IESE Insight - Finance

Jeff B. just sent me an email about this site. It had somehow slipped under my radar. Man do I feel stupid. It is really, really good! Recap of what the people at IESE are doing.
IESE Insight - Finance

Articles include fascinating looks at the "bubble", M&A in Europe, and the Euro.

I definitely bookmarked this one and will add it to my FinanceProfessor Links as well.

(PS Thanks Jeff!)

Look at Me Now: The Role of Cross-Listing in Attracting U.S. Investors by John Ammer, Sara Holland, David Smith, Francis Warnock

SSRN-Look at Me Now: The Role of Cross-Listing in Attracting U.S. Investors by John Ammer, Sara Holland, David Smith, Francis Warnock:

Ammer, Holland, Smith, and Warnock provide an interesting look at what leads non-US firms to cross-list (sell their securuties on US markets).

Several key points:

* relatively few foreign firms do cross list.

* cross listed firms are owned by US investors at a greater rate than non cross-listed firms:

"in 1997, U.S. investors held roughly 17 percent of the market capitalization of foreign companies that listed on the NYSE, NASDAQ or AMEX, but less than 3 percent of other foreign companies."

As the authors write: "what is it about cross-listing that makes previously unwanted shares more attractive to U.S. investors? " Is it lower transaction costs? less of a home country bias? increased investor protections? all of the above?

A few interesting findings:

* US investors already own a greater percentage of firms that eventually cross list than firms that do not eventually cross list, but the percentage grows even more following cross-listing:

"Our estimates imply that U.S. investors would have held an average of 6 to 8 percent of the market capitalization of cross-listed firms even if these firms had not listed in the United States, more than the average 3 percent held in foreign firms that are not cross-listed. Nonetheless, firms that cross-list experience an economically and statistically significant increase in U.S. holdings, equivalent to 8 to 11 percent of thefirms’ equity"

* This increase is most pronounced in firms that had lacked transparency priot to cross-listing (and the accompanying compliance with US accounting practices but NOT and regulatory rules/investor protections):

"...the cross-listing effect is closely tied to improvements in investor access to value-relevant information. Firms that use poor accounting practices, or that come from countries with weak accounting standards, experience a statistically larger cross-listing effect thando firms from a strong accounting background."

and

"By contrast, our results provide little support for the idea that firms with weak investor protections increase their attractiveness bybonding themselves to U.S. securities laws"

See? I told you this was interesting. Long, but interesting.

Cite:
Ammer, John Matthew, Holland, Sara B., Smith, David C. and Warnock, Francis E., "Look at Me Now: The Role of Cross-Listing in Attracting U.S. Investors" (March 11, 2005). Board of Governors of the Federal Reserve System International Finance Discussion Paper No. 815 http://ssrn.com/abstract=556208

Apology

Hi everyone...

I just wanted to let you know that contrary to popular opinion I have not gone anywhere, just a tad busy. I got a bit too involved in a few different relief "missions" (not sure if that is the right word or not) for the Katrina Victims.

One for the animal victims (we are collecting and shipping down pet supplies, medicines, towels, etc) and then organizing a trip down for the finance club at St. Bonaventure as well to help load trucks and hopefully clean up some in Southern Mississippi. If you would like to donate to either, by all means let me know :)

Added to trying to get a house painted before bad weather, and I just have fallen behind. As I always say, I think things are getting better, and I hope to have two new entries done today.

I also will try to catch up the emails that I have sort of let go.

jim

BTW PSU is 2-0 :) Bills 1-0 and well, I will just ignore the Mets' recent fall from grace.

Are casinos really important for national security?

Don't do it France! I hope they come to their senses. This would entrench management even more.

French Anti-Takeover Plan Under Fire: Financial News - Yahoo! Finance: "A soon-to-be-published decree, touted by ministers after rumors of a PepsiCo Inc. bid for French food company Danone SA provoked a political outcry in July, would give the government a veto over takeovers in 10 industries deemed sensitive to national security.

Sectors on the list, already confirmed by the Finance Ministry, include several over which most states retain tight control, such as arms manufacturing and encryption.

But the decree also covers companies with activities in biotechnology, data security, casinos and antidote production -- fueling concern that it could lead to a broader kind of protectionism."

Who Loses from Trade? Evidence from Taiwan by Brad Barber, Yi-Tsung Lee, Yu-Jane Liu, Terrance Odean

Who Loses from Trade? Evidence from Taiwan by Brad Barber, Yi-Tsung Lee, Yu-Jane Liu, Terrance Odean:

In a paper that finds the exact opposite of San 2005, Barber, Lee, Liu, and Odean report individual investors lose when trading with individuals. This finding, which fits with previous work much more than San's surprise finding, is based on stock trades in Taiwan from 1995 to 1999.

From the paper:

"The trade data include the date and time of the transaction, a stock identifier, order type (buy or sell), transaction price, number of shares, and the identity of the trader. The trader code allows us to broadly categorize traders as individuals, corporations, dealers, foreign investors, and mutual funds. The majority of investors (by value and number) are individual investors."

Not surprisingly, this is many many many trades: "For the five-year period, ...more than 500 million buys and 500 million sales."

The methodology?

"On each day for each stock, we sum the value of buys made by a particular investor
group (corporations, dealers, foreigners, mutual funds, or individuals). The intraday return on these purchases is calculated as the ratio of the closing price for the stock on that day to the average purchase price of the stock. On each day, we construct a portfolio comprised of those stocks purchased within the last ten trading days."

"Statistical tests are based on the monthly time-series of returns, where we calculate three measures of risk-adjusted performance. "

1. "market-adjusted abnormal return by subtracting the return on a value-weighted index"
2. "estimate Jensen’s alpha by regressing the monthly excess return earned by each
investor group’s buy (or sell) portfolio on the market risk premium."
3. "...an intercept test using the four-factor model developed by Carhart (1997)." [these factors are "the return on a value-weighted portfolio of small stocks minus the return on a value-weighted portfolio of big stocks...the return on a value-weighted portfolio...of high book-to-market stocks minus the return on a value-weighted portfolio of low book to-market stocks, and...the return on a value-weighted portfolio of stocks with high recent returns minus the return on a value-weighted portfolio of stocks with low recent returns."

The findings?

When trading with institutions, individuals systematically lose:

"Institutions appear to gain from trade, though the gains from trading reach an
asymptote at approximately six months (140 trading days). After one month (roughly 23 trading days), the stocks bought by institutions outperform those sold by roughly 80 basis points. After six months, stocks bought outperform those sold by roughly 150 basis points.

In contrast, stocks sold by individuals outperform those bought. The magnitude of the difference is smaller than for institutions since most trades by individuals are with other individuals and do not contribute to the difference in performance between stocks sold and stocks bought. The large gains by institutions map into small losses by individuals merely because individuals represent such a large proportion of all trades."

This finding does fit existing theories on the informational advantages of instititions and once again reminds us that markets are not perfectly efficient. The question now appears to me more of how far from this perfect efficiency we lie.

You will want to read this one. Very interesting!

Barber, Brad M., Lee, Yi-Tsung, Liu, Yu-Jane and Odean, Terrance, "Who Loses from Trade? Evidence from Taiwan" (January 2005). EFA 2005 Moscow Meetings Paper http://ssrn.com/abstract=529062

The Firing of a manager

One of the coolest things about finance, and in particular about teaching finance, is that almost any news item can be used to demonstrate various finance lessons. Indeed, just today Kimmunications gives us financial lessons we can take from the Hurricane Katrina disaster.

The story I wanted to point out however has received very little national coverage. Indeed, it really is not that big of story outside of Pittsburgh: The firing of Pirates' manager Lloyd McClendon. Huh? Bear with me.

The firing of a coach or manager (in any sport) can be used to demonstrate numerous aspects of finance. Possibly the simplest point is the decision process that owners (and General Managers) use to evaluate managerial performance. It is easy to understand why simple win-loss percentage may not be a good measure. (for instance the team may not have enough skilled players, may have had many injuries, or may just have experienced some bad luck.) The thought process necessary to remove a coach or manager is very similar to that necessary to replace a money manager.

Just looking at raw investment returns (which is analogous to looking at winning percentage) is not sufficient; it is a starting point only. A money manager may be doing a very good job but the fund's raw returns may be negative because of a down market, or the fund may lag peers because of a more constrained investment philosophy. Of course finance has tools to measure portfolio performance on a market adjusted basis, but none of these tools (Sharpe Ratio, Treynor Measure, and Jensen's Alpha are most common), is perfect and consequentially some good money managers are fired while some poor managers retain more funds under management than their performance warrants.

A second way that the firing of a sports coach/manager can be used effectively in a finance class is to use the tendency of sports' coaches to “clean house” upon being hired. This house-cleaning is common place in most sports as the new hire wants to bring his/her “own people” to the team. Scherbina and Jin (2005) find that new mutual fund managers are more likely to sell those “losers”, that had been acquired by the former fund manager.

While there is (and should be) debate as to why this behavior is common (did the former managers hold on to poor performers—both players and stocks-- because of a reluctance to make mistakes or because they had better information as to the true worth of the stock/player than the new manager?), it is consistent with the behavioral finance tenant of people being reluctant to admit their own mistakes.

One final problem in all of this is that it is difficult to test. In both sports and finance, poor performance generally precedes the firing. And in each case the performance improves following the firing, but what is more difficult to test (especially in sports) is whether this improved performance is merely a reversion to the mean (a new sector is hot, bad luck reverses, players' injuries heal etc), or if the new manager is the cause of the improved performance.

So with this in mind, you no longer need to feel guilty about watching ESPN or reading about sports, you're just looking for class material. ;)

Brain Regions Blamed for Bad Investment Ideas

How cool is this? Behavioral finance meets neural science.

Brain Regions Blamed for Bad Investment Ideas:

"Researchers say two different brain regions may be involved in making risky vs. conservative investment mistakes, a finding that may eventually help economists build better models of people's investment behavior.'Overall, these findings suggest that risk-seeking choices (such as gambling at a casino) and risk-averse choices (such as buying insurance) may be driven by two distinct [brain regions],' write Camelia Kuhnen of the Stanford University School of Business and colleagues in the Sept. 1 issue of Neuron."

The key finding:

"anticipation of reward stimulates the risk-seeking area of the brain and may increase the likelihood of individuals switching from conservative, risk-aversion investment behavior to risky investment behavior. A similar story in reverse may also apply to marketing strategies used by insurance companies."

For the record I think this is the first time I have ever blogged an article for FinanceProfessor.com from WebMD!

Why we should not cap gas prices

I found this when I was researching gas prices for a friend who is convinced that prices should be capped. I disagree! Let markets work.

The FinancialRounds does a good job of explaining why capping is not a solution:

"we have to have some mechanism to allocate the available gas among the people
who want it. You can do it by lottery, by government fiat (i.e. you get a
"ration card"), by random chance, by staying in line, or by market mechanisms
(i.e. prices)....If supply decreases (say, following a hurricane), prices rise. If they rise high enough, you might decide that it's not worth it to drive to your favorite restaurant, and instead you might choose to drive to one closer so that you have more money to spend on other things. This leaves more gas available to the folks who place a higher value on it.

Well said!

Assorted Topics

Trying to catch up some:

1. FreeMoneyFinance is doing an amazing thing. Matching donations upto $5000 for aid to Hurricane victims! GO and give now! I hate to make cyclists pay extra, but in this case, I want him to pay the full amount ;)
2. Speaking of the Hurricane, a few more financial points to note. The IRS has relaxed some rules and deadlines for those affected and even has advice for those who give to charities.
3. Bloomberg reports on New Orleans' Muni debt:

   "The reconstruction of New Orleans and the other ports on the Gulf Coast that were devastated by the hurricane is going to be a municipal market story. The bankers who design and sell municipal bonds, ordinarily a much-maligned group, are going to figure as superheroes in this modern Battle of New Orleans. Rated Baa2 by Moody's Investors Service and BBB+ by Standard & Poor's -- in other words, almost junk -- New Orleans already carried what the rating companies call a ``high debt burden'' and low financial reserves. So it would probably be a good idea for the state to set up a special authority to sell several billion dollars in bonds designed to help rebuild the city."

In related news, Bllomberg also reports that the economy may not be hurt by as much as some fear from Katrina.

"This paradoxical economic benefit can be seen on a large scale as well. Woodward found that South Carolina's rebuilding efforts following Hurricane Hugo in 1989 delayed the start of the early 1990s recession for the state. The U.S. Bureau of Economic Analysis doesn't estimate the effects of a disaster on the national economy, but my own analysis of gross domestic product data from 1947 to 2005 shows that, with a two-quarter lag, a hurricane will boost growth by 0.3 percentage points.

Similarly, when a hurricane-force storm struck Denmark in December 1999, causing extensive and serious damage, the Danish Ministry of Finance calculated that the effect of the storm was to lift GDP by 0.8 percent in 2000 compared with what it would have been, and by a further 0.3 percent in 2001."

And one more hurricance related story: The SBU Finance Club is in the planning stages of a trip (or trips) down to the Gulf Coast. I will keep you posted, but if you know what 20-25 people will be able to help in early October, let me know! Also if you want to organize a similar trip down to help, contact me.

In non hurricane news:

1. Call for papers:

March 15-17, 2006: The Academy of Finance is accepting submissions of both abstracts and completed papers for the forthcoming 20^th Annual Meeting, March 15-17, 2006. We are also accepting proposals for special panels.... This information and more may also be found at their website, www.hcob.wmich.edu/aof/.

2. The NASD has a pretty useful site with advice for saving for college. Definitely worth checking out!

And don't forget to make FreeMoneyFinance pay the entire amount! (i.e. don't forget to donate!)

Explanation for lack of posts

Just wanted to apologize for paucity of posts in recent days. The combination of watching too much Katrina news, classes starting, and network problems have combined to eat up any posting time.

I think the computer problems are past so hopefully I will be back posting either tonight or tomorrow.

BTW if you have not done so, please donate to the charity of your choice for the hurricane victims.

Is the sky falling?

I had an email this week from a former student. I answered him today. The answer was very long but I do think it may interest some of you. I guess it should be labeled as an editorial, so it is an editorial.

A quick look:

"As for your questions on the gloom and doom that you feel pervade the world. Please do not take this personally, but totally disagree. In fact that is why I waited a while before responding. I wanted to be sure I had read your mood correctly and not just reply off the cuff.

Writing this in the aftermath of Hurricane Katrina with its amazing suffering, destruction, egregious looting, and apparent lack of recovery planning, it is easy to get caught up in the idea that things are not good, that the world is doomed, and that people are inherently evil. I disagree. Of course things are not perfect, but they are much better for most people than they ever have been.

“Things” are by and large good. Indeed arguably things are better than they have ever been. Yes that is a massively large statement, but I do believe it to be true. "

Full letter.

Dr. James Lorie

I missed this totally. The finance profession definitely owes the late Dr. Lorie a great deal. He is one of the people behind CRSP.

Victor Niederhoffer and Laurel Kenner: Daily Speculations:

" Much of the mystery shrouding the stock market dissolved when James H. Lorie began documenting the historic rise and fall of stock prices.

The idea was simple but laborious: chart stock prices from 1926 to1960 and beyond. Dr. Lorie, a University of Chicago professor, helped establish the Center for Research in Security Prices at the Graduate School of Business.

Dr. Lorie, who lived in Chicago's Lincoln Park neighborhood, died of pancreatic cancer Saturday, Aug. 6 in Northwestern Memorial Hospital in Chicago."

SBU's response to Hurricane Katrina

Do me a favor, pass this one on. I played a small part in the idea so I really want it to work.


St. Bonaventure is offering free room and board and one-half tuition scholarships to students from higher education institutions in areas affected by the hurricane so those students can continue their studies here at St. Bonaventure on a temporary basis.

“Our doors — and our hearts — are open,” said Sr. Margaret Carney, O.S.F., S.T.D, University president. “We have put into motion every effort to accommodate students from higher education institutions affected by the hurricane and invite them to contact us. Our goal is to help these students continue their education without interruption.”

We're asking all faculty, staff and students to help us by sharing this information with any professional or social organizations you're affiliated with.

"We expect students to return to their home institutions at the earliest possible moment and will make every effort to help them with that transition," said Mary Piccioli, dean of enrollment. "Our classes began August 29, so it’s important that students contact us as soon as possible if they’re interested in attending classes at St. Bonaventure."

Interested students can contact St. Bonaventure via Mary Piccioli at (800) 462-5050, or via e-mail at admissions@sbu.edu. For full information on St. Bonaventure’s response to Hurricane Katrina, please visit the University’s Web site.

Seasonal, Size and Value Anomalies by Ben Jacobsen, Abdullah Mamun, Nuttawat Visaltanachoti

SSRN-Seasonal, Size and Value Anomalies by Ben Jacobsen, Abdullah Mamun, Nuttawat Visaltanachoti: "

Uh, oh. Here is one that will cause my notes to be redone!

Jacobsen, Mamum, and Visaltanchoti use the Fama-French data library to look at three types of anomalies. Their findings may surprise you!

The anomalies are broken down into three categories:

1. Seasonal--the Halloween Effect (that is that stocks do better from November to April) and the January Effect.
2. Value--The Book to Market anomaly and the Earnings to Price anomaly.
3. Size Effect-the small firm effect

The authors use a "time series of (log) portfolio returns starting with the random walk model and then include a January dummy, a Halloween dummy, or both, to study the interaction between these effects and the different portfolio returns." (See equation 1)

The findings?

1. Returns appear lower in the summer (thus the so-called Halloween effect is supported) :

• "excess returns on almost all portfolios are during summer not significantly different from zero and negative in approximately half of all portfolios. This confirms the finding of Bouman and Jacobsen (2002) for international results also for the US: excess returns in the US on many portfolios are close to zero and often negative during summer months."

2. Value anomalies appear to be largely year-round phenomena

• "Size effect and the well known value effects, like Book to Market, Earnings to Price,
  Cash Flow to Price and Dividend to Price effects are not affected by the Halloween
  effect. These anomalies persist in summer and winter."

3. The size effect appears to be dependent on the measure of comparison and disappears (or even reverses sign!) when the January effect is controlled for!

• "After controlling for a January effect we find no evidence of a size effect in equally weighted portfolios and a reversed size or, in other words, a ‘large firm effectÂ’ in value weighted portfolios."

Which deserves a WOW! I told you I would have to edit my notes!

Cite:
Jacobsen, Ben NMI1, Mamun, Abdullah and Visaltanachoti, Nuttawat, "Seasonal, Size and Value Anomalies" (August 2005). http://ssrn.com/abstract=784186