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Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches

April 23, 2014 Comments off

Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches
Source: Social Science Research Network

Applying a “co-search” algorithm to Internet traffic at the SEC’s EDGAR website, we develop a novel method for identifying economically-related peer firms. Our results show that firms appearing in chronologically adjacent searches by the same individual (Search Based Peers or SBPs) are fundamentally similar on multiple dimensions. In direct tests, SBPs dominate GICS6 industry peers in explaining cross-sectional variations in base firms’ out-of-sample: (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. We show that SBPs are not constrained by standard industry classification, and is more dynamic, pliable, and concentrated. Our results highlight the potential of the collective wisdom of investors ― extracted from co-search patterns ― in addressing long-standing benchmarking problems in finance.

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Private equity: Changing perceptions and new realities

April 23, 2014 Comments off

Private equity: Changing perceptions and new realities
Source: McKinsey & Company

Private-equity performance has been misunderstood in some essential ways. It now seems that the private-equity industry decisively outperforms public equities with respect to risk-adjusted returns, which may prompt return-starved institutional investors to allocate even more capital to the asset class. But this good news comes with an asterisk: top private-equity firms now seem less able to produce consistently successful funds. That’s because success has become more democratic as the general level of investing skill has increased.

The new priority for success is differentiated capabilities. Limited partners (those who invest in the funds raised and managed by general partners) expect funds that exploit a general partner’s distinctive strengths will do well, while more generalist approaches may be falling from favor. Institutional investors will need to get better at identifying and assessing these skills, and private-equity firms will need to look inward to better understand and capitalize on the factors that truly drive their performance.

Foreign Direct Investment (FDI) in the United States: Drivers of U.S. Economic Competitiveness

April 22, 2014 Comments off

Foreign Direct Investment (FDI) in the United States: Drivers of U.S. Economic Competitiveness
Source: U.S. Department of Commerce, International Trade Administration

This paper studies the impact of FDI on the U.S. economy, the strengths and attractiveness of the United States as a destination for FDI, and the competitiveness of the United States with respect to investment trends by geography and industry sector.

FDI is a key source of capital, job creation, innovation, and cross-border trade. In the United States, FDI has continued to flourish because firms worldwide recognize the United States as an innovative and stable market and the world’s largest economy. Moreover, the United States upholds its longstanding open investment policy, recognizing that the free movement of capital across borders is at the heart of today’s global economy.

Major Surgery Needed: A Call for Structural Reform of the US Corporate Income Tax

April 21, 2014 Comments off

Major Surgery Needed: A Call for Structural Reform of the US Corporate Income Tax
Source: Urban Institute

A corporate income tax can play a useful role by preventing shareholders from deferring tax on retained corporate profits. The current U.S. corporate income tax is deeply flawed, however, because it relies on definitions of corporate residence and income sourcing that corporations can easily manipulate, causing economic distortions and erosion of the corporate tax base. Two structural reform options to address these problems are securing international agreement on better ways to allocate the corporate tax base among countries and replacing the corporate income tax with full taxation of American shareholders’ dividends and accrued capital gains on stock in publicly traded companies.

Managing Retirement Risks

April 18, 2014 Comments off

Managing Retirement Risks (PDF)
Source: American College of Financial Services

This table was built for the Retirement Income Certified Professional® (RICP®) designation program for financial advisors. Building a retirement income plan starts by making sure that the client’s income needs and other financial objectives are met. But after that is the tough task of evaluating all the risks that retirees face, and developing a plan to address each one. This table identifies 18 risks in six different categories. With each risk, we define the risk, provide an example, identify facts that describe the magnitude and scope of the risk, and offer a wide range of possible solutions.

The solutions offered here are intended to provide ideas. Building a retirement income plan is a complex process and building solutions to retirement risks is much more than just checking the box. For example, solving longevity risk may include deferring Social Security, purchasing annuities with lifetime payouts, buying life insurance to provide an income stream to a surviving spouse, and carefully choosing a withdrawal strategy from a retirement portfolio. In other words, almost every risk described here requires a carefully crafted, balanced set of solutions that requires thought, knowledge, and experience.

Ratifying and Implementing Trade and Investment Treaties in Canada

April 15, 2014 Comments off

Ratifying and Implementing Trade and Investment Treaties in Canada
Source: Parliamentary Library of Canada

Under Canada’s constitutional system, the conduct of foreign affairs is a royal prerogative power of the federal Crown.

Consequently, the Executive Branch has the exclusive power to negotiate and conclude international treaties. Parliament has the exclusive power to enact legislation to implement those treaties.

As Canada continues to enter into such treaties, a number of important questions arise:

  • What is the interaction between Canadian and international law in the treaty-making and implementation processes, particularly in relation to trade and investment?
  • What measures must the Executive and Legislative branches take so that these treaties can come into force?
  • What formal role do the provinces and territories play in the negotiation, ratification and implementation of trade and investment treaties?

Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets

April 15, 2014 Comments off

Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets
Source: Journal of Finance, forthcoming (via SSRN)

We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker’s (1968) economic theory of crime, we identify the tax evasion component in foreign portfolio investment data by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investor-level tax evasion affecting cross-border investment in equity and debt markets.

The U.K.’s Ambitious New Retirement Savings Initiative

April 15, 2014 Comments off

The U.K.’s Ambitious New Retirement Savings Initiative
Source: Center for Retirement Research at Boston College

The brief’s key findings are:

  • The United Kingdom is rolling out a low-cost retirement system for workers who lack pension coverage.
  • The new system has three core elements:
    • Employers auto-enroll their workers at a 4-percent contribution rate, matched by the employer and government combined.
    • A new non-profit provides the infrastructure to keep costs low.
    • The plans’ target date funds start young workers with low-risk investments to avoid losses that could discourage saving.
  • The U.S.’s new “myRA” program includes two similar design features – low-risk investments and government infrastructure – but it lacks auto-enrollment.

Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices

April 8, 2014 Comments off

Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices
Source: Federal Reserve Board

TIPS are notes and bonds issued by the U.S. Treasury with coupons and principal payments indexed to inflation. Using no-arbitrage term structure models, we show that TIPS yields contained liquidity premiums as large as 100 basis points when TIPS were first issued, reflecting the newness of the instrument, and up to 350 basis points during the recent financial crisis, reflecting common funding constraints affecting a variety of financial markets. Applying our models to the U.K. data also reveals liquidity premiums in index-linked gilt yields that spiked to nearly 250 basis points at the height of the crisis. Ignoring TIPS liquidity premiums is shown to significantly distort the information content of TIPS yields and TIPS breakeven inflation rate, two widely-used empirical proxies for real rates and expected inflation.

CRS — The Volcker Rule: A Legal Analysis

April 8, 2014 Comments off

The Volcker Rule: A Legal Analysis (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

This report provides an introduction to the Volcker Rule, which is the regulatory regime imposed upon banking institutions and their affiliates under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (P.L. 111-203). The Volker Rule is designed to prohibit “banking entities” from engaging in all forms of “proprietary trading” (i.e., making investments for their own “trading accounts”)—activities that former Federal Reserve Chairman Paul A. Volcker often condemned as contrary to conventional banking practices and a potential risk to financial stability. The statutory language provides only general outlines of prohibited activities and exceptions. Through it, however, Congress has empowered five federal financial regulators with authority to conduct coordinated rulemakings to fill in the details and complete the difficult task of crafting regulations to identify prohibited activities, while continuing to permit activities considered essential to the safety and soundness of banking institutions or to the maintenance of strong capital markets. In December 2014, more than two years after enactment of the law, coordinated implementing regulations were issued by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).

Fiduciary Duty and Investment Advice: Attitudes of Plan Sponsors

April 4, 2014 Comments off

Fiduciary Duty and Investment Advice: Attitudes of Plan Sponsors
Source: AARP Research

This AARP survey of employers that sponsor retirement savings plans (“plan sponsors”) examines a range of issues related to investment advice available to plan participants from the financial institutions that provide their plan (the “DC provider”). It reveals widespread support for holding advice to a “fiduciary” standard; that is, requiring advice offered by DC providers to individual plan participants to be in the best interest of the participants.

Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media

April 3, 2014 Comments off

Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media
Source: Social Science Research Network

Social media has become a popular venue for individuals to share the results of their own analysis on financial securities. This paper investigates the extent to which investor opinions transmitted through social media predict future stock returns and earnings surprises. We conduct textual analysis of articles published on one of the most popular social-media platforms for investors in the United States. We also consider the readers’ perspective as inferred via commentaries written in response to these articles. We find that the views expressed in both articles and commentaries predict future stock returns and earnings surprises.

Preparing for bigger, bolder shareholder activists

April 3, 2014 Comments off

Preparing for bigger, bolder shareholder activists
Source: McKinsey & Company

Activist investors are getting ever more adventurous. Last year, according to our analysis, the US-listed companies that activists targeted had an average market capitalization of $10 billion—up from $8 billion just a year earlier and less than $2 billion at the end of the last decade. They’ve also been busier, launching an average of 240 campaigns in each of the past three years—more than double the number a decade ago. And even though activists are a relatively small group, with only $75 billion in combined assets under management compared with the $2.5 trillion hedge-fund industry overall, they’ve enjoyed a higher rate of asset growth than hedge funds and attracted new partnerships with traditional investors. As a result, they have both the capital and the leverage to continue engaging largecap companies.

Do Financial Knowledge, Behavior, and Well-Being Differ by Gender?

April 3, 2014 Comments off

Do Financial Knowledge, Behavior, and Well-Being Differ by Gender?
Source: Urban institute

Using the National Financial Capability Survey, we examine differences among men and women in financial knowledge, behavior, and well-being. We find that women are less financially knowledgeable than men. Women are less willing than men to take financial risks and have more credit cards than men. However, women are equally likely to pay their credit cards in full every month and are equally likely to save for retirement. More differences by gender arise when we separate men and women by family type. Unmarried women with dependent children are worse-off and likely have other financial stresses.

Startup City: The Urban Shift in Venture Capital and High Technology

April 2, 2014 Comments off

Startup City: The Urban Shift in Venture Capital and High Technology
Source: Martin Prosperity Institute

High tech startups are taking an urban turn. Manhattan and Brooklyn, downtown San Francisco, and Santa Monica are all becoming tech hubs. This is a new development. While large urban centers have historically been sources of venture capital, the high tech startups they funded were mainly, if not exclusively, located in suburban campuses in California’s Silicon Valley, Boston’s Route 128 corridor, the Research Triangle of North Carolina, and in the suburbs of Austin and Seattle. But high tech development, startup activity, and venture investment have recently begun to shift to urban centers and also to close-in, mixed-use, transit-oriented walkable suburbs. This report, which is based on unique data from the National Venture Capital Association, Thompson Reuters and Dow Jones, examines this emergent urban shift in high tech startup activity and venture capital investment.

Venture Capital and Strategic Investment for Developing Government Mission Capabilities

April 2, 2014 Comments off

Venture Capital and Strategic Investment for Developing Government Mission Capabilities
Source: RAND Corporation

A wide range of military capability improvement efforts have benefited from development and procurement methods that accommodate urgent operational needs. Changes in the threat environment suggest a need for a fresh examination of the adequacy and suitability of acquisition methods for the coming decade. This report examines one class of acquisition method, known as government venture capital (GVC), or government strategic investment (GSI). The research extracts general observations from previous cases and from a partial economic model of the GSI type of initiative. Taken together, these analyses will help government acquisition managers to judge more thoroughly the suitability of strategic investment methods for motivating future government mission–oriented innovation by private firms.

The report does not explicitly compare GSIs and alternatives for their efficacy in advancing government mission objectives. If it had, it is likely that the main advantage of GSI would be improved access to information about alternative approaches available in the commercial market, resulting from the close relationships the GSI structure engenders between government and business.

Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons?

March 25, 2014 Comments off

Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons?
Source: International Monetary Fund

Stock markets play a key role in corporate financing in Asia. However, despite their increasing importance in terms of size and cross-border investment activity, the region’s markets are reputed to be more “idiosyncratic” and less reliant on economic and corporate fundamentals in their pricing. Using a model that draws on international asset pricing and economic theory, as well as accounting literature, we find evidence of greater idiosyncratic influences in the pricing of Asia’s stock markets, compared to their G-7 counterparts, beyond the identified systematic factors and local fundamentals. We also show proof of a significant relationship between the strength of implementation of securities regulations and the “noise” in stock pricing, which suggests that improvements in the regulation of securities markets in Asia could enhance the role of stock markets as stable and reliable sources of financing into the future.

SEC — Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform

March 25, 2014 Comments off

Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform
Source: U.S. Securities and Exchange Commission

The staff of the Securities and Exchange Commission today made available certain analyses of data and academic literature related to money market fund reform.
The analyses, which were conducted by the staff of the SEC’s Division of Economic and Risk Analysis, are available for review and comment on the Commission’s website as part of the comment file for rule amendments proposed by the SEC in June 2013 regarding money market fund reform.

The analyses examine:

  • The spread between same-day buy and sell transaction prices for certain corporate bonds from Jan. 2, 2008 to Jan. 31, 2009.
  • The extent of government money market fund exposure to non-government securities.
  • Academic literature reviewing recent evidence on the availability of “safe assets” in the U.S. and global economies.
  • The extent various types of money market funds are holding in their portfolios guarantees and demand features from a single institution.

Tracking Global Demand for Emerging Market Sovereign Debt

March 19, 2014 Comments off

Tracking Global Demand for Emerging Market Sovereign Debt
Source: International Monetary Fund

This paper proposes an approach to track US$1 trillion of emerging market government debt held by foreign investors in local and hard currency, based on a similar approach that was used for advanced economies (Arslanalp and Tsuda, 2012). The estimates are constructed on a quarterly basis from 2004 to mid-2013 and are available along with the paper in an online dataset. We estimate that about half a trillion dollars of foreign flows went into emerging market government debt during 2010–12, mostly coming from foreign asset managers. Foreign central bank holdings have risen as well, but remain concentrated in a few countries: Brazil, China, Indonesia, Poland, Malaysia, Mexico, and South Africa. We also find that foreign investor flows to emerging markets were less differentiated during 2010–12 against the background of near-zero interest rates in advanced economies. The paper extends some of the indicators proposed in our earlier paper to show how the investor base data can be used to assess countries’ sensitivity to external funding shocks and to track foreign investors’ exposures to different markets within a global benchmark portfolio.

SEC — Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio

March 14, 2014 Comments off

Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio (PDF)
Source: U.S. Security and Exchange Commission

As with anything you buy, there are fees and costs associated with investment products and services.

These fees may seem small, but over time they can have a major impact on your investment portfolio. The following chart shows an investment portfolio with a 4% annual return over 20 years when the investment either has an ongoing fee of 0.25%, 0.50% or 1%. Notice how the fees affect the investment portfolio over 20 years.

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