Monday, April 14, 2003

Today's class in Managerial Accounting & Control was extremely interesting.  Every once in a while, the professor will toss out a random fact, and today's was a beauty. We were discussing agency theory, some current research about it, and possible solutions available to the participants.  I find agency theory to be fascinating, because it is so complex and so subtle; its effect on human behavior is pervasive yet often imperceptible, especially in a business context.  One interesting situation that was posed was that of a manager who had to decide whether to make an investment into a project or not.  Given that the project had an internal rate of return (IRR) of 25%, exceeding the firm's cost of capital, and given that the manager would share in these rewards, why is it that most managers decline to make investment, causing a massive tendency for most firms to underinvest? The reason is that managers' time horizons and firms' time horizons differ.  Managers' time horizons are often shorter than firm horizons.  Managers may depart the firm soon, or have downside risk from restructuring or simply bad luck.  This results in a risk profile that is higher than what the firm holds as a whole, and causes investment decisions to be held to a much higher IRR threshhold than what maximizes wealth for the firm.  A beautiful and subtle observation. This difference in risk concentration, however, is something that financial markets are supposed to solve.  To this end, there is a rumor that an offshore hedge fund has created a fund that pools cash-flow risk for executives whose compensation is highly dependent on their firm's performance.  This removes the "market" risk from executive compensation, while introducing some free-rider problems.  You could call this an "interesting" example, but it's much more than this: the rumor has it that 30 CEOs in the Fortune 500 are in this risk transfer pool. 1:39:51 PM    comment []

Lucky had a great time in Strasbourg last weekend visiting friends.  Great food, a lovely city, and fun people made for a great time.  Highly recommended for a weekend getaway- be sure to visit the enormous cathedral, eat lots of tarte flambée, and drink lots of young riesling.   1:16:11 PM    comment []

Last week's slide about cultural myths, as promised.  Each country's observation was contributed by someone from that country, so don't get all PC with me. Japan Myth:  Japanese eat sushi every day.  (It's for special occasions.) Advice:  Get buy-in before meetings (no surprises).  Avoid being blunt or direct (subtlety is key). Russia Myth:  Russians drink heavily (not more than Swedes, Aussies, Irish combined). Advice:  Personal relationships and rapport are extremely important (best accomplished through social drinking). USA Myth:  Americans like to work long hours.  (They don't want to, they have to.) Advice:  Challenge is a good motivator.  So is the desire and vision of a better future. Panama Myth:  Panamanians are still under the thumb of the US.  (They're on their own now.) Advice:  The skills are there, but there is often no motivation to use them. Turkey/USA Myth:  Turkey is a conservative Islamic country where women have a secondary role. Advice:  Americans are very approachable, but shy away from non-PC talk at work. Portugal Myth:  Portugal is a Spanish state.  Portuguese are open and inviting from the start. Advice:  Deadlines will be met, even though it may not seem so.  Work is formal.  Networking- learn about football.   1:11:08 PM    comment []

Harald Hau's Quotes of the Day from Corporate Finance These quotes are from last Thursday's finance class, whose topic was (again) CAPM, the Capital Asset Pricing Model.  We spent a lot of time discussing where the CAPM was applicable and where observed financial market behavior deviated from model predictions. "Most US households are extremely poorly diversified, which is against the theory." "Finance can't explain high trading volumes.  CAPM implies that you would only hold the market and only trade to hedge risk. [when asking the extent of class knowledge retained from last period's statistics class]  "You know about covariance?  And you don't know about this?  ... I think you are telling me rubbish." [The Grand Finale Quote, when showing a pie chart of per-country ownership of the world equity market]  "What you see here is not distribution of voting rights in the UN, but distribution of voting rights in world markets.  You can see that the Coalition has most of the voting rights... then Old Europe at 20%... Japan, depends on when you measure them... China big but not related to population... Africa... you can forget about it."   1:03:38 PM    comment []