Monday, October 3, 2016
You may have noticed that there is not a lot of discussion of ethics in your textbook. A major reason is that from a financial view, if the market or society values ethical behavior, unethical behavior by a company will hurt its market value, thus defeating the goal of maximizing shareholder value. Consider the case of Wells Fargo, which is under fire for fraudulently creating up to 2 million deposit and credit card accounts. In addition to the fines paid by the company, last week, California announced that it was barring state transactions with Wells Fargo, including underwriting state bond issues. Today, Chicago announced that it was divesting $25 million that it has invested with Wells Fargo and next week Illinois plans to announce its plans to suspend Wells Fargo from the state investment network. So, while Wells Fargo may have temporarily increased value by fraudulent actions, these actions will now negatively affect shareholder value.
If you look at stock prices, you will see bid and ask prices that may only be different by a penny. What you may not realize is that this has only occurred since 2001. Prior to that, stock prices were quoted in eighths or sixteenths, so a price quote of 40 1/8 meant $40.125. Part of the reason for the change was that the bid-ask spread was the dealer profit, which also meant that investors were paying this difference. However, it has been argued that small cap stocks were hurt by decimalization because market makers have less incentive to trade less liquid small cap stocks and this has also lead to less research on small companies. Today, a pilot program was begun in which 10 small company stocks began trading on 5 cent tick sizes, meaning the smallest change in the stock price for these stocks is now a nickel. About 1,200 stocks will eventually be included in the test program, with three different groups with different trading rules. The goal of the study is to determine if increasing the tick size can lead to increased liquidity in small cap stocks.
Wednesday, September 28, 2016
The ratio of CEO pay to that of other workers has been a hot button topic and reports often peg the ratio at 300:1 or higher. A controversial part of the Dodd-Frank Act requires companies to begin reporting the CEO pay relative to the median compensation at that company. In a new survey of 117 companies, the majority of the companies reported a ratio less than 200:1. Surprisingly, the financial services sector, which has drawn considerable scrutiny for CEO pay, has a lower CEO pay ratio, in part because the wages in that industry are relatively high. Industries that have high CEO pay ratios tend to have mare part-time and less-skilled employees.
Sunday, September 25, 2016
Usually with a new project, a company will wait until after the project has begun to determine if the project will be successful or not. With the Paramount pictures movie Monster Trucks, the company decided that it had it had a monster flop on its hands. The movie, which has been in development since 2013, reportedly cost $125 million. Even though the movie won't be released until January 2017, Paramount announced that it would write off $115 million related to the movie. Write-offs due to poor box office receipts usually occur after a movie is released, but the move is not unprecedented. For example, in January 2015, DreamWorks wrote off $155 million due to unreleased films, which is the option to abandon. Whether Monster Trucks is ultimately released will help determine if the remaining development costs are written off.
Wednesday, September 21, 2016
Microsoft announced that it was raising its dividend by 8 percent and would buy back an additional $40 billion in shares after the company concludes its current $7.1 billion buyback, which is left from the company's previous $40 billion buyback. The buyback amounts to about 9 percent of outstanding shares, although because of the company's ESOP, the number of outstanding shares will be reduced by less than that amount. The dividend increase means that Microsoft is allocating nearly $1 billion more toward dividends this year than last. Total dividends paid by Microsoft this year should top $12 billion.
The cash held by foreign subsidiaries of U.S. companies has reached a record $2.5 trillion. Microsoft and GE both hold more than $100 billion overseas, while Apple and Pfizer have $91.5 billion and about $80 billion, respectively. Overseas cash now tops cash held domestically, which reached $1.94 trillion. Of course, much of the reason for the foreign cash holdings is the U.S tax system, which taxes repatriated earnings at 35 percent, the highest corporate tax rate in the world. Although various tax breaks on the repatriation of cash have been floated, naysayers argue that the last repatriation tax break in 2004 resulted in little investment. Rather, repatriated cash was used for dividends and stock buybacks. We should point out that a repatriation tax break would actually be a boon to the IRS. Consider, if the repatriation tax rate were lowered to 15 percent, companies would only get $.85 for every dollar repatriated. Assuming a 35 percent personal tax rate, investor would only receive about $.55 in dividends after tax per dollar repatriated, an effective tax rate of about 45 percent.
Monday, September 12, 2016
Unfortunately, most legislation is the result if unethical behavior. As part of the Sarbanes-Oxley Act, the SEC passed Rule 13a-14 that said CEOs and CFOs are required to sign and attest that the financial statements filed with the SEC do not include material misstatements or omissions. In 2013, a judge found that the CEO and CFO of Basin Water were not liable for sham transactions since they were not directly involved in the transactions. The 9th U.S. Circuit Court of Appeals recently overturned this decision and stated that "a mere signature is not enough for compliance" and is allowing the SEC to sue for disgorgement of gains. The recent ruling makes it even more important for CEOs and CFOs to run ethical companies.