|
The Dow changes its makeup, IPOs, Governance, Fama&French on CAPM and mu
|
Jim Mahar
|
Apr 02, 2004 00:10 PST
|
The Dow changes its makeup, IPOs, the Importance of Governance, Fama and
French on the CAPM, Free Trade is good, OPEC, and MUCH more!
FinanceProfessor News April 2 , 2004
**********************************************************
FinanceProfessor.com
Bringing the Real World to the Classroom and vice versa!
Sign up for the free Newsletter at www.FinanceProfessor.com
**********************************************************
Top Stories
**********************************************************
1. Shake up in the DOW
2. IPOs: Waves, Underwear, and Burying the Competition
3. Disney splits CEO and Chair positions
4. Ritter looks at differences between US and European IPO markets
5. Better Governance = Better Credit rating
6. Fama and French look at Capital Asset Pricing Models (yes plural)
7. Increased transparency leads to better forecasts
8. Fed Governor Bernanke endorses free trade and a safety net for
displaced workers
9. OPEC cuts production targets
10. A Shell game? Oil firms cut reserve forecasts following Shell’s
cuts
**********************************************************
Hi everyone!
Sorry this is a few days late. It has been busy. But with so many
stories it was imperative that I get the newsletter out before I fell
even further behind.
Before the news, I would like to personally thank you to those of you
who wrote letters of support on my tenure application. I did get it! :)
Thank you!!!
I am trying to continue the trend of recent newsletters by including
more academic papers than just the news. You seem to agree that this is
more useful and there are some great articles this time! I would
especially urge you to read the survey article on CAPMs (yes plural) by
Fama and French. It is great! (see Investments).
I hope your semester is going well. Sorry I have been sort of bad on
replying to your emails. I have been trying to cut down on online time
(24*7 seems a bit much ;) ).
jim
JimM-@FinanceProfessor.com
As a special notice to those who get the newsletter via Topica, I have
been told that they will begin running advertisements within the
newsletter. I am not sure if immediately or not, I hope it is not too
large of inconvenience and want to emphasize that I had zero to do with
the decision and do not receive any of the revenue.
and now the news:
***********************************************************
Corporate Finance News
***********************************************************
Despite reports (and even some illegal sales!) to the contrary, the most
widely anticipated Google has not yet gone public. It has been quite a
while since a stock has drawn this kind of anticipation--even pre school
teachers are wanting in on the action! Other tech firms are benefiting
from the publicity as analysts speculate that a hot IPO will push other
internet stocks higher.
http://www.jsonline.com/bym/news/mar04/217731.asp
Predictably, the publicity is also drawing in more competition as a new
generation of search engines hits the street. Google in response has
continued to up their services and have announced they will also offer
email.
http://www.pcmag.com/article2/0,1759,1557825,00.asp
http://seattlepi.nwsource.com/business/167021_marchex31.html
http://www.dmnews.com/cgi-bin/artprevbot.cgi?article_id=27043
As we have seen before IPOs seem to go in waves. After some down years,
this seems to be an up year. Already there have been almost as many
IPOs as all of last year. Interestingly however, if the past is a good
indicator of the future, this may be more of a spike than a tidal wave.
Why? "While the IPOs to begin trading this year have risen 6.1% above
their debut prices, they've fallen, on average, 4% below their closing
prices on their first day of trading."
http://www.usatoday.com/money/markets/us/2004-03-28-ipo_x.htm
Can we have a little Dignity please? Dignity is England’s largest chain
of Funeral homes and they plan on raising over 113 pounds in their
initial public offering. I hate to make predictions, but this IPO is
really going to bury the competition. (sorry I couldn’t resist! I
tried.)
http://news.bbc.co.uk/1/hi/business/3589869.stm
A staple in any lesson on IPOs is that a part of the underpricing may be
the result of a fear of the investment bankers and firm being sued in
the event that the price is too high. This is largely the reason for
such complete disclosures of all risk factors in the prospectus.
Sometimes however things slip through the cracks. Take ChinaLife’s IPO
of last year. It now is the target of a lawsuit claiming that
accounting irregularities were not “adequately disclosed.” Immediately
after the shares went public, the stock climbed to over 7 HK$, it is now
trading at about HK$4.75.
http://money.cnn.com/2004/04/01/news/international/china_life.reut/index.htm
(In the spirit of the band the Barenaked Ladies) The IPO market is also
hot down under. Under where? No Underwear. HAH! ;) Australian
underwear manufacturer Pacific Brands had their IPO recently. The
coverage is good as it shows the allotment to institutions and retail
clients, the fact that it was three times oversubscribed, and it
explains what the venture capitalists made on the deal (about 73%).
http://finance.news.com.au/common/story_page/0,4057,9166429%255E462,00.html
//www.lyrics007.com/Barenaked%20Ladies%20Lyrics/Pinch%20Me%20Lyrics.html
After a very public proxy battle in which a surprisingly high 43% of
shareholders withheld their support for Eisner, Disney split the
chairman and CEO positions. The new Chairman is former US Senator
George Mitchell. For what it is worth, Eisner now claims he is relieved
and glad to have been able to give up some of his responsibilities.
Sure.
http://ap.dallasnews.com/dynamic/stories/D/DISNEY?SITE=TXDAM&TEMPLATE=BUSINESS.html
One of my favorite topics in a corporate finance class is to use option
theory to analyze various stakeholder positions. For instance,
bondholders (who are in a position equivalent to a short-put position)
are risk averse since their payoff is capped and increases in volatility
increase the value of the put. Using this type of analysis, ceteris
paribus, shareholders of a financially distressed firm (who have a
position equivalent to being long a call option) have a great incentive
to stall the actual bankruptcy proceeding (something good might happen).
Recently, HealthSouth gave us an example of this. Their shareholders
are fighting creditors and urging patience before any bankruptcy occurs.
http://www.forbes.com/newswire/2003/07/03/rtr1018091.html
http://www.webprowire.com/summaries/531167.html
***********************************************************
Corporate Finance Research
***********************************************************
What a treat! European Financial Management has a cool paper by Jay
Ritter discussing the differences between the US and European IPO
markets. For instance: did you know that in Germany there is a "when
issued market" that allows trading in the shares prior to issuance. For
what it is worth, this is sort of like how the opening lines are set on
NFL football games in Las Vegas. The only question on this one is
where to put it. Should it be a corporate story or an international
story. Either way, it is a real keeper!
http://www.blackwellpublishing.com/pdf/eufm_lead_nov03.pdf
Loughran and Ritter (2002, RFS) suggested that CEOs may not be concerned
about leaving money on the table in IPOs because the losses are netted
against the rises in stock price in the secondary market. Ljunqvist and
Wilhelm now test this and find that CEOs who are happy with the IPO are
less likely to switch investment bankers for the firm's SEO. Which does
fit the initial story. It should probably be noted that this line of
research (behavioral finance in a corporate setting) is still in its
infancy. Stay tuned.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=485302
This one makes sense. Better governance, better credit rating.
Ashaugh, Collins, and Lafond find that increased transparency, increased
board independence, and a decreased ability of shareholders to block
takeovers associated with higher credit ratings. On the other side, a
higher number of blockholders is associated with lower ratings.
Additionally the authors report that "having a majority of the board
that is made up of outside independent directors is a key provision in
corporate governance that overshadows the NYSE and NASDAQ requirements
of having 100% independent audit, nominating, and compensation
committees."
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=511902
In an upcoming JF, Grullion and Michaely give us an in depth look at
stock repurchases. They find more buybacks and that the buybacks reduce
the free cash flow problem. They also find that buybacks apparently do
not signal improved operating performance in the future. Cool factoid:
"between 1984 and 2000 corporations spent approximately 26 percent of
their annual earnings on repurchases." Additionally, the paper brings
up some interesting questions. Probably the most interesting question
is why stock repurchases lead to lower systematic risk?! My guess is
that there is a confounding variable at work. Specifically, suppose
that firms who have seen recent increases in slack (so lower leverage)
are more apt to do buy backs. These same firms would be more likely
than their peers (who have not seen their leverage drop) to have lower
systematic risk. Which is a bit of a stretch, but is consistent with
the finding.
http://www.afajof.org/Pdf/forthcoming/repurchases.pdf
On the other hand, in the Journal of Financial Intermediation, Hirtle
finds that profitability at banks who do repurchases does in fact
increase following the repurchase.
http://www.olin.wustl.edu/jfi/vol12.htm#Repurchases
Garcia has a thought provoking piece that warns against short-term
thinking. The short version of the paper is that as technology,
competition, and strategy have shrunk the business world, firms may have
an even greater incentive to think short term. Winner takes all idea
and if you do not win the first round, you may not be around to play
other rounds. While I am not in total agreement, is a very thought
provoking--be sure to read the modified prisoners dilemma and the doctor
example, both are good!
http://www.westga.edu/~bquest/2004/thinking.htm
Sometimes too much of a good thing is a bad thing. This can be the case
with money (Free Cash flow problem), with food (obesity epidemic),
insider ownership (Philippe). Huh? Never heard of Philippe? Me
neither. Here is the deal: if you figure out what firm this is really
about you get a free FinanceProfessor newsletter :) Ok, so it is not
that hard to figure out. It is a case study by Carol Fischer and myself
on a cable firm that is in the news quite a bit lately. (BTW if you
want the case using the real names, check out FinanceProfessor.com.)
http://www.westga.edu/~bquest/2004/philippe.htm
http://www.financeprofessor.com/Adelphia/adelphia_communications%202.19.04.htm
http://www.financeprofessor.com/Adelphia/Adelphianews.html
Frye confirms that firms are using equity based compensation *EBC) more
than in the past. Additionally she finds a "positive relation between
Tobin's q and the percentage of employee compensation that is equity
based." Interestingly, she finds accounting measures decrease after
firms begin paying with EBC. (which may suggest that firms without EBC
focus too much on accounting measures and not enough of cash flow
measures.
http://www.business.sc.edu/jfr/forthcoming.html
The diversification discount is the finding that diversified firms sell
at less than similar firms in the same industries. (the 1+1 = 1.5 story
from class). In a forthcoming JFR piece, Best, Hodges, and Lin find
that this discount is partially (but not completely) explained by higher
information asymmetries at diversified firms which does make perfect
sense.
http://www.business.sc.edu/jfr/forthcoming.html (BTW sorry about the
link)
Anderson, Becher, and Campbell (ABC) report that following bank mergers,
CEO pay increases. That part is not new. What is new is that they show
that these increases in pay are the result of increases in
productivity and not just because the CEO is running a larger bank or
because the CEO is more entrenched. While almost a year old I found the
link when doing class notes and since I am friends with all three
authors, figured, why not?
http://www.olin.wustl.edu/jfi/vol12.htm#Incentives
While I think it was posted before, I am using it in class and it is
interesting, so I will run it again. Penas and Unal examine bonds
around bank mergers and find that bondholders benefit from the deals.
Why? Diversification (that lowers risk) and "achieving too-big-to-fail
status" are the main reasons.
http://jfe.rochester.edu/03176.pdf
***********************************************************
Investments
***********************************************************
I love summary articles. They help make sense of the world and let us
see the forest through the trees. Some of my favorites include the
Harris and Raviv summary article on capital structure, Fama's paper that
responds to Behavioral Finance Theories, and Cliff Smith's introduction
to his book of readings in Corporate Finance. And now I have a favorite
on the CAPM and other pricing models. While still officially a working
paper, Fama and French give us an excellent recap of both current and
past work in the field. My favorite line (and totally coincidentally
the conclusion): "The CAPM, Like Markowitz' (1952, 1959) portfolio model
on which it is built, is nevertheless a theoretical tour de force. We
continue to teach the CAPM….but we also warn students that despite its
seductive simplicity, the CAPM's empirical problems probably invalidate
its use in applications." WOW! Well said.
http://gsbwww.uchicago.edu/fac/finance/papers/capm%202004.pdf
Confused about the differing assumptions of pricing models? More than
likely you know that the assumptions don't hold very well and you
probably know much research has looked at how the assumptions matter.
Fama and French now provide a framework to hopefully make sense of some
of this confusion. In a working paper they show that investor tastes and
expectations matter. For instance, when discussing the CAPM, they
conclude that with differing expectations, there is little a priori
reason to expect that the market portfolio is the tangency portfolio
(and hence the market portfolio may or may not be mean variance
efficient, which is a central tenant of CAPM). Additionally the authors
use the concept of investor disagreement (and its impact on the market
portfolio) to discuss a range of topics ranging from value investing, to
stock picking, and mutual fund performance. Very interesting. Not sure
how they do it. Great paper after Great paper!
http://gsbwww.uchicago.edu/fac/finance/papers/assetprices2004b.pdf
The Financial Analyst Journal has an editorial designed to stir up
controversy. The title? "Is Our Industry Intellectually Lazy?" In it
the editor Robert Arnott references numerous cases where people who know
better either make use of unrealistic assumptions or forget their
fundamentals, and subsequently make erroneous conclusions. Interesting
and disturbing.
http://www.aimrpubs.org/faj/issues/v60n1/pdf/f0600006a.pdf
The Dow Jones Industrial average is being shaken up. Kodak,
International paper, and AT&T are being removed while Verizon, AIG, and
Pfizer are being added. The good people at Dow Jones say this is
because they want to keep the Dow representative of the overall economy.
As telecommunications, Finance, and health care have grown, it was felt
that these sectors were underrepresented in the index. BTW for a look
at how the Dow (a price weighted index) differs from the S&P 500 (a
market weighted index) check the FinanceProfessor link).
http://www.nytimes.com/aponline/business/AP-Dow-Components.html
http://www.fool.com/News/mft/2004/mft04040111.htm
http://www.voanews.com/article.cfm?objectID=61E725A5-DC1F-4C04-93C31F1749FC27CB
http://www.financeprofessor.com/introcorpfinnotes/marketindicies.html
http://www.fortune.com/fortune/streetlife/0,15704,607005,00.html
http://www.chron.com/cs/CDA/ssistory.mpl/business/2479849
http://money.cnn.com/2004/04/01/markets/dow/index.htm
***********************************************************
Financial Institutions and Markets
(also Money and Banking)
***********************************************************
Increases in Central Bank transparency seem to be working. That is the
conclusion of a working paper by Swanson that finds increased
transparency over the 1980s and 1990s led to improved market forecasts
of short term interest rates and other Central Bank actions.
Interesting given the improved technology and methods we have seen over
the past two decades, the paper also finds that market participants did
not improve in their ability to forecast GDP changes.
http://www.federalreserve.gov/pubs/feds/2004/200406/200406abs.html
John Reed has agreed to stay on for another year as head of NYSE.
http://news.moneycentral.msn.com/breaking/breakingnewsarticle.asp?feed=OBR&Date=20040401&ID=3551750
http://money.cnn.com/2004/04/01/markets/reed.reut/index.htm
While definitely not an official case, I threw some past notes together
on the NYSE problems of last fall. Feel free to use them if you like.
http://www.financeprofessor.com/mba610/Problems_at_NYSE.html
Speaking of the NYSE, it is now considering trading derivatives!
http://www.msnbc.msn.com/id/4645116/
A bill to revamp Fannie Mae, Freddie Mac, and other so-called agencies
passed a senate committee but its future looks doubtful. One area of
criticism that may lead to changes is how the agencies (Fannie Mae and
Freddie Mac in particular) fail to write-down their assets in a timely
fashion.
http://money.cnn.com/2004/04/01/news/fortune500/fannie_mae.reut/
http://www.quicken.com/investments/news_center/story/?story=NewsStory/dowJones/20040401/ON200404011612001110.var&column=P0DFP
The European Central Bank kept interest rates constant at 2%.
Interestingly while some in the US are calling for the Fed to raise
rates (of course not politicians), most of the speculation in Europe was
that rates there would be cut again in an effort to speed up the
economy. The economy which is seemingly picking up speed itself.
http://news.bbc.co.uk/1/hi/business/3589841.stm
http://www.eubusiness.com/afp/040401124627.o8y794b4
World markets got an early April Fool’s Day joke when someone started
the rumor that Alan Greenspan had had a minor heart attack.
Fortunately, he did not and is fine.
http://www.chron.com/cs/CDA/ssistory.mpl/business/2479191
***********************************************************
International Finance
***********************************************************
Sorry for the long section of quoting, but this is such a good recap it
is definitely worth it! It is from a speech by Fed Governor Bernanke,
but I am convinced he took it from our discussions of globalization in
class last semester!
“Despite what seems to economists to be a compelling case for trade,
non-economists are far more skeptical. A perennial public concern, from
the emergence of the "Rust Belt" in the 1980s, to the days of Ross
Perot's "giant sucking sound," to the more recent debate about the
effects of international outsourcing, is that the expansion of trade
will cause production to move abroad, at the expense of domestic
employment.” While conceding that some jobs will be lost and some jobs
created, and states that “the workings of a competitive labor market,
assisted perhaps by appropriate economic policies, ensure that jobs will
be created that are commensurate with the size of the labor force and
the available mix of worker skills. Thus, in the long run, factors such
as population growth, education and training, labor force participation
rates, and labor market institutions determine the level and composition
of aggregate employment.” Finally he wraps up by stressing the
importance of assistance for displaced workers because it “is the right
and fair thing to do. Second, helping workers who have lost jobs find
new productive work is good for the economy as well as for the affected
workers and their families. Finally, if workers are less fearful of
change, less pressure will be exerted on politicians to erect trade
barriers or to take other actions that would reduce the flexibility and
dynamism of the U.S. economy. In the long run, avoiding economic
isolationism and maintaining economic dynamism will pay big dividends
for everybody.” BRAVO!
http://www.federalreserve.gov/boarddocs/speeches/2004/20040330/default.htm
One of my all time favorite international finance papers is by Butler
and Joaquin from 2001. In it they find that in Bear Markets
correlations between markets rise, thus leading to an overstatement of
the benefits of international diversification and a partial explanation
to the home country bias. Now Hon, Strauss, and Yong show that this was
in fact the case following 9-11 as correlations increased.
http://www.business.sc.edu/jfr/forthcoming.html for Hon, Strauss, and
Yong paper
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=221992 for
Butler/Joaquin paper
Do we believe them? Washington, erstwhile of steel tariff fame, now
says that China is failing to play fair when it comes to trade. That
said, it is probably time to float the yuan. Remember folks, two wrongs
do not make a right.
http://news.bbc.co.uk/1/hi/business/3591753.stm
There are signs that the Japanese Central Bank may finally be ending
(temporarily) their intervention in world currency markets. T is
estimated that over the past two years, they have purchased nearly $500
B in US government bonds. Why? TO keep the yen from rising and hurting
Japanese exporters.
http://money.cnn.com/2004/03/31/news/economy/japan/index.htm
Will the current weakness in the US dollar (and heightened prices of oil
for US consumers) lead to pricing oil based on a basket of currencies?
OPEC is reportedly looking into it. My guess? Sooner or later it will
happen. Why? Economically it does make a lot of sense for OPEC.
http://news.bbc.co.uk/1/hi/business/3590133.stm
***********************************************************
Economics
***********************************************************
Although if you watched TV much you will deny it, the US economy
continues to improve. Car sales, housing starts, and even the ISM
manufacturing index are up. Job growth remains sluggish however. As a
result of the slow job growth, outsourcing has been taking much
criticism.
http://www.reuters.com/financeNewsArticle.jhtml?type=economicNews&storyID=4730600
http://money.cnn.com/2004/04/01/news/economy/ism/
http://money.cnn.com/2004/04/01/news/economy/jobs_walkup/index.htm
http://www.msnbc.msn.com/id/4645334/
***********************************************************
Personal Finance
***********************************************************
April has been designated as Financial Literacy month by the US Senate.
Fed governor Ben Bernake took it as an opportunity to address students
as part of the Fed’s jump Start program. Given the increasing financial
complexities of the modern world, it is imperative to be financially
literate. To this aim, the Chicago Fed has created an online resource
to aid people in personal finance decisions. (The last link from the Fed
itself is better.)
http://www.chicagofed.org/cedric/financial_education_research_center.cfm
http://www.federalreserve.gov/boarddocs/speeches/2004/20040401/
http://www.jumpstart.org/
http://www.federalreserveeducation.org/fined/index.cfm
***********************************************************
Energy Markets
***********************************************************
Given the almost ubiquitous coverage in the US, do I even need to report
this? Oil prices have climbed steadily over the past month. Why? Many
factors: increasing demand, US rebuilding strategic reserves, promised
OPEC production cuts, continued problems with getting Iraqi oil
production back online, a declining US dollar (remember oil is
denominated in USD), and even rumors of diminishing supplies. The
result is that gas and energy prices have climbed sharply. And of
course this is an election year so both presidential candidates had to
make their two cents known.
http://www.alertnet.org/thenews/newsdesk/N01555945.htm
http://www.forbes.com/business/newswire/2004/04/01/rtr1320570.html
http://news.bbc.co.uk/1/hi/business/3586197.stm
http://news.bbc.co.uk/1/hi/business/3590133.stm
Interestingly, the Saudis and others are insistent that market
conditions do not warrant such high prices and that the market price is
simply too high because of hedge funds and other speculators. Lo and
behold, upon news of the production cuts, oil prices did fall as it was
reported that US supplies were greater than previously reported.
However, from a political point of view, some are now speculating that
higher prices may lead to increased tension between the US and Saudi
Arabia. For their part, Saudi Arabia assured Washington that if prices
rise too highly, they will increase production.
http://quote.bloomberg.com/apps/news?pid=10000087&sid=aQ1wtxbAeMFw&refer=top_world_news
http://metimes.com/2K4/issue2004-13/methaus.htm
http://news.bbc.co.uk/1/hi/business/3591299.stm
http://www.cnn.com/2004/ALLPOLITICS/04/01/whitehouse.oil/
It should be noted that not all oil producers are part of OPEC.
Moreover even those that are generally do not abide by the production
limits. Additionally the decision to cut production was far from
unanimous.
http://www.chron.com/cs/CDA/ssistory.mpl/business/2478959
How do I know when oil prices are high? I go for a run. Living in a
marginal oil producing area (Olean derives its name from oil), there are
still many wells in the surrounding area. However, it is fairly costly
to extract the oil, so most of the wells sit unused until oil prices
rise substantially. Sure enough last week on a run I saw some wells
being turned on. Lesson: in times of high prices, even high cost
producers can make money. Ok, it’s unscientific, but it’s my newsletter,
I can add a personal antidote now and then. ;)
Iran agreed to supply China with $20 billion of liquefied natural gas
over the next 25 years.
http://metimes.com/2K4/issue2004-13/methaus.htm
Argentina is beset by its own energy crisis. Why? Limits on gas
imports, too few power plants, and a drought that reduces hydro-electric
production.
http://news.bbc.co.uk/1/hi/business/3589583.stm
***********************************************************
Financial Service Industry
***********************************************************
Congrats to SBU grad Sam Molinaro! The Bear, Stearns chief financial
officer made almost $11 million dollars last year! “As is the custom at
the investment bank, the executive's salary was just $200,000. However,
Molinaro received a bonus of more than $5.3 million, about 25 percent
higher than last year. He also received more than $4.5 million in
restricted stock, an increase of more than 50 percent, and about
$777,000 in "other income." “
http://www.cfo.com/Article?article=12501&f=ThisWeekInFinance030504
The SEC named Chester Spatt of Carnegie Mellon Chief Economist replacing
Larry Harris who will return to USC (the University of South
California).
http://www.pittsburghlive.com/x/kqvradio/s_187223.html
http://www.sec.gov/news/press/2004-45.htm
http://www.post-gazette.com/pg/04092/294311.stm
***********************************************************
Derivatives
***********************************************************
Lost in the shouting over the debate on whether to expense stock options
is how to value them. CFO.com has an interesting article that suggests
the binomial model, and not the Black-Scholes Option pricing model, is
the way to go. Why? Largely because with differing assumptions,
valuations can be brought down using the Binomial model. I am not
convinced yet.
http://www.cfo.com/Article?article=12679&f=AlsoOn032904
***********************************************************
Accounting News
***********************************************************
One of the first things that you learn in the first accounting class is
the importance of accrual basis accounting. Surprisingly, the US
government does not use it! Moreover, according to CFO Magazine, "The
nation's budget deficit would rise dramatically if the U.S. government
used the accrual method of accounting favored by Federal Reserve Board
chairman Alan Greenspan. The 2003 budget deficit came in at $374.8
billion — an amount figured using cash accounting, in which transactions
are booked when funds are received or paid. According to a report issued
Friday by the Department of the Treasury and the Office of Management
and Budget, that figure would be $665 billion under the accrual method."
http://www.cfo.com/article/1,5309,12499||T|441,00.html?f=TodayInFinance_Inside
For the second time this year Shell lowered its reserve estimates. Now
news comes that the company had known the estimates were overly
optimistic since 2000. Largely as a result of these well publicized
restatements, regulators and analysts are turning up the heat on other
producers and sure enough some are reducing their estimates as well. El
Paso lowered its reserves by a staggering 41%!
http://money.cnn.com/2004/04/01/news/international/shell.reut/index.htm
http://www.dfw.com/mld/dfw/business/8291946.htm?1c
http://www.denverpost.com/Stories/0,1413,36~33~2027564,00.html
Is it over yet? Please stop? I am so sick of the whole argument of
whether to expense options or not. Yes, they should be expensed. Now
get on with it. This has been dragging on for years and years. Finally
FASB agrees.
http://www.cfo.com/article/1,5309,13039||T|881|,00.html
http://www.dallasnews.com/sharedcontent/dws/bus/stories/040204dnbusoptions.95c8a.html
Want a real “feel good story”? How about this? Auditors are doing
their jobs better! That is the conclusion of a Wall Street Journal
story that says these changes are the result of market demands and
government mandates.
http://www.accountingweb.com/cgi-bin/item.cgi?id=98946
A small study of Carolina firms suggest that compliance with
Sarbanes-Oxley provisions are increasing the cost of an audit by an
average of 23%.
http://www.cfo.com/article/1,5309,12906,00.html
***********************************************************
Top Ten List
***********************************************************
After giving it some thought I came up with the ten papers that have
influenced my thinking on the nexus of contracts.
1. Jensen (1986) Agency Cost Of Free Cash Flow, Corporate Finance, and
Takeovers" American Economic Review, Vol. 76, No. 2, May 1986
2. Alchain and Demsetz (AER 1972-Production, Information Costs, and
Economic Organization” AER 62:777-795.
3. R. Coase Nature of the Firm (1937)
4. Jensen 1994: Theory of Man: Journal of Applied Corporate Finance
1994
5. Jensen and Meckling (1976) Theory of the firm, Managerial Behavior,
Agency costs and Ownership Structure:, JFE3, 305-360.
6. Black and Scholes (1973). The pricing of options and corporate
liabilities, Journal of Political Economy, 81, 637-654
7. Galai and Masulis 1976. Option Pricing model and the risk factor of
stock. JFE, 3:1, 53-82.
8. Jensen and Ruback 1983. Market for Corporate Control, JFE
11:1—5-50.
9. Stuart Gilson 1989-Management Turnover and Financial Distress, JFE
25, 241-262.
10. Jensen and Murphy 1990 Jensen, Michael C., and Kevin J. Murphy,
“Performance Pay and Top Management Incentives,” Journal of Political
Economy, April 1990; 98(2): 225-64
How many have you read? What do you think? Agree? Disagree?
***********************************************************
FinanceProfessor.com Site of the Month
***********************************************************
Two this month. I used them both in class and am amazed at how useful
each was.
The first is a multiple time winner. Erisk.com. Sure they changed the
format of their newsletter (less often but more in detail) a move which
I was not a great fan of, but their site is just so good. If you teach
or take any course, the site is a wealth of information. I particularly
like their Cases. Great learning tool!!
http://www.erisk.com
http://www.erisk.com/Learning/CaseStudies.asp
The second may have been Site of the Month before as well. I think it
was. The Corporate Library. While you have to pay for some things, it
is a very helpful site that specializes in corporate governance. For
instance they list actual executive contracts (useful for class and
maybe research) as well as make an annual worst board.
http://www.thecorporatelibrary.com/Research/default.html
http://www.thecorporatelibrary.com/Products-and-Services/popup-descriptions/BA-WorstBoards2003.html
***********************************************************
Financial Trivia/History
***********************************************************
On March 31, 2004 the Dow Jones Industrial Average closed at 10,357
It closed March, 1999 at 9,786
It closed March 1994 at 3,635
It closed March 1990 at 2,707
***********************************************************
Teaching Ideas
***********************************************************
I have long had students fill out a short “bio” on the first day of
class. This allows me to not only get to know the students more quickly
but also look back either during the semester or after and often the
stories etc are much more interesting and helpful. A colleague
suggested using a digital camera and attaching a picture to the data
base so it would “come up” when the student’s bio came up. This would
help when you get that dreaded call from a past student asking for a
reference and you do not remember him/her. (has only happened once—to a
student I had in a summer class, but still felt horrible).
***********************************************************
Of interest to students and others!
***********************************************************
What great advice! CFO.com suggests how you can build your own Kitchen
Cabinet. No it is not a woodworking class, but rather a group of people
that you can trust and that can help you in your career and life. (FYI:
Andrew Jackson’s Kitchen Cabinet was his informal advisors. They
complement his official cabinet). A MUST READ.
http://www.cfo.com/Article?article=12799&f=Careers040204
***********************************************************
What I am reading
***********************************************************
An Imperfect God: George Washington, his slaves, and the creation of
America. The basic idea is that Washington, in spite of his role as a
plantation owner who once helped to raffle off slaves (can you
imagine?!), came to realize the equality of people and did end up
freeing his slaves. While not strictly scholastic (the author uses some
personal stories), it is absolutely packed with delicious tidbits of
information. I can not believe how much I have learned on the role of
blacks in the Revolution and the various plans (some even from South
Carolina!) to emancipate the slaves. GREAT--Possibly my favorite history
book since April 1865 (a book which has much the same “feel”.
http://www.amazon.com/exec/obidos/ASIN/1559279273/finpapers/104-9378365-5272442
While I am not yet done with Testament, I am convinced that I must be
lucky—no one should randomly be able to get so many good books in a row.
This was a Christmas present (the giver had not read it) so I did not
know what to expect, but it is great. It is the story of Webb Baker a
union Soldier from Illinois. Using Baker’s letters, Benson Bobrick
gives us an almost first hand account of what it was like to be a Union
Soldier in the western theater. If I am still ranking things, this is
best Civil War book since April 1865 ;)
http://www.amazon.com/exec/obidos/tg/detail/-/0743250915/ref=ase_finpapers/002-8519378-9308813?v=glance&s=books
I finished The Last Stand of the Tin Can Soldiers. Definitely
recommended. It centers on the amazingly long odds facing the US Navy
in The Battle of Leyte Gulf during the US recapture of the Philippines.
It was a battle that changed history and one that almost makes David vs.
Goliath look like a battle of equals. Amazingly, David won. VERY
interesting. I was disappointed only in that I had ristened to the
abridged version.
http://www.amazon.com/exec/obidos/ASIN/0553802577/finpapers/104-9378365-5272442
I finally finished last Train to Paradise. It was ok. The difference
between Flagler and Rockefeller sort of reminds of the difference
between Allen and Gates. All told, the book was good, but just did not
really capture my imagination. The part about constuctuion was ok, but
not as good as the part about the hurricanes. I will definitely say
that the book strengthened my respect for hurricanes!
http://www.amazon.com/exec/obidos/ASIN/1400049474/finpapers/104-9378365-5272442
I also Finished Riotous Assembly. Way off the beaten path, it was funny
but somewhat disappointing. It is by Tom Sharpe who is one of funniest
writers ever, but no where near as good as Wilt (also by Sharpe).
(warning: some subject matter may not be appropriate for all). It is
set in South Africa and helped to expose the utter lunacy of apartheid.
http://www.amazon.com/exec/obidos/ASIN/0871131439/finpapers/104-9378365-5272442
In an attempt to get ready for spring and summer bike riding, I have
just started reading (not doing) the Lance Armstrong Performance Program
by Lance Armstrong and his coach Chris Carmichael. While most reviewers
say the book is too simple and geared towards beginners, I fid it
interesting (which I guess says something about my biking abilities).
FWIW Lance has nothing to worry about from me. His personal training
would wipe me out!
http://www.amazon.com/exec/obidos/ASIN/1579542700/finpapers/104-9378365-5272442
*************************************************************
Quotes of the week:
*************************************************************
Labor disgraces no man; unfortunately, you occasionally find men who
disgrace labor---US Grant
Those who bring sunshine to the lives of others cannot keep it fro
themselves---Sir James Barrie
For many, the acquisition of wealth does not end their troubles, it only
changes them---Marcus Annaeus Seneca
The best preparation for good work tomorrow is good work today---Elbert
Hubbard
Fatigue is the best pillow---Ben Franklin
All quotes from The Book of Positive Quotations by John Cook
http://www.amazon.com/exec/obidos/ASIN/0517202166/finpapers/104-9378365-5272442
*************************************************************
Well that is was fun, but alas that is all I have time for this time
around. I hope you enjoyed it and learned something (or even many
things) from it! THANK-YOU for reading it. I always am glad when I
hear that my energies have not been totally wasted. ;)
If you have any ideas for the site or the newsletter please let me know.
Jim
JimM-@FinanceProfessor.com
Where spring is flirting with us. We had 15 inches of snow two weeks
ago but this past weekend was great! Temperatures about 60 and sunny.
I even got out on the bike for the first time. Now there are snow
flurries in the air and the weather people called for up to 3 inches of
new snow.
SBU has lost four men and three women basketball players for a variety
of reasons. Mmm, I wonder if I have any eligibility left ;)
who at last look was in the 96th percentile in the Yahoo fantasy sports
basketball pool. I have three of the four teams, but had Kentucky
winning it all. Of course that was before I learned that UConn’s star
Okafor is a finance major with a GPA of over 3.8! Gee, I better get him
reading this newsletter!
Who is now going to go prove Ben Franklin correct.
*************************************************************
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. :-)
*************************************************************
copyright 2004 FinanceProfessor.com
|
|
 |
|
