FINANCE CLASSROOM

It's been a busy month or so since FMA, so I've been out of touch blog-wise, So her are a few snippets:

• We're now in the final throes of the semester (only two weeks left once the students get back from Thanksgiving), and they just had their second exam in my principles class). So, I had about 1000 pages of grading to do (I don't do scan-tron graded exams). But they did extremely well, so I feel good about it. Now all I have left to cover is CAPM and WACC, so I'm right on schedule.
  

• I've been experimenting with online web-conferencing software as an enhancement to my classes. We use a really clunky system called Sakai, which has limited web-conferencing capabilities (only 15 or so concurrent users). So I and another faculty who's also a techie have been looking into using a commercial vendor that will allow us to do deliver online instruction (and review sessions) for 50-100 students at a time. I figure that this (along with my pre-recorded videos) could be the backbone for a fairly thorough and well-done online class.

• The little guy is talking up a storm, and is a riot to be around. He loves to get a running start and then do a running headbutt. Unfortunately, he's at just the right height that he hits his dad in a very sensitive area. But it was pretty funny at Thanksgiving when he caught his uncle unawares. It probably didn't help that I distracted him at just the right moment. when he wasn't. Not nice, I know. But funny
  

• Trying to get a paper out this weekend, another one in the following week, and a third one over December break. And then I'll do the usual scramble to get a new piece together for the FMA deadline in January.

Finally, I came across a pretty good quote (by Aristophanes) that will probably make it onto my door: “Youth ages, immaturity is outgrown, ignorance can be educated, and drunkenness sobered, but stupid lasts forever.”

Gotta get to bed. Later.

I just heard from a coauthor - we got a paper accepted at the Denver FMA meeting in October. The idea resulted from taking an idea we'd been working on and applying it to another data set we had available.

It's funny - we submitted two papers: this one was an early version, and the other was pretty much finished. However, to be fair, the results on this one were more interesting. And since we'd already gotten one paper on the program, we were actually glad we got the second one rejected - doing two papers at a conference means there's less time for catching up with friends.

This tale of two papers reminds me of a piece I read a while back (unfortunately, I can't recall its title). It discussed how there's a trade-off in research between "newness" and "required rigor". In other words, if you're working on a topic that's been done to death (e.g. capital structure or dividend policy), you'll be asked to do robustness tests out the yazoo. On the other hand, if it's a more novel idea, there's a lower bar on the rigor side, because the "newness" factor gets you some slack on the rigor side. .

In general, however, the "rigor" bar has been ratcheting up for the last 20-30 years, regardless of the "newness" factor. To see this, realize that the average length of a Journal of Finance article in the early 80s was something like l6 pages - now it's more like 30-40. As further (anecdotal) evidence, a friend of mine had a paper published on long-run returns around some types of mergers in the Journal of Banking and Finance about 9 years back. They made him calculate the returns FIVE different ways.

In any event, to make a long story short, I'm hoping we got accepted at FMA because the reviewers though our paper was a good, new idea.

But it's probably because we got lucky.

But either way, we'll take it - see you in Denver!

Here's a very interesting and informative piece titled "Edifying Editing" by R. Preston McAfee (former co-editor of AER and editor of Economic Inquiry). It's not entirely applicable to finance because he's an econ guy. But there is a great deal of similarity between the fields. Here are a few things that stuck with me:

1. He cites a paper by Dan Hamermesh (1994), who discovered that, conditional on not receiving a report in 3 months, the expected waiting time was a year. So, if you want to endear yourself to editors and you're a reviewer, get stuff done quickly. I know that the longer I wait on a referee report, the less I feel like punching it out.
2. Around 25% of the to AER during his tenure were rejected due to poor execution. That is, the paper represented a good start on an article worthy topic, but provided too little for the audience. I recently was discussing a former student (and current coauthor) with a friend of mine who edits a pretty good journal. His comment was that my friend does good work, but "needs to finish his papers". Unfortunately, my friend often sends papers out to journals to get feedback from referees. That's what colleagues are for.
   
3. He feels like a a surprising number of papers provide no meaningful conclusion. Don;t merely reiterate your introduction in the conclusion. The introduction is to motivate a problem and summarize your results, and the conclusion is your opportunity to tie things together and make some parting shots.
4. He feels that submitting a paper where the editor has deep expertise usually produces a higher bar but less variance in the evaluation.
   

All in all a very worthwhile read. So read it here.

HT: Marginal Revolution

Here's a pretty interesting governance piece, highlighted recently on the Wall Street Journal's Dealbook: Chief Executives Beware- Analysts May Seal Your Fate:

An academic study found corporate boards are more likely to be influenced by the recommendations of equity analysts following the 2002 rule change that separated the analysts from investment bankers. The study conducted by professors at the Paul Merage School of Business at the University of California in Irvine and at the Jesse H. Jones Graduate School of Management at Rice University in Houston, found that this increase in trust in analysts meant that boards are more likely than in the past to fire an under-performing chief executive based in part on analyst recommendations.

The paper is titled CEO Dismissal: The Role of Investment Analysts as an External Control Mechanism, and it's authored by Margarethe Wiersema (of UC-Irvine) and Yan Zhang (of Rice University). It's a pretty good example of the way that regulatory changes affect the impact of various monitoring agents. My take on it is that post SOX, boards are much more likely to "yank the cord" on CEOs following a whole host of "bad news" events (earnings disappointments, product recalls, etc...). I bet that'd make for an interesting research topic for someone (offered free of charge - I'm not going to pursue it).

You can read a PDF of a working paper version of paper here.

One of my original purposes in starting this blog was to create a place to keep track of things I came across on the Web that might be useful in my classes. I just found another one: "Cash Flow Is King: Cognitive Errors by Investors" by Todd Houge (of U of Iowa) and Tim Loughran of Notre Dame. Here's the abstract:

For those of you who aren't academics, the publishing process (for "refereed" journals) goes like this:

1. You send a piece out to a journal
2. The editor reviews it to find one or more suitable referees (people who supposedly have some background in that area)
3. The referee goes over the piece with a fine-tooth comb. They make comments/suggestions about everything from the statistical methodology you've used to the writing style to the basic premises of the piece. Pretty much anything is fair game, stopping just short of "you dumb, you ugly, and yo momma dress you funny")
   
4. They write a referee report that can be either clear rejection (i.e. go away or we will taunt you again), revise and resubmit (make the following suggested changes and we'll look at it again) or accept (almost never done on the first round).
5. If it's a revise and resubmit, you attempt to make the changes (or at least address the issues raised in some way) and then resubmit it to the journal. The editor sends it back to the referee(s) for another look. Sometimes they even bring in a new referee.
   
6. Steps 4 and 5 can be repeated several times (the record I've heard at a finance journal is 4 rounds).

Most times, the referees' comments truly improve the paper (they should, since they're chosen ostensibly because they know the topic). But once in a while, you get a referee who seems like an idiot. Or alternately, you get two referees who ask you to do two things that are mutually exclusive. In that case, it can feel like this:

HT: Mike Munger