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(no subject)
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Jim Mahar
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Feb 27, 2004 13:53 PST
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Update on trials, Greenspan on everything!, Much new research, Economy
and energy prices climb, and much more!
FinanceProfessor News February 27, 2004
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FinanceProfessor.com
Bringing the Real World to the Classroom and vice versa!
Sign up for the free Newsletter at www.FinanceProfessor.com
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Top Stories
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1. Trials, Trials, Trials!
2. French Interview
3. TONS of Corporate research
4. Takeovers takeover!
5. The end of the Equity Risk premium puzzle?
6. Changes at the NYSE
7. US economy continues to grow
8. Greenspan on just about everything
9. Higher energy prices
10. Outsourcing
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Hi everyone!
I hope your semester is going well. Things are busy here at St.
Bonaventure! We just named a new president (Sister Margaret Carney),
named a new Athletic Director (Ron Zwierlein, and we had our visit from
AASCB accreditation people. Additionally I should hear on the tenure
decision any day, so it has been rather hectic.
Wow, literally hundred of great articles. The entire newsletter could
have been on Alan Greenspan who has been unusually active over the past
few weeks. Most of these stories are in the Institutions/Money and
Banking Section.
I am deciding how to do the newsletter. On one hand I really like the
news aspects, but realistically if we go with eth monthly newsletter,
much of the news is somewhat old. On the other hand, the news that does
get included is more like a course packet and we can almost see the
story develop and in some instances end in the course of the month.
This allows the story to be sort of a mini-case. If you want news for
rapidly I would recommend The New York Times Your Money Newsletter (for
a daily newsletter that is very good) or any of CFO.com’s many
newsletters (both daily or weekly).
As a result of not tracking every single finance story, there will be
more room for summaries and links to academic articles. You will see
that in this newsletter where I broke the corporate finance section into
a news section and a research section. Also I will be posting periodic
updates to one of two journals/blogs. One is just for finance
(http://www.financeprofessor.com/blogs/financeprofessorfinancetalk.htm)
and one for other things
(http://www.financeprofessor.com/blogs/financeprofessortalk.htm)
I hope these changes make it easier for both you and me to manage the
size and content of the newsletter.
Well I should shut up and send out the newsletter!
jim
JimM-@FinanceProfessor.com
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Top Story: scandal herding?
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The financial news has been full of more court cases than a Court TV
marathon. A quick listing and where the cases currently stand:
http://news.bbc.co.uk/1/hi/business/3411063.stm
Adelphia: The government is preparing its case against the Rigases and
former executive Michael Mulcahey). Jury selection is just wrapping up.
The speculation in the local papers (Buffalo News) is that the case
will boil down to Rigas vs. Rigas where both sides play one family
member off against the other. Meanwhile the firm itself is readying to
come out of bankruptcy but first is trying to get an $8 Billion loan and
is considering changing its name.
http://www.suntimes.com/output/business/cst-fin-trial24.html
http://www.theaustralian.news.com.au/common/story_page/0,5744,8781578%255E643,00.html
http://www.washingtonpost.com/wp-dyn/articles/A63126-2004Feb22.html
http://www.miami.com/mld/miamiherald/business/national/8020048.htm
http://www.buffalonews.com/editorial/20040124/4028052.asp
http://www.buffalonews.com/editorial/20040222/1048297.asp
Enron: Wow. Once the Fastows struck a plea bargain, the aim turned to
former CEO Jeff Skilling. And yes he too got to wear hand-cuffs. He is
now facing fraud, insider trading, and other charges that could get him
325 years in prison, which if he were to survive the entire 325 years
would be a record. ;)
http://news.bbc.co.uk/1/hi/business/3397887.stm
http://news.bbc.co.uk/1/hi/business/3502303.stm
http://news.bbc.co.uk/1/hi/business/3398913.stm
http://www.msnbc.msn.com/Default.aspx?id=3951358&p1=0
http://www.sptimes.com/2004/02/19/Business/Enron_s_survivors_ant.shtml
http://www.sundaytimes.news.com.au/common/story_page/0,7034,8749768%255E950,00.html
http://www.chron.com/cs/CDA/ssistory.mpl/business/2421009
http://www.kansascity.com/mld/kansascity/business/8002279.htm
Martha Stewart: Hot off the presses! Just as I finshed this the judge
in the case threw out the most serious fraud charges. There are still 4
other counts for which she must be tried. The prosecution has rested
their case after about 3 weeks of testimony. Their main point has been
that Martha sold not because of a prearranged sell order at $60 a share,
but that that story was just a cover. The real reason was that she was
“tipped that ImClone CEO Sam Waksal was selling.” While I am not going
to try and predict the outcome, I will say with certainty that she
wished she had just taken the approximate $50,000 loss instead of what
is now (after the stock has rebounded) about a $90 million loss
(presuming the main reason the stock price has fallen is on her
reputation) plus lost reputation etc.
http://www.foxnews.com/story/0,2933,112302,00.html
http://www.businessweek.com/bwdaily/dnflash/feb2004/nf20040220_0523_db016.htm
http://www.dailynews.com/Stories/0,1413,200~20950~1969700,00.html
http://www.newsday.com/news/local/wire/ny-bc-ny--marthastewart-cha0223feb23,0,724569.story?coll=ny-ap-regional-wire
http://www.ksat.com/money/2880224/detail.html?treets=ant&tml=ant_natlbreak&ts=T&tmi=ant_natlbreak_1_10350102272004
Tyco: This one is a marathon in and of itself. There have been way too
many stories in what is now a five month long trial to recount, but the
most recent is that the CFO said he did not think he had to tell other
officials of a payment of $20 million to a board member and also that $8
million relocation allotments were not that unusual. Additionally more
reports of loans being forgiven as a form of bonus have surfaced. Has
there EVER been a better case of Jensen’s Free Cash flow problem?
http://www.ajc.com/business/content/business/ap/ap_story.html/Financial/AP.V2200.AP-
http://www.in-forum.com/ap/index.cfm?page=view&id=D80TPD1G3
http://www.newsday.com/news/local/wire/ny-bc-ny--tycotrial-fatigue0215feb15,0,5705320.story?coll=ny-ap-regional-wire
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Interview with Kenneth French
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A subscriber pointed out that while I had included the link to the
IndexFunds Eugene Fama interview, I missed the interview with Kenneth
French. It is flat out great! I especially liked the discussion of how
their three factor model came about: “"I guess we were trying to answer
the question: If you were trying to form a portfolio with high expected
returns or low expected returns, how would you go about doing that? At
the time, the capital asset pricing model was the basic theory that said
high beta stocks--high expected returns, low beta stocks--low expected
returns. And so we looked at that and we looked at a bunch of other
things that people had already identified and what we discovered was,
gee, beta didn`t seem to work very well….” READ IT! :)
http://www.indexfunds.com/articles/kennethfrench_20031015_interview_with_kenneth_french.htm
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Corporate Finance Research
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The existence of virtually any anomaly suggests multiple explanations
that are possibly correct. For example, it could be that the unexpected
returns really do exist (thus drawing market efficiency into question),
or that the model is incorrect. Another explanation that should never
be overlooked is that the poor controls were used and thus the anomaly
is only due to researcher error. As Fama pointed out in his behavioral
finance article (my favorite Fama article!), this is especially
problematic in longer term studies. For instance previous work has
found there to be a long-run underperformance for firms that issue
seasoned equity. Li and Zhao use a more complete matching control (the
so-called propensity score matching method) and find that SEO issuers do
NOT under perform in the long run!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=451740
Three of my favorite teachers ever have collaborated on the next two
papers! Barclay, Holderness, and Sheehan find that private placements
(which have been long seen as a means of improving monitoring) may
actually reduce monitoring and help to entrench managers. Consistent
with previous research there is an immediate price jump on the
announcement of the private placement. Further like Hertzel, Lemmon,
Linck, and Reees (2002), they find a longer run price decline. What is
new however is that this price decline is associated with private
investors that subsequently turn out to be passive. An interesting
hypothesis: this passivity is purchased by managers in the form of
purchase discounts.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=471720
Due to the dividend exemption, corporations would logically be expected
to be prefer dividends to other forms of return. However, Barclay,
Holderness, and Sheehan provide evidence that blockholders (who may have
acquired the shares in either open market or through private placements)
do not show evidence of that they buy shares in firms that pay higher
dividends, or (and this is actually related to their other paper) do
firms with corporate blockholders increase dividends at a faster rate
than their peers.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=472201
Need another reason why liquidity is important? Butler, Grullon, and
Weston find that after controlling for other factors (size etc)
"investment banks' fees are significantly lower for firms with more
liquid stock." Moreover, the cost difference is seemingly economically
significant. They "estimate that the difference in the investment
banking fee for firms in the most liquid quintile versus the least
liquid quintile, controlling for other factors, is approximately 107
basis points, which represents about 22.3 percent of the average
investment banking fee in our sample." Which to me is a surprisingly
large impact.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=471721
Kisgen reports that managers manage capital structure in a way to
prevent downgrades and to get upgrades. For instance firms that "are
near a change in credit rating" make moves to improve their rating by
issuing less debt and retiring more debt. Importantly, he finds that
this balance sheet management takes place before firms are in what we
would generally call financial distress. (I always love it when a paper
catches me by surprise with something that should have been obvious.)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=355680
Ex-post settlement. That is the fancy name for it. The idea that after
the fact, if you do a good job, the contract is renegotiated and you get
more money. One form of this renegotiation is in the form of a bonus.
One occasion that is often the trigger for such a bonus is a successful
(defined as completed, not one where the shareholders necessarily win!).
In a forthcoming JFE article, Grinstein and Hribar find that 39% of
their sample paid such a bonus and that this bonus was highly tied to
managerial power. As an aside they also report that the two day event
window return for firms where the CEO has the most power is a negative
and significant –3.8%.
http://jfe.rochester.edu/03284.pdf
This one is pretty interesting. If a single person is in charge, then
it makes sense that the decisions (and consequences) would be more
volatile than if a more formal system of checks and balances were in
place. Sure enough, a paper by Adams, Almeida, and Ferreira finds that
“stock returns are significantly more variable for firms run by powerful
CEOs.”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=312184
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Corporate News
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Takeovers and attempted takeovers dominated much of the corporate news
of the past month. Where to start? First we had J.P. Morgan Chase &
Co. Inc. acquired Bank One Corp. for about $58 billion in stock. The
deal will diversify J.P. Morgan along two lines: geographically it will
now have more of a presence outside of the East and along product lines
it will no linger be as dependent on investment banking and trading
http://msnbc.msn.com/id/3959595/
A deal that attracted more attention was Cingular winning the bidding
war for AT&T Wireless. Vodaphone, the early favorite, dropped out when
the price got too rich for them given the fact that there would have
been anti-trust concerns stemming from Vodaphones 37% stake in Verizon.
Cingular agreed to pay $41 Billion. Interestingly, Vodaphone stock
climber almost 5% on the news of the “loss” while SBC and Bell South
(the main owners of Cingluar) both fell some.
http://www.washingtonpost.com/wp-dyn/articles/A47187-2004Feb17.html
http://www.nytimes.com/2004/02/17/business/17WIRE.html?dlbk
http://news.bbc.co.uk/1/hi/business/3495113.stm
And then there was Disney. The week after Disney CEO Michael Eisner was
given a $6.25 million stock bonus, Comcast launched a hostile bid for
the firm. Disney’s board immediately rejected the offer as too low and
for now at least Comcast seemed content to leave the Magic Kingdom
alone. However, that does not mean that Eisner is out of hot water.
Now many institutional shareholders are calling for him to step aside.
http://news.bbc.co.uk/1/hi/business/3479743.stm
http://www.washingtonpost.com/wp-dyn/articles/A679-2004Feb23.html
http://www.nytimes.com/2004/02/17/business/17disney.html?dlbk
http://news.bbc.co.uk/1/hi/business/3494809.stm
http://www.latimes.com/business/la-fi-bidders17feb17,1,3665404.story?coll=la-headlines-business
http://www.miami.com/mld/miamiherald/business/national/8057471.htm
http://news.bbc.co.uk/1/hi/business/3491854.stm
With all of these mergers, it is sometimes worth remembering that
mergers do not always go as planned. Just ask Daimler Chrysler. It has
been 7 years since the merger of Chrysler and Daimler Benz (wow time
flies!) and the benefits are still nowhere to be found.
http://www.businessweek.com/bwdaily/dnflash/feb2004/nf20040224_6625_db014.htm
Horizontal mergers (those of firms in the same industry) are the most
likely to be shot down by regulators on anticompetitive grounds. Such
is the case with Oracle’s attempted acquisition of PeopleSoft.
http://www.businessweek.com/investor/content/feb2004/pi20040227_6365_pi038.htm
As you probably have heard by now the strike at three California grocery
store chains (Safeway, Kroger, and Albertson’s) was settled today. What
you may not have seen is that in settling, the chains may have given in
too much: the stock prices of all three chains were down on the news.
http://www.forbes.com/newswire/2004/02/27/rtr1279291.html
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Investments
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WOW! What a great article The equity risk premium has puzzled
researchers for years. In a nutshell it is the finding that the equity
risk premium demanded by investors is too large to be explained by
changes in stock returns or changes in consumption unless very high
levels of risk aversion were assumed. (See Grossman-Schiller, 1981,
Mehra-Prescott 1985). In a forthcoming JF article, Ait-Sahalia, Parker,
and Yogo may have taken much of the mystery out of the puzzle.
Acknowledging that the puzzle can not be explained by looking at
co-movements with overall consumption, the authors, break consumption
down into basic and luxury components. Predictably the luxury component
of consumption is more volatile AND “covaries significantly more with
stock returns than does aggregate consumption.” Then when the equity
premium is examined relative to the consumption of the luxury
consumption, the size of the premium can be explained by a much lower
risk aversion. Additionally, rather than relying on inaccurate
government data or biased reported data, the authors look at actual
consumption of luxury goods. A VERY cool paper!!!!!!! I was so excited
by this one I ran down and interrupted a colleague. Be sure to read it!
http://www.afajof.org/Pdf/forthcoming/AitSahalia-Parker-Yogo.pdf
While there now seems to be evidence that herding happens, I still am
not really sure what to make of the herding papers. Of course they
conflict (at least partially) with the more extreme views of efficient
markets, but I am not sure how much. For example, it is logical to
watch and observe other traders in order to better gauge the supply and
demand curves other investors have. That said, the papers are always
almost always interesting (especially Grinblatt, Titman, and Wermers
(1995)). A forthcoming JF article by Feng and Seasholes is no
exception. Using a cool data set that identifies where the locale of
the individual Chinese traders, the authors find that trades are "highly
correlated" even when geographically separated. This suggest to be
"evidence of market-wide shocks…and little evidence of…group
psychology." Additionally it appears that those traders who live nearer
firm's HQ have better information.
http://www.afajof.org/Pdf/forthcoming/feng_seasholes_20031023.pdf
In spite of an abundance of studies that suggest the existence of
calendar anomalies (days of the week, late summer, year end, month end)
they make no sense to me. (and yes I realize some can be explained away
using microstructure or tax explanations). That said I was very happy
to stumble upon this paper by Gerlach when at the Southern Finance
Association meetings. He finds that macro news events can describe most
of the anomalies away. So score one more for efficient markets :)
http://faculty.wm.edu/jrgerl/calendar%20anomaly.pdf
Sports time. NASCAR is hot! How hot? Even FinanceProfessors are
writing about it! In a working paper Sullivan and Dussold (who BTW
was/is a runner) look at the stock performance of the sponsor of the
winning car in various races. They find a positive and statistically
significant price jump.
http://www.siue.edu/BUSINESS/econfin/papers/NASCAR%20paper%20for%20SEA%20meeting.pdf
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Financial Institutions and Markets
(also Money and Banking)
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I will quote Fed Governor Bernanke’s speech to the American Economic
Association:
“There was a time when central bankers did not talk to the public.
Montagu Norman, the Governor of the Bank of England for a quarter of a
century after the First World War and a highly influential figure in his
time in central banking circles, was notorious for his reclusiveness,
both personal and professional. According to his biographer, Norman
lived by the maxim, "Never explain, never excuse" (Boyle, 1967, p. 217.
Well folks, that is not the case now. The Fed governors have been
especially active of late! I might also add especially interesting, but
that would suggest they are not always so. :)
http://www.federalreserve.gov/boarddocs/speeches/2004/200401032/default.htm
Probably most active of all has been Fed Chairman Alan Greenspan. His
most important comments were probably his call to cut social security.
Does it need to be cut? Yes. More than likely it does. We have all
known and it no one is willing to do anything about it. The trouble is,
as always, that to make the necessary changes is paramount to political
suicide. Indeed already both Bush and Kerry are running away from the
comments. It is too bad.
http://msnbc.msn.com/ID/4373896/
http://us.cnn.com/2004/ALLPOLITICS/02/25/elec04.prez.socialsecurity/
http://www.palmbeachpost.com/news/content/shared/news/politics/stories/02/27nethaway.html
Is the sky really falling? Fed Governor Edward Gramlich gave a
troubling speech in London this week. Speaking about the links between
the budget deficit, trade deficit, and investment, he warns, “the U.S.
is now in violation of the stability condition for both budget and trade
deficits.” Moreover, looking ahead, “the United States will face huge
looming costs for retirement and health care programs.” He concludes
that, “neither deficit may be terribly harmful in the short-run,” but,
“in the long-run, however, both deficits could trigger…changes in prices
interest rates and exchange rates. Continued budget deficits will
steadily detract from growth.”
http://www.federalreserve.gov/boarddocs/speeches/2004/20040225/default.htm
Greenspan also spoke out on Government sponsored housing enterprises.
Short version: they are getting too big for out own good.
http://www.federalreserve.gov/boarddocs/testimony/2004/20040224/
Greenspan obviously has had a busy time of it. In fact BusinessWeek did
a story on his hectic week.
http://www.businessweek.com/bwdaily/dnflash/feb2004/nf20040224_8908.htm
Several possible changes of real importance affecting the NYSE are being
considered. For starters, the NYSE said they were going to increase its
electronic trading by opening it up to more institutional trades. Then
The NY Times reported that “Federal regulators are considering a rule
change that would give equity investors the ability to choose speed of
execution over the best possible price and that could steer trades away
from the New York Stock Exchange and to its electronic rivals.”
http://www.iht.com/articles/130801.html
http://www.oregonlive.com/business/oregonian/index.ssf?/base/business/1076072166212210.xml
http://www.nytimes.com/2004/02/06/business/06nyse.html
http://msnbc.msn.com/id/4385126/
In a very much-related paper, Jain finds that expected (and hence
required) returns dropped upon the introductions of electronic trading
in 118 countries. Why? He hypothesizes that transactions costs have
decreased and liquidity has increased and hence a lower premium is
necessary.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=470766
The NYSE is also asking that Former NYSE president Richard Grasso pay
back much of his $140 pay package.
http://quote.bloomberg.com/apps/news?pid=10000087&sid=asfFK2RS6Kms&refer=top_world_news
YES! While the reporting of US equity trades is essentially
instantaneous, bond price data is not. But that may soon be changing as
more trades are reported sooner. :)
http://www.forbes.com/business/newswire/2004/02/11/rtr1256951.html
http://www.municipalbonds.com/press_release/2004_02_11c.html
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International Finance
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In an upcoming JFE article, Doidge provides more evidence that one
benefit of foreign firms cross listing in the US is that legal
protection provided by the US legal and market system. He looks at a
sample of foreign firms who have multiple classes of shares. Some of
these firms have cross-listed shares in the US and some do not. The
finding? Voting premiums (the higher price that is associated with the
super voting shares) are 43% higher for the firms that do not cross
list. Likely explanation: minority shareholders in home country may
piggy-back on US protections.
http://jfe.rochester.edu/02367.pdf
What a good article on globalization! Best part is that it points out
how the job losses etc get reported as stemming from globalization, but
the good news (new jobs, lower prices etc) do not.
http://www.post-gazette.com/pg/04039/270209.stm
The volatility in the US dollar continues. After a long slide, the
dollar bounced around as John Snow (US Treasury Secretary) said a strong
dollar was US policy but reaffirmed that prices should be set in the
marketplace and voiced concerns over recent discussions for . Then
Greenspan said in his testimony to Congress (See Institutions section)
that rates could remain low. Then this past weekend the dollar climbed
against the yen as Japan raised its terror alert levels.
http://news.bbc.co.uk/1/hi/business/3402665.stml
http://money.cnn.com/2004/01/16/news/economy/snow_dollar.reut/
http://news.bbc.co.uk/1/hi/business/3508651.stm
The US and Australia signed a pact that dramatically lowers trade
barriers between the two nations. HOWEVER, not all markets were yet
opened. In particular, US agricultural markets remain partially closed,
and specifically the sugar market
http://www.theage.com.au/articles/2004/02/09/1076175102043.html
http://news.bbc.co.uk/1/hi/business/3464485.stm
Speaking of the WTO, it yet again reprimanded the US about rising trade
deficits, and “subsidies and tariffs which protect the agriculture,
steel, textiles and clothing sectors. The WTO also warned that the
"large bilateral trade imbalances could give rise to protectionist
pressures". Which sounds a lot like Greenspan’s comments below.
http://news.bbc.co.uk/1/hi/business/3404053.stm
US and China in talks over Yuan
http://news.bbc.co.uk/1/hi/business/3515451.stm
Saudi Arabia is still pushing for admission into the WTO. Standing in
its way? The US. Why? The US is pushing for more open markets.
http://www.forbes.com/business/newswire/2004/01/17/rtr1215622.html
Morse and Shive have a partial explanation of the home country bias.
Short version? Investors in “flag waving nations” hold more of stock in
their own country.
http://www.bus.umich.edu/NewsRoom/ArticleDisplay.asp?news_id=2387
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Economics
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The US economy continues to show signs of improvement. With US economic
growth at slightly more than 4%, most agree that the worst is behind.
The growth is not uniform across all areas of the economy and job growth
is still lagging. In total however, the economy looks much better than
one hears on TV news. That is also the opinion of U.S. Treasury
Secretary John Snow who while stressing thing were going well, also
said: “We are not, by any means, satisfied." To that point he said the
Bush administration was still pushing tax cuts and “holding the line on
federal spending.”
http://www.forbes.com/markets/newswire/2004/02/23/rtr1271773.html
http://news.bbc.co.uk/1/hi/business/3493510.stm
Forecasting is not easy (just ask those who tried to pick super bowl
champions!). For example the recent problems with White House
forecasts. One word of advice, consider biases in forecasts.
http://www.washingtonpost.com/wp-dyn/articles/A538-2004Feb23.html
http://www.washingtonpost.com/wp-srv/politics/daily/graphics/budget_022404.html
Outsourcing has long been a cause of low job growth in manufacturing.
Now it is having the same effect on service jobs. Which is actually
good news for the global economy, but not so good for the US economy.
By the way, while outsourcing often gets a bad name. It shouldn’t.
http://www.businessweek.com/bwdaily/dnflash/feb2004/nf20040224_6702_db042.htm
http://www.businessweek.com/magazine/content/04_09/b3872014_mz001.htm
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Personal Finance
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While it is from December, a loyal reader sent me the following link
that helps you to plan for retirement. It is good! It takes you through
a series of questions from how long you plan on living to how much risk
you want.
http://biz.yahoo.com/fool/031211/1071155580_1.html
While there are countless cases of people getting in over their heads
with more debt than they can handle, overall the personal debt story is
not too bad. That is the opinion of Alan Greenspan and Susan Bies (and
me ;) ). Why? Because while debt is increasing, so too are real
estate and stock prices. Thus, market based debt ratios are not so bad.
http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/default.htm
http://www.federalreserve.gov/boarddocs/speeches/2004/20040226/
Looking for money? Newsday suggests that you not look at your IRA or
Pension plan, even if you are allowed to do so. Why? If you are under
59 1/2 “in most cases you'll face both a hefty tax liability plus an IRS
penalty.”
http://www.newsday.com/business/custom/retirement/ny-bzplan1129,0,4966165.story?coll=ny-retirement-headlines
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Energy Markets
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A cold winter, low inventories, and OPEC cuts combined to push up energy
prices. N.Y. natural gas recently hit record highs while in some parts
of the US gas is again flirting with the $2.00 a gallon figure.
http://msnbc.msn.com/id/3958515/
http://www.forbes.com/markets/newswire/2004/02/10/rtr1253376.html
http://news.bbc.co.uk/1/hi/business/3488310.stm
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Real Estate
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Did you know? American homeownership rate stands at a record 68.6
percent
http://www.csmonitor.com/2004/0209/p20s02-wmgn.html
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Accounting News
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Sorry these are so short…I really want to get the newsletter out today!
It’s that time of year again. When people complain about the high rates
of interest charged on Tax Refund Anticipation Loans.
http://www.accountingweb.com/cgi-bin/item.cgi?id=98665
This is good news! FASB is “considering a stricter definition of a
"current liability," in a proposal to make U.S. rules more similar to
international standards.”
http://www.accountingweb.com/cgi-bin/item.cgi?id=98678
More good news! The EU may make firms change auditors (either the firm
or minimally the senior auditor) on a periodic basis.
http://www.accountingweb.com/cgi-bin/item.cgi?id=98671
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Mini-lesson: IPO underpricing
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Two concerns IPO researchers have are the apparent short-run
underpricing (the stock trades up in the secondary market) and the
longer run underperformance (stock falls during long event window).
Previous research has been only partially successful in explaining the
continued existence of these two conflicting and seemingly contradictory
anomalies. Some of these previous attempts include Chowdry and Nanda
1996 who show that stabilization activity can explain some of the
initial underpricing. Fama (1998) suggests that the difficulty of
matching samples may explain the apparent long run underperformance.
However due to disagreement of studies, IPO pricing remains troubling.
Derrien (in a forthcoming JF) models these two findings and shows that
if noise traders (presumed to be individual investors) are overly
optimistic, they will bid up prices even when the initial price is
higher than most valuation models would predict. That is: because the
price is going to go higher, informed investors will participate in the
offering since they can profitably trade out of the security in the
aftermarket. If this is true (and it is supported by a sample of French
IPOs that demonstrate initial return and turnover is positively related
to individual investor demand), then investment bankers knowingly
overprice the issue (relative to intrinsic value) but underprice
relative to the short-run demand. Why underprice? One explanation is
that by knowingly overpricing the shares, the investment banker would be
exposed to higher stabilization (and legal) costs if the noise traders
realized the shares were in fact overpriced. (Interesting!)
http://www.afajof.org/Pdf/forthcoming/DERRIEN.pdf
It must be noted however, that the many possible explanations of IPO
mispricing are not mutually exclusive. For instance, In the above
article Darrien suggests that the initial underpricing may be the result
of a desire to lower price stabilization costs. Cliff and Denis have
suggest another explanation: IPO underpricing is a means of attracting
top analyst coverage. Using a sample of 1050 IPO firms that also had
SEOs, they found that the more underpricing, the more star analyst
coverage and the more positive the recommendation. Moreover, the better
the coverage, the more likely subsequent SEOs were done with the same
investment banker.
http://www.afajof.org/Pdf/forthcoming/CliffDenisIPO.pdf
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Financial Trivia/History
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Ok, so it may not be strictly finance…although it does speak of
information asymmetries.
Tuesday Morning Quarterback is by far my favorite article on the web
during football season. In his season recap, Gregg Easterbrook
commented on several things with financial ties: For one he mentioned
the WSJ report that “studies find that the United States Postal
Service's Priority Mail, priced at $3.85 for a letter, is slower than
standard first-class mail, priced at 37 cents. Only 65 percent of
Priority Mail is delivered within three business days, versus 81 percent
for standard first class.” How can this be? It is a good example of
transaction costs. Few people actually check to see if their mail gets
there when it is supposed to.
http://www.nfl.com/nflnetwork/story/7075491
More football: before the start of this past season, the Buffalo Bills
installed new Astroturf. This year the company that made the astrotruf
went belly-up. Now the Bills have no one to maintain their field.
Which is a pretty cool example of why revenue may drop as a firm takes
on too much leverage.
http://www.sportsline.com/nfl/teams/report/BUF/7111461
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What I am reading
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I just finished The Price of Loyalty. Not sure how much of it is true.
But if it is true, I am very disappointed in Bush etc. Interestingly,
this week’s statements from Greenspan seem to suggest that more of the
book is true than I would like to believe. !
http://www.amazon.com/exec/obidos/ASIN/0743255453/finpapers/104-9378365-5272442
I finished Founding Brothers. Loved it! It is by Joseph Ellis (a
history teacher) and is very interesting. Although I was disappointed
with TJ. But he and Adams made up in the end, so I guess all was not
bad.
http://www.amazon.com/exec/obidos/ASIN/
0788761331/finpapers/104-9378365-5272442
I am about a third of the way through Tom Clancy's The Teeth of the
Tiger. Not his best, but still pretty interesting. Makes you wonder
how much is true/could be true.
http://www.amazon.com/exec/obidos/ASIN/039915079X/finpapers/104-9378365-5272442
Still working on Gentleman Revolutionary by Richard Brookhiser. Good,
just not enough time in the day! Amazing how many great leaders there
were around at the time of the Revolution and immediately after.
Distribution is not IID. ;)
http://www.amazon.com/exec/obidos/ASIN/0684863650/finpapers/104-9378365-5272442
I am really enjoying Lance Armstrong's Every Second Counts. It really
does not say much, but for some reason I like it a lot. Maybe because
of what he has gone through, maybe because of the biking.
http://www.amazon.com/exec/obidos/ASIN/0767914481/finpapers/104-9378365-5272442
I am ristening to The Last Train to Paradise. So far it is only about
the building of the railroad to Key West. OK. It really is something I
knew zero about. From a finance perspective it is interesting to see
how the area was developed etc. And the similarities between Standard
Oil and Microsoft. Looking forward to the hurricane part.
http://www.amazon.com/exec/obidos/ASIN/1400049474/finpapers/104-9378365-5272442
So far at least a better “railroad building book” that I am also
ristening to is Nothing Like it in the World by Stephan Ambrose. It is
about the building of the Trans-continental Railroad. I love just about
everything he writes and this is no exception.
http://www.amazon.com/exec/obidos/ASIN/0743506472
/finpapers/104-9378365-5272442
I just started Power Failure by Mimi Swartz and Sherron Watkins. It is
about Enron. Wow. The most amazing thing to me is that they got away
with so much for so long.
http://www.amazon.com/exec/obidos/ASIN/0385507879/finpapers/104-9378365-5272442
I am about 80% done with Mozart's Brain and the Fighter Pilot. Really
like it but just need more time. Especially to do any of the mental
exercises the book suggests.
http://www.amazon.com/exec/obidos/ASIN/00609810057/finpapers/104-9378365-5272442
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Quotes of the week:
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Decided to showcase Marv Levy this week:
Numerical age is just as approximation of your functional age---Marv
Levy
http://www.twobillsdrive.com/
Expect rejection, but expect more to overcome it---Marv Levy
http://www.schucktales.com/quotes/marv-quotes.htm
“Everyone wants to win; the special person has the will to win."
"What you do should so speak so loudly that no one can hear what you
say."
"Adversity is an opportunity for heroism."
"Expect rejection, but expect more to overcome it."
"Where else would you rather be than right here, right now
http://www.schucktales.com/quotes/marv-quotes.htm
“When I was twelve, I went hunting with my father and we shot a bird. He
was laying there and something struck me. Why do we call this fun to
kill this creature who was as happy as I was when I woke up this
morning. “---Marv Levy
http://www.brainyquote.com/quotes/authors/m/marvlevy130029.html
“Where else would you rather be than right here, right now?"
http://www.marvlevy.net/marv/marvisms.html
Adversity is an opportunity for heroism."
"The harder you work, the harder it is to surrender."
"What it takes to win is simple, it's not easy."
"Plan your work and work your plan
http://www.marvlevy.net/marv/marvisms.html
"Leadership, I've often said, is the ability to get other people to get
the best out of themselves."
http://www.marvlevy.net/marv/bottom.html
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Well that’s it. I hope you liked it and maybe even 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
Where there is still snow everywhere but it is beginning to feel like
spring :)
Who really has to clean his office!!
Who thinks baseball should have a salary cap. (yeah I know, economically
most would say no, but in sports there needs to be some way that all
teams can compete. Baseball would do well to look at football)
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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 2004 FinanceProfessor.com
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