Friday, November 30, 2007

An Airline Shrugs at Oil Prices - New York Times

An Airline Shrugs at Oil Prices - New York Times:
"Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices..."
That other airlines were not hedging (or at least not hedging long-term) has been one of my pet peeves going back as far as the newsletter days. Sure it costs money to hedge, and sure is not without some risks (see for instance this story on what happened when oil prices fell), but hedging makes too much sense not to do.

How does hedging work? Why? The best explanation I have ever seen comes from an old Corporate text book I once used by Rao (do not think it is still in print and I can not find my copy). In it he described how hedging allows management to worry about what they do well and can control (service, pricing, safety etc) and not what they can not control (oil prices in this case).

An other view (the two views are definitely NOT mutually exclusive) is that hedgers have both better access to capital markets and less need to go when the asset (oil) moves in teh 'wrong' direction. My favorite paper in this area has long been Carter, Rogers, and Simkins.

Of course that said, all of the good I can say about hedging goes out the window if firms use the same derivatives to speculate.

Thanks to Felix over at Conde Nast's for the heads-up on this one.

Do International Financial Reporting Standards Live Up to Their Promise? - Knowledge@Wharton

Do International Financial Reporting Standards Live Up to Their Promise? - Knowledge@Wharton:
"Under the lead of the International Accounting Standards Board (IASB), already more than 100 countries, most notably the European Union and many Asian economies, have either implemented International Financial Reporting Standards (IFRS) or plan to do so. So far, the United States has been a holdout. But the winds are changing. On November 15, 2007, the U.S. Securities and Exchange Commission (SEC) -- which up to then was requiring foreign companies to either report using Generally Accepted Accounting Principles (GAAP) or to reconcile to them -- announced that it would promote international compatibility by allowing foreign companies to access U.S. capital markets while reporting under IFRS. At the same time, the SEC is contemplating changes that would grant domestic firms the choice between reporting under GAAP or IFRS."
This change would lower reporting costs by making reporting more consistent.

Is this positive or negative? Probably positive if we can extend the evidence from a new paper by Daske, Hail, L, and Verdi. The authors
"analyze the effects on market liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters [and] find that market liquidity increases around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed but there is evidence indicating an increase in equity valuations. Partitioning our sample, we find that the capital-market benefits exist only in countries with strict enforcement regimes and institutional environments that provide strong reporting incentives."

While it will be interesting to see if the same impact is felt in the US (my guess is we won't as we already have a strong accounting system--but maybe some through reduced accounting costs?), but we will see soon enough). See, accounting and finance do go together very nicely.

The Subprime Drama Continues, but for How Long? - Knowledge@Wharton

Wharton's Knowledge@wharton has a good discussion with Richard Herring on the continuing developments in the real estate and sub-prime lending markets.

The Subprime Drama Continues, but for How Long? - Knowledge@Wharton:
"Has the crisis run its course? Knowledge@Wharton asked that question and several more to Richard Herring, a professor of finance at Wharton and co-director of the Wharton Financial Institutions Center. Herring spoke recently at a meeting in Rome about 'the darker side of securitization.'"
Thanks DH!

Thursday, November 29, 2007

Private placements

Another financial instiitution that had had major writedowns gets a cash infusion. Worldwide: "-- E*Trade Financial Corp., the U.S. discount broker grappling with mortgage losses, will get a $2.55 billion cash infusion from a group led by hedge-fund manager Citadel Investment Group LLC."

This is on the heels of Citi getting $7.5 Billion from Abu Dhabi.
"Investors seem delighted that Abu Dhabi is injecting $7.5 billion into Citigroup, bidding up stocks in general on new confidence that the mortgage solvency crisis might ease. "
Several items of note (BTW these are great for class! Hint hint ;) ).

1. Originally (with the writedowns) leverage ratios had gone up dramatically. Assets had been slashed while debt was largely the same. As this happened, financial distress costs rose.

I have talked to a few investors who had taken that portion of their portfolio above the SIPC's insured $500,000 out of E-trade.
E-trade CEO even acknowledged this in his released statement:
" `This capital infusion will restore investor and customer confidence in the company...' ''
Note to my classes, why? What could this have done to E-Trade? Since it is almost December I will give you a bonus hint: think It's a Wonderful Life!

2. The stock market reaction to these private placements is generally positive at least in the short run. . That much is well known. What is less understood is the "Why". Some of it of course is the reduction of these agency costs, but not all private placements take place in this crisis environment and they are still met with positive (albeit less positive) reactions.

My favorite explanation is that when people who have better information do something, I would be smart to follow their lead. This information hypothesis story goes back at least as far as Wruck's 1989 paper (he also mentions monitoring) and has received quite a bit of support--e.g. this 1999 paper by Goh, Gombolo, Lee, and Liu).

There is another version however. For at least some private placements, the new investors are more apt to be active in monitoring management. This version is consistent with much of what we see in private equity firms as well.

It is undoubtedly true that in some cases monitoring improves, but it often is troubling since a private placement is usually done by management (and not always in a time of need). Why would management actively seek out investors to make their lives miserable.

A recent paper by the late Michael Barclay with Cliff Holderness and Dennis Sheehan (three professors who I owe a great deal of my financial learning both at Penn State and Rochester) further questions this monitoring hypothesis and shows that it can be overstated since often the new investors are passive.

Further antecodal support for the information explanation is that (at least in the resolution of these major financial events) there appears to be a fairly strong industry effect at times when things look bad. The intuition is that these private investors are not just buying the firm, they are also buying into the industry.
(a fascinating version of this is by Besley, Kohers, and Steigner) who actually find a negative reaction in good times (the monitoring may make firm X a stronger competitor) but a positive reaction when in a bear market.

4. Firms do try to get back to their target debt levels. Publicly issuing equity can take months and is generally associated with a stock price decline, so privately placing equity is often a faster (and more positive!) event.

5. And finally, Ben Franklin had it right when he said "Necessity never made a good bargain." The new investors (especially at Citi) seemingly got a pretty good deal. From the
"In general, Wall Street was relieved to hear about the Abu Dhabi Investment Company's infusion, which will boost Citi's ratio of cash to debt and, in turn, make Citi stronger financially. Once the equity units Abu Dhabi bought are converted into stock in 2010 and 2011, Abu Dhabi will hold a 4.9 percent stake in Citi. Until those units get converted, Citi will pay Abu Dhabi a yield, or essentially an interest rate, of 11 percent."

From the NY Times's Dealbook on the ETrade deal:
"Citadel is getting E*Trade’s portfolio for a cut-rate price: It is paying $800 million for assets that had a book value of $3 billion. E*Trade said Thursday it is taking a $2.2 billion haircut on the transaction."

Tuesday, November 27, 2007

SSRN-Do Buyouts (Still) Create Value? by Shourun Guo, Edith Hotchkiss, Weihong Song

I do not have time to really comment on this one, but I did find it very interesting. I'll try to add some to this later, but at least I can point it out and quote the abstract.

SSRN-Do Buyouts (Still) Create Value? by Shourun Guo, Edith Hotchkiss, Weihong Song:
"For a sample of 176 buyouts completed between 1990 and 2006, we show that these deals are somewhat more conservatively priced and lower levered than their predecessors from the 1980s, but that the deals still impose substantial default risk on the firms. For 89 of these LBOs with post-buyout data available, we find that gains in operating performance are either comparable to or exceed those observed for benchmark firms matched on industry and pre-buyout characteristics....Returns to either pre- or post-buyout capital invested are significantly positive for the sample overall, and are positive for all outcome groups except those ending in a distressed restructuring. Returns to post-buyout capital are greater when the deal is financed with a greater proportion of bank financing, or when there is more than one private equity sponsor involved in the deal, consistent with increased monitoring by these providers of capital."

Fed to Inject $8 Billion to Lubricate Economy - New York Times

Fed to Inject $8 Billion to Lubricate Economy - New York Times:

"Seeking to reassure banks amid the continuing credit crisis, the Federal Reserve said yesterday that it would provide $8 billion in funds to ease concerns about lending during the holiday season.

The $8 billion — essentially a low-interest loan to the nation’s banks — will be issued Wednesday and repaid Jan. 10. The 43-day loan period is the longest in three years for this type of year-end injection. While it is not an unusual step for the Fed, the injection usually takes place later in the fourth quarter and involves a smaller amount. In 2005, the last time the Fed issued year-end funds, it issued 28-day repurchase agreements for $5 billion, starting Dec. 8."

I may NEVER say this again (it really was not my favorite class--sorry Rich ;) ), but I wish I were teaching Money and Banking right now.

Sunday, November 25, 2007

BonaResponds "commercial"

My day job is a financeprofessor, but what most on campus know me for is my role in BonaResponds. In that light, you can call this an agency cost problem if you must, but here is an unpaid for advertisement...

Help BonaResponds While Shopping!

Ok, this is easy. All you have to do is click through this link and then shop at any of 100s of stores (Barnes and Noble, Best Buy,, Ebay, even Wal Mart,, Travelocity, Verizon, etc etc. (scores and scores of retailers in all categories!)

Just type in BonaResponds as your charity (in their terms who do you Goodsearch for) and then shop like you would anyways. The retailer will donate a portion of the sale (generally about 3%, but in some cases 5%, 9%, or even 25%) to BonaResponds!!

Support BonaResponds here

And if you are curious about what BonaResponds does, checkout Or better come volunteer with us. You will love it, and if you want we can even talk finance (I actually have two students who are are going in January who have asked me to cover material in the van! So we will be doing international finance and derivatives on the drive down and back in my van.)

I think someone has been spying on our Faculty meetings!

Somehow the Unknown professor has been spying on our faculty meetings. He has to have been. There is no way he could have had so many items EXACTLY correct! LOL... Hi is starting a faculty meeting Bingo--the games won't last long!

Tuesday, November 20, 2007

Seems like Bonuses won't suffer as much as most expected U.S.:
"Securities firms typically use slightly less than 50 percent of their revenue to pay salaries, benefits and bonuses....Year-end bonuses usually account for about 60 percent of compensation. In the first nine months of 2007, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns told their shareholders that they set aside $52.4 billion for compensation, up 9 percent from a year earlier. For the whole year, the figure rises to $62.5 billion...The total increases when bonuses for employees at hedge funds, leveraged buyout firms and banks such as New York-based JPMorgan Chase & Co. and Frankfurt-based Deutsche Bank AG are included. The industry's bonuses are larger than the gross domestic products of Sri Lanka, Lebanon or Bulgaria. The average $201,500 bonus is more than four times the $48,201 median household income in the U.S. last year, according to U.S. Census Bureau statistics."

Congratulations to Robert Strong!

The University of Maine - News - November 16, 2007 - Carnegie Foundation Names UMaine's Strong 2007 Maine Professor of the Year:
"Robert A. Strong, a University of Maine professor of finance, has been selected as the 2007 Maine Professor of the Year by the Carnegie Foundation for the Advancement of Teaching and the Council for the Advancement and Support of Education (CASE.)"
A very good choice. Congratulations! (and note, he is a Penn State Alum :) )

Sunday, November 18, 2007

The Sums of All Parts: Redesigning Financials - Accounting -

Look for changes in financial statements soon:

The Sums of All Parts: Redesigning Financials - Accounting -
" ...another large step towards the most dramatic overhaul of financial
statements in decades, the Financial Accounting Standards Board Wednesday laid
out a series of subtotal figures that companies would be required to include on
their balance sheets, income statements and cash flow statements. The new look
for financials will break all three statements into five general categories:
business, discontinued operations, financing, income taxes, and equity (if
needed). "

Saturday, November 17, 2007

Fannie Mae's credit losses still in doubt - Nov. 16, 2007

Well that didn't take long. The day after I speculated with zero evidence of the nightmare that would exist if one of the big agencies got into trouble, Fortune had the same idea but they backed it up with the troubling accounting game that Fannie Mae apparently was playing:

As usual when you try to hide something on investors, they tend to get annoyed and more distrustful. The result? A falling stock price.

Fannie Mae's credit losses still in doubt - Nov. 16, 2007:
"In announcing quarterly results Nov. 9, Fannie Mae (Charts) used a different methodology for calculating its credit-loss ratio -- one that had the effect of making the ratio appear more reassuring to investors than it is. In response to investor concerns about the change, first reported this week on, Fannie Mae executives held a conference call with analysts Friday morning that did little to placate investors. Fannie Mae shares fell $2.32, or 5.39%, Friday. The company's stock price has plunged 17% since Fortune revealed the change in disclosure in a story posted online Wednesday"

Friday, November 16, 2007

Steven Levitt Lecture

I took a small group to the Steven Levitt(of Freakonomics' fame )Lecture at UB this week. I will give you some highlights soon.

Weird going to an academic lecture (more or less ;) ) in a basketball arena and having the crowd feel like a basketball game.

A few thoughts: overall VERY interesting.

Random comments and notes from the Levitt Lecture in Buffalo.

Before: Seems weird going to an academic lecture in a basketball arena with a few thousand others. Interestestingly a large portion of the audience were high school students which proves something for about economics but I am not sure what. Some possibilities:

  1. they have a lower opportunity cost of time than others
  2. demand curves slope down and they were offered free tickets.
  3. They were told to go by their teachers and thus had more of an incentive

The first speaker was a high-up at UB (I think VP of academic affairs at UB—I THINK) who was good. His best line was: “only by asking the right questions can world make sense.” (or something like that).

The second speaker was Issac Ehrhlich. He spent most of the time introducing Levitt. His best line: “He [Levitt] proved that economics is not the abysmal science it had been known as.”

Levitt then came on. Some of his comments:

  • “Incentives are at the heart of what economists do.”
  • He then told the story of John S___ an IRS employee who caused 7 million children to disappear. No, he was not a mass murderer but it was his idea to mandate Social Security numbers for children on parents’ tax returns to qualify for deduction. Many had been lying to get the deduction. With this rule change they could not do it anymore. Makes the IRS about $2B per year! One great idea. Unfortunately for him, he worked in government and was not well paid for the idea: he had to fight (and get congressional help) to get a bonus of $25,000.
  • His mom was a psychic. His dad was a doctor specializing in “internal gas”. He then told the story of how he chose to get a PHD in Econ and his math difficulties (indeed his story of his first PHD math class was not unlike mine. Only difference is that he overcame his problems ;) )
  • His dad told him if he could not compete against smarter competition “in real economics”, choose a niche that others do not want and excel there.
  • His favorite story in Freakonomics is that of the drug dealers (See video below).
  • Altruism may or may not increase utility, but the research into altruism definitely showed that people care of how they appear to others.
  • My favorite story was about his new work on prostitutes. He said that the world’s oldest profession may also be the world’s worst. Big risks, little money etc. He had a prostitute speak to his class. Had to pay her out of own pocket as paying for a prostitute is frowned upon. Among findings: probably more likely to have sex with a police officer than be arrested by one. The type of “service” has changed over time as premarital sex has become more common. Now take the “weird stuff” to prostitutes (Gary Becker thought that up—I might add internet as well—or so I hear!).

Q&A (others Questions were left out)

  • Q. On Trickle down economics. (person clearly wanted to hear it did not work)

A. Tough question. Tradeoff between a bigger pie and more equality. Lower taxes do increase economy but also inequality. In the end “we really do not know”.

  • Q. How do you come up with some of your metaphors?

A. Having a mom as a psychic who channels dead people and a father who studies intestinal gas really created an atmosphere where anything was ok. This cuts down on his self-censorship.

  • Q. On Health Care:

A. Health care is tough. For some reason people expect it for free. Health care not really different. If you want it, you pay for it. Healthcare is a hige share of GNP, but we do get a lot for it….somehow need to encourage innovation. For instance years ago people expected polio to take up large percentage (30%) if healthcare costs. Then vaccine. Polio costs fell. But now it is difficult to keep patents etc, so vaccines are less profitable, so less of an incentive to develop new ones.

Here is an example of what it was like. This was from a few years ago, but VERY VERY similar to what he did. Some of it even in the same words.

Interesting history lessons

Yeah this is probably sort of trivial, but I love history and finance so the combination of the two is too good to pass up. This is on the 1920s. It shows the how the stock market worked with specialists at posts and how the ticker tape was created--the video of order confirmations is fascinating and reminscient from my mental picture of Orwell's 1984), the risks of buying on margin, and the crash of 1929.

Wednesday, November 14, 2007

Transactions costs, renting, and leasing

While leasing is a topic we won't cover in class to any detail until later in the semester, a friend called all excited about ZipCars today. ZipCars allows you to rent for periods as short as as an hour.

In their words:
"Zipcar is the closest thing to owning a car without the cost and headaches. It's also more convenient, cost-effective and more fun than renting."
The call got me thinking: As technology drives down transaction costs, what other types of transactions will become economically justified. Any thoughts on what other markets might develop as transactions costs fall still further?

Make a difference

I know there are literally thousands of great causes out there. Take, BonaResponds for instance, which is always looking for donations (we are adopting a family in Mississippi and helping to rebuild their home which will cost about $20,000) so I am definitely not saying do one to the exclusion of others, but this one seems like quite a "win-win". I am giving it a try.

Give one, get one:
"Between November 12 and November 26, OLPC is offering a Give One Get One program in the United States and Canada. This is the first time the revolutionary XO laptop has been made available to the general public. For a donation of $399, one XO laptop will be sent to empower a child in a developing nation and one will be sent to the child in your life in recognition of your contribution. $200 of your donation is tax-deductible (your $399 donation minus the fair market value of the XO laptop you will be receiving)."
For more on this program (which like all has limitations--some may be on Ebay etc, but on net is a wonderful attempt to help those in need and raise them from poverty see this NY Times piece/video.

Illustrated Cash Flow For Dummies

Illustrated Cash Flow For Dummies: "Illustrated Cash Flow For Dummies"

Pretty funny. A good visual lesson on your personal finance!

Google Options Make Masseuse a Multimillionaire - New York Times

Google Options Make Masseuse a Multimillionaire - New York Times:

Co-founders Larry Page and Sergey Brin are each worth about $20 B each and the weatlth has not stopped there. A few look-ins:
" Although no one keeps an official count of Google millionaires, it is estimated that 1,000 people each have more than $5 million worth of Google shares from stock grants and stock options."
"“It isn’t considered ‘Googley’ to check the stock price,”said an engineer...[but]...Others admit that, when gathered around the espresso machine it is hard to avoid the topic of their sudden windfalls.“It’s very clear that people are taking nicer vacations,"
Not surprisingly this wealth has made some nice stories, for instance:
""Bonnie 1999...On a lark, she answered an ad for an in-house masseuse at Google, then a Silicon Valley start-up with 40 employees. She was offered the part-time job, which started out at $450 a week but included a pile of Google stock options that she figured might never be worth a pennyAfter five years of kneading engineers’ backs, Ms. Brown retired, cashing in most of her stock options, which were worth millions of dollars...."
Of course all too often what goes up also goes down. And if Google were to fall, it would have a long ways to go:

"Jim Cramer, the high-decibel CNBC talk-show host, told his audience...“never to take financial advice from anyone who doesn’t recommend Google.”

Google['s] capitalization...nearly equals the total value of the three largest traditional media companies: Time Warner, Walt Disney and the News Corporation. Even at Google’s current stock price, 34 of the 38 analysts following the company have buy recommendations...Fred Hickey, editor of The High-Tech Strategist one of the few willing to call Google’s stock surge “insanity.” But even he isn’t predicting when it might end. He has placed a tiny bet against Google, but no more. “You cannot short a mania,” "
Thanks GS for sending this to my attention.

Tuesday, November 13, 2007

Mortgage Crisis Extends Its Reach -

Sometimes things change really quickly for instance, there are now calls to expand Government's role in the housing market. Huh? Only months ago the exact opposite was being considered!

From the Wall Street Journal--Mortgage Crisis Extends Its Reach - "
The expanding government role isn't the result of initiatives from Washington. As investors have fled from housing exposure, lenders wanting to sell loans they make have had no choice but to rely more on existing agencies that will still buy mortgages, like government-sponsored Fannie Mae and Freddie Mac. To raise funds to lend in the first place, lenders are leaning more heavily on the 12 regional Federal Home Loan Banks, which are cooperatives chartered by Congress but owned by commercial banks and other financial institutions....The political sentiment to expand the companies' powers -- while growing out of the plight of borrowers facing foreclosure -- plays into the hands of the two shareholder-owned companies. Until a few months ago, the debate in Washington centered on whether regulators should be able to force the two, which were both recently involved in accounting scandals, to reduce their holdings of mortgages."
Want a nightmare scenario? While an unlikely event, we would really have troubles is one of them (or worse both) got into financial trouble. (Although we would be able to answer the questionof whether the US government would bail out an agency. Given their accounting problems, it is worth considering.

Sunday, November 11, 2007

Do you have a student managed investment fund?

From Edward Lawrence:
"The University of Missouri - St. Louis is in the process of collecting data on all Student Managed Investment Funds in the world."
If you have not filled out his survey and do have a fund, email him or Kerry Sallee.

Edward C. Lawrence, Ph.D.
Professor of Finance & Area Coordinator
College of Business
One University Boulevard
University of Missouri - St Louis

Saturday, November 10, 2007

Real Estate, CDOs, Banks, and the Economy

The story began in June when trouble in the real estate market (which played out first as sub-prime borrowers could not make payments) began spilling over to the banking industry (Bear was the to acknowledge the damage as it took writedowns (and then made loans to) two of its hedge funds as their holdings of CDOs (a type of mortgage backed security) fell sharply.

In recent weeks the problems have continued to mushroom as financial firms big and small have written down billions of dollars of assets. (See CIBC, Wachovia, Merrill, JP Morgan, Bank America, Citi, E-trade, and maybe Barclays, et al). While not enormous as a percentage of value (Citi estimates the losses at about $64B) it is not surprising that bank stocks have suffered.

What is the biggest concern is that this spreads to the overall economy. The line of reasoning is: banks get in trouble, they lend less, and soon the economy suffers. This is one of the things that is worrying Fed Chairman Ben Bernanke. As a result the Fed has lowered the Fed Funds target and reiterated that the discount window is open to any bank that needs it. (which is what they should have done).

No one can say for sure how this will play out, but it seems like everyone has an opinion. For instance:

UPDATE 3-Wachovia, Capital One say credit conditions worsen Bonds News
"This is now worse than Long-Term Capital (Management),' said Jack Malvey, chief
global fixed-income strategist at Lehman Brothers Inc., referring to the hedge
fund whose 1998 collapse threatened to unhinge global financial markets. 'This
is a painful lesson in financial engineering.'"

Josef Ackermann CEO of Deutsche Bank in Reuters:
"If you go back to the Asian crisis, the Latin American crisis, the Russian
crisis, these were pretty regional," said Ackermann, who also heads global
banking organization the Institute of International Finance.
"(This) is psychologically the worst crisis that I have seen in my 30 years,"

The Economist:
"One worrying lesson for bankers and regulators everywhere to bear in mind is
post-bubble Japan. In the 1990s its leading bankers not only hung onto their
jobs; they also refused to recognise and shed bad debts, in effect keeping
“zombie” loans on their books. That is one reason why the country's economy
stagnated for so long. The quicker bankers are to recognise their losses, to
sell assets that they are hoarding in the vain hope that prices will recover,
and to make markets in such assets for their clients, the quicker the banking
system will get back on its feet."

and finally Business Week:
"Studies have shown that tighter loan standards tend to precede economic
slowdowns. Between July and October, banks tightened their lending criteria
significantly for a variety of business and consumer loans, according to the
Fed's latest survey of senior loan officers. Bankers cited a less favorable,
more uncertain economic outlook, and many pointed to less liquid secondary
markets and greater risk aversion.Sharply tighter standards...will put an added drag on the housing market and consumer spending. And more stringent rules for commercial real estate loans will dampen business outlays for new construction, which has been a key driver of capital spending this year."
So what's next? Who knows? Stay tuned, it will be interesting!

BTW one of the important stories that are coming out is the fact that this is affecting all tranches of the debt as even AAA rated debt is being marked down (which is why the rating agencies are concerned). The San Antonio Express News reminds us that conflicts of interest exist here too.

Corporate goverance making inroads in Nigeria!

In a story that shows the importance of capital markets and governance, the Central Bank of Nigeria is pushing for better corporate governance of banks. Remember that Nigeria wants to grow into one of the top 20 economies by 2020, this is a good start. Nigeria: No Bank Survives Without Good Corporate Governance -CBN (Page 1 of 1):
"The Central Bank of Nigeria (CBN) has restated that no bank would survive, even with large capital base, without good corporate governance practices. ....He further explained that good corporate governance means good management, accountability, adding that good management principles...."


"...the CBN has rules and regulation which stipulate the roles of the chief executive, independent directors, directors, audit committee and the roles of management to ensure good corporate governance....the CBN tried to build these rules, adding that one of such was limitation of state government ownership of banks, as part of measures to avoid huge withdrawal from the bank on the ground that they are owners. He stated that government withdrawal in the past has contributed to the failure of the nation's banks."

and then also:

"...also stated that media on the other hand has the role to play to encourage corporate governance and report those that do not comply"

Friday, November 09, 2007

Science Journal -

Science Journal - A look at the Puri and Robinson JFE article on optimism.
"Optimists, the Duke finance scholars discovered, worked longer hours every
week, expected to retire later in life, were less likely to smoke and, when they
divorced, were more likely to remarry. They also saved more, had more of their
wealth in liquid assets, invested more in individual stocks and paid credit-card
bills more promptly. Yet those who saw the future too brightly .... behaved in
just the opposite way, the researchers discovered....Optimism is a little like
red wine," said Duke finance professor and study co-author Manju Puri. "In
moderation, it is good for you; but no one would suggest you drink two bottles a

Great coverage by the WSJ of a fascintating JFE article.

Index of Orlando FMA Papers

Index of Orlando Papers: A reader commented today that the FMA had taken down the program from last month's Meetings in Orlando. Fortunately they did leave the directory of papers online. Enjoy!

Fall 2007 FMA Online--

Fall 2007 FMA Online: "
"Jay's Ritter's Keynote Address tackles the question of if there is a corporate governance premium for listing in the United States, with an insightful look at international competition for new listings of IPOs."
At the FMA's in Orlando I was talking to a friend and our comments about Jay Ritter were almost identical: "He is a genius." Well here is your chance to watch his presentation from the European Financial Management's annual meeting. It is just under 30 minutes long but very good!

Thursday, November 08, 2007

A conversation with with the CEO of General Electric Jeffrey Immelt - Charlie Rose

A conversation with with the CEO of General Electric Jeffrey Immelt - Charlie Rose: "A conversation with with the CEO of General Electric Jeffrey Immelt"

Immelt talks on risk and return, globalization, global warming, foreign exchange risks, the US dollar and trade deficit, the role of government, and much more. It is really good. We can debate if he is an expert on some of the things (say education or healthcare), but I think we can all agree he is a smart person and it is an interesting conversation. (Indeed Warren Buffett calls him best manager in US!)

Yes, I am a big fan of Charlie Rose, but this conversation is even better than most. The next time I have to miss a class, this might be required watching. But in the interim, I definitely recommend it.

Tuesday, November 06, 2007

No More Bench Strength - New York Times

The NY Times missed a great opportunity here. The article is good, but it could have been great. First the facts from the article.

No More Bench Strength - New York Times: "
Thirty years ago, companies rarely looked beyond their own executives to find new chiefs, said Kevin J. Murphy, a professor of finance at the Marshall School of Business at the University of Southern California. In the 1970s, only 10 percent of new chiefs at Standard & Poor’s 500 companies came from the outside, he said. Now that figure is closer to a third."
Which in and of itself is a nice bit of trivia. Unfortunately, the article did not mention a great academic article by Hermalin that gives much insight into this phenomenon and hypothesizes that real option analysis and closer board governance can help explain why outsiders are now more apt to replace the CEO than in the past.

Close circuit to those of you at USC: if you get a chance, take a class from Kevin Murphy. He ranks VERY high in my all time favorites!

Here is a follow up via NPR.

Study: Free beats fee for Radiohead's 'In Rainbows' | Tech news blog - CNET

I have to admit this is probably not strictly speaking finance, but it is REALLY interesting, so....

First the background: Radiohead released their newest album free online. They merely asked people to donate.

Well, the album was released and the tallies are coming in. And not overly surprisingly, people did not give all that much. Some highlights:

Study: Free beats fee for Radiohead's 'In Rainbows' | Tech news blog - CNET "Those who predicted that Radiohead would see mass financial support after allowing fans to pay whatever they wanted for the band's latest album appear to have been a tad optimistic, according to a study released Monday."

The breakdown:
"... Of those who downloaded Radiohead's digital album, In Rainbows last month, about 62 percent walked away with the music without paying a cent....About 17 percent plunked down between a penny and $4, far below the $12 and $15 retail price of a CD. The next largest group (12 percent) was willing to pay between $8 and $12--the cost of most albums at Apple's iTunes is $9.99. They were followed by the 6 percent who paid between $4.01 and $8 and 4 percent coughed up between $12 and $20."
The economist in me is totally not surprised (see most open source products), but I do have to confess I was hoping that people would pay. Oh well.

And now I think I will take their advice and go to sleep.

A few other blogs that you might be interested in

Without boring the entire finance world, there are two other finance blogs that I help with. One is for just my finance classes, the other is for a our student-run investment portfolio class (called Students in Money Management or SIMM). Feel free to read either or both, they do have quite a few interesting posts.

Monday, November 05, 2007

Does short-term debt lead to more "earnings management"?

In another paper from the FMAs, Gupta and Fields look at whether more short term debt leads to more "earnings management."

Does short-term debt lead to more "earnings management"?

Short answer: YES.

Longer answer:

Intuitively the idea behind the paper is that if a firm has to go back to the capital markets, they do not want to do so when times are bad. Of course, sometimes times are bad. In those times, management may be tempted to "manage" earnings so that things do not appear as bad as they may be.

The findings? Sure enough, managers seemingly manage their firm's earnings more when the firm has more short term debt.

A few look-ins:

From the Abstract (this is the best summary of the entire paper):
"...results indicate that (i) firms with more current debt are more susceptible to managing earnings, (ii) this relation is stronger for firms facing debt market constraints (those without investment grade debt) and (iii) auditor characteristics such as auditor quality and tenure help diminish this relation...."

Which fits intuition. Why?
* The more the constraints, the more incentive the management has to manage earnings since if they do not, they may not be able to refinance.
* Auditors would frown upon this behavior and the stronger the auditor, the less likely it is that the manager would manage earnings.

How does this "earnings management" manifest itself? The most common way (although not the only way) that managers manipulate earnings is through the use of accruals . Thus, the authors examine this and find:
"A one standard-deviation increase in short-term debt (total current liabilities) increases discretionary accruals by 1.69% and increase total accruals by 2.28%. Our evidence supports the idea that debt maturity significantly impacts the tendency of firms to manage earnings."
Which is a really interesting finding!

Sunday, November 04, 2007

CIBC analyst got death threats on Citigroup: report - Yahoo! News

It is well known that there have traditionally been many more buy recommendations than sell. This has been largely explained incentives both of the analyst (who does not want to lose the information that comes from better access to management) and from the brokerage firm (who does not want to lose potential investment banking business). Recent research (Kadan, Madureira, Wang, and Zach) suggests that these problems have been at least somewhat mitigated by regulations, but not completely.

Why? Well in what sounds like a plot from a novel or movie, we may have to add another explanation: Death threats!!!

CIBC analyst got death threats on Citigroup: report - Yahoo! News:
"The analyst whose downgrade of Citigroup Inc sparked a broad stock market sell-off on Thursday said she has received several death threats stemming from her research, the Times of London said. Meredith Whitney of CIBC World Markets Inc late Wednesday downgraded Citigroup to 'sector underperformer,' saying the largest U.S. bank by assets might need to raise more than $30 billion of capital and cut its dividend. Her downgrade triggered a 6.9 percent drop in Citigroup's shares.... 'People are scared to be negative, especially when a company has such a wide holding,' Whitney told the Times of London in an article published Saturday. 'Clients are not pleased with my call and I have had several death threats,' she continued. 'But it was the most straightforward call I've made in my career and I am surprised my peer analysts have been resistant. It's so straightforward, it's indisputable."
Wow! Can that be true?

Saturday, November 03, 2007

Google Reader -Jim's shared items

Google Reader -Jim's shared items: Google's Sharing feature is really cool. For what is worth here are articles that I liked and thought you might. It is updated regularly.

Britney Spends Big, Court Papers Reveal -

Britney Spends Big, Court Papers Reveal -
"Court papers released Thursday in Britney Spears' custody dispute with Kevin Federline show she spends lavishly on clothes and entertainment, and doesn't save or invest any of her roughly $737,000 monthly income....she spends zero on education, savings and investments and gives $500 a month in charitable contributions...."
I have nothing to add to that...

Friday, November 02, 2007

Obesity Epidemic Among CEO Pay - Business on The Huffington Post

Eve Tahmincioglu: Obesity Epidemic Among CEO Pay - Business on The Huffington Post:
"Stanley O'Neal who is leaving Merrill Lynch after giving it a big fat gift of a $8 billion dollar write-off thanks to risky investments. The board just can't help but feed this obesity epidemic. They're giving him $160 million plus in severance for his troubles as he heads for the door. At some point, the nation's corporations, or most pointedly, their corporate boards, will realize throwing money at their CEOs is probably not the best idea"

CEO pay is perennially a hot topic. Since we will be doing in class soon, figured this would be a good time to start thinking about it.