SSRN-Do Japanese CEOS Matter? by Sanghoon Ahn, Utpal Bhattacharya, Taehun Jung, Giseok Nam

eWhen comparing CEO pay across countries it is always important to realize what the CEO is bringing to the table. For instance, it has long been speculated that Japanese CEOs (Shachos) do not add as much value due to the decision making process where more consensus building is done than in the US.

Now Sanghoon Ahn, Utpal Bhattachrya, Taehun Jung, and Giseok Nam look at the long term impact of new CEOs on Japanese firms. The finding? CEOs in Japan do not matter that much.

SSRN-Do Japanese CEOS Matter? by Sanghoon Ahn, Utpal Bhattacharya, Taehun Jung, Giseok Nam:

"There seems to be no long-run positive change in performance or policies after a shacho change, even when the shacho change is non-routine. Finally, in trying to explain firm performance or policies, we attempt to separate a firm-fixed effect from a shacho-fixed effect, and are unable to disentangle a shacho-fixed effect. We are thus left to conclude that shachos do not positively matter in the Japanese corporation in this decade of a stagnant economy."

News Analysis - For U.S. and Carmakers, a Path Strewn With Pitfalls - NYTimes.com

First off, I realize there are no easy answers here. None. People will lose jobs. People will lose their investments. But that said, it REALLY scares me when governments (any government) interferes with the running of a company (any company).

News Analysis - For U.S. and Carmakers, a Path Strewn With Pitfalls - NYTimes.com:

"He [Obama] made it clear that the White House would oversee, and heavily influence, decisions about what plants to shutter, what brands of cars to abandon and how much workers and managers will be paid.

And with no edge to his voice, he left hanging the threat that he might yet force G.M. into a quick, managed bankruptcy, if it was the fastest way to remake the company. That message was directed at G.M.’s reluctant bondholders, an unsubtle warning that they must negotiate to get 16 or 20 cents on the dollar — or risk getting far less.

Mr. Obama did not nationalize the company, at least in any technical sense."

I guess GM had is coming when they asked for government money. Money rarely comes without strings attached. But this does set a very scary precedent (yeah I know, steel makers in the 1950s). Dictating how a firm is run, who runs it, and how they are paid. Let's hope this does not catch on.

And yes, I know some so called experts are claiming this is good (and indeed it is better than what France did with Peugeot where as a condition of government money job cuts were outlawed). But the GM example is so bad that it could have lasting a deleterious effects on the economy for decades to come. (Take an extreme case, suppose you are a food processor that is federally inspected. Does this Federal inspection count enough that they could dictate business dealings, pay, who runs the firm?)


NOTE: This is not saying the government moves are right or wrong. Replacing the CEO may well be needed, but it should be the Board of Directors decision. The only way I see this not being a problem is to claim they are already in effective bankruptcy and the government is merely playing the role of a bankruptcy trustee that is operating in the best interest of creditors.

What a depression might look like

From the WSJ via Yahoo.

What would a depression be like today?

"There is no consensus definition for 'depression.' Harvard University economist Robert Barro defines it as a decline in per-person economic output or consumption of more than 10%, and puts the odds of a depression at about 20%.

This 20% number is much higher than some other economists are predicting. For instance:

"Paul Kasriel of Northern Trust put the odds of a depression at just 1% because of the aggressive lending by the Federal Reserve and the fiscal stimulus just beginning to hit the economy. "There are just too many powerful countercyclical policies in place that will prevent the worst-case scenario," he says.

But still, what if it did happen. What would it be like?

It would not be as bad as the 1930s. Why? For one thing we have more "safety nets" and for another point we are starting at a much higher level.

"There were no unemployment insurance, no food stamps, none of the automatic things that maintain some income for people who are out of work," says former Massachusetts Institute of Technology economist Robert Solow....

and later:

"...spending on food accounting for a little less than a tenth of a typical family's disposable income today, compared with a little less than a quarter in 1930, a modern depression wouldn't hit people in the stomach as the Great Depression did."

If anyone knows of an "Alternative History" piece on this, if could be really interesting!

Market timing (or do you want something else to worry about?)

Today's lesson showing the difficulty in market timing comes from the good people at the Pension Benefit Guaranty Corporation. It seems that just prior to the market collapse they decided to go INTO stocks.

From the Boston Globe:
Pension insurer shifted to stocks - The Boston Globe: "

Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks."

Since September that have been quiet as to their losses (yeah, no transparency here either, do you see a pattern?), but given their assets are no doubt down and their potential claims are up (firms going bankruot etc), it has the look of a bad situation (and probably many billions more of bailout money).

Again from the Boston Globe:

"...analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.

"The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency."

Trivia aspect of story: "Charles E.F. Millard, the former agency director who implemented the strategy" was "a former managing director of Lehman Brothers...."

Stakeholder Governance: A Bad Idea Getting Worse by George Dent

Every corporate course starts out with a discussion of the the Nexus of Contracts and why it is that shareholder based models are superior to any other model (Short explanation: as residual claimants they are on the sloped section of the payoff graph and thus have best incentives to monitor).

The following article by George Dent reiterates this and reminds us (and US) that investment can go elsewhere.

SSRN-Stakeholder Governance: A Bad Idea Getting Worse by George Dent:

From the abstract:

"The traditional objections to stakeholder governance remain valid: the interests of stakeholder groups clash not only with those of the shareholders but also with each other, and acceptable means for choosing representatives of stakeholders other than employees have not been discovered. Stakeholder governance would impair economic efficiency: maximization of shareholder wealth remains the best proxy for maximizing the benefits of private enterprise to society. Beyond the traditional problems with stakeholder governance, economic developments make it an even worse idea. Capital has become more mobile, and the U.S. is no longer so dominant a venue for investment; many countries (notably China and India) have now entered the competition for capital, and corporate governance in many countries now treats investors better than the U.S. does. Instituting a serious stakeholder role in corporate governance now would send capital fleeing abroad, with great resulting damage to the American economy."

For clarification: stakeholder governance is that which gives stakeholders other than shareholders an active role on boards. For a more rigorous defense of shareholder based governance see Tirole 2001.

Cite: Dent, George W.,Stakeholder Governance: A Bad Idea Getting Worse(March 2009). Case Western Reserve Law Review, Vol. 48, 2009; Case Legal Studies Research Paper No. 09-9. Available at SSRN: http://ssrn.com/abstract=1368947

This Is Going To Blow Your Mind: YouTube EDU! | Simoleon Sense

This Is Going To Blow Your Mind: YouTube EDU! | Simoleon Sense

Simoleon Sense was right! It is a list of university videos of lectures etc. GREAT stuff! BTW along these lines, the SBU School of Business just started a new Blog and a YouTube Video channel. Check in now and then.


SBUSchoolofBusiness blog

You can now follow what is going on at the St. Bonaventure University School of Business!

No longer will you have to lose contact with your favorite school upon graduation. Nor will you have to wonder what other faculty and students are doing at the School of Business.

Content will be updated regularly, so check back often. Or better yet subscribe! It's free and you get a daily email whenever the blog is updated.

Intel Announces That Its Stock Is Wildly Overvalued (INTC)

When companies sell stock, it sells a signal to the market. Henry Blodgett interprets the recent Intel stock sale announcements:

Intel Announces That Its Stock Is Wildly Overvalued (INTC):

"Why would a company with $13 billion of cash and $5 billion of free cash flow file to sell $1 billion-worth of stock at $15 a share?

That's right!

Because it thinks the stock is wildly overvalued."

South Park's take on the Economic Crisis

I did not see this on TV, but several of my students brought it to my attention. HILARIOUS!

YouTube - South Park - Episode 1303 - Margaritaville (HQ) - Part 1/3: "Randy steps forward with a solution to fix the desperate financial state everyone finds themselves in. The town gets behind him and everyone starts to live a life that no longer depends on any economy at all."

There are three parts of it on YouTube (the other parts are linked on the right). You can also see the whole thing on SouthParkStudios.com



The third one, linked below, is at once hilarious, repulsive, and silly. REMEMBER IT IS A CARTOON. No Chickens were killed in the filming of the episode.

Regulation and going public

This week in my MBA class we covered IPOs and discussed that even before the economic crises that is dominating all aspects of the financial world, the number of IPOs was down significantly from 1990-1998 levels. We then discussed the increased cost of government regulation as a likely cause.

This same point was mentioned by Bill Gurley in the following Seeking Alpha article:

Dear Mr. Geithner: Do Start-Ups and VCs Really Need More Regulation?

"I have no idea how effective Sarbanes has been at reducing fraud (it obviously did not prevent our current economic malaise), but I do know one thing, Sarbox created a significant burden and tax on small companies that desired to tap into America’s public capital markets, and one that could have long-lasting negative impact on the long-term success of startups and innovation in America.

It’s pretty simple: Sarbanes-Oxley costs $2-3mm to implement, and is also a huge burden on a company's IT and development staff (taking away from feature expansion and product improvement). For a company doing $50mm in revenue with a 10% pre-tax operating margin, you only have say $6mm in after-tax earnings to report. These new Sarbox costs effectively cut your total profitability in half, which has a huge impact on valuation.

Of course, what this in fact causes is companies to feel the need to be much, much larger before they even try to go public. Notably, IPOs have been systematically reduced post-Sarbox"

This view is supported in academic literature by Piotroski and Srinivasan who find

"...we find that the listing preferences of large foreign firms choosing between U.S. exchanges and the LSE's Main Market did not change following the enactment of Sarbanes-Oxley. In contrast, we find that the likelihood of a U.S. listing among small foreign firms choosing between the Nasdaq and LSE's Alternative Investment Market decreased following the enactment of Sarbanes-Oxley. The negative effect among small firms is consistent with these marginal companies being less able to absorb the incremental costs associated with SOX compliance."

Cite:
International Listings(January 1, 2008). Rock Center for Corporate Governance at Stanford University Working Paper No. 11. Available at SSRN: http://ssrn.com/abstract=956987

WTO: protectionism on rise, endangering recovery - International Herald Tribune

WTO: protectionism on rise, endangering recovery - International Herald Tribune:

"The world is slipping dangerously into protectionism, threatening to strangle global economic recovery, the World Trade Organization said.

In an alarm bell to WTO's 153 members, Director-General Pascal Lamy said free trade has suffered 'significant slippage' this year as countries have erected new barriers to imports in the form of tariffs, subsidies and other measures designed to protect domestic industries."

Where’s the Plan, Wall Street? - DealBook Blog - NYTimes.com

Where’s the Plan, Wall Street? - DealBook Blog - NYTimes.com:

"For the last several months, Americans have looked to Washington to lead them. But where’s the leadership on Wall Street

It’s worth noting that most Wall Street C.E.O.’s are being advised by their legal and public relations teams to keep their heads down or risk provoking more public outrage. But there is the flip side to that coin: reasoned leadership may generate a reasonable response, helping the industry pre-empt what it fears most — additional government regulation.

So in that spirit, here’s a five-point plan to refashion Wall Street"

It is an interesting article. All 5 points deserve consideration. Unfortunately I have a faculty meeting to go to, so I will only give one look-in:

"One of the most important markets that may have to be reformed is the market for credit default swaps — those insurance plans that investors can buy to protect themselves from an institution’s defaulting. There’s good reason for the insurance to exist: If you are a client of a firm or own its debt, swaps are a smart way to make sure you are left with something if the firm collapses. But investors are allowed to buy swap protection even if they have no exposure to the firm. That means they are not buying the insurance to protect themselves, but rather as a speculative bet. In this case, it’s the equivalent of buying insurance on someone else’s house.

And that’s a problem. It creates an incentive to burn that person’s house down, or even whisper that it is practically a tinderbox."

First ETF To Mimic Hedge Funds Set To Launch - News In Focus

I am excited about this! If for no other reason it is good to talk about something other than gloomy regulations.

First ETF To Mimic Hedge Funds Set To Launch - News In Focus:

"The first exchange-traded fund designed to replicate hedge fund strategies is set to launch on Wednesday.

After receiving a final green light from the Securities and Exchange Commission at midday, the IQ Hedge Multi-Strategy Tracker ETF (NYSE: QAI) should start trading by day's end, according to IndexIQ Advisors LLC.

If it's able to truly mimic popular fund-of-hedge funds, the new ETF could provide the first real challenge to a fee structure critics characterize as highly exorbitant."

And note the last sentence. Gee, markets do work. If hedge fund fees are too high, competition comes into the arena.

Oh and how will it work?

"The benchmark for QAI resembles a fund-of-funds portfolio since it includes six different types of hedge fund strategies. The idea is to capture the entire hedging universe rather than singling out one or two strategies. The ETF includes hedging strategies covering long-short; global macro; market neutral; event driven; fixed-income arbitrage and emerging markets."

Hernando de Soto Says Toxic Assets Emerged From a Shadow Economy - WSJ.com

When in doubt, blame the accountants?

Why? As Hernando de Soto points out, there are trillions of dollars of off balance sheet obligations that can not be easily accounted for.

Without a doubt regulators and law makers deserve much of the criticism for allowing this to happen, but at the root is a failure in information systems (and by this I mean accounting and not IT).

Hernando de Soto Says Toxic Assets Emerged From a Shadow Economy - WSJ.com:

"These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property."

Now of course, the accountants were only following the law and as such can only be blamed so much. But maybe if FASB or some other accounting group remembered that their ultimate objective should be to reduce information asymmetries and improve management decisions and not rote compliance and tax avoidance, they would have realized that all liabilities and not just traditional debt obligations should be accounted for in a manner that is accessible both internally and externally.

Investors need to know. Managers need to know.


BTW The small excerpt of the WSJ op/ed piece by Hernando de Soto does not do it justice. Read the whole thing. It is very well thought out.


Update: (about 30 minutes after posting this originally). I just heard from an accountant saying that this was at least partially required. To which I will only say that we can still not figure out actual liabilities this far into the process. It is a problem. Maybe one of ignorance, but at some point the presentation has to improve to make the true risk more easily understood.

Update 2: More evidence that accounting needs to get a wake-up call....From the same day's WSJ in an article on stress-testing banks:

" Remember, 19 of the largest financial firms have been asked to submit to stress tests detailing the adequacy of their capital.

Talk about irony. Financial markets are in disarray today because leading firms chose to bury complicated instruments in their books. The results were opaque balance sheets that hid the considerable use of leverage, and proved misleading both to investors and examiners. These same firms are now being required by regulators to use these misshapen accounts to make far-ahead predictions."

Again, the accounting numbers were and are inadequate.

Atlas Shrugged in Real Life

Ok, I can't make this stuff up. Ayn Rand's Atlas Shrugged is so life like that it is now as if reading (or in my case ristening) to a script.

Background: Atlas Shrugged is a novel written in 1957 by Ayn Rand. In it, in response to a largely governmental caused "emergency" the top leaders of the business world give up and just walk away in response to taxes, regulation, and other confiscatory governmental policies. Indeed, it seems that whoever is in the hottest spotlight, is the next to go.

So without further comment, a letter from Jake DeSantis announcing his resignation from AIG.

From the NY Times

"The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G."

"DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:"

later:

"After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we...have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

.... I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down."

The only difference now between now and then, is that DeSantis (unlike Galt, Wyatt, Dannager, et al) left an explanation.

BTW if you have not read the book, I can not give it a higher recommendation except to say it is in my Top Ten (maybe top five) of all time.


Thanks to ClusterStock/Business Insider.