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Welcome back, who monitors?, SRI, Voluem & Noise, MBA or masters?, and m
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Jim Mahar
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Aug 27, 2003 12:16 PDT
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Welcome back, monitors, waves, SRI, the relationship between volume and
noise, and MBA or Masters-which is right for you?
FinanceProfessor News August 27, 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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WELCOME BACK!
1. Internal and external monitors: great synergy!
2. Problems with media monitors
3. Do institutions split after a split? (sorry could not resist ;-))
4. What influences financing decisions?
5. IPO waves
6. Profits from momentum investing may be overstated
7. Socially responsible investing
8. Volume and Noise: not talking about decibels
9. Home country bias
10. MBA or Masters? Does it matter?
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Hi everyone!
Welcome back! As schools start up again, it is time to send out another
newsletter. Sorry, that it has been a while. The easiest explanation
for the time off is that I have been a bit too busy with things, but
since you last heard from me I did get two papers accepted for
publication, so it was not an entirely wasted time :-).
I decided to try something a bit different with this newsletter. Rather
than try to bring everyone up to date on all of the news in the
financial world in a single email (impossible), this issue will
emphasize academic papers a bit more than normal. Let me know what you
think.
By the way, one reason you did not get a newsletter in July was that I
have been having many problems with the newsletters not reaching you.
The main reason seems to be the large number filters and anti-spam
(anti-worm?) screening packages out there. The problem is particularly
severe for those using AOL, Yahoo, or Hotmail. I am really not sure
what I can do about it except to suggest you make a filter for the
newsletter (add to your “friends” list.
FWIW this semester I will be teaching Advanced Corporate, Money and
Banking (2 sections), and International Finance this semester if you are
teaching one of them and want to discuss anything just give me a holler.
Thanks!
jim
JimM-@FinanceProfessor.com
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Corporate Finance
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Internal and external monitoring have a strong complementary
(synergistic) effect. That is the finding of Cremers and Nair who show
that firms with both strong internal as well as external controls tend
to outperform firms without the strong controls. To test this, the
authors construct various portfolios and find that those firms who
measure high on both categories outperform others in the sample
http://papers.ssrn.com/abstract_id=412140
Speaking of external monitors, Dyck and Zingales remind us that we
should also consider the role of the media in monitoring (and changing)
corporate behavior. That said, there are definite problems with media
monitors. These inefficiencies include a serious misalignment of
incentives that may not lead to shareholder wealth maximization.
http://gsbwww.uchicago.edu/fac/finance/papers/corporate%20governance.pdf
A stock split occurs when a company changes the number of shares it has
outstanding. For example, suppose the firm had 1 million shares
outstanding and then announced a 2:1 split. The firm would now have 2
million shares outstanding. It is not surprising that the stock price
drops after the split, but what continues to leave researchers puzzled
is why there is a stock price change on the announcement of the split.
For years practitioners have suggested that by making the stock price
lower the shares are affordable to a greater number of investors and
hence there is greater liquidity and therefore a higher stock price.
Other theories include that the news of the split signals better times
ahead and subsequently it signals higher future dividends. Dhar,
Goetzmann, and Zhu use a cool data set to show that true to theory, more
individual investors appear to own (and trade) the stock after the
split. However, this is not completely good news. They also find the
post-split shares trade more, have higher serial correlations, and move
more with the market indices. All in all the results strengthen
arguments for both a clientele effect and also the view that splits may
make the stock trade less efficiently.
http://papers.ssrn.com/abstract_id=410104
What influences what type of debt a firm uses? Denis and Mihov find
that the largest determinant is the credit rating of the firm. In their
forthcoming JFE article, they report that high quality firms are more
likely to opt for a public issuance while medium rated firms take the
bank debt route and low credit rated firms go for private debt
placements. However, credit quality is by no means the only
determinant.
http://jfe.rochester.edu/02195.pdf
Want more on debt financing? Ok, but only since you are nice. There
has long been evidence that firms try to time their equity issuances in
order to get the lowest cost of capital possible. Now Baker, Greenwood,
and Wurgler report in a forthcoming JFE that firms also time debt
obligations. When long-term rates are low, the firms try to capture
these “low” rates, by issuing longer-term debt. Which, while not
surprising, may be further evidence that market efficiency is not market
perfection and that the financing waves we see may make sense (and
cents) after all.
http://jfe.rochester.edu/02219.pdf
What better way to spend the July 4th holiday than by catching (or in
this case studying) some waves? Ok, so while I would rather be looking
at ocean waves fortunately for us, Pastor and Veronsi decided to study
IPO waves on the 4th (see date on paper). They were even nice enough to
write about their findings (but no postcard!). They explain IPO waves
by creating a model of “optimal IPO timing.” Their model predicts that
firms will be more willing to issue shares when the required returns are
lower, when the firm’s expected cash flows are higher (which could be
interpreted at there being more positive investment opportunities-and
therefore likely a greater need for cash), and “when the uncertainty
surrounding those [cash] flows is high.” What sets this paper aside
from others of the same genre is this not only models the IPO timing,
but it also empirically tests the model. And guess what? It passes!
Using data from 1960-2002, the model is supported. What really makes
the paper valuable however is that the model can be used to explain some
of the troubling findings that have been pointed out by others in the
field. For example, the finding that market-to-book values for IPO
firms drop over time has been suggested to show that investors are
irrational in the pricing of IPOS. However, P&V’s model accurately
predicts this decline and explain it not as irrationality but rather
that it is due to less uncertainty (options lose value) and mean
reversion. (highly recommended article!)
http://gsbwww.uchicago.edu/fac/finance/papers/ipowave2.pdf
Michael Schill (get used to the name, you will see it about 5 times in
this newsletter!) finds that firms raise less money in the primary
markets when the market is more volatile. Predictably, this is most
pronounced for small firms and IPO firms. Specifically he finds that
when market volatility is above average, 13% fewer firms go public and
they raise about 21% less. Mmm, this may be another partial explanation
for IPO waves.
http://papers.ssrn.com/abstract_id=412160
In a Modigliani and Miller world when corporate taxes are introduced,
the optimal debt level increases. Desai, Foley, and Hines have a cool
paper that finds, among other things, that this positive relationship
between tax rates and interest does hold. FWIW one of the “other
things” that influences debt financing is the interest rate: the higher
the interest rate, the less debt firms use, which fits nicely with the
story above! (BTW, yes this is predominantly intended as an
International Finance article, but it is cross-listed here because it is
so relevant.)
http://papers.ssrn.com/abstract_id=405023
What is insider trading? That we know. Trading by insiders at the
firm. However, there is disagreement as to what is legal and what is
illegal insider trading. The basic idea is if the trade is based on
information that is not publicly available, you probably should not make
the trade. However, there are exceptions and About.com’s Jopshua Keenan
takes a crack at explaining what is legal and what is illegal. (His
description also includes more details of the Barry Switzer insider
trading case.)
http://beginnersinvest.about.com/cs/newinvestors/a/102702a.htm
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Investments
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Market efficiency is a tough thing to beat. Go ahead, find an anomaly
(note to Matrix fans: I am not talking about Neo) and then have it torn
to bits in future papers. Lesmond, Schill (I’m telling you he is
everywhere!), and Zhou come to the defense of market efficiency and find
that the reported profits from momentum investing are minimally
overstated and possibly non-existent because of the higher than normal
transactions costs involved with the necessary trading. For example
while previous papers (example Jegadeesh and Titman 1991) account for
transactions costs, they only use the average cost of trading. This
paper reports that where momentum investing seems to be profitable is
concentrated in stocks with higher than average transactions costs.
Thus after they make adjustments for transaction costs, the abnormal
returns disappear.
http://papers.ssrn.com/abstract_id=256926
Socially Responsible Investing (SRI) means different things to different
people, but essentially is investing in firms that treat their employees
well, care for the environment, and make products or perform services
that are aligned with the goals and desires of the investors (for
example, many investors may refuse to buy tobacco stocks). For as long
as I can remember there has been a debate as to whether investors give
up pecuniary returns when they choose to invest in a socially
responsible fashion (SRI). Theoretically limiting the choice of firms
you can invest must reduce the efficient frontier. Dupre, Girerd-Potin,
and Kassoua investigate the actual cost of socially responsible
investing from a different angle. Using the ARESE ratings (a rating
based on firms’ social responsibility) for 173 European firms from
1999-200, they construct efficient frontiers with and without social
concerns. Predictably, the social concerns push the efficient frontier
to down (lower return) and to the right (more risk). This is NOT to say
do not invest ethically, merely it points out that utility maximization
(and not merely maximization of financial returns), is the reason for
the increased popularity of socially responsible investing.
http://papers.ssrn.com/abstract_id=394101
Empirical studies to date have largely failed to show convincingly that
SRI funds have lagged other funds. This may be because the studies have
focused on actual returns (ignoring risk) or because of the makeup of
socially responsible portfolios (for example, SRI funds tend to be
heavily weighted towards tech stocks which out performed other stocks
for much of the 1990s). Most academic studies of the topic find that
when risk is accounted for, there is a SRI penalty (for example, Geczy,
Stambaugh, and Levin ) but for the die hard believers (get it? ;)),
there are always problems with these studies. For example, recent
papers by the Geczy et al paper came under attack for using comparison
funds that were closed to new investors.
http://www.socialfunds.com/news/article.cgi/article1190.html
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=416380
Maybe volume and noise are synonymous in more ways than one. Well,
maybe. Using a sample of trades from the Taiwan Stock Exchange, Hu and
Chan conclude that more frequent trading leads to more noise. Their
specific test looks at the time between trades and find that the longer
period between trades (90 seconds vs. 4 seconds) is associated with
lower levels of noise. Ok, let me first clarify things. Noise here
means the transitory errors in asset pricing and not the volume of the
trading floor. Thus, neither volume or noise should be measured in
decibels.
http://papers.ssrn.com/abstract_id=325340
Similarly, Downing and Zhang find the same type relationship (more
trading more pricing noise) in an upcoming Journal of Finance article.
Their data looks at US municipal bonds.
http://www.afajof.org/Pdf/forthcoming/zhang.pdf
This one is a must for any investment class! Jegadeesh, Kim, Krische,
and Lee provide a fascinating look at investment analysts in an upcoming
JFE. They study stock analyst recommendations. Some of their findings
are that analysts tend to prefer glamour stocks (higher growth and with
momentum), and firms with whom the analyst’s firm has an investment
banking relationship. Additionally, changes in analyst recommendations
tend to have more information content than do the levels of
recommendations.
http://www.afajof.org/Pdf/forthcoming/jegadeesh.pdf
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Financial Institutions and Markets
(also Money and Banking)
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Mutual funds play a larger role in markets where fund investors have
greater protections, more money, and in countries where “defined
contribution pension plans are more prevalent.” That is the finding of
Khorana, Servaes, and Tufano who look at the mutual fund industry in 55
different nations. In nations where there are fewer protections, there
is an added importance of monitoring and subsequently more concentrated
ownership. While the findings are all pretty much as expected (say, the
article is pretty interesting and it is always nice to see when
empirical findings support theoretical musings.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=399723
There is no doubt that this one will be assigned to my class!
Westerholm, Swan, and Liu look at how market design impacts how the
market operates. That is, there is a tradeoff between transaction costs
and volatility. Having dealers available to trade continually increases
expenses, which in turn lead to larger spreads (transaction costs) for
these so-called continuous dealer markets. On the other hand in return
for these larger spreads, the dealers do help to reduce volatility,
thus, the tradeoff between transaction costs and volatility.
http://papers.ssrn.com/abstract_id=410193
This is big! In a forthcoming JFE article Naik and Yadav write that
dealer firms (i.e. firms with multiple dealers making markets in various
stocks) make their inventory decisions in isolation of what the other
dealers in the firm hold. This decentralized approach thus foregoes
some internal hedging that would take place due to diversification
across stocks held. (While I like the paper a lot, it seems a bit hard
to believe that the firms would not consider the internal hedging that
occurs.)
http://jfe.rochester.edu/02080.pdf
Continuing the same discussion, another soon to be released JFE article
that you will want to read is by Bollen, Smith, and Whaley. It models
(and tests!) the bid/ask spread of stock trades and models it as a
function of “minimum tick size, order-processing costs, inventory
holding costs, adverse selection costs, and competition.” VERY cool.
And the model even seems to work empirically!
http://jfe.rochester.edu/02503.pdf
A summer rerun? While I am fairly certain I included this story in a
previous newsletter, a loyal newsletter subscriber suggested it so hey,
why not? If the major networks can run reruns, why not me? ;) It is
widely known that European banks have grown much more “market-oriented”
over the past 20-30 years. In some sense this Americanization has been
very good for the banks and their customers. The how and whys are
actually more interesting than the historical reporting of a trend and
it is in this light that Rajan and Zingales provide an interesting look
at what has happened, why, and what may happen in the future with
respect to European banks. Short answer: the authors expect the pace of
change to slow down due to “political concerns.”
http://gsbwww.uchicago.edu/fac/finance/papers/rajanbanks.pdf
Terrorism futures will not soon be in the offering, but it did seem like
it might have some merit. Fortune shows us a few of the many studies
that have shown how market prices incorporate information. .
http://www.fortune.com/fortune/investing/articles/0,15114,471785,00.html
http://dc.internet.com/news/article.php/2243331
There is a thin line between inflation and deflation. Inflation (rising
prices) makes money worthless, but deflation is often more of a worry as
borrowers pay back with money that has grown more valuable (so their
real borrwing costs have increased) and more importantly consumers have
an incentive to not spend money, which
http://www.federalreserve.gov/boarddocs/speeches/2003/20030723/
There is a thin line between inflation and deflation
http://www.federalreserve.gov/boarddocs/speeches/2003/20030723/
http://news.bbc.co.uk/1/hi/business/2961318.stm
IBM lost an important pension case that may have large ramifications
when a Federal judge ruled that the computer giant had discriminated
against older employees when the firm switched from a defined benefits
to cash balance pension plan. A possible result? Many firms will
abandon their pension plans in favor of 401K plans.
http://www.msnbc.com/news/946935.asp
http://www.fortune.com/fortune/investing/articles/0,15114,474643,00.html
http://www.gomemphis.com/mca/business/article/0,1426,MCA_440_2211542,00.html
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International Finance
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Investors have long exhibited a “home country bias” whereby they hold
more shares of firms from their own country than would seem warranted
based off of typical diversification theory. This seeming anomaly has
been partially explained in many ways (my favorite is Butler’s view that
when markets fall, the correlation is actually greater than the long run
correlation, hence overstating the value of diversification). Li looks
at this from a different perspective by trying to examine how risky the
foreign marklets would have to be before investor behavior would make
sense. He finds that “in order to hold predominantly domestic equities,
each G7 investor has to believe that the risk of foreign investment is
several times higher than the actual risk.”
http://papers.ssrn.com/abstract_id=403480
Sarkissian and Schill report that firms themselves also have a
“home-country bias.” Somewhat surprisingly they find that firms that
cross list securities tend to do so more often in markets that are
similar (and hence more correlated with) the firm’s home market. (note
this differs with previous work because it does not examine where the
greatest benefits are, but rather only looks at what actually happens.
Theory would suggest that if listing internationally is to maximize
capital market availability, then the greatest benefits would be in
nations where there is a low correlation.) In the authors’ words the
“findings suggest that the same familiarity constraints that affect
investment-portfolio selection also exert a profound influence on
financing decisions.”
http://papers.ssrn.com/abstract_id=267103
In yet another paper (this is getting ridiculous! How does he have time
for all of this?), Sarkissian and Schill try to explain why this home
country bias may exist. After looking at why firms list their shares
internationally and find that much of the supposed cost of capital
saving is probably exaggerated in previous studies. Consistent with the
hypothesis that firms list in nations where there are better shareholder
protections, foreign firms that list in the US experience the greatest
benefit.
http://papers.ssrn.com/abstract_id=395140
Dare I say Micheal Schill is en feugo? Wow.
While the above article is no doubt correct in saying that sometimes the
benefits of cross-listing are overstated, there are many market
imperfections that firms attempt to make full advantage of by becoming a
multinational firm. For instance, Desai, Foley, and Hines have a cool
paper that finds that multinational firms sell more debt in nations with
higher tax rates. Moreover, the authors find that in nations with
poorly developed capital markets, the subsidiaries borrow more from
“related parties” than from unrelated parties. Why? Best guess is that
there would be lower expected cost of non-compliance. This ability to
structure loans around market imperfections is one area where MNCs have
an advantage over local firms.
http://papers.ssrn.com/abstract_id=405023
Has the US decided to give up on a strong dollar in order to increases
exports? That is the conclusion of many after hearing comments from US
officials in recent week after climbing for the latter part of the
summer. Overall it should be noted that even before these comments the
Dollar had fallen by over 10% this year against the Euro and similar
amounts against most major currencies.
http://news.bbc.co.uk/1/hi/business/3019291.stm
This just keeps getting worse. A combination of ridiculous economic
policies (redistribution of land was a bad idea that predictably
crippled the economy) and a severe drought have ruined the Zambian
economy. Yes ruined. Add to the mix run a banking system that is
teetering in the brink and facing run-away inflation and it is no
surprise that there are shortages of foreign goods (no money to buy
them) and that the unemployment rate is over 70% (reread that! Yes
seventy percent)!. In response, the government is trying to offer a
quick fix by printing more money. However, this is only helping to fuel
the inflation and leading people to take more money out of the banks.
Amazingly, the printing of money may slow as (I am not kidding!) the
central bank is running out of paper and ink!
http://news.bbc.co.uk/1/hi/business/3109969.stm
The battle against agricultural subsidies just will not go away. This
has been a major sticking point for some time and will no doubt be in
the news much over the coming months as a new trade deal is negotiated.
The problem? The US and EU push for an end of all subsidies in other
nations and yet continue to subsidize their own farmers and in the case
of the US : steel manufacturers as well.
http://news.bbc.co.uk/1/hi/business/3059699.stm.
http://news.bbc.co.uk/1/hi/business/3104341.stm
http://jang.com.pk/thenews/aug2003-daily/26-08-2003/business/b14.htm
http://news.bbc.co.uk/1/hi/business/3179749.stm
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1059479343471
In an attempt to force banks to invest in companies and individuals
(that is to make loans to the private sector) rather than merely buying
government bonds, the central bank of Pakistan is driving down interest
rates so that the banks cannot just make their money on the high
yielding government bonds.
http://news.bbc.co.uk/1/hi/business/3111081.stm
China is reportedly considering widening the trading band on the Yuan.
However, some are maintaining that this step is not enough and are
asking President Bush to push China to allow the yuan be allowed to
float freely. China seems reluctant to allow this floating until the
firms are better able to compete. Stay tuned.
http://www.forbes.com/markets/currencies/newswire/2003/07/31/rtr1044932.html
Khanna, Palepu, and Srinivasan examine the relatively new S&P
Transparency and Disclosure scores for 466 firms from Asian-Pacific
countries. Consistent with theory, they find that the more the
interaction with US firms, the more transparent the firm’s disclosure
practices. Specifically they find “a positive association between these
disclosure scores and the following types of market interactions:
business operations in the US, US listing, international equity
ownership, US equity or direct investment in the company’s home country,
and business travel from the home country to the US.”
http://papers.ssrn.com/abstract_id=408621
Momentum for the UK adopting the Euro appears to be waning slightly as
more firms favor keeping the pound and a key pro-Euro official is likely
to quit his post. However, as this story continues to show us, momentum
can often change quickly so stay tuned.
http://news.bbc.co.uk/1/hi/business/3183913.stm
http://news.bbc.co.uk/1/hi/uk_politics/3181759.stm
Russian officials are looking into how to start that nation’s first true
derivative market. The first step is to learn more about how derivative
markets work and how they should be regulated but studying what other
countries have done.
http://biz.yahoo.com/bw/030827/266012_1.html
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Economics
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Quick overview of the economy? In most areas things are improving. Not
as fast as some would like, but most evidence suggests that it is
expanding both in the US and elsewhere.
While most figures (and the always best selling beige Book) show the US
economy is growing again, consumer confidence and job growth have
remained sluggish. This in spite of the fact that more concrete
measures (including manufacturing) seem to be rising faster than
expected. However, US job growth is anemic which has led some to quit
looking for job and others to worry about their own jobs. Why is this a
concern? If consumers are so concerned that they quit spending then
their lack of confidence could lead to a slow economy in the future. In
part in response to the lack of confidence, Fed officials (and
especially Republicans seeking reelection)were out in force exclaiming
the good economic news.
http://www.usatoday.com/money/economy/fed/beigebook/2003-07-30-economy-improving_x.htm
http://news.bbc.co.uk/1/hi/business/3107411.stm
http://reuters.com/financeNewsArticle.jhtml?type=economicNews&storyID=3188964
http://www.forbes.com/markets/currencies/newswire/2003/07/30/rtr1043731.html
http://www.msnbc.com/news/946983.asp
http://www.businessweek.com/bwdaily/dnflash/aug2003/nf20030827_6640_db016.ht
On problem with confidence figures is that they are reported numbers and
people often report what they think the person doing the survey wants to
hear. That is one possible explanation as to why different groups can
do a similar survey and get such differing results.
http://www.msnbc.com/news/946988.asp
http://news.bbc.co.uk/1/hi/business/3107411.stm
http://news.bbc.co.uk/1/hi/business/3182811.stm
The US unemployment rate fell but the job news was not all good. Job
growth was still slow and many unemployed people apparently have simply
quit looking for a new job In the UK there also have been signs of
economic strength where factory production rose for the first time in
eight months.
http://www.msnbc.com/news/947028.asp
http://news.bbc.co.uk/1/hi/business/3117185.stm
The continuing war in Iraq and an economy, which while growing is not
setting any records, combined to drastically increase the US budget
deficit. This has led the Congressional Budget Office to increase their
deficit projections but others are not so sure. For example Business
Week citing a strengthening economy believes that the deficit may be
lower than previous projections.
http://www.washingtonpost.com/wp-dyn/articles/A5092-2003Jul30.html
http://news.bbc.co.uk/1/hi/business/3182339.stm
http://news.bbc.co.uk/1/hi/world/middle_east/3183979.stm
http://www.businessweek.com/investor/content/aug2003/pi20030822_6863_pi031.htm
http://money.cnn.com/2003/08/26/news/economy/iraq_effect/index.htm
http://famulus.msnbc.com/FamulusIntl/reuters08-26-215320.asp?reg=MIDEAST
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Personal Finance
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Countries are not the only party to run budget deficits. Households are
as well and coupled with the willingness and availability of personal
debt financing many people are finding that they are getting in over
their heads. A KPMG report looks at this from a UK perspective.
http://news.bbc.co.uk/1/hi/business/3184379.stm
Do you remember Yale economist Robert Shiller? He was the person whop
wrote the very success Irrational Exuberance book back in 1999. Now he
is pushing for more people to use financial tools in their everyday
life. SOME GREAT IDEAS! For example he correctly suggests that there
should be insurance for people based on their profession. The
advantages of this would be large, for example a steel worker could
protect himself from layoffs in the steel industry that would hurt his
earning potential. That said, while I agree the large gap between the
rich and the poor needs to be addressed, I find myself very reluctant to
suggest raising taxes is the answer!
http://www.msnbc.com/news/901679.asp
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Derivatives
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Ok, I know this has been site of the week before, but it is so good and
the recent interview with Nobel Prize winner Ken Arrow is so good that I
have to give it another plug! Go sign up for Financial Engineering News!
No I do not get anything and this is not a paid advertisement, but just
a sincere recommendation. You will love it.
http://fenews.com/fet_aug2003/one_on_one_interview/one_on_one_arrow.html
http://www.fenews.com
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Real Estate
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Did you blink? If so you may have missed the major reversal in mortgage
rates! Predictably, with rising rates there are fewer mortgage
applications although home sales (which adjust with a lead time) are
still strong.
http://www.nytimes.com/2003/08/05/business/05ECON.html
http://www.msnbc.com/news/957903.asp
http://www.businessweek.com/bwdaily/dnflash/aug2003/nf20030827_8544.htm
There are high transaction costs involved in any move. A new study of
first time home buyers in the UK suggests that about 90% ended up paying
more than expected for these costs (such as moving vans, taxes, etc).
The study by Norwich Union finds that the average first time home buyer
paid nearly 6000 British pounds on their move which seems awfully high
to me.
http://news.bbc.co.uk/1/hi/business/3104387.stm
No doubt partially as a result of the above expenses and a hot market
for several years, first time home buying is down in the UK.
http://news.bbc.co.uk/1/hi/business/3125103.stm
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Accounting News
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Conservatism is under attack from certain circles. For example, some
(including even the FASB) are now suggesting it may be better to abandon
conservatism in order to show more unbiased financial statements. In a
surprisingly interesting article (NOTHING personal, but come on, it is
about accounting conservatism!) Ross Watts looks at this issue and
examines conservatism both from a both an historical/theoretical
perspective as well as by reviewing the empirical literature on the
subject.
http://papers.ssrn.com/abstract_id=414522
Danielson and Press provide an interesting look at how well accounting
numbers can do to describe the economic returns of a firm. And they
conclude, that in spite of the many complaints, accounting numbers do a
pretty good job (not perfect) at proxying for actual economic returns.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=397020
All of the new rules designed to improve audit quality are having an
unintended consequence: many small accounting firms are ending their
practice of providing audits.
http://www.accountingweb.com/cgi-bin/item.cgi?id=97897
http://www.washingtonpost.com/wp-dyn/articles/A50375-2003Aug26.html
http://www.accountingweb.com/cgi-bin/item.cgi?id=98016&d=815&h=817&f=816&dateformat=%25B%20%25e,%20%25Y
As we have seen repeatedly, following the accounting and governance
scandals of the past few years, investors are demanding better
accounting numbers.
http://www.mckinseyquarterly.com/article_abstract.asp?ar=1327&L2=5&L3=7&srid=27&gp=0
Gee, this one is not shocking. The modernatization of the IRS is behind
schedule. What was originally supposed to be done in 2001, now will not
be ready at least for another year. Let’s hope they filed for an
extension. ;-)
http://www.accountingweb.com/cgi-bin/item.cgi?id=97887
Wier, Stone, and Hunton look at whether, and if so what type of,
graduate education is useful in predicting professional success in
accounting. Using a fairly large data set (about 9000 total students),
the authors conclude that graduate education does help (and it is not
just a selection or halo effect!) but at differing degrees. For
instance, performance evaluations for those with a masters in accounting
may start off higher than those with a MBA, but longer term, it appears
that MBAs win out. VERY INTERESTING!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=397620
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FinanceProfessor.com Lesson of the week
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There are three basic organizational types that all corporate text books
discuss: Proprietorship, partnership, and corporation.
http://www.financeprofessor.com/financenotes/lessonsoftheweek/OrganizationalTypes.html
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FinanceProfessor.com Site of the Week
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Bond information is notoriously difficult to obtain, but Bondsonline a
good source. It includes up to date quotes, a discussion of the types
of bonds, spread information, and much more. A great resource to use in
class!
http://www.bondsonline.com/
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Of interest to finance Faculty
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Did you know that FEN (a part of SSRN) has a job listing service?
http://www.ssrn.com/update/fen/fenjob/fen_job.html
FEN also has a list of upcoming conferences!
http://www.ssrn.com/update/fen/fenann/fen_ann.html
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Teaching Ideas
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Forward this newsletter to your class, or better have them sign up for
it!
Use football examples to teach finance. Not only is it more
interesting, but you can justify watching every game on TV by saying you
are preparing notes. BTW, the paper here is by Rodney Paul and me.
However, I had nothing to do with the pictures.
http://www.westga.edu/~bquest/2003/football.htm
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What I am reading
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Sorry this will return in the next issue. I need to sort out what I
have read over the summer and really want to get this one out today.
Sorry.
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Quotes of the week:
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Exuberance is easily corrected, Dullness is incurable---Quintilian
Whatever you want to teach, be brief---Horace
There is no way but up from here---Shania Twain
Always do right. This will gratify some people and astonish the
rest---Mark Twain
Happiness depends upon ourselves---Aristotle
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Thanks for reading! I hope you liked it and learned something (or even
many things) from it! I wish you all a great semester! If I can help
in any way let me know! Thanks!
Jim
JimM-@FinanceProfessor.com
For those of you in the East it has been a remarkably wet summer. In
July we had about 12 inches of rain! Yes as in a foot!
Consequentially, the mosquitoes are beyond awful. They make Alabama
mosquitoes seem mild! ;-)
Who is cautiously optimistic about the Buffalo Bills this year! Cannot
decide on Penn State. I hope they are ok.
Who finally broke down and bought a new car: Honda Element. Ugly but
otherwise it has everything I wanted.
Who may be biking the NYC Century on September 7th. I need to get at
least one more long ride in. I am not particularly afraid of the
distance but rather the 6AM start and long drive to and fro.
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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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