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A cynical look at Executive pay, Much on the SEC, CBOT chooses LIFFE, a
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Jim Mahar
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Jan 22, 2003 08:24 PST
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FinanceProfessor News January 22 , 2003
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FinanceProfessor.com
Bringing the Real World to the Classroom and vice versa!
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Top Stories
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1. A cynical look at Executive compensation
2. Microsoft initiates a dividend
3. Kmart closes more stores
4. A bidding war for a grocery store!
5. Samuelson’s Dictum: micro efficient, macro inefficient?
6. SEC: more responsibility and more money.
7. Oil: war threat and Venezuela’s strike drive up prices
8. What can be done to help African trade?
9. A defense of earnings management
10. SuperBowl prediction
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Hi again!
There are so many good stories this week I almost didn’t know where to
stop! I tired to keep it a bit shorter, but was not very successful.
This week really points out how fast finance is evolving (a common
discussion in my classes this week). In almost every section there are
several stories that will immediately change the way finance is taught
and shows the almost impossible task of keeping standard texts up to
date. The more I think about it, the more I believe it. I hope this
newsletter helps you and your students stay abreast with this evolution.
Mark your calendars/day planners/PDA etc. Friday at 2 PM eastern time
(7 PM GMT) we will try something new: a chat session in the new
FinanceProfessor Yahoo group. Of course it is free and will be a good
way to share ideas and discuss financial news academic papers or just
about anything else. It will be a great opportunity to see what others
are doing in class or to pick up some new perspective on finance topics.
It is really easy to do and should be a good learning experience for
everyone. Sort of a mini-conference. :-)
Speaking of conferences, I would be remiss if I did not again mention
the FMA site that now has streaming video of many of the key
presentations from October’s FMA conference in San Antonio. They are
only online and free for a limited time so be sure to check them out.
They are great!!!!
http://www.fma.org/
Well I will get out of the way and let you get to the news.
Enjoy!
jim
JimM-@FinanceProfessor.com
and now the news:
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Corporate Finance
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Feeling cynical? If you aren’t now, you will by the time you finish the
new Bebchuk and Fried paper on executive compensation. They paint a
fairly gloomy picture of managers exerting their power to “extract rents
and to camouflage the extent of their rent extraction.” Rather than
designed to solve agency cost problems, the paper makes the case that
executive pay can by an agency cost in and of itself. Let’s hope things
aren’t this bad.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364220
When text books are written about merger deals that have done poorly,
the Time Warner-AOL deal will likely top the list. This past week CNBC
aired a documentary on the deal. Like an unauthorized biography, the
show was harsh on both parties, and in doing show showed many of the
things that can go wrong. Notably, the stock deal occurred near the
peak of the internet bubble, allowing AOL to pay for the deal with what
some are calling “funny money.” Moreover, the woes have not stopped
since the deal occurred as the combined firm has faced much managerial
in-fighting and accounting mark-downs. The most recent mark-down was
for yet another $10 billion. Of course the firm was back in the news
this past week as Steve Case resigned and the board selected Dick
Parsons as the new CEO. (BTW I would like a copy of the show, if anyone
knows where I can get one, please let me know.)
http://www.msnbc.com/news/856912.asp
http://www.dallasnews.com/business/technology/stories/010903dnbusheist.5f3b8.html
http://www.nytimes.com/2003/01/14/business/media/14AOL.html
http://news.bbc.co.uk/1/hi/business/2651821.stm
http://news.bbc.co.uk/1/hi/business/2666983.stm
In one of the least widely reported stories I have stumbled upon, Wilber
Ross is purchasing the assets of steel operations that have gone
bankrupt and is potentially in the position to make a lot of money.
How? By purchasing the assets of the firms and leaving the so-called
legacy costs (example pension and heath-care costs) out. It is a great
example of several important topics that are often hard to demonstrate
in class: how a. bankruptcy changes the rules of the game, b. why it
is sometimes better to purchase assets rather than the whole firm, and
c. that inadvertently government policies can impact more than intended.
In this case, Ross is relying on the government (read tax payers) to
pick up the legacy costs. Which is not a condemnation for without the
bail-outs, it is unlikely that any of the deals would get done.
However, his reliance on tariffs is troubling. (This one will reach text
books!)
http://slate.msn.com/id/2077087/
It began off so easily, last week it was announced that 53% of England’s
Safeway PLC was purchased by Morrisons for a deal worth $4.6 billion.
The immediate market response was a jump of 29% for the target, and a
loss of about 8% for the bidder. However, before the deal was
completed, several other parties (including Wal Mart, Tesco, and KKR)
joined the fray and a bidding war was on in an attempt to increase
market share in the ultra competitive UK grocery market. In many ways
this is what makes mergers so exciting is the suspense and bids, and
counterbids where each side is trying to find ways to squeeze extra
money from the deal. As is the norm, the bidding war has raised the
premium form an original 29% to near 50%. (Did you really think I could
leave out a deal that involved a “family run” grocery store?)
http://www.msnbc.com/news/856996.asp
http://news.bbc.co.uk/1/hi/business/2652529.stm
http://news.bbc.co.uk/1/hi/business/2652279.stm
http://www.nytimes.com/financialtimes/business/FT1042490762663.html
http://www.guardian.co.uk/business/story/0,3604,875669,00.html
http://news.bbc.co.uk/1/hi/business/2676095.stm
http://news.bbc.co.uk/1/hi/business/2682559.stm
Revise your notes on this one. Microsoft has decided to begin paying
dividends. However, Slate questions whether the dividend is meaningful
as it is for only 16 cents a share and a small portion of their over $47
billion cash on hand. Two reasons that Microsoft and other tech firms
are reluctant to pay dividends is that most of their employee (read
executive) stock options are not dividend protected and hence paying
dividends would lower their option value and secondly due to the
so-called option overhang, a end of buyback programs would lead to stock
dilution.
http://slate.msn.com/id/2077122/
http://slate.msn.com/id/2076731/
Bankruptcy is many things: a “time-out”, an opportunity to renegotiate
with creditors what you owe, and time to reorganize your business, but
few think of it as good news. Fewer still feel it is good news when 2
sports teams in the same league declare bankruptcy in the same week, but
that is exactly how NHL commissioner Gary Betman described the news of
the Buffalo Sabres bankruptcy. Earlier, the Ottawa Senators (who have
the most points of anyone one) ran out of money and could not make
payroll. However, as the Globe and Mail points out, in each of these
cases, it was not the hockey operations that got the teams into trouble
but other activities of the owners that spilled over. In the event of
the Sabres, the bankruptcy will almost assuredly mean the money they owe
Adelphia never gets paid. (That said, if markets work, the league still
may be in some trouble, as there are few buyers for either team.)
http://www.globeandmail.com/servlet/ArticleNews/sports/RTGAM/20030114/wxbrun0114/Sports/sportsBN/breakingnews-sports
If Kmart’s stores had been nearly as busy as their management has been,
the bankrupt company’s problems would be solved. But the activity
remains concentrated at headquarters as the troubled retailer announced
over 300 more store closings and named a new CEO. However, many are
pondering if even these changes will be enough to turn the fortunes of
the firm and allow it to compete against the Wal Mart juggernaut.
(Trivia: Olean NY now has a store and San Antonio Texas does not!)
http://biz.yahoo.com/rb/030114/retail_kmart_14.html
http://www.freep.com/money/business/kside15_20030115.htm
So much for client-privacy proposed SEC law would force lawyers to
disclose when firms were breaking the law. Shockingly, lawyers are
opposed. Go figure.
http://money.cnn.com/2003/01/09/news/proposed_sec.dj/
If you canput up with a pop-up ad, About.com has a pretty good section
on the mechanics of an IPO as well as a discussion of the winners’
curse.
http://stocks.about.com/library/weekly/aa011303a.htm
http://economics.about.com/library/weekly/aa010803a.htm Note: it uses
baseball as an example :-)
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Investments
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Jung and Shiller have an interesting paper that looks at Samuelson’s
dictum: that is that the market is more efficient pricing individual
stocks than getting the overall price level (i.e. the market) correct.
In English it means that while we can price stocks relative to one
another reasonably well, we can not price the overall market as well.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=348180
In a somewhat related story, Jon Markam got me. His article entitled
Super Models had nothing to do with “super-models” but was about super
models. Got it? It deals with mathematical representations of the
financial world, which weren’t the models I envisioned. In particular
he writes on Didier Sornette’s attempt to describe why markets crash.
Sornette relies on his background in predicting earthquakes and rocket
disasters to attempt to understand market drops. By studying past
collapses, Sornette attempts to understand and even forecast market
sell-offs. He finds that over confidence, easy money, and herding all
play key roles. Now the bad news: he believes the US market will fall
sharply and then take a long recovery period. He even provides updated
monthly forecasts at his UCLA link.
http://moneycentral.msn.com/content/p38353.asp
http://www.ess.ucla.edu/faculty/sornette/prediction/index.asp#prediction
James Glassman points out that mutual funds whose manager’s name is also
in the fund name tend to do better than other funds. Why? It could be
that the mangers have better incentives, or that they are freed from
short-term appraisal problems, or self-selection (better mangers start
their own funds), or it could be mere coincidence. Probably deserves
more attention. Could make an interesting (and relatively easy)
academic paper.
http://www.chron.com/cs/CDA/story.hts/business/1741364
Speaking of mutual funds, Jack Bogle was again on his soapbox claiming
that the mutual fund must improve itself I can not say it as well as he
can “We used to be in the business of long-term investing, and now we're
in the business of short-term speculation." “Average annual portfolio
turnover at equity mutual funds is more than 100% now, up from the
mid-teens back when Bogle was starting in the business in the 1950s.
High turnover, Bogle believes, is a recipe for high costs and
disappointing long-term performance.”
http://www.fortune.com/fortune/investing/articles/0,15114,406061,00.html
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Financial Institutions and Markets
(also Money and Banking)
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As predicted, the SEC passed the improved investor protections that were
proposed last year. The changes make it more difficult to release pro
forma financial statements and speed up managerial disclosure of stock
sales. And similarly, in England, a new set of investor protections
were adopted. Both rules come largely from last year’s corporate
governance crisis. However, the SEC changes do not go as far as the
original proposals (see also the accounting section)
http://www.washingtonpost.com/wp-dyn/articles/A63047-2003Jan15.html
http://news.bbc.co.uk/1/hi/business/2664153.stm
http://news.bbc.co.uk/1/hi/business/2674007.stm
http://www.nytimes.com/2003/01/22/business/22SEC.html
Along similar lines, President Bush promised “the largest ever increase”
in SEC funding for 2004. The extra money is intended to help crack down
on fraud. It is almost double the funding the watchdog got in 2002.
Gee, where did you see that predicted last year? Like I said during the
Enron collapse, if you are a student, get your application in to the
SEC, they will be hiring.
http://biz.yahoo.com/rf/030111/economy_bush_8.html
Speaking of the SEC, remember Harvey Pitt who resigned in early
November? Well he is still alive and well and, and, and still running
the SEC! Really. It was reported that Bush planned on nominated
William Donaldson to the post, but it hasn’t happened yet, so Pitt
continues to rule the roost. Of course this can cause some conflicts as
Pitt is not only a lame duck (hey, I mean it in the nicest possible
way!), but also will be looking for work soon.
http://www.startribune.com/stories/535/3589677.html
The Washington Post draws into question how well the Nasdaq and the NYSE
will be willing and able to follow through with all of their “tough
talk” designed to improve corporate governance. Will they actually
delist firms for not having enough outside board members? Only time
will tell, but given their track records, it is far from guaranteed.
That said, things may be different this time and both markets are
adamant that they mean business this time. (Interesting fact: in last
two years the Nasdaq has delisted 670 firms including “about 100 for
corporate governance issues” the NYSE on the other hand has yet to
delist anyone fore corporate governance issues, but this may be in part
due to their policy of reaching out to firms to alter the governance
issue before it comes to a head. (or not, remember Enron was a NYSE
firm.)
http://www.washingtonpost.com/wp-dyn/articles/A19050-2003Jan20.html
Specialist firms and markets themselves are suffering as the stock
market (in either price or volume) has yet to rebound. As would be
predicted firms are still laying people off in an attempt to bring
capacity back into equilibrium.
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20030119/bs_nm/financial_sharedealers_preview_dc_1
Bad check fees (i.e. penalties for checks written for more money than is
in an account) can be a means for banks to make money. Banks are
drawing criticism that they encourage the bad check writing as a means
to increase fee income.
http://www.nytimes.com/2003/01/22/business/22BOUN.html
In what I (naively?) hope was just a random break-in, Alan Greenspan’s
house was burglarized. If not random, it could be a terrorist plot or
an attempt to kidnap the Fed Chairman. (Or I could have read one too
many Tom Clancy type book). While details are quite sketchy, it appears
the culprits got away largely with jewelry.
http://money.cnn.com/2003/01/17/news/greenspan/
The Nasdaq’s Super-Montage system is now up and running. Designed to
compete against ECNs (Electronic Communication Networks) by
incorporating the latest technology, and in many ways is doing so by
emulating ECNs. The system has so far been seen as a success but
market fragmentation is still a concern.
http://daytrading.about.com/library/weekly/aa011603a.htm
http://www.wallstreetandtech.com/story/electronicTrading/WST20030117S0004
Interested in learning more about the Nasdaq? They are now offering a
free info packet (online PDF file) that goes into great detail about how
a trade is executed and more.
http://www.nasdaq.com/about/MarketMechanics.stm
Where did this one come from? The London Stock Exchange and the
Frankfort Bourse may “hook-up” after all. This has been on and off so
many times I have lost count.
http://www.guardian.co.uk/business/story/0%2C3604%2C875653%2C00.html
One final Institutional story: the NYSE reintroduced its composite
index. An important change in the index is that is now weighted based
on the firms float derived market value and not on the shares
outstanding market value (called full market value weight index).
http://www.nyse.com/marketinfohome.html?query=/marketinfo/pressindexes.html
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International Finance
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If you look at a globe of economic activity, Africa seems to be behind
much of the developed world. Moreover with a rampant Aids problem, much
corruption, and war, the continent faces falling further behind. To
combat this, some African nations are going together and trying to
establish a common currency and developed nations are trying to reach
out and help. This week there are stories on both fronts.
While President Bush did not make it to Africa as originally planned,
the US was well represented at several African business symposiums.
With economies still dramatically lagging the rest of the world, we are
seeing some positive changes since the 2000 African Growth and
Opportunity Act and there is now more talk to increase free trade with
the continent further. However, these are not always painless changes
as the 600,000 lost US textile jobs document. Interesting tidbit:
according to the Dallas News article Africa provides North America with
as much oil as the Persian gulf.
http://www.dallasnews.com/business/columnists/jlanders/stories/012003dnbusWorldview.5f422.html
http://allafrica.com/stories/200301210053.html
Africa and globalization
http://news.bbc.co.uk/1/hi/business/2664187.stm
http://news.bbc.co.uk/1/hi/business/2664619.stm
http://news.bbc.co.uk/1/hi/business/2664623.stm
Bush’s speech
http://allafrica.com/stories/200301150317.html
Prior to adoption of a common currency the nations involved typically go
through a period where they attempt to increase the correlation of their
economies through standardizing monetary policy and the establishment of
common rules. Nigeria has a track record of corruption and of changing
monetary policy frequently and allowing inflation to be high. It is
thus that Nigeria’s inclusion in a possible 12 nation West African
common currency (West African Monetary Unit) is drawing attack from the
IMF and others.
http://allafrica.com/stories/200301160115.html
http://allafrica.com/stories/200301170609.html
Similarly, the European Union (EU) is growing impatient with France’s
growing budget deficit is not a real surprise. The problem is that to
hold together a common currency, there have to be rules to keep the
economies tied together. Individual nations however have incentives to
break these rules in order to improve their own economy. That is the
case in France and Germany who are reluctant to cut governmental
spending but they are rapidly increasing their deficit which is against
the rules of the EU.
http://news.bbc.co.uk/1/hi/business/2638593.stm
http://www.eubusiness.com/cgi-bin/item.cgi?id=101521
http://news.bbc.co.uk/1/hi/business/2680573.stm
The IMF endorsed a national bankruptcy law that would allow nations who
are unable to make their debt payments the ability temporarily suspend
their payments while they negotiate with creditors. (If you think about
it, a bankruptcy is little different from a “time-out” in
basketball-designed to allow the team to regroup). Several countries,
most notably the US, is still opposed to the plan.
http://news.bbc.co.uk/2/hi/business/2638741.stm
One of the key tenants to globalization is that everyone has some area
where specialization can benefit them. (in simple English, every
country has some competitive advantage). Following 9-11, and after
seeing hours of news coverage of barren land and bombed out buildings,
some were saying that Afghanistan was the exception for they had little
to offer the world save unskilled labor. Think again. Afghanistan is
opening its doors to foreign mining companies. Why? The country has
some of the world’s largest copper reserves.
http://news.bbc.co.uk/2/hi/business/2640211.stm
Venezuela’s woes have gotten worse as a bank strike, a halt to foreign
exchange dealings, and several large MNCs pulling their people out of
the nation were added to the mix. The strikes which are now in their
8th week, are aimed at the government, have already taken a large toll
on the economy: the bank strike drove down currency valuations while
the oil strike continues to wreck havoc on their oil industry. As a
result, the World Bank has stopped the distribution of their $225
million loan. Former President Jimmy Carter is currently trying to
negotiate an end to the strike but neither side is expressing a
willingness to meet the other half way.
http://news.bbc.co.uk/2/hi/business/2644869.stm
http://www.dallasnews.com/sharedcontent/dallas/business/stories/010903dnbusoil.618e2.html
http://www.smh.com.au/articles/2003/01/21/1042911382135.html
http://www.msnbc.com/news/861696.asp
http://news.bbc.co.uk/1/hi/business/2682731.stm
As the US dollar continues to fall on the prospect that a war will hurt
the US economy (and/or increase inflation and government spending), the
Dallas News has a nice article on why currencies change value and what
the implications are for both importers and exporters. The nutshell
view of the article is that the falling US dollar is not all bad and it
will help US manufacturers.
http://www.dallasnews.com/business/columnists/jlanders/stories/010603dnbusworldview.a15d7.html
http://www.forbes.com/home_asia/newswire/2003/01/20/rtr852074.html
India is making more moves to liberalize their notoriously regulated
financial markets. Their newest moves allow Indian mutual funds to buy
up to $1 billion of foreign shares and is seen as a step, albeit small,
towards letting the reupee become a floating currency.
http://news.bbc.co.uk/2/hi/business/2645901.stm
One point that Hernando De Soto makes in his “The Mystery of Capital:
Why Capitalism ism Succeeds in the West and fails everywhere else” is
that there is a large underground economy in many nations due to a poor
infrastructure and tax laws. Evidence of this can be found in Uganda,
where even a transaction as minor as selling a pig, involves 4 taxes.
The result? Barter and “illegal”/unreported trades.
http://news.bbc.co.uk/2/hi/business/2636437.stm
Japan’s closed banking system may get a bit more opened if Softbank is
allowed to sell its shares in to any of the three foreign based
firms.
http://www.nytimes.com/2003/01/10/business/10CND-AOZO.html
Japan selling off assets amid the largest number of bankruptcies on
record.
http://news.bbc.co.uk/1/hi/business/2675847.stm
http://www.iht.com/articles/83518.htm
In spite of defaulting on some loan payments, Argentina did win further
loans from the IMF. Argentina (indeed much of South America) continues
to experience hard economic times.
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2003/01/15/financial2008EST0382.DTL
http://news.bbc.co.uk/1/hi/business/2662951.stm
http://news.bbc.co.uk/1/hi/business/2666793.stm
As you all know, the International Monetary Fund (IMF) lends money to
nations but the money generally comes with strings attached. For
example a nation may have to privatize certain industries or end
subsidies or float their currency. Many of tehis conditions are
definite improvements, but some believe these “strings” are too
burdensome. This week both Indonesia took the big step of saying they
would like to end their loan with the IMF rather than continue to put up
with the restrictions.
http://news.bbc.co.uk/1/hi/business/2679915.stm
Turkey continues to do what the IMF says and therefore continues to get
their money. Specifically the nation announced plans to continue with
its privatization plans. (good news, although the possible war with
Iraq may make the timing suspect.)
http://news.bbc.co.uk/1/hi/business/2653889.stm
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Economics
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In the US the good economic news was that the new home starts were up a
robust 5% but much of the other news was not as good. A sampling: US
lost over a hundred thousand jobs, the trade deficit was up, industrial
production was down, and consumer sentiment fell still further.
http://money.cnn.com/2003/01/10/news/economy/employment/index.htm
http://www.forbes.com/markets/currencies/newswire/2003/01/17/rtr851610.html
http://www.globeandmail.com/servlet/ArticleNews/PEstory/TGAM/20030118/IBECON/Business/business/businessInternationalHeadline_temp/2/2/6/
Need more proof that US economy is not running at full steam? Last week
marked the release of everyone’s favorite, the Beige Book. That is the
name of the Federal Reserve’s report on the state of the economy. And
sure enough, the Fed thinks the economy is growing, albeit slower than
hoped for last year. At least a part of this is due to fears of war and
the accompanying higher energy prices.
http://news.bbc.co.uk/1/hi/business/2662855.stm
In Germany the economic story was pretty much the same as in the US with
very low growth and in the last quarter of 2002, maybe zero growth.
Many fear this stagnation will spill over to other EU nations.
http://www.nytimes.com/2003/01/17/business/worldbusiness/17GERM.html
The Israeli –Palestine war and the threatened Iraqi war continue to
impact the Middle East. Israel saw its first ever two years in a row of
negative GNP growth and other nations are having to adjust as well.
http://www.metimes.com/2K3/issue2003-3/bus/week_of_bad.htm
What will the tax cuts mean to the US economy? What will they mean to
the Budget? Those are hard questions to answer. But many are trying.
Including FinanceProfessor
Chris Lamoureux who points out that payroll taxes and taxes on dividends
(at least for taxpaying firms) will both go down. Put into per person
basis, the story estimates that “92 million taxpayers would receive an
average tax cut of more than one-thousand dollars this year.”
http://www.kold.com/Global/story.asp?S=1074968&nav=14RTDF8x
One thing that makes the analysis so difficult is that any change leads
to other changes. For example, a tax cut will spur the economy, which
in turn will lead to more tax revenue. So the tax cut really does not
reduce revenue by as much a static analysis suggests. This is dynamic
analysis (or dynamic scoring as it is called in Washington) is much more
difficult than static analysis which assumes other things do not change.
Both democrats and republicans are playing this difference to the
fullest as they argue over cutting taxes.
http://www.dallasnews.com/business/columnists/rdodge/stories/121602dnbusnatview.24da2.html
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Derivatives
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The Chicago Board of Trade chose LIFFE (sorry I couldn’t resist) and as
expected,
Eurex the loser in the contest to provide the platform for the Chicago
Board of Trade decided to launch its own market in the US.
http://db.riskwaters.com/public/showPage.html?page=9070
http://www.suntimes.com/output/business/cst-fin-cbot13.html
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Personal Finance
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This is a pretty cool personal finance site from a Tucson TV channel.
It has everything from IRA definitions to 20 cheap dates.
http://www.kold.com/global/category.asp?c=15965
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Energy Markets
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As promised, OPEC has opened their pumps more and since it was already
publicly promised, the news was already discounted in the price, and
there was little movement when it actually happened. (but yet people
acted surprised, why?) Moreover as talk of war has continued to grow
and Venezuela remains largely inoperative due to their strike, oil
prices are continuing to move upward.
http://news.bbc.co.uk/1/hi/business/2652189.stm.
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=2&cid=580&u=/nm/20030112/bs_nm/energy_opec_dc
http://www.nytimes.com/2003/01/14/business/worldbusiness/14OIL.html
http://www.metimes.com/2K3/issue2003-3/bus/opec_kingpin_gives.htm
One concern is if the strike in Venezuela continues (there are reports
of it losing steam), AND a war breaks out that limits Iranian and Iraqi
production, then the remaining OPEC nations could not pick up the slack.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1042491018123&p=1012571727176
http://quotes.freerealtime.com/dl/frt/N?art=C2003012200022r2358&SA=Latest%20New
How should the Federal government be paid for allowing oil drilling?
Payments in kind and royalties or cash on the barrelhead? (pun
intended!)
http://www.chron.com/cs/CDA/story.hts/business/1741080
Reform of Russia’s power industry may take longer than anticipated and
immediately the stock market showed its displeasure by driving prices
down about 7%.
http://www.themoscowtimes.com/stories/2003/01/22/041.html
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Money and Politics
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A good article that looks at why a dividend tax cut may not be as
important as some are making it out to be. Morevoer, after the initial
release, there have been some clarifications that may offer the tax-free
status for non-taxpaying firms in a trade for higher taxes at the time
of sale.
http://www.nytimes.com/2003/01/22/business/22TAX.html
http://www.clickonsa.com/sh/money/smartmoney/money-smartmoney-featuresfrom--20030108-011519.html
http://www.nytimes.com/2003/01/10/business/10NORR.html
And one on the fact that much of it may not make it into law even with a
Republican controlled congress
http://www.nationalpost.com/financialpost/story.html?id=%7BBC4ABF5F-F0F0-419F-A9F6-EA3DA3E8A0F0%7D
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Accounting News
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Is earnings management always bad? No, if you believe the new paper by
Arya, Glover, and Sunder. They point out that Earnings management can
in reduce the noise inherent in earnings and thereby reduce investor
uncertainty. To quote the paper “ a smooth car ride is not only
comfortable, it also assures the driver of the driver’s expertise.”
Moreover, too much transparency may reduce incentives of managers. (I
must say that there are some good points, but overall I would still
argue on the side of more, not less transparency and therefore less
earnings management.)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=322260
Speaking of transparency, accounting firms are famous (notorious) for a
lack of it, however, a recent divorce between a partner at E&Y has
opened the veil of secrecy if only for a short while. Among the details:
“Ernst & Young had revenue of $4.3 billion in the year ended Sept. 30,
2000, up 12.3 percent from figures in the previous year. Total earnings
were $1.3 billion.”
http://www.nytimes.com/2003/01/14/business/worldbusiness/14ACCO.html
When is consulting not consulting? If it is tax-consulting. After
much lobbying by accounting firms, the SEC has taken what seems to be a
step back and will not require audit firms to disclose consulting fees
that are derived from tax consulting. This is a step back for the
effort to improve auditor independence.
http://www.washingtonpost.com/wp-dyn/articles/A24593-2003Jan21.html
http://www.nytimes.com/2003/01/22/business/22SEC.html
http://money.cnn.com/2003/01/22/news/companies/sec_reforms.reut/
One new SEC rule that is set to take place (again toned down from
earlier editions) is the new requirement that Auditors (at least the
main auditors and select others) may not be on the same firm for an
extended number of years. This is so the two sides do not grow too
friendly, but may cause problems for smaller firms.
http://www.chron.com/cs/CDA/story.hts/business/1745427
EBITDA (earnings before interest, taxes, depreciation, and amortization)
is an often reported financial number that is a fast way to see how a
firm’s operations are faring. However, EBITDA may be misused if it is
merely a means of keeping investor focus away from heavy debt loads on
the firms balance sheet. Great quote from Financeprofessor James Owers
“EBITDA is what the operational managers hand off to the CFO to pay the
taxes and the interest on the debt."
http://www.businessweek.com/bwdaily/dnflash/jan2003/nf20030114_1115.htm
Charles Neimer has taken the position as interim head of the Public
Company Accounting Oversight Board. He replaces William Webster who
resigned before starting over a past record that drew his selection into
question. Niemeier was formerly the chief accountant of the SEC.
http://www.msnbc.com/news/856820.asp
And the first order of the day is to set our compensation. $452,000 is
the decided amount for the pay of members of the Accounting Board.
http://www.nytimes.com/2003/01/10/business/10ACCO.html
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Taxes
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Is the US tax code out of whack? With so many service firms now, some
thing the tax code should be altered to collect more from these areas.
http://www.dallasnews.com/business/columnists/ashah/stories/123002dnbustexasview.70d46.html
Just how progressive are US taxes? It depends on who you believe.
http://www.nytimes.com/2003/01/14/business/14ECON.html
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US states
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The slower than expected economy and increased spending have led to a
growing number of US states are having financial difficulties. NY,
California, Virginia are but three where citizens can expect higher
taxes and lower services. To make matters worse, Federal cutbacks have
placed more of a burden on states’ coffers.
http://www.msnbc.com/news/860276.asp
http://news.bbc.co.uk/2/hi/business/2645987.stm
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FinanceProfessor.com Lesson of the week
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There are two major issues that must be dealt with when it comes to pay:
form of pay and level of pay. The level of pay is important as it gets
the employee “in the door” while the form of pay is what we hope
influences “good” behavior from the employee. While the level of pay is
the headline grabber, the form is often equally important is aligning
incentives.
http://www.financeprofessor.com/financenotes/lessonsoftheweek/executivecompensation.html
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FinanceProfessor.com Site of the Week
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There are co-winners this week. Erisk and RiskWaters.com. Both are
great sources of information, news, and analysis on risk management
topics. I really like them both!
http://erisk.com/
http://riskwaters.com/
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Financial Trivia/History/or just interesting things
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Martin Luther King’s family know a good thing when they see it. They
are now trying to force the Library of Congress to pay upwards of $20
million for the late reformist’s personal papers. Actually there is
quite a precedent; the Library of Congress reportedly paid $18 million
for Richard Nixon’s papers. So for equality, the money should be paid.
While economically justified, I am still more than a bit disappointed by
the idea.
http://www.forbes.com/2002/08/13/0813mlk.html
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Of interest to students
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Have an interview coming up? Learn what not to do! Monster.com
provides a list of interviewers’ pet peeves.
http://interview.monster.com/articles/petpeeves/
Remember, now is the time to get to work on getting a job or internship!
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What I am reading
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April 1865: the Month that Saved America by Jay Winik is rapidly
becoming my favorite Civil War Era book. I am about 75% done with it
and it is simply great. So many things happened that month and the
response to each could have been much different. It is not too hard to
imagine a vastly different world if things had gone differently. GREAT.
http://www.amazon.com/exec/obidos/ASIN/
1402502192/finpapers/104-9378365-5272442
I am maybe half way through Thomas Jefferson: Genius of Liberty. The
introduction by Garry Wills alone is worth the price. (does anyone know
what else Wills has written? I will have to look into that. He seems
very good!)
http://www.amazon.com/exec/obidos/ASIN/0670889334/finpapers/104-9378365-5272442
I went back and finished some books that had been started a long time
ago but never finished due to the holidays and/or travel last semester.
I finished Isaac’s Storm by Erik Larson. It was good, not great. It
really shows the absolute terror/power of nature. Wow. I can not
imagine the fear that night--with no lights, 150 mph winds, almost no
buildings left, water everywhere, thousands dead. The sea literally
came up to meet the land.
http://www.amazon.com/exec/obidos/ASIN/
0375708278/finpapers/104-9378365-5272442
I also got back to ristening to Heart of a Soldier by James Stewart (he
of Den of Thieves fame). Overall it was pretty good It deals with the
story of Rick Rescorla who was the security head at Morgan Stanley-Dean
Witter. The story drew my attention for its 911 ties, but really goes
back through his whole life. What I did not like was the almost
unbelievability of some of the stories. He and his friend predicted
both WTC bombings? And one section sounds so much like Tom Clancy as to
beg which was written first. However, overall it was good and I am glad
I read it. (I should confess that I listened to the abridged version of
this and abridgement usually worsens the book, so the unabridged version
may be better!)
http://www.amazon.com/exec/obidos/ASIN/0743240987/finpapers/104-9378365-5272442
Sheepishly I must admit to be ristening to Wilt. I had no idea what it
was about, I promise. Just that I was told it was very funny. And it
is. Books on Tape class it the funniest book in their catalog and if
not #1, is in the running.
http://www.amazon.com/exec/obidos/ASIN/0330253603/finpapers/104-9378365-5272442
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Quotes of the week:
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The century upon which we have entered must inevitably be one of
tremendous triumph or tremendous failure for the whole human race,
because, to an infinitely greater extent than ever before, humanity is
knit together in all its parts—_Theodore Roosevelt (1901)
Jefferson’s words [all men are created equal] “are…a continual challenge
to ourselves, as well as an inspiration to the oppressed of all the
world.”---Samual Eliot Morison.
MAYBE These are the enemies: poverty, ignorance, disease. They're our
enemies, not our fellow man, not our neighbor. And these enemies
too….we: we shall overcome---LBJ.
If a man is called to be a streetsweeper, he should sweep streets even
as Michelangelo painted, or Beethoven composed music, or Shakespeare
wrote poetry. He should sweep streets so well that all the host of
heaven and earth will pause to say, here lived a great streetsweeper who
did his job well..--MLK
http://members.aol.com/klove01/marquote.htm
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Thanks for reading! I hope you liked it and learned something (or even
many things) from it! Sorry it was a bit longer than I had planned.
That always happens. And just now I remembered I told you I would look
back at CAPM. Oh well, next time.
Remember the chat session on Friday at 2pm Eastern (7 pm GMT). I look
forward to meeting many of you.
If you have any ideas for the site or the newsletter please let me know.
Jim
JimM-@FinanceProfessor.com
Where it has been remarkable cold. Lows below zero (F) almost every
night for a week with highs maybe in the teens.
Who is running but not very fast given I have been wearing 8-10 layers
on top and 4-6 layers on my legs to stay warm.
Who wants Oakland in the Super Bowl. (sorry to those of you in Tampa,
but I just can not cheer for a team with Warren Sapp on it!) Hence my
prediction: Oakland 24-17 (even though I am going against my main view
that Defense wins championships.)
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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 2003 FinanceProfessor.com
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