Thursday, June 29, 2006
*"Ben Hermalin and Michael Weisbach (2003) quote Adam Smith on agency problems arising from separation of finance and management....Berle and Means (1933) essay these same issues in the context of public corporations with diffuse ownership....Nevertheless, the current flowering of the corporate governance issue, accompanied by a tsunami-like surge of research...offers something new."
* "It was recently noted by Gillan (2006) that searching "corporate governance" on SSRN yielded 3500 items....being impelled to reinterpret virtually all of Finance."
*"Finance may well become the business school's quintessential normative discipline. Teaching business ethics, always something of an embarrassment, may simply come to be teaching Finance well!"
* "The corporate governance issue divides itself conveniently into two complementary components of substance and implementation. The former asks the question of corporate purpose. Arguments in the corporation's alleged objective function are the domain of inquiry. Shareholders versus stakeholders is the vernacular phrasing."
"Tirole concedes three pedestrian reasons for the narrower construal of corporate purpose [that is why we should focus on shareholders] These include paucity of appropriable resources, parsimony (workability) and avoidance of foot-dragging and deadlocks in decision making (again, workability). There is no doctrinal defense of share- or debtholders' property rights. Tirole's concessions to shareholders' exclusivity as claimants to both cash flow and control rights are unabashedly and exclusively practical."
*"Whatever your personal predilection---and mine veers toward the traditional, narrower view on Tirolean grounds--- it would be wrong to ignore the tectonic drift in public sentiment toward a greener, more European view of corporate purpose."
* "...the explosion of interest in corporate governance is too easily misinterpreted as a theme, even a nuance, in Finance. Nomenclature aside, corporate governance is a watershed, comparable to the reinvention of the field beginning in the late 1950's by Modigliani, Miller, Scholes, Merton, Jensen, Fama, et al."
*"The corporate governance movement breathed life into Behavioral Finance that sought explanations for anomalies of the frictionless, efficient markets so integral to the earlier recasting of Finance. But whereas Behavioral Finance deployed a set of unrelated psychological constructs as explanations for previously puzzling financial occurrences, corporate governance offered a cohesive story originating at the epicenter, the inner sanctum of corporate affairs"
Greenbaum then goes on to discuss the role of intermediaries:
*"...banks have been complicit in the more heralded corporate scandals...In any case, this failure of banks to perform expected monitoring was widespread. Standard explanations fell into the "my brother thinks he's a chicken" category. That is, the fees paid to the intermediaries were too seductively large to be jeopardized....This is the same reason Arthur Andersen and Enron's lawyers were said to have looked the other way."
* He concludes: "The financial intermediaries, along with boards, external auditors, lawyers, the stock exchange and governmental regulators, are the guardians society depends upon to protect corporate integrity. The intermediaries' role is to monitor, but they are just as subject to subversion as those they are charged with monitoring."
Well said and a great speech. Definitely I^3 (which is I think the first time I have ever given a speech an I^3 rating.)
Cite: Greenbaum, Stuart I., "Corporate Governance and the Reinvention of Finance" (June 20, 2006). Available at SSRN: http://ssrn.com/abstract=908613
That said, this just has to be wrong. Tradesports has a market for the likelihood of a Category 3 or above hurricane hitting various states in the US. Ok, so Florida is most likely. I will buy that. Then Texas, Louisiana, and the Carolinas. Ok, so far so good. But then it gets a tad wacky. MS and NY have about the same likelihood.
New York? Yes, NY has been hit before and no doubt will be again. But the odds of it happening are much less than that of Mississippi. For instance, it is estimated that there is a 26% chance of NY being hit with a category 4 or greater storm in the next 50 years). But given the odds backed out of the midpoint of Tradesports bid and ask, it seems almost a 10% chance THIS year which does not fit with "expert" predictions.
So is the market wrong? It does seem like it is. So why doesn't someone fix it? Probably not worth it. Depth of the market is small and transaction costs (spreads) are pretty high. Which is exactly the type of market where theory would predict inefficiencies to exist.
But on the other hand (can you tell it is late?), it could be that the market is made largely of NY residents who are net hedgers. Thus they are "betting" on a hurricane hit so that if it does happen, the payoff will act like insurance. These hedgers would be willing to settle for a lower return. (so maybe the market is efficient afterall ;) ) But it is too late (2:50 AM) for me to think that one through...lol...
Tuesday, June 27, 2006
In the current JFQA there is just such an article by Richard Grossman and Stephen Shore. Using a data set that goes from 1870 to 1913 for British stocks, the authors find no small firm effect, and only a limited value effect.
In their own words:
"Unlike modern CRSP data, stocks that do not pay dividends do not outperform stocks that pay small dividends during this period. But like modern CRSP data, there is a weak relationship between dividend yield and performance for stocks that pay dividends. In sum, the size and reversal anomalies present in modern data are not present in our historical data, while there is some evidence for a value anomaly."Which makes me wonder how many other things we think we "know" we really don't.
The current version of the paper is not listed on SSRN, but a past version of the paper is available (at least right now) here.
FreeMoneyFinance comments that a good way to save money is to avoid going shopping. I could not agree more!!!
"If you want to save money, don't go to any store to just pass time. You'll most certainly spend more than you would if you hadn't gone. Instead, take a walk, go to the park or visit a free museum. You'll not only save money, but may even improve your physical fitness too. And these benefits are worth more than money!"Financial Rounds gives some tips on dealing with identity theft. It is definitely not somehting that I would like to go through! But the tips are very good. For example:
"Others will invariably have advice for you and some judgemental comments (i.e. "this is what happens when you bank online"). Expect them, and don't let them get to you."MoneyScience links to an article on econophysics from the Yale Economic Review.
"The philosophical approach of econophysics is certainly different from that of economics in general. While economists begin with a few fundamental assumptions and then construct a theoretical model to explain observations, econophysicists tend to start with the empirical evidence and extract patterns from the data. In doing so, econophysicists do not rely on assumptions of rationality, which have proven experimentally inconsistent in some cases, such as transitivity of preferences."Freakonomics points out a NY Times article that perfectly sums up my thoughts on virtually every meeting I have had the pleasure of attending:
"Personally, I hate meetings....as much as I admired and enjoyed many of the people in the back-to-back-to-back meetings, it was too hard to get any actual work done. I would sometimes look around, watch 20 talented...people spending an hour batting around ideas, perhaps 2% of which would come to fruition, and mourn the loss of 20 man-hours and what could have been accomplished individually during that time …"CyberLibris argues that microfinance is nothing more than finance that tight controls:
"With microfinance, lenders are in the ideal situation: First, they can discriminate among borrowers, they simply don't lend (in many instances) to men (who run with the money to have a good drink). Women are reliable, hence they get the money. To make sure that the money is well-spent contractual provisions often involve the community in which the lending woman live. For instance, if she fails to pay, the community may be on the hook and have to repay for her or be punished by having a more difficult access to the next loan. The community plays a monitoring and a supportive role to ensure success. This is the dream situation for any banker!"Cafe Hayek comments on the seemingly always pending minimum wage legislation:
"What is it about unskilled- and low-skilled labor that makes many people fancy that the law of demand does not apply to it? Are the greedy, profit-lusting employers of this labor so foolish that they’ll just dish out more money for the same output as before, without economizing further on labor"BTW the Yale Economic Review also has a book review of Jeffrey Sach's End of Poverty that is pretty interesting. I am looking forward to hear what he (EarthInstitute) has to say about Warren Buffett's donations. I was a bit surprised when some callers on NPR's Talk of the Nation were critical of the donations. No doubt in response to these callers, NPR has posted an interview with health experts showing how helpful the GatesFoundation has been.
Monday, June 26, 2006
Major kudos to Warren Buffett!
"Buffett has pledged to gradually give 85% of his Berkshire stock to five foundations. A dominant five-sixths of the shares will go to the world's largest philanthropic organization, the $30 billion Bill & Melinda Gates Foundation, whose principals are close friends of Buffett's (a connection that began in 1991, when a mutual friend introduced Buffett and Bill Gates).
The Gateses credit Buffett, says Bill, with having "inspired" their thinking about giving money back to society. Their foundation's activities, internationally famous, are focused on world health -- fighting such diseases as malaria, HIV/AIDS, and tuberculosis -- and on improving U.S.
libraries and high schools."
"With so much new money to handle, the foundation will be given two years to resize its operations. But it will then be required by the terms of Buffett's gift to annually spend the dollar amount of his contributions as well as those it is already making from its existing assets. At the moment, $1.5 billion would roughly double the foundation's yearly benefactions"
Now let's hope others follow the example. From BusinessWeek:
"Billionaire investor Warren Buffett's pledge to give most of his money away to the Bill and Melinda Gates Foundation has experts predicting it could energize the nonprofit sector and possibly spawn a new wave of philanthropy"
Thursday, June 22, 2006
Corporate Diversification is bad
The standard line for the past 20 years has been that corporate diversification is bad for shareholders. We have seen this in the diversification discount work of Comment and Jarrell (1995) and many other papers (for instance Megginson, Morgan, and Nail) have shown that diversification lowers firm value.
Corporate Diversification is NOT always bad
More recently however, there has been some questioning of that position. This strand of research has largely been driven by the idea that for some firms diversification is good.
This school of thought won support in the 2005 Journal of Finance article by Rene Stulz where he showed that diversification may lower the risk of expropriation in countries with poor shareholder protections (i.e. where there is a high risk of expropriation).
Now Beneish, Jansen, Lewis, and Stuart show the same thing happened within the US tobacco industry. Namely that the tobacco industry's diversifying deals (for instance when Philip Morris bought Kraft) lowered the probability of (or minimally delayed) government lawsuits and expropriation.
In the authors' words:
"Although prior work has often shown diversification transactions to be negative net present value projects, we propose that diversification created value in the tobacco industry by building "political capital" and making tobacco firms less attractive targets of regulation and litigation by changing the composition of tobacco firms' assets."The authors then use three methods to back up the theory that diversification in the face of high expropriation risk can be good for shareholders. (the three methods are: the examination of diversification-increasing announcement returns, the positive association of thee returns with proxies for expropriation risk, and the examination of the changed behavior of firms after the 1998 Settlement whereby expropriation became a reality)
The authors then measure how "good" this diversification is for shareholders.
With admittedly noisy models, they conclude that in the case of tobacco firms, diversification "protected from $5.7 to $15.3 billion in shareholder value through delayed or reduced expropriation."
Lesson? Corporate diversification can be good for shareholders facing a high risk of expropriation.
Beneish, Messod Daniel, Jansen, Ivo Ph., Lewis, Melissa Fay and Stuart, Nathan V., "Diversification and Shareholder Payments in the Tobacco Industry: The Expected Expropriation Cost Reduction Hypothesis" (June 8, 2006). Available at SSRN: http://ssrn.com/abstract=908623
Wednesday, June 21, 2006
From Science Daily:
"The "click" of comprehension triggers a biochemical cascade that rewards the brain with a shot of natural opium-like substances, said Irving Biederman of the University of Southern California. He presents his theory in an invited article in the latest issue of American Scientist.
"While you're trying to understand a difficult theorem, it's not fun," said Biederman, professor of neuroscience in the USC College of Letters, Arts and Sciences
"But once you get it, you just feel fabulous."
The brain's craving for a fix motivates humans to maximize the rate at which they absorb knowledge, he said.