Category: Finance

Betting on basics: An investment banker goes public with what appeals to financiers

Named one of "America’s 50 Most Powerful Women" by Fortune magazine, Cristina Morgan has represented her firm on more than 100 IPOs for such familiar names as Adobe, Google, Pixar and Netscape. Recently she was inducted into the W. P. Carey School’s Alumni Hall of Fame. Here, Morgan talks about the role of the investment banker, and weighs in with some advice for individuals interested in making their own stock picks.

Are investors really fooled by earnings manipulation?

Accrual accounting, which allows firms to adjust cash flow from operations, is intended to provide flexibility so that financial statements can be made more informative. Nevertheless, managers may instead use the flexibility to mislead stakeholders about the underlying strength of the company. The extent to which investors and analysts are influenced by earnings manipulation is at the heart of recent research by a team led by W. P. Carey School of Business finance Professors Michael Hertzel and Jeffrey Coles.

Analyze this: Listening to experts doesn’t always work

A recent study tracked investor reaction to more than 50,000 reports issued by 2,794 analysts between 1993 and 1999. While the data show that both large and small investors react to analyst counsel, the larger — and presumably more sophisticated — traders tend to make more money doing so. Compared to those making larger trades, smaller investors seem less aware of conflicts that securities analysts may face, and this lack of understanding translates into less profitable stock-market decisions.

Housing balloon springs a slow leak

Picture the U.S. housing market as a bright red, helium-filled balloon bumping around the ceiling for the last couple of years, but currently suffering a slow leak that interrupts its sprightly bounce, suggests Crocker Liu, professor of finance and real estate at the W. P. Carey School of Business. The latest figures from the National Association of Realtors say sales of previously-owned homes dropped 4 percent in June and July, falling to a 30-month low and adding to a record for-sale home inventory of 4 million. However, Liu contends the market is simply reacting to the Mardi Gras good times of the recent past with a much-needed correction.

The privatization of Fannie Mae

Fannie Mae’s recent $11 billion accounting scandal drew headlines, but even before that, critics, analysts and academics have urged that the time has come for this Government Sponsored Enterprise (GSE) to be completely privatized. Herbert Kaufman, a finance professor at the W. P. Carey School of Business who has been studying GSEs for many years, is among those who argue for privatization. By the 1980s the GSEs had served an important purpose in integrating the mortgage markets into the capital markets, Kaufman says, but at that point they should have been privatized. The issue, he continues, is the government’s possible contingent liability in case of default.

SOX: No one-size-fits-all solution to dishonest accounting

The auditing and reporting requirements of the Sarbanes-Oxley Act — effective since 2004 for larger and midsize corporations and yet to take hold for the smallest companies — have triggered complaints about the costs and questions about the effectiveness of the law. Accommodating Sarbanes-Oxley (a.k.a. SOX) has cost corporations millions as executives and employees undergo special training in compliance. Its requirements for accounting oversight and independence, and its checks on conflicts of interest and fraud, have resulted in a mixed verdict on its effectiveness so far, say experts at the W. P. Carey School of Business.