Summary of business news and analysis

Kimbro, Marinilka Barros and Xu, Danielle, Should Shareholders Have a Say on Executive Compensation? Evidence from Say-on-Pay in the United States (February 2013). Available at SSRN: http://ssrn.com/abstract=2209936 or http://dx.doi.org/10.2139/ssrn.2209936

Abstract:

"This paper examines the SEC 2011 regulation requiring an advisory (non-binding) shareholder vote on the compensation of the top five highest paid executives – “say-on-pay” (SOP). Using a unique dataset of the first two years of SOP votes from the Russell 3000, we find approval (reject) votes are associated with firms that have: better (lower) financial performance, higher (lower) market returns, lower (higher) returns volatility, lower (higher) total compensation, lower (higher) abnormal CEO compensation and lower (higher) abnormal accruals. We also find evidence to suggest that firms that receive a high level of SOP rejection votes subsequently reduce the growth of executive compensation levels. This study contributes to the literature in two ways. First, it is the first to empirically examine the first two years of SOP votes in the United States. Second, our analysis provides evidence of shareholder efficiency in identifying excessive CEO compensation and poor financial performance, thus suggesting that shareholder voting rights are an effective mechanism of corporate governance that addresses the problem of incomplete contracts and management rent extraction. The first two years of SOP votes in the US votes show a great degree of shareholder sophistication in recognizing the monitoring and reward tools that need to coexist between the owners and firm managers."

Keywords: Say on Pay, Corporate Governance, Executive Compensation, Voting Rights

Keywords: Reason, Rationality,Freedom, Libery

We like the description that an entrepreneur is somebody who believes in "a yet-to-be-made future".

Sarasvathy, Saras D., What Makes Entrepreneurs Entrepreneurial?. , Vol. , pp. 1-9, . Available at SSRN: http://ssrn.com/abstract=909038

Abstract:

"What are the characteristics, habits, and behaviors of the species entrepreneur? Is there such a thing as "entrepreneurial thinking"? Is there a learnable and teachable "core" to entrepreneurship? This case examines the problem-solving process of 30 entrepreneurs from a variety of industries whose companies range in value from $200 million to $6.5 billion. Careful analysis reveals a distinct thought process: "effectual reasoning." Using U-Haul as an example, the case delineates the way in which entrepreneurs factor in affordable loss, strategic partnerships, and leveraging contingencies. Thinking entrepreneurially, as opposed to managerially or strategically, means believing in a yet-to-be-made future that can be shaped by human action and realizing that, to the extent that such action can control the future, one need not expend energy trying to predict it. It is much more useful to understand and work with the people who are engaged in the decisions and actions that bring it into existence."

Keywords: Entrepreneur, Entrepreneurship

De Socio, Antonio and Nigro, Valentina, Does Corporate Taxation Affect Cross-Country Firm Leverage? (November 29, 2012). Bank of Italy Temi di Discussione (Working Paper) No. 889. Available at SSRN: http://ssrn.com/abstract=2206357

Abstract:

"We evaluate the relation between firm leverage and taxation of corporate income using a dataset of mostly unlisted European corporations, highly representative of medium-sized and large firms. We use a correlated random effect approach in order to take into account unobserved heterogeneity and to assess the contribution of cross-sectional variation of the regressors. We also apply quantile regressions to evaluate a possible differential impact of taxation on leverage across firms. Our results suggest that corporate income taxation is positively related to leverage and explains part of the cross-country variability, showing a stronger effect for less levered firms. In accordance with the theory of the debt tax shield, the relation between debt and taxation is stronger for highly profitable firms. These findings are robust to the inclusion of different measures of the financial development and characteristics of the legal system of the country where firms are located."

Keywords: Firm Leverage, Leverage, Corporate Taxes, Capital Structure

US public debt is skyrocketing. Future reduction due to economic improvement wishful thinking?

Keywords: US Debt, US Economy

Keywords: Investment Climate, Investment Strategy, Private Equity, Global Economy, China

Mercatus Center published a good article on the relationship between economic prosperity and freedom:

Mercatus Center: Economic Freedom and Economic Privilege, Matthew Mitchell, Jan. 10, 2013

Keywords: Freedom, Growth, Wealth, Prosperity

Related:

Previous MarketObservation posts, covering the subject of "economic freedom":

"Economic Freedom" on MarketObservation

The Daily Beast: Africa Is Rising: Inside the Continent’s Great Economic Leap, Jan. 6, 2013

Most of the globe may still be reeling from the great recession, but one continent is booming. Surprise—it’s Africa. Jake Bright on what’s driving the growth, and whether the opportunities are trickling down. read more in The Daily Beast

Keywords: Africa, Resources, African Institutions, Trade with Africa, Free Markets

Fusionmarketsite: Exclusive interview with Felix Zulauf, Jan. 2013

We recently sat down with world-renowned money manager Felix Zulauf to get his view on global markets. Felix discusses the European debt crisis, the rebound in Chinese equities, the recent Japanese election and its impact on their markets, the U.S. markets in light of our fiscal issues, and much more. read more on Euromarketsite

Keywords: Felix Zulauf, Euro, Global Economy, China

Keywords: Megatrends, Re-Balancing, Economic Development

Thomas Åstebro, Carlos J. Serrano, Business Partners, Financing, and the Commercialization of Inventions, NBER Working Paper No. 17181, Issued in June 2011

Abstract:

"This paper studies the effect of business partners on the commercialization of invention based ventures, and it assesses the relative importance of partners’ human and social capital on commercialization outcomes. Projects run by partnerships were five times more likely to reach commercialization, and they had mean revenues approximately ten times greater than projects run by solo-entrepreneurs. These gross differences may be due both to business partners’ value added and to selection. After controlling for selection effects and observed/unobserved heterogeneity, our smallest estimate of partner value added approximately doubles the probability of commercialization and increases expected revenues by 29% at the sample mean."

Keywords: Inventions, Entrepreneurial Success Rates, Partnerships

Important academic paper to "calibrate" judgement related to corporate decision making:

Ben-David, Itzhak, Graham, John R. and Harvey, Campbell R., Managerial Miscalibration (August 8, 2012). Charles A. Dice Center Working Paper No. 2010-12; Fisher College of Business Working Paper No. 2010-03-012; AFA 2007 Chicago Meetings Paper . Available at SSRN: http://ssrn.com/abstract=1640552 or http://dx.doi.org/10.2139/ssrn.1640552

Abstract:

"We test whether top financial executives are miscalibrated using a unique 10-year panel that includes over 13,300 probability distributions of expected stock market returns. We find that executives are severely miscalibrated, producing distributions that are too narrow: realized market returns are within the executives’ 80% confidence intervals only 36% of the time. We show that the lower bound of the forecast confidence interval is lower during times of high market uncertainty; however, ex-post miscalibration is worst during these episodes. We also find that executives who are miscalibrated about the stock market show similar miscalibration regarding their own firms’ prospects. Finally, firms with miscalibrated executives appear to follow more aggressive corporate policies: investing more and using more debt financing."

Keywords: Overconfidence, Behavioral Biases, Behavioral Corporate Finance

Keywords: Fiscal Cliff, US Deficit, Obama, Boehner

Keywords: US Economy, Eurozone Economy, S&P, Euro Stoxx

Keywords: S&P, Tech Stocks

Conrad, Christian and Zumbach, Klaus Ulrich, The Effect of Political Communication on European Financial Markets During the Sovereign Debt Crisis (December 12, 2012). University of Heidelberg, Department of Economics, Discussion Paper No. 536. Available at SSRN: http://ssrn.com/abstract=2188358

Abstract:

"We quantify all statements by major European politicians reported by Reuters during the August 2011 to December 2011 period and show that political communication significantly affects European stock and bond markets as well as the EURUSD exchange rate. Communication with respect to Italy induces the strongest market reactions. Financial markets consider the German bond market a safe haven."

Keywords: Political Statements, Capital Markets, High-Frequency Response

Source: Intel Free Press

Keywords: Technology, China

Keywords: Fed, Quantitative Easing, Fed Balance Sheet

IndexUniverse: Malkiel: Cheap Money Advice For The Wired, Dec. 10, 2012

Burton Malkiel, the Princeton economics professor and author of the index investing classic “A Random Walk Down Wall Street,” has a new gig that’s worth taking measure of. The legend of passive investing is now chief investment advisor of Wealthfront, a Silicon Valley-based financial advisory firm that is serving up a dirt-cheap online approach to money management. read more on IndexUniverse

Keywords: Indices, Index, Index Investing, Online Money Management

Highly relevant article of Megan McArdle on the demographic shift in the US - a problem which also other Western civilizations face:

The Daily Beast: Our Demographic Decline, by Megan McArdle, Dec. 4, 2012

Birthrates are falling. Will the economy follow

....... "Start with a simple equation: economic growth equals the growth in the workforce plus the growth in the productivity of that workforce. If the workforce shrinks, then productivity growth needs to be higher, in order to compensate; otherwise your economy shrinks. In theory, we can compensate for the coming demographic shift with higher productivity. A shrinking population, after all, means a higher capital to worker ratio.


But this doesn't quite work, because our population will not simply get smaller; it will also get older. If everyone was going to suddenly die at 45, we might be able to get the requisite productivity boost. But as the population ages, it will change dramatically, becoming less innovative, more risk averse, less physically capable. Just as we desperately need productivity to speed up, it is probably going to slow down.".... Source: Excerpt of Megan McArdle article

Keywords: Population, Western Economies, Economic Growth, Demographics