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. :)
Sunday, December 19, 2004
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 investing. The key difference from a financial perspective is the no-interest rule since the Islamic socially responsible investing paradigm is not much different than what other religions do."
Islamic finance, and the majority of all socially responsible investing (SRI), is different from "regular investing" that ignores social factors. SRI is based on the premise that by investng responsibly, we can improve the world. SRI has taken on many aspects: economic, environmental, social, and even whether the firm encourages gambling, drugs, or other so-called vices.
Many of the differences in Islamic Finance (especially Islamic banking) revolve around the no interest (no-riba) principle. For example, Islamic banks must take equity positions in homes rather than taking a traditional mortgage. Others examples include profit sharing plans, leasing, and repurchase plans. These allow the financial institution to make money while satisfying the no-interest principle.
While still a relatively small percentage of the overall financial market, Islamic Finance is a fascinating, important, and often overlooked area. Moreover, its importance will only increase as nations with large Islamic populations play a increasing role in world markets.
Therefore, I was quite excited when I received a link to AIF Investor Services. AIF is designed to help make Islamic Investment easier by not only explaining what Islamic Finance is, but also by rating firms (only a few at the present) on how well they abide by Islamic rules.
While making recommendations on for-profit firms is well beyond the scope of this blog, I can say I learned several things by reading their site and especially will recommend the FAQ page on Islamic Investing. It is good!
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 investing. The key difference from a financial perspective is the no-interest rule since the Islamic socially responsible investing paradigm is not much different than what other religions do."
Islamic finance, and the majority of all socially responsible investing (SRI), is different from "regular investing" that ignores social factors. SRI is based on the premise that by investng responsibly, we can improve the world. SRI has taken on many aspects: economic, environmental, social, and even whether the firm encourages gambling, drugs, or other so-called vices.
Many of the differences in Islamic Finance (especially Islamic banking) revolve around the no interest (no-riba) principle. For example, Islamic banks must take equity positions in homes rather than taking a traditional mortgage. Others examples include profit sharing plans, leasing, and repurchase plans. These allow the financial institution to make money while satisfying the no-interest principle.
While still a relatively small percentage of the overall financial market, Islamic Finance is a fascinating, important, and often overlooked area. Moreover, its importance will only increase as nations with large Islamic populations play a increasing role in world markets.
Therefore, I was quite excited when I received a link to AIF Investor Services. AIF is designed to help make Islamic Investment easier by not only explaining what Islamic Finance is, but also by rating firms (only a few at the present) on how well they abide by Islamic rules.
While making recommendations on for-profit firms is well beyond the scope of this blog, I can say I learned several things by reading their site and especially will recommend the FAQ page on Islamic Investing. It is good!
Monday, December 13, 2004
Google Gives Employees Another Option
Google Gives Employees Another Option:
"Google (GOOG) plans to give employees a novel method of cashing in their options starting next April. The search giant will let employees sell their vested stock options, which give the holder the right to reap the difference between the initial price and the current price, to selected financial institutions in an auction marketplace it's setting up with Morgan Stanley"
"Google (GOOG) plans to give employees a novel method of cashing in their options starting next April. The search giant will let employees sell their vested stock options, which give the holder the right to reap the difference between the initial price and the current price, to selected financial institutions in an auction marketplace it's setting up with Morgan Stanley"
Thursday, October 28, 2004
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 better.
However, I also got a few subscribers saying that they would like more news (instead of reviewing academic articles. To this I would say that there are so many good sites out there, I am not sure what value I can add. Specifically, I suggest the NY Times Deal Book which is how I start most days. Sign up for it!! It is free and HIGHLY RECOMMENDED!
That said, I know many of you are also interested in accounting stories, so I would like to suggest the Financial Accounting Blog and the newsletter from AccountingWEB.com. Both are very informative and interesting! I read the blog through my MYYahoo page and have subscribed to the AccountingWEB weekly newsletter!
BTW, no I do not get anything for these plugs, I am just trying to help! And to lessen the complaint letters that I get! ;)
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 better.
However, I also got a few subscribers saying that they would like more news (instead of reviewing academic articles. To this I would say that there are so many good sites out there, I am not sure what value I can add. Specifically, I suggest the NY Times Deal Book which is how I start most days. Sign up for it!! It is free and HIGHLY RECOMMENDED!
That said, I know many of you are also interested in accounting stories, so I would like to suggest the Financial Accounting Blog and the newsletter from AccountingWEB.com. Both are very informative and interesting! I read the blog through my MYYahoo page and have subscribed to the AccountingWEB weekly newsletter!
BTW, no I do not get anything for these plugs, I am just trying to help! And to lessen the complaint letters that I get! ;)
Thursday, August 26, 2004
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 Monitoring and a lack of transparency (hard to tell who is doing what, so why not shirk)
Inefficient internal capital markets (so money is wasted through misallocation)
A lack of loyalty on mangers' and employees' behalves---this would lead to reduced performance and higher expenses.
There really is little doubt that all of these play a role in the discount. Moreover, we should still consider the possibility that there may not be a real discount since the firms do freely chose to become conglomerates. This endogeneity may be the result of a discount that would have been larger had the firms not become conglomerates. (A view which I doubt, but do consider worthy of attention).
At the upcoming FMA convention in New Orleans, McNeil and Smythe will present their paper that supports the view that internal capital markets are not as efficient as many would like to believe.
The authors report what every upper and middle level manager in the world already knows: that politics matter.
More specifically McNeil and Smythe write that lobbying by divisional managers plays a role in the allocation of capital. This is a problem because if the internal market were perfect, the allocation decision would be based soley on the merits (the risk and returns) of each project.
In their words:
"To test the Lobbying Power Hypothesis, we examine the sensitivity of business
segment capital expenditures to segment manager characteristics expected to
contribute to a manager's lobbying power for a sample of firms that have
identifiable division/segment managers....There are several division manager
characteristics, such as tenure as suggested by Wulf (2002b), that could be
connected to lobbying power. We collect information on division manager tenure
with the firm, time in position, salary level relative to the CEO, membership on
the board of directors, age, and whether the manager is one of the firm’s top
five executives. Each characteristic could indicate and/or impact the degree of
a manager's lobbying power. In the analysis, we examine the association between
division capital expenditures and each of the aforementioned division manager
characteristics."
and the findings?
"We find evidence that segment level capital expenditures are associated with
division manager characteristics which, we argue, reflect division manager
lobbying power. For example, the results indicate that relatively high q
segments receive lower capital expend itures when headed by a manager with low
tenure or by a manager competing with multiple top executive/segment
managers."
VERY INTERESTING!!!!
http://207.36.165.114/NewOrleans/Papers/1101756.pdf
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 Monitoring and a lack of transparency (hard to tell who is doing what, so why not shirk)
Inefficient internal capital markets (so money is wasted through misallocation)
A lack of loyalty on mangers' and employees' behalves---this would lead to reduced performance and higher expenses.
There really is little doubt that all of these play a role in the discount. Moreover, we should still consider the possibility that there may not be a real discount since the firms do freely chose to become conglomerates. This endogeneity may be the result of a discount that would have been larger had the firms not become conglomerates. (A view which I doubt, but do consider worthy of attention).
At the upcoming FMA convention in New Orleans, McNeil and Smythe will present their paper that supports the view that internal capital markets are not as efficient as many would like to believe.
The authors report what every upper and middle level manager in the world already knows: that politics matter.
More specifically McNeil and Smythe write that lobbying by divisional managers plays a role in the allocation of capital. This is a problem because if the internal market were perfect, the allocation decision would be based soley on the merits (the risk and returns) of each project.
In their words:
"To test the Lobbying Power Hypothesis, we examine the sensitivity of business
segment capital expenditures to segment manager characteristics expected to
contribute to a manager's lobbying power for a sample of firms that have
identifiable division/segment managers....There are several division manager
characteristics, such as tenure as suggested by Wulf (2002b), that could be
connected to lobbying power. We collect information on division manager tenure
with the firm, time in position, salary level relative to the CEO, membership on
the board of directors, age, and whether the manager is one of the firm’s top
five executives. Each characteristic could indicate and/or impact the degree of
a manager's lobbying power. In the analysis, we examine the association between
division capital expenditures and each of the aforementioned division manager
characteristics."
and the findings?
"We find evidence that segment level capital expenditures are associated with
division manager characteristics which, we argue, reflect division manager
lobbying power. For example, the results indicate that relatively high q
segments receive lower capital expend itures when headed by a manager with low
tenure or by a manager competing with multiple top executive/segment
managers."
VERY INTERESTING!!!!
http://207.36.165.114/NewOrleans/Papers/1101756.pdf
Friday, July 16, 2004
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 seen as a means of improving monitoring) may actually reduce monitoring and help to entrench managers because many of those purchasing the blocks are not actively monitoring management.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=471720
Yale’s Lily Qiu dives into this question further and finds evidence that suggests that large public pension funds (PPF) may do a better job monitoring than insurance or mutual funds. Qiu's case is built on the finding that firms with large public pension fund holdings “engage in less merger and acquisitions activity.” Moreover, when M&A deals are done, Qiu reports that “The presence of PPF ownership is…significantly and positively associated with long-term M&A abnormal returns…[and]with post-M&A improvement in asset turnover rates.”
Not convinced yet? Qiu is not done: “the negative association between PPF ownership and M&A likelihood is concentrated among cash-rich and low Q firms; among M&A firms, those with higher PPF ownership are less likely to engage in "buying growth" acquisitions.”
A quick explanation of the last sentence? Ok, low Q values (technically Tobin's Q which is market value divided by replacement value) and high cash firms are often cited as being where the Free cash flow problem (see Jensen 1986) is the worst.
Thus, at these firms mergers and acquisitions are often seen as negative projects that only serve to make managers better off. That it is at this
type of firm where the PPF influence seems the strongest, suggests that PPF are stronger monitors of management than other blockholders.
http://papers.ssrn.com/paper.taf?abstract_id=521803
Cite: Qiu, Lily, "Which Institutional Investors Monitor? Evidence from Acquisition Activity" (December 2003).
Yale ICF Working Paper No. 04-15. http://ssrn.com/abstract=521803
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 seen as a means of improving monitoring) may actually reduce monitoring and help to entrench managers because many of those purchasing the blocks are not actively monitoring management.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=471720
Yale’s Lily Qiu dives into this question further and finds evidence that suggests that large public pension funds (PPF) may do a better job monitoring than insurance or mutual funds. Qiu's case is built on the finding that firms with large public pension fund holdings “engage in less merger and acquisitions activity.” Moreover, when M&A deals are done, Qiu reports that “The presence of PPF ownership is…significantly and positively associated with long-term M&A abnormal returns…[and]with post-M&A improvement in asset turnover rates.”
Not convinced yet? Qiu is not done: “the negative association between PPF ownership and M&A likelihood is concentrated among cash-rich and low Q firms; among M&A firms, those with higher PPF ownership are less likely to engage in "buying growth" acquisitions.”
A quick explanation of the last sentence? Ok, low Q values (technically Tobin's Q which is market value divided by replacement value) and high cash firms are often cited as being where the Free cash flow problem (see Jensen 1986) is the worst.
Thus, at these firms mergers and acquisitions are often seen as negative projects that only serve to make managers better off. That it is at this
type of firm where the PPF influence seems the strongest, suggests that PPF are stronger monitors of management than other blockholders.
http://papers.ssrn.com/paper.taf?abstract_id=521803
Cite: Qiu, Lily, "Which Institutional Investors Monitor? Evidence from Acquisition Activity" (December 2003).
Yale ICF Working Paper No. 04-15. http://ssrn.com/abstract=521803
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