University of Colorado-Boulder



University of Colorado-Boulder

Leeds School of Business

MBAX 6200 Sanjai Bhagat

Advanced Corporate Finance Office: KOBL S431

Fall 2011 Office Hours: Mon (1 pm – 3 pm)

MW 9:30 am – 10:50 am, KOBL 375 303-492-7821

sanjai.bhagat@colorado.edu

I. Course Objective

The objective of the course is to provide the student with a state-of-the-art understanding of the following corporate finance topics: corporate investment policy, real options, mergers and takeovers, corporate governance, corporate restructuring, management compensation, and corporate financial strategy. This course will provide a definite competitive edge to students planning careers in financial consulting, corporate budgeting and planning, venture financing, and corporate law.

II. Course Materials

Course materials consist of scholarly journal articles and working papers.

Lecture notes/overheads and some of the more recent papers can be accessed from my home-page:



III. Course Outline and Readings

A. Background

A1. M.C. Jensen and C.W.Smith, "Stockholder, Manager, and Creditor Interests: Application of Agency Theory," Recent Advances in Corporate Finance, 1985, 93-132. jensen-smith.doc

A2. A. Lo, “Efficient Markets Hypothesis,” The New Palgrave: A Dictionary of Economics, 2007.

A3. Jensen, Michael C., Putting Integrity into Finance: A Positive Approach, 2011, Harvard NOM Working Paper No. 06-06; Available at SSRN:

B. Corporate Governance and Corporate Control

Mergers and Takeovers

B1. S. Bhagat, A. Shleifer, and R.W. Vishny, "Hostile Takeovers in the 1980s: The Return to Corporate Specialization," Brookings Papers on Economic Activity, 1990, 1-84. target-gain.doc 

b-shleifer-vishny.ppt

B2. G. Andrade, M. Mitchell, and E. Stafford. "New Evidence and Perspectives on Mergers." Journal of Economic Perspectives (2001): 103-120. NewEvidenceMergers.ppt

B4. E.H. Kim and V. Singal, "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review 83, 1993, 549-569. monopoly.ppt 

B5. S. Bhagat, M. Dong, D. Hirshleifer and R. Noah, "Do Tender Offers Create Value?" Journal of Financial Economics, 2005, V76 N1, 3-60. b-hirshleifer.ppt

B6. S. B. Moeller, F. P. Schlingemann, R. M. Stulz, “Firm Size and the Gains From Acquisitions,” Journal of Financial Economics 73, 2004, 201-228.

B7. U. Malmendier and G. Tate, Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics,Volume 89, Issue 1, July 2008, Pages 20-43. CEO-Overconfidence-Turnover.ppt

B8. M. Zhao and K. Lehn, “CEO Turnover After Acquisitions: Do Bad Bidders Get Fired?” Journal of Finance, 2006, v61 (4, Aug), 1759-1811.

B9. Leonce L. Bargerona, Frederik P. Schlingemanna, René M. Stulzb, , and Chad J. Zutter, Why do private acquirers pay so little compared to public acquirers? Journal of Financial Economics, Volume 89, Issue 3, September 2008, Pages 375-390

B10. Micah S. Officer, The price of corporate liquidity: Acquisition discounts for unlisted targets, Journal of Financial Economics, Volume 83, Issue 3, March 2007, Pages 571-598

B12. Missaka Warusawitharana, Corporate asset purchases and sales: Theory and evidence, Journal of Financial Economics 87, Issue 2, February 2008, Pages 471-497

B13. S. Bhagat, S. Malhotra and P.C. Zhu, “Emerging country cross-border acquisitions: Characteristics, acquirer returns and cross-sectional determinants,” Emerging Markets Review, Volume 12, Issue 3, September 2011, Pages 250-271.

B14. I. Erel, R.C. Liao and M.S. Weisbach, “World Markets for Mergers and Acquisitions,” 2009, Ohio State University working paper.

Spinoffs and Corporate Refocusing

B15. P. G. Berger and E. Ofek, “Causes and Effects of Corporate Refocusing Programs,” Review of Financial Studies 12, 1999, 311-346. Spin-offs.ppt

B16. L Daley, V. Mehrotra, and R. Sivakumar, “Corporate Focus and Value Creation: Evidence fron Spinoffs,” 1997, Journal of Financial Economics 45, 257-281.

B17. S. Krishnaswami and V. Subramaniam, “Information Asymmetry, Valuation, and the Corporate Spin-off Decision,” 1999, Journal of Financial Economics 53, 1999, 73-112.

B18. S. Ahn and D.J. Denis, “Internal Capital Markets and Investment Policy: Evidence From Corporate Spinoffs,” Journal of Financial Economics 71, 2004, 489-516.

B19. T.R. Burch and V. Nanda, “Divisional Diversity and the Conglomerate Discount: Evidence From Spinoffs,” Journal of Financial Economics 70, 2003, 69-98.

Corporate Governance

B20. M.J. Roe, "The Political Roots of American Corporate Finance," 1997, Journal of Applied Corporate Finance 9, 8-22. Politics.ppt

B21. R. LaPorta, F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, “Investor Protection and Corporate Governance,” Journal of Financial Economics 58, 2000, 3-28.

B22. B. Holmstrom and S. N. Kaplan, “The State of U.S. Corporate Governance: What’s Right and What’s Wrong,” Journal of Applied Corporate Finance," 2003, v15 (3,Spring), 8-20.

B23. J.A. Brickley, R.C. Lease and C.W. Smith, Jr., "Ownership Structure and Voting on Antitakeover Amendments," Journal of Financial Economics 20, 1988, 267-292. Antitakeover-2.pptx

B24. S. Bhagat and R.H. Jefferis, "Voting Power in the Proxy Process: The Case of Antitakeover Charter Amendments," Journal of Financial Economics 30, 1991, 193-226.

B25. L.A. Bebchuk and E. Kamar, “Bundling and Entrenchment,” Harvard Law Review, May 2010.

B26. A. Brav, W. Jiang, F. Partnoy, and R. Thomas, “Hedge Fund Activism, Corporate Governance, and Firm Performance,” 2006, Duke University working paper.

B27. R. Greenwood and M. Schor, “Hedge Fund Investor Activism and Takeovers,” 2007, Harvard University working paper.

B28. D. DelGuercio and J. Hawkins, “The Motivation and Impact of Pension Fund Activism,” Journal of Financial Economics 52, 1999, 293-340.Pension-Fund-Activism.ppt ProxyVoting-SecuritiesLending

B29. S. Bhagat and B. Black, “The Non-Correlation Between Board Independence and Long-Term Firm Performance” Journal of Corporation Law, 2002, Volume 27, Number 2. b-black.ppt

B30. S. Bhagat and R.H. Jefferis, The Econometrics of Corporate Governance Studies, 2002, MIT Press.

B31. S. Bhagat , B. Bolton, and R. Romano, “The Promise and Pitfalls of Corporate Governance Indices,” Columbia Law Review, 2008. Corporate Governance – Performance.ppt

Sox-GovernancePerformance Governance-Performance Oct2011

B32. S. Bhagat and H. Tookes, “Voluntary and Mandatory Skin in the Game: Understanding Outside Director's Stock Holdings,” European Journal of Finance, 2011, forthcoming.

Management Compensation

B34. M.C. Jensen and K.J. Murphy, "Performance Pay and Top-Management Incentives," Journal of Political Economy 98, 1990, 225-264. Jensen-Murphy.ppt

B35. B. J. Hall and J. B. Liebman, “Are CEOs Really Paid Like Bureaucrats?” 1998, Quarterly Journal of Economics 108, 653-691. Hall-Liebman.ppt

B36. L. Bebchuk, J. Fried, "Paying for Long-Term Performance,” University of Pennsylvania Law Review158, 1915-1957, 2010.

B37. N. Burns and S. Kedia, “The Impact of Performance-based Compensation on Misreporting,” 2006, Journal of Financial Economics 79, 35-68. Performance Compensation Misreporting.ppt

B38. Armstrong, Christopher S., Alan Jagolinzer and David Larcker, “Chief Executive Officer Equity Incentives and Accounting Irregularities”, Journal of Accounting Research 48, 225-271, 2010.

B39. S. Bhagat and R. Romano, “Reforming Executive Compensation,” European Company and Financial Law Review, vol 7, no. 2, pp. 273-29, 2010. ReformingExecComp

B40. S. Bhagat and B. Bolton, “Bank Executive Compensation And Capital Requirements Reform” University of Colorado working paper, 2011. IBCompensation

B41. Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, Paul C. Pfleiderer, “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive,” Stanford University working paper, September 2010.

Finance and Law

B41. S. Bhagat and R. Romano, “Empirical Studies of Corporate Law,” in Handbook of Law & Economics, 2007, editors Mitchell Polinsky and Steven Shavell (Harvard Law School). CorporateLaw.ppt

B42. J.M. Karpoff, D.S. Lee and G.S. Martin, “The Cost of Cooking the Books,” Journal of Financial and Quantitative Analysis, 43 (September 2008), 581-612.

B43. J.M. Karpoff, D.S. Lee and G.S. Martin , The consequences to managers for financial misrepresentation, Journal of Financial Economics,Volume 88, Issue 2, May 2008, Pages 193-215

C. Capital Structure

C1. J.R. Graham and C.R. Harvey, "The Theory and Practice of Corporate Finance," Journal of Financial Economics 60, 2001, 187-244.

C2. S. Bhagat, J.A. Brickley and J.L. Coles, "The Costs of Inefficient Bargaining and Financial Distress: Evidence from Corporate Lawsuits," Journal of Financial Economics 35, 1994, 221-248.

C3. R.Rajan and L. Zingales, “What Do We Know About Capital Structure? Some Evidence From International Data,” Journal of Finance 50, 1995, 1421-1460. CapitalStructure.ppt

Capital Structure in Different Industries

C4. A. Kayhan and S. Titman, “Firms Histories and Their Capital Structures,” 2007, Journal of Financial Economics 83, 1-32.

C5. S. Bhagat, B. Bolton, and A. Subramanian, “Manager Characteristics and Capital Structure: Theory and Evidence,” Journal of Financial & Quantitative Analysis, forthcoming 2011.

C6. A. Gomes and G. Phillips, “Why Do Public Firms Issue Private and Public Securities?” 2007, NBER working paper.

C7. V.A.Dang, “An Empirical Analysis of Zero-Leverage and Ultra-Low Leverage Firms: Some U.K. Evidence,” Manchester Business School working paper, 2009.

C8. Harry DeAngelo, Linda DeAngelo, René M. Stulz, Seasoned equity offerings, market timing, and the corporate lifecycle, Journal of Financial Economics 95, 275-295, 2010

D. Corporate Financial Strategy

D1. C.W. Smith, Jr., "Investment Banking and the Capital Acquisition Process," Journal of Financial Economics 15, 1986, 3-30. RaisingCapital.ppt

D2.J.R. Ritter, “Equilibrium in the IPO Market,” Annual Review of Financial Economics 3, 2011.. IPO.ppt

D3 Campbell R. Harvey, Marc L. Lipsonb and Francis E. Warnock, Darden conference issue: Capital raising in emerging economies, Journal of Financial Economics, Volume 88, Issue 3, June 2008, Pages 425-429.

D4. Hand, J.R.M., 2003, “Profits, losses and the non-linear pricing of internet stocks,” Intangible Assets: Values, Measures and Risks, Oxford University Press.

D5. R. Aggarwal, S. Bhagat and S. Rangan, “The Impact of Fundamentals on IPO Valuation ,” Financial Management, 2009, v 38, 253-284,. IPO Valuation.ppt

D6. H.J.Seppanen, “Financial Statement Information and Evaluation of Newly Listed High-

Technology “Nano Caps”” Aalto University (Finland) working paper, 2010.

D7. A. Poulsen and M. Stegemoller, “Moving from Private to Public Ownership: Selling Out to Public Firms vs. Initial Public Offerings,” 2005, University of Georgia working paper.

D8. B.W. Nocco and R.M. Stulz, “Enterprise Risk Management: Theory and Practice,” 2006, Ohio State University working paper.

D9. K.Aretz and S. M. Bartram, “Corporate Hedging and Shareholder Value,” 2009, Lancaster University working paper.

E. Venture Financing

E1. S. Bhagat, “Why Do Venture Capitalists Charge Such High Discount rates?” University of Colorado working paper, 2007. venture-discount-rates.doc VentureCapital.ppt VC-update siliconvalley

E2. Steven N. Kaplan1, Josh Lerner , It Ain't Broke: The Past, Present, and Future of Venture Capital, Journal of Applied Corporate Finance,Volume 22, Issue 2, pages 36–47, Spring 2010.

E3. S. N. Kaplan and P. Stromberg, "Venture Capitalists as Principals: Contracting, Screening, and Monitoring," 2001, American Economic Review, v91(2,May), 426-430. VC-Contracting.ppt ImpliedReturn

E4. S.N. Kaplan and Per Stromberg. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," Review of Economic Studies, 2003, v70(2,Apr), 281-315.

E5. S. N. Kaplan, B. A. Sensoy, and P. Stromberg, “Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies,” Journal of Finance 64, 2009, 75-115.

E6. O. Bengtsson and B. A. Sensoy, “Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts,” Ohio State University working paper, 2009.

E7. O. Bengtsson and B. A. Sensoy, “Investor Abilities and Financial Contracting: Evidence from Venture Capital,” Ohio State University working paper, 2009.

E8. O. Bengtsson and S.A.Ravid, “The Geography of Venture Capital Contracts,” Ohio State University working paper, 2009.

E9. D. Hsu, “Why Do Entrepreneurs Pay For Venture Capital Affiliation,” Journal of Finance 59, 2004, 1805-1841.

E10. Hochberg, Yael V., Alexander Ljungqvist and Yang Lu, “Who You Know Matters: Venture Capital Networks and Investment Performance,” Journal of Finance, 2007, v62(1,Feb), 251-301.

E11. M. Wright and R. Chopra, “Returns to Venture Capital,” forthcoming, 2010.

E12. R. Smith, R. Pedace, and V. Sathe, “Venture Capital: Performance, Persistence, and Reputation,” University of California – Riverside working paper, 2009.

E13. N. Dai and V. Ivanov, “Entrepreneurial Optimism, Credit Availability, and Cost of Financing: Evidence from U.S. Small Business,” SEC working paper, 2009.

E14. A. Metrick and A. Yasuda, “The Economics of Private Equity Funds,” 2007, Wharton School working paper.

E15. A.Balcarel, M. Hertzel, and L. Lindsey, “Contracting Frictions and Cross-Border Capital Flows: Evidence from Venture Capital,” Arizona State University working paper, 2010.

F. Corporate Investment Policy, and Valuation

F1. Free corporate valuation app for the iPad:

F2. A. Damodaran, “Valuation Approaches and Metrics,” 2005, Foundations and Trends in Finance.

F3. S. Bhagat and I. Obreja, “Employment, Corporate Investment and Cash Flow Uncertainty,” University of Colorado working paper, 2011.

F3a. Scott R. Bakera, Nicholas Bloomb, and Steven Davis, “Measuring Economic Policy Uncertainty,” University of Chicago working paper, 2011.

F4. S. Bhagat, N. Moyen and I. Suh, “Investment and Internal Funds of Distressed Firms,” 2005, Journal of Corporate Finance, v11, 449-472.

F5. P. Joos and G.A. Plesko, “Valuing Loss Firms,” 2004, MIT working paper. Valuation.ppt

F6. A. Damodaran, The Dark Side of Valuation, 2001, Prentice Hall.

G. Real Options

G1. M. Amram and N. Kulatilaka, 1999, Real Options, Harvard Business School Press..

G2. S. Bhagat, “Real Options in the Telecommunications Industry,” in Real Options: The New Investment Theory and its Implications for Telecommunications Economics (1999), Kluwer Academic Publishers, Boston, MA. Real-options.ppt

G3. A.G. Sutherland and J.R. Williams, “Valuing Real Options: Insights From Competitive Strategy,” 2008, The Valuation Handbook: Valuation Techniques from Today’s Top Practitioners.

G4. M. Hartmann and A. Hassan, “Applications of Real Options Analysis for Pharmaceutical R&D Project Selection,” Research Policy 35, 2006, 343-354.

H. Financial Crisis

H1. S. Bhagat, “Causes of Subprime Credit Crisis,” 2008, University of Colorado working paper. Subprime Crisis

H2. Yale University Symposium, “Future of Financial Regulation,” 2009.

H3. K. French et al, The Squam Lake Report, 2010, Princeton University Press.

H4. K. Kahle and R.M. Stulz, “Financial Policies and the Financial Crisis: How Important Was the Systemic

Credit Contraction for Industrial Corporations?” 2010, Ohio State University working paper.

H5. Ran Duchin, Oguzhan Ozbas, Berk A. Sensoy, Costly external finance, corporate investment, and the subprime mortgage credit crisis, Journal of Financial Economics 97, 418-435, 2010.

H6. Murillo Campello, John R. Graham, Campbell R. Harvey, The real effects of financial constraints: Evidence from a financial crisis, Journal of Financial Economics 97, 470-487, 2010.

H7. R. Ball, “The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?” Journal of Applied Corporate Finance, Volume 21, Issue 4, pages 8–16, Fall 2009.

H8. S. Bhagat, “How to Grow Employment and the Economy,” University of Colorado working paper, 2011.

IV. Course Schedule

Sep 7: Organization and Background, Mergers and Takeovers

Sep 12: Mergers and Takeovers

Sep 14: Mergers and Takeovers

Sep 19: Mergers and Takeovers

Sep 21: Spinoffs and Corporate Refocusing, Term Paper Proposal Due

Sep 26: Spinoffs and Corporate Refocusing

Sep 28: Corporate Governance

Oct 3: Corporate Governance

Oct 5: Corporate Governance

Oct 10: Management Compensation

Oct 12: Management Compensation

Oct 17: Capital Structure

Oct 19: Capital Structure

Oct 24: Corporate Financial Strategy, Term Paper Draft Due

Oct 26: Corporate Financial Strategy

Oct 31: Corporate Financial Strategy

Nov 2: Corporate Financial Strategy

Nov 7: Finance and Law

Nov 9: Corporate Investment Policy

Nov 14: Corporate Investment Policy

Nov 16: Valuation

Nov 21: Fall break

Nov 23: Fall break

Nov 28: Valuation, Term Paper Due

Nov 30: Student Presentations

Dec 5: Student Presentations

Dec 7: Student Presentations

Dec 14: Final Exam 9:30 am – 11 am, S125.

V. Course Policies

A. Grading

The grade breakdown is as follows:

Item Weight

A. Class participation and attendance 10%

B. Term Paper (proposal, due: September 21) 5%

C. Term Paper (draft, due: October 24) 15%

D. Term Paper (write-up, due: November 28) 20%

E. Term Paper (presentation) 20%

F. Final Exam 30%

A. Class participation is critical to the success of this course. Student questions and comments are expected and welcome. Attendance will be taken at random (unannounced). Students are requested to place their name-cards in front of their desk at all times during class.

The class will be conducted in a professional manner: Students and the instructor are expected to be prepared for each class, and behave professionally in the class.

B. Proposals for the term paper are due on September 21, 2011, before the start of class. However, you should set up an appointment to see me to discuss your term paper proposal – by September 15, 2011. The proposal should answer the following two questions:

▪ What will the paper be about?

▪ Why is this topic interesting and important?

You should also include a list of at least four academic papers that you intend to read as background for your paper. The proposal should be no more than a page.

C, D and E. The term paper draft is due on October 24, 2011, before the start of class. The term paper draft should be at least ten pages long (double-spaced pages (twelve-point font, one-inch margin all-around)), and include the following:

▪ What is the paper about?

▪ Why is this interesting and important to study/read?

▪ A critical survey of the literature.

▪ Outline of the original analysis that would be of interest to somebody in the real world: a CFO, venture capitalist, consultant, investment banker or government regulator/legislator.

▪ References that includes at least four academic papers.

The term paper is due on November 28, 2011 before the start of class. Student presentations are scheduled for November 30, December 5 and 7. The paper can be on any topic that will be covered in the course.

The paper should include

• a critical survey of the literature

• and some original analysis that would be of interest to somebody in the real world: a CFO, venture capitalist, consultant, investment banker or government regulator/legislator.

The paper (including exhibits) should be between fifteen and twenty typed, double-spaced pages (twelve-point font, one-inch margin all-around). The paper is an individual exercise: While you are welcome and encouraged to talk to your friends, work-associates, instructors, etc. regarding ideas, facts, institutional practices, real cases, and so on, you should write the paper without assistance from anyone. Similarly, the presentation is also an individual exercise.

On your paper please note the following:

On my honor, as a University of Colorado at Boulder student, I have neither given nor received unauthorized assistance on this paper.

A Note on Academic Honesty & Plagiarism: The development of the internet has provided students with historically unparalleled opportunities for conducting research swiftly. The availability of these materials does not, however, release the student from appropriately citing sources where appropriate; or applying standard rules associated with avoiding plagiarism. Please see

If you use internet sources, please be careful about the credibility of your sources.

Also, please review ,

,

,



and .

F. The exam will consist of essay-type questions, and will be closed-book, closed-notes, and in-class. The exam will be based on study questions that will be handed out during the semester. The exam will be graded anonymously in the sense that students will not write their names on the exam and at the time I grade the exam I will not know whose exam it is.

B. Readings

If you wish to get the most out of my lectures, you are advised to read the “critical portions” of the assigned readings for a particular class before that class. The critical portions of a reading include the abstract, introduction, summary/conclusions of the paper. You might wish to read the main body of the paper after we have discussed it in class.

NOTICE

Guidelines for the Term Paper

Suggested order for the sections:

Cover Page

Title, Name, Course, Date

Executive Summary

No more than one page. The most important part of your paper! Briefly explain what the paper is about, why this is an interesting and important topic, and your main findings/conclusions. Consider a CFO, venture capitalist, consultant, a investment banker, or government regulator/legislator as your primary reader of this page.

Introduction

What is the paper about?

Motivation: Why is this interesting and important to study/read?

Overview of the paper.

(Main Body)

(Footnotes on same page.)

Please consider using sub-sections to better organize your paper, and improve its readability.

Please check the transition between paragraphs.

Summary and Conclusions

Exhibits (Tables, Graphs, etc.)

Captions and legends in the exhibits should make them self-explanatory. Cite data sources.

References

____________________________________________________________________

Check for grammar and spelling.

All arguments/assertions should be supported using:

logical constructs, and/or

theoretical considerations (cite references), and/or

previous empirical evidence (cite references).

You should revise the paper at least four times over a period no less than a week.

October 12 class:

FTI-Litvak-presentation

HP-CEO-1 HP-CEO-2 HP-CEO-3

• REVIEW & OUTLOOK WALL STREET JOURNAL

• OCTOBER 25, 2011

So Much for the Volcker Rule

Even in 298 pages, regulators can't decide what to regulate.

• Article

If you tried to write a parody of the uncertainty and confusion triggered by federal rule-making, it would be hard to top the latest proposal from Washington's financial regulators. So here's an ironic hat tip to the bureaucrats who wrote the draft Volcker Rule, which will allegedly limit risk-taking at financial firms backed by taxpayers.

In 298 pages, rather than sketching out simple, clear rules for banks to follow, regulators essentially wonder out loud how they can possibly write this rule. Officially there are 383 questions posed in the document, but many of these questions have multiple parts. Our colleagues at the Deal Journal blog counted 1,347 queries, covering everything from how "trading accounts" should be defined to what a "loan" is.

The regulators admit that "the delineation of what constitutes a prohibited or permitted activity . . . involves subtle distinctions that are difficult both to describe comprehensively within regulation and to evaluate in practice." Think of this as a cry for help from bureaucrats seeking an understanding of the markets they are nonetheless going to restructure come what may.

***

Bank lobbyists are certainly eager to provide some hand-holding. We wouldn't be surprised to see thousands of pages of suggestions roll in between now and January 13, when the public comment period ends. Many of these comments will no doubt offer compelling reasons why a particular type of transaction should be exempt from the principle that nobody should be gambling with a taxpayer backstop. The regulators will then have about six months to consider all of these suggestions, ponder the thousands of answers to their 1,347 questions, and then write a final rule. At least that's what the 2010 fiasco known as Dodd-Frank demands.

Dodd-Frank demands all this from regulators because for the life of them former Senator Chris Dodd and Representative Barney Frank couldn't figure out how to write a Volcker Rule themselves. Like nearly every other tough call in financial regulation, Messrs. Dodd and Frank punted this one to the executive branch, invested federal agencies with new authority, and expected the same regulators who failed to prevent the last crisis to somehow avert the next one.

We supported former Federal Reserve Chairman Paul Volcker's concept of a ban on proprietary trading as a good-faith effort to protect taxpayers from having to rescue too-big-to-fail banks again. Democrats in Congress weren't going to prevent future bailouts, so whenever an institution is playing with taxpayer money (via insured deposits or access to the Fed's discount window) it should be allowed to serve clients but should not be permitted to make trades for its own proprietary account. But drafting such a law isn't easy and the details are crucial.

When America's esteemed legislators couldn't figure out how to write a Volcker Rule, they forwarded it to the bureaucracy as a kind of Volcker Suggestion. But before the lawmakers enacted this remarkable delegation of authority, they gutted even the Volcker Suggestion by exempting certain instruments from consideration.

Lawmakers made clear that whatever the shape of the final rule, it would not interfere with the liquidity of the U.S. Treasury market or debt issued by Fannie Mae and Freddie Mac. So even if bureaucrats spend most of the next year crafting the perfect rule, it will still allow Wall Street giants to make enormous bets on the direction of U.S. government bonds and debt issued by government-sponsored enterprises. There are also built-in exemptions in the commodities market. There will likely be limits on trading derivatives of commodities, but if traders are buying actual physical assets they can still swing for the fences.

Even outside of these exempted zones of politically favored speculation, the recent proposal suggests that we're not going to get anything close to perfection. And some of the regulators may already have figured this out. Readers will recall that Dodd-Frank created the Financial Stability Oversight Council so that the chiefs of the various regulatory agencies could coordinate their actions to identify and attack risks to the financial system. But one of the knights of this regulatory round table was missing when they decided to saddle up on this quest to tilt at Goldman's risk book.

The draft rule carries the names of various Beltway departments but not the Commodity Futures Trading Commission. Since the CFTC now oversees much of the derivatives market, which in Beltway lore is the principal cause of systemic risk, it's an odd omission. A cynic might even wonder if CFTC Chairman Gary Gensler is checking the political winds before endorsing this turkey. A source at the commission says that the agency is backed up fulfilling other Dodd-Frank mandates but will get to Volcker eventually.

They shouldn't bother. Reasonable people have seen enough to say that Washington is incapable of drawing bright lines and applying clear rules fairly across all securities markets. The result is all but certain to be a final rule that different people will interpret different ways, leading to loopholes for traders and arbitrary enforcement. Under this Beltway rendering of Volcker, trading will continue but with a much higher bureaucratic cost and with the illusion of safety that only regulation can create.

Until the government is willing to create a durable financial system that allows failure, the best policy response is to make the rules so simple that even Washington can enforce them. That means higher, even very high, bank capital standards and margin requirements on risky trades between banks. Those aren't panaceas, but they offer more hope for taxpayers than the bureaucratic and bank-lobbyist jump ball that is now the Volcker Rule.

Printed in The Wall Street Journal, page 13

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Tuesday, September 13, 2011 As of 12:00 AM

New York

85º

|

68º

[pic]

DEALS & DEAL MAKERS

SEPTEMBER 13, 2011

Tough Times Help Activists

Markets and Education to Be Separated; Pressure to Create Four Companies Is Resisted

Article

Video

Stock Quotes

Comments (2)

more in Wall Street »

Email

Print

Save↓ More

[pic][pic]

[pic]

smaller

Larger

By GINA CHON

McGraw-Hill Cos., owner of credit-rater Standard & Poor's, said it would slough off its education division, the latest example of a shift in corporate direction amid shareholder demand for change.

McGraw-Hill Chairman and Chief Executive Harold "Terry" McGraw III on Monday said the changes weren't in response to activist investors. He called his company's breakup plan along with a share buyback "McGraw" plans, and added the strategy was in the works since last year.

[pic]

McGraw-Hill has been under investor pressure to break up the company, and it has announced a split between the education business and its financial service side, Gina Chon reports on Markets Hub. (Photo: AP Photo.)

But industry watchers say concessionary moves by company leadership have been cropping up lately, as executives have more to worry about with lingering challenges from the financial crisis, worries about the economy and increasing market volatility. Management and board members, experts say, are anxious to avoid bitter, protracted and public battles with investors, especially when they have plans already under way, as was the case with McGraw-Hill.

"When markets are more volatile and the economy is troubled, boards of directors are more inclined to reach accommodations with short-term oriented, activist hedge funds," said Scott Barshay, managing partner in the corporate department of law firm Cravath, Swaine & Moore LLP's, which generally represents companies, not activist investors.

Some data support the point. Of activist-investor campaigns against U.S. corporations so far this year, 15% turned into proxy fights, as opposed to 26% in 2006, according to FactSet SharkWatch data. In a proxy fight, a corporate issue, such as the makeup of a board, is put to a shareholder vote—something management often wants to avoid.

Calling it Splits?

See other companies that have announced plans to split themselves apart in recent months.

[pic]Scott Eells/Bloomberg News

So far in 2011, more than 46% of board seats granted to activist representatives were part of non-proxy-fight activist campaigns, FactSet showed. In 2006, less than 40% of board seats granted to activist representatives were done outside of formal proxy fights.

Companies aren't necessarily quick to acknowledge any influence of investors on their decisions, or share credit. Officials often emphasize they had review efforts under way before the activist investor appeared.

McGraw-Hill said it is splitting its markets and education businesses into two public companies. McGraw-Hill Markets, the working name of what will be the financial services business, will focus primarily on capital and commodities markets. It will include the S&P's credit-ratings firm and S&P Indices.

The company isalso accelerating its $2 billion stock-repurchase plan, with plans to complete a $1 billion buyback by the end of 2011, and is looking for cost cuts, it said. Shares ended the day up about 4%, or $1.54, to $40.26.

Hedge fund Jana Partners LLC and the Ontario Teachers' Pension Plan last month pushed the company to divide into four parts, including separating the indices business.

[pic]

On Monday, Jana and the pension fund called the announced moves "vital steps in reversing years of underperformance at McGraw-Hill, and are critical parts of what we were seeking for shareholders."

The investors will review the company's plan in more detail before deciding whether they will take further action, people familiar with the matter said.

Yahoo Inc., which last week ousted its chief executive, Carol Bartz, and is pursuing a strategic review, also has a prominent investor calling for change. Daniel Loeb's Third Point LLC recently disclosed a 5.15% stake and after Ms. Bartz's ouster publicly threatened to try to remove Chairman Roy Bostock and fellow directors at the company's annual meeting next year.

Through Mr. Bostock's spokesman, the board said it "recognizes the critical challenges facing the company and appreciates constructive input from all shareholders." The statement said the board would discuss Mr. Loeb's concerns with him.

"Management teams and their boards are more willing to consider issues put forth by other thoughtful parties as opposed to digging lines in the sand that create tension, which can ultimately lead to a proxy battle," says Bruce Goldfarb, CEO of proxy solicitation firm Okapi Partners, which works with both activists and corporations.

A $1 billion investment disclosed in May by New York hedge-fund firm Paulson & Co. in Hewlett-Packard Co. was part of a "wake up call" in the tech company's decision last month to explore a spinoff of its PC business, a person familiar with the matter said. The company declined to comment.

More

Deal Journal: Analysts React

Deal Journal: Canadian Pension Funds Ride Again

In August, Kraft Foods Inc. said it was splitting in two, putting its global snacks and North American grocery businesses in separate baskets. Kraft had been working toward the breakup for some time, but made the move in part to get ahead of at least one investor, Nelson Peltz's Trian Fund Management LP, according to people familiar with the matter. Kraft Chief Executive Irene Rosenfeld has said investor pressure didn't factor into the timing of Kraft's decision.

In some recent, high-profile proxy battles, activists have lost, such as Carl Icahn's bid to replace the entire board of Forest Laboratories Inc. However, Mr. Icahn was successful in his long battle to shake up Motorola Inc., which led to a breakup of the company. He also benefited from Google's Inc.'s $12.5 billion deal to acquire Motorola Mobility in August.

Write to Gina Chon at gina.chon@

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit



WALL STREET JOURNAL

Hertz Sole Bidder as Avis Quits Pursuit .

• AUTOS

• SEPTEMBER 15, 2011

Hertz Sole Bidder as Avis Quits Pursuit

By GINA CHON

Avis Budget Group Inc. said Wednesday it is dropping its more-than-yearlong effort to acquire Dollar Thrifty Automotive Group Inc., leaving Hertz Global Holdings Inc. as the sole bidder for the rental-car company.

"We have decided not to pursue a transaction at this time," Avis said in a public filing about its Dollar Thrifty pursuit.

Avis disclosed in June a deal to acquire Avis Europe PLC for about $1 billion, and banks backing the deal recently sweetened terms for investors for certain parts of the loan package in the transaction.

The move by Avis to drop its long running fight with Hertz for Dollar Thrifty highlights the current marketplace in which a lot of M&A deals are on hold. Gina Chon joins Paul Vigna and Bob O'Brien on The Markets Hub.

.

At the time of the Avis Europe deal, Avis said it was maintaining its offer for Dollar Thrifty—recently valued at about $1.5 billion—but that its priority was Avis Europe. Since then, financing has become more expensive amid market volatility, partly leading Avis to end its bid for Dollar Thrifty, according to people familiar with the matter.

In Wednesday's filing, the company said its bid had made "significant progress" under antitrust regulatory review but that it decided not to do a deal "in light of current market conditions."

Last month, Dollar Thrifty set an Oct. 10 deadline to receive "best and final" offers for the company. Dollar Thrifty Chief Executive Scott Thompson told Hertz and Avis the uncertainty over Dollar Thrifty's future isn't in anyone's best interest.

On Wednesday, he said Hertz's bid didn't necessarily face clear sailing and declined to count Avis out.

"I have always thought the company's standalone value would be the highest hurdle for Hertz to clear in its attempt to buy Dollar Thrifty," he said. "We are pleased Avis disclosed that the [Federal Trade Commission] process has gone well, and that may give them optionality in the future. In this circus you just never know what the future will bring."

Dollar Thrifty originally had a $1.2 billion deal with Hertz in April 2010. Then Avis entered with a higher bid, and a bidding war ensued that resulted in Dollar Thrifty shareholders rejecting the Hertz deal at a meeting last September.

Dollar Thrifty then said it would share information with Avis in its efforts to gain antitrust clearance for the deal, but the two parties hadn't yet signed a deal agreement. Avis has been going through the regulatory process for more than a year.

In May, Hertz returned to the bidding war for Dollar Thrifty, offering about $2.2 billion for the car-rental firm. That topped Avis's offer, valued at the time at about $1.7 billion.

Hertz has also been going through the regulatory-review process for Dollar Thrifty and recently received a request from the Federal Trade Commission for more information. Its offer is now worth about $2 billion; Dollar Thrifty has a market value of about $1.8 billion.

Write to Gina Chon at gina.chon@

[pic]

[pic]The Wall Street JournalWALL STREET JOURNAL, OCT 11 2011, Economy

Jobs Panel Pushes Help for Start-Ups

• Article

• Video

• Comments (56)

more in Business »

• Email

• Print

• Save↓ More

•

• [pic][pic]

• [pic]

• smaller

• Larger

By SUDEEP REDDY

A private-sector board of advisers to the White House is pressing the administration to streamline regulations and encourage start-up businesses, among other recommendations to create more jobs.

The President's Council on Jobs and Competitiveness, in its latest report to be released Tuesday, also strongly backs efforts to spend more on U.S. infrastructure projects, offering a lift to an Obama administration initiative mired in congressional wrangling.

[pic]

A private-sector board of advisers to the White House is pressing for streamlined regulations and help for start-up businesses, among other recommendations to create more jobs. WSJ's Sudeep Reddy discusses with Kelly Evans and Bob O'Brien on The News Hub

The group, composed mostly of corporate executives, is set to offer the recommendations Tuesday to President Barack Obama in Pittsburgh. They include dozens of ideas on issues such as education, training and foreign direct investment, all designed to create jobs.

"None of us has the magic potion," the chairman of the council, General Electric Co. Chief Executive Jeff Immelt said in an interview Monday. "We hope this can add a voice to break some of these things free."

Jump-Starting Jobs

Among ideas from the President's Council on Jobs and Competitiveness:

1. Accelerated investment in infrastructure and energy projects

2. Program to support entrepreneurship and help young, fast-growing firms

3. National initiative to boost foreign investment in the U.S.

4. Simplified regulatory reviews and streamlined project approvals

5. Training and skills-development programs created with the private sector

The council was created in January, and its first report in June highlighted some issues, such as visa delays for people wishing to visit the U.S., that now are getting more attention from the government. A group of administration officials has been charged with finding ways to implement many of the recommendations across the federal bureaucracy.

Many of the group's new recommendations are directed at changing federal policies without major legislation or new government funding. For instance, the council suggested shortening the application-processing time for Small Business Administration loans. Others are endorsements of longstanding ideas, such as more investment in infrastructure such as bridges and power systems.

The report also highlights many longstanding business concerns about regulation, such as lengthy permitting procedures for construction projects. The group calls for the government to designate a lead federal agency on each project and encourage greater cooperation among state and federal agencies involved in reviewing projects.

Among its ideas to spur start-up activity, the council recommends Congress eliminate taxes on income from investments of $25 million or less in a privately held firm as long as the investment is held for at least five years. It also calls for cuts to corporate income taxes for the first three years of a company's existence to encourage it to expand.

The recommendations on infrastructure include an expansion of public-private financing for investment in roads, schools, water systems and other public works. For instance, the group called on Congress to create a national infrastructure bank that mixes money from federal, local and private-sector sources.

[pic]

WSJ's Sudeep Reddy has exclusive details about Washington seeking $1 trillion in foreign investment to spark job creation in the U.S. AP Photo.

The jobs council members recognize many of the ideas could get caught up in political combat, but they hope the report would pressure policy makers to act, Mr. Immelt said.

"What we tried to do is a broad and deep set of recommendations," he said. "It's impossible to talk about job creation and competitiveness and assume at the same time that there will never be any legislative resolution to some of these things."

The council calls for a "comprehensive entrepreneurship agenda," noting that companies under five years old accounted for about 40 million new U.S. jobs in the past three decades.

But some of the council's recommendations for nurturing start-up firms would be unlikely to gain traction amid political debates about immigration.

The group proposed changing immigration rules so all foreign students who earn a degree in science, technology, engineering or math from a U.S. university could stay in the country. The council also called for a new provisional visa program for immigrant entrepreneurs.

"We are sympathetic to the political sensitivities around the topic of immigration reform," the members said in the report. "But when it comes to driving job creation and increasing American competitiveness, separating the highly-skilled worker component is critical. We therefore call upon Congress to pass reforms aimed directly at allowing the most promising foreign-born entrepreneurs to remain in or relocate to the United States."

The group's proposals to encourage training and education could prove more successful in the short run.

Council members have launched their own training programs in manufacturing industries as a model that they hope can be replicated down the road with federal support. They're also leading private-sector efforts to work with states on health care training to fill the hundreds of thousands of unfilled jobs in that sector.

The council says in its report that it has undertaken a private-sector initiative to yield 10,000 more engineering graduates in the U.S. each year, working with universities on recruitment and retention of engineering students.

[pic]The Wall Street JournalWALL STREET JOURNAL, OCT 11 2011,

Populist Anger Over Economy Carries Risks for Big Business

By GERALD F. SEIB

• Like this columnist

[pic]

• Article

• Video

• Comments (184)

more in Capital Journal »

• Email

• Print

• Save↓ More

•

• [pic][pic]

• [pic]

• smaller

• Larger

American business is entering a political danger zone.

As the pressures from three years of brutal economic performance mount, so too are the signs that those pressures are pushing business leaders into the public cross hairs. The populists of the tea party on the right and the Occupy Wall Street movement on the left are the most obvious leading indicators, but not the only ones.

Even while President Barack Obama says he wants to lower taxes for small businesses, for example, he is growing increasingly harsh in his condemnation of the practices of the financial industry and the need for "millionaires and billionaires" to pay more in taxes.

[pic]

American business is entering a political danger zone. The populists of the tea party on the right and the Occupy Wall Street movement on the left are the most obvious leading indicators, but not the only ones. Jerry Seib explains on The News Hub.

When Fox News asked Americans in a recent poll to say whether a series of people and institutions were helping or hurting the economy, the lowest score went to corporate chief executives. By almost six to one, voters said corporate chiefs had done more to hurt than to help the economy—a worse rating than accorded the president, congressional Republicans or Democrats, labor unions or lawmakers affiliated with the tea party.

Similarly, the Gallup poll found earlier this year that 62% of Americans want corporations to have less influence in America, up from 52% a decade ago.

For the business community, the real danger isn't that Wall Street is unpopular (it's rarely been otherwise), or that populists mistrust big business (they always have). Instead, the danger for the business community is that it could become the next target for the question: Where are the jobs?

With unemployment at 9.1% and holding, many Americans already perceive that government is failing to solve the jobs problem. The administration's stimulus package prevented unemployment from being even worse, but it has hardly resolved the jobs quandary.

Now President Obama is promoting a jobs bill that is half the size of the original stimulus package, and facing an uphill climb in a Congress wary of spending money on it. His jobs council on Tuesday plans to release a report calling for, among other things, more infrastructure spending and a push to attract job-creating foreign investment.

Meanwhile, the Federal Reserve has repeatedly fired its monetary cannon, with an impact that looks limited to the frightened worker. And, like the government generally, the Fed is about out of ammo.

Which leaves the business community. On that front, there is a radical disconnect between the picture populist critics paint from outside, and the one business leaders describe from inside.

The populist crowd sees American companies that have enough money to create jobs, but not in America. Indeed, in the 1990s, Commerce Department data show, American multinationals added 4.4 million jobs in the U.S. and 2.7 million abroad. But in the first decade of this century, they cut their work forces in the U.S. by 2.9 million, while increasing employment overseas by 2.4 million.

Moreover, relatively few jobs are coming back even as corporate profits improve. Analysts are forecasting corporate earnings growth of 13.5% for the just-ended third quarter, according to Standard & Poor's, which suggests to Wall Street protesters that companies are hoarding profits without creating work.

Business leaders see the inverse. Third-quarter earnings growth? Less than expected, and much of it attributable to the benefits of an artificially weak dollar that already has turned around.

More broadly, business leaders say deep economic imbalances have become virtual show-stoppers on the jobs front. Consumer demand is weak as Americans pay down mountains of debt and find their houses are worth a lot less than they thought; rising government debt presages tax increases that require them to stockpile cash; and growing government regulations is driving up the cost of labor and production.

If demand is higher and barriers lower abroad, they say, investments flow there naturally.

So what is hindering job creation? Unpatriotic corporate behavior, or a suddenly hostile business environment?

The full answers are much more complicated. The forces holding down job creation include many—a deeply flawed and uncompetitive corporate tax code, rising health costs, crumbling infrastructure, an inadequate education system—that transcend current problems. Those, in fact, are issues the White House jobs council's new report tries to address.

The danger for American business, though, is that it in a hothouse environment of rising populism, and absent a better job making its case, it can become the target of punitive measures—surtaxes, even more regulation, trade barriers and restrictions on the flow of capital—that would make job creation harder.

"While I sympathize with what I think is a lot of the anxiety, frustration and fear among the Occupy Wall Street people, I just worry that there are people who are yearning for a simple answer that doesn't exist," says Matthew Slaughter, a member of President George W. Bush's Council of Economic Advisers now at Dartmouth College's Tuck School of Business.

Write to Gerald F. Seib at jerry.seib@

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit



................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download