Does Board Structure in Banks Really Affect Their Performance? by Shams Pathan, Mamiza Haq, Philip Gray :: SSRN

This one will definitely make it to class!

Does Board Structure in Banks Really Affect Their Performance? by Shams Pathan, Mamiza Haq, Philip Gray :: SSRN:

"Using a panel of 212 large U.S. bank holding companies over the period 1997-2004, we examine if board structure (board size, composition and gender diversity) in banks relate to their performance. After controlling for relevant sources of endogeneity (simultaneity, reverse causality and unobserved heterogeneity) via system generalized method of moments (GMM), we find that board structure in banks affect their performance. Particularly, the results show a negative association between board size in banks and their performance. We also find evidence of a negative relation between board independence and performance. In addition, our results support a positive association between gender diversity and bank performance."

So-called sweatshops, Good or bad? or both?

Image via CrunchBaseChinese Readers on the 'iEconomy' - NYTimes.com:

By now you probably have seen the series of articles the NY Times is running on China and Apples. If not, I HIGHLY recommend you read them and realize why so many jobs went overseas (pun intended). The first article sets the stage by recounting a conversation with President Obama and the late Steve Jobs where Jobs basically said the jobs the US lost are not coming back.


Here is a flavor from the New Republic:

"The article, by Charles Duhigg and Keith Bradsher, is difficult to summarize. If you care at all about the economy and future of the American workforce, you should read it for yourself. But the main takeaway is that other countries, particularly China, offered Apple something not available here: A cheaper, more compliant workforce. This anecdote captured the situation well:

"One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”"

What you may not know (at least I didn't) that the articles were also posted in China. The comments are very interesting and on both sides of the issue.

Those attacking Apple (and China for allowing such conditions to exist):

"It’s ridiculous that the local government is trying to promote the city’s image while horrible accidents are still happening like this. If what is prohibited in the U.S. is highly protected here by the local authorities, we will never be treated with dignity. — 安吉丽娜朱莉的男朋友"

or

"...everything is driven only by G.D.P., so which government official would dare supervise those companies? They (the governments) have long reduced themselves to the servant of the giant enterprises. — Occasional Think"

But on the other hand:

"Without Apple, Chinese workers will be worse off. I hope China can some day soon have dozens of its own companies like Apple, who (only) work on high-end research and development and send manufacturing lines to Africa. — Anonymous"

and

"If more rigorous labor protection standards and 8-5 working time protocol are being strictly executed, we can expect a plunge of the workers’ wages. If labor organizations with monopoly rights are established, those rural migrant workers who cannot find a position in the organization will be forced back to their hopeless villages.....  — YeyeGem"

and

"If people saw what kind of life workers lived before they found a job at Foxconn, they would come to an opposite conclusion of this story: that Apple is such a philanthropist. — Zhengchu1982"

Which reminds me of this clip from Milton Friedman (the entire thing is an excellent defense of Capitalism) but the part that begins at 1:00 is totally apt for this discussion. (HT Susan A)




Who is right? Who is wrong? There are no easy answers. In a free society with no information asymmetries, by definition if someone takes a job FREELY, and can leave FREELY, then it must be that the employee is better off with the job than without.  And clearly factories like these (and by no means is it only Apple) do lift the standard of living.  But if the people are not working there freely or are working under false auspices and can not quit, then all bets are off.  

Related articles

• Apple in China: The New York Times goes for the Pulitzer (tech.fortune.cnn.com)
• Why Apple Doesn't Make the iPhone in America (suburbanmen.com)
• Apple: Poor working conditions inside the Chinese factories making iPads (dailymail.co.uk)
• When Barack Obama joined Silicon Valley's top luminaries for dinner in California last February(2011), each guest was asked to come with a question for the president. (tarpon.wordpress.com)
• Want to feel like an Apple factory boss? New strategy game lets you run a sweatshop (venturebeat.com)

The Costs and Benefits of Long-Term CEO Contracts by Moqi Xu :: SSRN

The Costs and Benefits of Long-Term CEO Contracts by Moqi Xu :: SSRN: Abstract:

A good explanation of why long term contracts may increase investments but at the cost of worse short-term performance.

"This paper uses a new dataset of 3,717 US CEO employment contracts to study the time horizon of CEOs. Longer contracts offer better protection against dismissals: turnover probability increases by 20% each year that passes towards contract expiration. In theory, this should encourage CEOs to pursue long-term projects. Using an instrumental variable approach based on inter-state judicial differences, I show that contract horizon is indeed positively correlated with investment. However, longer contracts also make it harder to dismiss undisciplined managers and therefore impose less discipline. Consistent with this argument, CEOs under short-term contracts perform better in (the fewer) acquisitions that they make, and CEOs under longer contracts enjoy more salary increases and perquisites. Overall, firm value does not differ across contract types."

Financial Trust Index: Less Than a Quarter of Americans Trust Financial System - MarketWatch

               Image via WikipediaFinancial Trust Index: Less Than a Quarter of Americans Trust Financial System - MarketWatch:

"The latest issue of the Chicago Booth/Kellogg  School Financial Trust Index released today finds that only 23 percent of Americans say they trust the country's financial system. And, trust for banks continues to slide downward."

Warning: this makes for fertile ground for stricter regulations.

Related articles

• Americans Haven't Been This Angry About The Economy Since March 2009 (businessinsider.com)

Royal Bank of Scotland Slashes C.E.O.'s Bonus - NYTimes.com

Royal Bank of Scotland Slashes C.E.O.'s Bonus - NYTimes.com:
In less than an hour I will be teaching on how monitoring and public opinion do influence firms, I guess we have a new example:

"Royal Bank of Scotland announced on Thursday that it would pay its chief executive, Stephen Hester, an all-stock bonus of £963,000, or $1.5 million, less than half what he received last year.

The bank, which is 82 percent owned by British taxpayers, had come under pressure from the country’s prime minister, David Cameron, to rein in bonuses for top executives."

Off by a factor of 3? Maybe. US Energy Dept cuts Natural Gas forecasts by 66%

If you care, you already saw that Natural Gas prices were up on Monday.  Why?  Well in part because our previous estimates of the natural gas potential in the Marcellus Shale were WAY off :( 

From Bloomberg:

The U.S. Energy Department cut its estimate for natural gas reserves in the Marcellus shale formation by 66 percent, citing improved data on drilling and production......The estimated Marcellus reserves would meet U.S. gas demand for about six years, using 2010 consumption data, according to the Energy Department, down from 17 years in the previous outlook.

It should be noted that many experts, including US Geological Survey had been cutting forecasts since August as wells were not producing up to previous expectations.

Related articles

• Natural Gas Prices Continue to Fall on Tech-Driven Supply Increase (ibtimes.com)
• Cyprus Aims to Join Natural Gas Boom With Big Offshore Deposits (spectrum.ieee.org)
• Fracking our Marcellus Shale (latimermville.wordpress.com)
• Natural gas production in the US will triple by 2035, Energy Information Administration says (pennlive.com)

Full disclosure: SIMM is long natural gas, but short Chesapeake,one of the largest producers of natural gas.

Vertical mergers: the "why" is not as clear as we thought

The "why" for vertical mergers just got more cloudy.  Vertical mergers are those that go up or down a firm's supply chain.  For instance buying your supplier or buying your customer.

The standard explanation for the "value added" by such a deal has been a reduction of transaction costs (negotiation, cost or reneging, etc) as well as control of a supply source and quality etc issues.  And they MAY still be the explanations, but they are at least drawn more into question by new findings from University of Chicago economists Hortacsu and Syverson  who examine where firms buy from and sell to (the flows of the article).  There finding?  More often than not even after a vertical acquisition the firm does not buy from nor sell to its new "relative".

From Bloomberg's BusinessClass article:

"If most vertically integrated companies aren’t supplying themselves, then why do they own production chains? It is harder to get a clear answer to this question from the data, but there are some clues to an explanation. Trying to understand why companies own production chains by looking at the way goods flow along the chain could be misleading. Instead, it might be the things we can’t see -- managerial oversight, marketing know-how, customer contacts, intellectual property, and other information- based capital -- that drive most vertical integration.

By integrating, companies can spread these types of capital over the production chain. Integrated firms appear to let the market and contracted suppliers handle most of the flow of tangible goods along the chain, while using control through ownership to apply the necessary intangible capital, which is by nature harder to write contracts over."

Ironically we covered vertical mergers TODAY in class. Guess I better update my notes.

It’s Showtime: Do Managers Report Better News Before Annual Shareholder Meetings? by Valentin Dimitrov, Prem Jain :: SSRN

I hope no one is surprised by this: managers seemingly try to influence analysts and shareholders by providing good news just prior to the firm's annual meeting. That is the conclusion on a paper by Dimitrov and Jain that examines the 40 days prior to the firm's annual shareholder meeting.


It’s Showtime: Do Managers Report Better News Before Annual Shareholder Meetings? by Valentin Dimitrov, Prem Jain :: SSRN:

The pre-meeting returns are significantly higher when shareholder discontent with managerial performance is likely to be stronger. The decile of companies with the worst past stock price performance exhibits average cumulative abnormal returns of 3.4% and buy-and-hold returns of 7.0% during the 40-day pre-meeting period. Companies with poor past performance exhibit even higher pre-meeting returns when shareholder pressure on management is greater, such as when institutional ownership is high, when CEO compensation is high, and when shareholders submit proxy proposals on corporate governance. We complement the evidence based on CARs by showing how managers of poorly performing firms manage the timing and content of earnings announcements and management forecast announcements before the annual shareholder meetings. Overall, the results suggest that managers attempt to influence shareholders before annual shareholder meetings through positive news.

One caveat that I would like strengthened a bit: reversion to the mean.  If a firm is in worst performing decile, it may get better just by chance/bid ask bounce, etc.

Related articles

• Carl Icahn Issues Open Letter to Shareholders of Oshkosh Corporation (prnewswire.com)
• Why aren't shareholders revolting over excessive boardroom pay? (guardian.co.uk)
• Investing Red Flags: 3 Companies with High Corporate Governance Risk (wire.kapitall.com)

Early Life Conditions and Financial Risk-Taking in Older Age by Dimitris Christelis, Loretti Dobrescu, Alberto Motta :: SSRN

My BonaResponds work and a conversation on yesterday's run got me thinking as to how much early life events affect adults. That there are generational poverty type issues is well known, but I had never really thought about the type of assets held controlling for wealth but Christelis, Dobrescu, and Motta had: (emphasis mine)

Early Life Conditions and Financial Risk-Taking in Older Age by Dimitris Christelis, Loretti Dobrescu, Alberto Motta :: SSRN:

"Using life-history survey data from eleven European countries, we investigate whether childhood conditions, such as socioeconomic status, cognitive abilities and health problems influence portfolio choice and risk attitudes later in life. After controlling for the corresponding conditions in adulthood, we find that superior cognitive skills in childhood (especially mathematical abilities) are positively associated with stock and mutual fund ownership. Childhood socioeconomic status, as indicated by the number of rooms and by having at least some books in the house during childhood, is also positively associated with the ownership of stocks, mutual funds and individual retirement accounts, as well as with the willingness to take financial risks. On the other hand, less risky assets like bonds are not affected by early childhood conditions. We find only weak effects of childhood health problems on portfolio choice in adulthood. Finally, favorable childhood conditions affect the transition in and out of risky asset ownership, both by making divesting less likely and by facilitating investing (i.e., transitioning from non-ownership to ownership)."

Analysis: The great hedge fund humbling of 2011 | Reuters

Analysis: The great hedge fund humbling of 2011 | Reuters:

"...was a humbling year for the $1.7 trillion hedge fund industry, with the average fund dropping 4.8 percent and some stock-focused funds suffering an average 19 percent decline, according to research compiled by Hedge Fund Research and Bank of America Merrill Lynch analysts.

Investors who sidestepped hedge funds and instead chose mutual funds fared much better. For example, the Vanguard 500 Index fund gained 2 percent, and PIMCO's StocksPLUS Long Duration Fund, 2011's best performing mutual fund, enjoyed a 21.2 percent return...."

Now any analysis of return without a mention of risk measures is incomplete, but this at least shows once again that hedge funds are not the automatic way to make money that many seemingly believed in only a few years ago.

My brillant sell-everything trade (cont.) - Jan. 18, 2012

My brillant sell-everything trade (cont.) - Jan. 18, 2012:

Ties together some behavioral finance and some traditional finance:

"The truth is that while most economists assume that stock movements are largely random, there's plenty of debate about how far that randomness goes.

What should an individual investor make of that? Assume stocks are too unpredictable for you to be a profitable trader, but lower your expectations for how much you'll earn from buy-and-hold too.

You should also keep in mind that the risk of owning stocks remains real. Most investors in midcareer -- and many in retirement -- take comfort in the fact that over long stretches like 15, 20, or 30 years, stock investors have never lost money.

Boston U.'s Bodie has argued that the safety of long-run averages is a statistical illusion. As years pass, the chances of stock returns falling short of a risk-free investment get slimmer, but the potential size of your losses also gets bigger. You might be part of an unlucky generation that sees a long string of losing years."

Any article that cites both Zvi Bodie and Meir Statmen is almost guaranteed to be mentioned! Both are great finance professors/writers whom I am lucky enough to know.

Kodak Files for Bankruptcy Protection - WSJ.com

Image via WikipediaKodak Files for Bankruptcy Protection - WSJ.com:

"Eastman Kodak Co. filed for Chapter 11 bankruptcy protection in New York early Thursday morning, after the struggling photography icon ran short on cash needed to fund a long-sputtering turnaround.

The storied former blue chip said it had secured $950 million in financing from Citigroup Inc. to help keep it afloat during bankruptcy proceedings."

From USA Today:

""After considering the advantages of Chapter 11 at this time, the board of directors and the entire senior management team unanimously believe that this is a necessary step and the right thing to do for the future of Kodak," CEO Antonio M. Perez said in announcing the decision...."

Here is the actual filing

KodakBankDeclaration_Jan2012

(My Finance 402 students should definitely read through it).

When I was at the University of Rochester, EK was a major employer going through layoffs, but I had no idea that that trend had gone on for so long. Again from USA Today:

"As of a year ago, Kodak had 7,100 employees in the Rochester area and 18,800 companywide. The worldwide figure is now 17,000, the company said in its bankruptcy papers, about 8,000 of them in the U.S. It did not give a new Rochester-area figure.

At its peak in the early 1980s, the company employed 62,000 people in Rochester and 130,000 worldwide."

It is sad in some respects to see 132 year old firm get into such difficulty, but not unexpected as their products were largely pushed aside by digital photography and (at least speaking from my own experience, their digital cameras (low end) did not last very long. I went through 4 or 5 before switching brands.

Related articles

• Kodak files for bankruptcy protection (oxfordschoolofphotography.wordpress.com)
• Bankruptcy fears again hit Kodak's stock (seattletimes.nwsource.com)
• Bankruptcy fears again hit Kodak's stock (sfgate.com)
• Kodak, we are sad to see you leaving... (semanticreatures.wordpress.com)

Hedge Funds are About to Undress

Image via WikipediaHedge Funds are About to Undress:

While we do not know the consequences of the new regulations, Oilprice.com is expecting a contraction in the hedge fund world as a result of the new rules"

"The July 21 deadline for the hedge funds to register required by the one year anniversary of the Dodd-Frank bill is fast approaching, and the industry is roiling with turmoil. The net result for the rest of us could be shrinking market liquidity and falling asset prices as hundreds of funds shut down or move overseas rather than meet the new, onerous disclosure requirements and the vastly increased legal liabilities they imply.

The new regulations raise the level of disclosure virtually to the same level already demanded by your garden variety, plain vanilla mutual fund. Details will have to be released about assets under management, performance, strategy, risk management procedures, custody, brokerage relationships, soft dollar arrangements, commission discounts and kickbacks, fees, compensation of the managers, types of clients, conflicts of interest, and of course, their largest holding. All of this information must be provided in plain English, filed with the SEC, where it will be available online to the public."

For a good "cheat sheet on the Dodd-Frank bill click here.

Related articles

• 2011: Disastrous Year For Mutual, Hedge Fund Managers (ritholtz.com)
• Why hedgies are lobbying for lower walls (blogs.ft.com)
• How to make money in hedge funds. [David Crozier] (ecademy.com)
• Hedge Funds May Attract $80 Billion in 2012, Barclays Says (businessweek.com)
• 40pc of hedge funds mislead investors, according to Oxford University study (telegraph.co.uk)

Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers? by Harrison Liu, Edward Swanson :: SSRN

Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers? by Harrison Liu, Edward Swanson :: SSRN:

I caught myself literally saying "Wow" when I read this....

Liu and Swanson look at the timing of stock repurchases. Past literature had shown that managers prefer share repurchases to dividends. One reason often given for this preference is the flexibility that buybacks have as opposed to dividends which, once set, are rarely lowered. We have known that this flexibility results in some market timing but what had only been speculated on, was that managers use buybacks to counter act short selling.

The Abstract: (emphasis is my own)

Abstract:
Motivated by the substantial capital used to repurchase stock and its potential to affect price discovery, we develop an empirical model of changes in corporate share repurchases. We find that several accounting measures of capital availability and firm performance influence repurchases, but our novel discovery is that corporate managers trade against shorts by increasing share repurchases in response to an increase in short sales. Trading against shorts appears to violate SEC regulations that price be set by “independent market forces without undue influence by the issuer.” We also examine how managers trade with their personal capital. In general, they trade with short sellers (i.e., selling when shorts sell); however, managers change their behavior and do not sell when the company is repurchasing shares. By not selling their personal stock holdings, managers maintain the credibility of the buy signal from the corporate share repurchases.

Two "Look-ins":

"We estimate that quarterly share repurchases increase by an average of $1,140,000 for each one percentage point increase in short interest. This trading is unlikely to result from reverse causation, whereby short sellers react to corporate repurchases (i.e., endogeneity), because (1) short sellers have no incentive to increase their position when a company is buying back its shares, and (2) the amount of corporate share repurchases is reported quarterly, so it is not readily available to shorts in a timely manner."

and

"Managers can easily monitor the aggregate short position in their company’s stock since short interest is publicly reported....managers’ could adjust share repurchases to counteract changes in short sales. International Bancshares Corporation (IBC) is one of the few companies to publicly admit to this practice. In a press release on March 25, 2009, IBC states that it “is particularly vulnerable to the harmful practices of short-traders because under CPP, the Company is prohibited from repurchasing its common stock. (CCP refers to the U.S. Treasury Department’s Capital Purchase Program.) The Treasury, which held stock warrants as part of TARP funding, responded by granting IBC permission to repurchase stock. "

Fascinating stuff! I^3 (Interesting, important, and informative!)



Cite:
Liu, Harrison and Swanson, Edward P., Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers? (January 16, 2012). Available at SSRN: http://ssrn.com/abstract=1986396

Related articles

• Questioning the Evil of Short Sales (nytimes.com)