Wednesday, March 28, 2007

MBA or CFA? has two interesting articles that will especially interest students.

On is on getting an MBA.

How an MBA can help you:
"Credibility. Confidence. A big-picture perspective. Appreciation for other points of view. That's what MBAs say when asked what the degree has done for them.

'It gave me a broad perspective of the business world. How the economy works [and] how my industry works,' says Susan Odegaard Turner"
The second article is on getting a CFA.

Is the CFA right for you?

“When I see a candidate with a CFA, it brings to my mind the seriousness they have in being successful in their career,” says Doug Rickart, division director for Robert Half Financial Services Group in Minneapolis. “You have to have the self-discipline to study for it and stay on task during the three-year process. It adds something to the credentials and really proves your abilities.”
Especially important for students at small schools is the section on the CFA being a "great equalizer".

SSRN-Control Rights and Capital Structure: an Empirical Investigation by Michael Roberts, Amir Sufi

SSRN-Control Rights and Capital Structure: an Empirical Investigation by Michael Roberts, Amir Sufi:

Roberts and Sufi show that "financing decisions of solvent firms are dictated by creditors...."

More specifically they show that following a covenant violation, creditors exercise some of their power and limit further debt issuances. (Of course this is not surprising, but still always good to see what we expect to happen actually happens.)

A couple of look ins:
"... 97% of credit agreements contain at least one financial covenant and almost 80% of these agreements explicitly restrict the amount of debt that a firm may have in their capital structure....more than one quarter of all publicly listed firms in the US violate a financial covenant at some point...Among firms with an average leverage ratio of at least 5%, this fraction approaches one third. Thus, financial covenants are not only a prominent feature of debt contracts (Smith and Warner (1979) and Bradley and Roberts (2003)) but they are also frequently violated (Dichev and Skinner (2002)) and, importantly, rarely lead to default
or acceleration of the loan (Gopalakrishnan and Parkash (1995))."
Just because the paper shows that the violation does not lead to accelerationof the loan, it does not mean that violation does not bring with it penalties. From reduced credit, to increased rates, to forced equity issues, the creditors do use their power to protect their position but do fall short of demanding immediate payment.

As the authors state:
"[The paper] documents that the transfer of control accompanying covenant violations has significant consequences for corporate debt policy over and above any changes in manager’s preferences for debt. Specifically, net debt issuances decline, on average, by 70 basis points in the quarter following a covenant violation. This sharp reduction in net debt issuance is persistent for two years following the violation, and leads to a reduction in leverage ratios by 3%."

Cool paper! I^3!!!


Roberts, Michael R. and Sufi, Amir, "Control Rights and Capital Structure: an Empirical Investigation" (January 31, 2007). Available at SSRN:

Tuesday, March 27, 2007

A Brief History of Derivatives

Prepping for class I stumbled upon this. It is grear! LOL...

A Brief History of Derivatives:
"To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the year 1700 B.C., Jacob purchased an option costing him seven years of labor that granted him the right to marry Laban's daughter Rachel. His prospective father-in-law, however, reneged, perhaps making this not only the first derivative but the first default on a derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah, but because he preferred Rachel, he purchased another option, requiring seven more years of labor, and finally married Rachel, bigamy being allowed in those days. Jacob ended up with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel, and a lot of domestic friction, which is not surprising. Some argue that Jacob really had forward contracts, which obligated him to the marriages but that does not matter. Jacob did derivatives, one way or the other."

Islamic Finance

Business Times:
"Malik said the 21st century is seeing so much political conflict between Islam and the West, yet in the field of Islamic finance, the West has embraced it with open arms.

The UK, for instance, recently introduced new legislation to promote Islamic finance, particularly Islamic bonds or sukuk." Exclusive Exclusive:
"Which approach is best, active or passive investing, is a never-ending debate on Wall Street, where passive indexers such as DFA and Vanguard Group Inc. are the antithesis of celebrity stock pickers. If there's any criticism of indexing, it's that as goes the market, so go the indexes, which can lead to losses unless an investor also invests in active funds to mitigate the market swoons.

The indexers have been winning lately. According to the Standard & Poor's Indices Versus Active Funds Scorecard, which tries to add substance to the debate, the S&P 500 Index beat both actively managed large- and small-cap U.S. stock funds last year. The index topped 69.1 percent of large-cap funds, while the S&P SmallCap 600 Index led 63.6 percent of small-cap funds. The indexes posted similar results for the past three- and five-year periods."

Monday, March 26, 2007

SSRN-Operating Under a Liquidity Crunch: The Impact of LBOs on Product Availability in the Supermarket Industry by David Matsa

SSRN-Operating Under a Liquidity Crunch: The Impact of LBOs on Product Availability in the Supermarket Industry by David Matsa:
"The structure of financing can impact a firm's operations in important ways. This paper examines how leveraged buyouts affect a supermarket's provision of product availability -- an important dimension of quality in the retail sector. Using U.S. consumer price index microdata to measure the prevalence of out-of-stocks, I find that supermarket leveraged buyouts, which reduce liquidity, lead to increases in out-of-stocks of 10 percent. "
A second "look-in":
"[Matsa] examine[s] the degree to which the impact of LBOs on product availability is affected by various factors associated with either increased liquidity constraints or increased agency costs — a product’s distribution channel, the local competitive environment, the size of the outlet, and the size of the firm undertaking the LBO.... also looks at whether LBO firms had unusually low levels of stockouts before the transactions. All five of these analyses provide indirect evidence pointing towards liquidity constraints as the primary factor driving the average increases in stockouts.

This paper illustrates an important relationship between a firm’s financing and its operations
in the retail sector. The findings are consistent with the empirical literature on capital-market imperfections
and inventory investment...."
This paper is in the spirit of Chevalier (1995) who reported that when firms go through a leverage increasing event (LBO) they are more susceptible to a price war.

As somewhat of an expert on grocery stores (I grew up in my family's), I can say that it definitely makes sense (although probably not cents) and that liquidity (and other financial side of balance sheet items) can and do negatively impact operations.

That said, it is I am somewhat surprised that Matsa was able to disentangle the many other factors that have an effect on "outs". (For instance, if he were to track outs at our stores I am confident that the would fine that other variables also impact "outs"--for example a trip to Mississippi, a snow storm, a misplaced order, a bad salesperson etc. That is the relationship is a noisy one. That he found a "long-lasting" and "highly significant"relationship is surprising and troubling to one who likes to think the right hand and left hand sides of the balance sheet are at least somewhat isolated.


Matsa, David A., "Operating Under a Liquidity Crunch: The Impact of LBOs on Product Availability in the Supermarket Industry" (November 19, 2006). Available at SSRN:

Thursday, March 22, 2007

What a great way to spend some free time!

Damodaran Online: Home Page for Aswath Damodaran-

Of course I have seen this site before but just adopted his book for a fall class (SIMM for those of you at SBU) and got playing around on his site. It is even better than I remember! GREAT STUFF!!

Are Hedge Funds out of Control? - Knowledge@Wharton

Here is a great podcast interview with Andrew Metrick of Wharton. You can either risten or read it as the transcript is available.

The first part of the interview is about his book and valuation (my favorite line, which fits perfectly with our classes):
"I think, actually, a lot of that is more the art of being a great venture capitalist than it is the science"
The latter part of the interview deals with hedge funds. A look-in:

Are Hedge Funds out of Control? - Knowledge@Wharton:
"Metrick: I don't see how significant regulation could actually be implemented at all. I would imagine that if the U.S. government tried to regulate hedge funds in any way that really kept them from performing to a level that they want to perform, they'll just all move to the Cayman Islands. So, I think that we're better off with extremely light forms of regulation that at least enable the hedge funds that are out there to not hide from us.

And on top of that, I would echo a suggestion of [a colleague who is now at MIT] who has called for something akin to what we have for plane crashes. When there is a plane crash, we go in there with a team and we try to figure out what happened. We really look through everything and then publicize the results: 'This is why this crash occurred; this is why Amaranth, for example, went down.'

So, the only thing that a hedge fund should be required to do is to agree that if they have a shut-down, within certain rules -- they're larger than a certain amount and they have a certain amount of out flows -- that they simply agree in advance that they'll open their books after they're closed."

Saturday, March 17, 2007


Massey News Article - New take on predicting stock market returns:
"...a study by finance Professor Ben Jacobsen, has spread rapidly around the finance community. Professor Jacobsen, and his associates, have reported that conclusions on stock market return predictability vary drastically when the timeframes of observation are altered.

They say forecasts will vary, for example, if they are based on data from three or 11 days trading instead of on data from commodity prices over a month, a week or a day – as is current practice. Data taken from varied periods of commodity trading gives surprising results that challenge the cornerstone of finance research, says Professor Jacobsen.....
The full study ‘The Interval of Observation’ by Ben Jacobsen, Ben Marshall and Nuttawat Visaltanochoti is available on

Friday, March 16, 2007

Wal-Mart pulls bank application |

Well that did not last very long!

Wal-Mart pulls bank application |
"Wal-Mart Stores (WMT.N: Quote, Profile , Research) said on Friday it has withdrawn its request to open a specialty bank after immense opposition from politicians, consumer groups and community banks hampered its application with U.S. bank regulators.

'Since the approval process is now likely to take years rather than months, we decided to withdraw our application to better focus on other ways to serve customers,' said Wal-Mart Financial Services President Jane Thompson in a statement."

Wal-Mart blasted by congressman

Wal-Mart blasted by congressman:
"Wal-Mart Stores Inc. may be eyeing a larger role in banking than it has previously disclosed, according to lease details made public Thursday by a congressman who accused the world's largest retailer of hiding plans to become a retail bank."
I have a tough time being surprised by this.

Monday, March 12, 2007

Short-term CFOs Equal Short-term Planning - -

Managers and shareholders often disagree about the timing 0f projects. We have long argued that managers are much more myopic than are shareholders. This supports that:

Short-term CFOs Equal Short-term Planning - -
"An overwhelming majority — 87.6 percent — of finance chiefs reported that companies have shortened the payoff horizons of their investment decisions to coincide with the shorter tenure of executives. That result does not augur well for the U.S. economy in the long run, notes Campbell Harvey, a Duke professor. 'Investments should be chosen based on their contribution to firm value, without adding an arbitrary constraint tied to CEO or CFO job tenure"

The SEC Is Eyeing Insider Stock Sales

The SEC Is Eyeing Insider Stock Sales:
"The SEC's goal in creating automatic trading plans was to allow executives to sell shares without triggering insider trading charges. To gain that legal 'safe harbor,' however, executives must meet certain conditions. They must set up a trading plan when they don't know of any significant nonpublic information, lay out the dates or prices at which trades will be made in advance, and give up control of the trades to a broker.

Those limited rules allow executives more maneuvering room to time sales than is generally understood. According to the study by Alan D. Jagolinzer, an assistant professor at the Stanford University Graduate School of Business, executives selling shares through 10b5-1 plans do substantially better than would be expected if trading were truly automatic. In a study of roughly 117,000 trades made by 3,426 executives at 1,241 companies, trades made inside plans beat the market by 6% over six months, while those at the same firms who traded outside of plans only topped it by 1.9%.

More often than not, sales made through plans by insiders occur ahead of a stock drop. The rules also allow executives to end plans before they've been fully executed, set up multiple short-term plans, and begin selling immediately after adopting a plan"

Friday, March 09, 2007


With spring training well underway, what better time to bring up bats?

From the Buffalo News:

"Bats Trading, an upstart electronic trading system hundreds of miles away in Kansas City, said it handled the volatility with none of the glitches that others did.

Bats has quickly become the third-largest stock trader by volume, trailing only the NYSE and Nasdaq Stock Market, thanks to its technology and aggressive pricing. And with new Securities and Exchange Commission regulations designed to ensure that trades are routed to the market that offers the best price, Bats is poised to pull more business away from the NYSE and Nasdaq."

Backdating takes another "victim"

"Cirrus Logic, a maker of audio and video chips, announced that David D. French has resigned as president and chief executive officer and as a director after an internal review determined that he was aware of possible backdating of stock option grants...."