Friday, June 25, 2004

SSRN-Stock Options and Long Term IPO Performance by Kuntara Pukthuanthong, Thomas Walker

SSRN-Stock Options and Long Term IPO Performance by Kuntara Pukthuanthong, Thomas Walker

Question: How cool is this?!? (answer below)

A paper by Pukthuanthong and Walker will also be presented at the European FMA Meetings. The paper examines the use of options in pay packages of IPO firms. And finds that "new public companies that have high use of stock options outperform those that have low use of stock options from the lock-up period until three years after the issue." They find similar results when looking at operating performance. The authors also document that firms with higher use of options (even after controlling for better performance) experience lower managerial turnover.

Now there is somewhat of a problem with endogenity (i.e. Management has the ability to select the use of options and will not if the future looks bleak), but that said, this is an important paper as it reminds us all that options are useful and can lead to higher shareholder returns. That is something we may be tempted to downplay (especially in class) after the problems at Enron, Worldcom etc.

Answer to above question: So cool that it should be used in Sierra Mist commercials!

SSRN-The Effects of Regulation Fair Disclosure on Management Forecasts by Carla Carnaghan, Ranjini Sivakumar

SSRN-The Effects of Regulation Fair Disclosure on Management Forecasts by Carla Carnaghan, Ranjini Sivakumar

In a paper to be presented this coming week at the European FMA meetings, Carnaghan and Sivakumar find evidence that shows that regulation FD did reduce information Asymmetries. Additionally they "find that the information disclosed by managers has improved in terms of frequency, specificity and verifiable information provided." And therefore " Regulation Fair Disclosure has achieved one of its stated goals of providing a more level playing field to all investors." YEAH! :)

SSRN-The Capital Asset Pricing Model: Theory and Evidence by Eugene Fama, Kenneth French

SSRN-The Capital Asset Pricing Model: Theory and Evidence by Eugene Fama, Kenneth French

Fama and French provide a great review and discussion of CAPM with all of its limitations. Why is it used in class? Great model. Main problem? It doesn't work! Paper should be (and was in my class) required reading.

oh, and yes I know this has been included in a past newsletter, but it was so good I figured everyone should see it.

Thursday, June 24, 2004

SSRN-Agency Costs of Overvalued Equity by Michael Jensen

SSRN-Agency Costs of Overvalued Equity by Michael Jensen

I know we talked about this one in class, but it is just so so good. Jensen talks about what led to the governance crisis we saw at Tyco, Enron, etc. A big part of teh answer may be overpriced equity. Why? A stock price that is overvalued is caused when investors have overly optimistic expectations. Thus, if the investors were to learn the truth, the stock price would fall. This creates an incentive to hide information from investors. Moreover, to keep the stock price high, management may be willing to take more chances and further hide the bad results.

Typical control mechanisms fail to work on this problem. For instance, stock based pay makes the problem worse and the takeover market fails miserably since no one would want to take over an overpriced stock. Jensen suggests one solution: the board providing more information (including to short sellers).

SSRN-Market Evaluation of Off-Balance Sheet Financing: You Can Run But You Can't Hide by Steve Lim, Steven Mann, Vassil Mihov

SSRN-Market Evaluation of Off-Balance Sheet Financing: You Can Run But You Can't Hide by Steve Lim, Steven Mann, Vassil Mihov

Super short version: using operational leases as a means of keeping debt off the balance sheet may fool bond rating agencies, but it does not seem to fool the bond market.

Lim, Mann, and Mihov (all from TCU) find that attempts to hide debt (in the form of operating leases--the most popular form of off balance sheet financing) may "be useful in maintaining higher debt ratings" but "it does not fool the market, because bond yields reflect off-balance sheet the same manner as balance sheet does." I love it when the market gets it right! :)

The New York Times : New Rule on Short Selling

The New York Times > Business > Market Place: New Rule on Short Selling

Ok, time to update your notes on short selling! You can now sell on a downtick. At least temporarily and for some stocks. The SEC approved a one year trial (starting in January 2005 that will remove many of the short sale restrictions for "one-third of the stocks in the Russell 3000." However, for other stocks it may actually be more difficult since the SEC also has made the rules against naked short selling (shorting without first borrowing the shares) more restrictive.

The Washington Post looks at Google ownership

Following a Rich Tradition (

The insiders at Google really are insiders ;)

To quote the article Google ownership is a "carefully crafted roster of early-stage investors [that] reads like a Who's Who of Silicon Valley" or as Alan Meckler states in the article: ""It is a traditional Silicon Valley old boys network,...."It is very similar to what happened in the 1990s when there were a group of 20 or 30 venture capital firms and key people. There is a lot of history repeating itself here."

Some of the pre-IPO owners? Stanford University, Jeff Bezos, Andy Bechtolsheim the co-founder of Sun Microsystems Inc., as well as the VC firms of Sequoia Capital and Kleiner Perkins.

Even more interesting thasn who owns the shares is the giganic returns that some of these can expect. For instance, the VC firms reportedly each invested $12.5 million in Google for their 9.4% stakes. After the IPO the investment could be worth over $1Billion!

FRB: Speech, Gramlich--Reducing Budget Deficits--June 24, 2004

FRB: Speech, Gramlich--Reducing Budget Deficits--June 24, 2004

Fed Governor Gramlich just gave a interesting and informative speech on the Federal Budget Deficit. He points out the difficulty in forecasting it, the fact that it is based on cash basis accounting which brings its own problems (example future social security problems!), and even suggests ways to improve the budgeting process. My take is that budget deficits are not in and of themselves bad, but the resulting debt does raise interest rates and if not controlled can cause an economic slowdown. Moreover, governments are notoriously bad at picking positive NPV projects, so smaller is better!

As an aside, the speeches of Fed Governors are almost always interesting! No seriously! I mean it. Quit laughing. The texts of their speeches are available free online and I am convinced you could teach a full semester seminar-type class centered just the speeches.

Bank mergers create value. Why?

Penas and Unal have provided a great look at bank mergers in this forthcoming JFE piece. rather than looking at equity, they examine what happens to the merging banks'bonds. As theory would predict, they find that the bonds go up in value. Why? As the authors state: "The primary determinants of merger-related bondholder gains are diversification gains, gains associated with achieving too-big-to-fail status, and, to a lesser degree synergy gains." Great stuff! A tip of the hat for such an interesting paper!

SSRN-Revealed Preferences for Corporate Leverage by Thomas Philippon

SSRN-Revealed Preferences for Corporate Leverage by Thomas Philippon

WOW!!! A must read! Philippon examines firms' capital structure empirically and theortically. He finds that firm value does not exactly fit the static trade-off model. Specifically he finds that low levels of debt are not accompanied by as low of firm values as would be expected. However, in other areas, what we have been teaching seems exactly right: more growth options means less debt, highly profitable firms do have higher target debt ratios (even though they may not all be the targets), and expected future financing deficits makes financial slack more valuable. Interestingly, he also finds some evidence that managerial power (as proxied by CEO tenure) is assocaited with lower levels of debt. READ IT!!! :)

SSRN-Patriotism in Your Portfolio by Adair Morse, Sophie Shive

SSRN-Patriotism in Your Portfolio by Adair Morse, Sophie Shive

Ok, so maybe, just maybe rationality can not explain everything in investments. Morse and Shive find that patriotism (and not just transaction costs) helps to explain why investors overweight investments in their home country, i.e. the home country bias.

Wednesday, June 23, 2004

SEC Seeks Independent Fund Board Chairmen Update 11: SEC Seeks Independent Fund Board Chairmen

Quite the debate on this one! It is rare that the SEC is so publicly split on an issue. I think it is good however. It does strengthen investor protections somewhat. Although I do admit that some of the benefits may be less than advertised. Overall, I would agree with the SEC chairman on this one and vote that having an independent chairman is good.

The New York Times > Business > Son Tries to Distance Himself at Adelphia Trial

The New York Times > Business > Son Tries to Distance Himself at Adelphia Trial: "Michael J. Rigas, the former Adelphia Communications vice president, was too busy managing the company's cable TV systems to have joined in the misdeeds that crippled the company, his lawyer said yesterday in the closing arguments of his criminal trial"

Closing arguments are being made in the Adelphia trial and it looks like it is every man for himself!

The trial, which has dragged on for months, was punctuated with witnesses for each side merely saying the other side was wrong. I do not claim to have any inside knowledge on this, but from what I have seen of the trials, there is little chance of the accused being completely exonerated. The key question left (IMO) is whether they will get jail time.

Also what does the IRS have to say about all of this? For instance, consider the money (eventually cut to $1 million a month) that John Rigas was getting and not reporting on the firm's financial statements. Was he claiming it on his personal income taxes? If not that seems like an easy case to try.

BBC NEWS | World | South Asia | India's economy - oil the nuts and bolts

A roadmap for India By Kaushik Basu
Professor of economics, Cornell University

Kaushik provides a fascinating look at what is wrong with the Indian Economy and how the new government should take steps to fix it. For instance, it takes 11 times longer to start a business in India than it does in Singapore.

His list includes 1: Improve efficiency 2. Cut corruption 3. Establish good fiscal policy 4. "Enable economically disadvantaged people to escape pverty." Of course these are all good, but it is his ideas on how this should be done that merits a click-through!

Tuesday, June 22, 2004

What to do??

Ok, FinanceProfessors, I need some advice. I submitted a paper last july (as in July 2003) to a journal and despite several emails back and forth with the editor and several promises to have a decision "soon" (in October), "by January" (in December) or "by Monday" in April, I have yet to hear anything.

A few weeks ago I wrote asking for the paper back so that I can submit it elsewhere. (Mind you it has not been rejected, just no decision at all!) and as of this AM the editor has still not gotten back to me.

Mind you this is the same editor that lost (yes lost) another of my papers last year. Needless to say I am not recommending sending papers to this Journal (I will tell you which one in a private email if you ask).

So do I just write it off? Send it to another Journal? Or do I continue to hound the editor? or ????

thanks in advance!

New York Post Online Edition: business

New York Post Online Edition: business: "PERELMAN'S PULL NET$ REVLON AID "

Mmm, need an example from the US of what is wrong with Japanese keirtsus? Revlon to the rescue! According to the NY Post, Ron Perelman--the controlling shareholder in Revlon and major shareholder in Citigroup, used some of his power to get Citigroup to make the loan. Why is this wrong? If the loan should have been made anyways, then no problem, BUT if the loan was an error, and only made because of the cross-holdings, then the original problem gets spread to other companies and the banking sector.

BBC NEWS | Business | US bank in $14bn takeover deal

BBC NEWS | Business | US bank in $14bn takeover deal: "The US banking industry has seen its latest round of consolidation after Wachovia agreed to buy SouthTrust for $13.7bn"

Wachovia continues its push to be a truly national bank with the announced acquisition of SouthTrust. The deal will move Wachovia strongly into the mid couth (Texas). Additionally it will save money by the elimination of about "The banks have said that they plan to cut more than 4,000 jobs and may shut as many as 150 branches."
BTW Quite a few former students of mine work at Wachovia so to them: good luck :)

Morocco signs Free Trade Agreement with U.S

Morocco signs Free Trade Agreement with U.S

In a move that will no doubt pay dividends to both countries, Morocco and the US agreed to "immediately eliminate tariffs on more than 95 percent of bilateral trade in consumer and industrial products. All remaining tariffs on these goods are to be eliminated within nine years - the best market access package of any U.S. free trade agreement with a developing country signed to date. The agreement also significantly reduces barriers to agricultural products and services"

Merrill Lynch dropped from Google IPO

Times Online - Business

The Google IPO was in the news again. First the firm ammended its prospectus to warn that the Dutch Auction process they are using may result in a stock price decline after the issue.

The second interesting story is that they dropped Merrill Lynch from the IPO syndicate. Why? Officially no one is saying, but the speculation is that ML's computer system was unable to do what the people at Googlle wanted (supposedly to make sure enough shares were going to individual investors).

BTW Recap of Google IPO story is here

Friday, June 18, 2004

SSRN-Oil Imports, National Defense, and Bio-Energy by Robert Ames, Anthony Corridore, Paul MacAvoy

SSRN-Oil Imports, National Defense, and Bio-Energy by Robert Ames, Anthony Corridore, Paul MacAvoy

I love articles that make me think. This is one of them! The authors suggest that it is time for America to go on a diet: a low oil diet. What would happen if we cut imports? Well we would likely see higher prices and would have to drill in some places we generally do not want to, but prices would become more stable and maybe, just maybe, there would be less global turmoil. (mmm get it? TurmOIL? ;)

BTW MacAvoy was dean when I was at the University of Rochester.

Race Across AMerica--No Finance Content

Welcome to Race Across AMerica

The RAAM (Race Across AMerica) starts this weekend. It is NUTS! I can not even begin to imagine. WATCH THE VIDEO!!! The video is very well done.

If it weren't a race, it would be unreal fun, but the competion seems to take the fun away. Check out what the neck contraptions they use to hold their neck's up. AMAZING!

Sleep is just a rumor, can you imagine biking for 40 hours straight? As part of a 8-9 day ride?

Thursday, June 17, 2004

It pays to be good!

Durnev and Kim in a forthcoming Journal of Finance article provide further evidence that it pays to be good. Why? Becuase firms with stronger shareholder protections are generally rewarded with a higher valuation (and hence lower cost of capital) than their peers. MOrevoer, the authors show that the cost of being bad is higher when there are many growth opportunities and when the country has fewer investor protections.

Prosecutor says Adelphia bankrupted by founder's greed - Jun. 16, 2004

Prosecutor says Adelphia bankrupted by founder's greed - Jun. 16, 2004

Closing arguments are underway in the Adelphia Trial. It is approaching 4 months since the trial began. Interesting, although not surprisingly, the Rigases did not take the stand (if this were Letterman, he would say it was the only thing they didn't take--just kidding!!!). Of course, they are innocent until proven guilty, but having written two published cases on Adelphia, I am of teh opinion that minimally they are guilty of amazingly poor accounting practices and an almost complete lack of minority shareholder protections.

BBC NEWS | Programmes | From Our Own Correspondent | Meet the world's second richest man

BBC NEWS | Programmes | From Our Own Correspondent | Meet the world's second richest man: While I knew Buffett was a very down to earth guy, I ddi not know he lived "ordinary suburban home on an ordinary tree-lined road."

The rest of the article centers on last month's Berkshire Hathaway annual meeting

BBC NEWS | Business | Mr Greenspan's balancing act

BBC NEWS | Business | Mr Greenspan's balancing actWhy does inflation seem higher than economists are reporting? A big reason is that economists are more concerned with what is called teh core inflation rate. This core ignores volatile food and energy prices. You and I however have to eat and drive, so those prices appear in our mental calculation of inflation.

Wednesday, June 16, 2004

MSNBC - Martha Stewart sells some of her stock

MSNBC - Martha Stewart sells some of her stock

Interesting, although not earth shattering. Really this is just a test story to see how I can publish to the blog.

Books, Bikes, and Bonas

Hi everyone. I am just getting used to this thing and have to write something to test it, so here are some random musings and an update as to what i have been doing lately.

Had a GREAT time biking htis past weekend. I did the MS 150 (although I chose the 164 mile option) from Pittsburgh to Lake Erie. It was super fun and even went faster than I expected. I was sad to see it end! Would haev liked a few more days! HIGHLY recommended! I am already looking for another ride to do.

BTW I got to meet cool people (who just happened to be fast bikers!) and got to spread the word Risten to New England :) Remember risten is the combination of read and listen ;)

Speaking of ristening, I have been ristening to many books of late. Almost all of them have been really good! I finished Of Mice and Men, which was short and well written but depressing. I am about 50% done with the Teller of Tales: the Life of Arthur Conan Doyle. Surprisingly good! I Really liked Bleachers by John Grisham. In fact I liked it so much I ristened to it twice! Different but almost as good is Naked in Baghdad which gives the view of Baghdad before and during the war began through the eyes of NPR's Anne Garrells. I also liked Trojan Odyssey Clive Cussler which was a nice break. And of course I am ristening to Lance Armstrong's Every Second Counts. But the top book so far this year remains An Imperfect God. It is GREAT. It is about George Washington and slavery. A trillion "if onlys" and "wow I did not know that". Best book since "April 1865." (yes with the exception of April 1865, all of those have been read or ristened to in the past two months!)

oh and I am almost done with what I call the Endorsement paper. We find that when athletes do good things (win a MVP, big championship, or set a world record) the stock price of their sponsors goes up. When they do bad things (seriously injured or arrested), the stock price goes down. It is almost done. Stay tuned.

Oh and nes from Bonas...lets see, constrcution on teh new fitness center continues. We have to rename it. Why not Richter Hall. We do not need two RCs (PSU has two BABs and it causes confusion). FTR here is a link to the webcam of the new fitness center.


Welcome to's new Blog

I decided to try again. I have heard that this is pretty easy to use and if it works, a GIANT IF, then maybe I can save some time communicating with many people and hopefully working on teh newsletter at the same time.

I shouyld probably warn you, that this will have more than just finance on it. Sort of random stuff aas well. Of course has some stuff that is not strictly speaking finance as well so I guess you are probably used to it by now. LOL