ph.D in either finance or economics. At last count, I've had over 40 this last year alone. Some of them found this site through google, searches that led them to one of my posts about academic salaries, what's involved in getting a Ph.D., or what a professor does all day. Others found it through links from related websites.

However they got here, it's been a pleasure answering questions about the graduate admission process, what it takes to succeed in a Finance Ph.D. program, job prospects, and so on. One of the best parts of being an academic is the chance to leave a legacy. Having students go on to become professors themselves is a pretty cool way to do that. As a professor, I've had between one and two of my own students a each year eventually go on to a doctoral program, and it's been surprisingly fun to play a small part (through this websits) in other students' academic careers as well.

If you've gotten into grad school or are seriously considering it, and anything I've said on the blog (or in private emails) has been helpful, drop me a line and let me know where you're at (I'll keep things confidential unless explicitly instructed otherwise) . And I hope that you'll keep in touch. You're not exactly "my" students, but I'd be interested to see how things come out.

And who knows - I might get more fodder for blog posts.

Thursday Link Dump

The last couple of posts have been humorous (or at least, in some cases, tasteless), so I guess it's time for a link dump.

Private Equity & Hedge Funds
First off, there are a troika of pieces on PE-bond relationships: Accrued Interest breaks down the implications of takeovers for bondholders, Floyd Norris at NY Times discusses how debt is used to fund payouts in PE deals, and Marketwatch relates the woes of bondholders in LBOs.

Via FT Alphaville: activist hedge funds are using the Web to convince shareholders to their way of thinking.

According to this Financial Times piece, Hedge Funds are taking positions in bankrupt firms.

Curious about who the big dogs are in the PE worked? LBO wire reports.

Investments
Felix Salmon discusses "Debt arbitrage". He's been writing some great pieces lately - time to update my links.

Mark Hurlbert at presents the latest insider buy/sell ratios - they're still mildly bullish.

New York Magazine has a (fairly typical) piece on how top executives are making TOOOO MUUUCCCHHH MONEY (both coming and going).

MarketBeat reports on "accelerated share repurchases.

Barry Ritholtz at The Big Picture presents a bit of a history lesson and examines Historical Bear Market Contractions

CXO Advisory Group reports on some interesting pieces. One describes historical patterns of the value premium (the additional return earned by high book/market firms over their low book/market peers), and another examines factor models and finds that "A model combining market return, liquidity and coskewness ... explains individual stock returns in 35 out of 40 years.

Humor
Joe Carter has his latest installment of the Yak Shaving Razor series up at Evangelical Outpost.

Craig Newmark links to a corporate finance version of the old "you have two cows" joke.

Enough blogging - I've cleared out my bloglines account, and it's time to get back to something productive.

Walter The Farting Dog

Caution - tasteless, scatological, and childish humor ahead.

Like most six to eight year old kids, the Unknown Son and Unknown Daughter are fascinated with all things gross. For Unknown Son, the natural fascination of little boys with gross things was compounded by some of his medical issues: when he had his surgery to remove his tumor, it messed up his intestines for quite a while. And in addition, it turns out he had an undiagnosed allergy to dairy products. Without being too indelicate, let's just say that the combination it gave him the ability to really clear out a room.

So, they were really excited when I brought home a "special" book from the library for last night's bedtime story: Walter the Farting Dog: Trouble At the Yard Sale . Walter is a dog with a flatulence problem. There are over a half dozen books chronicling his escapades. And they're guraranteed kid pleasers. As one of the reviewers said,

We hold this truth to be self-evident: farting makes kids laugh.

Of course, the Unknown Wife wasn't nearly as pleased. But I am a hero with the kids for at least a day or two (and yes, I have another Walter book for tonight's story).

Seminar Bingo For Ph.D. students.

If you're a Ph.D. student (or faculty member) and are bored in a seminar, here's something to keep you busy


Compliments of PhdComics. It's a good thing I hadn't found their site when I was in grad school or I would have wasted even more time.

Happy Easter!

He is Risen!

A Happy Easter to all of you and yours. We're celebrating ours the traditional way. We visited my mom and two brothers yesterday, and did the church thing this morning. Now it's to Grandma's place for Easter Dinner with the Unknown Wife's side of the family. It'll be a good time - three sisters, each with husbands and two kids. So there'll be 14 people in a fairly small house on the Connecticut Shore.

The Unknown Wife, her mom, and her two sisters married pretty interesting sorts - there's one pastor (Unknown Mother-in-Law's married him after her first husband passed away), one independent actuarial consultant, one college professor, and one therapist. Not that it matters a whole heck of a lot, but of the average "spousal IQ" for the family is probably 140 or so). So there's always lots of interesting conversation.

Here's hoping you all have a good time with your nearests and dearests.

Door Art

Soon I'll be grading my end-of-semester projects. Since plagiarism is a constant problem, I'm thinking of putting this on my door.

Beware The Underpants Gnomes

It's getting near to the end of the semester, so I get a bit weird at times. Today was one of them. I was lecturing on Efficient Markets, and I asked them what happens when new information arrives. Their answer was that prices change. Hence the reference to the Underpants Gnomes.

The Underpants Gnomes come from a South Park Episode where one of the kids says that Underpants Gnomes are stealing his underpants. After a while the gang finds the gnomes' cave, and ask the gnomes why they're stealing underpants. Their answer was that they have a three step plan:

• STEP 1: Collect Underpants
• STEP 2: ?????
• STEP 3: PROFIT!

Then I told them that their answer was like the Underpants Gnomes - they were missing something. So, one said "After the information arrives, they analyze it." So now, they have Step 1: Information arrives; Step 2: The information is analyzed; Steep 3: ???; Step 4: PRICES Move!

This went on for a while, and they finally got it (they didn't realize that there had to be trading taking place). But from now on. whenever they're missing one or more steps in a process or algorithm, I'll tell them they're acting like Underpants Gnomes.

It's a pretty common occurence - a student give a response that has "some" of the puzzle. But they think they're correct. The hard thing is to get them to understant ALL the steps in the solution or logic chain. Since I'm going to beat them over the head with this idea for the rest of the semester, hopefully they'll retain it. And I know I'll use this in my repertoire in future semesters almost from day one.

With my luck, they'll mention Underpants Gnomes on my evaluations. I can just imagine what the Dean will see when he sees that in the comments section. Ah well -- he's already has figured out that I teach a bit differentlyt than his other faculty.

In case you're interested, here's a You Tube Clip of the episode, and here's some background (from Wikipedia).

And yes - I am well past ready for the semester to end. Boy, am I past ready - only ten more days in the classroom before finals (but who's counting?)

A New Project

I finished three projects this past semester that I'd been working on for a while. So, that means I get to start a new one. It should be interesting for a number of reasons. First, it's an idea that I first thought of over 7 years ago. I initially filed it away since I had too many other things going on. In addition, it involved time-series analysis, and I don't have a very good grounding in that part of econometrics.

But one of my new colleagues has been doing exactly the kind of time series I need (vector autoregression) for many years. He's an interesting sort - it's been almost 40 years since he got his Ph.D., and he won the College Research award this past year. He averages 2-3 pubs a year after 39 years in the game. Now THAT is truly impressive. He's also a pretty funny and lively guy. So I'm looking forward to working with him.

In addition, it's the kind of research topic I enjoy - it brings together a couple of different strands of literature, and also extends some earlier work with an added twist. Someone once called my style the "Chinese Menu" approach to research - pick one topic from column A and one from column B and mix them together.

And finally, it'll require a fair bit of SAS programming to put the data together (really - that's a plus, not a minus). It'll take a couple of weeks of work and will require combining data from three separate large data sources. But that shouldn't be too hard (famous last words there, eh?), since I'm a fairly good programmer. It'll even require me to learn a few new tricks, which is always fun.

There are only 4 weeks left of classes at Unknown University, and with luck I'll have the data pulled together to hand off to my colleague by the time final exams come around. Then I can focus on my cycling for a bit while HE tortures the data.

Monday Link Dump

It's been a hectic week, so I haven't posted much. As a result, there's a number of interesting pieces that have been sitting in my bloglines account (some for a while). So, it's time for another link dump:

Investing:

We were just talking in class about the "neglected firm" effect, where firms with less (or no) analyst coverage earn higher risk-adjusted returns. CXO Advisory Group just highlighted a paper on a variant of this phenomenon. In "Media Coverage and the Cross-Section of Stock Returns", Fang and Peress find "stocks with no media coverage outperform stocks with high media coverage, rebalanced monthly, by 0.23% per month (3% per year) after adjusting for market, size, book-to-market, momentum and liquidity factors.

And in another piece, CXO reports on a paper by Hur and Sharma titled "Stock Market Returns and Size Premium". This paper indicates that the "Size Premium" (where smaller firms earn abnormal risk-adjusted returns is driven by down markets. In other words, small firms earn a "fair" risk adjusted return in up markets, buy have positive risk adjusted returns in down markets.

Private Equity and Corporate Finance:

The Wall Street Journal reports on the increasing trend where companies use leveraged recapitalizations as "do it yourself LBOs" in "How Borrowing Yields Dividends For Many Firms" (note: online subscription required).

For those who can't get enough of the world of Private Equity, there's a blog called BlogginBuyouts (HT: Abnormal Returns)

Fun:

David Tufte at VoluntaryXchange links to the Movie Cliche of The Day

Enough bloggery - back to work.

Top 100 April Fool's Jokes of All Time

From the Spaghetti tree to H.G. Well's Martian Invasion broadcast, the media playing tricks on the public is an April Fool's tradition.

The Museum of Hoaxes has compiled a list of the top 100 April Fool's Day hoaxes of all time. My personal favorites are#7: Alabama changing the value of pi and #51: SmelloVision.

For the other 98, click here.

Off At The R.I.S.E. Forum

I've been away from the Blog for the last few days for a couple of reasons. First, because I was getting a big burned out, and needed a few days off.

Second, and more important, I was at a conference in the teeming metropolis of Dayton Ohio at the 7th annual R.I.S.E (Redefining Investment Strategy Education) Forum. For those of you who aren't familiar with it, here's a description from last year's press release:

The University of Dayton will host the sixth annual R.I.S.E. (Redefining Investment Strategy Education) Forum from March 30 to April 1, 2006. R.I.S.E. is the first forum of its kind to bring students, faculty, and Wall Street together in an interactive learning environment to discuss a range of issues facing tomorrow’s leaders in the financial services industry. More than 1,200 participants, including undergraduate and graduate finance students and professors from universities around the world, will join professionals and internationally renowned industry leaders in what is the world's largest student investment conference.

Since this was my first time at R.I.S.E., I went solo (in other words, I didn't take any students from Unknown University). It burned up a couple of days at the end of the semester (when I couldn't really spare them), but it was well worth it. I heard some good sessions on estimating cash flows, value investing, and private equity. And there was a great session on Saturday where a number of faculty advisors and/or trading room managers from different schools shared their experiences.

Even more important than the sessions, however, was the chance to network. I had a number of good discussions with SMIF faculty advisors from other schools, and have quite a few ideas on how to improve our fund.

On Friday night, instead of going to the dinner at the U.S.A.F museum, I went instead to the "Oregon" district (only a few miles away from the hotel). It's an interesting and extremely funky place - everything from tattoo shops to espresso bars to a Christian Bookstore right next to a porn shop. I had a good meal of sushi and Thai food at Thai 9 and then sat at a table outside the neighboring coffee bar and watched the locals go by for about an hour (hey - I'm the type of persin who likes to watch people at airports).

Next year, I'll definitely bring some of Unknown University's students with me. All I have to do now is hit my Dean up for some $$ (or get some of the investment fund's alumni to pitch in). But I might not bring them to the Oregon district - there are some things I'd rather not know...