Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Some interesting titbits

The new year has brought with it a number of interesting titbits related
to financial markets

  • Andrew Ross Sorkin (“To Battle, Armed With Shares”,
    New York Times, January 4, 2006) reports on
    the emergence of hedge funds as activist investors.
    I have long been convinced of the Michael Jensen
    thesis
    that the US got its takeover regulations badly wrong in the 1980s. In my
    posting
    early last year
    , I argued that the US still has to get its regulations right
    in this area. The emergence of hedge funds as major players in the market for
    corporate control may force me to change my view on this. Sorkin also states that large
    once-conservative mutual funds are now prepared to side with hedge funds and against
    incumbent managements. This has the potential to change corporate governance in a
    fundamental way.
  • The Financial Times reports (“Korea becomes king of
    derivatives hill”, Anna Fifield, January 4, 2006) that Korea has
    overtaken the United States to become
    the largest equity derivative market in the world.
  • Floyd Norris reports (“In 2005, Companies Set a Record for Sharing
    With Shareholders”, New York Times, January 7, 2006) that
    the amount that the companies in the S&P 500 returned to shareholders in the
    form of dividends and buyback in 2005 represented 4.6% of the market capitalization
    of the index at the end of the year. This was the same percentage as in 2004. The
    figures show that buybacks were about one and half times the dividends. Norris also
    points out that “the big surge in such buybacks came only after one major advantage of buybacks
    – in the tax code – was removed. Now the United States taxes both dividends and capital gains at a 15
    percent rate.” This presents a challenge to corporate finance theory unless as
    Norris speculates “Or perhaps all those buybacks are simply an indication that corporate
    America has good profits now, but a dearth of attractive investment opportunities for all that cash.”
  • Andrew Ross Sorkin (“Sometimes, Two Is Less Than One”,
    New York Times, January 8, 2006) quotes a Goldman Sachs study
    that looked at 10 big companies that split up between 1994 and 1999,
    and found that the average company’s shares fell 6 percent between the announcement and
    the actual split. One reason offerd for this phenomenon is that big-cap investors no
    longer want to own a collection of small-cap or midcap companies. The other possible
    reason is that investors interested in one unit are unlikely to be interested
    in the other. Sorkin suggests that these are short term phenomena and that the jury
    is still out on whether split-ups add value in the longer term.
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