Okay, I think I have a fix on this. Suppose we want to test our hypothesis that otherwise comparable firms with high levels of indebtedness cut back on expenditures desired by employees in circumstances where their not-so-indebted cousins would not. (For a further explanation of that hypothesis, review Part I of this discussion from last week.) How do we do it? We'll assume that we haven't found a smoking gun memo in which the company's Treasurer writes to the CEO and says, "we can't afford those darn safety vests any longer. Tell Human Resources to stop buying them so we can make the interest payments!" Assume we're looking at circumstantial evidence. What counts as evidence? What we can't do is simply say: firm X buys safety vests for its employees and is mostly equity financed. Firm Y doesn't and isn't. No matter how many Xs and Ys we find compliant with our hypothesis, we will still have only correlation, not causation. The arrow of...
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It is odd to see an academic peer-reviewed paper in which the actual substance of the paper seems to diverge so completely from what the authors say are their conclusions. This is the case, though, in a new paper by Cecile Carpentier and Jean-Marie Suret, dealing with the question: do stock price declines create a plausible deterrent for industrial accidents? Here's the link: JofEEM. Here's the abstract: We analyze the stock market reaction to 161 major environmental and non-environmental accidents, reported on the front page of the New York Times for half a century. To determine if the market induces a real deterrence effect, we extend the event windows up to one year. On average, the market reacts negatively and enduringly to the announcement of an accident. However, this average effect is largely driven by the airline industry and by government interventions. The estimated average compounded abnormal return following environmental accidents does not differ from ze...
When does the right to vote have a negative value, and why? Shares in one of Rupert Murdoch's concerns, Twenty-First Century Fox Inc., are divided into voting and non-voting classes. Both represent an equity interest, so both are inferior to debt in the event of a restructuring or litigation. The reason for the division is that Murdoch and his family want to maintain control, yet they don't want to have to own as large an equity share as they would need in order to do so. The two class share structure allows him effective control of the company, with 39.7% of the voting rights, even though he (and his family) have a total of only 12% of the equity. Twelve percent is still a large chunk of a corporation, but dissidents could conceivably challenge Murdochian control if both classes of stock were equity, challenges that are cut short since he controls almost 40% of the shares that count for purposes thereof. My curiosity is piqued, though, by the fact (a recent turn of eve...
The Delaware Chancery Court issued an important decision early this month (May 5th), allowing Sotheby's to proceed with its annual stockholders' meeting the following day. The significance of that? -- the court is taking a laissez-faire attitude toward a new more aggressive use of the "poison pill" by corporate boards. A "poison pill" in corporate law is the colloquial term for certain shareholder rights plans devised back in the 1980s to make hostile takeovers more difficult. Typically, a plan will provide that when a particular shareholder owns more than some threshold percentage of the equity (say, 15%), there will be a new issuance of shares, to the other shareholders, at a discounted price. The block of shares that puts the potential trouble maker over the 15% mark then, is in two senses "poisoned." It dilutes the value of his equity (for the obvious supply/demand reason) and it significantly lessens the trouble maker's weight...
I see from a recent "Heard on the Street" column that the investment bank Goldman Sachs has an operational unit that it calls "the Federation." As explained in the column, the Federation combines range of back office activities that do not generate revenue themselves but are nonetheless of great significance: accounting, legal, compliance, risk management etc. Goldman Sach's management committee is apparently divided three ways: representatives from sales and trading, reps from investment banking, and those from the Federation. The HOTS column cannot help but make Star Wars references here (a powerful organization known simply as the Trade Federation is manipulated by Sith Lords, an important plot point in the three prequel movies.). Personally, I would have made Star Trek references instead. The Federation of Planets, after all, constitute the good guys of that universe, not puppets of the bad guys. Still, to each his own. Anyway, the news conten...
HANDBOOK OF RESEARCH on IPOs, ed. Mario Levis, 512 pp. Catalog says that this book "provides a comprehensive review of all the emerging trends and directions in the global IPO markets." Another research collection just out is: GOVERNANCE AND FAMILY FIRMS ed. Julio Pindado and Ignacio Requejo, both of the Universidad de Salamanca, in Spain. Catalog quotes Lloyd Steier, of the University of Alberta, "The compilation of articles in this book offer some of the most rigorous and relevant research relative to governance conducted in the pas decade." Something more abstract/theoretical: WHY IS THERE MONEY?: Walrasian General Equilibrium Foundations of Monetary Theory, by Ross M. Starr, University of California, San Diego. Walras' work is generally thought to have been superceded by the Arrow-Debreu model. This author begs to differ. I'll give a final item, on a trade policy question: THE US-CHINA TRADE DISPUTE Facts, Figures and Myths, by Imad Moosam ...