Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN

Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN:

Are older board members good or bad? The answer seems to be "Yes".


Whether it is good OR bad ...it depends on what you want the board to do. If you want conservatism, then older board members appear to be better. However, if you want to risk taking leadership, you probably want a younger board.

From the abstract:

"After controlling for endogeneity using firm size as instrument, the effect of board age is found to be more significant....we show that the performance of younger and high-growth firms is more sensitive to board age, which points to a risk-based explanation. Indeed, it appears that older boards are more reluctant to take risks and particularly to undertake acquisitions. Overall, the results underline the disadvantage of (re)appointing older managers since the latter tend to be more conservative, perhaps because of their shorter decision horizons or greater vested interests."

and from the paper:

"... we further show that the impact of board age does not depend on the firm’s size or affiliation to a business group, but is stronger among younger and high-growth firms, and among firms using more intangible assets. These results point out that some firms may require different types of managers because of their different characteristics. More precisely, it appears that the greater determination and ability to take risk typical of younger managers make them more fit to operate in high-growth or rapidly-changing environments (Child, 1974; Wiersema and Bantel, 1992). 

.....Our cross-sectional regressions show that firms with older boards exhibit a significantly lower variability in their operating profits, market values and stock returns. They are also less likely to undertake acquisitions, which are considered to be risky investments. This result is consistent with May (1995) who notes that managers with more capital vested are more likely to diversify in order to reduce their firm’s idiosyncratic risk. In the case of Japan, age can be a good proxy for a manager’s vested capital due to the enduring practice of lifetime employment and deferred compensation (Ono, 2010). This negative influence on risk-taking may explain why older boards are associated with lower profitability and firm value." 

 I guess not unsurprising, but interesting none-the-less.


Cite:
  Nakano, Makoto and Nguyen, Pascal, Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms (July 5, 2011). Available at SSRN: http://ssrn.com/abstract=1879250

Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN

Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN:

Du, Waisman, Wang, and Zhou provide an interesting look at a topic that frankly I never considered: whether post employment non compete contracts in financial service firms are priced by market participants and whether the enforcement of these contracts is good for bondholders.



From the abstract:

"...this study examines whether and to what extent the capital markets recognize the risk associated with the mobility of human capital. We evaluate the state-by-state variations in the enforceability of noncompetition agreements in the United States to test the market-discipline hypothesis and find a significant negative relation between the degree of enforcement of noncompetition agreements and the yield spreads for bonds issued by financial institutions. We also find that the negative relation is more prominent for investment-grade bonds and bonds with long-term maturities. In addition, we find that investors care more about managerial stability when bond issuers have weak protection of shareholder rights."

From the paper:

"Noncompetition agreements can function as strong binding mechanisms that significantly increase managerial stability and reduce the mobility of human capital (Garmaise 2010). The legal enforcement of covenants not to compete varies widely across jurisdictions in the United States. For example, a majority of states allow and enforce noncompetition agreements as long as they are ―reasonable and necessary,‖ though California virtually forbids such covenants. This variation in legal enforcement provides a natural setting to apply the insights of the law and finance literature (La Porta et al. 1997, 1998). 

This paper examines whether bondholders demand different yield spreads if the legal enforcement of noncompetition agreements affects the mobility of human capital. Following existing research (Morgan and Stiroh 2001), we collect data on new bond issues from financial institutions and document that the statewide enforcement level is negatively correlated with bond spreads, which means that investors do recognize the risk associated with the mobility of human capitals and price the risk accordingly. We also find that bonds investors care more about the managerial stability of financial institutions having weak protection of shareholder rights. "

Interesting.

Cite:

Du, Wei, Waisman, Maya, Wang, Haizhi and Zhou, Mingming, Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry (June 18, 2011). Available at SSRN: http://ssrn.com/abstract=1885752

How to use the Fama French Model | Empirical Finance Blog

WOW. Simply the best CAPM and Fama French discussion I may have ever seen. Will DEFINITELY be used in several of my classes this coming year....


How to use the Fama French Model | Empirical Finance Blog:

Super short version:

Even though CAMP does not work, many (most still use it) with some bad results. Why? One reason may be that few people understand other models. Thus Wes Gray (the mastermind behind the Empirical Finance Blog) goes on to explain the Fama French model, link to Sharpe's page for data, and then gives spreadsheet examples of how to use it. Simply great job!

A few look in's:

"The CAPM is prolific, but doesn’t appear to work"

and then after showing it does not work

"Given such a poor track record, is anyone still using the CAPM?

Lot’s of people, apparently…

Welch (2008) finds that ~75% of professors recommend the use of the model when estimating the cost of capital, and Graham and Harvey (2001) find that ~74% of CFOs use the CAPM in their work."

and finally:

"The key lesson is that one shouldn’t be asking whether or not their active manager can outperform the market, rather, they should be asking, given my active manager’s exposures to the market, size, and value, can he beat alternative products in the marketplace that charge ‘index’ fees and not ‘active’ fees."

GREAT job Wes!


HT to MoneyScience

SEC builds new tips machine to catch the next Madoff | Reuters

Exclusive: SEC builds new tips machine to catch the next Madoff | Reuters: "The TCR Database is the SEC's most significant response to its well-documented fumbling of early tips about Madoff's $65 billion fraud. The SEC's new Office of Market Intelligence, which last summer also forged a first-of-its kind partnership with the Federal Bureau of Investigation, is using the database as a key tool.

The changes are part of an effort by SEC Chairman Mary Schapiro to overcome the agency's reputation for being a step or two behind the bad guys. It is far too soon for the SEC to declare victory. But some of the agency's harshest critics notice a change.

Among them is Harry Markopolos"

Related articles

• Madoff's legacy: SEC reform (business.financialpost.com)
• SEC charges longtime Madoff employee with fraud (marketwatch.com)
• Madoff Employee to Plead Guilty (online.wsj.com)
• Madoff's Computer Programmers Arrested (nyconvergence.com)

A lottery game with a windfall for a knowing few - The Boston Globe

A lottery game with a windfall for a knowing few - The Boston Globe:


WOW....and the state leaves is open?

"Massachusetts State Lottery: For a few days about every three months, Cash WinFall may be the most reliably lucrative lottery game in the country. Because of a quirk in the rules, when the jackpot reaches roughly $2 million and no one wins, payoffs for smaller prizes swell dramatically, which statisticians say practically assures a profit to anyone who buys at least $100,000 worth of tickets."

Selbee bought $307,000 worth of $2 tickets for a relatively obscure game called Cash WinFall.....the Selbees, who run a gambling company called GS Investment Strategies, know a secret about the Massachusetts State Lottery: For a few days about every three months, Cash WinFall may be the most reliably lucrative lottery game in the country. Because of a quirk in the rules, when the jackpot reaches roughly $2 million and no one wins, payoffs for smaller prizes swell dramatically, which statisticians say practically assures a profit to anyone who buys at least $100,000 worth of tickets.

During these brief periods - “rolldown weeks’’ in gambling parlance - a tiny group of savvy bettors, among them highly trained computer scientists from MIT and Northeastern University, virtually take over the game. Just three groups, including the Selbees, claimed 1,105 of the 1,605 winning Cash WinFall tickets statewide after the rolldown week in May, according to lottery records. They also appear to have purchased about half the tickets, based on reports from the stores that the top gamblers frequent most."

UPDATE 8/3/2011: the state of Massachusetts partially shut down the "loophole"by limiting the number of tickets played at any one time:
From NPR.

‪Paul Bloom: The origins of pleasure‬‏ - YouTube

Interesting behavioral finance implications of this.

For example:

1. Boasting/bragging that you own something matters.
2. The history of an asset matters (people would pay more of something that has an interesting story, or was owned by someone they "liked").
3. Pain is state dependent.
4. Pleasure/pain is subjective and relative.


‪Paul Bloom: The origins of pleasure‬‏ - YouTube: "Psychologist Paul Bloom argues that human beings are essentialists -- that our beliefs about the history of an object change how we experience it"

‪Geoffrey West: The surprising math of cities and corporations‬‏ - YouTube

‪Geoffrey West: The surprising math of cities and corporations‬‏ - YouTube:

"Physicist Geoffrey West has found that simple, mathematical laws govern the properties of cities -- that wealth, crime rate, walking speed and many other aspects of a city can be deduced from a single number: the city's population. In this mind-bending talk from TEDGlobal he shows how it works and how similar laws hold for organisms and corporations."

I really can not decide where to put this one. I opted for FinanceProfessor since in class when we try to project out long term growth rates, students always try to say growth will be constant forever, this say otherwise.

Ritter Says Buyout-Backed IPOs, Larger Firms Do Better - The Washington Post

Ritter Says Buyout-Backed IPOs, Larger Firms Do Better - The Washington Post

"July 26 (Bloomberg) -- Jay Ritter, a finance professor at the University of Florida, talks about Dunkin' Brands Group Inc.'s planned initial public offering, the state of the U.S. IPO market and the performance of companies after they go public. Ritter speaks with Lisa Murphy on Bloomberg Television's "Fast Forward." (Source: Bloomberg) (Bloomberg)"

Finance does not get much better than listening to Jay Ritter speak on IPOs. He is that good!

Dunkin' Donuts IPO makes a scorching debut - USATODAY.com

Dunkin' Donuts IPO makes a scorching debut - USATODAY.com:

"The parent of Dunkin' Donuts and Baskin-Robbins ice cream parlors found a strong reception as investors pushed shares to $27.85, up from the $19 initial price.

Such a strong welcome for Dunkin' Brands' initial public offering sets the tone for the rest of the week, a robust one for deals. Nine companies plan to go public this week, making it the busiest week since Dec. 13,"

What does the CDS market say about the so-called debt crisis?

A collegue mentioned yesterday that with all the talk of a US default, what is the market saying?  Looking at CDS spreads, it does not appear that the US will default.  Yes it is up significantly in last year, but still lower than in 2009 and much lower than that of other soverign debt. 

Here is the quote of  5 yr US Treasury.

Icahn, a Deal-Maker With a Spotty Record - NYTimes.com

Image by Getty Images via @daylifeIcahn, a Deal-Maker With a Spotty Record - NYTimes.com:

We talk about Ichan in class a great deal. He is an interesting character. Probably most famous for launching many takeover (or supposed takeover attempts) and being rumored for greenmail, in my opinion his bigger role is monitoring firms' management and helping disseminate information on both managerial practices and apparent undervaluation. (indeed looking at a study of Q values of firms he owns ala Rene Stulz)

From the NY Times:

"Mr. Icahn’s own record as a deal-maker — either as a bidder or as a catalyst for a takeover — is spotty at best.....

Investors in Clorox appeared hopeful that Mr. Icahn will succeed this time, pushing shares in the company up 7.3 percent by midday to $73.51. Still, the price remains below Friday’s offer price, indicating some apparent skepticism"

and later:

"The unsolicited offer is a strategy Mr. Icahn has turned to time and again: 15 times since 1997, according to the data provider FactSet Shark Repellent. He most recently bid $1.9 billion for Mentor Graphics, with the aim of flushing out a potential bidder."

Related articles

• Carl Icahn makes $10.2B offer for Clorox (ctv.ca)
• Carl Icahn: I'll Buy Clorox! But I'm the Wrong Buyer (blogs.wsj.com)
• Icahn fights them on the bleaches (telegraph.co.uk)
• Carl Icahn: Yes, I Want to Buy Clorox. Really (blogs.wsj.com)

How will the world integrate emerging economies

‪AtGoogleTalks's Channel‬‏ - YouTube:

Fascinating stuff! Looks at rates of growth historically and how current rates of growth in emerging economies and developed markets are differ. More economics than finance, but well worth your time!

"Michael Spence, winner of the Nobel Prize in Economic Sciences, explains what happened to cause this dramatic shift in the prospects of the five billion people who live in developing countries. The growth rates are extraordinary, and continuing them presents unprecedented challenges in governance, international coordination, and ecological sustainability. The implications for those living in the advanced countries are great but little understood.

Spence clearly and boldly describes what's at stake for all of us as he looks ahead to how the global economy will develop over the next fifty years. The Next Convergence is certain to spark a heated debate how best to move forward in the post-crisis period and reset the balance between national and international economic interests, and short-term fixes and long-term sustainability."

Interesting case: Skype: The inside story of the boffo $8.5 billion deal - Fortune Tech

Skype: The inside story of the boffo $8.5 billion deal - Fortune Tech:

An interesting case for classes. From Fortune:

"In September 2009, Silver Lake Partners and venture firm Andreessen-Horowitz bought Skype from eBay, where it had become the Kurt Cobain of technology companies (wildly popular, deeply troubled). The value of that deal: $2.75 billion.

In May 2011 the new owners announced that they were selling the company to Microsoft for $8.5 billion.

Voilà! Six billion bucks in less than two years."

YouTube - ‪Leading@Google: Joseph Grenny‬‏

YouTube - ‪Leading@Google: Joseph Grenny‬‏:

Maybe the best argument for taking a behavioral finance class is to know what things people are prone to fall prey to and thus be ready with defenses to beat the issues. Which in a nutshell is the view that Joseph Grenny takes in his book. Here he speaks at Google about how to not fall into the same old traps.

"Why is it that 95% of all diet attempts fail? Why do New Year's Resolutions last no more than a few days? Why can't people with good intentions seem to make consistent and positive strides in the way they want to improve their careers, financial fitness, physical fitness, and so on?

Based upon the latest research in a number of psychological and medical fields, the authors of Change Anything will show that traditional will-power is not necessarily the answer to these strivings, that people are affected in their behaviors by far more subtle influences. Change Anything shows how individuals can come to understand these powerful and influential forces, and how to put these forces to work in a positive manner that brings real and meaningful results."