Knowledge@Emory -- Finance and Investment

Analysts Might Herd, But They Don�t Trample Investors

Thu, 08 Sep 2011 20:49:58 EST

Stock analysts—especially those at large brokerage firms—are known for their herding tendencies, but stock buyers need not be overly concerned at the possible destabilizing effects on stock prices, argue Narasimhan Jegadeesh, Dean’s Distinguished Chair of Finance at Emory University’s Goizueta Business School, and colleague Woojin Kim of Korea University. Their research, presented in a paper titled “Do Analysts Herd? An Analysis of Recommendations and Market Reactions,” shows that the market anticipates analysts’ herding proclivities and “responds appropriately.” Analyzing data from over two decades of stock price movements and analyst recommendations, the researchers found that investors seem to pay more attention to recommendations that go against the grain, compensating in part for any herding that pushes investors away from a true valuation of a stock based on company fundamentals. Their research suggests that market commentators should be wary of overstating the importance of herding as a major cause of market ills.

A Growing Conflict of Interest in Mutual Funds?

Fri, 25 Feb 2011 15:41:31 EST

At the end of 2009, more than half of the $2.8 trillion in 401(k) assets in the U.S. was invested in mutual funds, according to a report from the Investment Company Institute. For mutual find companies, winning a big employee retirement account can be exceedingly profitable. If serving as the trustee of a 401(k) plan is the key source of business, what's at stake for the individual investor? Recent research from Breno Schmidt, assistant professor of finance at Emory University's Goizueta Business School, and Lauren Cohen of the Harvard Business School indicates that there is some reason for concern. Their findings, "Attracting Flows by Attracting Big Clients," have been published in The Journal of Finance.

Why are U.S. Executive Salaries So High?

Fri, 25 Feb 2011 15:41:31 EST

On February 18, the Associated Press reported that the base salary for David Nelms, chairman and CEO of Discover Financial Services Co, increased to $4.55 million in 2010, up from $1 million the year before. He was also awarded a $1.7 million bonus. Many observers wonder what’s driving the increases in executive pay, particularly given that the unemployment rate in the U.S. continues to hover around the 9 percent mark in most states. According to Shivaram Rajgopal, a professor of accounting at Emory University’s Goizueta Business School who studies executive pay, this suggests that something is wrong with the compensation-setting system. In particular, he sees two problems: Wall Street’s preference for short-term profit over long-term investment, and cozy corporate boards.

Is the U.S. Facing a Double-Dip Recession?

Wed, 15 Sep 2010 20:57:30 EST

Concerns about a double-dip recession in the U.S. grew in early September when economist Nouriel Roubini predicted a 40 percent chance that America would slide back into recession by early 2011. Even U.S. President Barack Obama made recession concerns the centerpiece of a Cleveland, Ohio, speech on September 8. But some faculty at Emory University and its Goizueta Business School aren’t so quick to sound the alarm over a double dip. The economy may continue to be plagued by high unemployment and a withering real estate market for some time, they note, but past experience indicates that may not necessarily lead to another recession.

Assessing the Pitfalls of Corporate Performance Measurements

Fri, 13 Aug 2010 15:44:33 EST

While corporations routinely utilize scorecard measurements to evaluate strategic performance, the interpretation of this data can sometimes be clouded by the preconceptions and motivations of those in charge, says William B. Tayler, assistant professor of accounting at Emory University’s Goizueta Business School. In a new research paper titled “The Balanced Scorecard as a Strategy-Evaluation Tool: The Effects of Responsibility and Causal-Chain Focus," Tayler discusses the pitfalls of scorecards and ways to mitigate its potential problems.

What Will Follow America's Financial Reform Act?

Fri, 13 Aug 2010 15:44:33 EST

In late July, America's three dominant credit-ratings providers told some bond issuers that they can no longer quote their ratings to satisfy the SEC requirements as written in the recently passed Wall Street Reform and Consumer Protection Act. The consequence of this provision spooked the agencies and shut down part of the bond market, forcing the Securities and Exchange Commission to temporarily drop its rating requirement as an ad hoc fix. Faculty at Emory University's Goizueta Business School and industry experts dissect the bill and offer up the good, the bad, and the uncertain.

BP Disaster: When Vision and Reality Collide

Thu, 17 Jun 2010 15:06:29 EST

More than 50 days have passed since BP's offshore drilling rig Deepwater Horizon exploded, killing 11 workers and spewing an unchecked flow of oil into the Gulf of Mexico. The tragedy unleashed a global wave of fury against the British energy company, raising questions of competence, ethics, and risks. Recovering from such a tarred image will be tough, say faculty at Emory University's Goizueta Business School. Not only did the company break a cardinal rule of marketing, under-promise and over-deliver, but BP's vision of being an alternative energy firm appears to have overtaken other strategies, leading to increased risk taking.

Is the Euro Bailout a Splendid Idea or a Greek Tragedy?

Wed, 12 May 2010 21:19:38 EST

On May 10 the European Union and the International Monetary Fund pledged to bail out debt-ridden Greece to the tune of nearly a trillion dollars. The move calmed investors who feared the country would default on its massive international debt. But like the Troubled Asset Relief Program that saved U.S. banks, will this momentary reprieve be a wake-up call for reform in Greece—and other economically strapped EU countries—or is it just throwing good money after bad? Addressing this issue, Knowledge@Emory spoke with Jeff Rosensweig, associate professor of international business and finance and the director of the Global Perspectives Program at Emory University’s Goizueta School of Business.

Banking on the Benefits of Regulation

Thu, 11 Mar 2010 21:59:33 EST

Though the bulk of the bailouts took place over a year ago, many Americans are still upset over the billions handed over to banks and how some executives who took TARP funds still received big bonuses. If the Obama Administration has its way, one primary solution to these issues will come in the form of increased regulation for banks. But many argue that restricting banks may not solve the problems and point towards examples like the Sarbanes-Oxley Act and its issues. Faculty at Emory University and its Goizueta Business School weigh in on the possible effects of further regulations.

Looking for a Quick Recovery? Why America's Recession Differs From the Great Depression

Thu, 11 Feb 2010 17:28:01 EST

While some observers liken America's current economic condition to the Great Depression, others say the correlation is unjustified. In a Q&A with Knowledge@Emory, Leonard Carlson, associate professor of economics at Emory University and an expert in the economic history of the U.S, highlights some of the similarities and differences between the economic collapse of the 1930s and the “Great Recession” of 2007–2009. Carson discusses attitudes toward government intervention, the role of deficits in recessionary periods, changes in the workforce, and the “creative destruction” inherent in the economic downturns of both eighty years ago and today.

Want to Really Know How a Stock is Doing? Don't Just Look at the Company's Bottom Line

Thu, 11 Feb 2010 17:28:01 EST

Skittish investors will not be surprised to learn that the bottom line of a company's income statement fails to tell the whole story. New research by Jan Barton, an associate professor of accounting at Emory University’s Goizueta Business School, suggests that subtotals near the center of the income statement, such as operating income, have a much stronger association with contemporaneous stock returns than do the top-line and bottom-line numbers. In a paper entitled, “Which Performance Measure Attributes Do Investors around the World Value the Most—and Why?” slated for publication in The Accounting Review in May, Barton and co-authors Grace Pownall, professor of accounting and associate dean of the doctoral program at Goizueta, and Bowe Hansen of the University of New Hampshire, argue that no one single performance measure can serve as a Rosetta Stone for investors as they shop for stocks around the world. Still, Barton says, the research suggests that helpful metrics tend to be those that quickly and directly reflect information about a firm’s future cash flow.

Does the Pursuit of Information and Its Presentation in Financial Statements Bias Investors?

Thu, 14 Jan 2010 05:07:31 EST

As the New Year begins, investors and analysts eagerly await the release of 2009 year-end corporate financial statements. But exactly how do investors interpret the data, especially when some accounting entries are not provided on a consistent basis? In a research paper, William B. Tayler, assistant professor of accounting at Emory University’s Goizueta Business School, and a co-author note that information pursuit bias—specifically seeking out and needing to calculate results in a financial statement—can lead to weighting that information more heavily in the decision-making process.

As the Dow Rises, Will Confidence in the Markets Persist?

Wed, 11 Nov 2009 20:38:34 EST

On Oct. 14, the Dow Jones Industrial Average hit 10,000 and market-watchers were eager to interpret it as a sign that the U.S. economic recovery is gathering steam. But is the Dow's upward movement a reason for confidence, or do major obstacles still lie ahead? Financial experts at Emory University's Goizueta Business School acknowledge that domestic and international markets are rebounding, but caution it doesn't necessarily mean that good buys are to be had.

The Relevance of Short-Selling and Weakened Margin Restrictions on the Market

Wed, 30 Sep 2009 16:54:41 EST

In a recent research paper titled “Margin Trading, Overpricing, and Synchronization Risk,” William B. Tayler, assistant professor of accounting at Emory University’s Goizueta Business School, and co-authors take a critical look at short-selling, exploring how the weakening of margin restrictions to allow for more short-selling can drive up and further exacerbate overpricing in the market. But Tayler does contend that disciplining traders can be a difficult proposition, with efforts to reign in short-selling serving to delay the market’s inevitable corrections.

Goizueta NYSE Euronext Panel Explores Financial Next Steps

Wed, 30 Sep 2009 16:54:41 EST

A year has passed since the worst economic crisis since the 1930s crashed the global financial markets. Speculation abounds on when things will settle down and return to the new normal. On September 2, Larry Benveniste, dean of Emory University's Goizueta Business School, and Duncan L. Niederauer, CEO of the New York Stock Exchange Inc., teamed up to host a panel of business and political luminaries to explore lessons learned and contemplate the question, “Where Do We Go From Here?” Moderated by Susan Lisovicz, CNN’s primary correspondent on the stock market, the live, web-streamed discussion included Frank Blake, CEO, The Home Depot Inc.; U.S. Sen. Saxby Chambliss (R-Ga.); Daniel Amos, CEO, Aflac Inc.; and Atlanta Federal Reserve Bank CEO Dennis Lockhart.

Buffett: Rock Star of American Capitalism

Wed, 16 Sep 2009 22:52:01 EST

Warren Buffett, arguably the most successful investor alive, inspires tens of thousands of fans to travel to Omaha, Nebraska, each year to attend the annual shareholder meeting of Berkshire Hathaway. Little wonder that Alice Shroeder's insightful biography, "The Snowball: Warren Buffett and the Business of Life," has proved popular among readers. She explores the ways Buffett built his wealth, and also the reasons why he plans to give most of it away to charity.

Can Companies Maintain Quality As They Cut Costs?

Wed, 16 Sep 2009 22:52:01 EST

This week U.S. Federal Reserve Chairman Ben Bernanke announced that the "recession is very likely over." While there are indicators to suggest the American economy is in recovery, executives at most companies are still grappling with ways to manage costs. With 216,000 jobs shed in August, pushing the national unemployment to rate to 9.7%, cutting human capital clearly continues to be a primary method of cost reduction. But is it the best option? Faculty at Emory University and its Goizueta Business School say indiscriminate cuts can yield unintended consequences over the long term, and add that trimming away expenses instead of hacking at them may be a better strategy.

Examining the Costly Lessons from Business Failures

Wed, 12 Aug 2009 20:15:42 EST

Plenty of lessons can be learned from the glut of businesses that have fallen under the swift sword of a merciless recession. Yet according to authors Paul B. Carroll and Chunka Mui, executives continue to make the same mistakes that defeated their predecessors. In Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years, Carroll and Mui draw on research into more than 750 business failures to reveal the misguided tactics that mire companies.

Risk, the Derivatives Market, & Proposed Regulatory Reforms: What's Ahead?

Thu, 16 Jul 2009 12:58:48 EST

In a recent interview with Knowledge@Emory, Nicholas Valerio III, associate professor in the practice of finance at Emory University's Goizueta Business School, discusses the recent Department of Treasury reform proposals impacting derivatives, the problems with over-the-counter derivatives, the future of Wall Street, and two landmark books offering a helpful perspective on risk and the psychology of the market.

Has Corporate Bankruptcy Become a Competitive Advantage?

Wed, 10 Jun 2009 21:01:04 EST

Chrysler's 42-day trek through U.S. bankruptcy court allowed the American automaker to restructure and paved the way for today's sale of the bulk of its assets to Italy's Fiat. The alliance gives Fiat further entree into the American market and may also give it a competitive advantage. But is filing Chapter 11 always the best option? According to legal and finance experts at Emory University and its Goizueta Business School, the stigma of filing for bankruptcy is considerably less than it once was and there can be benefits to such a move. To remain viable though, companies still need a solid business plan.