Evidence of learning in the stock market

This is a bit of an old article, but the idea of stock market learning came up in class on Wednesday and ethics all of last week, so I will mention market learning in the context of governance.

Short version: it used to be that you could get a higher return by buying firms with good governance (Gompers, Ishii, and Metrick, 2003)  (as measured by the Gompers-Ishii index) and shorting poorly governed firms.  BUT then the market learned and now the index is seemingly priced (in other words higher Q values, but returns no longer predicted by index levels.

 Investing in Good Governance - NYTimes.com:

"There is evidence that good-governance features included in standard governance indexes do improve the performance of companies – but that their significance is already reflected in market prices."

Here is the paper showing the learning:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1593911

'via Blog this'

Related articles

• Does Good Governance Pay?
• CEO Ownership and Stock Market Performance
• Dual-class share structures: The cost of control

So-called sweatshops, Good or bad? or both?

Image via CrunchBaseChinese Readers on the 'iEconomy' - NYTimes.com:

By now you probably have seen the series of articles the NY Times is running on China and Apples. If not, I HIGHLY recommend you read them and realize why so many jobs went overseas (pun intended). The first article sets the stage by recounting a conversation with President Obama and the late Steve Jobs where Jobs basically said the jobs the US lost are not coming back.


Here is a flavor from the New Republic:

"The article, by Charles Duhigg and Keith Bradsher, is difficult to summarize. If you care at all about the economy and future of the American workforce, you should read it for yourself. But the main takeaway is that other countries, particularly China, offered Apple something not available here: A cheaper, more compliant workforce. This anecdote captured the situation well:

"One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”"

What you may not know (at least I didn't) that the articles were also posted in China. The comments are very interesting and on both sides of the issue.

Those attacking Apple (and China for allowing such conditions to exist):

"It’s ridiculous that the local government is trying to promote the city’s image while horrible accidents are still happening like this. If what is prohibited in the U.S. is highly protected here by the local authorities, we will never be treated with dignity. — 安吉丽娜朱莉的男朋友"

or

"...everything is driven only by G.D.P., so which government official would dare supervise those companies? They (the governments) have long reduced themselves to the servant of the giant enterprises. — Occasional Think"

But on the other hand:

"Without Apple, Chinese workers will be worse off. I hope China can some day soon have dozens of its own companies like Apple, who (only) work on high-end research and development and send manufacturing lines to Africa. — Anonymous"

and

"If more rigorous labor protection standards and 8-5 working time protocol are being strictly executed, we can expect a plunge of the workers’ wages. If labor organizations with monopoly rights are established, those rural migrant workers who cannot find a position in the organization will be forced back to their hopeless villages.....  — YeyeGem"

and

"If people saw what kind of life workers lived before they found a job at Foxconn, they would come to an opposite conclusion of this story: that Apple is such a philanthropist. — Zhengchu1982"

Which reminds me of this clip from Milton Friedman (the entire thing is an excellent defense of Capitalism) but the part that begins at 1:00 is totally apt for this discussion. (HT Susan A)




Who is right? Who is wrong? There are no easy answers. In a free society with no information asymmetries, by definition if someone takes a job FREELY, and can leave FREELY, then it must be that the employee is better off with the job than without.  And clearly factories like these (and by no means is it only Apple) do lift the standard of living.  But if the people are not working there freely or are working under false auspices and can not quit, then all bets are off.  

Related articles

• Apple in China: The New York Times goes for the Pulitzer (tech.fortune.cnn.com)
• Why Apple Doesn't Make the iPhone in America (suburbanmen.com)
• Apple: Poor working conditions inside the Chinese factories making iPads (dailymail.co.uk)
• When Barack Obama joined Silicon Valley's top luminaries for dinner in California last February(2011), each guest was asked to come with a question for the president. (tarpon.wordpress.com)
• Want to feel like an Apple factory boss? New strategy game lets you run a sweatshop (venturebeat.com)

Why acting ethically is good business.

In my corporate finance classes I always make a point to stress that in the absence of large information asymmetries, acting ethically is generally also acting in shareholders' best long-run interests.

Why? Because the market place is a hard disciplinarian and few people (customers, suppliers, or investors) want to do business with firms that are not acting ethically.

Consider for a second, if you knew XYZ company was dumping toxic wastes, would you willingly do business with them when there are alternatives? MBA Depot (which incidentally is just a great site) provided a bit more evidence on this topic this week with a 2003 paper by Montgomery and Ramus, they conclude:

"more than 97% of the MBAs in the sample said they were willing to forgo financial benefits to work for an organization with a better reputation for corporate social responsibility and ethics."

Of course any survey is at least somewhat suspect and it is easy to say one thing and do another, but 97% is a pretty high number! It is also pretty encouraging!