Monday, September 22, 2014

Tesco Error Triggers New Profit Warning - WSJ

Investor beware. Accounting, despite all it does wonderfully, is never perfect and whether fraud or user error induced, there can be painful missteps for all of us who rely on the accounting system.

Tesco Error Triggers New Profit Warning - WSJ:

"Tesco's newly installed chief executive, Dave Lewis, said on Monday that the company has uncovered a "serious" accounting issue.

The issue involved the early booking of commercial income and delayed booking of costs, the company said, triggering a third profit warning in three months. Tesco, which has done a preliminary investigation into its U.K. food business, said it hasn't ruled out illegal activity but would wait until the results of the investigation are known.

"We have uncovered a serious issue and have responded accordingly," said Mr. Lewis,"

'via Blog this'

Friday, September 19, 2014

Evidence of learning in the stock market

This is a bit of an old article, but the idea of stock market learning came up in class on Wednesday and ethics all of last week, so I will mention market learning in the context of governance.

Short version: it used to be that you could get a higher return by buying firms with good governance (Gompers, Ishii, and Metrick, 2003)  (as measured by the Gompers-Ishii index) and shorting poorly governed firms.  BUT then the market learned and now the index is seemingly priced (in other words higher Q values, but returns no longer predicted by index levels.

 Investing in Good Governance -
"There is evidence that good-governance features included in standard governance indexes do improve the performance of companies – but that their significance is already reflected in market prices."
Here is the paper showing the learning:

'via Blog this'

Thursday, September 18, 2014

Alibaba's Governance Leaves Investors at a Disadvantage -

Alibaba's Governance Leaves Investors at a Disadvantage -

 "In Alibaba, control is going to be locked forever in the hands of a group of insiders known as the Alibaba Partnership. These are all managers in the Alibaba Group or related companies. The Partnership will have the exclusive right to nominate candidates for a majority of the board seats. Furthermore, if the Partnership fails to obtain shareholder approval for its candidates, it will be entitled “in its sole discretion and without the need for any additional shareholder approval” to appoint directors unilaterally"

'via Blog this'

This will definitely make the class discussion!  Thanks Lucian!

Biggest pension shunning hedge funds a green light for liquid alts

Biggest pension shunning hedge funds a green light for liquid alts:

"The California Public Employees' Retirement System, commonly known as Calpers, announced Monday it is eliminating its $4 billion exposure to hedge funds for reasons largely related to high fees."

In a related article on Main St, Hal Bundrick writes:

"“We are always examining the portfolio to ensure that we are efficiently and cost-effectively achieving our risk-adjusted return goals," Ted Eliopoulos, interim chief investment officer for the nearly $300 billion pension fund, said in a statement. "Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at Calpers’s size, the ARS program is no longer warranted."


Still on the hedge fund band wagon?  Let's go over to the where Morgan Housel wrote back in January: 

"'s become plainly clear in recent years that the biggest bull market was in inflated promises. As a group, hedge funds -- which now manage $2.5 trillion -- have consistently underperformed a basic S&P 500 index fund over the last five years. 

Anyone want to predict hedge fund fees will keep falling?

Thursday, December 05, 2013

Blackstone Unit Wins in No-Lose Codere Trade: Corporate Finance - Bloomberg

Blackstone Unit Wins in No-Lose Codere Trade: Corporate Finance - Bloomberg: The unit of Blackstone Group LP (BX) structured the loan in a way that would lead to a payout on swaps it held, according to three people with knowledge of the situation who asked not to be identified because the discussions were private. The contracts were triggered on Sept. 18 after Codere delayed an interest payment by two days to comply with the loan terms. GSO held 25 million to 30 million euros of the swaps, meaning it may have made at least 11.4 million euros ($15.6 million), according to one of the people and data compiled by Bloomberg.

Here is John Stewart's version:

Friday, November 08, 2013

CEO Pay More Closely Matches Firms' Results -

CEO Pay More Closely Matches Firms' Results -

"The study is among the first to assess how the rising popularity of performance-based restricted stock is affecting CEO pay. Performance-based stock is the fastest-growing segment of executive pay, accounting for 27.4% of the value of compensation granted to CEOs in 2012, up from 18.8% in 2008, according to a separate study by the Journal and pay consulting firm Hay Group.

So far, the results suggest that the trend toward performance-linked stock hasn't had a big impact on average pay levels."
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Tuesday, October 22, 2013

Financial Crisis Made Us More Likely To Cheat, Steal: 'Think Robin Hood'

Financial Crisis Made Us More Likely To Cheat, Steal: 'Think Robin Hood':

"After suffering a financial loss, people are more willing to lie, cheat and steal to improve their situation, according to a study conducted by a group of researchers including Dan Ariely of Duke University's Fuqua School of Business."

Saturday, September 28, 2013

5 things I learned today #2

I had fun with my 5 things yesterday's so I am doing it again.

Five things I learned today:

  1. Volume of equity options traded with the Options Clearing House (OCC )is over 10 times that of non equity traded options.  This ratio has stayed relatively constant since 2000.  Data source: OCC. (Sept 26, 2013)
    yearequitynon equityequity percentageequity to non equity
  2.  Playing with FINVIZ is fun.  For instance:

There are over 3600 firms that trade on the NYSE. (

391 of the S&P 500 trade on the NYSE
109 of the S&P 500 trade on the NASDAQ

27 of the Dow Jones Industrial stocks trade on the NYSE
 3 of the Dow Jones Industrial stocks trade on the NASDAQ,fa_div_pos

3. Given the importance of option trading, Kane's finding that option markets are important for price discovery should not be a surprise, but rather seen as confirmation of what we already assumed.
"I find evidence that the equity prices do adjust towards the option prices to reconcile the mispricing event. The results show that there is a significant movement in the equity prices towards the option prices, however consistent with the model the equity prices only move part of the way and the implied prices move back resulting in a reconciliation price in the middle"

Kane, Hayden, Price Discovery Across Equity and Option Markets (September 13, 2013). Available at SSRN: or

4. CEO pay was pretty constant from 1936 to 1980...then, not so much:

Time        Median CEO pay in millions of constant 2000 dollars

Arantxa Jarque: CEO Compensation: Trends, Market Changes, and Regulation in Economic Quarterly, Summer 2008

5.  The quarterly correlation between bonds and stocks has been negative in the 2000s.   CBS reported on a paper by Harvard's Malcom Baker and NYU's Jeffery Wurgler.

Here is the key table from the CBS report:
            Decade   Correlation
  • 1970-79: 0.49
  • 1980-89: 0.36
  • 1990-99: 0.19
  • 2000-11: -0.55

The second really cool thing about the Baker and Wurgler paper is that in it they break down bonds into different types: for instance "bond like" stocks have a higher correlation whereas more speculative stocks have a lower correlation.  VERY cool!

(as I would label it: I^3: Informative, Interesting, and Important!

  I didn't believe the correlations were so low so I decided to test it myself.  I took a closed end fund and compared it to the S&P and the Dow.  And, well, they seem to be right!  Check for yourself: here.


Thursday, September 26, 2013

5 things I learned today

I have decided I need to get back to blogging more.  I am not sure where the time will come from, but has to happen, so:

Five things I learned today:

  1.  Diversified firms have less underpricing in IPOs.  This may be caused by signaling quality by the more focused firms. 
The source of this new knowledge is: “Industrial Diversification and Underpricing of Initial Public Offerings” with Thomas Boulton and Scott Smart, 2013, Financial Management, 42, 679-704  Available online:

   2. Better governed firms adjust their capital structure faster.    Especially when further "out of whack"   Source of new knowledge: Liao, Mukherjee, and Wang.  
A look in: 
"...predict that a good corporate governance system would, in
serving the best interest of shareholders, induce managers to make more timely
(upward) adjustments to capital structure deviations."

  3. Dividends have a more pronounced signal (ie are more important) in countries where investor protections are lower.  (FYI this is exactly what I have been hypothesizing in class.  Good to get confirmation.)  
"Results suggest that dividends are more informative in firms with potentially more severe agency problems and in countries with weak investor protection and low transparency" 

  4.  There are roughly 4800 ETFs and ETPs in the world.    ETFs have about $2 trillion invested in them.  SONK:

  5. Credit Default Swaps on US debt are starting to rise in the face of a potential default when the debt ceiling is hit.  SONK:

Tuesday, September 17, 2013

Where Did 6 Million Missing Workers Go? | The Exchange - Yahoo Finance

Where Did 6 Million Missing Workers Go? | The Exchange - Yahoo Finance:

"The other reason is a surprising pullback in the portion of Americans who even want to work. The labor-force participation rate is declining for a variety of reasons, such as younger people going to college or graduate school instead of looking for a job, and out-of-work middle-aged people who simply give up looking for a job and become labor-force dropouts. Economists have been expecting the participation rate to inch up as the economy recovers. But it hasn’t."

How serious is this?

Opinions vary, but the New Yorker estimates the unemployment rate at about 11% if not for the dropouts:
"In August, 2008, just before Lehman Brothers blew up, the participation rate was 66.1 per cent. Five years later, it’s still almost three percentage points lower than it was then.
Assuming the participation rate stayed constant over the past five years, ...A bit of grade-school arithmetic provides the answer. In August, 2008, the participation rate was 66.1 per cent. Applying that figure to a working-age population that has grown by about ten million in the past five years, there would be about 162.6 million people in the labor force, rather than the actual figure of 155.5 million. With 144.2 million Americans currently employed, 18.4 million would then be classified as unemployed. (The actual figure is 11.3 million.) And the unemployment rate would be roughly 11.3 per cent...."

In fairness the New Yorker also tries the calculations under different assumptions, but regardless, the "real" unemployment rate is higher than what we see report.  

Thursday, September 05, 2013