Bem, apanhado de noticias da semana e discussão
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Bem, apanhado de noticias da semana e discussão
Recebo há uns tempos uma newsletter de um senhor que se dedida com muita preserverança a fazer um apanhado de noticias da semana e respectivos comentários do ponto de vista um pouco mais académico. Confesso que não é a minha cup-of-tea, mas deixo aqui como experiência. Se alguém mostrar interesse, eu voltarei a deixar. Podem também subscrever a dita em www.FinanceProfessor.com .
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Top Stories
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1. A look at IPOs
2. Catching up with Adelphia
3. Calpers and Tyco
4. Cranberry time?
5. What is the real value of interest tax shields? You will be surprised.
6. Greenspan on the economy
7. Globalization is good for most!
8 NeuroEconomics.
9. Is Ahold Europe’s answer to Enron?
10. Why foreign firms have higher valuations if they cross list in the US.
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Spotlight: IPOs
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There are several upcoming academic articles on IPO underpricing that warrant some attention. Some of the most interesting:
Smart and Zutter find that dual class IPOs have less underpricing. Part of this is that they sell at a lower price after their sale. (This discount may be caused by a lack of voting power which increases potential manager-shareholder conflicts). However, there is also another explanation: Brennan and Franks (1997) suggest that underpricing might be a means to get more shares into a diverse group of shareholders (imagine rationing limits the ability of a few taking large positions) which would increase management power. Now if there are dual class shares, management already has much of the power and therefore need not have a diverse shareholder base so there is less underpricing. Consistent with this is less institutional ownership at non-dual class shares as well as fewer takeovers in the years following the IPO.
http://jfe.rochester.edu/02154.pdf
A second IPO paper that deserves your attention is Demers and Lewellen who look at internet stocks and find the number of “web hits” increases with the degree of underpricing. This evidence, however weak, supports the marketing aspect of underpricing which suggests that firms under price in order to create a stir and draw attention to their name. This is done either for operational reasons, or in order to issue a SEO later that would be higher priced. While it still may be a reach to say that it is worthwhile to under price (advertising might be cheaper), the evidence is consistent with the theory.
http://jfe.rochester.edu/02166.pdf
And finally Gompers and Lerner find no abnormal long-run performance of IPOs. This differs with several previous studies, the difference appears to be in changing the control group, which should be no surprise as long run tests are often model-dependent and small firms often are especially troubling. This sample is over 3600 firms spanning 1935-1972. (BTW did you really think I could pass-up a “long run paper” co-authored by the best marathoner in the field today? In case you didn’t know, Paul Gompers was once a world-class (or at least national class) marathoner!
http://www.afajof.org/Pdf/forthcoming/gompers.pdf
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Catching up with ……Adelphia.
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Well after a few months of relative quiet, Adelphia sure has been in the news a great deal of late. If you do not remember, Adelphia was the US’s sixth largest cable provider and was headquarter in nearby Coudersport PA. Then due to what most see as fraud and self-serving behavior of the Rigases, the firm was forced into bankruptcy and delisted. The Rigases were the first of the big names to be arrested by Federal authorities when the elder John Rigas was taken away in handcuffs.
So just a quick update of what has happened recently.
They have hired a new executive team to what many (including former CEO John Rigas) claim is an exorbitant contract, they are moving their headquarters from Coudersport PA to Denver Colorado, they ended their long term ban on “adult” channels, and they began charging significantly higher rates (over a 100% increase in many cases) to their commercial users.
And as amazing as it sounds, it seems like all of the accounting problems are not yet over! The company just admitted they would have to restate their 2002 earnings after certain expenses were classified as capital expenditures.
http://www.forbes.com/home_europe/newsw ... 93110.html
http://biz.yahoo.com/rf/030220/media_adelphia_2.html
Last week Adelphia announced a new controversial pay package for the new executives. The pay plan, which calls for $26 million to the new CEO Michel William Schleyer and $16 million for the new COO Ronald Cooper, has been called excessive by many shareholders, including the Rigases themselves. The new execs both come from ATT’s Broadband unit. Since the firm is in bankruptcy the pay plan must be approved by the bankruptcy judge. The new CEO is saying that if the pay plan is cut, he may not leave the firm. (personally I doubt it, but maybe). The plan as structured has a $7.6 “severance package” (platinum parachute, which pays him $7.6 million if Schleyer is removed from either his CEO or Chairman of the board positions for any reason! Schleyer is threatening to not take the job if the pay is reduced, but I think I would call his bluff.
http://www.buffalonews.com/editorial/20 ... 019818.asp
http://abcnews.go.com/wire/Business/reu ... 4_689.html
http://biz.yahoo.com/rf/030220/media_adelphia_2.html
Adelphia is moving their corporate headquarters to Denver in a move that will likely hurt Coudersport PA quite bad. http://www.insidedenver.com/drmn/busine ... 79,00.html
The sale of the Sabres appears to more likely as Thomas Golisano appears have gotten approval to buy the team which has played poorly this year. Stay tuned.
http://sportsnetwork.com/default.asp?c= ... 467143.htm
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Corporate Finance
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In an upcoming JFE, Anderson, Mansi, and Reeb find that when founding families’ have large ownership, it results in lower borrowing costs. The hypothesized explanation is that the lenders see the family, which is generally both poorly diversified and concerned with their reputation, and hence more risk averse, as a means of reducing agency costs. Of course this view may have been changed after the Adelphia problems where a large family block of shares may have led to, rather than solved, problems.
http://jfe.rochester.edu/02062.pdf
Uh, oh! Do we have it all wrong? We do if the new paper by Fernandez (forthcoming in JFE), is correct. He shows that the traditional ways of finding the present value of interest tax shield is often incorrect. In fact the only time that the traditional VL=VU +TD is correct is when we are valuing a no-growth perpetuity. This is because the correct “way to estimate the value of these tax shields claims is not by thinking of them as the present value of a cash-flow, but as the difference between the present values of two different cash-flows: flows to the unlevered firm and flows to the levered firm.” If you teach of take an upper level corporate finance class, you better read this one!
http://jfe.rochester.edu/02442.pdf
Diego Garcia calls into question the famous paper by Leland and Pyle that has private ownership being held as a signal of firm quality.
http://papers.ssrn.com/sol3/papers.cfm? ... _id=289801
As predicted, Former K-mart executives are now in trouble ad charged with Fraud for issuing false statements. The trouble seems to lie in their accounting for trade allowances. (These are payments for selling a manufacturer’s products). GAAP and the SEC each require these allowances, if they can be cancelled, to be recorded as income on a matched basis (when the product is actually sold), but Kmart decided to take them all at once (thus upping income) even though they were for several years. What makes it a fraud case are the allegations of faking phone calls, and not sending mails in order to appease internal auditors. (interesting!)
http://www.nytimes.com/2003/02/27/business/27SHOP.html
(also listed in accounting)
(With apologies to Paul Harvey) “No known connection” but remember the last newsletter where we spoke of Director and Officer (D&O) insurance? Well now Chubb insurance has started an ad campaign to push their D&O insurance
http://www.timesonline.co.uk/article/0, ... 32,00.html
If there is one thing that we have learned so far in 2003, it is that bankrupt firms can get out of contracts by declaring bankruptcy! Specifics of this example include the steel companies (Bethlehem Steel) dropping many of the retirees’ pension and health care benefits, or Adelphia charging its customers more than their previous contracts stated, or US Air restructuring their pilot pension plans. http://www.boston.com/dailyglobe2/053/b ... lan+.shtml
http://www.washingtonpost.com/wp-dyn/ar ... 3Mar2.html
With the slow stock market and questions on the economy, we have seen many fewer mergers than a few years ago. However, that may be changing slightly as a number of potential deals are in the works.
Horizontal mergers are still known to draw more regulatory scrutiny as being anti-competitive. A case in point is the Spanish deal between two television providers which the EU has decided to investigate again. The Financial Times is now reporting that the deal itself may be scrapped (I doubt it) as a result.
http://news.ft.com/servlet/ContentServe ... 2571727310
Northland Cranberry Corp. is trying to buy Ocean Spray Cranberry company. The horizontal deal is designed to reduce costs and allow the combined firms to compete against larger (non cranberry) juices. Interesting tidbit, the CEO of Northland, left ocean Spray in 1993 to start Northland. The offer is for $800m of which about 55% would be cash.
http://www.nytimes.com/aponline/busines ... .html?dlbk
A few of the deals we have seen (in particular in the UK) have been garnered much attention from rival bidders. For example a few weeks ago we saw the hostile takeover attempt as firms lined up to try to buy UK grocer SafewayPLC. Now we see a similar case with the motel/pub owner 6 continents. And 6 continents is showing once again that the best defense is often to do what the bidding firms want to do. In this case 6- Continents has decided that spinning off various operations is the correct way to go to realize cost savings and a higher valuation.
http://news.ft.com/servlet/ContentServe ... 2571727307
Sticking with grocers (always a good thing to do), we have a very interesting look at Nash Finch. They are under investigation by the SEC, have not files all of their finaical statements, and can not pay their debt off and are in default on some of their loans. Rather than declare bankruptcy, they worked out a deal with creditors where for a fee (1.5% of principal), the debt contracts could be extended.
http://biz.yahoo.com/rf/030228/retail_nashfinch_1.html
http://biz.yahoo.com/bw/030228/285587_1.html
Who is speaking? In one of the more weird stories in some time, Analyst Jack Grubman is reported to have been the person behind some of the words that came out of WorldCom during their collapse last year.
http://www.nytimes.com/2003/02/27/business/27TELE.html
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Investments
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Ok, but come on? A JF article? If your friends invest in the stock market, you are more likely to do so as well. That is the finding of a new paper by Harrison Hong, Jeffrey D. Kubik and Jeremy C. Stein . To which I can only ask one question: “Are you going to jump off a cliff if your friends do?”
http://www.afajof.org/Pdf/forthcoming/S ... vision.pdf
ok, quick what is a premium bond? If you said the combination of a bond and a lottery you are correct! They were first issued in the UK in the late 1950s and are back in vogue with a record number being sold last month. The odds of winning a big price are about 1 in 28,500, but there are additional smaller prizes. However, you won’t get rich if you do not win as the average expected return is less that 3%.
http://news.bbc.co.uk/1/hi/business/2779179.stm
While we all know the stock market is down, what may have passed the radar scope is that volume is way down too. This low volume may lead to more volatility as there is less liquidity and trades have a greater impact.
http://www.boston.com/dailyglobe2/054/b ... ess+.shtml
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Financial Institutions and Markets
(also Money and Banking)
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One reason the Fed’s rate cuts may not be working as well this time around is that the longer term rates have not fallen in conjunction with the short-term rates. Why? Well no one is sure but one reason might be the rising Federal Deficit which will increase the supply of long-term bonds. Another reason may be that the gains from the cut are being offset by higher energy prices. It is for this latter reason that the European Central Bank is expected to cut rates.
http://www.nytimes.com/2003/02/23/busin ... 3VIEW.html
http://www.timesonline.co.uk/article/0, ... 48,00.html
The new head of the SEC is William Donaldson. In his comments this past weekend, he said he would like to reorganize the SEC into a faster more efficient and more agile force that is proactive rather than reactive. In case you were wondering, yes he is a former marine.
http://smartmoney.com/bn/ON/index.cfm?s ... 00367-1011
http://www.chron.com/cs/CDA/story.hts/business/1800207
One specific thing the SEC hopes to do is to standardize the separation of investment banking activity and research activity both in the US and in the Europe. But any standardization will not be easy as each side things their systems are better.
http://www.timesonline.co.uk/article/0, ... 18,00.html
And in this corner, Alan Greenspan. The Fed Chairman spoke out against the President’s tax cut and stimulus plan by saying the economy was doing ok and would likely get better in the near future, and thus the stimulus plan is not needed and the tax cuts may increase the already rapidly expanding deficit. White House economic adviser Glenn Hubbard however, then went public and stressed that Greenspan was entitled to his opinion and the White House has complete faith in him. (of course, this acknowledgement came a week after the original comments, but….)
http://www.theage.com.au/articles/2003/ ... 62341.html
http://reuters.com/financeNewsArticle.j ... ID=2294321
Speaking of Hubbard, almost immediately after endorsing Greenspan he decided to resign. (Have I read too many fiction books?)
http://www.dailytelegraph.co.uk/money/m ... tcity.html
After seeing so many mergers in the banking industry, it seemed like the small bank was almost extinct, but now it is staging a comeback and in Buffalo and elsewhere, small banks are fighting back. While they still do not make up much of the total market share, they are becoming more numerous and competing on service, low fees, and locations. This brings to mind the barbell theory of banks: the big and the small banks will be better able to compete than the mid sized banks. This was the explanation for many of the mergers in the 1990s to combine medium sized banks into larger banks.
http://www.buffalonews.com/editorial/20 ... 028299.asp
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International Finance
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This one should come as no shock. Countries with greater property right protections experience higher growth. That is the conclusion of a forthcoming Journal of Finance article by Claessens and Laeven that finds that this may explain the somewhat troubling fact that firms in developing nations have higher fixed assets to total assets than in developed nations, which goes against standard theory that growth firms have fewer assets in place.
http://www.afajof.org/Pdf/forthcoming/Laeven.pdf
Why do foreign firms that list in the US have a higher valuation (as measured by q values) than firms that do not list in the US? A theory proposed by Doidge, Karolyi, and Stulz suggest that it is the combination of better access to capital and less ability to expropriate wealth.
http://jfe.rochester.edu/02367.pdf
In “Imagine There is No Country” by Surjit S. Bhalla, we get further confirmation that free trade and globalization are good! The book reports that while there are still many sections of the world very poor, the number living on pennies a day is falling and the imbalance is actually lessening between the haves and the have-nots. This improvement is largely seen where countries have adopted more free market ideas. Why does this differ with what you are used to hearing in the popular press? In part he claims the data used in many studies is pretty bad.
http://www.businessweek.com/bwdaily/dnf ... _db065.htm
Ok, quick! Name the largest trading partner of the US. If you said Canada, you are in the know! And on top of that they are one of, if not the largest!, exporter of oil and natural gas to the US. (I did not know Oil…in fact I question it, but that is what the article says.)
http://www.nationalpost.com/financialpo ... 83444B2%7D
Can Toshihiko Fukui the new person at the top of the Bank of Japan get the nation’s economic ship tuned? He was selected as the top person in a new three person team to try to pull Japan out of its economic doldrums. The biggest problem remains the banking sector but followed closely by deflation. If you believe foreign investors, then the answer to the above question seems to be no. (My advice remains to dramatically raise the money supply, provide a partial government bailout to banks, and devalue the yen.)
http://news.bbc.co.uk/1/hi/business/2785601.stm
http://sg.biz.yahoo.com/030228/15/38dqv.html
http://reuters.com/financeNewsArticle.j ... onomicNews
http://news.bbc.co.uk/1/hi/business/2807015.stm
http://www.yomiuri.co.jp/newse/20030303wo12.htm (this last article provides an interesting description of how the new leaders were selected)
In currency markets, the record US trade deficit helped push the dollar higher against the Yen which led to Japanese central bank intervention in the market in an attempt to keep the yen low.
http://www.forbes.com/personalfinance/r ... 94552.html
http://www.clickonsa.com/sh/money/stori ... 00259.html
While Venezuela is back pumping oil, it is far from capacity and the strike did major damage to the nation’s economy.
http://www.chron.com/cs/CDA/story.hts/business/1800313
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Economics
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Greenspan maybe right, the US economy is growing faster than most had thought. In fact, the 4th quarter GDP was again revised upwards.
http://news.bbc.co.uk/1/hi/business/2781833.stm
WOW! Game-theory aficionados have to read this one! It looks at the new field of neuroeconomics. What is that? It looks at how the brain physically reacts to various economic stimuli and tries to see why some people behave “rationally” and others do not. Very interesting :-)
http://www.nytimes.com/2003/02/27/business/27SCEN.html
Inflation, in large part due to rising oil prices, came back in to the picture, albeit only slightly, as prices from .3% in the previous month. http://www.upi.com/view.cfm?StoryID=200 ... 0524-5862r
http://news.bbc.co.uk/1/hi/business/2787865.stm
http://story.news.yahoo.com/news?tmpl=s ... ks_week_dc
http://biz.yahoo.com/rm/030301/economy_ ... eke_1.html
Let me preface this by saying we really do not know, but one estimate of the cost of a potential war with Iraq is $1 trillion by 2010. This includes the cost of reconstruction and the ripple effects of reduced foreign investment. Of course it could be much lower, but already we are seeing projected record deficits in the US as a result of the build-up and continued war on terrorism. AS for the actual fighting that may occur, the BBC article suggests that costs would escalate by $500m per day of fighting.
http://story.news.yahoo.com/news?tmpl=s ... _iraq_dc_2
http://news.bbc.co.uk/1/hi/business/2805769.stm
It is always nice to see people use economics/finance to solve problems. For example, London is famous for its traffic problems, so in order to cut down congestion, they turned to economics and are now charging a toll to drive in the heart of the city. While there are some problems with getting the fees collect, overall it seems to be working.
http://news.bbc.co.uk/1/hi/business/2807871.stm
http://news.bbc.co.uk/1/hi/england/2776253.stm
http://news.bbc.co.uk/1/hi/uk/2786899.stm
France reported their unemployment rate was up this past month. What is interesting of course is up to what level. It was only up .8%, but to over 9%. This is about 150% of the US rate. Why? A big reason is their expensive social programs and the difficulty in letting workers go.
http://news.bbc.co.uk/1/hi/business/2807811.stm
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Personal Finance
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It’s getting nearer to tax time in the US and the Washington Post published an article that tells you about some of the changes in the tax code.
http://www.washingtonpost.com/wp-dyn/ar ... 3Mar1.html
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Energy Markets
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The threat of war, low supplies, cold weather, and continued production problems in Venezuela continue to keep oil prices high. They are now at the highest levels since the last Gulf War. Prices neared $40 a barrel but closed the week slightly under $37 a barrel.
http://www.msnbc.com/news/876996.asp
http://www.arabnews.com/Article.asp?ID=23000
http://www.nytimes.com/2003/02/27/business/27PLAC.html
Partially as a result, gasoline prices are also climbing. MSNBC provided an interesting article on what makes up the price of gasoline. The second biggest factor (after the petroleum) is taxes. The third largest cost is the actual refining practice itself. (good point in the article about taxes likely to continue to rise to pay for rising budget deficits at the state level.
http://www.msnbc.com/news/878211.asp
So if not oil, then what can we use for power? Many think cars of the future will run on hydrogen or some blend based on ethanol or soybean oil. However, whatever it will be, the future is not yet here as price wise, nothing is yet economically feasible (this is at least in part due to subsidies (direct and indirect) for other fuel sources.
http://story.news.yahoo.com/news?tmpl=s ... or_new&e=3
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Money and politics
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Bush’s tax cut plan continues to come under fire. Including some from Fed Chairman Alan Greenspan himself who questioned whether the economy needed any stimulus plan and whether the deficit spending was necessary, to Nobel Laureates and other economists who question whether cutting dividend tax rates will have much of a net impact once the implications of the deficit is factored in. On the other side you have those who feel that a better plan would be to end the double taxation of wages as well as on dividends by allowing FICA taxes to be deducted.
http://news.bbc.co.uk/1/hi/business/2779179.stm
http://news.bbc.co.uk/1/hi/business/2735269.stm
http://www.boston.com/dailyglobe2/054/b ... too+.shtml
http://www.boston.com/dailyglobe2/054/b ... ief+.shtml
Money may not be able to buy you love, but maybe support in time of war? That is what the US seems to be doing in some areas.
http://www.businessweek.com/bwdaily/dnf ... _db038.htm
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Financial Service Industry
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A JP Morgan unit gets 10 days in the penalty box (no trading!) from Japanese officials for trying to manipulate the market in exchangeable bonds.
http://www.nytimes.com/reuters/business ... .html?dlbk
OUCH! The NY Attorney General Elliott Spitzer is threatening to release the documents he subpoenaed to the public regarding the state’s $1.4 Billion settlement. This would likely lead to many more lawsuits against the investment banks. settlehttp://www.dailytelegraph.co.uk/m ... tcity.html
Lehman Brothers is being sued for $16 million in a compensation suit where the employee, Bond trader Kerim Derhalli says he was never paid the amount he was promised for working out bad loans during the Russian crisis.
http://news.bbc.co.uk/1/hi/business/2788873.stm
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Real Estate
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Is there a real estate bubble or not? Well, it depends on who you ask. One sign of trouble is that in certain areas of California, rents are falling while people are paying over the asking price for property. However, the counter argument is that low interest rates have allowed the housing market to stay strong.
http://story.news.yahoo.com/news?tmpl=s ... ifornia_dc
A similar story is playing out in the UK housing market where there is fear of a bubble bursting and seeing the values of houses fall.
http://news.bbc.co.uk/1/hi/business/2781833.stm
Even with some sniffs of inflation on the horizon, mortgage rates in the US fell to 30 year low. 15 year loans are now below 5.2%!
http://www.msnbc.com/news/762857.asp
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Accounting News
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Is this going to be Europe’s Enron? An accounting problem at Royal Ahold (the grocery store giant who owns Tops, Giant, and MANY others) lost 63% after admitting to overstating profits. The company fired its CEO and CFO as a result and now there is a report (unsubstantiated to date) that this is just the tip of the ice berg. (see Washington Post article)
http://www.washingtonpost.com/wp-dyn/ar ... Feb24.html
http://www.thestreet.com/_tsclsii/marke ... 70318.html
http://www.nytimes.com/2003/02/27/busin ... 7GROC.html
http://news.bbc.co.uk/1/hi/business/2797097.stm
http://www.washingtonpost.com/wp-dyn/ar ... 3Mar2.html
http://biz.yahoo.com/djus/030301/1600000053_1.html
Given the many stories of aggressive practices and even fraud, here is somewhat surprising paper by Ross Watts of the University of Rochester. He finds that conservatism is still alive and well in accounting.
http://papers.ssrn.com/sol3/papers.cfm? ... _id=371820
Slate has a good article looking at the two sets of books that firms keep. One set for reporting to shareholders and one for tax purposes. And the differences can be amazing. Take Enron (please!). They reported record earnings year after year through the late 1990s and yet were paying almost zero in taxes.
http://slate.msn.com/id/2078581/
A look inside the former Arthur Andersen. Wow. It was like a cult. Talk about your strict corporate culture and indoctrination.
http://www.nytimes.com/2003/02/23/busin ... 3VALU.html
As predicted, Former K-mart executives are now in trouble ad charged with Fraud for issuing false statements. The trouble seems to lie in their accounting for trade allowances. (These are payments for selling a manufacturer’s products). GAAP and the SEC each require these allowances, if they can be cancelled, to be recorded as income on a matched basis (when the product is actually sold), but Kmart decided to take them all at once (thus upping income) even though they were for several years. What makes it a fraud case are the allegations of faking phone calls, and not sending mails in order to appease internal auditors. (interesting!)
http://www.nytimes.com/2003/02/27/business/27SHOP.html
(also listed in accounting)
This may be taking full disclosure a bit too far! You have to read at least some of this 8K filing from Expediators International. They tell you what they think, why, and why they may be wrong. And in a funny matter to boot. Some parts are hilarious! Definitely the most entertaining SEC filing I have ever seen!
http://biz.yahoo.com/e/030220/expd8-k.html
http://www.edgar-online.com/brand/yahoo ... /?sym=EXPD
CALPERS, the Giant pension fund for California Employees, is pushing for firms who have moved their headquarters out of the US in order to avoid taxes, to move them back to the US. First on their target list? Tyco.
http://www.sfgate.com/cgi-bin/article.c ... 182361.DTL
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FinanceProfessor.com Site of the Week
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Financial Engineering news. I know I named it before, but it has been a while. The site rally is good. Check out the recent interview with Frank Partnoy (of FIASCO fame) on greed and what caused the corporate governance crisis. (Incidentally, but no doubt not coincidently, Partnoy has a new book coming out. It is on this exact topic. I look forward to reading it.)
http://fenews.com/
http://fenews.com/fen30/one_on_one_inte ... rtnoy.html
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Top Stories
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1. A look at IPOs
2. Catching up with Adelphia
3. Calpers and Tyco
4. Cranberry time?
5. What is the real value of interest tax shields? You will be surprised.
6. Greenspan on the economy
7. Globalization is good for most!
8 NeuroEconomics.
9. Is Ahold Europe’s answer to Enron?
10. Why foreign firms have higher valuations if they cross list in the US.
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Spotlight: IPOs
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There are several upcoming academic articles on IPO underpricing that warrant some attention. Some of the most interesting:
Smart and Zutter find that dual class IPOs have less underpricing. Part of this is that they sell at a lower price after their sale. (This discount may be caused by a lack of voting power which increases potential manager-shareholder conflicts). However, there is also another explanation: Brennan and Franks (1997) suggest that underpricing might be a means to get more shares into a diverse group of shareholders (imagine rationing limits the ability of a few taking large positions) which would increase management power. Now if there are dual class shares, management already has much of the power and therefore need not have a diverse shareholder base so there is less underpricing. Consistent with this is less institutional ownership at non-dual class shares as well as fewer takeovers in the years following the IPO.
http://jfe.rochester.edu/02154.pdf
A second IPO paper that deserves your attention is Demers and Lewellen who look at internet stocks and find the number of “web hits” increases with the degree of underpricing. This evidence, however weak, supports the marketing aspect of underpricing which suggests that firms under price in order to create a stir and draw attention to their name. This is done either for operational reasons, or in order to issue a SEO later that would be higher priced. While it still may be a reach to say that it is worthwhile to under price (advertising might be cheaper), the evidence is consistent with the theory.
http://jfe.rochester.edu/02166.pdf
And finally Gompers and Lerner find no abnormal long-run performance of IPOs. This differs with several previous studies, the difference appears to be in changing the control group, which should be no surprise as long run tests are often model-dependent and small firms often are especially troubling. This sample is over 3600 firms spanning 1935-1972. (BTW did you really think I could pass-up a “long run paper” co-authored by the best marathoner in the field today? In case you didn’t know, Paul Gompers was once a world-class (or at least national class) marathoner!
http://www.afajof.org/Pdf/forthcoming/gompers.pdf
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Catching up with ……Adelphia.
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Well after a few months of relative quiet, Adelphia sure has been in the news a great deal of late. If you do not remember, Adelphia was the US’s sixth largest cable provider and was headquarter in nearby Coudersport PA. Then due to what most see as fraud and self-serving behavior of the Rigases, the firm was forced into bankruptcy and delisted. The Rigases were the first of the big names to be arrested by Federal authorities when the elder John Rigas was taken away in handcuffs.
So just a quick update of what has happened recently.
They have hired a new executive team to what many (including former CEO John Rigas) claim is an exorbitant contract, they are moving their headquarters from Coudersport PA to Denver Colorado, they ended their long term ban on “adult” channels, and they began charging significantly higher rates (over a 100% increase in many cases) to their commercial users.
And as amazing as it sounds, it seems like all of the accounting problems are not yet over! The company just admitted they would have to restate their 2002 earnings after certain expenses were classified as capital expenditures.
http://www.forbes.com/home_europe/newsw ... 93110.html
http://biz.yahoo.com/rf/030220/media_adelphia_2.html
Last week Adelphia announced a new controversial pay package for the new executives. The pay plan, which calls for $26 million to the new CEO Michel William Schleyer and $16 million for the new COO Ronald Cooper, has been called excessive by many shareholders, including the Rigases themselves. The new execs both come from ATT’s Broadband unit. Since the firm is in bankruptcy the pay plan must be approved by the bankruptcy judge. The new CEO is saying that if the pay plan is cut, he may not leave the firm. (personally I doubt it, but maybe). The plan as structured has a $7.6 “severance package” (platinum parachute, which pays him $7.6 million if Schleyer is removed from either his CEO or Chairman of the board positions for any reason! Schleyer is threatening to not take the job if the pay is reduced, but I think I would call his bluff.
http://www.buffalonews.com/editorial/20 ... 019818.asp
http://abcnews.go.com/wire/Business/reu ... 4_689.html
http://biz.yahoo.com/rf/030220/media_adelphia_2.html
Adelphia is moving their corporate headquarters to Denver in a move that will likely hurt Coudersport PA quite bad. http://www.insidedenver.com/drmn/busine ... 79,00.html
The sale of the Sabres appears to more likely as Thomas Golisano appears have gotten approval to buy the team which has played poorly this year. Stay tuned.
http://sportsnetwork.com/default.asp?c= ... 467143.htm
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Corporate Finance
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In an upcoming JFE, Anderson, Mansi, and Reeb find that when founding families’ have large ownership, it results in lower borrowing costs. The hypothesized explanation is that the lenders see the family, which is generally both poorly diversified and concerned with their reputation, and hence more risk averse, as a means of reducing agency costs. Of course this view may have been changed after the Adelphia problems where a large family block of shares may have led to, rather than solved, problems.
http://jfe.rochester.edu/02062.pdf
Uh, oh! Do we have it all wrong? We do if the new paper by Fernandez (forthcoming in JFE), is correct. He shows that the traditional ways of finding the present value of interest tax shield is often incorrect. In fact the only time that the traditional VL=VU +TD is correct is when we are valuing a no-growth perpetuity. This is because the correct “way to estimate the value of these tax shields claims is not by thinking of them as the present value of a cash-flow, but as the difference between the present values of two different cash-flows: flows to the unlevered firm and flows to the levered firm.” If you teach of take an upper level corporate finance class, you better read this one!
http://jfe.rochester.edu/02442.pdf
Diego Garcia calls into question the famous paper by Leland and Pyle that has private ownership being held as a signal of firm quality.
http://papers.ssrn.com/sol3/papers.cfm? ... _id=289801
As predicted, Former K-mart executives are now in trouble ad charged with Fraud for issuing false statements. The trouble seems to lie in their accounting for trade allowances. (These are payments for selling a manufacturer’s products). GAAP and the SEC each require these allowances, if they can be cancelled, to be recorded as income on a matched basis (when the product is actually sold), but Kmart decided to take them all at once (thus upping income) even though they were for several years. What makes it a fraud case are the allegations of faking phone calls, and not sending mails in order to appease internal auditors. (interesting!)
http://www.nytimes.com/2003/02/27/business/27SHOP.html
(also listed in accounting)
(With apologies to Paul Harvey) “No known connection” but remember the last newsletter where we spoke of Director and Officer (D&O) insurance? Well now Chubb insurance has started an ad campaign to push their D&O insurance
http://www.timesonline.co.uk/article/0, ... 32,00.html
If there is one thing that we have learned so far in 2003, it is that bankrupt firms can get out of contracts by declaring bankruptcy! Specifics of this example include the steel companies (Bethlehem Steel) dropping many of the retirees’ pension and health care benefits, or Adelphia charging its customers more than their previous contracts stated, or US Air restructuring their pilot pension plans. http://www.boston.com/dailyglobe2/053/b ... lan+.shtml
http://www.washingtonpost.com/wp-dyn/ar ... 3Mar2.html
With the slow stock market and questions on the economy, we have seen many fewer mergers than a few years ago. However, that may be changing slightly as a number of potential deals are in the works.
Horizontal mergers are still known to draw more regulatory scrutiny as being anti-competitive. A case in point is the Spanish deal between two television providers which the EU has decided to investigate again. The Financial Times is now reporting that the deal itself may be scrapped (I doubt it) as a result.
http://news.ft.com/servlet/ContentServe ... 2571727310
Northland Cranberry Corp. is trying to buy Ocean Spray Cranberry company. The horizontal deal is designed to reduce costs and allow the combined firms to compete against larger (non cranberry) juices. Interesting tidbit, the CEO of Northland, left ocean Spray in 1993 to start Northland. The offer is for $800m of which about 55% would be cash.
http://www.nytimes.com/aponline/busines ... .html?dlbk
A few of the deals we have seen (in particular in the UK) have been garnered much attention from rival bidders. For example a few weeks ago we saw the hostile takeover attempt as firms lined up to try to buy UK grocer SafewayPLC. Now we see a similar case with the motel/pub owner 6 continents. And 6 continents is showing once again that the best defense is often to do what the bidding firms want to do. In this case 6- Continents has decided that spinning off various operations is the correct way to go to realize cost savings and a higher valuation.
http://news.ft.com/servlet/ContentServe ... 2571727307
Sticking with grocers (always a good thing to do), we have a very interesting look at Nash Finch. They are under investigation by the SEC, have not files all of their finaical statements, and can not pay their debt off and are in default on some of their loans. Rather than declare bankruptcy, they worked out a deal with creditors where for a fee (1.5% of principal), the debt contracts could be extended.
http://biz.yahoo.com/rf/030228/retail_nashfinch_1.html
http://biz.yahoo.com/bw/030228/285587_1.html
Who is speaking? In one of the more weird stories in some time, Analyst Jack Grubman is reported to have been the person behind some of the words that came out of WorldCom during their collapse last year.
http://www.nytimes.com/2003/02/27/business/27TELE.html
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Investments
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Ok, but come on? A JF article? If your friends invest in the stock market, you are more likely to do so as well. That is the finding of a new paper by Harrison Hong, Jeffrey D. Kubik and Jeremy C. Stein . To which I can only ask one question: “Are you going to jump off a cliff if your friends do?”
http://www.afajof.org/Pdf/forthcoming/S ... vision.pdf
ok, quick what is a premium bond? If you said the combination of a bond and a lottery you are correct! They were first issued in the UK in the late 1950s and are back in vogue with a record number being sold last month. The odds of winning a big price are about 1 in 28,500, but there are additional smaller prizes. However, you won’t get rich if you do not win as the average expected return is less that 3%.
http://news.bbc.co.uk/1/hi/business/2779179.stm
While we all know the stock market is down, what may have passed the radar scope is that volume is way down too. This low volume may lead to more volatility as there is less liquidity and trades have a greater impact.
http://www.boston.com/dailyglobe2/054/b ... ess+.shtml
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Financial Institutions and Markets
(also Money and Banking)
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One reason the Fed’s rate cuts may not be working as well this time around is that the longer term rates have not fallen in conjunction with the short-term rates. Why? Well no one is sure but one reason might be the rising Federal Deficit which will increase the supply of long-term bonds. Another reason may be that the gains from the cut are being offset by higher energy prices. It is for this latter reason that the European Central Bank is expected to cut rates.
http://www.nytimes.com/2003/02/23/busin ... 3VIEW.html
http://www.timesonline.co.uk/article/0, ... 48,00.html
The new head of the SEC is William Donaldson. In his comments this past weekend, he said he would like to reorganize the SEC into a faster more efficient and more agile force that is proactive rather than reactive. In case you were wondering, yes he is a former marine.
http://smartmoney.com/bn/ON/index.cfm?s ... 00367-1011
http://www.chron.com/cs/CDA/story.hts/business/1800207
One specific thing the SEC hopes to do is to standardize the separation of investment banking activity and research activity both in the US and in the Europe. But any standardization will not be easy as each side things their systems are better.
http://www.timesonline.co.uk/article/0, ... 18,00.html
And in this corner, Alan Greenspan. The Fed Chairman spoke out against the President’s tax cut and stimulus plan by saying the economy was doing ok and would likely get better in the near future, and thus the stimulus plan is not needed and the tax cuts may increase the already rapidly expanding deficit. White House economic adviser Glenn Hubbard however, then went public and stressed that Greenspan was entitled to his opinion and the White House has complete faith in him. (of course, this acknowledgement came a week after the original comments, but….)
http://www.theage.com.au/articles/2003/ ... 62341.html
http://reuters.com/financeNewsArticle.j ... ID=2294321
Speaking of Hubbard, almost immediately after endorsing Greenspan he decided to resign. (Have I read too many fiction books?)
http://www.dailytelegraph.co.uk/money/m ... tcity.html
After seeing so many mergers in the banking industry, it seemed like the small bank was almost extinct, but now it is staging a comeback and in Buffalo and elsewhere, small banks are fighting back. While they still do not make up much of the total market share, they are becoming more numerous and competing on service, low fees, and locations. This brings to mind the barbell theory of banks: the big and the small banks will be better able to compete than the mid sized banks. This was the explanation for many of the mergers in the 1990s to combine medium sized banks into larger banks.
http://www.buffalonews.com/editorial/20 ... 028299.asp
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International Finance
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This one should come as no shock. Countries with greater property right protections experience higher growth. That is the conclusion of a forthcoming Journal of Finance article by Claessens and Laeven that finds that this may explain the somewhat troubling fact that firms in developing nations have higher fixed assets to total assets than in developed nations, which goes against standard theory that growth firms have fewer assets in place.
http://www.afajof.org/Pdf/forthcoming/Laeven.pdf
Why do foreign firms that list in the US have a higher valuation (as measured by q values) than firms that do not list in the US? A theory proposed by Doidge, Karolyi, and Stulz suggest that it is the combination of better access to capital and less ability to expropriate wealth.
http://jfe.rochester.edu/02367.pdf
In “Imagine There is No Country” by Surjit S. Bhalla, we get further confirmation that free trade and globalization are good! The book reports that while there are still many sections of the world very poor, the number living on pennies a day is falling and the imbalance is actually lessening between the haves and the have-nots. This improvement is largely seen where countries have adopted more free market ideas. Why does this differ with what you are used to hearing in the popular press? In part he claims the data used in many studies is pretty bad.
http://www.businessweek.com/bwdaily/dnf ... _db065.htm
Ok, quick! Name the largest trading partner of the US. If you said Canada, you are in the know! And on top of that they are one of, if not the largest!, exporter of oil and natural gas to the US. (I did not know Oil…in fact I question it, but that is what the article says.)
http://www.nationalpost.com/financialpo ... 83444B2%7D
Can Toshihiko Fukui the new person at the top of the Bank of Japan get the nation’s economic ship tuned? He was selected as the top person in a new three person team to try to pull Japan out of its economic doldrums. The biggest problem remains the banking sector but followed closely by deflation. If you believe foreign investors, then the answer to the above question seems to be no. (My advice remains to dramatically raise the money supply, provide a partial government bailout to banks, and devalue the yen.)
http://news.bbc.co.uk/1/hi/business/2785601.stm
http://sg.biz.yahoo.com/030228/15/38dqv.html
http://reuters.com/financeNewsArticle.j ... onomicNews
http://news.bbc.co.uk/1/hi/business/2807015.stm
http://www.yomiuri.co.jp/newse/20030303wo12.htm (this last article provides an interesting description of how the new leaders were selected)
In currency markets, the record US trade deficit helped push the dollar higher against the Yen which led to Japanese central bank intervention in the market in an attempt to keep the yen low.
http://www.forbes.com/personalfinance/r ... 94552.html
http://www.clickonsa.com/sh/money/stori ... 00259.html
While Venezuela is back pumping oil, it is far from capacity and the strike did major damage to the nation’s economy.
http://www.chron.com/cs/CDA/story.hts/business/1800313
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Economics
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Greenspan maybe right, the US economy is growing faster than most had thought. In fact, the 4th quarter GDP was again revised upwards.
http://news.bbc.co.uk/1/hi/business/2781833.stm
WOW! Game-theory aficionados have to read this one! It looks at the new field of neuroeconomics. What is that? It looks at how the brain physically reacts to various economic stimuli and tries to see why some people behave “rationally” and others do not. Very interesting :-)
http://www.nytimes.com/2003/02/27/business/27SCEN.html
Inflation, in large part due to rising oil prices, came back in to the picture, albeit only slightly, as prices from .3% in the previous month. http://www.upi.com/view.cfm?StoryID=200 ... 0524-5862r
http://news.bbc.co.uk/1/hi/business/2787865.stm
http://story.news.yahoo.com/news?tmpl=s ... ks_week_dc
http://biz.yahoo.com/rm/030301/economy_ ... eke_1.html
Let me preface this by saying we really do not know, but one estimate of the cost of a potential war with Iraq is $1 trillion by 2010. This includes the cost of reconstruction and the ripple effects of reduced foreign investment. Of course it could be much lower, but already we are seeing projected record deficits in the US as a result of the build-up and continued war on terrorism. AS for the actual fighting that may occur, the BBC article suggests that costs would escalate by $500m per day of fighting.
http://story.news.yahoo.com/news?tmpl=s ... _iraq_dc_2
http://news.bbc.co.uk/1/hi/business/2805769.stm
It is always nice to see people use economics/finance to solve problems. For example, London is famous for its traffic problems, so in order to cut down congestion, they turned to economics and are now charging a toll to drive in the heart of the city. While there are some problems with getting the fees collect, overall it seems to be working.
http://news.bbc.co.uk/1/hi/business/2807871.stm
http://news.bbc.co.uk/1/hi/england/2776253.stm
http://news.bbc.co.uk/1/hi/uk/2786899.stm
France reported their unemployment rate was up this past month. What is interesting of course is up to what level. It was only up .8%, but to over 9%. This is about 150% of the US rate. Why? A big reason is their expensive social programs and the difficulty in letting workers go.
http://news.bbc.co.uk/1/hi/business/2807811.stm
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Personal Finance
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It’s getting nearer to tax time in the US and the Washington Post published an article that tells you about some of the changes in the tax code.
http://www.washingtonpost.com/wp-dyn/ar ... 3Mar1.html
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Energy Markets
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The threat of war, low supplies, cold weather, and continued production problems in Venezuela continue to keep oil prices high. They are now at the highest levels since the last Gulf War. Prices neared $40 a barrel but closed the week slightly under $37 a barrel.
http://www.msnbc.com/news/876996.asp
http://www.arabnews.com/Article.asp?ID=23000
http://www.nytimes.com/2003/02/27/business/27PLAC.html
Partially as a result, gasoline prices are also climbing. MSNBC provided an interesting article on what makes up the price of gasoline. The second biggest factor (after the petroleum) is taxes. The third largest cost is the actual refining practice itself. (good point in the article about taxes likely to continue to rise to pay for rising budget deficits at the state level.
http://www.msnbc.com/news/878211.asp
So if not oil, then what can we use for power? Many think cars of the future will run on hydrogen or some blend based on ethanol or soybean oil. However, whatever it will be, the future is not yet here as price wise, nothing is yet economically feasible (this is at least in part due to subsidies (direct and indirect) for other fuel sources.
http://story.news.yahoo.com/news?tmpl=s ... or_new&e=3
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Money and politics
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Bush’s tax cut plan continues to come under fire. Including some from Fed Chairman Alan Greenspan himself who questioned whether the economy needed any stimulus plan and whether the deficit spending was necessary, to Nobel Laureates and other economists who question whether cutting dividend tax rates will have much of a net impact once the implications of the deficit is factored in. On the other side you have those who feel that a better plan would be to end the double taxation of wages as well as on dividends by allowing FICA taxes to be deducted.
http://news.bbc.co.uk/1/hi/business/2779179.stm
http://news.bbc.co.uk/1/hi/business/2735269.stm
http://www.boston.com/dailyglobe2/054/b ... too+.shtml
http://www.boston.com/dailyglobe2/054/b ... ief+.shtml
Money may not be able to buy you love, but maybe support in time of war? That is what the US seems to be doing in some areas.
http://www.businessweek.com/bwdaily/dnf ... _db038.htm
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Financial Service Industry
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A JP Morgan unit gets 10 days in the penalty box (no trading!) from Japanese officials for trying to manipulate the market in exchangeable bonds.
http://www.nytimes.com/reuters/business ... .html?dlbk
OUCH! The NY Attorney General Elliott Spitzer is threatening to release the documents he subpoenaed to the public regarding the state’s $1.4 Billion settlement. This would likely lead to many more lawsuits against the investment banks. settlehttp://www.dailytelegraph.co.uk/m ... tcity.html
Lehman Brothers is being sued for $16 million in a compensation suit where the employee, Bond trader Kerim Derhalli says he was never paid the amount he was promised for working out bad loans during the Russian crisis.
http://news.bbc.co.uk/1/hi/business/2788873.stm
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Real Estate
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Is there a real estate bubble or not? Well, it depends on who you ask. One sign of trouble is that in certain areas of California, rents are falling while people are paying over the asking price for property. However, the counter argument is that low interest rates have allowed the housing market to stay strong.
http://story.news.yahoo.com/news?tmpl=s ... ifornia_dc
A similar story is playing out in the UK housing market where there is fear of a bubble bursting and seeing the values of houses fall.
http://news.bbc.co.uk/1/hi/business/2781833.stm
Even with some sniffs of inflation on the horizon, mortgage rates in the US fell to 30 year low. 15 year loans are now below 5.2%!
http://www.msnbc.com/news/762857.asp
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Accounting News
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Is this going to be Europe’s Enron? An accounting problem at Royal Ahold (the grocery store giant who owns Tops, Giant, and MANY others) lost 63% after admitting to overstating profits. The company fired its CEO and CFO as a result and now there is a report (unsubstantiated to date) that this is just the tip of the ice berg. (see Washington Post article)
http://www.washingtonpost.com/wp-dyn/ar ... Feb24.html
http://www.thestreet.com/_tsclsii/marke ... 70318.html
http://www.nytimes.com/2003/02/27/busin ... 7GROC.html
http://news.bbc.co.uk/1/hi/business/2797097.stm
http://www.washingtonpost.com/wp-dyn/ar ... 3Mar2.html
http://biz.yahoo.com/djus/030301/1600000053_1.html
Given the many stories of aggressive practices and even fraud, here is somewhat surprising paper by Ross Watts of the University of Rochester. He finds that conservatism is still alive and well in accounting.
http://papers.ssrn.com/sol3/papers.cfm? ... _id=371820
Slate has a good article looking at the two sets of books that firms keep. One set for reporting to shareholders and one for tax purposes. And the differences can be amazing. Take Enron (please!). They reported record earnings year after year through the late 1990s and yet were paying almost zero in taxes.
http://slate.msn.com/id/2078581/
A look inside the former Arthur Andersen. Wow. It was like a cult. Talk about your strict corporate culture and indoctrination.
http://www.nytimes.com/2003/02/23/busin ... 3VALU.html
As predicted, Former K-mart executives are now in trouble ad charged with Fraud for issuing false statements. The trouble seems to lie in their accounting for trade allowances. (These are payments for selling a manufacturer’s products). GAAP and the SEC each require these allowances, if they can be cancelled, to be recorded as income on a matched basis (when the product is actually sold), but Kmart decided to take them all at once (thus upping income) even though they were for several years. What makes it a fraud case are the allegations of faking phone calls, and not sending mails in order to appease internal auditors. (interesting!)
http://www.nytimes.com/2003/02/27/business/27SHOP.html
(also listed in accounting)
This may be taking full disclosure a bit too far! You have to read at least some of this 8K filing from Expediators International. They tell you what they think, why, and why they may be wrong. And in a funny matter to boot. Some parts are hilarious! Definitely the most entertaining SEC filing I have ever seen!
http://biz.yahoo.com/e/030220/expd8-k.html
http://www.edgar-online.com/brand/yahoo ... /?sym=EXPD
CALPERS, the Giant pension fund for California Employees, is pushing for firms who have moved their headquarters out of the US in order to avoid taxes, to move them back to the US. First on their target list? Tyco.
http://www.sfgate.com/cgi-bin/article.c ... 182361.DTL
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FinanceProfessor.com Site of the Week
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Financial Engineering news. I know I named it before, but it has been a while. The site rally is good. Check out the recent interview with Frank Partnoy (of FIASCO fame) on greed and what caused the corporate governance crisis. (Incidentally, but no doubt not coincidently, Partnoy has a new book coming out. It is on this exact topic. I look forward to reading it.)
http://fenews.com/
http://fenews.com/fen30/one_on_one_inte ... rtnoy.html
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