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This paper by the Federal Reserve Board compares the predictions for the market value of firms from the Gordon growth model with those from a dynamic general equilibrium model of production. Special attention is focused on the prediction for movements in the market value of firms in response to a decline in the required return or an increase in the growth rate of the economy. The tension between theory and data suggests that the skyrocketing market value of firms in the second half of the 1990s may reflect a degree of irrational exuberance.

This 33-page .pdf IMF paper provides an overview of recent theoretical and empirical research on herd behavior in financial markets. It addresses the following questions: What precisely do we mean by herding? What could be the causes of herd behavior? What successes hav existing studies had in identifying such behavior? And what effect does herding have on financial markets?

"It may not be the glory years, but buyout shops are back, raising billions--and heading into uncharted waters." An interesting look at the LBO world and the changes it is seeing. Discusses the idea of PIPE (private investments in public equities) and raises the question of whether LBO managers are out of their depth in the New Economy.

The return on the market portfolio plays a central role in the capital asset pricing model (CAPM), the financial theory widely used by both academics and practitioners. However, the intertemporal properties of the stock market return are not yet fully understood. In particular, ther is an ongoing debate in the literature about the relationship between market risk and return and the extent to which stock market volatility moves stock prices. This paper provides new evidence on the risk-return relation by estimating a variant of Merton's (1983) intertemporal capital asset pricing model (ICAPM).

Article discusses problems associated with accounting for and valuing intangible assets (see related articles by Baruch Lev). Offers some refresher info for those who have forgotten (or yet to take) their accounting course(s).

Given the ease and availability of online trading over the past several years, just how has the behavior of average investors changed? Are these individuals trading online more, and more frequently, or does their natural conservatism distance them from the lure of trading on the web? Finance professor Andrew Metrick and two colleagues from Harvard University find some answers in a recent research paper titled, "Does the Internet Increase Trading? Evidence from Investor Behavior in 401(K) Plans."

Many analysts argue that despite the carnage on Wall Street over the past year, stock prices are still high by historical standards. Is that true? Could stocks fall some more before they reach bottom? Wharton finance professor Jeremy Siegel, author of Stocks for the Long Run, suggests that benchmarks such as the price-to-earnings ratio present a more hopeful picture than many market observers believe.

This link was reported as bad and I was unable to find a current link.

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Corporate boards have long used such techniques as poison pills and anti-greenmail to stave off hostile outsiders. But shareholders' organizations say such anti-takeover techniques are really meant to protect bad executives. Wharton finance professor Andrew Metrick and two colleagues examine which side has the better claim.

"Especially in environmental matters, the link between socially responsible practices and shareholder returns is becoming evident. That's because a company's ability to deal successfully with environmental issues can be a credible measure of management quality, which is notoriously tricky to gauge, contends Frank Dixon, managing director with Innovest Strategic Value Advisors, New York. Management teams that excel in handling environmental issues, which come with a morass of technical, market, and regulatory problems, are likely to do a good job overall, says Dixon. In fact, Innovest's research has shown that stocks of companies with above-average environmental performance outperform their competitors by three to 25 percentage points annually. Dixon explains, 'The concept of fiduciary responsibility is beginning to change, to consider that environmental and social factors are relevant to the bottom line.'"

High book-to-market (B-to-M) firms tend to be in poor financial health, as reflected by their low stock prices and poor earnings performance. Yet research consistently shows that a portfolio of these "value" firms outperforms both the overall market and portfolios comprised of low B-to-M "glamour" firms.

The reason for this is because a small number of high B-to-M firms are strong enough to raise the portfolio's mean performance, compensating for the many high B-to-M firms that under-perform the market. Wouldn't it be great to have a way to distinguish prospective winners from likely losers? A University of Chicago Graduate School of Business professor thought so, too.

Pressure to meet the numbers is greater than ever. But don't let your company issue a misleading earnings report. An excerpt from the Harvard Business Review shows how to spot signs of trouble.

Donating to charities shouldn't be risky. But whether you're donating $50 or millions, it's important to make sure the money will be well-spent. Below you'll find the complete data from Forbes' annual survey of 200 charities. The list reveals which charities are raising funds most efficiently and which charities are stumbling with your money. It also includes the highest salaried position of each organization. A Web-exclusive file in PDF format is downloadable, searchable, printable, and best yet--free.

How would your firm look to the premier investor? What does great investment potential look like to Mr. Buffett? Here's his checklist.

High-tech companies and their investment bankers have a cozy symbiotic relationship regarding stock options. Caught in the crush is a new victim: the worker.

Institutions spend $50 billion a year selecting stocks. Here's how to tap their knowledge for free.

Mimicking their trades in company stock is no sure road to riches.

Article takes a look at historical bull and bear runs that occur in roughly 14-year cycles (secular = major multi-year trends in Wall Street speak).

Josef Lakonishok says stock prices are driven by gut-wrenching emotion that smart investors can exploit. Eugene Fama says an efficient market governs prices, which means stock picking is a cruel illusion. When both invest, who does better?

Editor's Note: See another article on this theme, 'Is That a $100 Bill Lying on the Ground? Two Views of Market Efficiency', at
http://knowledge.wharton.upenn.edu/articles.cfm?catid=1&articleid=651

Find a wide selection of interviews with business luminaries in our Interviews Section

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Cesar Labitan, Jr. MD (an MBAE student at Purdue University - Calumet) has assembled a collection of selected passages from the letters of Warren E. Buffett to the Shareholders of Berkshire Hathaway Inc. The idea was borrowed from Professor Lawrence Cunningham's 1997 book, "The Essays of Warren Buffett: Lessons for Corporate America" but differs from that book in the manner and order the sections are presented to the reader. This book presents Mr. Buffett's business teachers first and then progresses into Mr. Buffett's documented business thoughts and ideas. Finally, this book focuses on Mr. Buffett's writings related to his four major investment selection criteria. Because Buffett "never wanted to take other parts of the report and package them for resale" this entire work is free and available through the Internet.

Editor's Note: This book is also available for free in MS Word format. You can find it in the MBA Depot File Vault at:
http://www.mbadepot.com/vault/vault.php?ID=145

Also of interest: you can find Warren Buffett's annual letters to the shareholders of the Berkshire Hathaway company, going back to 1977 at:
http://berkshirehathaway.com/letters/letters.html

How an irrelevant index survived the tech meltdown.

Editor's Note: If you don't know what the DJIA really is (or if you're not sure), read this...it's really interesting. For more instruction on the basics of market indices finance, visit
http://www.financeprofessor.com/introcorpfinnotes/marketindicies.html

Find a wide selection of interviews with business luminaries in our Interviews Section

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CEOcast is a financial news site for investors that specializes in interviews with chief executives of small- to medium-sized public companies. The CEOs are given a chance to describe their businesses and then are questioned about recent financial results. Not exactly hostile interviews, these sessions are nevertheless an interesting chance to hear top execs discuss their industries and how they run the business. What we like is the ability to listen to CEOs by industry, fifteen of them, including consumer staples, healthcare, and utilities. Each CEO interview is accompanied by a Web page devoted to that company, listing its products, a list of institutional investors, and news releases from the firm. [HBS Working Knowledge]

Behavioral economists seek to explain why we so often make financial choices that are, to put it bluntly, really damn stupid.

We always assume rationality of our market participants, but are they? Are you? One argument against this rationality is the way humans are "wired." As a result of this wiring homo sapiens have developed a fight or flight response that while may serve us well in the event of physical danger, may be counter productive when facing financial risks. That is in times of severe stress we may behave differently. Mauboussin and Bartholdson examine this response and suggest that it may be behind the high turnover and short-term orientation of many investors (both individual and institutional). [FinanceProfessor Annotation]

Socially responsible investors don't want their money to support companies that do things they disapprove of, such as selling tobacco, alcoholic beverages or weapons. They may be willing to sacrifice some financial returns for their convictions -- but how much must they give up? In one of the first studies of socially responsible investing on a risk-adjusted basis, Wharton's Christopher C. Geczy, Robert F. Stambaugh and David Levin show that index-style investors may pay a modest price for investing in socially responsible funds. For investors who favor actively managed funds, though, the cost could be much higher.

Four ways to scan for volatility in the mutual fund universe.

Editor's Note: this is one article in the entire August issue of Fidelity Outlook, which is a .pdf document. So, you will have to scroll down to page 8 (page 6 of the magazine) to read it.

Market efficiency is a tough thing to beat. Go ahead, find an anomaly and then have it torn to bits in future papers. Lesmond, Schill, and Zhou come to the defense of market efficiency and find that the reported profits from momentum investing are minimally overstated and possibly non-existent because of the higher than normal transactions costs involved with the necessary trading. For example while previous papers (example Jegadeesh and Titman 1991) account for transactions costs, they only use the average cost of trading. This paper reports that where momentum investing seems to be profitable is concentrated in stocks with higher than average transactions costs. Thus after they make adjustments for transaction costs, the abnormal returns disappear. [FinanceProfessor.com Annotation]

The field of social-purpose investing is growing and becoming more sophisticated. Should investors expect lower returns to benefit society? A new Harvard Business School study examines the question.

Treat these employee perks as a real part of your portfolio, not as a lottery ticket.

What counts isn't the bottom line but rather how it is calculated.