Thursday, October 13, 2005

Smart Economist!

More interesting insights from the Smart Economist... note that you have to get a login to the site, but I would highly recommend it:
  • Why were there so many corporate scandals in the U.S., but not in Europe?

    "Suppose a CEO held 2 million options on his company’s stock that was trading at a price-to-earnings ratio of 30. If the CEO were to prematurely recognize earnings that led to a $1 increase in earnings per share, they would induce a $30 increase in stock price and a $60 million windfall for the CEO. Even though this price increase was unjustified - and untenable in the long run - the manager would be able to bail out before the stock price reverted to its true value. In fact, previous studies have found that the managers of companies issuing fraudulent earnings statements held options worth 14 times more than the managers of companies not issuing restatements."

    Aah, terrible! Misaligned incentives!! Is there a way to set up power and influence among shareholders so that if you have been a shareholder for a long time, you have more power? As in voting power, some other kind of influence? It seems like dispersed ownership results in some problems...

  • Explaining the rise of fund of funds (e.g. funds that invest in private equity funds

    "In particular, the author finds that investors with weaker governance structures tend to outsource more of their investments to FoF. For example, government institutions - whose governance is likely more influenced by politics than by performance - tend to use FoF more than performance-based institutions such as endowments. Investors with weaker governance may see FoF as more attractive since their use can help “shoulder the blame” in the case of poor performance. "

    Blast those incompetent governmental organizations again!
  • Do family firms outperform non-family firms?
    "In general, family firms exhibit better performance than other firms. However, this result mostly appears to be true because the firms in which the founder is also CEO or Chairman of the Board do particularly well. When subsequent generations enter the firm, their contribution usually appears to be negative. The presence of arrangements that give the family excess control - such as dual class shares or pyramid schemes - has a negative impact on these firms’ stock market valuation. This indicates that such arrangements are a tool used by controlling families to subtract value from minority shareholders."

    Shame on the second generation!
    "When the founder of the firm is directly involved in the management, as CEO or Director of the Board, the firm’s Tobin’s q is actually the highest... The opposite happens in the following generations, particularly the second. When the second generation gets involved in management, the likely effect is a destruction of value. "