SSRN-Stock Options and Long Term IPO Performance by Kuntara Pukthuanthong, Thomas Walker
Question: How cool is this?!? (answer below)
A paper by Pukthuanthong and Walker will also be presented at the European FMA Meetings. The paper examines the use of options in pay packages of IPO firms. And finds that "new public companies that have high use of stock options outperform those that have low use of stock options from the lock-up period until three years after the issue." They find similar results when looking at operating performance. The authors also document that firms with higher use of options (even after controlling for better performance) experience lower managerial turnover.
Now there is somewhat of a problem with endogenity (i.e. Management has the ability to select the use of options and will not if the future looks bleak), but that said, this is an important paper as it reminds us all that options are useful and can lead to higher shareholder returns. That is something we may be tempted to downplay (especially in class) after the problems at Enron, Worldcom etc.
Answer to above question: So cool that it should be used in Sierra Mist commercials!
Friday, June 25, 2004
SSRN-The Effects of Regulation Fair Disclosure on Management Forecasts by Carla Carnaghan, Ranjini Sivakumar
SSRN-The Effects of Regulation Fair Disclosure on Management Forecasts by Carla Carnaghan, Ranjini Sivakumar
In a paper to be presented this coming week at the European FMA meetings, Carnaghan and Sivakumar find evidence that shows that regulation FD did reduce information Asymmetries. Additionally they "find that the information disclosed by managers has improved in terms of frequency, specificity and verifiable information provided." And therefore " Regulation Fair Disclosure has achieved one of its stated goals of providing a more level playing field to all investors." YEAH! :)
In a paper to be presented this coming week at the European FMA meetings, Carnaghan and Sivakumar find evidence that shows that regulation FD did reduce information Asymmetries. Additionally they "find that the information disclosed by managers has improved in terms of frequency, specificity and verifiable information provided." And therefore " Regulation Fair Disclosure has achieved one of its stated goals of providing a more level playing field to all investors." YEAH! :)
SSRN-The Capital Asset Pricing Model: Theory and Evidence by Eugene Fama, Kenneth French
SSRN-The Capital Asset Pricing Model: Theory and Evidence by Eugene Fama, Kenneth French
Fama and French provide a great review and discussion of CAPM with all of its limitations. Why is it used in class? Great model. Main problem? It doesn't work! Paper should be (and was in my class) required reading.
oh, and yes I know this has been included in a past newsletter, but it was so good I figured everyone should see it.
Fama and French provide a great review and discussion of CAPM with all of its limitations. Why is it used in class? Great model. Main problem? It doesn't work! Paper should be (and was in my class) required reading.
oh, and yes I know this has been included in a past newsletter, but it was so good I figured everyone should see it.
Thursday, June 24, 2004
SSRN-Agency Costs of Overvalued Equity by Michael Jensen
SSRN-Agency Costs of Overvalued Equity by Michael Jensen
I know we talked about this one in class, but it is just so so good. Jensen talks about what led to the governance crisis we saw at Tyco, Enron, etc. A big part of teh answer may be overpriced equity. Why? A stock price that is overvalued is caused when investors have overly optimistic expectations. Thus, if the investors were to learn the truth, the stock price would fall. This creates an incentive to hide information from investors. Moreover, to keep the stock price high, management may be willing to take more chances and further hide the bad results.
Typical control mechanisms fail to work on this problem. For instance, stock based pay makes the problem worse and the takeover market fails miserably since no one would want to take over an overpriced stock. Jensen suggests one solution: the board providing more information (including to short sellers).
I know we talked about this one in class, but it is just so so good. Jensen talks about what led to the governance crisis we saw at Tyco, Enron, etc. A big part of teh answer may be overpriced equity. Why? A stock price that is overvalued is caused when investors have overly optimistic expectations. Thus, if the investors were to learn the truth, the stock price would fall. This creates an incentive to hide information from investors. Moreover, to keep the stock price high, management may be willing to take more chances and further hide the bad results.
Typical control mechanisms fail to work on this problem. For instance, stock based pay makes the problem worse and the takeover market fails miserably since no one would want to take over an overpriced stock. Jensen suggests one solution: the board providing more information (including to short sellers).
SSRN-Market Evaluation of Off-Balance Sheet Financing: You Can Run But You Can't Hide by Steve Lim, Steven Mann, Vassil Mihov
SSRN-Market Evaluation of Off-Balance Sheet Financing: You Can Run But You Can't Hide by Steve Lim, Steven Mann, Vassil Mihov
Super short version: using operational leases as a means of keeping debt off the balance sheet may fool bond rating agencies, but it does not seem to fool the bond market.
Lim, Mann, and Mihov (all from TCU) find that attempts to hide debt (in the form of operating leases--the most popular form of off balance sheet financing) may "be useful in maintaining higher debt ratings" but "it does not fool the market, because bond yields reflect off-balance sheet obligations...in the same manner as balance sheet does." I love it when the market gets it right! :)
Super short version: using operational leases as a means of keeping debt off the balance sheet may fool bond rating agencies, but it does not seem to fool the bond market.
Lim, Mann, and Mihov (all from TCU) find that attempts to hide debt (in the form of operating leases--the most popular form of off balance sheet financing) may "be useful in maintaining higher debt ratings" but "it does not fool the market, because bond yields reflect off-balance sheet obligations...in the same manner as balance sheet does." I love it when the market gets it right! :)
The New York Times : New Rule on Short Selling
The New York Times > Business > Market Place: New Rule on Short Selling
Ok, time to update your notes on short selling! You can now sell on a downtick. At least temporarily and for some stocks. The SEC approved a one year trial (starting in January 2005 that will remove many of the short sale restrictions for "one-third of the stocks in the Russell 3000." However, for other stocks it may actually be more difficult since the SEC also has made the rules against naked short selling (shorting without first borrowing the shares) more restrictive.
Ok, time to update your notes on short selling! You can now sell on a downtick. At least temporarily and for some stocks. The SEC approved a one year trial (starting in January 2005 that will remove many of the short sale restrictions for "one-third of the stocks in the Russell 3000." However, for other stocks it may actually be more difficult since the SEC also has made the rules against naked short selling (shorting without first borrowing the shares) more restrictive.
The Washington Post looks at Google ownership
Following a Rich Tradition (TechNews.com)
The insiders at Google really are insiders ;)
To quote the article Google ownership is a "carefully crafted roster of early-stage investors [that] reads like a Who's Who of Silicon Valley" or as Alan Meckler states in the article: ""It is a traditional Silicon Valley old boys network,...."It is very similar to what happened in the 1990s when there were a group of 20 or 30 venture capital firms and key people. There is a lot of history repeating itself here."
Some of the pre-IPO owners? Stanford University, Jeff Bezos, Andy Bechtolsheim the co-founder of Sun Microsystems Inc., as well as the VC firms of Sequoia Capital and Kleiner Perkins.
Even more interesting thasn who owns the shares is the giganic returns that some of these can expect. For instance, the VC firms reportedly each invested $12.5 million in Google for their 9.4% stakes. After the IPO the investment could be worth over $1Billion!
The insiders at Google really are insiders ;)
To quote the article Google ownership is a "carefully crafted roster of early-stage investors [that] reads like a Who's Who of Silicon Valley" or as Alan Meckler states in the article: ""It is a traditional Silicon Valley old boys network,...."It is very similar to what happened in the 1990s when there were a group of 20 or 30 venture capital firms and key people. There is a lot of history repeating itself here."
Some of the pre-IPO owners? Stanford University, Jeff Bezos, Andy Bechtolsheim the co-founder of Sun Microsystems Inc., as well as the VC firms of Sequoia Capital and Kleiner Perkins.
Even more interesting thasn who owns the shares is the giganic returns that some of these can expect. For instance, the VC firms reportedly each invested $12.5 million in Google for their 9.4% stakes. After the IPO the investment could be worth over $1Billion!
FRB: Speech, Gramlich--Reducing Budget Deficits--June 24, 2004
FRB: Speech, Gramlich--Reducing Budget Deficits--June 24, 2004
Fed Governor Gramlich just gave a interesting and informative speech on the Federal Budget Deficit. He points out the difficulty in forecasting it, the fact that it is based on cash basis accounting which brings its own problems (example future social security problems!), and even suggests ways to improve the budgeting process. My take is that budget deficits are not in and of themselves bad, but the resulting debt does raise interest rates and if not controlled can cause an economic slowdown. Moreover, governments are notoriously bad at picking positive NPV projects, so smaller is better!
As an aside, the speeches of Fed Governors are almost always interesting! No seriously! I mean it. Quit laughing. The texts of their speeches are available free online and I am convinced you could teach a full semester seminar-type class centered just the speeches.
Fed Governor Gramlich just gave a interesting and informative speech on the Federal Budget Deficit. He points out the difficulty in forecasting it, the fact that it is based on cash basis accounting which brings its own problems (example future social security problems!), and even suggests ways to improve the budgeting process. My take is that budget deficits are not in and of themselves bad, but the resulting debt does raise interest rates and if not controlled can cause an economic slowdown. Moreover, governments are notoriously bad at picking positive NPV projects, so smaller is better!
As an aside, the speeches of Fed Governors are almost always interesting! No seriously! I mean it. Quit laughing. The texts of their speeches are available free online and I am convinced you could teach a full semester seminar-type class centered just the speeches.
Bank mergers create value. Why?
Penas and Unal have provided a great look at bank mergers in this forthcoming JFE piece. rather than looking at equity, they examine what happens to the merging banks'bonds. As theory would predict, they find that the bonds go up in value. Why? As the authors state: "The primary determinants of merger-related bondholder gains are diversification gains, gains associated with achieving too-big-to-fail status, and, to a lesser degree synergy gains." Great stuff! A tip of the hat for such an interesting paper!
SSRN-Revealed Preferences for Corporate Leverage by Thomas Philippon
SSRN-Revealed Preferences for Corporate Leverage by Thomas Philippon
WOW!!! A must read! Philippon examines firms' capital structure empirically and theortically. He finds that firm value does not exactly fit the static trade-off model. Specifically he finds that low levels of debt are not accompanied by as low of firm values as would be expected. However, in other areas, what we have been teaching seems exactly right: more growth options means less debt, highly profitable firms do have higher target debt ratios (even though they may not all be the targets), and expected future financing deficits makes financial slack more valuable. Interestingly, he also finds some evidence that managerial power (as proxied by CEO tenure) is assocaited with lower levels of debt. READ IT!!! :)
WOW!!! A must read! Philippon examines firms' capital structure empirically and theortically. He finds that firm value does not exactly fit the static trade-off model. Specifically he finds that low levels of debt are not accompanied by as low of firm values as would be expected. However, in other areas, what we have been teaching seems exactly right: more growth options means less debt, highly profitable firms do have higher target debt ratios (even though they may not all be the targets), and expected future financing deficits makes financial slack more valuable. Interestingly, he also finds some evidence that managerial power (as proxied by CEO tenure) is assocaited with lower levels of debt. READ IT!!! :)
SSRN-Patriotism in Your Portfolio by Adair Morse, Sophie Shive
SSRN-Patriotism in Your Portfolio by Adair Morse, Sophie Shive
Ok, so maybe, just maybe rationality can not explain everything in investments. Morse and Shive find that patriotism (and not just transaction costs) helps to explain why investors overweight investments in their home country, i.e. the home country bias.
Ok, so maybe, just maybe rationality can not explain everything in investments. Morse and Shive find that patriotism (and not just transaction costs) helps to explain why investors overweight investments in their home country, i.e. the home country bias.
Wednesday, June 23, 2004
SEC Seeks Independent Fund Board Chairmen
Forbes.com: Update 11: SEC Seeks Independent Fund Board Chairmen
Quite the debate on this one! It is rare that the SEC is so publicly split on an issue. I think it is good however. It does strengthen investor protections somewhat. Although I do admit that some of the benefits may be less than advertised. Overall, I would agree with the SEC chairman on this one and vote that having an independent chairman is good.
Quite the debate on this one! It is rare that the SEC is so publicly split on an issue. I think it is good however. It does strengthen investor protections somewhat. Although I do admit that some of the benefits may be less than advertised. Overall, I would agree with the SEC chairman on this one and vote that having an independent chairman is good.
The New York Times > Business > Son Tries to Distance Himself at Adelphia Trial
The New York Times > Business > Son Tries to Distance Himself at Adelphia Trial: "Michael J. Rigas, the former Adelphia Communications vice president, was too busy managing the company's cable TV systems to have joined in the misdeeds that crippled the company, his lawyer said yesterday in the closing arguments of his criminal trial"
Closing arguments are being made in the Adelphia trial and it looks like it is every man for himself!
The trial, which has dragged on for months, was punctuated with witnesses for each side merely saying the other side was wrong. I do not claim to have any inside knowledge on this, but from what I have seen of the trials, there is little chance of the accused being completely exonerated. The key question left (IMO) is whether they will get jail time.
Also what does the IRS have to say about all of this? For instance, consider the money (eventually cut to $1 million a month) that John Rigas was getting and not reporting on the firm's financial statements. Was he claiming it on his personal income taxes? If not that seems like an easy case to try.
Closing arguments are being made in the Adelphia trial and it looks like it is every man for himself!
The trial, which has dragged on for months, was punctuated with witnesses for each side merely saying the other side was wrong. I do not claim to have any inside knowledge on this, but from what I have seen of the trials, there is little chance of the accused being completely exonerated. The key question left (IMO) is whether they will get jail time.
Also what does the IRS have to say about all of this? For instance, consider the money (eventually cut to $1 million a month) that John Rigas was getting and not reporting on the firm's financial statements. Was he claiming it on his personal income taxes? If not that seems like an easy case to try.
BBC NEWS | World | South Asia | India's economy - oil the nuts and bolts
A roadmap for India By Kaushik Basu
Professor of economics, Cornell University
Kaushik provides a fascinating look at what is wrong with the Indian Economy and how the new government should take steps to fix it. For instance, it takes 11 times longer to start a business in India than it does in Singapore.
His list includes 1: Improve efficiency 2. Cut corruption 3. Establish good fiscal policy 4. "Enable economically disadvantaged people to escape pverty." Of course these are all good, but it is his ideas on how this should be done that merits a click-through!
Professor of economics, Cornell University
Kaushik provides a fascinating look at what is wrong with the Indian Economy and how the new government should take steps to fix it. For instance, it takes 11 times longer to start a business in India than it does in Singapore.
His list includes 1: Improve efficiency 2. Cut corruption 3. Establish good fiscal policy 4. "Enable economically disadvantaged people to escape pverty." Of course these are all good, but it is his ideas on how this should be done that merits a click-through!
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