Thursday, June 29, 2006

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."


*"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!

Greenbaum, Stuart I., "Corporate Governance and the Reinvention of Finance" (June 20, 2006). Available at SSRN:

Market overreaction or hedging?

First off, let me state that I am a huge fan of markets. I think they are fairly semi-strong form efficient (not perfectly so), but can get caught up a bit with fads, etc. Inactive markets are particularly prone to such mispricing since there are not enough "arbitragers" (And here I am using Thaler's view that is not necessarily a risk free arbitrage) to "fix" items that are priced incorrectly.

That said, this just has to be wrong. Tradesports has a market for the likelihood of a Category 3 or above hurricane hitting various states in the US. Ok, so Florida is most likely. I will buy that. Then Texas, Louisiana, and the Carolinas. Ok, so far so good. But then it gets a tad wacky. MS and NY have about the same likelihood.

New York? Yes, NY has been hit before and no doubt will be again. But the odds of it happening are much less than that of Mississippi. For instance, it is estimated that there is a 26% chance of NY being hit with a category 4 or greater storm in the next 50 years). But given the odds backed out of the midpoint of Tradesports bid and ask, it seems almost a 10% chance THIS year which does not fit with "expert" predictions.

So is the market wrong? It does seem like it is. So why doesn't someone fix it? Probably not worth it. Depth of the market is small and transaction costs (spreads) are pretty high. Which is exactly the type of market where theory would predict inefficiencies to exist.

But on the other hand (can you tell it is late?), it could be that the market is made largely of NY residents who are net hedgers. Thus they are "betting" on a hurricane hit so that if it does happen, the payoff will act like insurance. These hedgers would be willing to settle for a lower return. (so maybe the market is efficient afterall ;) ) But it is too late (2:50 AM) for me to think that one

Tuesday, June 27, 2006

Out of sample tests

I am a big fan of so called "out of sample" tests. When researchers find some anomaly within a data set and then others test for the presence in the same data set, we really do not learn much if they find the same thing. But when a new data set is used for the test, we have a much better understanding of the possible anomaly.

In the current JFQA there is just such an article by Richard Grossman and Stephen Shore. Using a data set that goes from 1870 to 1913 for British stocks, the authors find no small firm effect, and only a limited value effect.

In their own words:
"Unlike modern CRSP data, stocks that do not pay dividends do not outperform stocks that pay small dividends during this period. But like modern CRSP data, there is a weak relationship between dividend yield and performance for stocks that pay dividends. In sum, the size and reversal anomalies present in modern data are not present in our historical data, while there is some evidence for a value anomaly."
Which makes me wonder how many other things we think we "know" we really don't.

The current version of the paper is not listed on SSRN, but a past version of the paper is available (at least right now) here.

Around the blog world

A few quick looks at really interesting articles from various blogs:

FreeMoneyFinance comments that a good way to save money is to avoid going shopping. I could not agree more!!!
"If you want to save money, don't go to any store to just pass time. You'll most certainly spend more than you would if you hadn't gone. Instead, take a walk, go to the park or visit a free museum. You'll not only save money, but may even improve your physical fitness too. And these benefits are worth more than money!"
Financial Rounds gives some tips on dealing with identity theft. It is definitely not somehting that I would like to go through! But the tips are very good. For example:
"Others will invariably have advice for you and some judgemental comments (i.e. "this is what happens when you bank online"). Expect them, and don't let them get to you."
MoneyScience links to an article on econophysics from the Yale Economic Review.
"The philosophical approach of econophysics is certainly different from that of economics in general. While economists begin with a few fundamental assumptions and then construct a theoretical model to explain observations, econophysicists tend to start with the empirical evidence and extract patterns from the data. In doing so, econophysicists do not rely on assumptions of rationality, which have proven experimentally inconsistent in some cases, such as transitivity of preferences."
Freakonomics points out a NY Times article that perfectly sums up my thoughts on virtually every meeting I have had the pleasure of attending:
"Personally, I hate much as I admired and enjoyed many of the people in the back-to-back-to-back meetings, it was too hard to get any actual work done. I would sometimes look around, watch 20 talented...people spending an hour batting around ideas, perhaps 2% of which would come to fruition, and mourn the loss of 20 man-hours and what could have been accomplished individually during that time …"
CyberLibris argues that microfinance is nothing more than finance that tight controls:
"With microfinance, lenders are in the ideal situation: First, they can discriminate among borrowers, they simply don't lend (in many instances) to men (who run with the money to have a good drink). Women are reliable, hence they get the money. To make sure that the money is well-spent contractual provisions often involve the community in which the lending woman live. For instance, if she fails to pay, the community may be on the hook and have to repay for her or be punished by having a more difficult access to the next loan. The community plays a monitoring and a supportive role to ensure success. This is the dream situation for any banker!"
Cafe Hayek comments on the seemingly always pending minimum wage legislation:
"What is it about unskilled- and low-skilled labor that makes many people fancy that the law of demand does not apply to it? Are the greedy, profit-lusting employers of this labor so foolish that they’ll just dish out more money for the same output as before, without economizing further on labor"
BTW the Yale Economic Review also has a book review of Jeffrey Sach's End of Poverty that is pretty interesting. I am looking forward to hear what he (EarthInstitute) has to say about Warren Buffett's donations. I was a bit surprised when some callers on NPR's Talk of the Nation were critical of the donations. No doubt in response to these callers, NPR has posted an interview with health experts showing how helpful the GatesFoundation has been.

Monday, June 26, 2006

Buffett to give away Billions


Major kudos to Warren Buffett!

From Fortune:

"Buffett has pledged to gradually give 85% of his Berkshire stock to five foundations. A dominant five-sixths of the shares will go to the world's largest philanthropic organization, the $30 billion Bill & Melinda Gates Foundation, whose principals are close friends of Buffett's (a connection that began in 1991, when a mutual friend introduced Buffett and Bill Gates).

The Gateses credit Buffett, says Bill, with having "inspired" their thinking about giving money back to society. Their foundation's activities, internationally famous, are focused on world health -- fighting such diseases as malaria, HIV/AIDS, and tuberculosis -- and on improving U.S.
libraries and high schools."

and later:
"With so much new money to handle, the foundation will be given two years to resize its operations. But it will then be required by the terms of Buffett's gift to annually spend the dollar amount of his contributions as well as those it is already making from its existing assets. At the moment, $1.5 billion would roughly double the foundation's yearly benefactions"

Now let's hope others follow the example. From BusinessWeek:

"Billionaire investor Warren Buffett's pledge to give most of his money away to the Bill and Melinda Gates Foundation has experts predicting it could energize the nonprofit sector and possibly spawn a new wave of philanthropy"

Thursday, June 22, 2006

Corporate diversification may not be such a bad thing afterall

SUPER SHORT VERSION: If facing expropriation, managers may maximize shareholder wealth by diversifying their firm.

Corporate Diversification is bad

The standard line for the past 20 years has been that corporate diversification is bad for shareholders. We have seen this in the diversification discount work of Comment and Jarrell (1995) and many other papers (for instance Megginson, Morgan, and Nail) have shown that diversification lowers firm value.

Corporate Diversification is NOT always bad
More recently however, there has been some questioning of that position. This strand of research has largely been driven by the idea that for some firms diversification is good.

This school of thought won support in the 2005 Journal of Finance article by Rene Stulz where he showed that diversification may lower the risk of expropriation in countries with poor shareholder protections (i.e. where there is a high risk of expropriation).

Now Beneish, Jansen, Lewis, and Stuart show the same thing happened within the US tobacco industry. Namely that the tobacco industry's diversifying deals (for instance when Philip Morris bought Kraft) lowered the probability of (or minimally delayed) government lawsuits and expropriation.

In the authors' words:
"Although prior work has often shown diversification transactions to be negative net present value projects, we propose that diversification created value in the tobacco industry by building "political capital" and making tobacco firms less attractive targets of regulation and litigation by changing the composition of tobacco firms' assets."
The authors then use three methods to back up the theory that diversification in the face of high expropriation risk can be good for shareholders. (the three methods are: the examination of diversification-increasing announcement returns, the positive association of thee returns with proxies for expropriation risk, and the examination of the changed behavior of firms after the 1998 Settlement whereby expropriation became a reality)

The authors then measure how "good" this diversification is for shareholders.

With admittedly noisy models, they conclude that in the case of tobacco firms, diversification "protected from $5.7 to $15.3 billion in shareholder value through delayed or reduced expropriation."

Lesson? Corporate diversification can be good for shareholders facing a high risk of expropriation.

Beneish, Messod Daniel, Jansen, Ivo Ph., Lewis, Melissa Fay and Stuart, Nathan V., "Diversification and Shareholder Payments in the Tobacco Industry: The Expected Expropriation Cost Reduction Hypothesis" (June 8, 2006). Available at SSRN:

Wednesday, June 21, 2006

Addicted to learning?

Ok, so this is not strictly finance, it is very interesting and would probably explain my ADhD. LOL..

From Science Daily:
"The "click" of comprehension triggers a biochemical cascade that rewards the brain with a shot of natural opium-like substances, said Irving Biederman of the University of Southern California. He presents his theory in an invited article in the latest issue of American Scientist.

"While you're trying to understand a difficult theorem, it's not fun," said Biederman, professor of neuroscience in the USC College of Letters, Arts and Sciences

"But once you get it, you just feel fabulous."

The brain's craving for a fix motivates humans to maximize the rate at which they absorb knowledge, he said.

"I think we're exquisitely tuned to this as if we're junkies, second by second."

Now if I can just get my students addicted to the finance version of this "drug".

However, Bierderman also found a reason for jumping from one thing to another (MY PROBLEM!):

"Biederman also found that repeated viewing of an attractive image lessened both the rating of pleasure and the activity in the opioid-rich areas. In his article, he explains this familiar experience with a neural-network model termed "competitive learning."

In competitive learning (also known as "Neural Darwinism"), the first presentation of an image activates many neurons, some strongly and a greater number only repetition of the image, the connections to the strongly activated neurons grow in strength. But the strongly activated neurons inhibit their weakly activated neighbors, causing a net reduction in activity. This reduction in activity, Biederman's research shows, parallels the decline in the pleasure felt during repeated viewing."

I was kicking myself last night for "wasting" so much time reading/ristening and even blogging about things that are not finance related (for example uploading pictures, writing on nutrition for the Park and Shop Blog, hurricane recovery efforts, and then even more random stuff on my Yahoo 360 blog). While I guess it is better than sitting around watching TV (or drinking and doing drugs etc), it is not helping finish any of the three papers I had told myself I would have done by July 4 (1 basically done, 1 maybe 1/2, 1 not close)!

But at least I have an excuse now ;)

Tuesday, June 20, 2006

Are you one of nearly 9 million?

It is estimated that there are approximately nine million (9,000,000) millionaires worldwide.

From SeattlePi"
"....the ranks of world millionaires had swelled to 8.7 million last year _ half a million more than the population of New York City.

Millionaires also invested more aggressively, pouring cash into emerging markets and pulling it out of fixed income holdings, as their wealth reached $33.3 trillion, more than double U.S. economic output, a study by Merrill Lynch and consultancy Capgemini found.

The red-hot Middle East saw nearly 10 percent growth in millionaires _ the world's fastest rate _ with record oil revenues and soaring stock markets pushing 300,000 people over the million-dollar mark."

Friday, June 16, 2006

SSRN interview with PrawfsBlawg via Financial Rounds

Since I get so much material from them, giving SSRN a plug is the least I can do.

Prawfsblog has an interesting interview with Gregg Gordon of SSRN. Probably interesting mainly to academics, but....

On look-in:
"SSRN was founded in 1994 by Michael Jensen and Wayne Marr to provide an efficient means to distribute scholarly research. Our motto, Tomorrow’s Research Today, drives what we do every day. Tomorrow’s Research Today means rapidly distributing research worldwide enabling researchers around the world to be on the cutting edge of new ideas. "
Read the entire interview here.

Thanks to FinancialRounds for pointing it out!

Thursday, June 15, 2006

Equity in Iraq? Or any country for that matter

Ok, just thinking aloud here which is always dangerous, but....

Iraq needs money to rebuild infrastructure, security, etc. But

a. can not afford to borrow that much
b. as an Islamic nation, the borrowing may be problematic on religious grounds

So, why not sell non-voting equity? Make the payoff some function of future GDP (or even include some lower payoff if violence is high). Then sell these claims and allow them to trade in secondary markets around the world.
  1. It gives Iraq the financing it needs.
  2. Avoids debt.
  3. Allows those who want to pay to pay (indeed it could be seen as partially a charitable thing to do--similar to buying "war bonds" during WW II), and
  4. spreads the financing across multiple nations and thus may create better incentives (since shareholders might not want to do anything to hurt their investment. (A side note, we might not want to allow short-selling ;) ).
I am sure I am missing something really important as it seems too obvious, but figured I would float it anyways.

I vaguely remember something similar being tried in France in the 1700s?. Google to the rescue: here is a paper on it. While it did not work, I see no reason why it can't work.


Don't count your chickens until they are hatched

You know the sayings: "Don''t count your chickens until they are hatched" and "it's not over until the fat lady sings." Well, it now appears the NYSE may give us yet another example of why it is wise to remember the end is not the end until it is over.

From today's NY Times DealBook:
"A trans-Atlantic deal that looked like a strategic coup for the newly public NYSE Group — its proposed acquisition of the pan-European stock exchange Euronext — appears to be turning into a quagmire. "
Why? It became political:
"The NYSE Group's traction has slipped as politicians in Europe have lined up in favor of a domestic alternative to the deal. The opposition reflects fears among European companies that they might be subject to American securities regulations if the acquisition is completed."
This despite public assurances by US politicians that regulations would be left in European hands.

Two lessons:
  1. It's not over until it's over.
  2. If in a takeover, you can make it political, you have a legitimate shot at blocking the deal.

Tuesday, June 13, 2006

Two stories on Islamic Finance

Two interesting Islamic finance articles:

First on the growth of Islamic finance. From the BBC:
"The dramatic growth of Islamic banking and finance appeared to have been confirmed during the recent World Economic Forum in Sharm al-Sheikh in Egypt.

One of Germany's biggest banks, Deutsche Bank, announced a joint venture with Ithmaar Bank of Bahrain and Abraaj Capital of Dubai to launch a $2bn (£1bn) Sharia-compliant financial fund.

More and more conventional international banks, such as Citibank, HSBC and UBS, are converting some of their services to interest-free Islamic finance models.

Estimates of the value of Islamic banking internationally range from $200bn to $500bn."

And secondly on England's desire to be at the forefront of this movement (again from the BBC):
"Chancellor Gordon Brown is to pledge support for the growth of Islamic finance, saying the UK can act as "a gateway" for the growing industry.

He will tell the Islamic Finance and Trade Conference he wants to the make the UK a centre for Islamic investment.

He will call for stronger trading links between the UK and Muslim countries as well as global trade reform."

for more on Islamic finance check here.

Interesting look at MBAs

Is an MBA worth it? The NY Times reports on an interesting look at this question. (NOTE: it does not prove anything and is not scientific, but it is interesting!)
"The popularity of the degrees has surged. In 1970, for example, business schools handed out 26,490 M.B.A.'s, according to the Department of Education. By 2004, after a period marked by an economic boom and heightened competition for top-flight business careers, that figure had jumped to 139,347. But opinion and data appear divided on the tangible benefits of an M.B.A."
On one side:

""The M.B.A. is the most versatile degree out there — most of the others are very field specific, but you can apply an M.B.A. to any field," said Rachel Edgington, a research director for the Graduate Management Admission Council, a nonprofit group in McLean, Va., that is overseen by leading business schools and administers annual admission exams."

And on the other side:

""M.B.A. programs train the wrong people in the wrong ways with the wrong consequences," said Henry Mintzberg, a management professor at McGill University in Montreal. "You can't create a manager in a classroom. If you give people who aren't managers the impression that you turned them into one, you've created hubris.""

The article overall centers on the Harvard class of 1996 and a film project (interview the graduates every five years).

Overall the evidence is mixed, but having an MBA myself, I have to agree that it was a worthwhile degree to get (even though I really do not use it much) and as Ms. Malone concludes:
""It's this big safety net; it's a credential that makes it easier to get a job later,... Maybe life shouldn't be that way, but it is what it is." "

Monday, June 12, 2006

A skeptical Appraisal of Asset-Pricing Tests

Not the best of news in this one. In fact it is sort of discouraging.

Lewellen, Nagel, and Shaken give us a Skeptical Appraisal of Asset-Pricing Tests

Short version: we really do not have much of an idea as to what asset pricing model is correct and to make matters worse existing tests may not be showing what we think they do.

Longer view:

A few quick views in the authors' words:
"The finance literature has offered an explosion of new asset-pricing models in recent years, motivated by evidence that small, high-B/M stocks have positive CAPM-adjusted returns. The new models – formal equilibrium theories as well as simple econometric models – propose a variety of risk factors beyond the market return or aggregate consumption"
Maybe the key paragraph in entire paper:
"Empirically, many of the proposed models seem to do a good job explaining the size and B/M effects, an observation at once comforting and disconcerting: comforting because it suggests that rational explanations for the anomalies are readily available, disconcerting because it provides an embarrassment of riches. Reviewing the literature, one gets the uneasy feeling that it seems a bit too easy to explain the size and B/M effects. This is especially true given the great variety of factor models that seem to work, many of which have very little in common with each other."
In the authors' own words:
"Our paper is motivated by that suspicion. In particular, we explain why, despite the seemingly strong evidence that many proposed models can explain the size and B/M effects, we remain unconvinced by the evidence."
And then:
"The heart of our critique is that the literature has often given itself an extremely low hurdle to meet in claiming success: high cross-sectional R2s (or low pricing errors) when average returns on the Fama- French 25 size-B/M portfolios are regressed on their factor loadings. This hurdle is low because size and B/M portfolios are well-known to have a strong factor structure, i.e., the Fama and French’s (1993) three factors explain more than 90% of the time-series variation in portfolios’ returns and more than 75% of the cross-sectional variation in their average returns. Given those features, obtaining high cross-sectional R2 is very easy because almost any proposed factor is likely to produce betas that line up with expected returns...."
Then after giving suggested solutions (sorting on other factors and emphasizing "theoretical restictions", and reporting confidendence intervals) to these problems, the authors test popular asset-pricing models.

Unfortunately they find little support for any of the asset pricing models:
"We apply these prescriptions to a handful of proposed models from the recent literature. The results are disappointing. None of the five models that we consider performs well in our tests, despite the fact that all seemed quite promising in the original studies."
Uuch. Well, I guess it's back to the drawing board.

Lewellen, Jonathan W., Nagel, Stefan and Shanken, Jay A., "A Skeptical Appraisal of Asset Pricing Tests" (January 2006). AFA 2007 Chicago Meetings Paper Available at SSRN:

What do bank examiners examine?

I have to confess, having never worked in a bank when I teach a banking class I have to rely on text book explanations. So it was with great interest that I read Fed Governor Olson's comments on "What are examiners looking for when they examine banks for compliance?" .

Some looks-ins:

  • "To assist you in your efforts to fine-tune your compliance-risk management programs, I'd like to give you a sense of what Federal Reserve examiners look for when they conduct examinations....I will also take a few minutes to address our more focused work in two particularly important areas of regulatory compliance: compliance with BSA [Bank Secrecy Act] requirements and Home Mortgage Disclosure Act (HMDA) data reporting requirements."
  • " Overall, a banking organization's compliance-risk management program should enable it to adequately identify, measure, monitor, and control the compliance risks involved in its various products and lines of business. These are fundamental principles not only for compliance-risk management, but also for sound management of credit, market, liquidity, and operational risk.
  • "It's worth taking a moment to define compliance risk. It is the risk of legal or regulatory sanctions, financial loss, or damage to reputation and franchise value that may arise when an organization fails to comply with laws, regulations, or standards or codes of conduct of self-regulatory organizations applicable to the business activities and functions of the banking organization."

  • "Generally, a Federal Reserve examination team begins by defining the scope of the examination; this is when examiners determine the areas of focus and level of scrutiny."
  • "Federal Reserve examinations for compliance-risk management are not designed to be gotcha games in which examiners look for one-time breaches of specific regulations or laws. Rather, these examinations are designed to assess the adequacy of the structure and processes the institution uses for managing compliance risk. Examiners are expected to look for the bigger picture and to look at the effectiveness of the program (including policies and processes) for managing the organization's compliance risk."
  • "As with all areas of risk management, our expectations--and therefore the scope of many examinations in this area--are framed by an emphasis on board and senior management oversight, policies and procedures, internal controls, monitoring and reporting, and training."
  • " Internal controls are a particularly crucial element of a compliance-risk management program. Examiners will verify whether the organization has established and implemented an effective system of internal controls, including appropriate reporting lines and separation of duties, as well as positive and negative incentives."
  • " The level of sophistication of banking organizations' monitoring activities generally varies according to the size and complexity of the organization, and examiners' expectations will vary accordingly."
Definitely a worthwhile read!!!

Saturday, June 10, 2006

Milken Institute Audio

Wow. I may never turn the computer off ;)

Audio presentations from the Milken Institute. These are really interesting. On everything from the economic impact of terrorism to globalization to education to civil liberties to medicine.

I have a feeling if Ben Franklin or Thomas Jefferson were around today, this is what they would be listening to!

Oh yeah, video clips are also available.

Friday, June 09, 2006

Video of Bogle's speech on the Mutual Fund Industry

I finally got around to watching Bogle's speech to Independent Mutual Fund Directors. It is available on the Bogle eblog.

My favorite quotes:
"...the more mangers take, the less investors make."

"If you do not believe we are we are in teh marketing business, consider rate of fund failure....there have been 30,000 funds in history, 11,000 of them are gone....Even in the last 5 years, 25%, actually 27% of all equity funds have vanished....I am afraid to say, it is largely a marketing business."
Well worth a listen!

Interesting Searches

I have been meaning take a look back at some interesting articles previously blogged for a while and I guess a quiet Friday is as good of time as any.

This is made MUCH easier with the blogspot search feature (top of blog) which is finally working correctly. For instance, a quick search of IPOs yields a look back on 10 articles that have been blogged over the past year. Some of the articles are even more interesting the second time around and the entire collection of search results will be added to my class notes section on IPOs. (feel free to do the same).

IPOs: Some of the articles I had not thought of in a while include a paper on branding and IPOs, analyst coverage following the IPO, and the relation between liquidity and long-term underperformance.

CEO PAY, Behavioral Finance, and Capital Structure also yield interesting searches!

Retirement woes

Many are not saving enough for retirement. Shock!


"NEW YORK ( – A new retirement risk index released Tuesday
estimates that 43 percent of working-age households are not likely to have
enough retirement income to replicate their current standard of living.
The Center for Retirement Research (CRR) at Boston College created the index and defines "at risk" to mean those households projected to fall at least 10 percent short of their income target in retirement.
The organization assumed a base target of 73 percent of one's pre-retirement income for all households."

Here is the actual study.

As FinanceProfessors or even those with a keen interest in finance, we have our work cut out for us. What can we do to help others? Volunteer to give lectures on the importance of saving and investing to and a "how to" to local groups, High Schools, or even just remind your own students prior to graduation.

Thursday, June 08, 2006

A SUPER quick look at international covariances

Shorter than short version: International return correlations may NOT be increasing as much as we thought!

This has to be short as I have meetings all afternoon. In fact it was in preparing for the meeting (essentially pension planning for a local religious community), that I stumbled upon the following. I do not have time to give it a complete "review" but it flies in the face of conventional wisdom (I think it would make John Stossel happy!)

The paper is by Bekaert, Hodrick, and Zhang. From their abstract:

"We examine international stock return comovements using country-industry and country-style portfolios as the base portfolios....First, we do not find evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find no evidence for a trend in idiosyncratic risk in any of the countries we examine."

Yeah, a definite "I'll read the rest later!" But for now, that is all i have time for.

Cite: Bekaert, Geert, Hodrick, Robert J. and Zhang, Xiaoyan, "International Stock Return Comovements" (November 28, 2005). AFA 2007 Chicago Meetings Paper Available at SSRN:

Why has CEO pay Increased so much?

Gabaix and Landier ask “Why CEO pay has increased so much?”.
Their answer: firms have gotten much larger.

Slightly longer version: Has CEO pay increased because of friendly boards? Super star status of CEOs?, or timing of option grants? Or is there an economically justified explanation. The answer is sure to surprise many who read only mainstream publications! In the authors’ own words (in the abstract):

The marginal impact of a CEO's talent is assumed to increase with the value of the assets under his control….The model predicts the cross-sectional Cobb-Douglas relation between pay and firm size. It also predicts that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the five-fold increase of CEO pay between 1980 and 2000 can be fully attributed to the increase in market capitalization of large US companies.”

While the authors admit that the paper is "Preliminary and Incomplete" it is also interesting and informative so I will mention it prior to its finished version.


Gabaix, Xavier and Landier, Augustin, "Why Has CEO Pay Increased So Much?" (March 14, 2006). MIT Department of Economics Working Paper No. 06-13 Available at SSRN:

BTW I think I saw this earlier on FinancialRounds, but when I went back to find it, I could not, so ???

Monday, June 05, 2006

Academic Journal Ranking Manipulations

The Unknown Professor has a fascinating post today about how Journal Rankings may be manipulated.

Two longish look-ins:
"In today's Wall Street Journal (online subscription required) Sharon Begley provides a rare look into the world of academic journal rankings. She describes some of the ways that scientific journals manipulate their "impact factors"."
and later describing his/her (I would imagine people know, but I won't out anything) own experiences (I would add to his below comment by saying I would be surprised if anyone who has published a few papers has not had the reference coaching happen now and then).
"One [way] is to ask authors to include additional citations to other pieces in the journal. I've seen this tactic used several times (both on my pieces and on those of colleagues). Typically, once a piece is either accepted or in the "last round", the editor might "suggest" other articles in the same journal which might possibly be cited. In one case, the editor gave a colleague of mine a list of eight possible citations (which would have increased the total citations in the author's bibliography by almost 50%). However, this doesn't happen as much as you'd think, because I use my bibliography as one of the criteria I use in deciding which journal to submit a piece to: if I cite a good number of articles from a particular journal, it's probably a good fit for the piece"

Do genes influence who will be entrepreneurs?

Do genes influence who will be entrepreneurs?

"A study of identical twins by researchers in Britain and the United States suggests family environment has little influence because nearly half of a person's propensity to be self-employed, or entrepreneurial, is due to genes.

"This relatively high heritability suggests the importance of considering genetic factors to explain why some people are entrepreneurial, while others are not," said Professor Tim Spector of St Thomas' Hospital in London."

Does anyone know if anything similar has been done looking at investment choices? Seems like it would be "relatively" easy to do. But I am not aware of it and a few feeble web searches yielded little.

Friday, June 02, 2006

CEO Bonus Problems--yes there is some risk, but

Wow. The NY Times has a great example of what can go wrong with Executive Compensation.

Some highlights:

* " As executive pay packages have rocketed in recent years, their defenders have contended that because most are tied to company performance, they are both earned and deserved. But as the Las Vegas Sands example shows, investors who plow through company filings often find that executive compensation exceeds the amounts allowed under the performance targets set by the directors."

*" Because of what the company called an "improper interpretation" of his employment contract, Sheldon G. Adelson, chairman, chief executive and treasurer of the Las Vegas Sands Corporation, received $3.6 million in salary and bonus last year, almost $1 million more than prescribed under the company's performance plan. "

*" Some employment agreements actually stipulate that they will provide bonuses even if company performance declines. The agreement struck in 2004 by Peter Chernin, president and chief operating officer of the News Corporation, entitles him to a bonus even if earnings per share fall at the company. If earnings rise by 15 percent in any given year, Mr. Chernin's bonus is $12.5 million. But if they fall 6.25 percent, Mr. Chernin's bonus is $4.5 million, and an earnings decline of 14 percent translates to a $3.52 million bonus. "

Read the entire article here, very interesting!