A look at Executive Compensation

FinanceProfessor.com gives an overview (and provides relevant links) of several useful articles discussing executive compensation, highlighting findings that suggest that despite of good intentions stock options might actually make agency costs worst, that regulation and increased transparency may not work as well as more active shareholders, and that regulation and transparency do not lower pay levels.

Ronald Reagan

You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is … [ Read more ]

A Unified Theory of Ten Financial Puzzles

FinanceProfessor.com has a post (with link) about an important finance paper which potentially explains “a host of puzzles.”

Greenbaum on Corporate Governance

Stuart Greenbaum gave a very interesting and important speech at the Financial Intermediation Research Society Meetings in Shanghai China. Fortunately for those of who did not go to China to attend the conference, the keynote address is available through SSRN. The abstract does not do the speech justice, so Jim Mahar (FinanceProfessor.com) provides some “visual bites” via some “look-ins”:

John Mayer

“Everything happens for a reason” is no reason not to ask myself if I am living it right.

FMA Online—Cliff Smith

FinanceProfessor.com has a post discussing how useful the new FMA Online site is, specifically referencing a video by Professor Cliff Smith of the University of Rochester. Includes relevant links.

Growth Options, Beta, and Cost of Capital

Jim Mahar (FinanceProfessor.com) gives an overview of the article, Growth Options, Beta, and the Cost of Capital by Antonio Bernardo, Bhagwan Chowdry, and Amit Goyal which “looks at the betas of firms’ assets in place relative to the betas of their growth options and finds that the growth options have significantly higher betas. The authors then show that this difference in betas can lead to … [ Read more ]

Mimicking Repurchases

Most examinations of stock buybacks find that the management is conveying information to the market about the relative valuation of the firm. Thus, buybacks are seen as good signals and the price tends to increase at the time of the announcement and (at least according to some authors) continue to outperform in the months following the buyback announcement.

Massa, Rehman, and Vermaelen extend this research by … [ Read more ]

Leverage and Investment

Showing that leverage leads to underinvestment is standard fare for any corporate finance class. However, as Lyandres and Zhdanov point out, it might be better to say that leverage influences investment, but that the direction of the bias is firm-dependent.

Does a “no vote” matter?

FinanceProfessor.com provides an overview of and link to an article by Del Guercio, Wallis, and Woidtke which looks at whether boards of directors actually listen to their voting shareholders and if they do hear shareholders, what the reaction is.

The future of text books?

I think we may have a glimpse into the future of text books with this one. It is the new Introduction to Corporate Finance by William Megginson and Scott Smart.

From videos for most topics, to interviews, to powerpoint, to a student study guide, to excel help…just a total integration of a text and a web site! Well done!

At St. Bonaventure we have adopted the text … [ Read more ]

Environmental economics

The World Bank (at least since 1991) has used NPV and IRR to study the environmental impact of its decisions. While finding the true cost and benefit of environmental questions is notoriously difficult, it is something that must be done. [FinanceProfessor Annotation]

Is growth good for shareholders?

Jay Ritter finds that shareholder returns are negatively correlated with economic growth.

Are Super Star CEOs bad for firm? It seem so.

FinanceProfessor.com blog entry examining the idea that super star CEOs are rarely good for the long term prospects of the firm. Includes links to a NY Times article and a SSRN article by Ray Fisman, Matthew Rhodes-Kropf and Rakesh Khurana.

A Defense of Economics

FinanceProfessor.com blog entry on the article “Economics Wins, Psychology Loses, and Society Pays” by Max Bazerman, Deepak Malhotra. In this article, the authors identify “five predominant myths, adapted from pervasive economic assumptions, which serve as guiding policy principles and serve to destroy value in society. These myths include:

1) Individuals have stable and consistent preferences
2) Individuals know their preferences and they pursue known preferences with volition
3) … [ Read more ]

The value of hedging revisited…

Maybe hediging is not all that it is cracked up to be. That is the conclusion of “Does Hedging with Derivatives reduce the Market Risk Exposure” by Bali, Hume, and Martell. They find that hedging, at least as it is currently being done, may not add to firm value.

How the Inflation Illusion Killed the CAPM

What killed the CAPM? While there may not be enough evidence to pronounce a court sentence, a leading candidate is the inflation illusion. Cohen, Polk, and Vuolteenaho “show that an implication of this joint hypothesis is that the security market line (the relation between an asset’s average return and its CAPM beta) is steeper [i.e there is a larger risk premium] than predicted … [ Read more ]

Irrational Optimism

No doubt many of you (myself included) will dutifully report to our students that the historical average return for large stocks is about 12% which corresponds to a risk premium of around 8%. (keeping math simple 😉 (see virtually any investment text for these numbers)) However, Dimson, Marsh, and Staunton report that this is probably an overly optimistic number. Not because the expected … [ Read more ]

Lou Brock

Show me a [person] who is afraid to look bad, and I’ll show you a [person] you can beat every time.