Tuesday, November 1, 2005


Investor Flows Were Behind the 2008 Oil Price Wild Ride

The 2008 turmoil in world oil prices was not caused by an imbalance of supply and demand, argues Professor Kenneth Singleton of the Stanford Graduate School of Business. Instead there was an "economically and statistically significant effect of investor flows on futures prices."

When They Are Wrong, Analysts May Dig in Their Heels

When they are wrong about quarterly earnings forecasts, analysts may stubbornly stick to their erroneous views, a tendency that might contribute to market bubbles and busts, according to research coauthored by John Beshears of the Stanford Graduate School of Business.

Public Sector Pension Plans: Change Is Under Way

Public agencies in the United States have started moving toward self-directed defined contribution retirement plans for employees. Stanford Graduate School of Business professor John Beshears, who is researching retirement systems, cautions that the issues of retirement benefits and pay during working years need to be considered together, not as isolated issues.

Why Does Corporate Governance Really Matter?

A New book by David Larcker and Brian Tayan showcases research into how boards can govern better.

Bankruptcy Laws Drive Corporate Default Rates

Permissive bankruptcy laws, not bad business downturns, seem to be the greatest cause of corporate bond defaults, according to Professor Ilya Strebulaev, co-author of a study that researched 150 years of figures.

Tax Policy Has Changed Who Owns Stocks

A new study from Stanford Graduate School of Business argues that household stock ownership decreases as the tax benefits associated with owning stocks inside a pension plan increase. The trend applies around the globe, says coauthor Ilya Strebulaev.

Temporary Shocks Explain Conservative Fiscal Corporate Policies

The likelihood of temporary shocks, such as the 2006 contamination that shut down spinach growers, contributes in previously unexplored ways to CFOs’ conservative approach to debt financing. In fact, says coauthor Ilya Strebulaev, managers should be even more focused on risk management.

Why Bank Equity Is Not Expensive

Since the 2008 market crash, banking interests and economists have clashed over how much of their operations banks should fund with equity as opposed to debt. Bankers and others often say that, "equity is expensive." A recent paper, coauthored by three faculty of the Stanford Graduate School of Business, argues: "Quite simply, bank equity is not expensive from a social perspective, and high leverage is not required in order for banks to perform all their socially valuable functions."

William Sharpe and the 4% Rule

Many retirees are advised to follow the 4% rule for managing spending and investing. William F. Sharpe and his co-authors argue that following this advice can lead to overpayments and surpluses. To avoid these pitfalls, retirees also have to have a clear idea of how much risk they are willing to take.

Doing the Wall Street Walk as a Kind of Shareholder Activism

For years major shareholders have registered their dissatisfaction corporate management through the Wall Street Walk, selling their shares. Business School researchers Anat Admati and Paul Pfleiderer find that this threat—with its potential to cause a stock price fall—can significantly impact the behavior of top management in the firm in question.

Just Hearing About a Stock Bubble Won’t Keep Investors Safe Just hearing about the economic chaos of an economic bubble with over-hyped and overvalued stocks won’t necessarily save investors from future economic disaster. First-hand experience appears to be necessary to avoid future bubbles say researchers.

A Central Clearing House Doesn’t Reduce CDS Risk

A plan by global financial regulators to fix the mess created by the misuse of credit default swaps is flawed, says Darrell Duffie, professor of finance at the Stanford Graduate School of Business.

Depression Babies: How Our Economic Experiences Affect Investment Behavior Finance professor Stefan Nagel and his co-author have demonstrated that personally experiencing something like the Great Depression has a significant impact on how we invest our money.

Incentives and the Financial Crisis

In any financial crisis, it is possible with 20/20 hindsight to identify the specific proximal causes. Rather than outlawing those activities, Professor Jonathan Berk recommends designing legislation that better aligns the incentives of bankers with the public interest.

Financial Restoration for the United States

During the past 200 years, there have been 16 credit crises in the United States, all marked by speculative excesses in the years immediately preceding. As the ultimate safeguard to stem a financial panic, the government should have in place the apparatus that will allow it to curtail such excesses in advance of their triggering a financial panic says Finance Professor James C. VanHorne.

Achieving Financial Stability

Professor Darrell Duffie argues that redesigning the U.S. financial system after the current financial crisis will focus on creating financial stability. “Most of us thought we had it, but we did not,” he notes.

For Underperforming CEOs, Economic Downturns Can Mean Sudden Death

When either their industry or the overall market is doing badly, CEOs are more likely to be fired, according to a recent study. But it isn’t just boards looking for scapegoats. The ones who are fired tend to be the underperformers regardless of market conditions.

How Dividends Encourage Consumer Spending Consumers are likely to run out and spend stock dividends while income from capital gains is more likely to be reinvested or saved, says the Business School’s Stefan Nagel and his coauthors. The finding could be considered in setting economic policy.

Investors Fear Missing a Sure Thing More Than They Fear Risk

What investors fear the most is not the risk of a loss per se, but the risk that they may do poorly relative to their peers say researchers Peter DeMarzo and Ilan Kremer of the Business School and Ron Kaniel of Duke University.

Economists Caution Investors on Hidden Risks of Hedge Funds High fees, inconsistent data, and difficult-to-understand risks are reasons for individual investors to avoid or minimize their investments in hedge funds, caution a group of 32 senior financial economists, including three from Stanford, in a new report. (November 2005)

Emotions Can Negatively Impact Investment Decisions Emotions can get in the way of making prudent financial decisions, according to researchers who found that people with certain kinds of brain injuries earned more money investing than a comparison group. (September 2005)

The Argument for a 30-Year Bond Darrell Duffie has long argued that the U.S. Treasury Dept. should revive the 30-year bond. In May, the government hinted it probably agrees with him. (April 2005)

Make Day Traders Act Rationally Rather Than Regulate Hedge Funds Hedge funds used to be seen as a way to keep irrational prices under control. No longer, argue researchers, who say many of the funds rode the last market bubble up on the backs of overpriced securities. (October 2004)

CEO Hubris Distorts Investment Decisions CEOs who are overconfident and thus overestimate their ability to generate value within the company systematically make distorted decisions about when, how, and how much to invest in new projects according to research by Ulrike Malmendier. (June 2004)

Pricing Real Estate Negotiating leases for commercial property is a difficult challenge even for professional real estate managers. Professor Steven Grenadier says the process can be broken down into actions that mirror the fundamentals of finance. He is now developing a user-friendly tool to help managers take the guesswork out of negotiating leases. (January 2004)

Short Selling May Affect Stock and Bond Prices The saga of what happened to stock prices following Palm Computing's 2000 IPO left many observers scratching their heads, but it has also led to opportunities to better understand the effects of short selling. (November 2001)

Tax Shield May Make Convertible Bonds Attractive Theoretically, convertible bonds—hybrids that are part bond, part stock—offer investors security and the option to convert if the firm's value rises. The real attraction may lie in the way the Internal Revenue Service views them. (November 2001)

Using Hedge Funds as Alternative Investment Vehicles The low correlation between hedge funds' performance and the market's ups and downs is the main reason why such funds are valued as alternate investment vehicles. They essentially exploit market inefficiencies, using long or short positions to offset market risks. (November 2001)

What's in it for Fund Managers? Compensating mutual fund managers managing active funds by benchmarking their fund's performance against an index has some potentially serious drawbacks. The use of benchmarks distorts the way a manager uses information because the manager's and the investor's goals are no longer the same say two Stanford Graduate School of Business researchers. (September 1996)