MLB: Wins and Payroll, a fast fast fast midseason look

Ok, so this is a really bad study (It took all of three minutes to do), but I found it interesting.

Data was sketchy at best and definitley would not hold up even in class let alone a paper, but like I said it took three minutes.


Y is number of wins right as of 1Am eastern today (June 15) (and yes I know some teams have played more games), X1 is payroll as reported by USA Today, X2 is number of players CURRENTLY on the disabled list.

Wins= 26.85 + (4.75E-08)Payroll
Payroll is significant at the 4% level (t=2.23)

Which is expected, pay more for talent get more wins.

What is interesting is to see how well this simple simple simple model predicts wins. (spreadsheet below). The best? The Red Sox. The Worst? The Nationals. The Mets? about 2 fewer ganes than would be expected (given they have one extra game to play than many teams AND won at least 8/9ths of the Friday game, I found this a good sign). LOL.

Then using a very noisy variable for injuries (Hey I am a Met fan, I get to use injuries as an excuse):

Y is number of wins right as of 1Am eastern today (June 15) (and yes I know some teams have played more games), X1 is payroll as reported by USA Today, X2 is number of players CURRENTLY on the disabled list.

Wins= 29.93 + (4.11E-08)(Payroll) + (-0.51627)(number of players CURRENTLY on DL)

t-stat for payroll 1.93, t stat for players on DL= -1.45

So point estimates are in the expected direction but not significant using normal levels. Tjis might be because of the failure to differentiate injury severity (15 vs 60 day DL), importance of player (a mop up player has the same weight as a Jose Reyes or Carlos Delgado), or the total number of games lost (literally this is just the number of players reported by Yahoo that are CURRENTLY) on the DL.

Team	payroll	Injuries	wins	expected wins based off of payroll	Wins - expected wins
Yankees	201449189	5	36	36.414706	-0.41471
Mets	148373987	8	32	33.896147	-1.89615
cubs	134809000	3	30	33.252453	-3.25245
red sox	121745999	3	38	32.632579	5.367421
tigers	115085145	3	34	32.316504	1.683496
angels	113709000	3	32	32.251202	-0.2512
phillies	113004046	3	36	32.21775	3.78225
astros	102996414	4	29	31.742861	-2.74286
mariers	98904166	6	30	31.548673	-1.54867
braves	96726166	7	30	31.445322	-1.44532
white sox	96068500	2	30	31.414114	-1.41411
Giants	82616450	2	34	30.775778	3.224222
indians	81579166	7	29	30.726556	-1.72656
blue jays	80538300	5	34	30.677165	3.322835
brewers	80182502	2	34	30.660281	3.339719
cardianals	77605109	4	34	30.537977	3.462023
rockies	75201000	4	31	30.423895	0.576105
reds	73558500	3	31	30.345955	0.654045
diamondbacks	73516666	6	27	30.343969	-3.34397
royals	70519333	7	28	30.201738	-2.20174
rangers	68178798	8	35	30.090673	4.909327
orioles	67101666	4	27	30.039561	-3.03956
twins	65299266	3	32	29.954032	2.045968
rays	63313034	9	34	29.85978	4.14022
As	62310000	7	27	29.812183	-2.81218
nationals	60328000	7	16	29.718132	-13.7181
pirates	48693000	5	30	29.166021	0.833979
padres	43734200	7	28	28.930713	-0.93071
marlins	36834000	5	32	28.60328	3.39672

What is I^3?

I^3 papers are those papers that I feel are extra special. The I^3 moniker stands for Interesting, Informative, and Important. You could do much worse than reading them. They really are good. Here are some past winners.

Happy New Year!

Before getting back to work this week, I wanted to wish you all a very happy, healthy, and prosperous 2005!

Here is past list of financial resolutions that I suggested would be fitting to almost all:

1. I will take an honest account of my spending habits, my net worth, and my investment goals.
2. I will let the power of compounding work for me and not against me by investing more and by paying off high interest debt (especially credit card debt which I will entirely pay off during as soon as possible).
3. I will set up a savings and investment plan and stick to it (hint: the best way to do this is with an automatic withdrawal program).
4. I will spend less than I want to and save more than I think I need to.
5. I will remember that there is “no free lunch.” If something looks too good to be true, it probably is.
6. I will diversify my investments to reduce risk.
7. I will not get caught up in daily market volatility but will keep my eyes on my long term goals.
8. I will remember that there is more to life than money.
9. I will invest not only in stocks and bonds but also in myself, my family, and my community.
10. I will remember that money is never worth losing one’s family, one’s friends, or one’s health over.
11. I will remember that amoung the most valuable assets anyone can have are a family and friends, a good reputation, good health, and a clean conscience.
11. I will be generous with my time and money.
12. I will be thankful for what I have and not jealous of what others have.

Happy 2005!!!

jim

who will get back to more "pure" finance on Monday.

Flannery and Rangan: more proof of the trade-off model

Have you had your fill of capital structure papers yet? Of course you have not! You can never have too many! So here is yet another paper on capital structure (with a similar finding) is to be presented at the AFA meetings.

It is by Flannery and Rangan. In the paper entitled Partial Adjustment toward Target Capital Structures they show that firms do have targets for their capital structure and do behave in a manner that attempts to get their leverage ratios back to this target.

The paper begins by describing the pecking order and the trade-off theory of capital structure. As they correctly point out, in its strictest sense, the pecking order theory implies that firms do not have a target capital structure—a conclusion which seemingly flies in the face both surveys of executives (example Graham and Harvey 2001) and mounting evidence.

In the authors’ words:

“In a pecking order world, observed leverage reflects primarily a firm’s historic profitability and investment opportunities. Firms have no strong preference about their leverage ratios, and, a fortiori, no strong inclination to reverse leverage changes caused by financing needs or earnings growth.” (I confess I had to look up a fortiori to be sure ;) )

Flannery and Rangan proceed to investigate changes to firms’ capital structure that result from stock price changes but do so in a world where it is not costless to move back towards the targeted capital structure. (The inclusion of both market price induced changes and transaction costs into their adjustment model is i^3—insightful, interesting and important)

The authors examine an enormous data set of “all firms present in the Compustat Industrial Annual tapes between the years 1965 and 2001.” For each of these firms they winsorize the data (which is largely in the form of ratios) at 1% and 99% to reduce the impact of outliers and data errors. (BTW winsorize just means to set the values in the outer tails equal to the 1st and 99th percentiles. -this was corrected from initial posting)

Using a detailed regression analysis, the paper finds that firms do move back to their previous target. That is under levered firms lever up, while over leveraged firms reduce their leverage. Moreover, when the distance away from this target is studied, firms furthest away from the target move the most back towards it. (see figure 1). This is consistent with a world where there are transaction costs of rebalancing capital structures since for smaller deviations away from the target, it may not be worthwhile to make the costly adjustment.

In their conclusion, the authors summarize the findings:

<>“We find strong evidence that nonfinancial firms identified and pursued a target capital ratio during the last 35 years of the twentieth century. The evidence is equally strong across size classes and time periods. As earlier researchers have found, target debt ratios depend on well-accepted firm characteristics. Firms that are under- or over-leveraged by this measure soon adjust their book debt ratios to offset the observed gap. Unlike some recent studies, we estimate that firms return relatively quickly to their target leverage ratios when they are shocked away. The mean sample firm acts to close its (market) leverage gap at the rate of more than 30% per year. One might dispute whether a 30% annual adjustment speed is “slow” or “rapid”, but it is far from zero for U.S. nonfinancial firms.

Our results strongly support the tradeoff theory of firm capital structure and the relevance of costly (partial) adjustment toward target leverage. Indicators of the pecking order and market timing (à la Baker and Wurgler [2002]) theories carry statistically significant coefficients, but their economic effects are swamped by movements toward a leverage target that reflects firm-specific characteristics."

Very Interesting! Or as I said above, i^3! :)


Alternative sites/cites:

From SSRN: Flannery, Mark Jeffrey and Rangan, Kasturi P., "Partial Adjustment Toward Target Capital Structures" (May 3, 2004). http://ssrn.com/abstract=467941

From the AFA program:

And from Mark Flannery’s web site:

BTW I just emailed both authors and have been told that modified version will be out within a few weeks. I will update the above links.

5 things I learned today #2

I had fun with my 5 things yesterday's so I am doing it again.

Five things I learned today:

1. Volume of equity options traded with the Options Clearing House (OCC )is over 10 times that of non equity traded options.  This ratio has stayed relatively constant since 2000.  Data source: OCC. http://www.optionsclearing.com/webapps/historical-volume-query (Sept 26, 2013)

year	equity	non equity	equity percentage	equity to non equity
2012	3,681,820,659	322,050,649	90.23%	11.43
2011	4,224,604,529	338,143,665	91.06%	12.49
2010	3,610,436,931	288,631,739	91.35%	12.51
2009	3,366,967,321	245,669,797	92.57%	13.71
2008	3,284,761,345	297,811,236	91.42%	11.03
2007	2,592,102,961	270,723,257	89.96%	9.57
2006	1,844,181,918	183,665,668	90.20%	10.04
2005	1,369,048,282	135,263,258	90.32%	10.12
2004	1,083,649,226	98,390,870	91.33%	11.01
2003	830,308,227	77,550,428	90.94%	10.71
2002	709,784,014	70,673,329	90.87%	10.04
2001	722,680,249	58,581,686	92.50%	12.34
2000	672,871,757	53,856,182	92.59%	12.49

  2.  Playing with FINVIZ is fun.  For instance:

There are over 3600 firms that trade on the NYSE. (Finviz.com)

391 of the S&P 500 trade on the NYSE
109 of the S&P 500 trade on the NASDAQ

27 of the Dow Jones Industrial stocks trade on the NYSE
 3 of the Dow Jones Industrial stocks trade on the NASDAQ

 http://finviz.com/screener.ashx?v=111&f=exch_nyse,fa_div_pos


3. Given the importance of option trading, Kane's finding that option markets are important for price discovery should not be a surprise, but rather seen as confirmation of what we already assumed.

"I find evidence that the equity prices do adjust towards the option prices to reconcile the mispricing event. The results show that there is a significant movement in the equity prices towards the option prices, however consistent with the model the equity prices only move part of the way and the implied prices move back resulting in a reconciliation price in the middle"

Kane, Hayden, Price Discovery Across Equity and Option Markets (September 13, 2013). Available at SSRN: http://ssrn.com/abstract=2325714 or http://dx.doi.org/10.2139/ssrn.2325714

4. CEO pay was pretty constant from 1936 to 1980...then, not so much:

Time        Median CEO pay in millions of constant 2000 dollars

1936-1939	1.1
1940-1945	1.07
1946-1949	0.9
1950-1959	0.97
1960-1969	0.99
1970-1979	1.17
1980-1989	1.81
1990-1999	4.09
2000-2005	9.2

Source:

Arantxa Jarque: CEO Compensation: Trends, Market Changes, and Regulation in Economic Quarterly, Summer 2008

Available at http://www.richmondfed.org/publications/research/economic_quarterly/2008/summer/pdf/jarque.pdf

Note: the original source of the data is: Frydman and Saks (2007).

5.  The quarterly correlation between bonds and stocks has been negative in the 2000s.   CBS reported on a paper by Harvard's Malcom Baker and NYU's Jeffery Wurgler.

Here is the key table from the CBS report:
     
            Decade   Correlation

• 1970-79: 0.49
• 1980-89: 0.36
• 1990-99: 0.19
• 2000-11: -0.55

Source: http://www.cbsnews.com/8301-505123_162-57464128/the-correlation-of-bond-and-stock-returns/

The second really cool thing about the Baker and Wurgler paper is that in it they break down bonds into different types: for instance "bond like" stocks have a higher correlation whereas more speculative stocks have a lower correlation.  VERY cool!

(as I would label it: I^3: Informative, Interesting, and Important!


  I didn't believe the correlations were so low so I decided to test it myself.  I took a closed end fund and compared it to the S&P and the Dow.  And, well, they seem to be right!  Check for yourself: here.



 

Catching up after FMAs before Finance club trip to NYC

Whew...and I thought I became a teacher in part to avoid business travel. LOL...After spending a week in Ohio with BonaResponds, a trip to Orlando for the FMAs, and now to NYC with the finance club should make me ready to stay home for a while.

The FMAs were great. I apologize for not getting more online about them already. I have a notebook full of papers to summarize, just need a few minutes to breathe. From a quality of paper point of view, it may have been the best FMA conference I have been to.

I have not counted how many papers were presented, but it had to be somewhere about 400-500. At any given point there were 25-30 sessions going. Each author had about 20 minutes to discuss the paper and then a discussant had 7 minutes to make comments. For the last few minutes it was then "thrown open" to the crowd for comments. In most of the sessions there were three papers. So it was utterly impossible to see it all.

Combine the many sessions with interviewing (have I mentioned we are hiring ? ;) ) and I only got to see a very small fraction. But I tried to get to the papers that would either help with class or my own research, or just seemed too interesting to pass up. So I think I had a good mix. (of course I had to leave sessions now and then and if I skipped out of yours, I apologize. I assure you it was nothing you said!)

Over the next few weeks I will recap and summarize the best of these so that you too can enjoy some of the conference (of course without having to travel to Orlando, which cemented its place into my least favorite US city list).

Hopefully these summaries will start later this afternoon, but with a NYC trip (I leave at 3:00 AM) and a student life meeting at 4:00 PM, no guarantees ;).

Is growth good for shareholders?

I love articles that turn the conventional wisdom on its head (and I held this view long prior to ristening to Freakonomics), but that said, this one surprised me. What is more, in doing looking at growth and returns, Ritter offers valuable insights into what matters in forecasting expected returns.

Jay Ritter finds that shareholder returns are negatively correlated with economic growth.
In his words:

"... does economic growth benefit stockholders? This article argues on both theoretical and empirical grounds that the answer is no. Empirically, there is a cross-sectional correlation of –0.37 for the compounded real return on equities and the compounded growth rate of real per capita GDP for 16 countries over the 1900-2002 period."

"I am not arguing that economic growth is bad. There is ample evidence that people who live in countries with higher incomes have longer life spans, lower infant mortality, etc. Real wages are higher. But although consumers and workers may benefit from economic growth, the owners of capital do not necessarily benefit."

Later:

"This article argues that limited historical data on stock returns are not a constraint, since these data are irrelevant for estimating future returns, whether in emerging markets or developed countries. This point has been made before, although possibly not as explicitly, in Fama and French (2002) and Siegel (2002), among other places. Of greater originality, this article argues that not only is the past irrelevant, but to a large extent knowledge of the future real growth rate for an economy is also irrelevant."

"I argue that only three pieces of information are needed for estimating future equity returns. The first is the current P/E ratio, although earnings must be smoothed to adjust for business cycle fluctuations. The second is the fraction of corporate profits that will be paid out to shareholders via share repurchases and dividends, rather than accruing to managers or blockholders when corporate governance problems exist. The third is the probability of catastrophic loss, i.e., the chance that “normal” profits are a biased measure of expected profits because of “default” due to hyperinflation, revolution, nuclear war, etc. This third point is the
survivorship bias issue, applied to the future."

A few other highlights:

*"I believe that the large stock price effects associated with recessions are partly due to higher risk aversion at the bottom of a recession, but also due partly to an irrational overreaction."

He argues that while some claim the high returns experienced in the US are the result of a survivorship bias, this claim is probably overstated. For this argument he points out that 1. in 1900 most people were positive on the devolped world, 2. most of the developed world economies today are the same as they were in 1900 (with a few exceptions), and 3. no convincing evidence exists to suggest that the market's risk premium (i.e. the return above the so-called risk free rate) can be expalined through a survivorship bias hypothesis. Why? because the so-called "risk free rate" may increase in response to systematic risk factors.

It is for this third point that Ritter offers one of my favorite lines from any finance paper:

* "Third, even if survivorship bias is important in explaining realized stock returns, it is not clear that survivorship bias should affect the equity risk premium, since bond and T-bill investors suffer just as much from devastation as equity holders do. In the 1950s and 1960s, when it might plausibly be argued that a nuclear war involving the U.S. and the Soviet Union had a significant probability of occurring in future decades, real rates of interest on U.S. government bonds were very low, suggesting that investors had no significant desire for immediate consumption before they were incinerated." (italics are mine)

So why are returns negatively correlated with economic performance?

* "Why is there a negative correlation between real returns and real per capita income growth? ....Siegel (1998) hypothesizes, that part of the negative correlation between real stock returns and per capita GDP growth is because high growth was impounded into prices at the start of the period."
*"optimistic investors will bid up stock prices, lowering the dividend yield."
*"One reason that GDP growth does not necessarily translate into high returns for minority stockholders is that managers may expropriate profits via sweetheart deals, tunneling, etc."

So what does matter? Ritter concludes with what many may deem the most important part of the paper:

"What...does predict future equity returns? The answer is simple: the current
earnings yield. The major adjustment that needs to be made is to smooth earnings for the effects of business cycles. Economic growth doesn’t matter. As a first approximation, the return on existing shares will equal the earnings yield on these shares, subject to the caveats that expropriation by insiders or catastrophic market meltdowns will prevent minority shareholders from receiving future earnings."

If the earnings yield is the real cost of equity capital, does this mean that the textbooks are wrong to say that the E/P ratio of a company is not its cost of equity capital? The answer is yes and no. A company can rationally be expected to earn above- or below-normal ROE for a period of time (economic profits), so in general it is incorrect to state that a firm’s cost of equity capital is its earnings yield. But for the market as a whole, above- and below-normal rates of profit growth largely cancel out, so in fact the market’s smoothed earnings yield is the expected real return on the market."

An definite I^3 paper. Well worth your time!

(for the uninitiated: I^3 = Interesting, Informative, Important)

Cite:
Ritter, Jay R., "Economic Growth and Equity Returns" (November 1, 2004). http://ssrn.com/abstract=667507
Although I question the date, as it says it was last edited on June 24, 2005.

Private Retirement Accounts--by Jim Finnegan at FEN

Ever since the election we have been bombarded with largely emotional and in some cases purely idiotic comments on the proposed social security reforms. (indeed there have been some so bad that I could not even force myself to read them--I will not give you names but if you search the Buffalo News you may find the articles. Be forewarned, they are really really bad.

I have pondered a reply. Indeed I almost thought about writing to the Buffalo News criticizing their choice of articles. However, true to form I ran out of time. ANd it is a good thing I did for now Jim Finnegan writing his editorial in Financial Engineering News says largely what I would have said and says it much better than I would have!

Private Retirement Accounts Could Use Some Financial Engineering

Some highlights:

• "What if private retirement accounts had existed when I first entered the workforce and began Social Security contributions (in 1975 as a college student summer shift worker in a factory)? How would I have fared?"
• "Personally, I favor private retirement accounts despite three key concerns:
  1. The short-term saving caps and longer-term four percent of earnings savings limit in the current plan are insufficient to provide most workers with even the opportunity to build a meaningful “nest egg” for retirement needs.
  2. The real transition costs will be much more than the $750 billion White House report estimate (And, I recognize this concern and the former one about limited rates of contributions are directly correlated.)
  3. The shift to private retirement accounts could discourage personal risk taking and entrepreneurship: As I noted earlier, I’m a 49 year old entrepreneur investing in FEN with very little current income to divert to a private investment account- when retirement is certainly on my mind.
• "Not withstanding these concerns, I believe the existing transfer payment system (current workers paying for today’s retiree benefits) looks more like a collapsing Ponzi scheme as the ratio of workers to retirees continues to decline."
• "But when it comes to their retirement, I don’t believe most people want to own a lifecycle retirement fund worth an uncertain future dollar value "
• The field of financial engineering has the tools to bridge this gap between private retirement accounts that offer an “uncertain future value” versus “certain future financial security.”

WELL SAID!!! Read the entire letter here.

The Future of Securities Regulation by Luigi Zingales

Luigi Zingales has been in the news a bunch lately. He has testified to Congress, been on NPR, in Forbes, in The Economist, and the Wall Street Journal to name just a few (and these have all been since September!!!)

Which is to say when Luigi Zingales speaks (or writes) on the Future of Securities Regulation it makes sense to take note.

(On the paper that follows he only allows two paragraphs quotes so the review will be short, but by all means read the whole thing.)

SSRN-The Future of Securities Regulation by Luigi Zingales:

"....I propose a series of reforms that center around corporate governance, while shifting the focus from the protection of unsophisticated investors in the purchasing of new securities issues to the investment in mutual funds, pension funds, and other forms of asset management....three main areas of intervention.

1. First, a reform of corporate governance aimed at empowering institutional investors to nominate their own directors to the board....a new Glass-Steagall Act, which...will separate mutual fund management from investment and commercial banking...
2. The second goal should be the protection of unsophisticated individuals with regard to their investments. The minimum this protection entails is enhanced disclosure....
3. The third goal should be that of reducing the regulatory gap between public markets and private markets. The recent trend of migration...suggests that this differential is excessive. This migration should be stopped not only by deregulating the public market, but also by introducing some disclosure standards in the private one."

(note the numbers (1,2,3) were added to help the reader and are not in the actual paper).

Good stuff! I highly recommended reading it all!

An I^3 Paper!(Interesting, Important, and Informative)


BTW: even if you are not interested in regulation, the figures at the back of the paper are excellent and could/should be included in many classes from Investments to Macroeconomics, Money and Banking, Financial Institutions, and even Corporate Finance.

Cite: Zingales, Luigi ,The Future of Securities Regulation(January 29, 2009). Chicago Booth School of Business Research Paper No. 08-27; FEEM Working Paper No. 7.2009. Available at SSRN: http://ssrn.com/abstract=1319648

The Copyright I guess is to Zingales himself, but I could not find it on the paper but he asked the copyright be mentioned. I would say it is his, but I will check and edit this when I know.

Greenbaum on Corporate Governance

Stuart Greenbaum recently gave a very interesting and important speech at the Financial Intermediation Research Society Meetings in Shanghai China. Fortunately for those of who did not go to China to attend the conference, the keynote address is available through SSRN. The abstract does not do the speech justice, so I will provide some "visual bites" via some "look-ins":

*"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."

However,

*"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.)

Highly recommended!

Cite: Greenbaum, Stuart I., "Corporate Governance and the Reinvention of Finance" (June 20, 2006). Available at SSRN: http://ssrn.com/abstract=908613

Finance Reading List

I was asked for a "summer reading list" for finance classes so here you go: ten (non technical) finance/economics books I would recommend.

1. The World is Flat by Thomas Friedman. It has been talked about everywhere (even the SBU graduation speaker mentioned it by name) but it is definitely worth the read! Probably my favorite of the bunch. Read what I wrote about it previously.

2. The Wisdom of Crowds by Jame Surowiecki. Great. Tells you more about market efficiency (and the lack thereof) than several classes could.

3. Random Walk Down Wall Street-by Burton Malkiel. A must read classic!

4. Against the Gods--Peter Bernstein. I remember my first reaction to this book was--Wow! It makes risk management not only interesting but fun!

5. The End of Poverty by Jeff Sachs. It is about ending extreme poverty. I really liked it! An important read that covers strategies to fight poverty from China to India to Africa. Also has an interesting economic history of the world. Introduction is by Bono.

6. Heard on the Street: Quantitative Questions from Wall Street Job Interviews--even if you are not interviewing, this one is interesting and somewhat fun! EVERY business school should have this one!

7. Barbarians at the Gate--Yeah, it's outdated. Yeah, it reads like a novel. Yeah, I like it and still use some of the examples.

8. Freakonomics--by Steven Levitt and Stepham Dubner. It is an interesting and fast read. Levitt is always a worthwhile read.

9. Fooled by Randomness by Nassim Nicholas Taleb. I hate to admit it but I think about this book during almost every sporting event I watch. It may not be the best written book on the list (and I have to agree with the Amazon review, he does come across as arrogant) but it is still definitely a VERY worthwhile read.

10. Worry Free Investing by Zvi Bodie. Basic idea: invest in bonds and options. Might be a tad text-bookish, but such a great idea. I hope more people do it!


Well there you have it. Ten Finance books to read this summer ;) No doubt I have forgotten many others as well, but here are a few to whet your appetite.

Maybe someday soon I will list ten non finance books again.

SSRN-Systemic Risk and Hedge Funds by Nicholas Tung Chan, Mila Getmansky, Shane Haas, Andrew Lo

Continuing the discussion on Hedge Funds and their regulation, Chan, Getmanksy, Haas, and Lo have some important contributions to make. Their paper Systemic Risk and Hedge Funds by Nicholas Tung Chan, Mila Getmansky, Shane Haas, Andrew Lo (which is being presented at the 2005 EFA conference paints a picture of banks being exposed to the hedge fund industry and the hedge fund industry being quite exposed to a series of risks. Together these factors are seen as increasing systematic risk.

Longer review:

Some quotes from their paper (which btw is 110 pages long):

* "innovations in the banking industry have coincided with the rapid growth
of hedge funds, unregulated and opaque investment partnerships that engage in a variety of active investment strategies, often yielding double-digit returns and commensurate risks. Currently estimated at over $1 trillion in size, the hedge fund industry has a symbiotic relationship with the banking sector, providing an attractive outlet for bank capital, investment management services for banking clients, and fees for brokerage services, credit, and other banking functions. Moreover, many banks now operate proprietary trading units which are
organized much like hedge funds. As a result, the risk exposures of the hedge-fund industry may have a material impact on the banking sector, resulting in new sources of systemic risks. And although many hedge funds engage in hedged strategies --—where market swings are partially or completely offset through strategically balanced long and short positions in various securities--—such funds often have other risk exposures such as volatility risk, credit risk, and liquidity risk."

The authors identify two themes:

"We argue that the risk/reward profile for most alternative investments differ in important ways from more traditional investments, and such differences may have potentially important implications for systemic risk, as we experienced during the aftermath of the default of Russian government debt in August 1998 when Long Term Capital Management and many other hedge funds suffered catastrophic
losses over the course of a few weeks, creating significant stress on the global financial system and a number of substantial financial institutions. Two major themes emerged from that set of events: the importance of liquidity and leverage, and the capriciousness of correlations among instruments and portfolios that are supposedly uncorrelated. These are the two main themes of this study, and both are intimately related to the dynamic nature of hedge-fund investment strategies and risk exposures."

The authors go on to explain that because of the dynamic nature of hedge funds, there currently exists no single measure of risk and that the benefits of diversification (as shown through standard Mean-Variance diagrams) may be distorted by changing correlations. Moreover, with the exposure to "tail risk" included, it is often difficult to guage the actual risk to return performance. After providing an example of this, they argue that investors do not fully appreciate this risk:

"The track record in Tables 2 and 3 seems much less impressive in light of the simple strategy on which it is based, and few investors would pay hedge-fund-type fees for such a fund. However, given the secrecy surrounding most hedge-fund strategies, and the broad discretion that managers are given by the typical hedge-fund offering memorandum, it is difficult for investors to detect this type of behavior without resorting to more sophisticated risk analytics that can capture dynamic risk exposures."

I really can not do the paper justice without going into too much detail (did I mention the 110 pages?), but I will share their conclusions:

"...Therefore, we cannot determine the magnitude of current systemic risk exposures with any degree of accuracy. However, based on the analytics developed in this study, there are a few tentative inferences that we can draw.

1. The hedge-fund industry has grown tremendously over the last few years.... These massive fund inflows have had a material impact on hedge-fund
returns and risks in recent years, as evidenced by changes in correlations, reduced
performance, increased illiquidity...and increased mean and median liquidation probabilities for hedge funds in 2004.

2. The banking sector is exposed to hedge-fund risks, especially smaller institutions, but the largest banks are also exposed through proprietary trading activities, credit arrangements and structured products, and prime brokerage services.

3. The risks facing hedge funds are nonlinear and more complex than those facing traditional asset classes....

4. ....Recent measurements suggest that we may be entering a challenging period. This, coupled with the recent uptrend in the weighted autocorrelation ρ∗t , and the increased mean and median liquidation probabilities for hedge funds in 2004 from our logit model implies that systemic risk is increasing.

We hasten to qualify our tentative conclusions by emphasizing the speculative nature of these inferences, and hope that our analysis spurs additional research and data collection to refine both the analytics and the empirical measurement of systemic risk in the hedge-fund industry."

Wow. Well done. Whether you agree or disagree with their conclusions, after looking over their work (this entry took about three times as long as a "typical blog entry"--did I mention it is 100 pages?), I am sure you will acknowledge the importance of the questions they raise.

a definite I^3 paper! (interesting, informative, and important)

Cite:

Chan, Nicholas Tung, Getmansky, Mila, Haas, Shane M. and Lo, Andrew W., "Systemic Risk and Hedge Funds" (February 22, 2005). http://ssrn.com/abstract=671443

Live from Salt Lake City

Hi from Salt Lake City!

I am here attending the Financial Management Association (FMA) meetings. I figured that if I could blog from Biloxi weeks after Katrina, I could make some time to do so from a conference.

Finance conferences are pretty much all day events. Today’s started at 8:00 AM and papers went until after 5:00 at which time there was a reception. (I confess I skipped the reception to run—WOW what a beautiful area!)

The day is broken into 90 minute segments during which time various financial research papers are presented. These 90 minute blocks repeat all day except for an hour break for lunch.

During a block upwards of 30 different “sessions” are held. These take place in various conference rooms in the conference hotels. Each session is further broken down into 3 thirty minute intervals in which a paper is presented and then discussed. The exact timing varies somewhat by conference but the norm at the FMAs (usually my favorite conference) is that the author has 20 minutes to explain the paper (motivation, data, methodology, and findings) and the discussant has about 10 minutes to comment on the paper and suggest possible improvements and extensions that would make the paper even better.

Those not presenting make up the fairly transient audience at the presentations. With up to 90 papers (30 sessions times 3 papers per session) are being presented in any time block, it is obviously impossible to see them all and those in attendance must pick and chose what to see. Thus, popular papers may be filled to capacity while others have only a handful in attendance.

Between each 90 minute presentation block, there is a 15 minute break time. This allows people to get from one presentation to the next (or at least try to make it, today’s wait for elevators was pretty bad!). This time also allows presenters to set up for their presentation and others to mingle while discussing what papers they will see next.

Additionally, throughout the entire day text book publishers and others selling items of interest to finance professors have set up displays in what amounts to a “trade show.” This allows professors to see the newest text books and to also see new class tools.

Oh, and I almost forgot, while all of this is happening, there are also many job interviews being conducted. Most of these occur in the hotel rooms but some schools opt to share a large open room for interviews.

So there you have it, a typical day at a finance conference.

It is sort of easy to see why people complain about conferences: they are quite expensive; they are a lot of work; they involve too much travel.

However, any analysis must also include the benefits. Today I saw 17 papers presented. Think about that for a second. Seventeen papers, it does not get much better than that!

On top of that where but a conference can you meet some of the best and brightest in the field from around the globe, get exposed to new ideas, and learn a great deal on virtually every aspect of finance all in a single day. And then wake up and do it all over again the next day!

To put it another way, conferences are definitely positive NPV projects!

What I am reading

Back in the day when I put out a regular newsletter, one of the favorite sections was always the "what I am reading" section. Since I have a few minutes, I will revive it.

I am about 3/4's done with The End of Poverty by Jeffrey Sachs. The book is simultaneously looks at 1. what makes developing economies (now and in the past) tick, 2. Sach's personal experiences with economies and governments around the globe, and 3. and his prescriptions to end extreme poverty by the end of this generation.

It is surprisingly good: at once both interesting and informative and even has an introduction by Bono. Definitely a positive NPV!

I am also ristening to Bona grad Neil Cavuto's Your Money or Your Life. It is a series of his editorials. They are OK. Not great, but well done none-the-less. I agree with his tax position, not necessarily on some of his other topics.

Also reading Team of Rivals which is really really good. It is about Lincoln and his cabinet. Finally I just finished ristening to 1491. Which was excellent!

Academic perspective? or incessant rambling?

Trying to step back and answer some of the questions people have been asking over the past few days in particular. They will not be particularly formal and clearly I have no idea of anything in the future, but since I keep getting asked, at least this MAY cut down on that.

1. Why should the government do anything? They don't when other companies go out of business.

A. Well, maybe the government should not do anything. I am not sure what I would have done, but given the size and severity of what is happening, I do think I would have intervened.

Some very good cases can and have been made for letting markets sort this out. Indeed, I am a big free markets believer too, but (and this is always dangerous to say), things are different this time. Most notably when a store or even large manufacturing firm goes out of business, they only marginally impact the overall economy. But banks, by being a provider of liquidity for many businesses and people, can help spread the problem. For instance from a 1994 paper by George Kaufman in the Journal of Financial Services Research.

"Contagion is a term used to describe the spillover of the effects of shocks from one or more
firms to others,l It is widely considered to be both more likely to occur in banking than in
other industries and to be more serious when it does occur. Bank (depository institution)
contagion is of particular concern if adverse shocks, such as the failure or near-failure of
one or more banks, are transmitted in domino fashion not only to other banks and the
banking system as a whole, but beyond to the entire financial system and the macroeconomy...."

Limited intervention now may limit the severity of the problems and thus in the long run mean less intervention is needed.


2. Has there ever been anything like this?

Yes and no. Yes to the degree that markets collapse, yes. For instance from 1929 to 1932 the US markets dropped by nearly 90%!
From the BBC:

"In two days the Dow Jones industrial average fell by 25% (ending on Black Tuesday, 29 October).

The volume of stocks traded set a record that was not broken for 40 years.

When it finally reached its record low in July 1932, the Dow Jones had fallen 89%, and it did not recover to 1929 levels until 1954"

Similarly the recovery in Japan was long and difficult with even today, 18+ years later, the market at only a fraction of its 1989 peak.

But there are differences. Take the US for instance. Homeownership is at record levels (and real estate prices have fallen in many areas). Stock ownership by individuals (through mutual funds, retirement plans, or just in regular accounts) is MUCH higher than during even the crash of 1987. So we just do not know the wealth effects we will see of the estimated 8 trillion dollars in the US (remember that is just equities and does not include real estate losses) or approaching $30 trillion worldwide in stocks. Will people stop spending so much? Almost assuredly.

3. What caused it and who is to blame?

Many things and many people. Unfortunately there is no single answer. Among the things, we loosened credit to allow more people to own their own homes. This while good in and of itself, helped to spur a real estate bubble. A colleague Giles Bootheway pointed out at a recent forum on the subject, this was added to by the low rates the Fed maintained well after (too long?) 9-11.
As things often do, one thing lead to another and in many places homes kept going up in value. This led to people thinking that prices would always rise. This then led to banks believing the same (they definitely should have known better) and making loans with very little low downpayments and with clauses that often increased the required payments after a few years. When the economy slowed only marginally, this led to many sub-prime borrowers not being able to make payments.
As these mortgages are been combined into new securities, the owners of these (often the larger bank and if not the larger banks often had put provisions so we liable) saw asset values drop. As this happened, they both sold other things to get cash (which drove other assets down) and largely quit making loans.

4. What is next?

No idea. We are not going to be out of this for a while. Sure the correlation between market returns and teh economy is low, but I have a very tough time not imagining at least a fairly pronounced recession.

That said, there will be many other impacts as well. Regulation will surely increase. My guess is that serious talk of privatization of social security will be tabled for years. There will be many law suits. Bond rating agencies, audit firms, and others will no doubt be the target even if undeservedly so.

Also it is very likely that risk premiums will be higher as a large percentage of the population (and not just those involved in finance) realize the limitations of diversification and that markets do not always go up.


5. What should I do now with my own portfolio?

Well if I could answer that one do you think I would be giving away info like that!? lol....Won't touch it Sorry.

I do feel bad for you, but if misery loves company, it is largely happening to everyone. This collapse is global with many indexes are down much more than those in the US. Moreover, the ones I really feel bad for are those who just retired or are nearing retirement. Last night at the store I heard of one recently retired man who is already trying to reenter the workforce as he does not feel he had enough set aside now that his portfolio is down by almost a quarter (which could have been much worse!)

When are behavioral biases most pronounced

When do Investors Exhibit Stronger Behavioral Biases? by Alok Kumar.

To get a quick understanding of this paper, ask yourself the following question: when do biases (financial or otherwise) play a large role in decision making?

Your answer probably includes "in areas where there is much subjectivity" or "in gray areas". Why? Because you can not readily prove the opinion wrong.

For example, why do most drivers feel they are "above average"? Probably because there is no easily identified (and readily available) measure of driving abilities, thus everyone is more or less allowed to think what they want and hence they are all "above average". (The reverse is true in track and field where an abundance of hard-fast (pun intended) data allows instant evidence of one's relative standing.)

Kumar ingeniously takes the above logic and applies it to financial markets. In the author's own words:

"In particular, how does value ambiguity (or information uncertainty) influence the strength of investors’ behavioral biases? Are investors more likely to make mistakes in settings with greater uncertainty or do stocks that are more difficult-to-value attract a clientele that exhibits stronger behavioral biases?"

This idea in and of itself is not new, but the empirical testing of this idea is and that is exactly what Kumar does! And sure enough, he finds that investors behave as behavioral finance would predict.

From the paper:

"Consistent with the theoretical predictions, I find that investor overconfidence is higher for stocks which are more difficult to value. Additionally, I find that higher market-wide (or economy-wide) uncertainty (higher mean stock volatility, higher unemploymentrate, etc.) induces greater overconfidence among individual investors."

He goes and and finds that several other biases are also more prevalent (for instance disposition bias) when uncertainty is high.

People will definitely be talking about this one! I^3! (for the new readers, I^3 is Interesting, Important, and Informative)


Cite:
Kumar, Alok, "When do Investors Exhibit Stronger Behavioral Biases?" (June 2005). Available at SSRN: http://ssrn.com/abstract=738884


To add my two cents to this: These findings suggest that biases are always there, but to varying degrees. It would thus be interesting to see some of the recent behavorial finance literature re-examined over different time periods to see how much the results may change. Stay tuned!

CFOs tell us what they think of SOX

Survery of CFOs on SOX

I will start this one with my standard discalaimer whenever I review a paper that is based on a survey data: be forewarned, survey data is often notoroiously inaccurate and biased. Thus, view the folloiwng with a good deal of skepticism.

The warning given, the paper itself is intersting. Peng, Dukes, and Bremer survey 1,312 CFOs who were in the Financial Executives International (FEI) database as of May 24th, 2005. Of course, the vast majority did not reply, but they did get 83 responses (6%).

So remembering the above disclaimer, How did the CFOs respond? Prett much as expected, they hate it! (which is exactly what I hear every time I speak with any of the CFOs I know.)

From the paper:

"...the approximate annual average cost of compliance to a company in our sample is estimated to be $1.77 million....More than 50% of the CFOs in our sample report that the cost estimate of compliance with the Act is between $500,000 and $3 million."

About 60% say that the costs of complainace outweigh the benefits.

Other interesting findings:

* "unlike Linck, Netter, and Yang (2005), we find that there is not any significant change in the following aspects of corporate governance practices due to the enactment of the Act since July 2002:"

There were some before/after differences however.

The paper reports that more firms are using independent audit committees and have more financial experts on the committee since teh adoption of the law. Moreover, more firms have adopted a code of ethics (80 of 83 repsonders said they do now, where only 57 did prior to SOX).

* The act has created jobs for accounting professionals: "The average number of staff that companies in our sample have to hire to deal with Section 404 compliance is 3.61 with the median value of five. The extreme cases are that two firms have to hire an additional 25 employees for Section 404 compliance."

What may be the most interesting however are the comments the authors received from CFOs. I will quote one to whet your appetite:

"“This Act was horribly overreaching. It is costly, and there is very little/absolutely no cost benefit relationship. The Act and, specifically, the Section 404 requirements, will do little, if anything, to deter the "crimes"/"irregularities" it was intended to deter/preclude. Management override is the biggest issue, and the Section 404 requirements hardly address that issue. It is a complete waste of time and money. PCAOB is ineffective, at best. Their "investigations" of the Big 4 firms is a joke, and the Big 4 firms don't know what to do or how to do it in complying with the Section 404 audits. They (the Big 4 firms) gouged "corporate America" in the purported "audits" of the control environments, using no/very little professional judgment in the conduct of their examinations. And I spent over 30 years with a Big 4 firm, including over 20 as a Partner.”"

uh, could you tell us what you really think?

Interesting article. It is still being revised and the authors have asked for comments, so if you have a few minutes, whay not send them your thoughts. And tell them you first saw the article here ;)

Cite:


http://www.southernfinance.org/PaperSubmissions/Submissions2005/S-3-35.pdf

Is Stock Picking Declining Around the World? by Utpal Bhattacharya, Neal Galpin

SSRN-Is Stock Picking Declining Around the World? by Utpal Bhattacharya, Neal Galpin:

Short version: Bhattacharya and Galpin examine the relative use of indexing vs. stock picking in various equity markets around the world. They find that indexing is increasing pretty much everywhere but especially in more developed markets. They also estimate that the "long run steady state" fraction of stock picking in US markets is 11% (it is now 24% down from 60% in the 1960s."

Longer version:
Bhattacharya and Galpin use an innovative method to measure the degree to which stock picking is used in an equity market. Based on this model, they then compare the relative percentage of stock picking (vs. Indexing) both using a cross sectional analysis as well as time series analysis.

The key idea behind the paper model is that if everyone indexes, then volume should be proportional to size of firm. In their words:

"The idea behind this measure is inspired by a theoretical insight in Lo and Wang (2000). They proved that, if the two-fund separation theorem holds, dollar turnover of a stock, which is defined as the dollar volume of shares traded divided by the dollar market capitalization of the stock, should be identical for all stocks.

An empirical implication of the above theoretical insight is that if every person in the world indexes between a risk-free portfolio and the market portfolio (or a value-weighted portfolio that is a proxy for the market portfolio), trading volume in stock i should be explained completely by the market capitalization of stock i."

Given this, the authors the essentially regress actual volume on capitalization (more technically they run the

"regression of log monthly stock volume (measured by number of shares traded in that month for stock i in a country) against the log of monthly shares outstanding (measured by number of shares outstanding in the beginning of the month for stock i). We run this regression for 43 countries, of which 21 are classified as developed markets and 22 are classified as emerging markets."

Most of the analysis begins in 1995, but for US stocks they go back into the early 1960s to yield valuable insights as to how markets have changed.

Findings:

* "The first big result.... is that there is more stock picking in emerging markets than in developed markets." This is shown in figure 1 and table 1.

* "The second big result that Figure 1(a) illustrates is that, on an average, stock picking is declining around the world. The declines in stock picking are quite dramatic, especially in the emerging markets."

In their examination of US stocks, they find that there has been a dramatic decrease in stock picking:

"In the United States, the maximum fraction of volume explained by stock picking has secularly declined from a high of 60% in the 1960s to a low of 24% in the 2000s"

Additionally, stock picking is relatively more popular where theory would predict--
namely where information asymmetries are highest. Thus stock picking is more common in young firms, in industries where there is lower asymmetries, and (only somewhat surprisingly) where there are fewer analysts.


VERY cool!! I^3. Indeed their finding that stock picking is negatively related to analyst coverage is worth the price of admission!


Cite:

Bhattacharya , Utpal and Galpin, Neal E., "Is Stock Picking Declining Around the World?" (November 2005). http://ssrn.com/abstract=849627

By the way, Neal is a SBU grad, so I could be a tad biased ;) I tried not to be, but you can be the judge.

Class Classification: Investments

Is Corporate Social responsibility good for shareholders?

Corporate Social Responsibility as a Conflict between Shareholders

Main point of paper: Barnea and Rubin ask the tough and important question of whether Corporate Social Responsibilty (CSR) is value increasing or whether it is an agency cost problem whereby managers and others accrue benefits at the expense of shareholders.

They find that firms with "higher insiders ownership and leverage are negatively related to the firm’s social rating." This is largely consistent (although by no means the final word) with a view that "insiders...may seek to over-invest in CSR for their private benefit to the extent that doing so improves their reputations as good global citizens."

Longer Summary:

Barnea and Rubin begin by stating Corporate Social Responsiblity (CSR) is a very hot topic but we do not know to the extent that it benefits shareholders. This paper investigates this by examining the CSR ratings on approximately 3000 firms.

They key finding is that CSR ratings are negatively related to the percentage of insider ownership. This is tested in several ways. For instance from their probit analysis (OLS on if the firm passes the CSR screen or not), they report:

"The most striking result in our analysis is that the coefficients of insider ownership and leverage are negative and significant at the 1% level across all specifications. On the other hand, the coefficients of institutional ownership are insignificant with inconsistent signs."

The paper also points out that while some CSR spending may be good, too much may be bad. In their words:

"A key argument in our analysis is that the relation between CSR expenditure and firm value is non-monotonic. When CSR expenditure is low, we expect that it should contribute positively to firm value, for example, by increasing the productivity of employees or by avoiding reputational or pollution-related costs and fines. But at some point...the marginal effect of an additional dollar of CSR expenditure must decrease shareholder wealth as there is no limit to the amount that a firm can transfer
to its stakeholders."

This is tested with a piecewise regression. The results are as expected. Again in Barnea and Rubin's words:

"The analysis suggests that at low levels of insider ownership (up to 25%), there is no relation between insider ownership and CSR, while at levels above 25%, the relation is negative and highly significant. This suggests that only levels of ownership above 25% align insiders with other shareholders as only then do insiders bear a significant amount of the costs involved with CSR. On the other hand, lower levels of ownership do not help to mitigate a potential CSR conflict."

The paper also tests whether capital structure influences CSR. The logic behind the use of leverage is that debt payments may help control agency cost problems through both less available cash at managers' discretion and additional monitors. Like above, they find that firms with more debt are rated lower on CSR.

Overall a very interesting and important paper! I^3

Comments: First of all let me say again that I really liked the paper and the analysis and I agree with their findings. Moreover the paper adds much to our understanding of this very important question.

However, I would like to at least suggest some alternative interpretations (and be sure to read my admission of a slight bias below).

* To the extent that higher insider ownership means concentrated holdings by investors, it could be that CSR spending lower due to the increase in risk that the spending necessary to improve CSR ratings would entail.

* Higher leveraged firms tend to be less profitable. This has at least two implications:

• The levered firm may not have the necessary resources to make this expenditures (especially to the degree that management ownership and size are tied together AND there are fixed costs of issuances.)
• The deductions allowed on the CSR expenses (think of it as a donation) are not as valuable. This tax shield is thereby reduced.
  

An imperfect solution to this might be to use Q-values to proxy for agency costs rather than leverage.


Overall a definite must read!!! Highly recommended!

Cite: Barnea, Amir and Rubin, Amir, "Corporate Social Responsibility as a Conflict Between Shareholders" (March 10, 2006). Available at SSRN: http://ssrn.com/abstract=686606


Disclaimer: Because of my ties to both a private University as well as the work I do with BonaServes I am at least partially dependent on donations, and hence not a totally disinterested party.

How to Lose $3 Million in Six Years - Yahoo! Buzz

The Buzz Log - How to Lose $3 Million in Six Years - Yahoo! Buzz:

"Callie Rogers was just 16 when she won a whopping $3 million in the lottery. Six years later, she reports that she blew untold sums on drugs, partying, exotic cars, and breast implants. A staggering $730,000 went to designer clothes alone, Ms. Rogers explains in an article from AOL. Says Rogers: 'I honestly wish I'd never won the lottery money — and knowing what I know now I should have just given it all back to them.' She's currently left with around $32,000.

In these trying economic times, Ms. Rogers will likely find little sympathy. Still, it's worth noting that she's hardly the first big winner who wished she'd never bought a ticket."

Not exactly what Jensen was talking about when he coined free cash flow problem, but an extreme case of it.