Sunday, January 29, 2006

SEC to Supervise Hedge Fund Industry - New York Times

Can you tell I read the NY Times today?

SEC to Supervise Hedge Fund Industry - New York Times: "Today some 7,000 hedge funds in the United States command an estimated $750 billion to $1 trillion in assets and leave a wide footprint in the financial markets, as they are believed to account for as much as 20 percent of all U.S. stock trading. They're about to be brought under new supervision by federal regulators concerned about their explosive growth and virtually unbridled operations.

But some big hedge funds are using a loophole to get around the new oversight, and the new regulation itself is being challenged in the courts.

Under a rule that bitterly divided the five-member Securities and Exchange Commission when it was adopted in October 2004, a new regime begins on Wednesday for these high-risk, largely unregulated and secretive investment pools"

"Under the SEC rule, most hedge fund managers now must register with the agency. That opens the funds' books to SEC examiners and makes them subject to an array of regulations including accounting and disclosure requirements. The examiners will be able to conduct inspection ''sweeps'' of hedge funds.

Thousands of hedge fund managers have already voluntarily registered. "

(If you are in my Portfolio class, this one is required! ;) )

10 Enron Players: Where They Landed After the Fall - New York Times

With the Key Lay trial beginning this week, the NY Times has a very cool article on where the other major players are today:

10 Enron Players: Where They Landed After the Fall - New York Times: "Some have moved on to other jobs and new chapters in their lives, while others continue to spend their days mired in their legal fights.

Here are 10 of the major figures and where they are now."

Multiple roles: IPO firm and Investment Banker

What a great article for a corporate or an institutions class! Not only is Weisel playing the lead in their own IPO, but also you get a chance to see a secondary offering as CALPERS is selling a portion of their stake.

Latest News and Financial Information | "While San Francisco-based Weisel is taking a risk in pricing its own IPO, it's not breaking new ground. Goldman Sachs, among others, underwrote its own offering.

'It's hardly unusual for there to be tensions between an investment bank and its client,' said Kenneth Froewiss, a professor of finance at New York University.

'The investment banker typically spends a fair amount of time courting the IPO client and telling them how wonderful they are, and then once they have the lead, of course the investment bank has to start worrying about the liability in terms of selling these shares,' Froewiss continued. 'The tone changes, the mood changes ... Things get a little tense.'"

Sunday, January 22, 2006

New blogging network for personal finance

From their press release:

"Five of the top Internet personal finance bloggers today announced they have banded together to create a first-of-its-kind personal finance blog network designed to put personal finance wisdom, best practices and commentary just a mouse click away.

The new network, with headquarters online at beginning today, will be composed of the following top-performing personal finance bloggers:
* JLP of AllThingsFinancial –
* Jim of Blueprint for Financial Prosperity –
* Flexo of Consumerism Commentary –
* Nickel of Five Cent Nickel –
* FMF of Free Money Finance –"

Friday, January 20, 2006

Pay Me Later: Inside Debt and its Role in Managerial Compensation by Rangarajan Sundaram, David Yermack

Gee, why hadn't I thought of that?! This is a cool one!

SSRN-Pay Me Later: Inside Debt and its Role in Managerial Compensation by Rangarajan Sundaram, David Yermack:
"CEOs with high debt-based incentives manage their firms conservatively to reduce default risk; and that pension plan compensation strongly influences patterns of CEO turnover and CEO cash compensation."
The authors make an inmportant contribution by pointing out the obvious: namely that CEOs get pain in ways other than cash and equity. This is a fact that has largely been overlooked by researchers (at least partially due to data availability). From the paper:
"a vast academic literature has emerged on executive compensation. A predominant focus of this literature has been equity-based compensation, paid in the form of restricted stock, stock options, and other instruments whose value is tied to future equity returns"

"Overlooked almost entirely is the widespread practice of paying top managers with debt."

CEO pay is rarely in the form of traditional market-based debt but several forms of pay (specifically pensions and long term deferred compensatation contracts) have the same characteristics as debt. In Jensen and Meckling terms this 'inside debt" is hypothesized to affect the incentives of the CEOs.

After a case study showing how deferred compenstaion and pension benefits were important in the Jack Welch/GE world, the authors show that this "inside debt" does make up a large portion of CEO pay and that this is more important as CEOs near retirement.

Using large firms (237 forms from teh Fortune 500 of 2002) the authors report the expected; debt does change behavior with managers becoming more risk averse.
(Rememeber if we assume managers are people and people respond to changes in incentives, then managers respond to incentives. So while important, the findings should not be seen as surprising.)
"As CEO pension values increase relative to their equity values, risk-taking as measured by distance-to default declines."
Good (and important) stuff! I^3!!!

Sundaram, Rangarajan K. and Yermack, David, "Pay Me Later: Inside Debt and its Role in Managerial Compensation" (May 16, 2005). NYU, Law and Economics Research Paper No. 05-08; AFA 2006 Boston Meetings Paper.

Saturday, January 14, 2006

SEC approves NASDAQ's Exchange application

Latest News and Financial Information | "The U.S. Securities and Exchange Commission on Friday approved the long-delayed application of the Nasdaq Stock Market (NDAQ.O: Quote, Profile, Research) to become a registered securities exchange.

Under consideration since 2001, the Nasdaq's application is key to its gaining full independence from regulatory organization NASD and competing on a more even footing with other markets, including the New York Stock Exchange (NYSE)."

Thursday, January 12, 2006

Don't Sweat the Inverted Yield Curve: No One Really Knows What It Means - Knowledge@Wharton

Yield curves (the graph of yield on a class of bonds to their time to matuiry) are usually upwards sloping. That is, you generally get a higher rate the longer you go out in time.

However, that is not always the case. Indeed, if you watch the living yield curve, you see that occasionally the yield curve is flat, and at other times (such as now) it is inverted with longer term rates being lower than short term rates.

Economists, and others, have a difficult time determining what this means. One common reading as the yield curve becomes inverted, it is a signal that in the future demand for money will be lower and since this happens in a recession, it suggests a possible recession ahead. Unfortunately (or fortunately as the case may be), this is a very noisy indicator.

Wharton's Knowledge looks at this issue this week. It is well worth a quick read!

Don't Sweat the Inverted Yield Curve: No One Really Knows What It Means - Knowledge@Wharton:
"The Treasury bond yield curve inverted December 27 for the first time in five years. That gave shudders to those who see the phenomenon as a harbinger of recession. And yet, the U.S. economy is strong, and surveys show most forecasters think it will stay that way. So what does the inverted yield curve really mean?

'I think it sometimes portends a recession, sometimes not,"

Wednesday, January 11, 2006

SSRN – AFA 2006 Boston Meetings

SSRN – AFA 2006 Boston Meetings
Well I missed the meetings by being in Mississippi, but that does not mean we can't go through some of the more interesting papers that were presented there.

Look for reviews over the next few weeks. :)

The Home Court Advantage in International Corporate Litigation by Utpal Bhattacharya, Neal Galpin, Bruce Haslem

The Home Court Advantage in International Corporate Litigation by Utpal Bhattacharya, Neal Galpin, Bruce Haslem: "The Home Court Advantage in International Corporate Litigation"

What is the source of "home teams" doing better? One source is possibly that in the event of a court case, domestic courts are more likely to side with firms from the home country. That is the main finding of Bhattacharya, Galpin, and Haslem.

They examine foreign firms that are involved with US firms in court cases. The authors find that the market takes this bias into account when reacting to announcements of the lawsuit.

A few quick "look-ins":
  • "The purpose of this paper is to bring methodologies from financial economics to address whether foreign firms do indeed have a disadvantage in U.S. courts or, to put it another way, whether U.S. firms have a home court advantage in their own country’s courts."
  • "We document that there is an abnormal share price drop for the defendant firm in its home market at the announcement of litigation. This drop, however, is less for the U.S. corporate defendant than it is for the foreign corporate defendant. The difference is economically and statistically significant, and it remains whether we match by year, industry, type of litigation, size or profitability."
  • "...if the case goes to trial, U.S. defendant firms are less likely to lose a U.S. federal
    lawsuit than a matched foreign firm, matched by year, industry, type of litigation, size or profitability."
  • "Some of these issues of equity may be structural (foreign firms have less skill in dealing with the U.S. justice system) or they may be bias (judges or juries are less sympathetic to foreign firms), and resolving which reason is more significant is beyond the scope of the paper."
Also worth noting: contrary to the findings of Moore (2003) the authors find that if the case goes to trial, "...the probability of a win for a U.S. firm is lower if the trial is decided by jury than if the trial is decided by a judge. The difference is statistically significant. This means that it is the judge, not the jury, who is biased against foreign firms."

Which deserves a wow!

Bhattacharya , Utpal, Galpin, Neal E. and Haslem, Bruce, "The Home Court Advantage in International Corporate Litigation" (February 2004). AFA 2006 Boston Meetings Paper

(note the last paragraph was edited since initial publication. I screwed up.)

Tuesday, January 10, 2006

Financial Rounds: Options Markets For Tickets

WHAT A GREAT POST! I will be using this one in class. No question. From the "unknown professor" at Financial Rounds.

Financial Rounds: Options Markets For Tickets: "Options Markets For Tickets

Yesterday I wrote that Tickets Are Like IPOs. Now I find out that tickets are optionable. So, like George Costanza, it seems that my two worlds are colliding. Here's an interesting application of markets (and derivatives) in a new setting.

A Chicago company, Sports Reserve, has opened up an options market for tickets to major sporting events. For a fee, you can buy an option (they call them 'Fan Forwards') to purchase a ticket to a sporting event (like the Super Bowl) for a particular team."

Read the rest!

Does location matter?

Yep, it's note making time again! I was just looking for papers on Market efficiency and the lack thereof and stumbled upon this:

Short version: Stocks that have headquarters in the same area tend to have higher correlations even though the location apparently (and this is crucial) have no impact on cash flow correlations.

In their words: "Moreover, stocks of companies that change their headquarters location experience a decrease in their comovement with stocks from the old location and an increase in their comovement with stocks from the new location. The local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents."

Interesting, but I am not TOTALLY convinced. But well worth a read!

JF version: (remember these only stay online for a while)
HQ Location matters by Pirinsky and Wang

SSRN also has a working paper version of the paper.

Saturday, January 07, 2006

Hedge Funds With Losing Records to Liquidate - New York Times

Hedge Funds With Losing Records to Liquidate - New York Times: "Hedge Funds With Losing Records to Liquidate "

A perfect example of survivorship bias in funds. Hedge funds that are unsucessful are being closed, so when people use only existing firms to measure performance, there is a tendency to overestimate actual returns since we are missing the lower tail of the distribution.

IBM is next major firm to drop defined benefit plans

Firms dropping defined benefit pension plans in favor of defined contribution plans is barely news, but I included this just because this article shows how much it expects to save which will make good class discussions. U.S.:
"International Business Machines Corp., the world's biggest computer company,
will cut its U.S. pension plans to help save as much as $3 billion in the next
four years.The changes will cost about $270 million in the fourth quarter,
Armonk, New York-based IBM said today in a statement. IBM said it will make up
for the cuts to defined benefits by boosting contributions to employee 401(k)
retirement plans beginning January 2008.IBM is among companies such as Verizon
Communications Inc. that are moving to reduce pension liabilities. IBM's pension
deficit, which was about $7.4 billion at the end of 2004, ranked fourth-highest
in the U.S. behind Ford Motor Co., Exxon Mobil Corp. and General Motors Corp."

Wisdom of Crowds on TV

Hi everyone, just got back from another volunteer trip in Mississippi. There is MUCH MUCH MUCH work to do, Many areas look as if they have not been touched. Check out the randomtopics2 blog for what the trip was like.

I also got an email from Chris Masse saying that "this coming Sunday, January 8, 2006 —sorry, I don't know at what time exactly. That's about 5 million viewers. James Surowiecki and NewsFutures's Emile Servan-Schreiber have been interviewed. "

Look for it.