From Forbes:
Enron chief accountant expected to plead guilty - report - Forbes.com: "he former chief accountant at Enron Corp is expected to plead guilty to one or more criminal charges related to the collapse of the energy company, the Wall Street Journal reported.
In its online edition, the newspaper cited sources familiar with the situation as saying attorneys for accountant Richard Causey have spoken to prosecutors in recent days about a plea agreement.
A plea agreement could have a major impact on the cases against his co-defendants, former chairman Kenneth Lay and former president Jeffrey Skilling.
The three men face fraud, conspiracy and other charges in relation to the alleged financial and accounting practices at the company. "
Wednesday, December 28, 2005
Thursday, September 29, 2005
Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance by Murray Carlson, Adlai Fisher, Ronal
Using option theory to understand and explain firm and investor behavior often yields important insight. This is no exception.
Carlson, Fisher, and Giammarino (CFG) use real option analysis (real options are essentially the application of option theory to “real” assets) to investigate the stock behavior around seasoned equity offers (SEO). Many researchers (probably most notably Ritter 2003) have shown that prior to a SEO stock prices rise, then fall on the announcement, and then underperform over the following period.
Potential explanations to this include market timing and inefficiency stories that have managers selling overpriced shares to investors who willingly buy the shares but at only a partial discount. The real option view allows us to add a more rational explanation to these behavioral models.
The very quick explanation is that firms have options on growth (i.e growth options). These options are more volatile than both the firms’ assets as well as the assets that make up the growth opportunities. So, when the firm uses the proceeds of the SEO to expand (which is to say to convert growth options into assets in place), the value of the firms’s equity drops.
In the authors’ words:
“Equity issues are associated with firm expansions. When firms invest, they convert growth options to assets in place. Even when the new assets are risky, they will be less risky than the options they replace. Although both size and book-to-market effects are present in our model, standard matching procedures fail to capture the dynamics of risk and expected return.”
How cool is that?!
And yes this is similar to the real option papers that try to explain the internet bubble away.
Cite:
Carlson, Murray D., Fisher, Adlai J. and Giammarino, Ron, "Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance" (December 5, 2004). 7th Annual Texas Finance Festival Paper. http://ssrn.com/abstract=562942
FTR I stumbled upon this paper while researching Real options for my advanced corporate finance class. I feel bad I had missed it for so long. And yes I will have to be redoing my notes for the umpteenth time. :)
Carlson, Fisher, and Giammarino (CFG) use real option analysis (real options are essentially the application of option theory to “real” assets) to investigate the stock behavior around seasoned equity offers (SEO). Many researchers (probably most notably Ritter 2003) have shown that prior to a SEO stock prices rise, then fall on the announcement, and then underperform over the following period.
Potential explanations to this include market timing and inefficiency stories that have managers selling overpriced shares to investors who willingly buy the shares but at only a partial discount. The real option view allows us to add a more rational explanation to these behavioral models.
The very quick explanation is that firms have options on growth (i.e growth options). These options are more volatile than both the firms’ assets as well as the assets that make up the growth opportunities. So, when the firm uses the proceeds of the SEO to expand (which is to say to convert growth options into assets in place), the value of the firms’s equity drops.
In the authors’ words:
“Equity issues are associated with firm expansions. When firms invest, they convert growth options to assets in place. Even when the new assets are risky, they will be less risky than the options they replace. Although both size and book-to-market effects are present in our model, standard matching procedures fail to capture the dynamics of risk and expected return.”
How cool is that?!
And yes this is similar to the real option papers that try to explain the internet bubble away.
Cite:
Carlson, Murray D., Fisher, Adlai J. and Giammarino, Ron, "Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance" (December 5, 2004). 7th Annual Texas Finance Festival Paper. http://ssrn.com/abstract=562942
FTR I stumbled upon this paper while researching Real options for my advanced corporate finance class. I feel bad I had missed it for so long. And yes I will have to be redoing my notes for the umpteenth time. :)
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