Category Archives: Finance

Executive Compensation Debate

I would like to call everyone’s attention to a formal online debate concerning executive compensation which began on Tuesday, October 20 and is scheduled to conclude on October 30th.  Later in the semester, we’ll discuss how to structure compensation to align incentives between owners and managers of firms.  However, this debate, which is sponsored by The Economistaddresses the ongoing public controversy concerning whether senior executives are worth what they are paid. 

Specifically, the motion reads as follows: “This house believes that on the whole, senior executives are worth what they are paid.”  The person defending the motion is Steven N. Kaplan, who is the Neubauer Family Professor of Entrepreneurship & Finance at the University of Chicago Booth School of Business.  Professor Kaplan may very well be one of the most widely published and prolific scholars on the topic of executive compensation.  The person who is against the motion is Nell Minow, who is Editor and Co-founder of The Corporate Library, which is an organization that bills itself as “…the leading independent source for U.S. and Canadian corporate governance and executive & director compensation information and analysis”.  Anyway, this debate should certainly be interesting to follow!

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57th Annual Management Conference 2009 on “The Future of Markets” at University of Chicago

I would like to call attention to the 57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009.  Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:

  • Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
  • Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
  • Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
  • Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
  • Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
  • Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance

Click here for an executive summary of the keynote panel. For some context on the panel members, read the “Conference Pre-Reading“. Also, the discussion (roughly 1 hour long) featuring Ted Snyder and Gene Fama (from the same conference) on the question “Is the stock market an “efficient” market? is also very worthwhile (executive summary here). Ironically, even though the keynote panel and Fama webcasts took place nearly two months prior to the publication of the Economist cover article (dated 7/16/2009) entitled “What went wrong with economics (and how the discipline should change to avoid the mistakes of the past)”, these webcasts address many of the issues that were brought up in the Economist article.

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57th Annual Management Conference 2009 on "The Future of Markets" at University of Chicago

57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009.  Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:

  • Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
  • Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
  • Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
  • Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
  • Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
  • Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance
Click here for an executive summary of the keynote panel. For some context on the panel members, read the “Conference Pre-Reading“. Also, the discussion (roughly 1 hour long) featuring Ted Snyder and Gene Fama (from the same conference) on the question “Is the stock market an “efficient” market? is also very worthwhile (executive summary here). Ironically, even though the keynote panel and Fama webcasts took place nearly two months prior to the publication of the Economist cover article (dated 7/16/2009) entitled “What went wrong with economics (and how the discipline should change to avoid the mistakes of the past)”, these webcasts address many of the issues that were brought up in the Economist article.]]>

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End the Corporate Income Tax!

This is one of Megan McArdle’s ideas for “fixing the world”. She goes on to argue that:

“At 35 percent, America’s levy on corporate income is one of the highest in the developed world. In 2007, about 2.5 million companies prepared lengthy returns at great expense, yet the tax generated only about 15 percent of total federal tax revenue. The tax on corporate profits discourages capital formation, targets shareholders regardless of their wealth, and fuels frantic, and costly, business efforts to dodge it. Among experts who study its effects, support for the tax is at best sort of sheepish.”

The risk management literature actually has much to say about how the corporate tax code discourages capital formation.  Specifically, the asymmetric nature of the corporate income tax creates disincentives for firms to bear risk.  Tax asymmetries derive from two important features of the corporate income tax; specifically, tax rate progressivity and incomplete tax loss offsets.  Thus tax asymmetries incentivize firms  underinvest in risky (but potentially profitable) assets, which in turn limits the economy’s prospective growth potential. 

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Financial Times and Goldman Sachs Business Book of the Year Longlist

Here’s the “longlist” for the 2009 Financial Times and Goldman Sachs Business Book of the Year Award. Apparently this list will get whittled down to a “shortlist” on September 17, and the “winner” will be announced at the end of October at a gala event in London.

  1. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A Akerlof, Robert J Shiller
  2. Clever: Leading Your Smartest, Most Creative People by Rob Goffee, Gareth Jones
  3. Free: The Future of a Radical Price by Chris Anderson
  4. Good Value: Reflections on Money, Morality and an Uncertain World by Stephen Green
  5. House of Cards: A Tale of Hubris and Wretched Excess on Wall Street By William D Cohan
  6. How the Mighty Fall: And Why Some Companies Never Give in by Jim Collins
  7. Imagining India: The Idea of a Renewed Nation by Nandan Nilekani
  8. In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel
  9. Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed
  10. The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals by Frank Partnoy
  11. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox
  12. Supercorp: How Vanguard Companies Create Innovation, Profits, Growth, and Social Good by Rosabeth Moss Kanter
  13. This Time Is Different: Eight Centuries of Financial Folly by Carmen M Reinhart, Kenneth Rogoff
  14. Waste: Uncovering the Global Food Scandal, by Tristram Stuart
  15. Why Your World Is about to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

I have read only two of the books on the list (cf. items 5 and 11 below), so it looks like I have some catching up to do!

The ft.com article entitled “Reading into financial crises past, present and future” provides a useful synopsis of these books.

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Are ‘Quant’ Kings Free of Blame?

Page C18 of today’s Wall Street Journal has a very interesting article entitled “Absolving the Quants, a Bit” concerning the financial market consequences of so-called quantitative hedge funds.  This article notes, among other things, that there has been a proliferation over time of hedge funds implementing similar “LTCM-style” quantitative  strategies.  With so many arbitragers chasing similar (transitory) profit opportunities all at the same time, these investors are finding that earning excess returns is becoming increasingly more difficult.  As the article notes, “To boost the raw returns achievable this year to those seen in 1998, a fund would have to borrow much more, with a consequent increase in risk. If funds are borrowing more, there is a bigger chance that a move to cut debt could trigger sharp and correlated market moves. Such an effect would likely be much broader than the "quantagion" caused when different computer-driven trading models work in similar ways.”

 

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Are 'Quant' Kings Free of Blame?

Page C18 of today’s Wall Street Journal has a very interesting article entitled “Absolving the Quants, a Bit” concerning the financial market consequences of so-called quantitative hedge funds.  This article notes, among other things, that there has been a proliferation over time of hedge funds implementing similar “LTCM-style” quantitative  strategies.  With so many arbitragers chasing similar (transitory) profit opportunities all at the same time, these investors are finding that earning excess returns is becoming increasingly more difficult.  As the article notes, “To boost the raw returns achievable this year to those seen in 1998, a fund would have to borrow much more, with a consequent increase in risk. If funds are borrowing more, there is a bigger chance that a move to cut debt could trigger sharp and correlated market moves. Such an effect would likely be much broader than the "quantagion" caused when different computer-driven trading models work in similar ways.”

 

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