Hands On USA : Thanksgiving video

Oops, this was supposed to go on My Randomtopics2 blog, sorry!!!

A Thanksgiving video is up. VERY good!!!

So many familiar faces!

But since I have you attention, why not consider coming down with us when we go back? Check out our plans here. It will be a GREAT trip!

Most corporate fraud found by luck: study - Yahoo! News

Most corporate fraud found by luck: study - Yahoo! News: "Despite tough regulations aimed at improving corporate governance, financial fraud is still on the rise around the world, and most is still detected by chance, a study from auditing firm PriceWaterhouseCoopers (PWC) showed on Tuesday"

"For the roughly one-third which said they could quantify the cost of the fraud, the total losses exceeded $2 billion, or an average of $1.7 million per company.

"Economic crime remains difficult to detect, despite everybody's best efforts to invest in internal controls," said Steven Skalak, Global Investigations Leader at PWC.

The survey showed that the most common methods of finding out about financial fraud were still accidental, like calls to hotlines or tips from whistle-blower employees."


Why am I not surprised? Because if people want to hide their dishonesty, it is often easy to do. In class I occassionally use the Adelphia case where I hand out the footnotes that let to the Rigas' downfall.

Knowing that there was a problem, most people (myself included)could not tell for sure which footnote was the "smoking gun."

Is Stock Picking Declining Around the World? by Utpal Bhattacharya, Neal Galpin

SSRN-Is Stock Picking Declining Around the World? by Utpal Bhattacharya, Neal Galpin:

Short version: Bhattacharya and Galpin examine the relative use of indexing vs. stock picking in various equity markets around the world. They find that indexing is increasing pretty much everywhere but especially in more developed markets. They also estimate that the "long run steady state" fraction of stock picking in US markets is 11% (it is now 24% down from 60% in the 1960s."

Longer version:
Bhattacharya and Galpin use an innovative method to measure the degree to which stock picking is used in an equity market. Based on this model, they then compare the relative percentage of stock picking (vs. Indexing) both using a cross sectional analysis as well as time series analysis.

The key idea behind the paper model is that if everyone indexes, then volume should be proportional to size of firm. In their words:

"The idea behind this measure is inspired by a theoretical insight in Lo and Wang (2000). They proved that, if the two-fund separation theorem holds, dollar turnover of a stock, which is defined as the dollar volume of shares traded divided by the dollar market capitalization of the stock, should be identical for all stocks.

An empirical implication of the above theoretical insight is that if every person in the world indexes between a risk-free portfolio and the market portfolio (or a value-weighted portfolio that is a proxy for the market portfolio), trading volume in stock i should be explained completely by the market capitalization of stock i."

Given this, the authors the essentially regress actual volume on capitalization (more technically they run the

"regression of log monthly stock volume (measured by number of shares traded in that month for stock i in a country) against the log of monthly shares outstanding (measured by number of shares outstanding in the beginning of the month for stock i). We run this regression for 43 countries, of which 21 are classified as developed markets and 22 are classified as emerging markets."

Most of the analysis begins in 1995, but for US stocks they go back into the early 1960s to yield valuable insights as to how markets have changed.

Findings:

* "The first big result.... is that there is more stock picking in emerging markets than in developed markets." This is shown in figure 1 and table 1.

* "The second big result that Figure 1(a) illustrates is that, on an average, stock picking is declining around the world. The declines in stock picking are quite dramatic, especially in the emerging markets."

In their examination of US stocks, they find that there has been a dramatic decrease in stock picking:

"In the United States, the maximum fraction of volume explained by stock picking has secularly declined from a high of 60% in the 1960s to a low of 24% in the 2000s"

Additionally, stock picking is relatively more popular where theory would predict--
namely where information asymmetries are highest. Thus stock picking is more common in young firms, in industries where there is lower asymmetries, and (only somewhat surprisingly) where there are fewer analysts.


VERY cool!! I^3. Indeed their finding that stock picking is negatively related to analyst coverage is worth the price of admission!


Cite:

Bhattacharya , Utpal and Galpin, Neal E., "Is Stock Picking Declining Around the World?" (November 2005). http://ssrn.com/abstract=849627

By the way, Neal is a SBU grad, so I could be a tad biased ;) I tried not to be, but you can be the judge.

Class Classification: Investments

Please, Sir, I Want Some More - How Goldman Sachs is Carving Up its $11 Billion Money Pie

New York Magazine has an interesting look at Wall Street bonuses.

Please, Sir, I Want Some More - How Goldman Sachs is Carving Up its $11 Billion Money Pie: "The standard portion of net revenue (total revenue minus interest expense) earmarked for compensation at Wall Street firms stands at an astonishing 50 percent. That?s because talent is the most precious commodity on Wall Street; it?s what they sell, so it?s also what they have to pay for."

"With all senior managers of Goldman taking home a $600,000 salary, an equal split of 30 percent of $1.65 billion would be worth almost $2 million, pushing their pay into the neighborhood of $2.6 million."

I always hate these articles as they always remind me how little I make. Oh well. LOL

New Email Service

Once again you guys have come to the rescue!

I mentioned that many people had requested an emailed newsletter since they could not access blogspot from work. Jeff from MBA Depot suggested Feedblitz. It is great. It allows you sign up and receive emails of the most recent blog entries.

In their words:

"It's easy too! No gurus required. The basic service is free to all - no restrictions, no ads. Plus, you can subscribe to any blog or RSS feed by email with FeedBlitz, even if that blog does not use FeedBlitz itself."

You should notice a sign-up box on the right of the blog (at least in Firefox, it sometimes is near the bottom in Internet Explorer). All you have to do is to enter your email address and click on the link they provide for you in email! So easy!

here, I will replicate the box here as well:

Enter your Email


Powered by FeedBlitz

Hope this helps. I will still try to get the newsletter out, but this will be a useful alternative!

moneyscience.org : SmartMoney Interview: Nassim Taleb

If you have never read Fooled by Randomness, you owe yourself a present for the Holidays. Money.science found an interview with the aurthor Nassim Taleb. Good stuff.

Short version of the book: many traders are just lucky and they take way too many chances because they think they are good.

moneyscience.org : SmartMoney Interview: Nassim Taleb: "Good call TaylorTree for spotting this interview in SmartMoney and alerting me to a recent addition to Taleb's website, Quick Notes and Comments in the Old Style (not quite a blog). You might also be interested in this article from Fortune Magazine teaming Taleb with Mandelbrot. Quite a combination: How the Finance Gurus Get Risk All Wrong. "

Writely - The Web Word Processor

Eric Briys did it again! The person who turned me onto blogging and the person behind Cyberlibris and the cyberlibris blog sent me a note today mentioning Writely.com.

I checked it out and wow! It is so cool. It is an online word processor that multiple people can use at the same time. It will be perfect for co-authoring papers etc. Indeed, you can pretty much make it a "wiki" world.

I have several uses (in and outside of finance) already ready to go.

Check it out. I bet you will be as excited as I am about it!!!

Writely.com

Update on things

Sorry I have been such a spotty poster of late. Between travel, tests, my own research, and other things (including a dog that got into macadamian nuts--a definite no-no!), I have not had much time.

just some quick updates on various topics:

1. Due to several requests (especially on the NYC trip) I will somehow be bringing back the newsletter yet again. It is such a pain to do, but there does seem to be a demand for it, so I will figure out a way. Look for it soon.

2. I am sure you will hear about it again from me, but if you can, get down and help out in the Gulf Coast region. It really was devastated and they can use our help. If you want, come with us. Bonaventure Responds is the name of our group that is going down over spring's midterm break (March 4-12, 2006). Even if you can only be there for a portion of the time, you will not regret it!

3. The Southern Finance Association meetings were ok. The resort was not ready for us and many people did stay away in the wake of Wilma, but there were several good papers presented.

more after class...

Gone for a few days

I am off to the Southern Finance Association meetings. I will be back on Friday. (yeah short trip). Depending on how much time is available and connection speed, I will try to give updates from the conference. But no guarantees.

Nasdaq to allow 1,2,3 letter symbols

Well, you can keep your phone number when you change carriers, so why not your ticker if you change markets?


Latest News and Financial Information | Reuters.com:

"From Jan. 31, 2007 it will be able to support one-, two- and three-character stock symbols for Nasdaq-listed and NYSE-listed stocks, in addition to the four-character symbols it currently uses.

The single-character stock symbol carries a degree of prestige. It is held by NYSE-listed companies such as Ford Motor Co. (F.N: Quote, Profile, Research) and Citigroup Inc. (C.N: Quote, Profile, Research) .

Nasdaq, which competes agressively against the NYSE for listings, said the symbol that a market assigns to an issuer 'should be transferable to a competing market if that issuer chooses to switch...'"

Capital structure lesson

It worked!

Want to hear a class? Here is my finance 401 class lecture on capital structure. Some studnets actually asked me to put them online :)

This is a senior level course.

Take a listen ;)

At the request of the authors

The post on abnormal returns accruing to elected officials was removed at the request of the authors.

Voting and Rationality

In much of the US today is Election day, so I will devote some time to politics and how it can be used to demonstrate finance (and economic) topics.

In the first of two blog entries dealing with politics, we will begin off with a seemingly simple question: Why vote?

It is a question that has pained economists for years. Why? The odds are very very high that you will not be the marginal voter (i.e. the election results would thus be the same whether or not you voted) and yet the cost of voting falls on the shoulders of the voter (no benefit, high cost).

So why vote? Writing in the NY Times, Stephen Dubner and Steven Levitt (who show good spelling diversification of their first names) examine the question and come to the conclusion that people vote so that they can be seen voting. I would take it a step further and suggest that this is only a portion of it. They also vote so they can feel good about what they did (or else why would so many absentee ballots be cast?), so while they may not feel AS good if no one sees them, they still feel better (to think of it in the form of a regression, it has a positive coefficient).

A couple of “look-ins” from their article:

“Why would an economist be embarrassed to be seen at the voting booth? Because voting exacts a cost - in time, effort, lost productivity - with no discernible payoff except perhaps some vague sense of having done your "civic duty." As the economist Patricia Funk wrote in a recent paper, "A rational individual should abstain from voting."”

They then examine a study of voting habits in Switzerland when voting by mail became allowed:

“Every eligible Swiss citizen began to automatically receive a ballot in the mail, which could then be completed and returned by mail…..Never again would any Swiss voter have to tromp to the polls during a rainstorm; the cost of casting a ballot had been lowered significantly. An economic model would therefore predict voter turnout to increase substantially….In fact, voter turnout often decreased….”

Why?

“It may be that the most valuable payoff of voting is simply being seen at the polling place by your friends or co-workers.”

Which is interesting in and of itself, but I think may have finance implications as well. Voting is a good example of how what we (if I can allow myself to be called an financial economist for a moment) often deem irrational behavior. But when viewed from a total utility point of view (“I feel better when I vote, so I vote”), It may be perfectly rational to vote.

This is not unlike my views of some behavioral finance hypotheses. From a strict risk and return perspective, investor behavior does often appear irrational, but investors, like voters, may gain some psychic satisfaction from their behavior. Thus from a perspective of utility maximization, the investor may still be acting perfectly rationally. Unfortuntely, this is MUCH more difficult to measure than risk and return.

How 1+1+1+1 Can Equal Less Than 4 - New York Times

This was in yesterday's NY Times. It is another supporting article for the diversification discount.

How 1 1 1 1 Can Equal Less Than 4 - New York Times:

"over the long haul, conglomerates, on average, perform worse in the stock market than the typical focused company. One likely cause is that they tend to do a poor job of allocating capital among their various divisions. Of course, if those units were separate publicly traded companies, the market itself would be making the allocation decisions. And it stands to reason that the overall market is a better administrator in this regard than the average corporate manager."

A study conducted by David S. Scharfstein, a finance professor at the Harvard Business School, offers evidence of inefficient capital allocation among widely diversified companies. Professor Scharfstein found that managers of conglomerates generally felt compelled to invest something in all of their divisions, regardless of the divisions' growth potential - a phenomenon that he calls intrafirm "socialism." Because of it, conglomerates tend to invest too much in divisions with low growth potential and too little in those with high potential."

"Professor Scharfstein's research was conducted for the National Bureau of Economic Research; a copy of his study is at [ssrn]."

Yet another example of a perfectly timed article. Just today in class we were speaking of the problems with internal capital markets!