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A general discussion, particularly useful to non-specialists; contains links to other resources

A growing body of research at several business schools has been examining why many analysts prefer making buy or hold recommendations on stocks. In some cases, at least, analysts' recommendations may be biased by considerations that could well represent a conflict of interest.

One of the most popular ways to gauge a company's health is to mind what corporate insiders are doing. If they're jumping ship or dumping shares, there's good reason to worry. But it's not as easy to track insider bearishness as you might think, thanks to a hedging tactic called the zero-cost collar, a tool that's saved insiders a boatload of cash while individual investors lick their wounds.

For mutual fund analysts, new insights into evaluating a fund's performance don't come along every day. Lately, though, financial experts at Wharton and other schools have collaborated on research that challenges some long-held notions about which funds are best for investors. Included in that research is a paper by Lubos Pastor of the University of Chicago and Wharton's Robert Stambaugh on how to improve standard benchmarks used to predict fund performance.

From late 1998 through the summer of 2000, Wall Street was an out-of-control beast, and IPOs were its sustenance. The Securities and Exchange Commission is reportedly investigating a host of questionable issues, including whether investment banks unfairly allotted pre-IPO shares in return for a variety of kickbacks. It is the practice of tie-ins, more than anything else, that has attracted most of the attention from regulators, because tie-ins fall under market manipulation, which the SEC specifically banned in 1997 when it passed Regulation M.

There are several variations of the tie-in, including paying high commissions as a quid pro quo for a higher allotment of IPO shares or placing large trades with banks who are allotting IPO shares. And then there was the practice of promising to buy IPO stocks at fixed minimum prices in the aftermarket.

In this seven-part piece, Red Herring takes you behind the scenes of the IPO allocation process. The series is the result of more than 100 interviews with the people who know what went on: underwriters, traders, hedge and portfolio fund managers, litigators, regulators, and executives from the newly public companies themselves.

Authors take a look at how money managers get compensated and whether these compensation schemes provide managers with the incentive to act in the investors' best interests. Their research concludes that certain money managers, due to the generally accepted method of compensation in the mutual fund industry, are likely to increase their portfolio's risk level in an effort to improve their chances of receiving higher bonuses.

Stock options are a great idea run amok, as evidenced by the massive option packages awarded to some high-profile CEOs. Options are given tax treatment so companies have an incentive to depend on them for more of their employee compensation. But options are not free to current investors, as they dilute present and current earnings per share. Bill Mann offers a shorthand he learned from Warren Buffett as a rough instrument to calculate their true cost.

Article takes a look at the underlying problems with today's investment banks' research analysts.

With stock prices down, poorly performing companies are more vulnerable to hostile takeovers. So it comes as little surprise that an increasing number are popping poison pills, a familiar takeover defense mechanism. What is surprising are the terms of some of the latest deals.

Investment pioneer Bill Hambrecht foresees an entirely new way for companies to go public. His vision amounts to nothing less than an IPO revolution -- for founders and investors alike.

See related article, 'A Better, More Honest IPO' at:
http://www.forbes.com/2002/10/17/1017ipo.html

By the time NASDAQ reached its peak in the recent bull market, many financial commentators had begun to accept the idea that stock market valuations were no longer driven solely by the traditional economic factors: earnings growth, inflation, and interest rates. Instead, they suggested, new factors—such as structural changes in the economy, new rules of economics, and the value of intangible assets and brands—justified the lofty stock prices. Today those valuations seem ludicrous, though the fundamental question remains: has the market changed what it factors into share values? Using a simple model based on changes in earnings, inflation, and interest rates, we found that the traditional factors alone explain most of the medium- and long-term movement in the S&P index of 500 stocks over the past 40 years. We uncovered scant evidence that the market had changed the things it consistently factored into stock prices.

Wall Street analysts relentlessly cheered the dot-com mania that pushed technology stocks to stunning gains in 1999. But even after those stocks went into a tailspin in 2000, few analysts urged investors to sell. Such behavior has drawn the attention of both the Securities and Exchange Commission and the U.S. Congress, which held hearings on the subject in mid-June.

For a complete set of career resources check out our Career Center

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Three MBAs. Three interviews. The razor-sharp recruiter who scored them. And what you can learn from their mistakes.

Companies are being pressured to eliminate classes of stock with supervoting rights.

Securities markets worldwide have been on a roller-coaster ride after the bursting of the dot-com bubble and Enron's meltdown. Moreover, technology and globalization are breaking down old market structures and creating new virtual ones. How will investors and regulators deal with these challenges? Wharton's Financial Institutions Center and the Brookings Institution organized a conference last week in Washington D.C. on "The Future of Securities Markets" to discuss these issues and more.

Armed with his database of U.S. mergers, Harvard Business School professor Mark Mitchell has been exploring models of risk arbitrage that challenge earlier theories. What he's found: Merger arbitrage is riskier than it looks.

A recent study of US IPOs from 1986 through early 2000, conducted by Cap Gemini Ernst & Young, found that "new economy" firms that promoted the use of non-financial measures did worse when evaluated by those same measures. This compounds their well-documented failure to provide meaningful financial returns and confirms the importance of identifying, measuring, and disclosing appropriate intangible value drivers.

Furthermore, the study found that the factors driving IPO success have stayed relatively constant over time and are strongly connected to intangibles such as good management practices, rather than based only upon the promise of new technology. In addition, the results of the CGEY study run counter to many other popular perceptions about the size and age of companies that conduct IPOs.

Now that the window for initial public offerings has all but closed, more Wall Street-bound companies are flirting with controversial reverse mergers.

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

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How card whiz Blair Hull parlayed a $25,000 casino stake into a trading empire worth more than $500 million.

Editor's Note: though not offering a lot of real value, this is an interesting look at the relationship between the world of gambling and investment banking.

When the next round of finance texts is written, the American Dot-com Bubble of the late 1990s is sure to take its place with the classics - the Tulip Bubble, the South Seas Bubble, the run-up to the great crash of 1929. But what caused it? According to one theory, the problem was a shortage of short selling, say Wharton finance professors Christopher C. Geczy and David Musto. The two researchers and a third colleague have written an article examining this thesis entitled, "Stocks are Special Too: An Analysis of the Equity Lending Market."

Note: Business 2.0 is now part of CNNmoney and some older articles are no longer available

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Thirty years after he helped put Silicon Valley on the radar of investment bankers worldwide, Bill Hambrecht is using the Net to torpedo conventional IPOs.

Jung and Shiller have an interesting paper that looks at Samuelson's dictum: that is that the market is more efficient pricing individual stocks than getting the overall price level (i.e. the market) correct. In English it means that while we can price stocks relative to one another reasonably well, we can not price the overall market as well. [FinanceProfessor Annotation]

Although the inner workings of the stock market are fascinating, few introductory texts have the space to describe them in detail. Furthermore, the U.S. stock markets have been changing so rapidly in recent years that many books have not yet caught up with the changes. This quick note provides an up-to-date view of how the U.S. stock markets work today. This note will teach you about:
- The functions of a stock market;
- Stock markets in the United States, including NASDAQ and the NYSE;
- The difference between limit and market orders;
- How stock trades take place; and
- Lots of other interesting tidbits about the stock market that you wanted to know, but were afraid to ask.

Is earnings management always bad? No, if you believe the new paper by Arya, Glover, and Sunder. They point out that Earnings management can reduce the noise inherent in earnings and thereby reduce investor uncertainty. To quote the paper "a smooth car ride is not only comfortable, it also assures the driver of the driver's expertise." Moreover, too much transparency may reduce incentives of managers. (I must say that there are some good points, but overall I would still argue on the side of more, not less transparency and therefore less earnings management.) [FinanceProfessor Annotation]

Investors generally subscribe to the conventional wisdom that growth stocks outperform value stocks. But a study of international portfolios by professors at the University of Chicago Graduate School of Business and the Yale School of Management has shown that in reality the reverse is true: Value stocks reap higher returns than growth stocks in markets around the world.

Editor's Note: this is an old article so it would be interesting to see the authors' subsequent work; one key finding is that CAPM does not work well (while CAPM considers sensitivity to the market return the authors found two other measures necessary: a measure to distinguish the risks in small stocks versus big stocks, and a measure to distinguish the risks in value stocks versus growth stocks.)

U.S. corporate scandals such as Enron and Tyco have highlighted the fact that insiders enjoy benefits above and beyond those of the average shareholder-the so-called "private benefits of control." How widespread are these benefits? What effects do they have on the development of a country's securities market? Furthermore, how can such benefits be curbed? New research indicates that in spite of the recent corporate scandals in the United States, other countries face much greater hurdles in curbing these private benefits, and in developing effective systems of corporate governance.

A "share-weighting" analysis gives a better read on the market's vital signs than major market indices.

By looking carefully at data on individual stock prices, it is easy to find many examples of "comovement" - groups of stocks whose prices tend to move together. For instance, prices of stocks in the same industry tend to move together, as do the prices of small-cap stocks, value stocks, and closed-end funds.

Why include a freeze-out provision in takeover contracts? Because if not, investors would not tender shares. How is that? Consider the Grossman-Hart (1980) view that if the takeover is in fact value maximizing, then shareholders would have an incentive to not tender their shares but to wait for the stock price to increase. Of course if shareholders knew this, then they would all wait and the deal would not get done. Freeze-outs force shareholders' hands and thereby eliminate the problem of non-tendering shareholders, thus enabling takeovers to occur. In an soon to be published JF article, Amihud, Kahan, and Sundaram look at the economic desirability of such freeze-outs. [FinanceProfessor.com Annotation]

Chen, Noronha, and Singal report in a forthcoming JF article that when stocks are dropped from the S&P 500, there is a temporary price decline. However when firms are added, the increase is seemingly permanent. This asymmetry is seemingly counter to most widely held views that demand curves for individual stocks are elastic. The authors suggest that this asymmetry is due to "investor awareness" whereby the investor becomes aware of the stock when it is admitted to the index but investors do not forget about the stock once dropped. [FinanceProfessor.com Annotation]