The Role of the Media in the Internet IPO Bubble by Utpal Bhattacharya, Neal Galpin, Rina Ray, Xiaoyun Yu

SSRN-The Role of the Media in the Internet IPO Bubble by Utpal Bhattacharya, Neal Galpin, Rina Ray, Xiaoyun Yu

Bhattacharya, Galpin (Yes, a SBU GRAD), Ray, and Yu provide an intriguing look at the financial media. As the title suggests, the paper is centered on coverage of IPOs in and out of the Internet Bubble period, but in getting to that topic, the paper brings up many roles the media play.

For instance: not only does the media lower information costs (Merton 1987 as well as others point this out), they also provide a 'positive feedback loop' and shape public thought (Schiller 2000), and even buy favor of corporations (Dyck and Zingales 2003)
[I would also add the possibility of getting increased ad revenue--Reuter and Zitzewitz 2004)].

The authors find that during the internet bubble, there was more coverage of internet IPOs and this coverage was more favorable, then for non internet IPOs. However, it appears that investors discount this coverage and do not let it significantly impact pricing.

As an aside, can you imagine reading 171,488 news items? WOW! Even with co-authors, that is a ton of reading!!!

Some highlights:

""Was the media coverage different for internet IPOs? We read all news items that came out between 1996 through 2000 on 458 internet IPOs and a matching sample of 458 non-internet IPOs--– a total of 171,488 news items--– and classify each news item as good news, neutral news or bad news. We find, not surprisingly, that the media coverage was more intense for internet IPOs. All types of news--– good, bad, or neutral-- were more for internet IPOs than for non-internet IPOs in both the bubble period and in the post-bubble period. Second, we document that the net news (good news minus bad news) was more positive for internet IPOs in the bubble period, and more negative for internet IPOs in the post-bubble period. Third, we document that net news increased after a positive stock return, and decreased after a negative stock return for internet firms. This provides some evidence in favor of Shiller's (2000) positive feedback hypothesis."

A bit later:

"We find, not surprisingly, that good news increases risk-adjusted returns the next period, and bad news decreases risk-adjusted returns the next period, and so net news (good news minus bad news) increases risk-adjusted returns the next period. We find, surprisingly, that the effect of net news on next period's risk-adjusted return was lower for internet IPOs, especially during the bubble period....We, therefore, make the following conclusion: though the media hyped up the good news about internet IPOs in the bubble period and hyped up the bad news about internet IPOs in the post-bubble period, the market somewhat discounted the media hype, especially during the bubble period

Interesting paper! Definitely recommended!


Cite:
Bhattacharya, Utpal, Galpin, Neal E., Ray, Rina and Yu, Xiaoyun, "The Role of the Media in the Internet IPO Bubble" (October 2004). http://ssrn.com/abstract=606264

Goldman loses in price stabilzation game

A great look at price stabilization from the NY Times. The case deals with Goldman Sachs' (and syndicate's) attempt to keep Lazard's stock price high.

"Last week, Goldman said in a filing that it was left with $15 million in losses after underwriting Lazard's initial public offering and trying in vain to prop up the stock as it began falling in the first days of trading"

Also later on in the article:

"According to the filing, Goldman had already accumulated 3.8 million shares, worth about $94 million, by the time stock dropped to $24.90. Goldman kept buying, at one point owning as much as 10 percent of Lazard, but it could not prevent the dam from bursting. Unwilling to take on even more risk, Goldman could not continue buying shares to stabilize the stock. But Goldman may not care so much about its trading losses. It split $42.7 million with six other firms for underwriting Lazard's offering.

Goldman proudly defends its failed buying spree by saying that it was going to bat for Lazard, but that is only half the story. Goldman was also buying to protect itself. Investors who had held on to their shares expecting them to go up - as Goldman had led them to believe they would - were livid."

Floor traders, hamburgers, and bowling balls

Newsweek has an interesting (albeit short) piece on what will happen to Wall Street (residential properties?!?!) as well as specialists after the NYSE merges with archipelago.

Just a Street? - Newsweek Business - MSNBC.com:

My favorite part:

Thain (the CEO of the NYSE) to a group NYSE floor traders:
"'You can walk out the door and get a job at McDonald's,'' noting those who add value to the new NYSE will survive. Wall Street types are fond of gallows humor, so a floor broker spent $200 at McDonald's and passed out hamburgers at lunch as traders talked about Thain's remarks and discussed their future. (Thain, through a spokesman, did not deny the account.)"

Ouch....

Later in the same article:

"In a sense, it's slipped already, as many of the nation's top brokerage firms have moved operations from the financial district to midtown and New Jersey. Morgan Stanley, which employed 1,300 brokers in the World Trade Center, relocated most of them to Westchester. Goldman Sachs, which has more space in lower Manhattan than any other employer and had been planning a new headquarters near Ground Zero, recently said it would look for space elsewhere. Jeffrey Liddle, a prominent employment attorney, has noticed the shift as many clients have left the city. "It's only a matter of time before Wall Street becomes an idea rather than a location,'' "

Which fits our in class "bowling alley" metaphor pretty well!

Want to go for a bike ride? Or donate to a good cause?

I have registered to ride in the MS 150 series. It is a two day 150 mile (actually 169 mile in this case, but who is counting ;) ) bicycle ride to raise money for the MS society.

It is a good cause so if you would like to learn more about the ride (or a ride near you--it is a national series that I HIGHLY recommend!!!---or if you want to donate to them, why not do it through this link. :)

thanks in advance!!

jim

FRB: Speech, Ferguson--Asset prices and monetary liquidity--May 27, 2005

With real estate prices (and possible bubbles) being on everyone's mind, Fed Governor Roger Ferguson took an opportunity to speak on the link between liquidity and asset prices.

Some highlights:

FRB: Speech, Ferguson--Asset prices and monetary liquidity--May 27, 2005: "...asset prices, especially the prices of equities and residential real estate....Because these assets are the most widely held by the general public...can significantly affect the macroeconomy. Rising asset prices support household consumption, whereas falling asset prices damp consumption....policymakers might also take special interest in asset price movements because it has been alleged that badly designed or poorly implemented policy (even if well intended) sometimes has helped feed unsustainable movements in asset prices. Accordingly, I would like to highlight some aspects of the link between monetary conditions and asset prices and point to areas"

"Overly rapid monetary expansion, or excessive liquidity, has been named as a leading suspect in some episodes of unsustainable movements in asset prices. Liquidity is not a precise concept, however. Liquidity could be measured narrowly as central bank money, for example, or more broadly to reflect the multiplier effects of the financial system; sometimes it is measured instead by the level of policy interest rates. All these definitions and others have been in play in the economics profession's analysis of the link between monetary conditions and asset prices. What is meant by "excessive" is even less well defined."

* "not all situations in which asset prices are rising rapidly under seemingly easy monetary conditions are worrisome. Some are quite benign and even signal a healthy economy. Accordingly, for policymakers who have to confront these situations in real time, a fundamental challenge is identification."

On the feared Real Estate Bubble:
*" For housing, rent-to-price ratios and income-to-price ratios are commonly used measures to assess valuation. Over the past several years, both measures have decreased sharply in many countries, and they currently are well outside historical ranges in some countries. In 2004, U.S. home prices increased 11.2 percent, their fastest pace since 1979, and right now, housing prices in many markets in the United States are relatively high when judged by conventional valuation measures To know if housing is fairly valued requires assessing whether today's valuations are consistent with unobservable future rents, interest rates, and returns--concepts for which we have only rough proxies. However, in some markets the most prudent judgment is that the growth of house prices will slow from the rapid pace experienced most recently."

On money supply and asset prices
*"We do find a positive correlation between growth rates of real house prices and M3, but the correlation does not seem to hold for real asset prices more generally--including, in particular, equities."

On the impact of globalization:
*" Among other complications is the possibility that financial globalization may be changing the links between liquidity and asset prices. Movements in asset prices across countries now appear to be more synchronized. This synchronization could arise in a number of ways. National business cycles and policy responses may be moving more in tandem just because national economies have become more closely integrated through trade and investment, producing in turn a greater synchronization in asset markets."


Nothing particularly new, but a nice review none-the-less!

Great advice from Free Money Finance

I am excited about this-- A new finance web site by a football fan and a serious cyclist. It is a total given that I am going to link to it and mention it. What makes this even better is that the site is really good!

It is Free Money Finance.
Free Money Finance

It is not an academic finance site, but it is excellent for those of you looking for solid information about your personal finances.

The advice is dead-on! I especially suggest you all read the Best Financial Advice series.

A quick taste:

From Lesson 2:
"“Spend less than you earn. Successful financial planning really stems from that simple statement. If you retain a portion of your current income, youÂ'll soon ask yourself a question: what should you do with that money? And that question is the beginning of wealth creation."

Great stuff!!! In fact I am going to cross post this on the FinanceClass blog as well.

A new spin on spin-offs

Chemmanur and Nandy provide an interesting look at Spin-offs. I will post more about it later..

for now a link and a quote:

"We show that the improvement in the average productivity of plants following spin-offs is driven primarily by improvements in the productivity of plants continuing with the parent firm, and not from productivity improvements in plants belonging to the spun-off entity.

However, contrary to the speculation in the existing literature, we document that plants that are spun-off do not perform worse than those belonging to the parent prior to the spin-off: in fact, plants in the spun-off entity perform better than the parent plants prior to the spin-off."

How to use VAR, ETL in Excel

Estimating Risk Measures

I wish I could retroactively require an article to be read! If I could, this would be it for my Portfolio class (Fin422).

Writing in Financial Engineering News, Kevin Dowd explains how to use Excel to calculate VAR and other risk measures. This will be VERY HELPFUL in class!!!

For instance: "To estimate the daily VaR at, say, the 99 percent confidence level, we can use Excel’s Large command, which gives the kth largest value in an array. Thus, if our data are an array called “losses,” we can take the VaR to be the eleventh largest loss out of 1,000. (We choose the eleventh largest loss as our VaR because the confidence level implies that one percent of losses – 10 losses – should exceed the VaR.) The estimated VaR is given by the Excel command “=Large(losses,11)”."

good stuff! Read it!!!

Presidential Address

If you have 40 minutes and want to learn a great deal about finance, listen (and/or watch) Rene Stulz's presidential address. He gave this at the 2005 AFA meetings in Philadelphia.

The basic theme of his speech is globalization. He points out that the world is not yet flat and the "impact of financial globabilization has been limited." Why? "...because of the “twin agency problems” that arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors. When these twin agency problems are significant, diffuse ownership is inefficient and corporate insiders must co-invest with other investors, retaining substantial equity. The resulting ownership concentration limits economic growth, financial development, and the ability of a country to take advantage of financial globalization."

VERY interesting!

Rene Stulz' Presidential Address

As an aside, I learned his office may be as organized as mine!!! :)

SSRN-Executive Stock Options: Early Exercise Provisions and Risk-taking Incentives by Neil Brisley

SSRN-Executive Stock Options: Early Exercise Provisions and Risk-taking Incentives by Neil Brisley: "...proposed 'progressive performance vesting' can allow the firm more efficiently to rebalance risk-taking incentives for the manager."

Pretty cool idea...short version: if stock price goes up significantly (you can index it if you want), then options vest earlier in order to lessen the increased managerial risk aversion problem that can be caused by managers' wealth being in the form of deep in the money options. Of course it might exasperate managerial incentive to withhold bad news but still I like the idea!

Success on several fronts. The paper is not only good, it is available from the Western Financial Association's meeting site.

A brief taste:

"Issued at-the-money, ESOs can provide incentives for managers to take risks. Yet if traditional calendar vesting options move deep in-the-money, perhaps years prior to vesting, they lose their convexity in payoffs andmay offer counter-productive incentives causing risk-averse managers to reject profitable risky projects. We address this problem and propose an alternative vesting schedule. We show that by making the proportion of options that vest a gradually increasing function of the stock price achieved, the firm can ensure that appropriate numbers of options are retained when still providing risk-taking incentives, but exercised once they have lost their convexity, thereby allowing the firm more efficiently to rebalance risk-takingincentives for the manager."

Good stuff!!

Improved Forecasting of Mutual Fund Alphas and Betas by Matthew Spiegel, Harry Mamaysky, Hong Zhang

Maybe mutual funds do beat the market more than previously reported?


SSRN-Improved Forecasting of Mutual Fund Alphas and Betas by Matthew Spiegel, Harry Mamaysky, Hong Zhang


Spiegel, Mamaysky, and Zhang look at measurement errors in measuring mutual fund performance and find that past researchers have not always gotten it right. In fact, when correct betas are used, it seems that find managers do better than we had thought.

A few quick quotes:

"...(betas) are poorly estimated. This in turn results in a systematic bias in the estimated alphas. Sorting on the estimated alphas populates the top and bottom deciles not with the best and worst funds, but with those having the greatest estimation error"

"Since mutual funds often, but not always, employ dynamic trading strategies their betas move over time in a ways that differ from fund to fund. Since no one statistical model is likely to fit every fund, the result is a great deal of misspecification error. This paper shows that the combined use of an OLS and Kalman filter model increases the number of funds with predictable out of sample alphas by about 60%"

"Overall, this paper’s findings offers support for at least part of their thesis;
managerial skill exists but its benefit to mutual fund investors is short lived."

Defnitely an I^3 designation! (Insightful, Interesting, and Important)


Cite:

Spiegel, Matthew I., Mamaysky, Harry and Zhang, Hong , "Improved Forecasting of Mutual Fund Alphas and Betas" (January 4, 2005). Yale ICF Working Paper No. 04-23. http://ssrn.com/abstract=567284

Who Gambles in the Stock Market? by Alok Kumar

Option theory meet portfolio selection. It fits the theory perfectly, even though I am less sure of some of the non economic aspects (for instance, why would Catholics be more likely to take chances), but it sure is an interesting paper that does fit with theory.

Short version: the poor take bigger chances. (gee, Option theory would predict that perfectly!)

SSRN-Who Gambles in the Stock Market? by Alok Kumar

If a desire to escape poverty induces gambling, socio-economic factors which promote lottery purchases are also likely to induce investors to adopt sub-optimal stock investment strategies. Specifically, investors with a large differential between their existing economic status and their aspiration levels would tilt their portfolios toward riskier lottery-type stocks. However, these investors may hold riskier stocks not necessarily because they are risk-seeking but rather because they want to have a positive probability, albeit very small, of reaching their aspiration levels."

A friend of mine calls lotteries taxes on the stupid (overlooking the physic pleasure of playing). Kumar addresses this point not by using intelligence, but rather education:

"investor characteristics may influence probability distortions, where relatively sophisticated investors are less likely to distort the small probabilities. For instance, educated individuals are more likely to understand the odds of winning while relatively less educated individuals may significantly distort the winning odds. If education is correlated with income and wealth, rich individuals are less likely to participate in lotteries."

One final quote:

"I assume that investors are more likely to perceive lower-priced stocks with very small but positive potential for high returns as lotteries. I further assume that stocks with higher variance (or higher idiosyncratic volatility or extreme returns) and positively skewed returns are likely to be perceived as high payoff potential stocks."

Interesting!

Cite:
Kumar, Alok, "Who Gambles in the Stock Market?" (May 2005). http://ssrn.com/abstract=686022

China allows some FOREX trading, but not yet the Yuan

A day after the US threatened financial penalties if the yuan is not soon allowed to float, China took what some see (although China denies), as a small step in that direction. You can now trade otehr currencies in China--but not yetthe Yuan.

Latest News and Financial Information | Reuters.com:

"China, whose currency has been pegged near 8.28 per dollar since the 1997-98 Asian financial crisis, has faced pressure from the United States and other countries to let the yuan appreciate as they say it is unfairly cheap at current levels, giving Chinese exporters an advantage in world markets.

Beijing has vowed to free up the yuan according to its own timetable and has said reform of its banking system -- sagging under more than $200 billion in bad loans...is a key prerequisite."

"The China Foreign Exchange Trade System's (CFETS) new platform hosts trading in the U.S. dollar against the euro , yen , Hong Kong dollar , British pound , Swiss franc , Australian dollar and Canadian dollar , plus the euro versus the yen ."

A quick look at three interesting stories

Hedge Funds, Sarbanes-Oxley, and Soccer

ADhD still too bad for a longer story ;) but three quick articles of note before I try and clean my office...

1. The Washington Post has an interesting look at Hedge Funds. Not only how they have grown so much in size and number, but also how they are playing a major role in proxy votes. With the increased importance comes worries that these largely unregulated funds could add to market instability.

One quote: ""There are so many funds out there now, and so much money, that they have to take on an activist role or they are not going to continue to produce," said Joseph Aaron of Wood, Hat & Silver LLC, a San Francisco firm that invests in hedge funds for individuals and institutions."

2. The NY Times reports on Sarbanes-Oxley in practice. Citing numbers from various sources, Floyd Norris writes: "About 8 percent of companies affected have reported material weaknesses in controls, an indication that the law addressed a real problem...."

"But many companies have complained that the costs were too high and that auditors forced them to go through expensive procedures that accomplished very little. One survey of 217 companies, by Financial Executives International, found the average cost of compliance to be $4.4 million. The companies had annual revenue averaging $5 billion""

In response to these costs (and reports of reduced information flow), the SEC is allowing a slightly more lenient interpretations of the rule but stresses it is not taking the teeth out of it.


3. Takeovers can cause many problems and sometimes even lost business, but The London Times' look at the aftermath of the takeover of Manchester United by Tampa Bay Buc's owner Malcolm Galzer may redefine how severe it can get: because of fears of violence (imagine that at a British Soccer game), the team may not be able to have crowds at home games!

"...many ordinary fans, too, are angry about the takeover, fearing higher ticket prices and a wholesale sell-out to corporate sponsors. Last week they were burning season-ticket renewal forms and threatening to boycott the club and its merchandise. The question now is how far they will go to express their rage."

So much for a takeover being over when the papers are signed!


Time to get to work...