Q&A: The conundrum of private placement discounts

A paper published a dozen years ago by finance professors Michael Hertzel and Richard L. Smith is still causing a stir among valuation practitioners and tax officials. "Market Discounts and Shareholder Gains for Placing Equity Privately" published in the Journal of Finance in 1993, challenged the notion that private placement discounts can be uniformly applied as marketability discounts in valuing closely-held firms. In a finding somewhat tangential to the thesis of the paper, Hertzel and Smith discovered that private placement discounts vary widely, depending on circumstances. Their tables are often used in cases where disagreements develop over the value of privately held firms. Hertzel has recently completed another study on private placements that is likely to add more fuel to the fire.

Pricing schemes reduce corporate taxes by billions

Multinational corporations, including some of the icons of American business, routinely cut tax liability through pricing schemes. By dropping the cost of goods sold to subsidiaries and inflating the price of goods that come back to the U.S., multinationals transfer profits — and tax liability — to tax-friendly nations. Experts estimate that corporations shift $62 to $87 billion of pre-tax income out of the U.S. each year resulting in substantial tax revenue losses. Legislation pending in Congress could help plug corporate tax-haven loopholes.

China steps up pace in reform of capital markets

Traumatic losses have punctuated the recent history of the Shanghai and Shenzhen stock exchanges — a paradox when viewed in the context of China’s rapid economic growth. The underperformance of the exchanges underscores the need to address capital market reforms, including accounting transparency and shareholder and creditor rights. W. P. Carey School finance professor Jeffrey Coles explored the liquidity and regulatory problems that afflict the Chinese exchanges at the Sino U.S. New Market Economy Forum held recently in Beijing.

Political wheel of fortune: Is Wall Street tied to presidential cycle?

For the last 30 years, especially during elections, investors have speculated about the apparent link between stock market behavior and the U.S. presidential election cycle. To the observer, returns seem to be higher during the second half of a president’s term than the first. Is it true, or has this phenomenon been merely an intriguing coincidence? A W. P. Carey School of Business finance professor analyzed market behavior going back to 1803 and confirmed that the pattern is real. The reasons why are not so clear.

Pitfalls inherent in ranking financial professionals

From business schools to baseball batters, we use rankings to determine who’s the best. Investors, too, look to rankings to assess the performance of financial professionals. The market has responded by providing several indices to gauge the success of funds, but investors need to look closely before deciding which ranking to use when making decisions. The indices can be misleading if you don’t know what they are measuring.