Red Cross Red Crescent - Make a donation-(updated)

Red Cross Red Crescent - Make a donation

At some level this is not the correct use of this blog, but on another level if it helps, I am willing to break the rules. So this is getting posted on all of my blogs and on the Website itself (later tonight).

After seeing the total destruction caused by the tsunami, I decided to end my week "vacation" and post a link for people to donate.

To say the

It's a Wonderful Life

Review: It's a Wonderful Life

I almost forgot, since it is Christmas time many of you will be watching one of my favorite movies of all time: It's a Wonderful Life.

As a teaching tip: the run on Savings and Loan in the movie makes an excellent point of discussion in Money and Banking classes and/or Financial Institutions classes.

If you have not seen the movie, look for it on Christams Eve and

Happy Holidays!!!!

Hi everyone.

I just wanted to wish you all a very very Merry Christmas and a Super happy and healthy New Year.

Thanks for all of the kind comments this past year and I look forward to seeing the site and the Blog grow even more in the coming year!

Again Happy Holidays!!

Jim

who will probably be posting more before Christmas, but no guarantees.

Updated IPO numbers from Jay Ritter--his so-called "Factoids"

In my book Jay Ritter is known as Mr. IPO. So when I saw that he updated his famous IPO database yesterday, I knew it would be the first entry today! So here you go:

Jay Ritter's updated 2004 IPO file
Among the many highlights:
188 firms went public in the US in 2004. The firms raised nearly $33 BillionThe firms left about $3.9 Billion (about 11.7%) "on the table"For the first time since 2000 a

Real Estate Derivatives

Real Estate Derivatives

I am excited about this one!!! The only thing I can say is what took so long?

A simple explanation of why derivatives exist is that they allow people (or firms) to transfer risk. That is, derivatives allow those who want to to assume more risk to speculate and those who want to reduce their risk to hedge.

Given that for most people the most valuable single asset that

Bad economics = bad tomatoes

I am somewhat hesitant to cross-post this, but it is such a great example of why I do not like government intervention that I think I will post it here as well.

A bit of background is necessary. My family owns 4 small grocery stores in Western New York State. As a means of helping out, I also publish a blog for the stores. This is a story from there:
I saw this on ABC News yesterday. What an

Congratulations to SSRN

From the desk of Michael C. Jensen: "SSRN is a collaborative of over 800 scholars worldwide who contribute their services"

I am sure many of you saw this already, but if not, I would like to add my congratulations and thanks to all who work on and help SSRN. But of course I would like to add special thanks to Michael Jensen and Wayne Marr. Their idea has really revolutionized the way research is

Islamic Investing

Consistently one of the most popular pages on FinanceProfessor.com is the Islamic Finance page. One reason I beleive is that so few people understand what Islamic Finance is.

From the executive summary on FinanceProfessor Islamic Finance page:
"Islamic Finance is based on interpretations from the Qua ran. Its two central tenants are no interest can be earned on loans and socially responsible

Tax year trading and wash sales--Grinblatt and Keloharju

With the end of the year rapidly approaching it is a good time to consider taking any tax losses that you can to lower this year's tax bite. And guess what? You will not be the only one doing this!

Grinblatt and Keloharju provide us an interesting look at tax year trading in the Finish Stock Market in their upcoming JFE article.

After showing that many researchers have hypothesized the

Cool site alert!!! Moneyscience.org

MoneyScience.org--What an absolutely cool site. I love it and so will you!
I found this site a few weeks ago when the founder Jacob Bettany emailed me. Wow. It is just a wealth of information! While it is advertised as a Quantitative Finance site, it has sections on everything from behavioral finance, to game theory, to jobs in Q-Fin, to a list of blogs, an interview with Joel Hasbrouck,to

Where do inefficiencies exist? Where imperfections exist!

Efficiency does not mean perfection!

This came up in class the other day, so I figured even though the Ofek, Richardson, and Whitelaw paper itself has been around for a while (it has been accepted but has yet to be published at the JFE), I would do a quick recap of the discussion and add the links to the actual paper in question.

We were speaking about market efficiency, and suggesting that if

Finally, finals are finished

Sorry for the absence of late. I got behind on about every front I can imagine. I was behind in correcting, in research, on sleep, on laundry, at the store, on you just about anything you name. So I took about a week off from the blog.

But yesterday was our December graduation ceremony and all grades have been submitted. In the research front, I THINK we (me and various co-authors) should

McKinsey Quarterly Interview on Corporate Governance

What a GREAT article! It is a McKinsey Quarterly Interview with Jack Creighton.

Yes, it is an interview and not based on a large database of firms, but that said, it is still EXCELLENT!

Some of the highlights:

"I'd require companies to have two different individuals playing the CEO and board chair roles. To put it simply, this is a question of internal control. You don't have the same person

The high price of subsidies--From the Buffalo News

What is wrong with government subsidies? A great deal!

Deciding what projects to invest in is hard work. And often times we do make mistakes, but time and time again the evidence shows that free markets make the best decisions. (In class terminology, markets make the best allocation decisions and funnel the money to its highest valued use.)

However, all too often politicians can not help but

Was it a Bubble?

A two-for-one deal! Send your paper to a conference and it is automatically considered for publication in the RFS!

Call For Papers: THE CAUSES AND CONSEQUENCES OF RECENT FINANCIAL MARKET BUBBLES
August 12-13, 2005

ISDEX, an authoritative and widely cited internet stock index, rose from 100 in January 1996 to 1100 in February 2000 – an incredible increase of about 1000% in four years – only to

Cash is up, but so too are Buybacks and Dividends--CFO.com

CFO.com reports that cash holdings are up.
In a survey of more than 360 midsize and large nonfinancial companies, Treasury Strategies also found that more than half consider themselves net investors rather than net borrowers....In other words, they have more short-term investments than short-term debt outstanding.
On the plus side, it appears that managers are giving more of this cash back to

Covered shorts: the long and short of it

The New York Times has an interesting article on covered shorts. That is the tactic where you are both long and short the same stock.

This is what The Perry Corporation, a New York-based hedge fund seems to have done by buying shares in Mylan Pharaceuticls while simultaneously shorting shares (or more technically having Bear Stearns and Goldman Sachs short the shares).

So if the shares go up,

Personal Finance and variable annuities

One thing I wish we had at St. Bonaventure was a personal finance class. Maybe even not for credit, but I do think it would help many people after graduation. However, often there seems to be little demand for such a class and to offer it for credit is almost too much like training and not enough like "education".
My biggest advice with respect to personal can be summarized into a series of rules

Reuter and Zutzewitz on the Bias in the financial press

SSRN-Do Ads Influence Editors? Advertising and Bias in the Financial Media by Jonathan Reuter, Eric W. Zitzewitz'

Super Short Review:

In a paper that will be presented in the American Finance Association's Annual Conference (AFA) this coming January, Reuter and Zitzewitz (R&Z) examine mutual fund recommendations from "major personal finance magazines (Money, Kiplinger's Personal Finance, and

Mark Cuban's New Hedge Fund - Blog Maverick - www.blogmaverick.com

New Hedge Fund - Blog Maverick - www.blogmaverick.com

Mark Cuban is starting a Hedge fund that will gamble. Literally! Forget stocks, forget bonds, the money will be used to make bets.

(In case you do not know, Mark Cuban is the Billionaire owner of the Dallas Mavericks and former owner of Broadcast.com.)

The article is great. It has so many interesting and thought provoking lines I really

More evidence that governance matters

Giannetti and Simonov find that some investors are more concerned with corporate governance than others.

Short version: Corporate governance does not affect all shareholders equally. Individual investors and this with no connection to the firm, are more apt to invest if the firm has a strong governance system. On the other hand, insiders apper to either not care or be more apt to invest if there

A look around at a few blogs

Last week before going to the Southern Economics conference in New Orleans, I noticed the SportsEconomist (who I had the good fortune of meeting in New Orleans) did an blog reading by quickly discussing a few of the interesting stories he had been reading on other blogs (including FinanceProfessor :) . Well, I liked the idea so much, here is my version of the same.

Jeff Horton at Synergyfest has

NPR's Talk of the Nation on Social Security, equity ownership, and home ownership

NPR's Talk of the Nation had a very interesting segment on "ownership". It was advertised as being focused on President Bush's supposed plan to create 100% home ownership (it won't happen) in ten years. But it really is part of a larger move towards more ownership of equity, real estate and other assets.

Frank Luntz a Republican Pollster, Stephen Moore of the Cato Institute, and James Surowiecki

The value of hedging revisited...

Does Hedging with Derivatives REDUCE THE MARKET Risk Exposure by Bali, Hume, and Martell

Put your thinking caps on for this one!

Short version: Hedging, at least as it is currently being done, may not add to firm value. Longer version: In a Modigliani and Miller world nothing really matters. This includes dividend policy, capital structure, and hedging. Hedging is the idea that by buying or

SSRN-Are Busy Boards Effective Monitors? by Eliezer Fich, Anil Shivdasani

SSRN-Are Busy Boards Effective Monitors? by Eliezer Fich, Anil Shivdasani

The answer? No. That is the finding of Fich and Shivdasani who look at firms whose board members sit on multiple boards. The authors find that these firms trade at a discount relative to their peer firms. As Fich and Shivdasani put it:

"We show that firms where a majority of outside directors hold three or more board

Impact of Baby boomers from Porterba

I was just sent this paper. It is by James Porterba. Given the recent post on the Geanakoplos, Magill, and Quinzii paper that concluded stock prices may be negatively impacted when baby boomers retire, I think this may give some further perspective to the issue.

Short version: Porterba concludes that not all assets will fall when the boomers retire and that past population booms have been

Right angles in event studies are good :)

In running or biking I am not a fan of 90 degree angles, but in event studies, I love them! An abrupt (straight up or straight down-i.e. a right angle) price movement following an "event" suggests that the news was both unanticipated and the market quickly incorporated the new information.

A right angle going forward suggests that the market not only was quick about incorporating the news, but

Salary Cap Football and Ratio analysis: what they teach us about markets

I am in a fantasy Salary Cap Football League through Yahoo. It is really fun and keeps me interested in all the teams.

But as much as I like picking the team, I think it is almost as fun to see how the market operates. For instance, earlier today I was researching various ratios that Yahoo provides for the players. These ratios include points/$. Since it is a salary cap league (example of hard

Flannery and Rangan: more proof of the trade-off model

Have you had your fill of capital structure papers yet? Of course you have not! You can never have too many! So here is yet another paper on capital structure (with a similar finding) is to be presented at the AFA meetings.It is by Flannery and Rangan. In the paper entitled Partial Adjustment toward Target Capital Structures they show that firms do have targets for their capital structure and do

Alti finds Market Timing's leverage impact is largely transitory

Two for the price of one today! We have two papers today that both give us more evidence that suggests that firms do “time the market” with respect to capital issuance (and consequently capital structure), but that the firms try to get back to their targeted capital structure quite quickly.

What makes it interesting (and not repetitive) is that each paper (Flannery and Rangan and Alti) each

When a crisis really is a crisis

In a paper to be presented at the upcoming American Finance Association Meetings, Pasquariello asks the interesting question "
Are Financial Crises Indeed 'Crises?'

The question is interesting for several reasons and on multiple levels.

For starters, if it is a crisis and has economic repercussions, then we may want to invest more to prevent the crisis in the first place. On the other hand, if

Michael Brennan on the Stock Market Bubble

Michael Brennan provides an interesting (and cutting) analysis of how the stock market climbed so high in the late 1990s. He writes that there was plenty of blame to go around and that even FinanceProfessors should take their share of the blame.

He begins by documenting the major bull market from 1980 to 2000:
"Between January 1980 and August 2000 American stock prices as measured by the S&P500

The McKinsey Quarterly: Internal rate of return: A cautionary tale

The McKinsey Quarterly: Internal rate of return: A cautionary tale

I was just preparing for class and came upon a great article from McKinsey Quarterly (published by Wharton) that gives some reasons why the Internal Rate of Return may not be all that it is cracked up to be.

Short version:

IRR may lead to the wrong investment decision more often than we thought! And to make matters worse,

The Pecking Order--Dead or Alive?

What a treat we have! It is by Colin Mayer and Oren Sussman. It is on the pecking order.

The last we visited the pecking order was January's FinanceProfessor.com newsletter:
Myers and Majuf's famous 1984 pecking order hypothesis attempts to describe how firms raise capital. The authors hypothesized that firms are driven by information asymmetries and transaction costs to use internally

The Sports Economist--Sports, Globalization, and Protectionism

The Sports Economist has an interesting article looking at global competition in sports. The basic idea is that competition has become global. As Skip Sauer (the Sports Economist and Clemson Economics professor) writes:
Over the past century, the scale of sporting competition has increasingly moved from the local to the national and international stage. The great Brazilian soccer players no

Ljunqvist and Wilhelm: Prospect theory and IPOs

In trying to explain IPO underpricing, 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 it seems to hold. How do they do this?

From my class notes:
"Let's talk about grocery stores for a while.

House Cleaning

When I started FinanceProfessor.com I envisioned it largely as a repository of summary articles. Well things changed some, but in my mind at least, the heart of the page is still the summary section (of which I sort of include the newsletters).

That said, a lack of time has often intervened, but finally I got around to partially updating the short summaries for Corporate Finance. It does not yet

Iowa Electronic Markets ~ Current Markets: 2004 US Presidential Winner Takes All Market

Iowa Electronic Markets ~ Current Markets: 2004 US Presidential Winner Takes All Market

For many reasons polls can be biased and inaccurate. For instance: do you answer your phone? I rarely do unless I know who is calling. Or do you tell the pollster what you thing they want to hear? Many do.

However, people are much less likely to lie if there is money at stake, so it is worthwhile to see what

Commercial banking and Investment banking-Yasuda

In a forthcoming Journal of Finance article, Yasuda adds significantly to our understanding of the relationships between corporate borrower, commercial bankers, and investment bankers.

It is rare that an abstract summarizes a paper's findings as well as this one, so I will let the abstract give his findings:
"[Commercial] bank relationships have positive and significant effects on a firm’s

Trends in Corporate Governance--Hermalin

In a forthcoming Journal of Finance article, Hermalin does a great job of showing how the various trends we see in corporate governance may be linked.

Some of the trends that are investigated include more "diligent boards", more outsiders being hired as CEOs, shorter tenures as CEO, and of course more CEO pay.

In the author's own words:
If regulatory and other pressures are leading to, say,

Still looking for Finance and Accounting news?

AccountingWEB - News and resources for accountants and accounting professionals.

A few weeks ago I apologized that because of a lack of time and the proliferation of anti-spam software, the FinanceProfessor.com newsletter was not really working as I had hoped. Thus, I offered my view that the blog was the future. Not surprisingly, I had a few complaints from those who liked the newsletter format

Will Baby Boomers drive down stock prices?

For about as long as I can remember (which some days is a few hours ;) ) I have wondered what would happen when the so-called baby boom generation retires and starts withdrawing money from the stock market. Will they depress the stock market? Should I save more as a result?

Geanakoplos, Magill, and Quinzii provide an interesting look at this question and their findings suggest that those of us

The end of the quiet period!

Shout, shout let it all out! Sorry about the cheesy Tears for Fears referencee, but the quiet period may be over for large firms! The SEC has requested comments on ending the quiet period. And to that I say HURRAY!

The so-called quiet period was the time when firms that were in the process of selling shares to the public could not communicate with the public. This led to many problems when

SEC to regulate hedge funds

In a controversial ruling, the SEC decided by a 3-2 vote to begin regulating hedge funds.

Prior to this, hedge funds have been largely unregulated. Since the funds are targeted at wealthy investors and institutions, it has been widely held that the SEC need not worry itself with the funds. However, as the classic Bob Dylan song says, “The times they are a changing.”

The arguments against

PBS show on the Crash of 1929

Set your recorders! Monday Night Football will have some competition tonight from a PBS special on the Stock Market Crash of 1929. I have seen reviews for it and it looks very good.

PBS even provides teaching notes but they seem more suited for high school. One tip that I would suggest is to compare and contrast Fed actions following the crash of 1987 (and the attacks of 9-11 for that matter)

More on Behavioral Finance

What a great article! It is a survey article on Behavioral Corporate Finance by Baker, Ruback, adn Wurgler. It is VERY good! Here is their abstract:

Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing

Fama on Market Efficiency- Not the same old thing!

sometimes I hate technology! I have rewritten this three times now. It keeps disappearing.WOW! If you have not read today's WSJ piece on Market Efficiency be sure to do so! It is on the first page (far left hand column) by Jon Hilsenrath. It is worth making a trip out to buy the paper if you doShort version:Even Fama is now admitting that behavioral finance has its place in the field.As a rule

Norwegian, American share Nobel economics prize - Oct. 11, 2004

Norwegian, American share Nobel economics prize - Oct. 11, 2004

Congratulations to Finn Kydland and Edward Prescott on winning the 2004 Nobel Prize for Economics!

While economic forecasting is difficult, our understanding has improved greatly in recent decades. We have come to understand that monetary and fiscal policy are important and that the supply side (not just the demand side) must be

Finally something economists agree on: Free Trade! A speech by the Fed's Roger Ferguson

FRB: Speech, Ferguson--Free Trade: What Do Economists Really Know?--October 7, 2004 Quick what is the only thing that economists can agree on? Free Trade! That said, many in the "public at large" do not agree. That is why it always serves us well to go back and see why free trade is a "good thing." Bravo!! Fed Vice Chairman Roger Ferguson does a wonderful job defending Free Trade!

The Evolution of the FinanceProfessor.com newsletter

In the past week I have had several emails, and two phone calls, from people asking about the newsletter. So in part to save time and in part to explain to all, I will make a few public comments about the newsletter.

First of all, yes it is coming out. Soon. Or so I say. It just takes too long! I estimate about 8 hours. Now if I had an extra 8 hours laying around...lol.

But even more than the

NPR : The Marketplace Report: Forgiving Third World Debt

The nearly annual debate as to whether developed nations should forgive the debt owed them by less developed nations has been in the news again this week. MarketPlace is one of my favorite (non music) radio shows and All Things considered each had reports on it.
NPR : The Marketplace Report: Forgiving Third World Debt

All Things Considered also discussed it:
http://www.npr.org/templates/

GREAT IDEA!!! Jump Start International

This is not a typical blog entry, but it does bring finance and business into a much better light and helps to reduce the unemployment in Iraq. I sure hope it is legit. It is almost too good to be true.

Those of you who have been subscribers for a while probably remember my editorial on how finance could help in the war against terrorism. By providing the funding necessary to improve the

Dilbert Comic Strip Archive - Dilbert.com - The Official Dilbert Website by Scott Adams - Dilbert, Dogbert and Coworkers!

Dilbert Comic Strip Archive - Dilbert.com - The Official Dilbert Website by Scott Adams - Dilbert, Dogbert and Coworkers!

This is great! Now that we have Dilbert on our side, I am sure managers will start expensing executive stock options! :)

Seriously, I have long railed on the need to expense the options. I will try to review an article or two this coming week on executive options.

Are you ready for some football? Super Bowl and stock returns

Football in New Orleans! No, I am not talking the Saints, the Green Wave, or even LSU. But rather the paper by Fehle, Tsyplakov, and Zdorovtsov that will be presented at the FMA conference in New Orleans.

Short version: Super Bowl advertisers outperform the market by about a half a percentage point on Super Bowl Monday. This increase, which apparently is permanent, is concentrated in heavy

The Stock Market and Political Cycles by John Nofsinger

Our tour of FMA papers continues with The Stock Market and Political Cycles by John Nofsinger.

John Nofsinger examines the historic relationship between who in office and how the stock market does. Contrary to previous papers that used data that went back to only to 1927, Nofsinger reports that for a longer time period (back to 1828!) "The full time-series history reveals that stock market

Does sentiment matter?

Does sentiment matter? By Anchada Charoenrook

Super Short version: Yes!


Slightly longer version:

Sentiment, as measured by the University of Michigan Consumer Sentiment Index, does affect stock prices. Charoenrook finds that “changes in consumer sentiment reliably predict excess stock market returns at one-month and one year horizons.


Long version:

This paper tries to settle the debate

Maybe Fraud is not even needed--Earnings restatements and Management turnover

The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover by Desai, Hogan, and Wilkins.
At the same FMA conference session as Jayaraman, Mulford, and Wedge's Accounting fraud and Management turnover, is The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover by Desai, Hogan, and Wilkins. This latter paper finds

Accounting fraud leads to higher management turnover--Go figure!

Our trip to the FMA meetings continues with a look at Accounting Fraud and Management Turnover By Jayaraman, Mulford, and Wedge.


Jayaraman, Mulford, and Wedge ask the question “What impact does accounting fraud have on the turnover of top management?” Their answer really should not surprise anyone who has been paying attention in recent years: fraud leads to higher turnover. However, just

Board Size debate continued: Faleye upholds tradition!

A more traditional view of Board size: Smaller is better

A great thing about academic conferences is that you can see multiple sides of most issues (group think is generally not a problem!) For instance at the upcoming FMA meetings Olubunmi Faleye will present a paper that represents the traditional view (at least since Yermack 1996) that smaller is better when it comes to board size. To

Corporate Governance by the Numbers: It Doesn't Work - Knowledge@Wharton Larcker, Tuna, and Richardson

http://knowledge.wharton.upenn.edu/article/1041.cfm: "Another paper that shows that governance is not eaily quantified."



Short Version: Larcker, Tuna, and Richardson provide more more evidence that corporate governance is not easily quantifiable and what works for one firm may not for other firms.

Longer Version:

Consistent with Coles, Daniel, and Naveen, but opposed to what many so-called

Does size matter? An examination of board composition and size by Coles, Daniel, and Naveen

Our trip through the FMA annual meeting at New Orleans continues with a look at a paper on Board Size and Makeup by Jeffrey L. Coles, Naveen D. Daniel, and Lalitha Naveen.

Short Version:

Optimal board composition and board size are a function of firm makeup.


Long Version:

They examine two questions: 1) Is there such a thing as an optimal Board of Directors? and 2) Is board composition firm

Law and Order and the impact of the slave trade

One of the most interesting papers I have read in some time! It really made me think.

Law and Order. No not the TV show. Real law and order. The importance of law in order in a society are often overlooked. This is unfortunate as almost nothing has as far reaching of repercussions. This was again made clear this past week when a friend sent me a link to Brad Delong's Economics blog. While the

Financial Engineering News: Richard Lindsey One on One Interview

Richard Lindsey One on One Interview

Technically this may be more economics oriented, but given that Finance is really just applied economics anyways (and we are financial economists), I am sure you will love this interview. It is with Paul Klemperer.

If the name does not ring a bell, you should know he is one of the world's foremost auction experts. To quote the FEN piece: "Paul Klemperer

And you thought the SEC was tough!?!?!?

The SEC is a pushover in comparison to Chinese regulators.

From Reuters: "China executed four people, including employees of two of its Big Four state banks, for fraud totaling $15 million. "

In some sick, weird, and bizarre way this story is more evidence that selling shares to the public is a means of reducing conflicts that arise from information asymmetries. Apparently these (and other)

Ever worry about sleeping through a test?

Investment Dealers' Digest

You know that feeling? Maybe you have even done it. The fear of over-sleeping and missing an exam or important meeting. Well now imagine you are the head of SunTrust Robinson Humphrey Equity Capital Markets and all of your research analysts missed the test and therefore can not issue research!

Let's go back and see how this happened! In an attempt to prevent further

Stanley looks at CEO pay when other CEOs are on the Compensation Committee

The basic question that is being asked is "Does having CEOs of other firms on your compensation committee impact CEO pay at your firm?"

As author Brooke Stanley puts it: "Since the compensation of any given CEO is a function of the compensation of his peers, when one CEO serves on another's Compensation Committee, he has an opportunity to indirectly influence his own compensation by

Teaching Kids about Money: Why It's Not Just Fun and Games - Knowledge@Wharton

Teaching Kids about Money: Why It's Not Just Fun and Games - Knowledge@Wharton

We all know that finance is important not just for our business lives, but also personal lives. Yet with millions of people living paycheck to paycheck and facing mounting debts, even a quick look around leads many (Alan Greenspan among them) to conclude that many people do not understand finance.

While it is

Executive Compensation and the Bills loss, What do they have in common?

What a tough loss for the Buffalo Bills this week. The key play was a 45 yard pass from Brian Leftwich to Jimmy Smith on 4th and 14 for the Jacquars. Had the ball dropped incomplete, the Bills could have run out the clock and gone home with a win.

But no, the pass was caught and the Bills ended up losing the game on the last play of the game (a walk-off touch down).

At the time I thought, "ARGH

Vote for Fama and Jensen for Nobel Prize ;)

A reader (Subscriber? What do you call someone who reads a blog?) just sent me a link to http://www.argmax.com/mt_blog/. I really am impressed with the site (although not with its name). It is one of the best Economic Blogs I have seen!

And when you are there, why not vote for some Finance people to the survey as to who will win the Nobel Prize. I think both Fama and Jensen are perfectly

Opler, Damodaran, Copeland, and other experts on valuation

FMA Online, Spring, 2004

It really doesn't get much better than this! Tim Opler, Aswath Damodaran, and Tom Copeland speaking on valuation. The presentations (video, powerpoint, and documents) are from last year's FMA conference in Denver.

The real short version of the presentations is that while Discounted Cash Flow Analysis (DCF) is the theoretically correct way to value a firm, most

Stock crashes when CEO flies

CEO plane usage linked to declining stock value.


Short version: David Yermack shows that when CEOs get personal use of corporate airplanes, the firm's stock underperforms "market benchmarks." This underperformance is consistent with a view that the plane usage is symptomatic if a greater agency cost problem.

Longer version:

Perquisite consumption (a fancy way of saying that managers have

3 years already? A look back...FRB: Testimony, Olson--Protecting the financial infrastructure--September 8, 2004

FRB: Testimony, Olson--Protecting the financial infrastructure--September 8, 2004

Can you believe it has been three years since the tragic events of 9-11-2001? You remember where you were and what you were doing. You remember who you watched the drama unfold with. You remember the panic-filled phone calls from friends in NYC or DC, the emails, the fear, the sadness. We all do.

At today's

SSRN-Reappearing Dividends by David Ikenberry, Brandon Julio

SSRN-Reappearing Dividends by David Ikenberry, Brandon Julio


If you teach finance, there is a good chance that you have been teaching that dividends are disappearing. This teaching no doubt flows from Fama's and French's 2001 paper that reported firms were cutting back on their dividend payments.

Well, NOT SO FAST! They're Back!! Or at least maybe they're coming back. That is the conclusion of

Non finance stuff

Sorry about the lack of posts this last week. With classes starting and working on three or four different papers, I have just run out of time. Hopefully it will all calm down soon. Maybe I can review a paper tonight.

Ristening update:

Absolutely love Grant Comes East by Newt Gingrich and William Forstchen. I LOVE IT!!! It is an alternative history version of the US Civil War. It is so

The Politics of Internal Capital Markets

As we have repeatedly seen, conglomerate firms trade at a discount to focused firms. This is not new. (See Comment and Jarrell 1995 for more). The short version of the discount is that for some reason, 1+1 =1.5

With such an important finding, there are of course many potential explanations as to why the discount exists. A far from complete list includes:
Poor managerial incentives Poor

Nasdaq vs NYSE Volume from the JFR Abstracts of the Forthcoming Articles

When eating my combination breakfast/lunch (bread, bananas, and warm iced tea) I was reading abstracts from forthcoming Journals of Financial Research. While there were many good articles, one that was particularly interesting was the Anderson-Dyl paper that examines reported volumes on the NYSE and NASDAQ.

JFR Abstracts of the Forthcoming Articles: "Market Structure and Trading Volume

Demand for NYSE seats is down

Gee, who would have "thunk" it? With the NYSE facing increased competition from the NASDAQ, ECNs, and regional exchanges, it only stood to reason that profits of the NYSE would fall. This hypothesis received more confirmation in the market for NYSE Membership (or seats). Evidence shows that the demand for seats is low.

A few weeks ago it was reported that seat prices were as low as $1.25

Can competition make NYSE look out for investors? Yes According to NASDAQ Head.

What caused the NYSE's governance problems?

Robert Greifeld the head of the NASDAQ (who admittedly has much to gain if he is correct). he argued that the problems (which manifested themselves in Richard Grasso's pay package) were possible because the NYSE was not being held in check by competition: "That was a direct relationship to the fact that they were not under competitive pressure...."

Cyberlibris blog: Finance at its best by two academic heavyweights

Cyberlibris blog:Finance at its best by two academic heavyweights%21

WOW! It just doesn't get any better than this! Interviews with both Eugene Fama and Ken French. Spectacular! They are done by Dimensional and Index Fund Advisors.

YOU HAVE TO WATCH THEM! THEY ARE SIMPLY THAT GOOD!!!

You will learn a ton!!!

* For instance, did you know that Fama had never taken a finance class? Why? It was so

Google ranked last in corporate governance?!

"On a scale of 0 to 100, ISS gave Google a 0.2 when compared with S&P 500 companies. "It would rank dead last," says Pat McGurn, a director with Institutional Shareholder Services"http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/08/24/BUGBU8D46M1.DTL

First, it really should be noted that Google is not in the S&P 500 and that comparisons to it are for illustrative purposes. But that said.

China considers buying Russian oil firm

Times Business: "CHINESE official said yesterday that Beijing was interested in buying the prize asset of Yukos"

Wow, this is an interesting story.

First of all it would mean that at least part of Yukos would be being renationalized. (That is it is going to be owned by a state government and not shareholders).

From the 1980s to now, privatization has been the main trend with repect to

Goldman Sachs to build near ground zero

New York Post Online Edition%3A business

The NY Post reported that "Goldman Sachs will build a $1.8 billion, 40-story headquarters tower in Battery Park City with the help of $1 billion in tax-exempt Liberty Bond financing, the Wall Street firm and Gov. Pataki announced yesterday.

Construction of the 1.9 million square foot skyscraper, to be completed in 2009, is to "coincide" with the rise of

Jay Ritter on Google's IPO

Lessons of Google's Dutch auction

Well it is done. Unless you have spent the last 24 hours in on the moon with Ignignot and Err (bonus points if you get the reference :) ) or backcountry hiking, you probably have heard that Google did in fact go public yesterday. The shares were sold at $85 which was the lower end of the $85 to $95 price range (which had been revised downward--see Wednesday's

SEC Vote Prohibits Mutual Funds From Directed Brokerage

SEC Vote Prohibits Mutual Funds From Directed Brokerage--washingtonpost.com: "The Securities and Exchange Commission yesterday unanimously approved a new rule that bars mutual fund companies from steering trades to brokers who promise to promote the funds in exchange for stock and bond business"

This marks a continuation in the SEC's attempt to reform the mutual fund industry. Specifically, the

Just in time for class, another CAPM Review :)

Galagedera provides an excellent review of the Capital Asset Pricing Model. From its beginnings (growing out of the work of Markowitz), to its possible demise the paper reviews the history of CAPM without breaking any new ground, but rather assuring that we are all up to speed with what has been done. Some of the high points: The review of the existing CAPM literature is excellent and laid out

The trials and tribulations of the Google IPO

Sooner or later the Google IPO will be completed, but in the mean time we can all take solace in the fact that it will provide class room material to FinanceProfessors for years to come. Almost every day the firm is giving us a great example for teaching!


Friday-- we learned that Google's founders had done an interview in playboy. This caused some problems as many feared it would violate the

Leary and Roberts answer "Do Firms Rebalance Their Capital Structures?"

Mark Leary and Michael Roberts answer the question: Do Firms rebalance their capital structures?
And their answer? Yes!
Short Version:
Leary and Roberts find that once adjustment costs are considered, firms do in fact try to return their capital structure towards some long run average or optimal level. This is contrary to previous literature on the topic, Longer Version:
Longer

New Newsletter is online!

I sent out the August Newsletter today. I really think it is the best one I have done. (definitely the top 5). So many great articles!

Here is a link to the newsletter
http://lists.topica.com/lists/FinanceProfessor/read/message.html?mid=1717368295&sort=d&start=88

and a link to subscribe to it if you do not already.
http://lb.bcentral.com/ex/manage/subscriberprefs.aspx?customerid=11418

Of

How many Boards does a director serve on? Too often the answer is too many!

Forbes has an interesting, albeit short, article that identifies 12 people who are on the boards of five or more S&P 500 firms.

Why might this be a problem? Board Members are supposed to oversee the firm's management and look out for shareholders' interests. Being on several boards can take up much time. As the article reports:
Forbes.com: "Just showing up takes 180-200 hours a year [per

What will the US economy do? Probably more slow growth

I have had two emails and two phone calls this week asking my opinion on the US economy. So I might as well share with you my answer. Short answer? Tough to say, but I think we will continue to see slow growth. A caveat, gauging how the US economy will do in the future is only slightly easier than determining how the Buffalo Bills will do this year (BTW my prediction: 9 and 7).

Events and news

SSRN-Remuneration: Where We've Been, How We Got to Here, What are the Problems, and How to Fix Them by Michael Jensen, Kevin Murphy, Eric Wruck

SSRN-Remuneration: Where We've Been, How We Got to Here, What are the Problems, and How to Fix Them by Michael Jensen, Kevin Murphy, Eric Wruck

In many ways, Murphy and Jensen's 1990 paper on CEO pay may have been one of the most influential finance papers written in the past 15 years. It showed not only how CEOs were being paid, but also stressed the importance of incentive based (pay for

SSRN-Facts and Fantasies about Commodity Futures by K. Rouwenhorst, Gary Gorton

SSRN-Facts and Fantasies about Commodity Futures by K. Rouwenhorst, Gary Gorton

If you talk to most investors, they consider investments as only stocks and bonds. However, other assets should also be considered. For example real estate and commodities can be very useful as ways of reducing risk.

Why are commodities so important? They play an important role in diversifying a portfolio. For

CBC News: Gene therapy turns lazy monkeys into workaholics

CBC News: Gene therapy turns lazy monkeys into workaholics

Compensation (which is essentially reward for work) is one of my favorite topics in finance. So of course this story on monkeys made me take notice!

Short version: how hard you work may be partially genetic. Which might help to explain why some people do not respond to changes in pay plans etc.

From the CBC:
"Without the dopamine

SSRN-The Rational-Behavioral Debate in Financial Economics by Alon Brav, James Heaton , Alex Rosenberg

SSRN-The Rational-Behavioral Debate in Financial Economics by Alon Brav, James Heaton , Alex Rosenberg

Looking for a finance paper without complex models or rigorous math? This is it! Brav, Heaton, and Rosenberg discuss the debate over behavioral finance and conclude that neither side is totally correct.


Most of the existing debate centers on findings of apparent irrationality (example over

SSRN-How the Inflation Illusion Killed the CAPM by Randolph Cohen, Christopher Polk, Tuomo Vuolteenaho

SSRN-How the Inflation Illusion Killed the CAPM by Randolph Cohen, Christopher Polk, Tuomo Vuolteenaho

Wow! It seems like I say that frequently, but what this paper definitely deserves a wow.

CAPM is dead. We know that. Only the most optimistic of those (myself included) hold out hope of its recovery.

Its death has been widely reported since Fama and French (1992). However, that does more to

The New York Times > Washington > Crucial Unpaid Internships Increasingly Separate the Haves From the Have-Nots

The New York Times > Washington > Crucial Unpaid Internships Increasingly Separate the Haves From the Have-Nots


I can not stress enough the importance of internships. They are critical in getting a permanent job. Internships provide valuable experience that serve both as a learning experience and a test job. I definite;y recommend that any student get one (or more) before they graduate.

BW Online | August 9, 2004 | Oil Prices Could Get Even Worse

Business Week speculates that we could see $50 a barrel oil sooner than we expect.

Why? Demand increases as well as production limits brought about not so much by OPEC but by not having excess capacity in the production of more oil. This lack of capacity is in part driven by lack of investment in the past, in part due to political turmoil, and partially because of OPEC's production limits.

BBC NEWS | Business | First Islamic bank to open in UK

BBC NEWS Business First Islamic bank to open in UK

Well it took a long time, but finally the first purely Islamic Bank is set to open in the UK. Of course, traditional British banks have been offering some "products tailored for Muslims".

The biggest difference between traditional Western banking and Islamic Banking is the absence of Interest. Consequentially the banks have to come up with

The New York Times > Financial Times > International Accounting Reform is on the way :)

The New York Times > Financial Times > Business > Hand that guides EU accounting reform


The New York Times > Financial Times > Business > Hand that guides EU accounting reform: "More than 7,000 listed companies in the EU will use international accounting standards, in what will be the biggest accounting reform in Europe for a generation"


John Tiner, the chairman of the Committee of European

SSRN-Lifetime Earnings, Social Security Benefits, and the Adequacy of Retirement Wealth Accumulation by Eric Engen, William Gale, Cori Uccello

SSRN-Lifetime Earnings, Social Security Benefits, and the Adequacy of Retirement Wealth Accumulation by Eric Engen, William Gale, Cori Uccello: "Engen, Galle, and Uccello provide new evidence on the adequacy of household retirement saving." Their findings may surprise some given the gloom and doom reporting by many in the popular press.

Short Version: the wealthy and middle class largely are

Save the environment, call a financier.

Finance to the rescue! An interesting deal with Amazon “açaí (pronounced ah-sigh-EE) - a dark purple berry rich in nutrients that sprouts atop the millions of palm trees lining the riverbanks in the Brazilian jungle” harvestors/farmers allows them to lock in a better price in return for preserving some wild areas. (gee hedging again! Do you notice a theme?) The buyer? Sambazon, short for

Today’s accounting lesson? Tell people when you change accounting policies!

Without admitting guilt, Halliburton agreed to pay a $7.5 million fine to the SEC. This investigation has drawn much attention because the reason for the investigation (questionable accounting practices) happened during John Cheney’s (current VP of US) reign as CEO. “The accounting change dealt with the way Halliburton booked cost overruns on projects….The actual change in accounting, the

Hedging: It’s good for you and good for your company

European Airlines Review Hedging As Oil Prices Rise: "Already grappling with stiff competition and deep cost cuts following a slump in global travel, rising fuel costs are the latest blow to the beleaguered industry"



Oil prices are at all time highs (in nominal terms) on both supply (OPEC said they could not pump much more at present) and demand (higher than expected) concerns. Now I am

Do takeovers destroy wealth for acquiring firms? Yes, according to Moeller, Schlingemann, and Stulz.

Moeller, Schlingemann, and Stulz examine the returns to acquiring firms in takeovers. They find that "from 1991 to 2001 (the 1990s), acquiring firms' shareholders lost an aggregate $216 billion, or more than 50 times the $4 billion they lost from 1980 to 1990 (the 1980s), yet firms spent just 6 times as much on acquisitions in the latter period."

However, before you say that all takeovers are

NYSE to increase electronic trading

As the NY Times reported "Electronic Trading on Big Board upstages Terror Talk"


It has long been assumed that sooner or later the NYSE would become more electronic. Today the world's most famous stock market decided that there is no time like the present and announced that the NYSE would become more of a hybrid market with both electronic and floor trading.

As the NYSE press release states

SEC probes Krispy Kreme accounting and Donuts are not a health food

SEC probes Krispy Kreme accounting - Jul. 29, 2004: "Krispy Kreme Doughnuts Inc. announced Thursday that the Securities and Exchange Commission was conducting an informal, non-public probe into the company's accounting."

The stock, which is down over 67% since last August, fell about 15% on the news.

This just continues a very bad year for the firm. In May the company's executives were sued

Leverage decision and manager compensation with choice of effort and volatility

Leverage decision and manager compensation with choice of effort and volatility

Cadenillasa, Cvitani and Zapatero (CCZ) in an upcoming Journal of Financial Economics (JFE) paper, model the incentive effects of paying executives with either levered, or unlevered, equity.

Their model, which is probably too complex to use in most undergraduate classes, separates managers based on ability

Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE by BOEHMER, SAAR, AND YU

Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE by BOEHMER, SAAR, AND YU

Boehmer, Saar, and Yu give us an interesting look at how transparency affects trading. Specifically they examine how trades happen at the NYSE after the 2002 adoption of OpenBook. OpenBook is "allows traders off the NYSE floor to observe depth in the book in real time at each price level for all

A look at what happens when sport stars do good and when they do bad

Have you ever wondered what happens to the stock of a sponsoring firm when the endorser does well? How about when the endorser does bad? For example, when Kobe Bryant was arrested, what happened to the firms whose products he endorsed (namely Nike, McDonalds and Coke (the owner of Sprite))? I did and this past year I got talking about it with some students and we could not find much evidence so

And you think Enron was bad? A look at Yukos

Sure US investors have seen their share of fraud cases (Adelphia, Enron, Worldcom etc.) However, with the seemingly imminent collapse of Russian Oil giant Yukos, it is worthwhile to remember that the US and Europe do not have a monopoly on fraud and corruption--in fact, it may be worse elsewhere!

Background:  As you proabbly know the Russian Oil giant Yukos owes an estimated $7 billion in back

Dividend Policy, Agency Costs, and Earned Equity by DeAngelo, DeAngelo, and Stulz

In a well done and interesting work, DeAngelo, DeAngelo, and Stulz tie dividend policy and agency costs (particularly the free cash flow problem) together. Their main point is that if firms did not pay dividends, managers would have too much cash at their disposal.

The authors begin by asking the question "why do firms pay dividends." To answer the question they examine what would happen if

Enron Sites for class use!

HoustonChronicle.com - Hot Topic: Enron: "ENRON COVERAGE FROM BEGINNING TO END"

Looking for Enron coverage? Given the recent arrest of Ken Lay, the problems facing Jeff Skilling, and Lea Fastow's jail time, it is worthy to look back to see how the story has developed.

So my top three list:

1. The Houston Chronicle continues to have the best coverage of the collapse of Enron and a

Readings, Teaching ideas, and non finance stuff etc

Sorry I had not posted for a few days, but it is summer here, which is vacation time right?  ;) lol.
 
Ok, so this will be my once a week, not strictly finance post.  But I will start off with a finance type question.  "What interesting ideas or strategies do you use to make classes more interesting?" or if you are a student "what would you like to see your FinanceProfessors do in class?"  Email

Home Field Advantage: the Finance experience!

Home field advantage: Lambeau Field, Adelphia Coliseum, Reilly Center, Cameron Indoor Stadium, and the Korean Stock Market?

Do domestic investors have an edge?
The trading experience of foreign investors in Korea
Choe, Kho, and Stulz show that home field advantages do not just exist in sports, but also in finance!

They look at all trades on the Korean stock exchange for a two year period

BBC NEWS | Business | Five months in jail for Stewart

BBC NEWS Business Five months in jail for Stewart: "Five months in jail for Stewart"


Yahoo's page


more later...sorry, no time

SSRN-Which Institutional Investors Monitor? Evidence from Acquisition Activity by Lily Qiu

SSRN-Which Institutional Investors Monitor? Evidence from Acquisition Activity by Lily Qiu: "Which Institutional Investors Monitor? Evidence from Acquisition Activity by LILY QIU "


There has been quite a bit of evidence of late that all shareholders do not do equal jobs of monitoring management. For example Barclay, Holderness, and Sheehan find that private placements (which have been long

Proof of a clientele effect: evidence from Taiwan

Taxes and Dividend Clientele: Evidence from Trading and Ownership Structure By Lee, Liu, Roll, and Subrahmanyam



Lee, Liu, Roll, and Subrahmanyam (LLRS) provide convincing evidence that a dividend clientele effect does exist. While previous researchers (for example Scholz-1992, Dhaliwal, Erickson, and Trezevant-1999, and Graham and Kumar-2003) have also found the existence of a clientele

Reaction speed: good news is incorporated faster. A look at the Market Reaction to Annual Earnings Announcements by Louhichi Wael

SSRN-Market Reaction to Annual Earnings Announcements: The Case of Euronext Paris by Louhichi Wael: "Market Reaction to Annual Earnings Announcements: The Case of Euronext Paris "

As I am considering doing a paper on event studies, I have been looking at a few event study papers of late. In this research I stumbled upon this paper by Louhichi Wael. Wael looks at abnormal returns following

Another look at retirement planning. Are equities the way to go?

As hoped and expected, the recent post on Ahmet Tezel's article in the Journal of Financial Planning on how much a retiree could safely take out of his/her retirement account has sparked further discussion.

SSRN-Irrational Optimism by Elroy Dimson, Paul Marsh, Mike Staunton: "Although the probable rewards from equity investment are attractive, stocks did not and cannot offer a guaranteed

The inefficiency of internal capital markets: another part of the diversification discount ?

SSRN-Corporate Diversification and Internal Capital Markets: Evidence from the Turkish Business Groups by Halit Gonenc, Ozgur Berk Kan, Ece Karadagli:

Gonenc, Kan, and Karadagli make use of an interesting data set to give more confirmation to the view that external capital markets are more efficient than internal capital markets. They "compare the performance of firms affiliated with

SSRN-Does Governance Affect the Performance of Closed-End Funds? by Gordon Gemmill, Dylan Thomas

SSRN-Does Governance Affect the Performance of Closed-End Funds? by Gordon Gemmill, Dylan Thomas

In the most recent newsletter there was a discussion of the SEC's recent vote to require independent chairman for mutual fund companies. While I concluded that an independent chairman was a good idea, the conclusion was based more on theory than empirical evidence. Unbeknownst to me at the time,

Do we have a new explanation of the conglomerate discount!!!!!!!

SSRN-Loyalty Based Portfolio Choice by Lauren Cohen


Are you loyal to your company? Your answer may depend on whether your company is a single division company or a conglomerate. As the University of Chicago's Lauren Cohen writes "Evidence from Social Psychology suggests that loyalty to the firm develops at the divisional level." Yeah yeah, so what does Social Psychology have to do with finance?

You win some, you lose some....Dominos lists on NYSE, Google to List With Nasdaq. Nasdaq pulls out of Canada

The New York Times > Technology > Google to List With Nasdaq: "In an amended regulatory filing with the Securities and Exchange Commission, Google said it would list with Nasdaq"

Today's scorecard:

NYSE 1 win 1 loss
Nasdaq 1 win 1 loss


Yes, the NYSE lost the big one. Sure, it may have been expected, the Nasdaq was the favorite from the start, but many at the NYSE hoped that the search

SSRN-When Labor Has a Voice in Corporate Governance by Olubunmi Faleye, Vikas Mehrotra, Randall Morck

SSRN-When Labor Has a Voice in Corporate Governance by Olubunmi Faleye, Vikas Mehrotra, Randall Morck

This one will definitely make class!!!

Faleye,Mehrotra,and Morck study firms where there are large blocks of employee owned shares that ARE VOTED. Their findings may surprise some people:

"Relative to otherwise similar firms, labor-controlled publicly traded firms invest less, take fewer

Blowing way bubbles?--Maybe the NASDAQ Bubble wasn't a bubble

So maybe there wasn't an internet bubble. Several academic papers are trying to justify the high valuations that existed in the late 1990s.

For instance Pastor and Veronesi (P&V) examine the question and allow for uncertainty in future earnings and, unlike similar work by others, they conclude that the NASDAQ was not necessarily overvalued.

Possible the best way to understand their

SSRN-Going Private via LBO - Shareholder Gains in the European Markets by Andre Betzer, Christian Andres, Mark Hoffmann

SSRN-Going Private via LBO - Shareholder Gains in the European Markets by Andre Betzer, Christian Andres, Mark Hoffmann


Betzer, Andres, and Hoffmann investigate what happened to European public firms that went private in the 1996-2002 period. Using classic event study methodology, they find "a positive and significant return...Of about 13.83% at the announcement day." (Don't you love the "

Are men and women that different when it comes to trading?

SSRN-An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity by Richard Deaves, Erik Lueders, Rosemary Guo Ying Luo

Do you remember the findings during the internet wave that female investors showed more patience and did not suffer from the same overconfidence that afflicted some male investors? Well, work by Deaves, Luenders, and Luo now draw that into question.

Is it where you live, or how much you make and what you know? A look at the Geography of Mutual Fund Investing

This one should come as no surprise, but it is interesting none-the-less. Malloy and Zhu have a working paper that "provide[s] evidence that individual investors located in less affluent, less educated, and ethnic minority neighborhoods invest more in mutual funds with expensive load fees." Which I would wager that you would all have expected.

A more interesting question (and much more

MSNBC - Michael Rigas fraud case ends in mistrial

MSNBC - Michael Rigas fraud case ends in mistrial: "The case against former Adelphia Communications Corp. Operations chief Michael Rigas ended in a mistrial Friday with jurors deadlocked on 17 counts against him"

I am surprised. Having written (with Carol Fischer) 2 cases on the problems at Adelphia, I guess I am somewhat of an expert on this and I thought they all would be found guilty. So

FPA Journal - Contribution: Sustainable Retirement Withdrawals

FPA Journal - Contribution: Sustainable Retirement Withdrawals: "investors' sustainable withdrawal in retirement depends not only on expected real returns in the future, but also on the variability of returns, the planned withdrawal horizon, the willingness and ability to run out of funds before the planned horizon, and the desire to leave some wealth to one's heirs"

While I flat out refuse to

FPA Journal - Focus: According to Form: Choosing the Right Business Entity

FPA Journal - Focus: According to Form: Choosing the Right Business Entity: "Different motivations result in different business-entity selections."

Virtually every corporate finance class and most entrepreneurial classes cover the standard organizational forms very early in the course. The timing is somewhat unfortunate as most students are not yet warmed up to finance. In part as a result,

SSRN-Are Large Boards Poor Monitors? Evidence from CEO Turnover by Olubunmi Faleye

SSRN-Are Large Boards Poor Monitors? Evidence from CEO Turnover by Olubunmi Faleye

Faleye who reports that large boards of directors are less likely to replace existing CEOs and if the CEO replaced, less likely to find a successor from outside the firm.

Moreover, when firms announce smaller boards, the firm's stock return is positive. Thus Faleye concludes: "suggest that a large size

A good day for international trade!

Two news items today that strengthen the belief that trade is good.

First, the US and China agreed to end their dispute over Chinese tax breaks on computer chips. If nothing else it shows that the WTO can be used effectively to solve disputes.
http://edition.cnn.com/2004/BUSINESS/07/08/china.trade.reut/
http://washingtontimes.com/business/20040708-094843-6754r.htm

the second story, which for

Finally a New Newsletter!

July Newsletter

Well it took Ken Lay and John Rigas to get me to get the newsletter finished, but after about 20 false starts I finally finished a Newsletter. Be sure to take a look at it!

Enron ex-boss pleads 'not guilty'

BBC NEWS | Business | Enron ex-boss pleads 'not guilty': "Enron ex-chairman Kenneth Lay has pleaded 'not guilty' to 11 criminal charges over the collapse of the former US energy giant.
The charges against Mr Lay include bank fraud, share trading fraud and making false statements."

I have had several people ask me "Why did it take so long?" My best answer is that prosecutors wanted to be sure

I'm back! and Happy July 4th!

Hi again....took a small vacation to Virginia and Gettysburg PA. It was fun. Biked 118 miles on Monday. Very pretty course from Abingdon Virginia.

On the way back stopped at JMU and PSU. Both the schools and the surrounding areas are testimony to why I hate sprawl. What had been great college towns are turning into cities with traffic problems and chain stores everywhere :(

I should

SSRN-Stock Options and Long Term IPO Performance by Kuntara Pukthuanthong, Thomas Walker

SSRN-Stock Options and Long Term IPO Performance by Kuntara Pukthuanthong, Thomas Walker

Question: How cool is this?!? (answer below)

A paper by Pukthuanthong and Walker will also be presented at the European FMA Meetings. The paper examines the use of options in pay packages of IPO firms. And finds that "new public companies that have high use of stock options outperform those that have

SSRN-The Effects of Regulation Fair Disclosure on Management Forecasts by Carla Carnaghan, Ranjini Sivakumar

SSRN-The Effects of Regulation Fair Disclosure on Management Forecasts by Carla Carnaghan, Ranjini Sivakumar

In a paper to be presented this coming week at the European FMA meetings, Carnaghan and Sivakumar find evidence that shows that regulation FD did reduce information Asymmetries. Additionally they "find that the information disclosed by managers has improved in terms of frequency,

SSRN-The Capital Asset Pricing Model: Theory and Evidence by Eugene Fama, Kenneth French

SSRN-The Capital Asset Pricing Model: Theory and Evidence by Eugene Fama, Kenneth French

Fama and French provide a great review and discussion of CAPM with all of its limitations. Why is it used in class? Great model. Main problem? It doesn't work! Paper should be (and was in my class) required reading.

oh, and yes I know this has been included in a past newsletter, but it was so good I

SSRN-Agency Costs of Overvalued Equity by Michael Jensen

SSRN-Agency Costs of Overvalued Equity by Michael Jensen

I know we talked about this one in class, but it is just so so good. Jensen talks about what led to the governance crisis we saw at Tyco, Enron, etc. A big part of teh answer may be overpriced equity. Why? A stock price that is overvalued is caused when investors have overly optimistic expectations. Thus, if the investors were to

SSRN-Market Evaluation of Off-Balance Sheet Financing: You Can Run But You Can't Hide by Steve Lim, Steven Mann, Vassil Mihov

SSRN-Market Evaluation of Off-Balance Sheet Financing: You Can Run But You Can't Hide by Steve Lim, Steven Mann, Vassil Mihov

Super short version: using operational leases as a means of keeping debt off the balance sheet may fool bond rating agencies, but it does not seem to fool the bond market.

Lim, Mann, and Mihov (all from TCU) find that attempts to hide debt (in the form of operating

The New York Times : New Rule on Short Selling

The New York Times > Business > Market Place: New Rule on Short Selling

Ok, time to update your notes on short selling! You can now sell on a downtick. At least temporarily and for some stocks. The SEC approved a one year trial (starting in January 2005 that will remove many of the short sale restrictions for "one-third of the stocks in the Russell 3000." However, for other stocks it may

The Washington Post looks at Google ownership

Following a Rich Tradition (TechNews.com)

The insiders at Google really are insiders ;)

To quote the article Google ownership is a "carefully crafted roster of early-stage investors [that] reads like a Who's Who of Silicon Valley" or as Alan Meckler states in the article: ""It is a traditional Silicon Valley old boys network,...."It is very similar to what happened in the 1990s when there were

FRB: Speech, Gramlich--Reducing Budget Deficits--June 24, 2004

FRB: Speech, Gramlich--Reducing Budget Deficits--June 24, 2004

Fed Governor Gramlich just gave a interesting and informative speech on the Federal Budget Deficit. He points out the difficulty in forecasting it, the fact that it is based on cash basis accounting which brings its own problems (example future social security problems!), and even suggests ways to improve the budgeting process. My

Bank mergers create value. Why?

Penas and Unal have provided a great look at bank mergers in this forthcoming JFE piece. rather than looking at equity, they examine what happens to the merging banks'bonds. As theory would predict, they find that the bonds go up in value. Why? As the authors state: "The primary determinants of merger-related bondholder gains are diversification gains, gains associated with achieving

SSRN-Revealed Preferences for Corporate Leverage by Thomas Philippon

SSRN-Revealed Preferences for Corporate Leverage by Thomas Philippon

WOW!!! A must read! Philippon examines firms' capital structure empirically and theortically. He finds that firm value does not exactly fit the static trade-off model. Specifically he finds that low levels of debt are not accompanied by as low of firm values as would be expected. However, in other areas, what we have been

SSRN-Patriotism in Your Portfolio by Adair Morse, Sophie Shive

SSRN-Patriotism in Your Portfolio by Adair Morse, Sophie Shive

Ok, so maybe, just maybe rationality can not explain everything in investments. Morse and Shive find that patriotism (and not just transaction costs) helps to explain why investors overweight investments in their home country, i.e. the home country bias.

SEC Seeks Independent Fund Board Chairmen

Forbes.com: Update 11: SEC Seeks Independent Fund Board Chairmen

Quite the debate on this one! It is rare that the SEC is so publicly split on an issue. I think it is good however. It does strengthen investor protections somewhat. Although I do admit that some of the benefits may be less than advertised. Overall, I would agree with the SEC chairman on this one and vote that having an

The New York Times > Business > Son Tries to Distance Himself at Adelphia Trial

The New York Times > Business > Son Tries to Distance Himself at Adelphia Trial: "Michael J. Rigas, the former Adelphia Communications vice president, was too busy managing the company's cable TV systems to have joined in the misdeeds that crippled the company, his lawyer said yesterday in the closing arguments of his criminal trial"

Closing arguments are being made in the Adelphia trial and it

BBC NEWS | World | South Asia | India's economy - oil the nuts and bolts

A roadmap for India By Kaushik Basu
Professor of economics, Cornell University

Kaushik provides a fascinating look at what is wrong with the Indian Economy and how the new government should take steps to fix it. For instance, it takes 11 times longer to start a business in India than it does in Singapore.

His list includes 1: Improve efficiency 2. Cut corruption 3. Establish good fiscal

What to do??

Ok, FinanceProfessors, I need some advice. I submitted a paper last july (as in July 2003) to a journal and despite several emails back and forth with the editor and several promises to have a decision "soon" (in October), "by January" (in December) or "by Monday" in April, I have yet to hear anything.

A few weeks ago I wrote asking for the paper back so that I can submit it elsewhere. (Mind

New York Post Online Edition: business

New York Post Online Edition: business: "PERELMAN'S PULL NET$ REVLON AID "

Mmm, need an example from the US of what is wrong with Japanese keirtsus? Revlon to the rescue! According to the NY Post, Ron Perelman--the controlling shareholder in Revlon and major shareholder in Citigroup, used some of his power to get Citigroup to make the loan. Why is this wrong? If the loan should have been

BBC NEWS | Business | US bank in $14bn takeover deal

BBC NEWS | Business | US bank in $14bn takeover deal: "The US banking industry has seen its latest round of consolidation after Wachovia agreed to buy SouthTrust for $13.7bn"

Wachovia continues its push to be a truly national bank with the announced acquisition of SouthTrust. The deal will move Wachovia strongly into the mid couth (Texas). Additionally it will save money by the elimination of

Morocco signs Free Trade Agreement with U.S

Morocco signs Free Trade Agreement with U.S

In a move that will no doubt pay dividends to both countries, Morocco and the US agreed to "immediately eliminate tariffs on more than 95 percent of bilateral trade in consumer and industrial products. All remaining tariffs on these goods are to be eliminated within nine years - the best market access package of any U.S. free trade agreement with a

Merrill Lynch dropped from Google IPO

Times Online - Business

The Google IPO was in the news again. First the firm ammended its prospectus to warn that the Dutch Auction process they are using may result in a stock price decline after the issue.

The second interesting story is that they dropped Merrill Lynch from the IPO syndicate. Why? Officially no one is saying, but the speculation is that ML's computer system was unable to

SSRN-Oil Imports, National Defense, and Bio-Energy by Robert Ames, Anthony Corridore, Paul MacAvoy

SSRN-Oil Imports, National Defense, and Bio-Energy by Robert Ames, Anthony Corridore, Paul MacAvoyI love articles that make me think. This is one of them! The authors suggest that it is time for America to go on a diet: a low oil diet. What would happen if we cut imports? Well we would likely see higher prices and would have to drill in some places we generally do not want to, but prices would

Race Across AMerica--No Finance Content

Welcome to Race Across AMerica

The RAAM (Race Across AMerica) starts this weekend. It is NUTS! I can not even begin to imagine. WATCH THE VIDEO!!! The video is very well done.

If it weren't a race, it would be unreal fun, but the competion seems to take the fun away. Check out what the neck contraptions they use to hold their neck's up. AMAZING!

Sleep is just a rumor, can you imagine

It pays to be good!

Durnev and Kim in a forthcoming Journal of Finance article provide further evidence that it pays to be good. Why? Becuase firms with stronger shareholder protections are generally rewarded with a higher valuation (and hence lower cost of capital) than their peers. MOrevoer, the authors show that the cost of being bad is higher when there are many growth opportunities and when the country has

Prosecutor says Adelphia bankrupted by founder's greed - Jun. 16, 2004

Prosecutor says Adelphia bankrupted by founder's greed - Jun. 16, 2004

Closing arguments are underway in the Adelphia Trial. It is approaching 4 months since the trial began. Interesting, although not surprisingly, the Rigases did not take the stand (if this were Letterman, he would say it was the only thing they didn't take--just kidding!!!). Of course, they are innocent until proven guilty,

BBC NEWS | Programmes | From Our Own Correspondent | Meet the world's second richest man

BBC NEWS | Programmes | From Our Own Correspondent | Meet the world's second richest man: While I knew Buffett was a very down to earth guy, I ddi not know he lived "ordinary suburban home on an ordinary tree-lined road."

The rest of the article centers on last month's Berkshire Hathaway annual meeting

BBC NEWS | Business | Mr Greenspan's balancing act

BBC NEWS | Business | Mr Greenspan's balancing actWhy does inflation seem higher than economists are reporting? A big reason is that economists are more concerned with what is called teh core inflation rate. This core ignores volatile food and energy prices. You and I however have to eat and drive, so those prices appear in our mental calculation of inflation.

MSNBC - Martha Stewart sells some of her stock

MSNBC - Martha Stewart sells some of her stock


Interesting, although not earth shattering. Really this is just a test story to see how I can publish to the blog.

Books, Bikes, and Bonas

Hi everyone. I am just getting used to this thing and have to write something to test it, so here are some random musings and an update as to what i have been doing lately.

Had a GREAT time biking htis past weekend. I did the MS 150 (although I chose the 164 mile option) from Pittsburgh to Lake Erie. It was super fun and even went faster than I expected. I was sad to see it end! Would haev

Welcome to FinanceProfessor.com's new Blog

I decided to try again. I have heard that this is pretty easy to use and if it works, a GIANT IF, then maybe I can save some time communicating with many people and hopefully working on teh newsletter at the same time.

I shouyld probably warn you, that this will have more than just finance on it. Sort of random stuff aas well. Of course FinanceProfessor.com has some stuff that is not