Thursday, November 30, 2006

SSRN-Are Elite Universities Losing Their Competitive Edge? by E. Han Kim, Adair Morse, Luigi Zingales

More evidence that the world is getting more flat. I don't have time to discuss it, but will provide the part of the abstract and a link:

SSRN-Are Elite Universities Losing Their Competitive Edge? by E. Han Kim, Adair Morse, Luigi Zingales: "
We study the location-specific component in research productivity of economics and finance faculty who have ever been affiliated with the top 25 universities in the last three decades. We find that there was a positive effect of being affiliated with an elite university in the 1970s; this effect weakened in the 1980s and disappeared in the 1990s. We decompose this university fixed effect and find that its decline is due to the reduced importance of physical access to productive research colleagues....Our results shed some light on the potential effects of the internet revolution on knowledge-based industries."
I stumbled upon this one while trying to find Zingales' cross listing paper. While not as exciting as some pure finance papers, it is interesting and fits well with what most would have predicted, namely that location no longer matters for much.
(I say that writing from the center of the Universe: Olean NY! ;))

Costs and Benefits of Regulation

As part of a study on the impact of regulation on market, the Committee on Capital Markets Regulation provides the SEC with several sudies today that try to guage the costs and benefits of regulation.

Particularly interesting is Zingales' look at whether regulations following the Governance Crisis of 2002 had a detrimental impact on the relative advantages of a US listing.

From the WLS (via Pittsburgh Post Gazette) Is a U.S. listing worth the effort?:
"The premium for listing on both U.S. and foreign markets averaged 51 percentage points from 1997 to 2001. It dropped to 31 percentage points between 2002 and 2005, Mr. Zingales found.

'We raised the cost of being public in the U.S.,' said Glenn Hubbard, dean of the Columbia University business school and co-chairman of the capital-markets committee. 'These things have long-term consequences."
"Others aren't so sure. Andrei Shleifer, an economics professor at Harvard University, called the decline in the foreign-listing premium "fascinating" but whether it is due to "improvements in corporate governance and the quality of stock markets abroad, or from the reduced benefits of U.S. listing, is still an open question."

Another possibility is that rather than the costs rising, it could be that the percieved benefit of a US listing declined. This was not as a result of the regulations, but because the governance crisis (which brought about the regulations) demonstrated that US markets were not as minority investor friendly as might have been percieved prior to the problems. For instance, again in the WSJ/Post-Gazette piece:
"Andrew Karolyi, a finance professor at Ohio State University who has also studied the cross-listing premium said Mr. Zingales's conclusion is "reasonable," but advised caution. Mr. Karolyi said in his own research he had been unable to relate a change in the cross-listing premium to corporate governance."

Over at IdeaBlog Larry Ribstein does a GREAT job discussing both sides and concludes that
"if you raise the price of something without also raising the value, the demand will fall, and that applies to bonding. I hypothesize that SOX, by meddling in the internal governance as well as disclosures of foreign firms, raised price more than value. The result would be declining cross-listings in the U.S., a phenomenon we have observed."
The NY Times also has an article on the findings and the committee that is speaking to the SEC today about regulation. A look-in:
"The committee...said the S.E.C. should be required to perform cost-benefit analyses on all rules before they were adopted. It said the S.E.C. should also take steps to rein in private securities litigation and adopt policies to shield corporate directors and auditors from some lawsuits....The report also calls for relatively modest changes in the enforcement of the Sarbanes-Oxley Act and supports greater shareholder democracy by limiting antitakeover defenses of companies"
Interesting and important stuff!!

Friday, November 24, 2006

Skirt lengths and Stock prices

A few weeks ago I mentioned this in class and I got many weird looks (even more than normal). I'll admit that the idea that hemlines and fashion could be linked to stock prices does seem quite ridiculous, but there may be some ties. The theory is that as hemlines rise (be it for less risk aversion or some other reason) so too do stock prices. Thus the best time to buy stocks is when hemlines are long. has a longer version of the video documentary available for free that has other similar fun examples. For instance, according to the video, most famous horror films come from times when bear markets dominate. Is it

The piece is definitely thought-provoking even though I am not totally convinced. For instance I would love to know if the apparent link is merely a spurious correlation or if there is some mass socio psychology (a behavioral finance) story at play, or if there is there a direct link (not quite cause and effect) such as each factor being driven by some other socio-economic variable that shows itself through culture).

But definitely fun and interesting! And besides...uh, no I better not. ;)

Grade inflation from HS to Grad school

Three related stories that are not strictly speaking finance but that should be of interest to most in academia.

In the first article, which is from the Ottawa Citizen, accelerated and executive MBA programs come under attack for their supposed detrimantal impact on learning in favor of revenue.

MBAs dumbed down for profit:
"An increasing number of Canada's business schools are literally selling MBAs to generate revenue for their ravenous budgets, according to veteran Concordia University finance professor Alan Hochstein.

That apparent trend to make master of business administration degrees easier to achieve at a premium cost is leading to 'sub-standard education for enormous fees,' the self-proclaimed whistleblower said yesterday"
The second article is a widely reported AP article that that centers on High School grade inflation. This high school issue not only makes the admissions process more difficult but it also influences the behavior of the students ("complaining works") and their their grade expectations ("I have always gotten A's and therefore I deserve on here").

A few look-ins from Boston Globe's version:
"Extra credit for AP courses, parental lobbying and genuine hard work by the most competitive students have combined to shatter any semblance of a Bell curve, one in which 'A's are reserved only for the very best. For example, of the 47,317 applications the University of California, Los Angeles, received for this fall's freshman class, nearly 21,000 had GPAs of 4.0 or above."
or consider this:
""We're seeing 30, 40 valedictorians at a high school because they don't want to create these distinctions between students...."
"The average high school GPA increased from 2.68 to 2.94 between 1990 and 2000, according to a federal study."
This is not just a High School problem. In part because of an agency cost problem (professors have incentives to grade leniently even if it is to the detriment of students), the same issues are regular discussions topics at all colleges as well. For instance consider this story from the Denver Post.
"A proposal to disclose class rank on student transcripts has ignited a debate among University of Colorado professors with starkly different views on whether grade inflation is a problem....

[some] professors who say their colleagues are so afraid of bad student evaluations that they are placating students with A's and B's.

The few professors who grade honestly end up with dismal scores on student evaluations, which affect their salaries, professor Paul Levitt said. There is also the "endless parade of malcontents" in their offices."

I would love to wrap this up with my own solution, but obviously it is a tough problem to which there are no easy solutions. That said, maybe it is time that I personally look back at my past years' class grades to make sure I am not getting too soft. If we all did that, we'd at least make a dent in the problem.

Thursday, November 23, 2006

Marketplace: Was Grasso worth it?

Marketplace: Was Grasso worth it?:
"Dick Grasso's critics have long said he was paid too much, particularly for heading what was at the time a nonprofit institution. And that the compensation process was flawed. But the Wall Street Journal reports today that he just didn't do a very good job, at least according to a report commissioned by New York Attorney General Eliot Spitzer.

A University of Utah finance professor concluded that during Grasso's highest-paid years new listings on the Exchange declined. So did its market share. Its overall trading volume soared, but so did that of every other stock exchange. The report says Grasso was just riding the wave, says Charles Jones who teaches finance at Columbia University."
While it is true that the market share and new listings were down, his performance is not as clear cut. For instance to say Grasso did a poor job is a little like saying that network television executives have done a poor job since the ratings have dropped in the age of cable and internet (which may or may not be true). What we don't know is whether the decline would have been worse under alternative management/strategies.

Wednesday, November 22, 2006

Google’s Shares Climb Above $500 - New York Times

The New York Times has an interesting look at Google's meteoric rise.

Google’s Shares Climb Above $500 - New York Times:
"Google’s shares gained $14.60, or 3 percent to close at $509.65, passing the $500 mark for the first time....Not bad for a company that was forced to reduce its initial share price to $85 barely two years ago because of lackluster demand. It quickly confounded the skeptics, rising to $100 on the first day of trading, and hitting closes of $200, $300 and $400 all within the course of 2005.

Google now has a total value of more than $150 billion, exceeding all but 13 American companies — icons of commerce "

Newswise | Average Investors Shouldn’t be So Confident

Newswise | Average Investors Shouldn’t be So Confident:
"An increase in the stock market’s overall performance, like the one that took place in October, can turn inexperienced investors into trade-happy amateurs, according to Brigham Young University business professors in a study published in The Review of Financial Studies.

“When investors start off in the market, they tend to trade pretty conservatively,” said Steven Thorley, the H. Taylor Peery professor of finance at BYU’s Marriott School of Management. “In periods where the overall stock market performs well, they see a good return on their portfolio and figure they are good at picking stocks, so they start to trade more frequently.”

Thorley and co-researchers Keith Vorkink and Meir Statman tested the proposition that investors trade their stock more frequently after increases in the general market return cause them to have higher confidence in their stock picking abilities. Behavioral economists refer to these beliefs as “investor overconfidence” and “biased self-attribution.” Vorkink is the Richard E. Cook associate professor of finance at the Marriott School, and Statman is the Glenn Klimek professor of finance at the Leavey School of Business at Santa Clara University."

The academic version (working copy) of this paper is available through SSRN.

SSRN-Payout Policy in the 21th Century: The Data by Alon Brav, John Graham, Campbell Harvey, Roni Michaely

What a cool paper!! By Brav, Graham, Harvey, and Michaely on Dividend payout rations. They essentially redo Lintners' clasic 1956 paper but also provide the data!

SSRN-Payout Policy in the 21th Century: The Data by Alon Brav, John Graham, Campbell Harvey, Roni Michaely:
"Our findings indicate that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending. Perceived stability of future earnings still affects dividend policy as in Lintner (1956). However, 50 years later, we find that the link between dividends and earnings has weakened. Many managers now favor repurchases because they are viewed as being more flexible than dividends and can be used in an attempt to time the equity market or to increase earnings per share. Executives believe that institutions are indifferent between dividends and repurchases and that payout policies have little impact on their investor clientele. In general, management views provide little support for agency, signaling, and clientele hypotheses of payout policy. Tax considerations play a secondary role"

Tuesday, November 21, 2006

Is it time to rethink accounting?

While I doubt a major overhaul is forthcoming, the fact that accounting firms are calling for the changes is telling and a good step.

Institutional Shareholder Services -- Corporate Governance Blog: Accounting Firms Seek Overhaul Submitted by: Tad Kopinski, Staff Writer:
"The six biggest international audit firms have called for a complete overhaul of corporate financial reporting as the U.S. and Europe move toward convergence of international audit standards.

In a Nov. 8 report, the accounting firms propose to replace static quarterly financial statements with real-time, Internet-based reporting that encompasses a wider range of performance measures, including non-financial ones. The report was signed by the chiefs of PricewaterhouseCoopers International, Grant Thornton International, Deloitte, KPMG International, BDO International, and Ernst & Young. The report can be downloaded here.

'We all believe the current model is broken,' Mike D. Rake, KPMG's chairman, told the Financial Times....

Rake noted that quarterly reporting and the short-term focus on companies' ability to meet Wall Street earnings expectations helped foster accounting scandals....The large discrepancy between the 'book' and 'market' values of many listed companies is clear evidence that the conten"

Monday, November 20, 2006

FMA Online

This has to be one of the most underrated sites in finance!

FMA Online:
"Feature Presentations (video)

2006 FMA European Conference Keynote Addresses

Michael Brennan, UCLA and London Business Schoool
'Rational (and Irrational) Prices, Returns, and Strategies'

Michael Brennan is a professor of finance at both UCLA Anderson and London Business School. His research interests include asset pricing, corporate finance, the pricing and role of derivative securities, market microstructure, and the role of information in capital markets. He has published extensively in all of these areas. He is currently working on several issues, including: the problem of asset allocation when investors face time-varying opportunity sets, initial public offerings and the allocation of control rights in the corporation, the determinants of international flows of portfolio investment, the role of convertible securities in corporate finance, and corporate hedging strategies."

Rewriting the Rules for Buyouts - New York Times

Ironically my Depattment chair said this exact thing to me last week too!

Rewriting the Rules for Buyouts - New York Times:
"MANAGEMENT-LED buyouts, by their very nature, are meant to benefit management and their private equity backers,” Stephen Lowey, a lawyer who often represents institutional investors, said to me last week. He contended that public investors almost always get cheated, and it’s not hard to see what he’s talking about."

The article goes on to give some prescriptions that might level the playing field some. These include having more minority say in deals, more independenet advisors. Which are nice ideas, but undoubtedly difficult (impossible?) to enact.

Red Hat seeks NYSE listing | CNET

In class the other week I was asked why firms choose on market over another. Here is why RedHot is changing from the Nasdaq to the NYSE:

Red Hat seeks NYSE listing | CNET
"'We believe that listing on the New York Stock Exchange will increase Red Hat's visibility among investors, reduce trading volatility and offer more efficient pricing,” said CFO Charlie Peters said"

Friday, November 17, 2006

College football contracts are dotted with extras and provisions -

Not strictly corporate finance, but a very interesting look at some contracts of college football coaches

College football contracts are dotted with extras and provisions - "Head football coaches' contracts with NCAA Division I-A schools can be more than a matter of money."

a few examples (for more read the article):

*"Cincinnati's Mark Dantonio and Florida's Urban Meyer can be suspended or fired for "commission of a crime ... whether prosecuted or not." Not counting minor traffic offenses."

* "Air Force's Fisher DeBerry will get a lifetime monthly annuity after he steps down — $7,000 a month if he coaches through the 2006 season, a figure that rises to $9,000 a month if he coaches through the 2010 season. His wife would collect two-thirds of the monthly amount if he dies before she does."

From a companion piece maybe CEOs are that highly paid afterall. The average NCAA Div 1 football coach makes $950,000 before benefits, bonuses, and otehr incentives.

Study Charts Broad Manipulation of Options - New York Times

Study Charts Broad Manipulation of Options - New York Times:
"Abuses of stock option grants are perceived to have spread like a virus among high-technology companies. But a new study suggests that hundreds of old-economy companies may also have caught the backdating bug.

In a paper to be released today, researchers estimate that 590 nontechnology companies appear to have manipulated options so their chief executives received them at the lowest price of the month. That compares with 130 technology companies that appear to have backdated their chief executives’ options to a monthly low."

A quick look-in to the paper by Bebchuck, Grinstein, and Peyer that the NY Times mentioned:
"*Lucky grants were more likely when the company did not have a majority of independent directors on the board and/or the CEO had longer tenure -- factors that are both associated with increased influence of the CEO on pay-setting and board decision-making.
• Lucky grants were more likely to occur when the potential payoffs from such luck were high; indeed, even for the same CEO, grants were more likely to be lucky when granted in months in which the potential payoffs from manipulation were relatively higher.
• Luck was persistent: a CEO's chance of getting a lucky grant increases when a preceding grant was lucky as well.
• We find no evidence that firms providing backdated options reduced the compensation paid through other sources"

Thursday, November 16, 2006

Economist Milton Friedman dies at 94 - Yahoo! News

Economist Milton Friedman dies at 94 - Yahoo! News:
"Milton Friedman, the Nobel Prize-winning economist who advocated an unfettered free market and had the ear of three U.S. presidents, died Thursday at age 94.
Friedman died in San Francisco, said Robert Fanger, a spokesman for the Milton and Rose D. Friedman Foundation in Indianapolis. He did not know the cause of death."

Compensation Special Report, Parts I & II -- hhas a great series of articles in their spoecial report on CFO pay. HIGHLY RECOMMENDED!!

Compensation Special Report, Parts I & II --
"Thanks to a growing battle for finance talent, CFOs are making more. Those at big companies saw their pay surge as much as 25 percent. Many firms are seeking to upgrade their finance talent, and the dwindling of the chief operating officer has also contributed to the boost, since CFOs often are asked to take on many of the former COO's duties....But with the Securities and Exchange Commission shining a new spotlight on compensation, boards are also making CFOs work harder to achieve the mega-pay levels that became common in the 1990s."

FRB: Speech, Kroszner--The Conquest of Worldwide Inflation: Currency Competition and Its Implications for Interest Rates and the Yield Curve--November

Great read: It is from today's speech by Fed GOvernor Randall Kroszner. PERFECT for a money and banking class!

FRB: Speech, Kroszner--The Conquest of Worldwide Inflation: Currency Competition and Its Implications for Interest Rates and the Yield Curve--November 16, 2006:
"I will begin by providing a few facts about the substantial improvement of inflation during roughly the past decade compared with the quarter century that preceded it. I will then try to understand why this remarkable decline in inflation has taken place. In particular, I argue that globalization, deregulation, and financial innovation, in part spurred by experiences of high inflation in the 1980s, have fostered currency competition that has led to improved central bank performance and, hence, the recent conquest of worldwide inflation. Friedrich Hayek had long ago advocated permitting greater competition among currencies, arguing that there would be a race to the top rather than a race to the bottom."

Wednesday, November 15, 2006

Utah finance conference

What a cool thing to do if you want to know what is is going on in the field of finance!

"The Utah 2006 Sixteenth Annual Winter Conference has partnered with the Social Science Research Network (SSRN) to provide electronic journal distribution and online subscription management services.

Registration is required to receive the E-mail abstracting journal and free access to the issue’s full text articles.

Hedge Manager Is Almost Famous - New York Times

An interesting look at how Hedge funds have become the profit centers for Investment Banks.

Hedge Manager Is Almost Famous - New York Times:
"More than any other investment bank, Goldman Sachs relies on trading gains to drive its profits. Mr. Agus had a very good year in 2005 — he is estimated to have made $10 million to $20 million — and he will surely get a raise in 2006. His year is further evidence that on Wall Street, the real money is being made not by investment bankers cutting high-profile deals, but by anonymous traders making risky, profitable bets with their firm’s capital."
An interesting question is what the success of hedge funds says about market efficiency.

Monday, November 13, 2006

Risk and Reward Column: The Invisible Problem of Risk Blindness

As the semester begins to wind down, many classes (mine included) take a look at various financial cases and what events led to the problems. Thus the timing of the FENews article on " The Invisible Problem of Risk Blindness is especially good:

A few look-ins:
"There is an old saying that everything changes, but everything remains the same. This is especially true with financial disasters. The precise circumstances – the people, amounts lost, etc. – always vary, but underneath these superficial differences there are remarkable similarities....Their risk models turn out to have been blind to the risks the firm was actually taking and no one realized until too late."

"So what are the causes of this “risk blindness?” One cause is false assumptions.... Another example is when VaR models rely on historical correlations and fail to allow for correlations polarizing in crises....." A second cause is estimation error.
And later:
"So what can be done to reduce these problems? Part of the answer is for risk managers to pay more attention to qualitative factors, to focus less on the models and more on the judgmental questions surrounding them."
And finally:
"agency problems go right the way up the corporate hierarchy. So how do we ensure that senior managers and directors take their responsibilities seriously? Again, the answer is simple, but won’t be popular – at least with senior abolish limited liability."

Wow! Good article! Highly recommending reading the entire thing!

Saturday, November 11, 2006

Small cos problem clouds US Sarbanes-Oxley revamp |

Small cos problem clouds US Sarbanes-Oxley revamp |
"Work on revising 2002's post-Enron Sarbanes-Oxley (SOX) corporate audit reforms is hung up on the question of how small companies should be treated, with U.S. regulators expected to meet on the issue on Sunday.

The chairmen of the Securities and Exchange Commission and the Public Company Accounting Oversight Board are expected to meet to discuss how SOX Section 404 should apply to companies with $75 million to $700 million in market capitalization."

Too Many Regulators For Wall Street? -

We always talk in class, that when the environment changes, so too do the various contracts and relationships that affect the firm. Here is a good case in point:

Too Many Regulators For Wall Street? -
"With two pending trans-Atlantic stock exchange mergers, the world's largest futures exchange forming in Chicago and rumors of more consolidation in the markets to come, there is the sense that the multiple federal securities regulators, state regulators and self-regulated entities like the NYSE Group (nyse: NYX - news - people ) and NASD will have to come to some sort of consensus for dealing with the shifting landscape."

Friday, November 10, 2006

VC Deals More Company-Friendly - -

VC Deals More Company-Friendly - -
"Venture capital backers are getting friendlier. In the past four years, the deal terms they've been handing start-up companies have shifted in favor of fledgling companies, says a new survey released by Dow Jones VentureOne's. Indeed, new deal terms offer improved liquidation preferences and decreased percentages of investor ownership, noted the study, which surveyed 350 executives.

The data provider attributes the shift to increased competition among VCs that are vying for the most promising entrepreneurs."

Thursday, November 09, 2006

NYSE Group to cut more than 500 jobs - MarketWatch

I am fascinated at the way the NYSE-Archipelago merger is having concrete results in reducing costs. It will continue to interesteing to see how they mesh the electronic with the floor trading. Stay tuned.

NYSE Group to cut more than 500 jobs - MarketWatch:
"Since March 2005 -- when the NYSE, Archipelago Holding and Securities Industry Automation Corp. had 3,484 employees on a combined adjusted basis -- there has been a reduction of 35% of its total workforce or more than 950 employees, the NYSE said.

'We estimate that the headcount reduction will save NYSE roughly $60 milllion per year in costs and that the reduction in consultants will reduce professional fees by roughly $20 million year,' Prudential analysts said in a research report Wednesday."

Wednesday, November 08, 2006

Financial page: PBS Frontline: Can You Afford to Retire

Barry over at Financial Page points to an interesting article on the state of retirement planning in the US.

Financial page: PBS Frontline: Can You Afford to Retire

A quick look-in:

" Half of America's private sector workforce are not covered by any retirement savings plan; their retirement will be anchored only by Social Security and whatever they have managed to save on their own.

The other 50 percent have one of the two main employer-sponsored retirement savings strategies: a traditional lifetime pension or a 401(k)-style investment plan. Today, twice as many workers have 401(k)s than have lifetime pensions, a complete reversal from 25 years ago, according to David Wray of the Profit Sharing/401(k) Council of America."

Good coverage!

Wednesday, November 01, 2006

SSRN-A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best? by Ray Fair

SSRN-A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best? by Ray Fair:
This paper examines the performance of the past five Federal Reserve chairmen using optimal control techniques and a macroeconometric model. Each chairman is judged by the actual performance of the economy under his term relative to what the performance would have been had he behaved optimally. Comparing chairmen only on the bases of actual performance of the economy is not appropriate because it does not control for different exogenous-variable values and shocks that the Fed has no control over. The results suggest that Greenspan was indeed the best, but followed closely by Martin. Volcker also does well, but probably not quite as well as Greenspan and Martin."