Tuesday, May 31, 2005

The Role of the Media in the Internet IPO Bubble by Utpal Bhattacharya, Neal Galpin, Rina Ray, Xiaoyun Yu

SSRN-The Role of the Media in the Internet IPO Bubble by Utpal Bhattacharya, Neal Galpin, Rina Ray, Xiaoyun Yu

Bhattacharya, Galpin (Yes, a SBU GRAD), Ray, and Yu provide an intriguing look at the financial media. As the title suggests, the paper is centered on coverage of IPOs in and out of the Internet Bubble period, but in getting to that topic, the paper brings up many roles the media play.

For instance: not only does the media lower information costs (Merton 1987 as well as others point this out), they also provide a 'positive feedback loop' and shape public thought (Schiller 2000), and even buy favor of corporations (Dyck and Zingales 2003)
[I would also add the possibility of getting increased ad revenue--Reuter and Zitzewitz 2004)].

The authors find that during the internet bubble, there was more coverage of internet IPOs and this coverage was more favorable, then for non internet IPOs. However, it appears that investors discount this coverage and do not let it significantly impact pricing.

As an aside, can you imagine reading 171,488 news items? WOW! Even with co-authors, that is a ton of reading!!!

Some highlights:

""Was the media coverage different for internet IPOs? We read all news items that came out between 1996 through 2000 on 458 internet IPOs and a matching sample of 458 non-internet IPOs--– a total of 171,488 news items--– and classify each news item as good news, neutral news or bad news. We find, not surprisingly, that the media coverage was more intense for internet IPOs. All types of news--– good, bad, or neutral-- were more for internet IPOs than for non-internet IPOs in both the bubble period and in the post-bubble period. Second, we document that the net news (good news minus bad news) was more positive for internet IPOs in the bubble period, and more negative for internet IPOs in the post-bubble period. Third, we document that net news increased after a positive stock return, and decreased after a negative stock return for internet firms. This provides some evidence in favor of Shiller's (2000) positive feedback hypothesis."

A bit later:

"We find, not surprisingly, that good news increases risk-adjusted returns the next period, and bad news decreases risk-adjusted returns the next period, and so net news (good news minus bad news) increases risk-adjusted returns the next period. We find, surprisingly, that the effect of net news on next period's risk-adjusted return was lower for internet IPOs, especially during the bubble period....We, therefore, make the following conclusion: though the media hyped up the good news about internet IPOs in the bubble period and hyped up the bad news about internet IPOs in the post-bubble period, the market somewhat discounted the media hype, especially during the bubble period

Interesting paper! Definitely recommended!

Bhattacharya, Utpal, Galpin, Neal E., Ray, Rina and Yu, Xiaoyun, "The Role of the Media in the Internet IPO Bubble" (October 2004). http://ssrn.com/abstract=606264

Goldman loses in price stabilzation game

A great look at price stabilization from the NY Times. The case deals with Goldman Sachs' (and syndicate's) attempt to keep Lazard's stock price high.
"Last week, Goldman said in a filing that it was left with $15 million in losses after underwriting Lazard's initial public offering and trying in vain to prop up the stock as it began falling in the first days of trading"
Also later on in the article:
"According to the filing, Goldman had already accumulated 3.8 million shares, worth about $94 million, by the time stock dropped to $24.90. Goldman kept buying, at one point owning as much as 10 percent of Lazard, but it could not prevent the dam from bursting. Unwilling to take on even more risk, Goldman could not continue buying shares to stabilize the stock. But Goldman may not care so much about its trading losses. It split $42.7 million with six other firms for underwriting Lazard's offering.

Goldman proudly defends its failed buying spree by saying that it was going to bat for Lazard, but that is only half the story. Goldman was also buying to protect itself. Investors who had held on to their shares expecting them to go up - as Goldman had led them to believe they would - were livid."

Floor traders, hamburgers, and bowling balls

Newsweek has an interesting (albeit short) piece on what will happen to Wall Street (residential properties?!?!) as well as specialists after the NYSE merges with archipelago.

Just a Street? - Newsweek Business - MSNBC.com:

My favorite part:

Thain (the CEO of the NYSE) to a group NYSE floor traders:
"'You can walk out the door and get a job at McDonald's,'' noting those who add value to the new NYSE will survive. Wall Street types are fond of gallows humor, so a floor broker spent $200 at McDonald's and passed out hamburgers at lunch as traders talked about Thain's remarks and discussed their future. (Thain, through a spokesman, did not deny the account.)"


Later in the same article:

"In a sense, it's slipped already, as many of the nation's top brokerage firms have moved operations from the financial district to midtown and New Jersey. Morgan Stanley, which employed 1,300 brokers in the World Trade Center, relocated most of them to Westchester. Goldman Sachs, which has more space in lower Manhattan than any other employer and had been planning a new headquarters near Ground Zero, recently said it would look for space elsewhere. Jeffrey Liddle, a prominent employment attorney, has noticed the shift as many clients have left the city. "It's only a matter of time before Wall Street becomes an idea rather than a location,'' "

Which fits our in class "bowling alley" metaphor pretty well!

Saturday, May 28, 2005

Want to go for a bike ride? Or donate to a good cause?

I have registered to ride in the MS 150 series. It is a two day 150 mile (actually 169 mile in this case, but who is counting ;) ) bicycle ride to raise money for the MS society.

It is a good cause so if you would like to learn more about the ride (or a ride near you--it is a national series that I HIGHLY recommend!!!---or if you want to donate to them, why not do it through this link. :)

thanks in advance!!


Friday, May 27, 2005

FRB: Speech, Ferguson--Asset prices and monetary liquidity--May 27, 2005

With real estate prices (and possible bubbles) being on everyone's mind, Fed Governor Roger Ferguson took an opportunity to speak on the link between liquidity and asset prices.

Some highlights:

FRB: Speech, Ferguson--Asset prices and monetary liquidity--May 27, 2005: "...asset prices, especially the prices of equities and residential real estate....Because these assets are the most widely held by the general public...can significantly affect the macroeconomy. Rising asset prices support household consumption, whereas falling asset prices damp consumption....policymakers might also take special interest in asset price movements because it has been alleged that badly designed or poorly implemented policy (even if well intended) sometimes has helped feed unsustainable movements in asset prices. Accordingly, I would like to highlight some aspects of the link between monetary conditions and asset prices and point to areas"

"Overly rapid monetary expansion, or excessive liquidity, has been named as a leading suspect in some episodes of unsustainable movements in asset prices. Liquidity is not a precise concept, however. Liquidity could be measured narrowly as central bank money, for example, or more broadly to reflect the multiplier effects of the financial system; sometimes it is measured instead by the level of policy interest rates. All these definitions and others have been in play in the economics profession's analysis of the link between monetary conditions and asset prices. What is meant by "excessive" is even less well defined."

* "not all situations in which asset prices are rising rapidly under seemingly easy monetary conditions are worrisome. Some are quite benign and even signal a healthy economy. Accordingly, for policymakers who have to confront these situations in real time, a fundamental challenge is identification."

On the feared Real Estate Bubble:
*" For housing, rent-to-price ratios and income-to-price ratios are commonly used measures to assess valuation. Over the past several years, both measures have decreased sharply in many countries, and they currently are well outside historical ranges in some countries. In 2004, U.S. home prices increased 11.2 percent, their fastest pace since 1979, and right now, housing prices in many markets in the United States are relatively high when judged by conventional valuation measures To know if housing is fairly valued requires assessing whether today's valuations are consistent with unobservable future rents, interest rates, and returns--concepts for which we have only rough proxies. However, in some markets the most prudent judgment is that the growth of house prices will slow from the rapid pace experienced most recently."

On money supply and asset prices
*"We do find a positive correlation between growth rates of real house prices and M3, but the correlation does not seem to hold for real asset prices more generally--including, in particular, equities."

On the impact of globalization:
*" Among other complications is the possibility that financial globalization may be changing the links between liquidity and asset prices. Movements in asset prices across countries now appear to be more synchronized. This synchronization could arise in a number of ways. National business cycles and policy responses may be moving more in tandem just because national economies have become more closely integrated through trade and investment, producing in turn a greater synchronization in asset markets."

Nothing particularly new, but a nice review none-the-less!

Great advice from Free Money Finance

I am excited about this-- A new finance web site by a football fan and a serious cyclist. It is a total given that I am going to link to it and mention it. What makes this even better is that the site is really good!

It is Free Money Finance.
Free Money Finance

It is not an academic finance site, but it is excellent for those of you looking for solid information about your personal finances.

The advice is dead-on! I especially suggest you all read the Best Financial Advice series.

A quick taste:

From Lesson 2:
"“Spend less than you earn. Successful financial planning really stems from that simple statement. If you retain a portion of your current income, youĂ‚'ll soon ask yourself a question: what should you do with that money? And that question is the beginning of wealth creation."

Great stuff!!! In fact I am going to cross post this on the FinanceClass blog as well.

Wednesday, May 25, 2005

A new spin on spin-offs

Chemmanur and Nandy provide an interesting look at Spin-offs. I will post more about it later..

for now a link and a quote:

"We show that the improvement in the average productivity of plants following spin-offs is driven primarily by improvements in the productivity of plants continuing with the parent firm, and not from productivity improvements in plants belonging to the spun-off entity.

However, contrary to the speculation in the existing literature, we document that plants that are spun-off do not perform worse than those belonging to the parent prior to the spin-off: in fact, plants in the spun-off entity perform better than the parent plants prior to the spin-off."

Monday, May 23, 2005

How to use VAR, ETL in Excel

Estimating Risk Measures

I wish I could retroactively require an article to be read! If I could, this would be it for my Portfolio class (Fin422).

Writing in Financial Engineering News, Kevin Dowd explains how to use Excel to calculate VAR and other risk measures. This will be VERY HELPFUL in class!!!

For instance: "To estimate the daily VaR at, say, the 99 percent confidence level, we can use Excel’s Large command, which gives the kth largest value in an array. Thus, if our data are an array called “losses,” we can take the VaR to be the eleventh largest loss out of 1,000. (We choose the eleventh largest loss as our VaR because the confidence level implies that one percent of losses – 10 losses – should exceed the VaR.) The estimated VaR is given by the Excel command “=Large(losses,11)”."

good stuff! Read it!!!

Presidential Address

If you have 40 minutes and want to learn a great deal about finance, listen (and/or watch) Rene Stulz's presidential address. He gave this at the 2005 AFA meetings in Philadelphia.

The basic theme of his speech is globalization. He points out that the world is not yet flat and the "impact of financial globabilization has been limited." Why? "...because of the “twin agency problems” that arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors. When these twin agency problems are significant, diffuse ownership is inefficient and corporate insiders must co-invest with other investors, retaining substantial equity. The resulting ownership concentration limits economic growth, financial development, and the ability of a country to take advantage of financial globalization."

VERY interesting!

Rene Stulz' Presidential Address

As an aside, I learned his office may be as organized as mine!!! :)

SSRN-Executive Stock Options: Early Exercise Provisions and Risk-taking Incentives by Neil Brisley

SSRN-Executive Stock Options: Early Exercise Provisions and Risk-taking Incentives by Neil Brisley: "...proposed 'progressive performance vesting' can allow the firm more efficiently to rebalance risk-taking incentives for the manager."

Pretty cool idea...short version: if stock price goes up significantly (you can index it if you want), then options vest earlier in order to lessen the increased managerial risk aversion problem that can be caused by managers' wealth being in the form of deep in the money options. Of course it might exasperate managerial incentive to withhold bad news but still I like the idea!

Success on several fronts. The paper is not only good, it is available from the Western Financial Association's meeting site.

A brief taste:
"Issued at-the-money, ESOs can provide incentives for managers to take risks. Yet if traditional calendar vesting options move deep in-the-money, perhaps years prior to vesting, they lose their convexity in payoffs andmay offer counter-productive incentives causing risk-averse managers to reject profitable risky projects. We address this problem and propose an alternative vesting schedule. We show that by making the proportion of options that vest a gradually increasing function of the stock price achieved, the firm can ensure that appropriate numbers of options are retained when still providing risk-taking incentives, but exercised once they have lost their convexity, thereby allowing the firm more efficiently to rebalance risk-takingincentives for the manager."
Good stuff!!

Friday, May 20, 2005

Improved Forecasting of Mutual Fund Alphas and Betas by Matthew Spiegel, Harry Mamaysky, Hong Zhang

Maybe mutual funds do beat the market more than previously reported?

SSRN-Improved Forecasting of Mutual Fund Alphas and Betas by Matthew Spiegel, Harry Mamaysky, Hong Zhang

Spiegel, Mamaysky, and Zhang look at measurement errors in measuring mutual fund performance and find that past researchers have not always gotten it right. In fact, when correct betas are used, it seems that find managers do better than we had thought.

A few quick quotes:

"...(betas) are poorly estimated. This in turn results in a systematic bias in the estimated alphas. Sorting on the estimated alphas populates the top and bottom deciles not with the best and worst funds, but with those having the greatest estimation error"

"Since mutual funds often, but not always, employ dynamic trading strategies their betas move over time in a ways that differ from fund to fund. Since no one statistical model is likely to fit every fund, the result is a great deal of misspecification error. This paper shows that the combined use of an OLS and Kalman filter model increases the number of funds with predictable out of sample alphas by about 60%"

"Overall, this paper’s findings offers support for at least part of their thesis;
managerial skill exists but its benefit to mutual fund investors is short lived."
Defnitely an I^3 designation! (Insightful, Interesting, and Important)


Spiegel, Matthew I., Mamaysky, Harry and Zhang, Hong , "Improved Forecasting of Mutual Fund Alphas and Betas" (January 4, 2005). Yale ICF Working Paper No. 04-23. http://ssrn.com/abstract=567284

Who Gambles in the Stock Market? by Alok Kumar

Option theory meet portfolio selection. It fits the theory perfectly, even though I am less sure of some of the non economic aspects (for instance, why would Catholics be more likely to take chances), but it sure is an interesting paper that does fit with theory.

Short version: the poor take bigger chances. (gee, Option theory would predict that perfectly!)

SSRN-Who Gambles in the Stock Market? by Alok Kumar

If a desire to escape poverty induces gambling, socio-economic factors which promote lottery purchases are also likely to induce investors to adopt sub-optimal stock investment strategies. Specifically, investors with a large differential between their existing economic status and their aspiration levels would tilt their portfolios toward riskier lottery-type stocks. However, these investors may hold riskier stocks not necessarily because they are risk-seeking but rather because they want to have a positive probability, albeit very small, of reaching their aspiration levels."
A friend of mine calls lotteries taxes on the stupid (overlooking the physic pleasure of playing). Kumar addresses this point not by using intelligence, but rather education:
"investor characteristics may influence probability distortions, where relatively sophisticated investors are less likely to distort the small probabilities. For instance, educated individuals are more likely to understand the odds of winning while relatively less educated individuals may significantly distort the winning odds. If education is correlated with income and wealth, rich individuals are less likely to participate in lotteries."
One final quote:
"I assume that investors are more likely to perceive lower-priced stocks with very small but positive potential for high returns as lotteries. I further assume that stocks with higher variance (or higher idiosyncratic volatility or extreme returns) and positively skewed returns are likely to be perceived as high payoff potential stocks."

Kumar, Alok, "Who Gambles in the Stock Market?" (May 2005). http://ssrn.com/abstract=686022

Wednesday, May 18, 2005

China allows some FOREX trading, but not yet the Yuan

A day after the US threatened financial penalties if the yuan is not soon allowed to float, China took what some see (although China denies), as a small step in that direction. You can now trade otehr currencies in China--but not yetthe Yuan.

Latest News and Financial Information | Reuters.com:

"China, whose currency has been pegged near 8.28 per dollar since the 1997-98 Asian financial crisis, has faced pressure from the United States and other countries to let the yuan appreciate as they say it is unfairly cheap at current levels, giving Chinese exporters an advantage in world markets.

Beijing has vowed to free up the yuan according to its own timetable and has said reform of its banking system -- sagging under more than $200 billion in bad loans...is a key prerequisite."

"The China Foreign Exchange Trade System's (CFETS) new platform hosts trading in the U.S. dollar against the euro , yen , Hong Kong dollar , British pound , Swiss franc , Australian dollar and Canadian dollar , plus the euro versus the yen ."

Tuesday, May 17, 2005

A quick look at three interesting stories

Hedge Funds, Sarbanes-Oxley, and Soccer

ADhD still too bad for a longer story ;) but three quick articles of note before I try and clean my office...

1. The Washington Post has an interesting look at Hedge Funds. Not only how they have grown so much in size and number, but also how they are playing a major role in proxy votes. With the increased importance comes worries that these largely unregulated funds could add to market instability.

One quote: ""There are so many funds out there now, and so much money, that they have to take on an activist role or they are not going to continue to produce," said Joseph Aaron of Wood, Hat & Silver LLC, a San Francisco firm that invests in hedge funds for individuals and institutions."

2. The NY Times reports on Sarbanes-Oxley in practice. Citing numbers from various sources, Floyd Norris writes: "About 8 percent of companies affected have reported material weaknesses in controls, an indication that the law addressed a real problem...."

"But many companies have complained that the costs were too high and that auditors forced them to go through expensive procedures that accomplished very little. One survey of 217 companies, by Financial Executives International, found the average cost of compliance to be $4.4 million. The companies had annual revenue averaging $5 billion""

In response to these costs (and reports of reduced information flow), the SEC is allowing a slightly more lenient interpretations of the rule but stresses it is not taking the teeth out of it.

3. Takeovers can cause many problems and sometimes even lost business, but The London Times' look at the aftermath of the takeover of Manchester United by Tampa Bay Buc's owner Malcolm Galzer may redefine how severe it can get: because of fears of violence (imagine that at a British Soccer game), the team may not be able to have crowds at home games!

"...many ordinary fans, too, are angry about the takeover, fearing higher ticket prices and a wholesale sell-out to corporate sponsors. Last week they were burning season-ticket renewal forms and threatening to boycott the club and its merchandise. The question now is how far they will go to express their rage."

So much for a takeover being over when the papers are signed!

Time to get to work...

Call for papers--New Orleans!

From John Gill:

"The American Academy of Accounting and Finance (
www.aaafonline.org) will hold its 12th annual meeting in New Orleans, Louisiana, on December 8, 9 and 10, 2005 (Thursday, Friday, and Saturday). You're invited to submit a proposal, abstract, or manuscript for presentation."

The submission deadline is September 30, 2005.

"The annual meeting will be held at the elegant Royal Sonesta Hotel on Bourbon Street in the heart of the historic French Quarter."

As a note, quite a few Bonaventure professors go to this conference regularly. I have been once, and while I do not think anyone will confuse it with the AFAs or FMAs, it is in New Orleans in December and that may be enough to get me to submit. But seriously, it is a good motivator (submit a proposal and you suddenly have a deadline).

I will return shortly

With finals etc I just needed a short break. I hope to get back at it within a day or two.

Thanks to those who have asked. I am fine :)


who may come back with a newsletter this week

Friday, May 13, 2005

The FASB takes on block valuation

Short version: if you own a large block of shares, the selling of those shares may change the price of the shares. So how do you value them for accounting purposes?

CFO.com reports that FASB is considering allowing more judgement when it comes to the valuation of these blocks. Currently this is only for brokers and dealers, but the same logic can be applied to nearly all large block holders.

Securities Blocks and Fair Value - - CFO.com

""This has been a contentious issue for the board for a long time," says board member Michael Crooch. "If you had a large, 10-million-share block of General Electric, you may have to sell it at a discount [relative to price-times-quantity], or you may actually have to pay a premium for a large block like that if there was heavy demand.""

Saturday, May 07, 2005

NASD Research Grant Funding

From Christine at the NASD:

NASD Investor Education Foundation
Research Grant Funding Available
Improving Disclosure to Investors
Deadline August 26, 2005

The NASD Investor Education Foundation invites eligible organizations to submit competitive grant proposals for research projects that comprehensively examine what constitutes effective and meaningful disclosure to investors.
· Successful projects must offer conclusions and recommendations for making disclosure more effective for the benefit and protection of investors.
· Project outcomes should include a research paper that merits publication in professional journals and presentations to securities regulation professionals.

For complete information and proposal submission instructions, please visit the NASD Investor Education Foundation Web site at http://www.nasdfoundation.org/.

The NASD Investor Education Foundation, established in 2003 by NASD, supports educational programs and research with the goal of providing investors with high-quality, easily accessible information and tools to better understand investing and the markets.

Friday, May 06, 2005

The Effect of The Sarbanes-Oxley Act of 2002 on Market Liquidity by Pankaj Jain, Jang-Chul Kim, Zabihollah Rezaee

Continuing the regulation theme of the previous post, Jain, Kim, and Rezaee give evidence that market liquidity improved following the passage of the Sarbanes-Oxlet Act in 2002.

SSRN-The Effect of The Sarbanes-Oxley Act of 2002 on Market Liquidity by Pankaj Jain, Jang-Chul Kim, Zabihollah Rezaee: "We detect wider spreads, lower depths, and higher adverse selection component of spreads in the period surrounding the reported financial scandals, indicating that liquidity measures were deteriorated as a result of those scandals. We find liquidity measures were improved following the passage of the Act. Our cross sectional analysis indicates that these changes in liquidity were pervasive and affected all types of firms, particularly large firms."

Interestingly, and somewhat different than the Aldridge paper, the authors find that regulation did have a positive impact on market efficiency (of course this is more than the normal SEC regulation that composed Aldridge's sample):

* "after the Act spreads declined, depths increased, and the adverse selection component of spreads decreased. These findings suggest that the Act and SEC related implementation rules were successful in improving market liquidity, creating a climate of investor confidence in financial information, and restoring normalcy in the financial markets particularly in the long-term."

Which fits nicely with why the law was passed :) Don;t look now, but maybe we got something right!

Suggested citation:
Jain, Pankaj, Kim, Jang-Chul and Rezaee, Zabihollah, "The Effect of The Sarbanes-Oxley Act of 2002 on Market Liquidity" (March 2004). 14th Annual Conference on Financial Economics and Accounting (FEA). http://ssrn.com/abstract=488142

SSRN-Do Financial Companies Benefit from SEC Regulation? by Irene Aldridge

SSRN-Do Financial Companies Benefit from SEC Regulation? by Irene Aldridge

Aldridge uses event study methodology to measure the impact of SEC regulations. She finds that while the volatility of Financial firms drops following new regulations, returns do not appear to change. This finding does not fit with the SEC's stated purpose nor the "existing regulation theories...Stigler (1971), Peltzman (1976), and Becker (1983) theories)".

First off, I really like event studies that focus on volatility changes (In fact I have co-authored two: one with Horan and Peterson that finds implied volatility drops following OPEC meetings and one with Godbey that finds the "implied volatility of Andersen audited firms increased following events detrimental to Andersen's reputation." Thus when I saw Aldridge's new paper I was almost forced to read it ;) It turned out to be an interesting and thought-provoking piece.

The empirical finding of no abnormal return is important. However, I do have some reservations about the interpretation. For instance, Aldridge writes that the Becker view is that financial firms do not want to keep the status quo and reductions of volatility are bad for these firms:
"The existing theories of regulation, to my knowledge, do not explicitly consider volatility changes in response to regulation. Becker (1983, p. 382), however, does discuss “tyranny of the status quo,” in which “the political sector would protect the status quo against many shocks and changes in the private sector.” Following this idea, and noting Schwert (1980) who observes that technological shocks, for one, increase volatility, it is fair to conjecture that governmental intervention that lowers volatility is thus bad for the companies subject to the rules."
However, I would be more prone to interpret this maintenance of the status quo as good news. As Aldridge writes in the conclusion:
"But, a caveat exists: in finance literature, lower volatility is not necessarily a bad
thing. In fact, the effect of decrease of volatility on companies is two-fold: 1) positive,
since the reduction in volatility reduces costs of financial distress, for example, and with those, the cost of equity financing for the firms; and 2) negative, since lower volatility entails lower returns to shareholders. While no definitive answer has been presented in the literature, perhaps Becker (1983) “status quo” is not a “tyranny” after all."
Note, that while this is in her conclusion, this is not her conclusion. But maybe it should be :)

Interesting article!

Suggested Citation:
Aldridge, Irene E., "Do Financial Companies Benefit from SEC Regulation?" (April 23, 2005). http://ssrn.com/abstract=705461

Thursday, May 05, 2005

FRB: Speech, Greenspan--Risk Transfer and Financial Stability--May 5, 2005

Greenspan spoke today on derivatives. Really interesting, but alas I am making out finals and have no time to comment.

So in his words, the SUPER short version:
FRB: Speech, Greenspan--Risk Transfer and Financial Stability--May 5, 2005: "Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth. As a consequence of the increasing demand for these products, the size of the global OTC derivatives markets, according to the Bank for International Settlements (BIS), reached a notional principal value of $220 trillion in June 2004. Indeed, the growth rate of the OTC markets was more rapid in 2001-04 than over the previous three years. At the same time, the growth rate of exchange-traded derivatives exceeded the growth rate of OTC derivatives over 2001-04. Throughout the 1990s, the Chicago futures and options exchanges debated whether the growth of the OTC markets was good or bad for their markets. The data seem to have resolved that debate"

Wednesday, May 04, 2005

Economics in the real world by Steven Levitt

This is an audio presentation by Steve Levitt, but it is really interesting. Levitt talks on market efficiency (in horse racing and stocks), parenting, dealing drugs for minimum wage, and even Rudoplh the Red Nose Reindeer! (Honest!!) A fun listen!

NPR : Talking 'Freakonomics' with Steven Levitt

Transfer Pricing

A cool article on transfer pricing--no it is not an oxymoron!

Reichelstein, Baldenius, and Melumad look at transfer prices and remind us that transfer pricing, the price that firms charge for internal "purchases", is a balancing act between tax reduction strategies, internal controls, and incentives.

“What most people think about is transfer pricing as a tax optimization issue,” Reichelstein says. “Yet, transfer prices are management tools. They have an important function to facilitate decision-making, to tell certain regional or country managers what the value or price of some intermediate product is and use that information to maximize the profit of the company as a whole. That is the economic function of transfer pricing.”"

"The separate worlds of tax folk and management planning types “even splits the accountants,” he notes, and creates separate industries. “The tax accountants look on pricing as entirely a compliance issue,” he says. Meanwhile, management accounting consultants are preoccupied with transfer prices for both internal allocations and public reporting purposes."
Very interesting! However, I am a bit less convinced that a weighted average solution is optimal, but hey, that is rather insignificant in the big picture.

Thanks to MBA Depot for pointing this one out to me!

Forbes.com looks at Morgan Stanley

The Street Purcell Is Paving - Forbes.com

Given how much has been written on the troubles at Morgan Stanley, it is interesting to see a new angle. Forbes writes that the firm is suffering as many of the firm's stars are leaving and looking for work elsewhere.

Two key points to to take from it

1. Intangible assets can often walk away, so be careful (this has repercussions not only to management scandals, but also capital structure, risk taking, etc. To keep their talent, Morgan will have to pay more.

2. Financial firms often do disappear as a result of managerical problems. (see EF Hutton, Drexel, Kidder Peabody, and others)

Quick highlights:

* "Generally when managements come under pressure, the human capital exodus is the precursor of a preordained demise," said Michael Holland, once a Morgan banker and now head of Holland & Co. "And it's almost all attributable to the actions or inactions of top management. Hubris is normally a part of it. I can't think of any case when it wasn't hubris." "

*"Few Wall Street powerhouses, once they began losing their top talent, have ever managed to regain their former independent glory."

*"Not only have individual bankers fled, but headhunters have told Forbes.com that they're beginning to target entire departments for their next big raids"

Shareholder group opposes Icahn

We just covered corporate governance and the difficulty of those opposed to management being elected to the board of directors in class. So Carl Ichan's attempt to win a seat on the Blockbuster Board is perfectly timed to encourage maximum learning ;)
Shareholder group opposes Icahn - Entertainment and Leisure - Retail - Services/Consulting - Media - Company Announcements - Newsmakers: "Considered a key recommendation for voting shareholders, ISS said the billionaire Icahn lacks expertise in media that the Blockbuster board needs. Moreover, the firm said, a yes vote for him and his co-nominees might hamper the re-election of Chief Executive John Antioco to the board. ISS says it wants Antioco to remain.

Icahn last week nominated himself and two entertainment industry veterans: Edward Bleier, a former Warner Bros. executive, and Strauss Zelnick, a former head of BMG Entertainment. ISS accepted Icahn's recommendation on Bleier and Zelnick, but said the billionaire should not be appointed.

ISS said the video giant's board 'could benefit from the extensive media experience of [Bleier and Zelnick], in light of the significant market challenges the company currently faces.'"

Monday, May 02, 2005

Increased Transparency in security issuance!

HURRAY!!! Finally it seems that there will be increased transparency in security issue process. This should reduce information asymmetries and result in less negative market reactions to SEOs and less IPO underpricing.

From Investment Dealers' Digest:

*"The Wall Street equity underwriting process, which sets prices and allocations when companies go to market to raise capital, may seem arcane and obscure to outsiders. But thanks to enhanced technological tools, it's now possible to go behind the curtain-demystifying the process...."

*"Issuers are clearly driving the trend. "One of the ways you ensure that there is an even playing field out there, and that the actual price discovery is fair, is to give issuers transparency," says John Heskett, vp of finance at the newly public Huntsman Corp. "And that's what we asked underwriters to do for us."

*"The lure of a view into a book build is not something all Wall Street firms are crowing over. In fact, it is a key example in the fight over deploying enhanced technology. On one hand, an issuer like Huntsman was aware of all the circumstances during the road show, not just those an underwriter might discuss while tossing irrelevant items aside. Conversely, being up-to-date may lead issuers to question why they're paying underwriters such a hefty fee."

Read the entire article here. It is by

Two Plus Two Equals What?

Both the NY Times and the Washington Post have interesting articles on the NYSE-Archipelago and Nasdaq-Instinet Deals.

Two Plus Two Equals What?:


* "Former SEC chairman Arthur Levitt said he thought the NYSE's new structure would improve the independence of its regulatory arm, not weaken it, by fully removing it from any influence by brokerage and trading firms.

'By breaking up the clublike atmosphere of the member organization and becoming a more democratic, publicly owned company, you take a great step toward more disclosure and greater investor protection,' he said."

*"What will it mean if the NYSE floor, the symbolic home of American capitalism, source of millions of photos depicting traders in the throes of euphoria and the depths of despair, goes away? Won't something be lost forever?

"The NYSE has always been baseball, motherhood and apple pie all rolled into one," said Bradley of American Century Investment, an opponent of human traders working on a floor to handle stock transactions. "But it's not really the NYSE that is the envy of the world," he said. "It's the capital-raising process in this country that is the envy of the world."

And there are plenty of people who believe there will continue to be a role for human traders on the floor for years to come, especially in volatile and thinly traded stocks. "We will see a lot more electronic trading and automation in stocks where there is no need for an intermediary," said Sauter of Vanguard. "But where I do see the need for the traditional floor model is for less liquid stocks with wider [fluctuations in price] where you want someone who will take risks and make a market in those stocks. The combination of the two models is really exactly what you want.""

The NY Times questions Goldman Sach's role in the NYSE deal:
"Goldman, you'll recall, is an adviser to both companies, an investor in Archipelago and a Big Board specialist - conflicts so blatant that they are almost laughable.

Of course, it is easy to blame Goldman Sachs for not recusing itself from at least one side of the deal, something it should have done if for no other reason than to avoid the appearance of a conflict "

'The World Is Flat': The Wealth of Yet More Nations

The New York Times > Books > Sunday Book Review > 'The World Is Flat': The Wealth of Yet More Nations

I got to see much of Friedman's 3 hour interview on C-Span. It was very interesting! I Highly recommend it!

A few of the highlights from Today's NY Times Book Review by Fareed Zakaria:

*"The metaphor of a flat world, used by Friedman to describe the next phase of globalization, is ingenious. It came to him after hearing an Indian software executive explain how the world's economic playing field was being leveled. For a variety of reasons, what economists call ''barriers to entry'' are being destroyed; today an individual or company anywhere can collaborate or compete globally. Bill Gates explains the meaning of this transformation best. Thirty years ago, he tells Friedman, if you had to choose between being born a genius in Mumbai or Shanghai and an average person in Poughkeepsie, you would have chosen Poughkeepsie because your chances of living a prosperous and fulfilled life were much greater there. ''Now,'' Gates says, ''I would rather be a genius born in China than an average guy born in Poughkeepsie.''"

*"What created the flat world? Friedman stresses technological forces. Paradoxically, the dot-com bubble played a crucial role. Telecommunications companies like Global Crossing had hundreds of millions of dollars of cash -- given to them by gullible investors -- and they used it to pursue incredibly ambitious plans to ''wire the world,'' laying fiber-optic cable across the ocean floors, connecting Bangalore, Bangkok and Beijing to the advanced industrial countries. This excess supply of connectivity meant that the costs of phone calls, Internet connections and data transmission declined dramatically -- so dramatically that many of the companies that laid these cables went bankrupt. But the deed was done, the world was wired. Today it costs about as much to connect to Guangdong as it does New Jersey."

*"People in advanced countries have to find ways to move up the value chain, to have special skills that create superior products for which they can charge extra."

*"points to the dramatic erosion of America's science and technology base, which has been masked in recent decades by another aspect of globalization. America now imports foreigners to do the scientific work that its citizens no longer want to do or even know how to do. Nearly one in five scientists and engineers in the United States is an immigrant, and 51 percent of doctorates in engineering go to foreigners. America's soaring health care costs are increasingly a burden in a global race, particularly since American industry is especially disadvantaged on this issue. An American carmaker pays about $6,000 per worker for health care."

READ IT! Or better yet Risten to it :)

A few other sources of info on this book:

Sunday, May 01, 2005

Susan Schmidt Bies on corporate and personal finance

Fed Governor Susan Schmidt Bies gave an interesting speech on trends in both corporate and personal finance. She also called for increased financial education.

A few highlights:

*"The improvement in corporate balance sheets in the past few years has been substantial. Most noteworthy are the gains achieved in balance sheet liquidity. Firms have taken advantage of low long-term interest rates to pay down short-term debt with longer-maturity debt. At the same time, firms have built up their cash positions to extraordinary levels. At the end of last year, the ratio of cash and equivalents to short-term debt at nonfinancial corporations stood at about twice its average level since the 1950s."

To which I would ask, I wonder if Jensen's Free Cash flow problem has slackened (pun intended) with increased monitoring by more active boards. Interesting research question.

* "In the household sector, some analysts have expressed concern about the rapid growth in household debt in recent years and the decline in the household saving rate. They fear that households have become overextended and will need to rein in their spending to keep their debt burdens under control. My view is considerably more sanguine. Although pockets of financial stress exist among households, the sector as a whole appears to be in good shape."

As evidence she points out that debt to net worth is in better shape than debt to income due to rising equity and real estate markets.

* "

College graduates preparing to enter the labor force will soon assume a new level of responsibility for managing their finances. Personal financial management includes the strategic use of both credit and savings to enhance asset accumulation and financial well being. Just as the choices that students have made regarding their education play a vital role in determining career opportunities, the decisions they make and behaviors they establish regarding financial management in the coming years will also impact future opportunities and their ability to capitalize on them.

Compared to a generation ago, the financial marketplace of today is significantly more complex. There is now an extensive range of consumer financial products and services, and providers of these goods and services."

hence the need for FinanceProfessor ;)

Definitely recommended reading!!!

As an aside, this speech took place at Canisus college! Shame on you Katie for not letting me know! ;)