Ideoblog: The first exchange-listed law firm

I guess more note revamping is in the works.

From Ideoblog: The first exchange-listed law firm:

"Slater & Gordon Ltd . . . became the first law firm in the world to list on a stock exchange on Monday. Already the firm's principals along with initial investors have booked a princely premium with the stock closing at $1.40, after gaining 40 cents on the initial public offer (IPO) price."

Law firms and accounting firms have been the traditional examples of firms that do not go public but remain partnerships. If Slater and Gordon start a new trend, it will be interesting to watch how the public law firms perform (and whether they behave differently as a result of their going public.)

Corporate Governance Blog: International Poison Pills

Stephen Deane at the Corporate Governance Blog has a very interesting article on the growing use of poison pills (not that kind!) in Japan and France.

Institutional Shareholder Services -- Corporate Governance Blog: ISS Releases New Report on Poison Pills in Japan, U.S., Canada and FranceSubmitted by: Stephen Deane, Director, ISS Center for Corporate Governance:

"Even as takeover barriers are falling in the United States, they are rising in Japan, France and elsewhere in Europe. European and Japanese companies are seeking to insulate themselves from unsolicited offers by adopting new takeover defenses such as poison pills....

Poison pills are popping up in Japan and France for the first time. France adopted legislation last year that legalizes poison pills,...In Japan, poison pills were as unknown as hostile bids until two years ago. Takeover defenses last year trumped Japan's only hostile bid by a domestic blue-chip company....To protect themselves from that possibility, hundreds of companies likely will place management proposals on proxy ballots in the coming weeks asking shareholders to approve poison pills"

I guess time to redo my notes ;)

What's going on? A look around

I should be working on a paper (have three in various stages but am sick of all three, so a quick update on things and a look around (much like the old newsletter).

The Blogging World and other News

In the most important blog article of the week, at the Financial Rounds the UnknownProfessor announced the good news on his son who is cancer free! Less important he also has a really cool group of links that would help people who are considering getting a PHD.

FreeMoneyFinance has an interesting (although not necessarily the final word) on why smart people make a higher income but do not necessarily have greater wealth. The article proposes many good points to which I would add look at medians. If intelligent people are overconfident, they are apt to take greater chances and thus while having higher average income, median income may be closer to the overall average. But regardless, the suggestion of living below your means is a good one!

I must confess I do not really understand much about China buying into the Blackstone Group. They say they are doing it as an investment, which may be, but just seems strange. I guess that is what happens when you have large surplus.

The NY Times writes on a recent study by Booz Allen, Hamilton that finds that boards of directors are getting much more active in replacing underperforming CEOs. That is not surprising and fits the evidence Jon Matt (one of my graduate students) found when he looked at trends in Governance for his independent study paper.

The BBC reminds us that globalization is not an immediate win for all. There are growing pains. While the long term prognosis is good, those who are losing out as the markets do deserve help and sympathy, BUT should not halt free trade!

The World Bank (while mired in political problems) did find time to report that the Carbon Market is booming. From TreeHugger: "According the new World Bank Report, just out:- "The carbon market grew in value to an estimated US$30 billion in 2006 " which is about 300% the size of it in 2005. This is good news as it creates incentives for firms to cut carbon emissions.

John Bogle recently appeared on Consuelo Mack's Wealth Track (26 minute video) I find Bogle interesting every time I hear him. Definitely recommended. Here is talks about the lower returns we should expect in the future. (Very similar to his Fall 2006 presentation in Rochester).

Super Bowl, World Series, World Cup? World table tennis championship (if there is such an animal)? Nope. the America's Cup is the most valuable championship to host.

Prepay mortgage or save more? This is always an important question facing homeowners and the Washington Post tries to shed some light on the answer.

Inside the BonaBubble:

BonaResponds did not go to Kansas after all. We were all ready to go and got a call saying that they really did not need our help, so we waited. We will be ready next time! BTW this is open to everyone, alumni, students, staff, or just readers of the FinanceProfessor blog! ;) If you want to go help in Mississippi or Louisiana contact us! BonaResponds@sbu.edu

Construction has begun on the library addition. and of course La Verna the new coffee house has opened!

The trail through the soon to be names Bob's Woods (to the East of Campus) is almost done. It was started as part of BonaResponds' spring local service day and we've been back working on it about 4-5 times since. It is going to be great. The official grand opening will be this fall, but if you are in the area, check it out now!

I sprained my ankle yesterday so I getting my full of ice, elevation, and aspirin. Fortunately it is not that bad but sure scared me when it happened!

Oh yeah, the Baseball team is in the A-10 playoffs! Three of their players are in my classes, so if you are reading this, GOOD LUCK!!


Ok, I will go do some regressions now...lol...

Some summer reading

With the end of classes, comes summer reading/ristening. So I figured I would share some of those books either started (I generally have 4 or 5 going at once.)

1. A Guide to Equity Index Construction by Daniel Broby. Good stuff. Will definitely be used in class next semester!
2. A Behavioral Approach to Asset Pricing by Harsh Shefrin. This one has been on by "to-read" list for a while. teaching SIMM in the fall gave me the kick I needed. It is the most technical of the books on the list but definitely have learned quite a bit and it will be useful in class! (Especially read the chapters on prospect theory).
3. Train your Mind, Change your Brain I am almost done with this. Very interesting! It fits perfectly with what I have always thought: namely you can teach an old dog new tricks, and the brain (and body for that matter) is much more flexible then traditional thought has given it credit for. Super short version: brains change based on environment and inputs. Well written and easy/fast to follow. (if you know anyone with who has had a stroke this should be a MUST read!--see pages 102-106ish).
4. Five Minds for the Future by Howard Gardner- Disciplined, Synthesizing, Creative, Respectful, Creative. I am not very far into it, but so far seems good!
5. Ideas that Stick. By the brothers Heath. First of all, any book with duct tape on cover is a given purchase. But this is awesome. Short version: covers how to get your ideas across and how to get them to "stick". Sure some is common sense, but very well done, interesting, and even fun! And useful not only in teaching, but also writing, managing, and just about everything else!
6. Long Way Gone: memoirs of a boy soldier--by Ismael Beah. The story of a 12 year old (yeah 12) boy who gets involved in the Sierra Leone Civil War. Unreal. FTR I almost didn't get it when I saw it was Oprah's list, but I did and it is good (and only sounds like a Dixie Chick song title).
7. I just ordered Pearl Harbor by Newt Gingrich and William Forsctchen. If it is even a fraction as good as the alternate history Civil War Trilogy by the same two co-authors (the best since Fama and French!), it will be great (Grant Comes East, the middle of the trilogy, is one of my favorite books of all time!)

Rules change, behaviors change: a NASCAR example

People maximize their own utility and react to rules changes. This simple idea (which really is core to all of economics and finance) is the foundation of every class I teach. So when I get a chance to show this simple idea in practice I am always excited. So much so I can't wait to finish the paper to show you some results.


Following the 2003 NASCAR season, officials changed the rules and created the Race for the Cup or Race for the Championship. What this entails is that for the last 10 races of the year are essentially a playoff where everyone can race, but only the top ten are allowed to win the overall championship. This changed racers' incentives. For instance, if you were out of the top ten, you might as well go for broke (i.e. win the race) even if this might result in you being in an accident and not finishing the race.

Sure enough, that is exactly what appears to have happened. For those racers out of the top ten in races 16-36 (I looked forward ten as well since those out of the top ten presumably also have the incentive to take chances to get into the top ten before the cut off), the likelihood of the racing ending as a result of an accident has increased.

This was found with the regression:

Accident = Intercept + B (Out of Top Ten Dummy Variable * New Rules Dummy Variable)

Variable Coefficient Standard Error t-Stat P value

Intercept	0.077215	0.005831	13.24109	2.89E-39
X Variable 1	0.024846	0.008633	2.878087	0.00402

So while this is just one look and a very preliminary one at that, it does appear that when the racers were rewarded more for higher finishes, they took more chances to get the higher place. Which of course is exactly what an economist (finance person) would predict.

Hopefully I will find some time and put this into a real paper, but at least I will be using it in class.

Thanks to James Kane and Anthony Dimario for the data collection on this and to Jonathan Godbey for helpful suggestions!

I did not know that...

While most of us know what a mutual fund is, FundSavvy does have a col site and some interesting facts that I sure did not know, for instance on their What are Mutual Funds? page:

"The popularity of mutual funds may be relatively new but not their origin which dates back to 18th century. Holland saw the origination of mutual funds in 1774 as investment trusts before spreading to Anglo-Saxon countries in its current form by 1868."

Marketplace: China loosens control on currency — a bit

Baby steps are better than no steps!

Marketplace: China loosens control on currency — a bit:

"Starting Monday, China will allow its currency to rise or fall 0.5% a day. The limit used to be 0.3%"

Why have investment banks been so profitable? From the Economist

The Economist gives us another great article! This one is on investment banking. Not only does it provide a short history (going back pre-JP Morgan), but also brings us up to date with a look at the current (very profitable) state of investment banking.

The alchemists of finance | Economist.com:
A relatively long look-in:

"Brokerage used to be described as a haulage business, lugging money, as a member of the Rothschild dynasty once put it, “from point A, where it is, to point B, where it is needed”.... But any haulage firm would be flabbergasted by the trading profits and returns on equity seen in investment banking in recent years....earnings from capital-market-related activities at the top ten global investment banks have risen by almost two-thirds in two years....That sort of profit increase is comparable with Apple's rewards for inventing the iPod.... Yet in investment banking there is nothing nearly so tangible to which to ascribe the gains.

Bankers themselves are fuzzy about explaining their trading profits....But it is clear that three powerful forces are at work, all of them overlapping and mutually reinforcing....

The first is the alchemist's trick of turning debt (mostly leaden) into derivatives (mostly liquid); the second is the emergence of a new class of leveraged client (hedge funds and private equity); and the third is seeking out new capital markets, and clients, around the world. Moreover, in all these pursuits the firms are now using not just their clients' money but, to differing degrees, their own too."

Which predictably lead to a discussion of whether this leads to increased risks (probably), whether investment banks have taken enough precautions (maybe), and a warning that these profits have arisen in "an unusually benign economic climate" that will eventually come to an end.

Good stuff! Check it out!

Thanks to FT Alphaville for pointing this one out!

SSRN-A Unified Theory of Ten Financial Puzzles by Xavier Gabaix

Just found this while reading through papers for the upcoming Texas Finance Festival and found this by Gabaix (he of larger firms = more CEO pay fame). His new paper is really interesting, a tad challenging, and nothing if not ambitious!

In it this important paper potentially explains "a host of puzzles." How big is a host? About 10 accoring to the paper.

A portion of the abstract:
SSRN-A Unified Theory of Ten Financial Puzzles by Xavier Gabaix: "This paper [offers] a unified explanation for a host of puzzles about stocks, bonds and exchange rates. It builds on the Barro-Rietz view, that risk premia come from the probability of macroeconomic crises or disasters, and adds a variable intensity of disaster that can be asset-specific. Agents have stochastic assessments (which can be rational or behavioral) about the fundamental value that their assets would have if a disaster occurred. The model appears to explain...puzzles on stocks, bonds and exchange rates"

So what puzzles? Pretty much everything that is tied to risk and return differences. For instance:

"(i) equity premium puzzle...(iii) excess volatility puzzle (the fact that equity prices are so volatile) (iv) value-growth puzzle (stocks with high price-dividend ratios have abnormally low future future) (v) upward sloping nominal yield curve...(vii) corporate bond spread puzzle (the spread between corporate and government bond rates are higher than warranted by the U.S. historical experience)...."

As the author states the work is preliminary (some minor typos etc), but don't let that stop you, it has the potential to be HUGE!!! Which makes it I^3 on potential alone!

Cite:
Gabaix, Xavier, "A Unified Theory of Ten Financial Puzzles" (January 31, 2006). Available at SSRN: http://ssrn.com/abstract=976436

NPR : Q&A: The World Bank at a Crossroads

NPR : Q&A: The World Bank at a Crossroads:

"The World Bank was founded in 1944, charged with the monumental task of eradicating global poverty. It offers loans to countries that might not otherwise get them. Since its inception, the bank has lent or given $400 billion.

Yet critics say the World Bank is a bloated, corrupt organization that has outlived its usefulness."

While not ground breaking, this one would be good for either an international finance or a financial institutions and markets class.

SSRN-The Economics of Islamic Finance and Securitization by Andreas Jobst

SSRN-The Economics of Islamic Finance and Securitization by Andreas Jobst:

"Islamic lending transactions are governed by the precepts of the shariah, which bans interest and stipulates that income must be derived as return from entrepreneurial investment. Since Islamic finance is predicated on asset backing and specific credit participation in identified business risk, structuring shariah-compliant securitization seems straightforward. This paper explains the fundamental legal principles of Islamic finance,..... In addition to a brief review of the current state of market development, the examination of pertinent legal and economic implications of shariah compliance on the configuration of securitization transactions informs a discussion of the most salient benefits and drawbacks of Islamic securitization. "

Interesting!

Chrysler deal: Cerberus CEO puts value on privacy - USATODAY.com

Chrysler deal: Cerberus CEO puts value on privacy - USATODAY.com:

"In Greek mythology, Cerberus is the three-headed hound that guards the entrance to Hades. But in the early 1990s, Cerberus was more like a junkyard dog, buying the debt of troubled companies, taking control and improving their operations.

As Cerberus grew and became more interested in larger companies, Feinberg hired prominent public figures — including former vice president Dan Quayle and former Canadian prime minister Brian Mulroney — to put the hell hound image behind him.

Last year, Feinberg succeeded in buying control of GMAC, the finance arm of General Motors. With the help of Cerberus Chairman John Snow, former Treasury secretary under President Bush, he has now engineered the Chrysler deal."

If Bonaventure people need more reason to follow this one, our on campus fitness center is named the Richter Center after Cerberus' co-founder William Richter. (for a nice history of the firm see this Business Week article.)

The Green Children Foundation

I just stumbled upon this on YouTube. The video, while too short, is pretty good. :)

"Last year, The Green Children shot a music video in Bangladesh to celebrate the work of Professor Muhammad Yunus, the father of microcredit and founder of The Grameen Bank"


The Green Children Foundation:

"We believe in the ability of the poor. With the use small loans (microcredit) people all around the world are bringing themselves out of poverty. We are focused on raising awareness about this fantastic method of poverty alleviation."

BTW they also have a very good description of Microfinance with some case studies as well.

A look back to the 1987 Stock Market Crash

Almost 20 years ago the stock market lost over 20% in the course of a single day and about 30% over a two week period. Now the Fed's Mark Carlson looks back at the crash in a fascinating history piece.

A Brief History of the 1987 Stock Market Crash

A quick look in:

"The market crash of 1987 is a significant event not just because of the swiftness and severity of the market decline, but also because it showed the weaknesses of the trading systems themselves and how they could be strained and come close to breaking in extreme conditions. The problems in the trading systems interacted with the price declines to make the crisis worse. One notable problem was the difficulty gathering information in the rapidly changing and chaotic environment. The systems in place simply were not capable of processing so many transactions at once."

Not surprisingly given it is a Fed governor pays particular attention to the Fed's response which was (correctly) to add liquidity to the market.

A definite must read!

Thanks to Research-Finance.com for the link!