The thinning ranks of climate change deniers are confronted with more compelling evidence in this week’s issue of Nature.
Nature reports that a comprehensive analysis of trends in tens of thousands of biological and physical systems has provided more evidence to bolster the near-universal view that man-made climate change is altering the behaviour of plants, animals, rivers and more.
The study, by an international research team featuring many members of the Intergovernmental Panel on Climate Change (IPCC), is a statistical analysis of observations of natural systems over time. The data, which stretch back to 1970, capture the behaviour of 829 physical phenomena, such as the timing of river runoff, and around 28,800 biological species.
Among the warming-linked changes seen in the study are the timing of plant flowering, bird nesting, ice melting, salmon migration and pollen release; declines in populations of polar bears, krill and penguins; and increased growth of Siberian pines and cool-water ocean plankton.
“This paper outlines an extremely robust case for linking a range of observed physical and biological changes to human-induced climate change, specifically warming,” says Roger Jones of the Centre for Australian Weather and Climate Research. “Unfortunately, the coverage of such data is not global and many regions of the world, including Australia, are not very well covered. Many of the regions that lack coverage are also thought to be highly vulnerable to the impacts of climate change.”
Corporate donations to political campaigns reveal a lot about mutual back-scratching in the political and business arenas. Now new research from Harvard Business School suggests that corporate giving may consist of more than monetary contributions. The evidence shows that firms involved in potentially controversial business activities—outsourcing, for example—understate their earnings if it might boost a candidate’s chances of election.
A new study by HBS professor Karthik Ramanna and a colleague from MIT, Professor Sugata Roychowdhury, suggests that accounting information itself may function as an important political contribution.
The authors studied “573 Democratic and Republican candidates in the 2004 congressional races,” and found that of “338 corporate donors that gave at least $10,000 to closely watched races—those races with greater uncertainty and higher visibility, involving 95 candidates of the total—were more likely to understate their earnings in the two quarters prior to the election.”
This so-called “‘downward earnings management,’ as it is known in accounting, seems to have been motivated by the desire of contributing firms to not taint preferred candidates with association to the political red flag of 2004—outsourcing—as well as to ensure future benefits and avoid future costs in regulatory matters. ”
Firms manage accounting numbers to avoid regulatory scrutiny. The implication is that firms manage accounting numbers to influence political decisions.
Importantly, the authors conclude, “While corporate donors in general do not exhibit evidence of downward earnings management, corporate donors to candidates in closely watched races exhibit significant evidence of downward earnings management in the second and third calendar quarters of 2004.”
The use of standardized tests in hiring practices has been criticized as racially biased, or at least as a hurdle for equal opportunity hiring programs. A paper published in MIT’s latest Quarterly Journal of Economics challenges this view.
David Autor, associate professor of economics at MIT, who conducted the study with David Scarborough of Black Hills State University, puts the question in blunt terms: “Job testing has the potential to raise productivity by improving the quality of matches between workers and firms. But because of the near-universal finding that minorities fare relatively poorly on standardized tests, there is a pervasive concern that better candidate selection comes at a cost of reduced opportunity for groups with lower average test scores.”
The study’s authors “studied hiring and job longevity among primarily high school-educated workers who were paid hourly wages for customer-service jobs in the private sector. The researchers relied on data from a national retail firm whose 1,363 stores switched from informal, paper-based screening to computer-supported, test-based screening over the course of one year.”
“Access to this data gave us the unique opportunity to evaluate the effects of job testing on minorities in a competitive business environment,” the authors said.
“Consistent with previous research, minority applicants performed significantly worse on the electronic employment test. But the researchers detected no change in the racial composition of hires once electronic screening was installed. Moreover, the authors found, productivity gains were equally large among minority and majority hires.”
The findings are significant because the outcomes do not support the accepted belief that minorities’ relatively low scores on standardized tests mean that such tests harm the job prospects of minority workers.
The findings strongly suggest that companies are fully capable of - and willing to - factor in equal opportunity program goals when screening by testing data.
Popular posts on Research Recap this week touched on several hot topics, as the threat of a financial meltdown receded, at least for now.
The latest salvo in the debate over ethanol as an alternative fuel was fired by the American Coalition for Ethanol in Lobby Says Ethanol Helping Reduce Gasoline Costs. But the announcement this week of an 8% drop in US prospective corn plantings is not good news for ethanol producers dependent on corn as feedstock.
Many hedge funds are having a tough go of it these days, and Penn State’s interesting paper, The Reasons Behind Declines In Hedge Fund Alpha, finds that size does matter, but not in a good way.
And the outlook for airlines has not gotten any better since our popular
Research Roundup: US Airline Industry. It’s looking like more heads will roll as Congress sinks its teeth into the issue of airline safety.
Sovereign Wealth Funds have plenty of cash, as documented by International Financial Services London in Sovereign Wealth Funds Assets up 18% in 2007. The challenge they face now is what to do with it, as recent bets on Western banks have proved to be problematic to say the least. A paper from Oklahoma University finds that a decline in a target company’s stock price is not unusual after an SWF investment. Another paper from the same source says financial bloggers appear to have an impact on stock prices, and not just a temporary boost.
Tower Group sees foresees the end of television as we know it in
“A-la-carte” Cable TV Pricing Would Bring “Economic Ruin”, arguing such a move by the FCC would be bad for everybody.
And just to show that we havent forgotten about the credit crisis, CreditSights’ interesting post Warning Signs Seen in Rising Credit Card Delinquencies
continued to draw interest.
Investments by Sovereign Wealth Funds often give the target company’s stock price a small boost, but the effect is short-lived, new research suggests.
A study* by scholars at the University of Oklahoma’s Price College of Business examines the impact of SWF investments on publicly listed companies.
The study’s authors emphasize in strong terms that their findings are very preliminary. Nor is there much research on SWFs to build upon. Indeed, the authors go so far as to state, “We consider the present a starting point in formal analysis of the SWF phenomenon.”
The authors “find evidence supporting the hypothesis that SWFs are acting in a manner that is consistent with profit maximization. While we are unable to rule out other potential goals, we believe our results should act as a reassurance to both regulators and market participants.”
They “hypothesize that markets would react negatively to equity investments by SWFs; yet, in a limited sample, we find stocks of targeted corporations exhibiting positive abnormal returns.”
We offer empirical evidence of the fact that, despite the negative tones in the press, investors welcome SWFs and that markets react positively to equity acquisitions by these funds, with an average announcement period abnormal return of 1.1%.
The authors theorize that SWFs’ tendency to hold stocks for the long term would remove some pressure on management to perform strongly. Their preliminary research seems to confirm this:
…despite the positive market reaction, we hypothesize that investments by SWFs have a negative impact on management incentives and lead to deteriorating firm performance. In support, we document abnormal returns equal to negative 6.63% for firms whose shares have been acquired by SWFs in the 120 days following the acquisition.
From their preliminary analysis, the authors found little evidence for the hypothesis that SWFs aim at technology or know-how acquisition. “Industry and sector allocations appear to vary greatly across funds, but we did not find evidence of any funds being heavily invested into hi-tech sectors. But we should cite Singapore’s two SWFs, Temasek Holdings and GIS, both of which have invested heavily into the financial sector with the stated goal of building networks that would encourage the development of local capital markets.”
*The Financial Impact of Sovereign Wealth Fund Investments in Listed Companies;(Veljko Fotak and William Megginson, Michael F. Price College of Business, University of Oklahoma.)
The continuing fallout of the subprime-induced credit crunch dominated the most-read posts at Research Recap in the first quarter. Indeed, all ten were related in some way to the financial turbulence.
When Research Recap first began posting on hitherto obscure topics such as subprime-backed debt instruments last summer, few outside the financial markets had heard of CDO, SIV and CDS. Now they are featured, if not fully understood, in the general media.
With subprime becoming prime time, our visitors are looking for the next shoe to drop. Judging by the hugely popular chart-topping post Warning Signs Seen in Rising Credit Card Delinquencies, there’s plenty of concern to go around. This post from CreditSights jumped right to the top of the rankings, despite being posted in the last week of the quarter.
It is gratifying to see people turning to Research Recap in increasing numbers in search of education on esoteric topics. The silver and bronze medals go to Research Primers on Credit Default Swaps, from Fitch, and on Structured Investment Vehicles, from Moody’s, both posted in January.
“Monolines” also become front page news and made the #4 spot, thanks to Standard & Poor’s February post, Bond Insurer Downgrades Could Lead to Bank Downgrades.
In fifth place, with a steady level of interest over several weeks, was the December analysis, Role of Hedge Funds in Subprime Crisis Examined, from the International Monetary Fund.
But the “Dark Side of the Moon” award for longest time in the charts goes to the very first Research Primer we posted in June, on Subprime Mortgage Lending from NERA Economic Consulting.
Oxford Analytica weighed in at #7 with its early January contribution Market-led Measures Not Enough to Solve Subprime Fallout. CreditSights featured again at #8 with its March post Write-down Spotlight Shifts to European Banks.
An early-March post from multiple sources, Alternative Proposals to Stem Subprime Foreclosures, took the ninth spot and the mid-March contribution Audit Integrity Questions Citigroup’s Risk Assessment rounded out the top ten.
A vote of confidence in financial bloggers – at least those featured on SeekingAlpha - emerges in a paper looking at the effect of their stock predictions.
According to the paper* by Veljko Fotak, a Doctoral candidate at the University of Oklahoma’s Price College of Business, blog recommendations appear to have an impact on stock prices and trading volumes.
The average market reaction is of an increase in stock prices of around 0.4% for long recommendations and a decrease of 0.8% for short recommendations.
The analysis was based on 500 buy and sell recommendations for the year 2006 from SeekingAlpha; of those, 340 are classified as long recommendations and 160 as short. The recommendations originated from 107 different blogs and 122 distinct bloggers.
Fotak found abnormal trading volumes after recommendations, but also that trading volumes appear abnormal in the days preceding the blog posting, which does leave open the possibility that abnormal trading volumes following blog publications are a result of trading momentum. “The stronger impact of short recommendations offers additional evidence in the still open debate as to whether short recommendations do lead to stronger market reactions,” Fotak writes.
Unlike studies of the effects of e-mail spam, Fotak found “no evidence of short-term mean reversion in the days following the event. “This difference in market reaction can be interpreted as an indication of the fact that, while e-mail spam is, often times, an attempt to manipulate markets, blogs are not. E-mail spammers spread false information in order to move the price of a security; eventually, the price reverts to its fundamental value. In the case of blogs, it is plausible to hypothesize that posters are acting out of a genuine desire to spread real information. The lack of mean reversion in prices following publication supports this hypothesis.”
Bloggers do appear, for the most part, to echo information already available in the media, Fotak writes. “Yet, as market reactions to select blogs suggests, some do spread genuine information and analysis, which does lead to a market adjustment.”
*The Impact of Blog Recommendations on Security Prices and Trading Volumes (Veljko Fotak - Michael F. Price College of Business, University of Oklahoma)
The “unscalability” of hedge fund managers’ acumen appears to be a major reason that the average risk-adjusted return (alpha) of hedge funds declines over time, new research shows.
A recent working paper by a researcher at Penn State examined the declining alpha the hedge fund sector has suffered over the past fifteen years.
One of the study’s main findings refutes the notion that average hedge fund alpha has declined due to the creation of a number of inferior hedge funds: “By studying the distribution of individual hedge fund alphas, we find that the large right tail (funds with positive alphas) that was once present has shrunk over time, while the left tail (funds with negative alphas) has remained unchanged.
Thus, the decrease in average alpha is not due to an increasing percentage of funds with unskilled managers and negative alphas, as suggested by the hedge fund bubble hypothesis.
(Chart displays the difference between “Top” and “Bottom” funds (95th
percentile minus 5th percentile; 90th percentile minus 10th percentile; 75th percentile minus 25th percentile). The sample period extends from January 1994 through December 2005. )
The two main reasons cited for the decline in alpha are the change in fund characteristics and market conditions.
Unsurprisingly the paper finds that “hedge fund investors chase alpha at the individual fund level, thus funds with large positive alphas receive more flow than those with negative alphas.” However, flow into the strategy to which a fund belongs always has a negative impact on the fund’s future performance.
Lastly, “Our findings indicate that the decline in alpha over time is attributable to capacity constraints, which arise both from the unscalability of managers’ abilities and from the limited profitable opportunities in the market. Therefore, hedge fund investors should consider the capacity constraints at both fund level and strategy level, before making the decision to chase alpha.”
∗Why Does Hedge Fund Alpha Decrease over Time? Evidence from Individual Hedge Funds (Zhaodong( Ken) Zhong, Smeal College of Business, Penn State University). Via Kedrosky.
A tax on carbon is frequently touted as the best way to reduce greenhouse gas emissions. But a new case study* argues pollution won’t be curbed unless tax revenues are channeled back into industry to encourage innovation.
In an accompanying commentary in The New York Times, Northwestern University associate professor Monica Prasad notes that Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries — in the case of Norway, emissions have actually increased by 43 percent per capita.
“An economist might say this is fine; as long as the cost of the environmental damage is being internalized, the tax is working — and emissions might have been even higher without the tax. But what environmentalist would be happy with a 43 percent increase in emissions?”
“The one country in which carbon taxes have led to a large decrease in emissions is Denmark, whose per capita carbon dioxide emissions were nearly 15 percent lower in 2005 than in 1990. And Denmark accomplished this while posting a remarkably strong economic record and without relying on nuclear power.”
… if we want lower emissions, the goal of a carbon tax is to prompt producers to change their behavior, not to allow them to continue polluting while handing over cash to the government.
Prasad argues that policy makers should be prevented from from turning the tax into a cash cow. “Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. Reduce the income tax? Give the money to low-income consumers? Use it to pay for health care? Everyone seems to forget that the amount of revenue is directly tied to the amount of pollution that is still going on.”
Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation. Danish firms are pushed away from carbon and pulled into environmental innovation, and the country’s economy isn’t put at a competitive disadvantage, Prasad writes.
“Another lesson is that the carbon tax worked in Denmark because it was easy for Danish firms to switch to cleaner fuels. Danish policy makers made huge investments in renewable energy and subsidized environmental innovation. Denmark back then was more reliant on coal than the other three countries were (but not more so than the United States is today), so when the tax gave companies a reason to leave coal and the investments in renewable energy gave them an easy way to do so, they switched. The key was providing easy substitutes.”
Logical as this argument sounds, much of the political appeal of carbon taxes derives from the opportunity to use the proceeds to solve any number of unrelated fiscal problems. So the likelihood of a tax being imposed diminishes in step with the ability of politicians to spend the proceeds on their pet projects.
Prasad notes that the lessons from the case study of Scandinavian green taxes cannot literally be applied to the U.S. For example, “It is not clear that extending gasoline taxes will be productive in the US in the absence of major investments in public transportation.”
Instead, she suggests that the correct policy is to “tax the industrial production and consumption of coal and other high carbon-content fuels in conjunction with stable or lower tax rates on lower carbon-content fuels and provide the revenue back to the affected industries in the form of tax exemptions or subsidies or investments in alternative energy-sources, cleaner-burning technologies, carbon capture and sequestration technologies, or energy capture and recycling programs. ”
*Taxation as a Regulatory Tool:Lessons from Environmental Taxes in Europe (Monica Prasad, Northwestern University)
Payday loans are one of the most frequently used types of credit in the country, yet there has been relatively little academic research on the matter. A new study by scholars at Vanderbilt Law School and Oxford University confirms what many people have suspected - that these and similarly small, high-interest and short-term loans increase the likelihood of bankruptcy.
Payday lenders now have more storefronts in the United States than McDonalds and Starbucks combined.
Despite the extremely short time frame of these loans, the author find “the cumulative interest burden from payday and pawn loans amounts to roughly 11% of the total liquid debt interest burden at the time of bankruptcy.”
“Standard economic theory suggests that consumer credit, even high-interest credit can facilitate consumption-smoothing, and the payday loan industry asserts that the loans help customers cope with short-term shocks that arise between paychecks… Many policymakers and consumer advocates have a different view, deeming the loans predatory and usurious.”
Not surprisingly, use of these loans increases the likelihood of Chapter 13 bankruptcy filing by statistically significant margins: 2.48 percentage points over the two-year time frame, in comparison to those who were rejected for payday loans.
First-time loan approval precedes significant additional high interest rate borrowing; and the consequent interest burden tips households into bankruptcy.
*Do Payday Loans Cause Bankruptcy? by Paige Marta Skiba (Vanderbilt University Law School) and Jeremy Tobacman (University of Oxford).
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