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