More evidence that it’s who you know that really matters: a new working paper* published by the Harvard Business School finds that sell-side analysts outperform on their stock recommendations when they went to the same university as a senior officer of the company. However, the authors also find that any advantage this might confer has beeen eradicated by Regulation FD, designed to impede selective disclosure.
“Exploiting novel data on the educational backgrounds of sell-side equity analysts and senior officers of firms,”the authors “test the hypothesis that analysts’ school ties to senior officers impart comparative information advantages in the production of analyst research.”
They test the data by “building portfolios that replicate sell-side analysts’ recommendations and by comparing how analysts perform on firms to which they have ties, relative to those firms to which they do not.”
Our main result is that equity analysts outperform on their stock recommendations when they have an educational link to that company. A simple portfolio strategy of going long the buy recommendations of analysts with school ties and going short the buy recommendations of analysts without ties earns returns of 5.40% per year in the full sample.
Rather than making the analysts overly sympathetic to their alma mater, school ties facilitate information sharing — or simply allow analysts to have a better insight into managerial quality — and thus provide analysts with school ties to a firm with an advantage over analysts of different educational backgrounds.
The study’s authors are able to use empirical techniques to distinguish between the two possible causal factors, and find that” agents in financial markets can gain informational advantages through their social networks.”
“In addition, laws designed to block these types of information pathways can be effective in curbing selective disclosure.”
Pre-Reg FD the return premium from school ties is 8.16% per year, while post-Reg FD the return premium is nearly zero and insignificant.
A similar test in the UK, which did not experience a change in the disclosure environment at this time, reveals a large and significant school tie premium for buy recommendations over the entire sample period, both pre- and post-2000.
Informal information networks are an important, yet under-emphasized channel through which private information gets revealed into prices, the authors conclude.
*”Sell Side School Ties” by Lauren Cohen, Harvard Business School; Andrea Fazzini, University of Chicago; and Christopher Malloy, Harvard Business School.
Technorati Tags: analyst-conflicts, market-analysis, price-analysis, regulation-FD, Securities, social-networks
Research Recap readers were waiting and watching for the additional subprime shoes to drop this week.
The most widely read post, by far, was Wednesday’s BofA Joins the Writedown Party, But is There More to Come? Prompted by Bank of America’s $3 billion writedown, the post examined projections by CreditSights of writedowns by BofA and Morgan Stanley, as well as ratings downgrades of CDOs by Fitch, Moodys and S&P.
The next most popular posts were along the same theme: More Bank, Brokerage Writedowns, Ratings Cuts Inevitable; and the alliterative Research Roundup: Writedown Wrapup.
But not all the news was negative this week. The fourth most-read post focused on the growth of social network websites. According to web analytics provider Hitwise, social network sites in the UK received more traffic during October than web-based email sites. Even more surprisingly, these sites, including MySpace, Facebook, Bebo and others generated more clicks to retail websites than their email counterparts.
Technorati Tags: (BOA), Bank-of-America, social-networks, subprime-mortgage, Zeitgeist
Social Network sites such as Facebook, MySpace and Bebo received more Internet traffic in the UK last month than email sites Hotmail, Yahoo! Mail and Gmail. According to Hitwise, the top 25 social networking sites accounted for 5.17% of all UK visits in October, as compared to 4.98% for email sites.
That growth is significant, as just a year ago the email sites more than doubled the traffic of the social networks.
According to Hitwise research director Robin Goad, the stats show that communication between friends using social networks is starting to eat into web-based email traffic.
A growing proportion of the UK online population is choosing to communicate with friends via social networks rather than email.
Perhaps more importantly, their statistics show that clicks to retail sites from social networking sites are now equivalent to the traffic generated from the web-based email sites. In other words, while many businesses view social networks as entertaining distractions, referrals via social networks are generating eCommerce activity.
Earlier this week, Facebook introduced Facebook Ads, in an effort to drive referral-based marketing. While time will tell which products are suitable for such referrals, it’s clear that social networks are already playing a role in driving online commerce.
In a related story, eMarketer projects that the shift from traditional media to online advertising is accelerating. They estimate that advertisers will spend $21.4 billion this year and project that to grow to $42 billion by 2011. The increased dollars spent online are coming out of their traditional media buys. Of the 100 leading national advertisers, according to eMarketer, more than half decreased their advertising budget for TV, radio, magazines and newspapers in 2006 while increasing their online advertising budget.
Combined, the 100 top advertisers spent nearly $230 million less on the Traditional Four media in 2006 compared with 2005, while boosting their Internet ad spending by $558 million.
Technorati Tags: Bebo, eCommerce, Facebook, internet, MySpace, social-networks
Last week, much of the Internet world was anxiously awaiting the answer to who would win the chance to invest in Facebook. Microsoft “won” the opportunity to invest $240 million in the social networking company, snubbing Google.
It didn’t take long for Google to respond. Yesterday, Google announced OpenSocial, a development platform that would be supported by a consortium of social networking and technology companies including MySpace, LinkedIn, Ning, Bebo, Salesforce.com, Oracle, Hi5, Friendster, Plaxo and Google’s own Orkut.
OpenSocial will consist of a series of common API’s (application programming interfaces) built on top of the existing Google Gadget platform. They will enable developers to build a single application which may run on multiple platforms of the participating software providers.
Here’s a quick roundup of the initial feedback:
The New York Times says “the alliance now presents a powerful counterweight to Facebook, which, after opening up its site to developers last spring, has persuaded thousands of them to create programs for its users. The addition of MySpace, the world’s largest social network with 110 million active members, and Bebo, the No. 1 site in Britain with 39 million active users, could also put pressure on Facebook to drop its own standard and join the alliance, called OpenSocial.”
The FT adds that “the move pointed to an acceleration of the realignment that had already been under way among some of the internet’s biggest powers as social networking has risen in importance, according to observers.”
The Economist questions whether this may spell the end of the fast ride for Facebook:
Could Facebook, a three-year-old social network and the hottest internet company of the year, soon be as passé as AOL? AOL, you will recall, was a popular but proprietary online service of the early 1990s. But then Netscape’s browser made the web easily and widely available, and today AOL is a lumbering unit of a media conglomerate. Another such “Netscape moment” may just have occurred in online social networks.
TechCrunch suggests that “Google may have just come out of nowhere and checkmated Facebook in the social networking power struggle.”
Meanwhile tech entrepreneur and blogger Dave Winer responds that
Google has a long way to go to build the base of users and developers connected using the new protocol that is the subject of all this chest-thumping. Do they exist in any tangible form? How much of a moving target are they? It’s like proclaiming the new owners of A-Rod’s contract as the winners of the 2008 World Series.
Technorati Tags: (GOOG), Facebook, Google, internet, MySpace, research-roundup, social-networks
“M-LEC” may not be a super sexy name, but the multi-sourced Research Roundup: M-LEC Superfund showed that “special investment vehicles” are a hot topic. This was our most widely read post by far during the last week.
Otherwise it’s commercial real estate that continues to attract strong interest. Joining the popular mid-October post Commercial Real Estate Risks Less Severe Than Subprime is the new entry, also from CreditSights: Commercial Real Estate CDOs Not As Low-Risk As They Seem? June’s evergreen Subprime Mortgage Lending Primer from NERA also made the top five.
Creeping up the charts was Blogosphere All A Twitter Over Forrester Estimates that emphasized the risks of extrapolating internet usage data. Concern over rising oil prices was evident in the popularity of Economic Impact Of High Oil Prices Less Than In Past.
With markets still hypersensitive to the lingering effects of the US subprime mortgage crisis, this issue is likely to remain front and center for some time.
Technorati Tags: commercial-real-estate, oil-&-gas, social-networks, subprime-mortgage, Twitter, Zeitgeist
When The New Yorker published its famous cartoon “On the Internet, nobody knows you’re a dog” in 1993, “social networking” was carried out in person at cocktail parties and the like. Now, online social networking truly seems to to be going to the dogs in Europe, where United Dogs & Cats Ltd. has raised an undisclosed round of funding, VentureWire reports (subscription required).
The funding comes from Ambient Sound Investments, the investment group established by the co-founding engineers of Skype. ASI has acquired a 15% stake in the Estonia-based start-up. The company is developing social networking sites such as Uniteddogs.com that unite people based on their interests rather than connecting users with the people they already know. The company aims to create a global network of localized Web sites and grow the number of active users, according to a release.
The Web sites allow users to make a free homepage for a pet, upload and comment on photos and videos, keep pet blogs and share stories with other pet owners.
Other social networking sites for pet owners have raised funding. Last year, San Francisco-based Dogster Inc. raised a $1 million round to support Dogster.com and Catster.com.
Technorati Tags: pets, social-networks
Morgan Stanley technology analyst Mary Meeker was among the notable speakers at the Web 2.0 Summit, the annual look at trends in the social technology market, hosted by publisher O’Reilly Media. Each year at the conference, Meeker does a rapid-fire 15 minute presentation. This year, she covered nearly 50 slides in her presentation.
After underperforming the S&P 500 in six of the previous seven years, tech stocks have outperformed the S&P by 918 basis points, year-to-date. While much talk has been made of the reemergence of the tech bubble, Meeker pointed out that recent tech stock performance has been supported by positive earnings revisions. At the same time, she noted that the high valuations given private companies in recent transactions would require superior execution to justify the multiples.
Meeker noted that consumers, not the enterprise, were now driving technology.
While enterprises have driven demand for technology for most of history, consumers were now the #1 users of semiconductors, surpassing IT and government.
Among other key trends Meeker indicated were driving the technology market:
- High demand for consumer Internet-enabled services is driving the demand for technology infrastructure by companies like Yahoo!, eBay, Amazon, Google, iTunes, PayPal, YouTube, Facebook and others.
- Wireless innovation is accelerating, with 3G handset adoption set to double by 2009
- Storage needs continue to ramp with consumers expecting to both connect and carry mobile devices
- Strong data center growth to support today’s technology products
- Enterprises are starting to emerge from their purchasing funk
Going forward, Meeker expects emerging markets to pace the next wave of technology adoption, led by China, India, Brazil and Russia. She also anticipates Web 2.0 technologies driving enterprise growth.
Among other interesting tidbits:
- Facebook is now the 7th rated site globally, in terms of minutes spent on the site, behind Yahoo, MSN, Hotmail, YouTube, MySpace and Google.
- Internet-enabled devices are gaining traction – consumer electronics such as Nintendo Wii, Microsoft Xbox Live, Apple’s iPhone and others are leading the charge.
- YouTube has over 206 million unique global visitors, nearly double what it had a year ago.
- Slide, a widget used on social networking pages, has over 5 million active users and 45 million installs.
The technology outlook was not all sunny, though. Meeker suggested that the risk of recession remained a potential challenge and that the risk of subprime woes spreading should not be underestimated.
Her full presentation is available from the Morgan Stanley Global Technology site.
In other news coming out of the Web 2.0 Summit:
MySpace to open its platform up for developers to fend off Facebook (Reuters)
Facebook’s Mark Zuckerberg speaks but says little (O’Reilly Radar) while John Battelle tries to get him to commit (Read/Write/Web)
Sequoia Capital’s Mike Moritz disputes the NY Times article that this is just a repeat of the bubble (via AlacraBlog)
Technorati Tags: Mary-Meeker, social-networks, Web-2.0
The fragility of the recent recovery from the subprime scare may underly the popularity of last week’s top post on Research Recap. Is Commercial Real Estate The Next Subprime? was “Number One With A Bullet,” more popular than the rest of the top five combined. In a followup to this report posted on Research Recap Sunday, CreditSights concluded that any problems in the commercial real estate sector are unlikely to have as severe an impact as the subprime residential mortgage crisis.
Subprime was also featured in our Number 5 post, UBS Warns of Higher Than Expected Losses.
The Number 2, 3 and 4 posts had online activity in common. Number 2, Capgemini’s Interest In Purchasing Cars Online Up Sharply, was followed by Wharton’s Web Recommendation Engines Can Miss The “Long Tail” and Valuing Facebook, which looked at conflicting views on the market value of Facebook.
Technorati Tags: automobiles, Facebook, online-shopping, social-networks, subprime-mortgage, UBS, Zeitgeist
Seventy eight percent of UK online users participate in one or more social networking applications. That’s the highest rate in Europe, where overall, about 56% of online users visited a social networking site in August. That’s according to a new study from Comscore.
Social networking sites are among the most heavily trafficked sites in the UK. According to Alexa, Facebook is the 3rd most popular UK site, while MySpace ranks 9th and Bebo 11th.
Perhaps more interesting than the raw number of visits is that UK users spend, on average, 5.8 hours per month on the sites. That’s nearly double that of European users as a whole. The 20% of UK users deemed the heaviest users visit social networking sites 71 times per month, spending an average of more than 22 hours. According to Comscore evp of international markets Bob Ivin:
About eighty percent of all online activity at Social Networking sites can be attributed to only 20 percent of visitors.
The results of the study are available on the Comscore site.
Technorati Tags: Bebo, Comscore, Facebook, internet, MySpace, online, social-networks
The Internet was abuzz last week amid rumors that Microsoft would bid approximately $500 million for a 5% share of social networking platform Facebook. That would suggest a valuation of $10 billion for the company.
The $10 billion figure dwarfs the $1 billion rumored to have been offered last year by Yahoo and would be a substantial multiple for a company whose 2007 revenues are projected to be in the $150-million range.
RBC Capital Markets looked at the potential value of Facebook in a recent research report, Facebook: Why Is It Worth So Much to Google and Microsoft? RBC analyst Jordan Rohan describes why they believe that the market has mischaracterized Facebook and, therefore, may undervalue it.
As with Google, Rohan views Facebook as a technology platform and not simply a media company. To understand that, they look at Facebook’s ambitions:
There is a social graph in the world, which is made up of people’s real connections. Facebook’s goal is to map out those connections and build a model of the real world social graph, so it can expose that to applications through its technology platform and enable the most efficient sharing of the world’s information.
According to RBC, Facebook is currently focused on three primary areas:
- Continued evolution of the technology platform (released less than four months ago) to cultivate and support an ecosystem of third party developers;
- Monetization of the platform, but not in a flashy television way
- Translation to languages other than English
Meanwhile, Microsoft CEO Steve Ballmer was interviewed by the Times of London regarding Facebook. While he would not confirm or deny the rumors of a potential Facebook investment, he warned that the interest in Facebook could simply be a fad:
I think these things [social networks] are going to have some legs, and yet there’s a faddishness, a faddish nature about anything that basically appeals to younger people.
The RBC report is available for purchase here.
Technorati Tags: (GOOG), Facebook, Google, internet, Microsoft, MSFT, social-networks
