Under The Buttonwood Tree

Daily Link Orgy - July 9, 2009

2009-07-09T11:08:00.001-05:00

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This is the tenth most downloaded paper related to a financial or investing topic.

Optimal Capital Allocation Using RAROC and EVA - By Neal Stoughton and Josef Zechner - Downloaded 21,718 times.

Abstract

"Equity capital allocation plays a particularly important role for financial institutions such as banks, who issue equity infrequently but have continuous access to debt capital. In such a context this paper shows that EVA and RAROC based capital budgeting mechanisms have economic foundations. We derive optimal capital allocation under asymmetric information and in the presence of outside managerial opportunities for an institution with a risky and a riskless division. It is shown that the results extend in a consistent manner to the multidivisional case of decentralized investment decisions with a suitable redefinition of economic capital. The decentralization leads to a charge for economic capital based on the division's own realized risk. Outside managerial opportunities increase the usage of capital and lead to overinvestment in risky projects; at the same time more capital is raised but risk limits are binding in more states. An institution with a single risky division should base its hurdle rate for capital allocated on the cost of debt. In contrast, the hurdle rate tends to the cost of equity for a diversified multidivisional firm. The analysis shows that hurdle rates have a common component in contrast to the standard perfect markets result with division-specific hurdle rates."

Daily Link Orgy - July 7, 2009

2009-07-07T11:08:00.003-05:00

Daily Link Orgy - July 2, 2009

2009-07-02T11:08:00.005-05:00

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This is the eighth most downloaded paper related to a financial or investing topic.

Value Maximization, Stakeholder Theory, and the Corporate Objective Function - By Michael C. Jensen - 22,687 downloads.

Abstract

"This paper examines the role of the corporate objective function in corporate productivity and efficiency, social welfare, and the accountability of managers and directors. I argue that since it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities and monopoly (and when all goods are priced), social welfare is maximized when each firm in an economy maximizes its total market value. Total value is not just the value of the equity but also includes the market values of all other financial claims including debt, preferred stock, and warrants."

Number 9.

Daily Link Orgy - June 30, 2009

2009-06-30T11:08:00.004-05:00

Daily Link Orgy - June 28, 2009

2009-06-28T11:08:00.004-05:00

Daily Link Orgy - June 26, 2009

2009-06-26T10:56:00.004-05:00

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This article is the fifth most downloaded paper related to a financial or investing topic.

Value Based Management: Economic Value Added or Cash Value Added? By Fredrik Weissenrieder - 28,505 downloads

Abstract

"What we use today to follow up a company's profitability and value creation is inconsistent with the capital market's mechanism, and what the market considers determines value--it is therefore imprecise and irrelevant. The accounting used will not any longer be a sufficient provider of financial information. Companies will experience a demand for more precise tools, both when it comes to metrics and the tool's ingredients (relevance) due to the increasing activity among shareholders/investors. The relevance in financial management must be dramatically improved. Companies must now identify the Value Based Management (VBM) concept that will best initiate a higher degree of Shareholder Value awareness in the company. A true VBM framework is consistent with the market's mechanism and our four factors that, according to the capital markets, determine value. The metric must be precise and relevant. Not random and irrelevant as accounting is today as a decision base."

Number 6.

Daily Link Orgy - June 24, 2009

2009-06-24T10:56:00.004-05:00

Daily Link Orgy - June 22, 2009

2009-06-22T10:56:00.005-05:00

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This is the third most downloaded paper related to a financial or investing topic.

A Comparison of Dividend, Cash Flow, and Earnings Approaches to Equity Valuation
Stephen H. Penman and Theodore Sougiannis - 37,934 downloads

Abstract

"Standard formulas for valuing the equity of going concerns require prediction of payoffs "to infinity" but practical analysis requires that they be predicted over finite horizons. This truncation inevitably involves (often troublesome) "terminal value" calculations. This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when applied to a finite-horizon valuation. Valuations based on average ex-post payoffs over various horizons, with and without terminal value calculations, are compared with (ex-ante) market prices to give an indication of the error introduced by each technique in truncating the horizon. Comparisons of these errors show that accrual earnings techniques dominate free cash flow and dividend discounting approaches. Further, the relevant accounting features of techniques that make them less than ideal for finite horizon analysis are discovered. Conditions where a given technique requires particularly long forecasting horizons are identified and the performance of the alternative techniques under those conditions is examined."

Number 4.

Daily Link Orgy - June 20, 2009

2009-06-20T10:48:00.005-05:00

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This article is the second most downloaded paper related to a financial or investing topic.

Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
Michael C. Jensen and William H. Meckling - Downloaded 57,828 times

Abstract

"This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem."

Just to show how influential this paper is, it has been cited 2,180 times in other academic papers.

Number 3.

Daily Link Orgy - June 18, 2009

2009-06-18T14:29:00.005-05:00

Daily Link Orgy - June 17, 2009

2009-06-17T08:55:00.007-05:00

Two more high profile individuals join the growing chorus of caution about the price of oil. James Mulva, the CEO of Conoco Phillips, and Nouriel Roubini, the economist.

I found a web site called Behavioural Finance through Simoleon Sense. This is a must read for any investors so they can learn to think better when investing.

Interesting article about EnCana, a Canadian Energy company deciding to cut its natural gas production by "a couple hundred million cubic feet per day in Canada, and a couple hundred million cubic feet in the U.S." The company's total gas production is 3.8 billion cubic feet per day. The company said its production in the Rocky Mountains was cut particularly hard due to oversupply in that region.

Weekly Link Orgy

2009-06-15T09:27:00.002-05:00

So it turns out that the U.S. Treasury is actually earning a return on its investment in Citigroup in excess of the return on the S & P 500. I have said for months that the Capital Purchase Program was not a "bailout" as the media called it. The government should keep the warrants it received and the taxpayer will get a huge return down the road.

An interesting article from Reason that details the ten most absurd cover stories from Time Magazine over the last forty years.

A couple of interesting video sites with presentations applicable to investing that you should monitor for updates. These include FORA.tv and TED.

Another video source is from the The Heilbrunn Center for Graham & Dodd Investing, which has recordings of lectures devoted to Value Investing.

Weekly Link Orgy

2009-06-10T08:29:00.001-05:00

An interesting blog post by Arthur Berman posted on the blog Petroleum Truth Report. Mr. Berman, who is a geologist, takes a contrary opinion opposed to the conventional excitement over shale plays in North America.

Is the "efficient market" hypothesis responsible for the financial crisis? Jeremy Grantham mocks the hypothesis in one of his recent quarterly letters. "The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight."

An interesting series of blogs that cover five North American Shale plays: Barnett Shale, Bakken Shale, Haynesville Shale, Fayetteville Shale and the Marcellus Shale. The blogs are well organized, easy to read and are not cluttered with extraneous information.

The emerging debate over what direction natural gas prices will go given that the oil to gas ratio is at 18, the highest level in many years:

Article One

Article Two

Article Three

Article Four

Article Five

Being bullish on natural gas is certainly a crowded trade, which may tell investors something about it.

Weekly Link Orgy

2009-06-01T06:13:00.001-05:00

General Motors, the second oldest member of the Dow Jones Industrial Average after General Electric limps toward bankruptcy. Does the market care anymore? We will find out on Monday.

One, Two, Three and Four.

Pundits are already calling into question the incipient U.S. Economic recovery as oil prices start to climb again, and yields move higher on the back of fears about giant Federal deficits.

The great war over regulating financial institutions begins. Will it do any good to regulate Hedge Funds? Did they cause this mess we are in? Having one central regulatory agency sounds like a good plan to start.

One and Two.

Are you tired of hearing everything about the insurance industry except fundamentals. Check out these presentations at the Insurance Information Institute.

Weekly Link Orgy

2009-05-26T08:08:00.001-05:00

Benjamin Graham speaks from beyond the grave.

Could the U.S. lose its AAA rating?

S & P warns on commercial real estate.

Do you remember when Sovereign Wealth Funds were going to take over the world?

An argument for dynamic capital requirements for banks by Grant Thornton.

Weekly Link Orgy

2009-05-18T09:24:00.012-05:00

Value investing is back.

CRE is going to get worse before it gets better.

The future of research on Wall Street.

Some notes from the Value Investing Congress held last week.

One.

Two.

Another "who is to blame" for the financial crisis.

Weekly Link Orgy

2009-05-11T12:38:00.002-05:00

All you ever wanted to know about Commercial Real Estate.

Is the economy hitting a bottom?

The results of the SCAP.

Consumer are shopping more.

But borrowing less.

Weekly Link Orgy

2009-05-04T09:07:00.011-05:00

This Weekly Link Orgy is devoted to Warren Buffett and the annual Berkshire meeting.

A broad overview of the meeting.

The derivatives Berkshire did are good!!!

Buffett and the investment portfolio.

Buffett, bank stress tests and Wells Fargo.

Buffett and Housing.

Buffett and consumer spending.

Some Q & A from the meeting.

Weekly Link Orgy

2009-04-27T07:01:00.006-05:00

Bottom Fishing in real estate for the brave ones out there.

The infamous Fed white paper on the bank stress tests.

Here's why you should care about leveraged ETF's.

This is why commercial real estate will be the next to fall.

Why groups suck at investing.

The dreaded Madoff clawback begins.

Weekly Link Orgy

2009-04-20T06:12:00.009-05:00

Intel calls a bottom.

If it's so good, why is EBAY getting rid of it?

Views of the Goldman Sachs earnings report.

One
Two
Three

The miracles of accounting.

A good review of a couple of a recent bank failure.

Another one here.

Great Basin Bank of Elko, NV fails.

American Sterling Bank of Sugar Creek, MO fails.

Weekly Link Orgy

2009-04-13T11:50:00.002-05:00

Make sure you understand what you own...these guys didn't.

The insurance industry lines up to get money from the government.

Is the financial crisis over?

Are the bank stress tests a farce?

Weekly Link Orgy

2009-04-06T09:22:00.001-05:00

Would you ever walk away from one of your assets?

The truth about the AIG bailout?

It looks like Sovereign Wealth funds are no longer taking over the world.

An interesting new web site that tracks outrageous predictions.

An excellent summary of the mess at Fannie Mae and Freddie Mac.

All you ever wanted to know about the Timber Industry.

Weekly Link Orgy

2009-03-30T05:33:00.011-05:00

The coming Tsunami in Commercial Real Estate:

Article One

Article Two

Article Three

How long will Geithner last?

Everybody is to blame for the mess we are in.

Is this another sign that things are coming back in the economy?

Weekly Link Orgy

2009-03-23T14:46:00.000-05:00

More evidence that the soft market in property casualty insurance is over.

Geithner speaks.

Interesting tidbit about when Newspapers were a growth industry.

Oh my God! There are speculators on Wall Street.

Weekly Link Orgy

2009-03-17T09:09:00.001-05:00

The Chinese are worried about its holdings of Treasuries.

General Electric gets cut to AA and the stock rallies.

AIG tries to explain why we have to keep lending it money.

Another newspaper drops its print edition.

Are Life Insurers next?