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Salomon & Worldcom, Hershey, Forecasting growth, dividends, MBAs, and mo
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Jim Mahar
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Sep 03, 2002 00:02 PDT
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FinanceProfessor News September 3, 2002
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Top Stories
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1. Salomon + WorldCom = Bad news.
2. When do CEOs matter? In good times and in bad
3. Hershey: Is it Stakeholders vs. Shareholders?
4. How to forecast growth? Throw some dice?!
5. The dividend debate revisited
6. Taxes and Mutual funds: OUCH!
7. Cheer-up Mr. Greenspan
8. Globalization and free trade, good or bad?
9. Will OPEC raise production quotas?
10. Is getting an MBA degree a positive NPV project?
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Hi everyone!
Welcome back to classes. I am sure many of you started this past week.
I know we did at St. Bonaventure. I am teaching three corporate finance
classes this semester. (2 introductory and one advanced).
I especially want to welcome all of the new subscribers.
I also want to apologize to those of you who emailed me this past week
if I did not reply to your email last week. I was just totally swamped
with mail. I did read them and will try to respond.
As for this week’s newsletter, there is much news including some very
interesting research papers. I especially want to point out the paper
by Chan, Karceski, and Lakonishok. It will definitely change the way
many corporate and investment classes handle growth rates! It is in the
investments section, be sure to look for it.
Occasionally an article is particularly tough to write. That happened
this week in the MBA section of the newsletter. A new study draws into
question the worth of an MBA. As one who teaches MBAs, anything of this
sort obviously gets the ire up. After thinking about the pro’s and
con’s of including it, I decided that full disclosure is the way to go.
So I included it. I hope my students feel they got their money’s worth,
and if not, PLEASE let me know what we could have done better.
Well, I better shut up and get out of your way. Enjoy!
jim
JimM-@FinanceProfessor.com
and now the news:
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Top Story: Corporate fraud continued
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Michael Kopper became the first Enron exec to strike a deal with federal
officials. He agreed to hand over $12m and to talk about what actually
happened. The money was to go to the SEC ($8m) and the Dept. of Justice
($4m) but creditors had different ideas and got a court to impose an
injunction on the funds.
http://news.bbc.co.uk/1/hi/business/2218613.stm
Now that the major transgressions of Enron have already been aired, some
of the smaller things are coming out. For example Newsweek reported
that officials paid themselves monthly rent checks for fictitious
offices and that the firm paid “periodic” $9,000 checks to the wife of
an executive for “consulting.”
http://www.msnbc.com/news/798765.asp?cp1=1
Attention returned to Worldcom this week and what it showed was not
flattering. In what could be called a smoking email (giving a new
definition to flames), Worldcom officials told employees to not
cooperate with auditors. (in hindsight that may be a very costly
mistake!)
http://www.washingtonpost.com/wp-dyn/articles/A64786-2002Aug26.html
In a related note, Scott Sullivan the former CFO of the struggling
telecommunications firm was indicted for trying to hide debt from
regulators and auditors.
http://news.bbc.co.uk/1/hi/business/2222137.stm
If that wasn’t bad enough, Salomon Brothers admitted to giving WorldCom
officials advantages in IPOs in order to court WorldCom’s investment
banking business. The total amount the executives made on these deals
is uncertain but Ebbers alone is reported to have made $11 million.
Ebbers and Salomon are going to have much explaining to do as evidenced
already by the SEC demanding records of their past IPOs.
http://www.msnbc.com/news/801581.asp
http://news.bbc.co.uk/1/hi/business/2226966.stm
http://www.latimes.com/business/la-fi-worldcom31aug31.story
http://www.washingtonpost.com/wp-dyn/articles/A184-2002Aug26.html
http://slate.msn.com/?id=2070225
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Corporate Finance
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Here is one that makes sense. When does management matter the most?
According to a working paper by Wasserman, Nohria, and Anand, management
(at least at the CEO level) matters most when the industry has a great
deal of slack (can you say the Free Cash Flow problem) and when the
industry has many growth opportunities (which usually are accompanied by
necessary decisions and large information asymmetries.) Elsewhere (in a
stable industry with little slack, managers have less of an impact and
subsequently should expect to be paid less. This fortunately fits
financial theory pretty well! :-)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=278652
In a somewhat related article, the New York Times looks at the role of
the CEO. One victim of the so-called “crisis in corporate governance”
has been the celebrity status of CEOs. For much of the past decade we
have seen CEOs rise in importance and in pay as employees came to
mentally associate with the CEO and other stakeholders put their faith
in the CEO. Enron, Adelphia, WorldCom and others may have put an end to
this trend, if so expect to see CEO pay growth slow in coming years.
http://www.nytimes.com/2002/09/01/weekinreview/01STEV.html
This one is going to make a great case study! The Board of Hershey’s
TRUST have decided that their trust needs to be diversified. However
this action has placed the company “in play” and runs counter to the
ideals of the founder Milton Hershey who played the role of total
provider to his town and employees.
http://www.washingtonpost.com/wp-dyn/articles/A24218-2002Sep1.html
Continuing the above story, there are various ways of categorizing
acquisitions. We can classify them on whether they were friendly or
hostile, for cash or for shares, or within the same industry
(Horizontal) or ahead or behind in the distribution chain. Of these
horizontal mergers are the most apt to draw regulatory scrutiny as they
can be anti-competitive. If a deal consummated, expect regulators to
require some asset sales. It was for this reason that Cadbury Schweppes
is entering the picture. They hope to buy the assets that are required
to be sold to satisfy regulators.
http://news.bbc.co.uk/1/hi/business/2216569.stm
http://www.economist.com/business/displaystory.cfm?story_id=1301917 -on
Nestle
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=3&cid=580&u=/nm/20020901/bs_nm/food_hershey_cadbury_dc_1
In capital structure decisions, firms should use market value weights to
measure leverage. Remember back in the late 1990s many (myself
included) used that as a means of explaining why firms could continue to
borrow. (The argument goes like this: the ratio of debt to market value
of equity is what is important. So as the market value of equity goes
up, so too can the amount of debt.) Well, now that the stock market has
fallen and the debt is still there. This increase in leverage COULD
have the consequence of slowing any recovery or worse, making a
recession much more severe as bankruptcies cascade across the economy.
http://www.denverpost.com/Stories/0,1413,36%257E11%257E801767,00.html
Everyone has heard of Initial Public Offerings (IPOs), butfewer have
heard of Secondary Equity Offerings (SEOs). That is because they are
more boring than their volatile brethren and the returns are much lower.
A secondary equity offering is the sale of new shares in a firm whose
stock already trades. These sales can be to the general public, or to a
select group of investors. When firms announce a secondary offering (in
particular a public offering) the stock price drop can be significant
(On average a 3% drop, but in some periods it is even larger). To get
around this implicit cost of raising new money, many firms are selling
equity privately which means the sale need not be disclosed until well
after it has happened.
http://biz.yahoo.com/rc/020901/markets_stocks_ipos_1.html
One of the results of a bankruptcy is that the firm can often break
agreements with its unions. This week US Airways asked its bankruptcy
judge to allow the contracts to be broken if a new contract cannot be
negotiated.
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=2&cid=580&u=/nm/20020827/bs_nm/airlines_usairways_dc_2
http://www.washingtonpost.com/wp-dyn/articles/A166-2002Aug26.html
A company’s board of directors is responsible for selecting management.
This is nicely demonstrated by United who this week announced they had
chosen their new CEO. He is Glenn Tilton the Vice Chairman of
Chevron-Texaco and acting chairman of Dynergy. Tilton more than has his
hands full as United is considering bankruptcy and has to get its costs
under control.
http://www.msnbc.com/news/802294.asp
http://www.chron.com/cs/CDA/story.hts/business/1558135
http://www.washingtonpost.com/wp-dyn/articles/A24738-2002Sep1.html
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Investments
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How well can investors forecast growth? Apparently not well at all.
That is one conclusion coming from a forthcoming Journal of Finance
paper by Chan, Karceski, and Lakonishok. This finding should be more a
bit troubling given the importance of growth forecasts in most valuation
models (for example, in the constant growth model Price = Dividend in
year one /(Required return –growth rate)). Further, the paper
empirically finds little evidence of firms that can consistently
maintain the same rate of growth.
http://www.afajof.org/Pdf/forthcoming/chan.pdf
(It will definitely change my notes this semester!)
If the first 8 months are the judge, then it appears the Dow is in for
its first three-years in a row down period since 1939-1941. So far for
2002, only 6 of the Dow 30 stocks are up and YTD the Dow is down 15.7%
(which is tame compared to the S&P 500 which is down 25% and the Nasdaq
which is down a whopping 48%).
http://money.cnn.com/2002/08/30/commentary/column_hays/hays/index.htm
In a related story, nearly $50 billion, a record amount (at least in raw
terms), was taken out of US stock mutual funds in July.
http://news.bbc.co.uk/1/hi/business/2217835.stm
Is the glass half-full or half-empty? It can not be stressed enough
that markets depend on conflicting opinions. So at any point in time
their must be both “bears” and “bulls”. For example, consider long-term
technical analyst Paul Desmond (who supposedly picked the market crash
of 1987). Desmond believes that stocks are over valued while the next
article suggests the reverse. (FWIW this is included to show students
what a technical analyst does, the article mentions several methods that
Desmond uses that involve looking not at stock fundamentals, but rather
stock prices and volume data.)
http://story.news.yahoo.com/news?tmpl=story2&cid=568&e=6&u=/nm/20020901/bs_nm/column_profile_dc_1
Traditionally insiders tend to sell more shares than they buy. This can
easily be understood when you consider that much of an executive’s pay
tends to be in the form of stock (or options that can be converted into
stock). Coupled with a desire for diversification and insider sells are
common place. For this reason, investors often track a ratio of sells
to buys to get a better feel for what insiders are doing. Recently
there has been a large change in the ratio as insiders are selling fewer
shares and even beginning to buy at a pace that suggest there may be
light at the end of the tunnel. Unfortunately it may be a long tunnel
as in part due to insider trading rules, there is generally a lag
between insider buying and stock market performance, but still it is a
good signal
http://www.nytimes.com/2002/09/01/business/yourmoney/01STRA.html
Do dividends matter? In what seems like an eternal debate, Scott Burns
reexamines the question. He believes that dividends are beneficial and
makes some good points. Traditionally the argument against dividends
has been built on the tax treatment of the dividends. However, as Burns
points out, the tax differential has shrunk and more importantly, many
now invest in tax deferred or exempt plans so that taxes become even
less of an issue. Now if we could just prove it empirically we would be
all set.
http://www.chron.com/cs/CDA/story.hts/business/1556476
Ok, so you know to watch expenses when you are investing in a mutual
fund. But did you know that taxes take twice the bite of expenses?
That is the conclusion of a study by Lipper Inc. who find that “Federal
taxes on average consume about 2.5 percentage points, or up to 25
percent, of a taxable stock fund's returns for investors in the highest
tax bracket.” What can you do? Look for tax-managed funds and funds
with low turnover (index funds often fit this bill—especially in a
rising market) and keep funds with high dividends and/or higher turnover
in a retirement account.
http://www.chron.com/cs/CDA/story.hts/business/1556377
Time Magazine provides a list of some low-risk investments that people
often overlook. For example--prepaying tuition.
http://www.time.com/time/magazine/article/0,9171,1101020902-344052,00.html?cnn=yes
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Financial Institutions and Markets (also Money and Banking
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Cheer-up Mr. Greenspan, you can not satisfy all of the people all of the
time. Fed Chairman Alan Greenspan launched an attack (of course a very
mild mannered one) at his critics who felt he should have done more to
prevent the run-up of the stock market to levels that in hindsight were
unsustainable. However, these criticisms are at least partially
ill-placed. Speaking at a Fed conference in Jackson Hole, Wyoming,
Greenspan defended his actions and essentially said that the role of the
Fed is to help the US economy and not to assure that markets are
correctly valued. Therefore the stock market is outside the auspices of
the Fed. This is true, however it can also be said that the stock
market influences the overall economy, and therefore the Fed should have
done more. But whether anyone could know and intervene (with the risk
of being wrong) is speculative at best. Moreover, even if we suggest
that he could somehow have known the market was overpriced and further
assume that he should have done something about it (on the basis that
the market affects the economy), we still have to remember he did do
something: he warned of “irrational exuberance.” Going forward the
problem facing the Fed is how to cope with the nearly $7.5 Trillion that
has disappeared from consumers’ balance sheets and its effect on the
economy.
http://www.nytimes.com/2002/08/31/business/31FED.html?ex=1031772407&ei=1&en=533f344377fb8bd1
http://money.cnn.com/2002/08/30/commentary/column_hays/hays/index.htm
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=2&cid=580&u=/nm/20020901/bs_nm/economy_fed_dc_1
http://www.washingtonpost.com/wp-dyn/articles/A18063-2002Aug30.html
http://www.nationalpost.com/financialpost/story.html?id={F097EC6A-E54C-43CD-9FFC-8C3E5A086BFC}
In response to the stock market sell-off and subsequent collapse of many
employees’ 401K plans, defined benefit plans may come back in style.
Defined benefit plans had fallen out of favor and have largely been
replaced by defined contribution plans where the firm agrees to set
aside a specific amount of money. In a defined benefit plan, the firm
assumes the risk of a poor return and agrees the employee will receive
(upon retirement) a set amount of money. Of course, the upside in these
plans is limited, but many are willing to trade some return for a safer
retirement.
http://www.cfo.com/article/1,5309,7507,00.html
Predicting catastrophic risks is hard. It is also important. This is
true whether the risk is weather related or terrorist related. It is
also important. If you are an insurance company and you estimate the
risk (or the accompanying cost) too low, you set premiums too low and in
the event of occurrence may be unable to pay and/or be put out of
business. If you gauge the risks too high, your premiums are too high
and you do not get any business. That is where Karen Clark fits in.
Part of her job is to gauge the risk. A year after 9-11, she is ready
to unveil her model. (BTW the model is not laid out, but the article
gets included as it shows how far reaching finance is and how it has to
interact with ALL areas.)
http://www.nytimes.com/2002/09/01/business/yourmoney/01TERR.html
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International Finance
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Globalization and sustainable development took center stage in South
Africa this week at the World Summit on Sustainable Development. Among
the many topics covered were health issues, water, sanitation,
global-warming, over-fishing, what can be done to stop poverty.
http://news.bbc.co.uk/1/hi/world/africa/2216360.stm
http://www.dawn.com/2002/08/27/top16.htm
http://www.johannesburgsummit.org/
Speaking at the conference, British Prime Minister Tony Blair launched a
new campaign to cut down on fraud. The plan calls for firms to disclose
payments they make to governments. If implemented across countries,
this should cut down on the fraud that is now prevalent in countries
where officials do not disclose the payments but rather take them for
their own. This is a major victory for the George Soros-sponsored
Publish-what-you-pay-coalition. Already the plan is drawing protests
from British firms who say they will be at a competitive disadvantage if
they are forced to comply with the rules.
http://news.bbc.co.uk/1/hi/business/2228808.stm
http://news.bbc.co.uk/1/hi/business/2230831.stm
An interesting aside to the conference is the massive amount of natural
resources that it consumed. An estimated 5 million sheets of paper,
over 300,000 tons of carbon monoxide, and an estimated 53 gallons of
water per day for each of the nearly 45,000 participants.
http://story.news.yahoo.com/news?tmpl=story2&cid=515&e=2&u=/ap/20020830/ap_on_re_af/world_summit_junk_3
Anti-Globalization advocates generally cite the growing disparity
between the rich and poor as a major factor as to why free-trade has
failed the masses. But as the Economist points out, those nations that
have adopted free trade policies have seen their wealth increase. The
best examples of this are China and India. Yes there have been some
losers and some job displacement, but overall free-trade has improved
their well-being. On the other hand, those nations who have elected (an
unfortunate and somewhat ironic choice of words as these countries are
often not democracies) to keep their doors closed, have fallen behind.
Additionally, much of Africa has fallen further behind due to violence
and the Aids pandemic, both problems that must be solved before the
region can see economic growth. (good article!)
http://www.economist.com/printedition/displayStory.cfm?Story_ID=1301840
Supachai Panitchpakdi of Thailand became the new head of the World Trade
Organization this week. (He had been in line for the job for the past
three years.). He is the first head from a developing nation. As he
laid out the course for the organization, he promised more openness and
expressed his desire to diffuse problems early rather than letting them
blow up into major international disagreements.
http://www.washingtonpost.com/wp-dyn/articles/A64885-2002Aug26.html
http://www.chron.com/cs/CDA/story.hts/business/1558159
The US Export-Import Bank is being criticized again. This time for
guaranteeing a loan to a billionaire family who almost assuredly could
have gotten financing elsewhere. This case does draw into question
whether the bank is still needed in this day of a myriad of financing
choices. That said, Bush recently approved plans to double its scope in
what critics are saying is “corporate welfare.” (BTW this deal also has
helped cement the bank’s nickname of the “Reverse Robin Hood bank.”
Think about it.)
http://www.nytimes.com/2002/09/01/business/yourmoney/01EXIM.html
While I consider myself as patriotic as the next guy, I felt somewhat
vindicated that the EU won in its court battle to impose sanctions on
the US is probably good news in the long run. The US was patently wrong
when it imposed protective steel tariffs. This $4 billion ruling is the
retaliation. Watch the next step. If the US changes its mind and
decides to retaliate to the retaliation, then we could have a trade war
that will hurt both sides, but for now that looks unlikely.
http://news.bbc.co.uk/1/hi/business/2225972.stm
http://www.nytimes.com/2002/09/01/international/europe/01TRAD.html
http://news.bbc.co.uk/1/hi/business/2230612.stm
As the Japanese economy slows for the umpteenth time and the Nikkei hits
18 year lows (yes eighteen!), Bank of Japan officials admit they are at
the end of the line when it comes to monetary policy; they have tried
lower rates, and they have tried increasing the money supply, but still
no recovery. As the Bank of Japan deputy governor Yutaka Yamaguchi
said: "We've practically used up all our options," So what to do? When
you have used your monetary policies up, turn to fiscal policy. For
example Martin Feldstein suggests tax breaks to spur spending.
http://story.news.yahoo.com/news?tmpl=story2&u=/dowjones/20020831/bs_dowjones/200208302058000635&e=2
http://www.washingtonpost.com/wp-dyn/articles/A27629-2002Sep2.html
Those who oppose the British adoption of the Euro may not like people to
go on vacation (or holiday as they say there) to the continent. Why?
Once the vacationers use the Euro, they are more likely to favor its
adoption.
http://news.bbc.co.uk/1/hi/business/2232554.stm
As we have seen time and time again, doing business internationally has
added risks. Consider Google.com. This week their web site was
apparently banned in China for being allowing Chinese web searchers
access to sites the Chinese Government deems inappropriate.
http://www.cnn.com/2002/TECH/internet/09/02/china.google.reut/index.html
16 money-center banks have agreed to “cut Brazil a little slack” and not
force the nation into a financial crisis. The banks, at the urging of
the Fed, will not pull the credit lines out from under Brazil. At least
for now.
http://www.washingtonpost.com/wp-dyn/articles/A64870-2002Aug26.html
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Economics
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What makes watching the economy so hard? So many things influence the
economy and it is so big. Indeed it is much like the old story of three
blind people who encounter an elephant and each only can feel a
different part of the elephant.
In the US alone, consumer confidence was down, while Housing starts and
durable goods orders were up. (the latter by a whopping 8.7%!) However
all in all the best indicator we have, the Commerce Departments’ GDP
numbers suggest that the economy grew at a slow 1.1% for the three
months ending June 30. Taking all of these indicators into
consideration, it should not be a shock that economists don’t get it
right very often either, having missed each of the past three
recessions.
http://www.nytimes.com/2002/09/01/business/yourmoney/01VIEW.html
http://news.bbc.co.uk/1/hi/business/2224474.stm
http://www.washingtonpost.com/wp-dyn/articles/A1335-2002Aug27.html
http://www.washingtonpost.com/wp-dyn/articles/A64899-2002Aug26.html
Given the level of difficulty in forecasting what the economy will do
next, and a desire to not go the same path that Japan has done and
running out of options to speed the economy), Fed Officials continue to
stay upbeat and while acknowledging a downside bias, are happy to keep
interest rates where they are for now.
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=4&cid=580&u=/nm/20020901/bs_nm/economy_fed_bernanke_dc_1
http://story.news.yahoo.com/news?tmpl=story2&u=/dowjones/20020831/bs_dowjones/200208302058000635&e=2
This one is great! Why do people walk on stairs but not escalators? The
marginal cost of walking on each is approximately the same (maybe
slightly higher due to a greater chance of falling on an escalator) but
the marginal benefit of walking is not as great on an escalator when
measured in time. Good (and fun) article showing that in the end,
marginal analysis works. BTW it is written by the University of
Rochester’s own Steven E. Landsburg
http://slate.msn.com/?id=2070182
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Personal Finance
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How bad to you want it? This is not a commercial for the NFL or for
military recruitment. It is a legitimate question that everyone has to
ask. How much do you want to sacrifice to be wealthy. I maintain my
advice: if it is not fun, in the long run, it is probably not worth
it--only do it if you enjoy it!
http://news.bbc.co.uk/1/hi/business/2223175.stm
Using a credit card can be expensive. After some banking problems
caused one graduate to do just that, she quickly found herself in over
her head and stopped making payments. That was a mistake. Now two
financial planners try to help her sort out her mess. What can we learn
form her unfortunate circumstances? Use credit card debt sparingly, pay
it of as soon as possible, and if you find yourself in trouble, talk
with the creditors, do not just stop paying!
http://news.bbc.co.uk/1/hi/business/2202440.stm
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Energy Markets
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OPEC is considering lifting its production quotas by as much as 750,000
barrels a day to slow the rising price of oil and to try and win back
some market share. The decision to do so will probably (there is still
much public dissention on the matter) come at the September 19th OPEC
meeting. While the two sides are fighting over the exact quota, what
gets glossed over is that OPEC nations are already estimated to be
producing 2 million barrels OVER their existing quotas, so the effect of
raising the quotas by 75,000 may not be that great.
http://news.bbc.co.uk/1/hi/business/2223320.stm
http://www.chron.com/cs/CDA/story.hts/business/1558128
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Financial Service Industry
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E-brokers, famous for low cut-throat pricing are playing a different
tune lately. Faced with declining volume, they have been raising the
fees they charge (many now even charge fees when you don’t trade!)
http://www.chron.com/cs/CDA/story.hts/business/1557549
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Accounting News
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Butler, Kraft, and Weiss look at the frequency at which firms report
earnings and the corresponding speed at which the information is
incorporated into the stock price. Not surprisingly, those firms that
reported quarterly have a faster price adjustment than those that report
annually. Additionally, the paper looks at those firms that report more
often voluntarily as opposed to those mandated to report more often.
The results suggest that the mandatory reporters derive less benefit
from the increased frequency, which suggests that the firms with high
information asymmetry self-select to report more regularly. This finding
may call into question the effectiveness of imposed mandates on
increasing report frequency. (That said, I would still vote for more
often reporting in order to shine the light on those few firms that
deliberately relish in their information asymmetries.)
http://papers.ssrn.com/paper.taf?abstract_id=312953
It’s closing time--(with apologies to Semisonic). Andersen is now out
of the US audit business. The firm says they will not go out of
business, but it is hard to imagine the firm being much of a force in
any field now. It is sad to see how far the once giant firm has fallen.
Even retirees are feeling the consequences of the collapse as their
retirement savings were tied up at the firm. (come on admit it, the song
is now in your head!)
http://news.bbc.co.uk/1/hi/business/2225862.stm
As Andersen largely closes up shop, CFO.com provides a very interesting
look abck at who was Arthur Andersen. (Not the firm, the person).
Ironically, the real Arthur Andersen once said "think straight and talk
straight." Gee, if they had only listened.
http://www.cfo.com/article/1,5309,7640,00.html
After months of an informal investigation, it was announced this week
that Bristol Myers Squibb is now under formal investigations by the SEC
into their accounting of inventory. In case you are wondering,
declaring it a formal investigation gives the SEC more subpoena power.
http://news.bbc.co.uk/1/hi/business/2224583.stm
http://www.cfo.com/article/1,5309,7639|0|||,00.html
With all of the talk on a possible baseball strike last week, CFO.com
reran its article on accounting in MLB, sure it has been included
before, but it is so good I couldn’t resist. Basic idea: owners try
and report as small a profit as possible.
http://www.cfo.com/article/1,5309,6703,00.html
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FinanceProfessor.com Lesson of the week
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I know this is going to be hard to believe, but occasionally finance is
not someone’s favorite class. I know, I know, it is hard to believe,
but sometimes people don’t like it as much as they should. I think the
#1 reason for this is that they tend to not understand why what they are
doing is important and where it fits in to the big picture. It is for
this reason that I am constantly drawing the model of the financial
system on the board. The model provides context for the material.
What is the model? It shows how money flows from those who have it to
those who need it and back. It also shows how financial intermediaries
fit into the system (they reduce transaction costs). Trust me, once you
know where you are, the actual work in the class is much more
interesting and easy.
http://www.financeprofessor.com/fin301/FinanceIntro3.html
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FinanceProfessor.com Site of the Week
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Wow, this is a really cool site. It is by Roy Davies who while being an
avid hiker and wrote is also a librarian and the son of Gyln Davies who
wrote the famous book on the history of money. Oh yeah, and Roy Davies
has a great site! For example, the first link explores finance in
fictional writings and is fascinating. The second link contains the
best source of information on various financial scandals that I have
seen online. Good stuff!
http://www.ex.ac.uk/~RDavies/bankfiction/welcome.html
http://www.ex.ac.uk/~RDavies/arian/scandals/
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Financial Trivia/History
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Did you know that financial prices used to be transmitted from NY to
Philadelphia by stationing signalers with flags on top of hills and tall
buildings. Reportedly, it would take about 30 minutes for the
information to travel the 90 miles. (source: the Game on CNBC)
Warren Buffett was right again. Remember back after the NFL draft when
I mentioned Warren Buffett was a friend of Grant Irons of Notre Dame
whom had signed with the Bills? At the time we joked who Irons fit
Buffett’s stock picks by being out of favor. (Irons had been highly
recruited out of high school, only to be injured for much of his last
years at ND). Well lo and behold, Irons made the team. Now if only
Buffett would pick the Bills!
http://buffalobills.com/news/index.cfm?cont_id=125123
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MBAs
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Beginning next spring there will be a nationwide MBA certification exam.
For $450 you will be able to take an exam that is roughly equivalent of
the Bar Exam. While there are problems with any such exam (teaching to
the exam etc), they can improve the quality of education. Indeed having
gone through New York States Regents, I am a big fan of most of these
type of exams.
http://www.usatoday.com/money/companies/management/2002-08-26-cmba_x.htm
Is getting an MBA a positive NPV project? That is essentially what the
people at
No less a force than the AASCB (the accreditation people) have spoken
out as critical of the degree and was extremely critical of schools for
being “behind the curve” and essentially teaching out-of date material.
Potentially more harmful is a new study by Pfeffer and Fong who report
much of the same at many (especially the lower ranked) schools and go a
step further and claim to find no empirical evidence that MBAs do better
in the business world than non-MBAs. True to form, graduate schools have
responded most vociferously citing articles that have MBAs to raise
salaries significantly. So who is right? If we believe markets, then
the degree must be worthwhile as an ever-increasing number of people are
buying it. However, these reports do suggest MBA programs need to do a
critical evaluation of their programs and ask whether we are preparing
students correctly for today’s business world. This self-evaluation
should concentrate on areas where the studies have suggested weakness: a
reliance on book learning, antiquated curriculum and computer
technologies, and little emphasis on interpersonal skills.
http://www.freep.com/money/business/mba27_20020827.htm
http://www.business2.com/articles/mag/0,1640,41346,00.html
http://www.uh.edu/admin/media/topstories/che/200207/20020702mba.html
http://www.suntimes.com/output/business/cst-nws-mba05.html
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Bonaventure news
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St. Bonaventure announced this past week that we have purchased the now
closed Castle Motel and the par-3 golf course behind it. No plans have
yet to be announced. Of course the Castle is the motel Temple’s John
Chaney made famous in a Sports Illustrated article.
Fox’s Business Anchor Neil Cavuto (a Bonaventure graduate) is climbing
the charts with his TV show and career even while battling Multiple
Sclerosis.
http://story.news.yahoo.com/news?tmpl=story2&cid=494&e=7&u=/ap/20020828/ap_en_tv/ap_on_tv_neil_cavuto_2
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What I am reading
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Gee, after several great books, the three I am read this week were at
best so-so.
The best of the bunch was the City of Light by Lauren Belfer. I really
didn’t know what to expect and even after finishing it I can not decide
if I liked it. I don’t think I did. It was about Buffalo and the
Niagara Falls regions in the early 1900s and as far as that goes was
very good, however throughout much of the rest of the book it was
annoyingly like a soap opera. But the history, if true, was fascinating
and it contained at least some on JP Morgan.
http://www.amazon.com/exec/obidos/ASIN/0553526251/finpapers/104-9378365-5272442
I also finished Phil Jackson’s (yes the Coach of the Lakers and Bulls)
Sacred Hoops: Spiritual Lessons of a Harwood Warrior. Not sure what to
say about it. Sort of anti-climatic. Ok, and even sort of interesting
in parts, but overall basically common sense. It is about religion at
least indirectly. Very average.
http://www.amazon.com/exec/obidos/ASIN/067156854x/finpapers/104-9378365-5272442
I am about half way through May Day by Nelson Demille and Thomas Block.
It is rare that I say this, but I can not wait for the book to end.
Unless it stages a strong second half comeback, the novel will go down
as a major disappointment. It is very predictable and in many ways
annoying. That said, it is sort of interesting. FWIW Demille’s Charm
School is one of my all time favorites so it is not the author.
http://www.amazon.com/exec/obidos/ASIN/0786101792/finpapers/104-9378365-5272442
I think I learned my lesson and will return to historical and finance
and other non-fiction books next.
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Quotes of the week:
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Poverty wants some things, luxury many things, avarice all
things--Benjamin Franklin
Start by doing what is necessary, then do what is possible, and suddenly
you are doing the impossible---Francis of Assisi
One day in retrospect the years of struggle will strike you as the most
beautiful.--- Sigmund Freud (as quoted in PositivePress.com’s Positive
quote of the day)
That man is richest whose pleasures are cheapest--Henry David Thoreau
Every new beginning comes from some other beginnings’ end—Semisonic's
Closing Time
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Thanks for reading! I hope you liked it and learned something (or even
many things) from it!
If you have any ideas for the site or the newsletter please let me know.
Jim
JimM-@FinanceProfessor.com
who forgets how busy things get once the semester starts!
Who picked more tomatoes this week. Also I read that it was the worst
year for apples in Western New York in 60 years. I believe it! We have
very very few.
Who had yet another disappointing race this week. I think I am racing
another 5k this weekend. I really can not figure out why I am having
such slow times. I just have no leg speed and have been falling apart
after about 2 miles. I think I need some downhill running to work on
turnover.
Who predicts the Bills will be 8-8 this year and that contrary to
popular opinion, the Mets will win at least one more game this year.
Maybe even one at home! ;-)
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Oh and a final favor…pass this on to someone you think would like it….a
fellow student, a past teacher, your current teacher, your parents,
anyone who it might help. Thanks!
Thanks for forwarding this so much. That is the only way I know this
newsletter is growing so fast. :-)
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copyright 2002 FinanceProfessor.com
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