November 24, 2004

Paul Kedrosky Catches One

Paul Kedrosky reports on something else I have to add to the to-read pile:

Infectious Greed: IPO Underpricing as Analyst Payoff:From the December issue of the Journal of Finance:

We report that initial public offering (IPO) underpricing is positively related to analyst coverage by the lead underwriter and to the presence of an all-star analyst on the research staff of the lead underwriter. These findings are robust to controls for other determinants of underpricing and to controls for the endogeneity of underpricing and analyst coverage. In addition, we find that the probability of switching underwriters between IPO and seasoned equity offering is negatively related to the unexpected amount of post-IPO analyst coverage. These findings are consistent with the hypothesis that underpricing is, in part, compensation for expected post-IPO analyst coverage from highly ranked analysts.

Posted by DeLong at November 24, 2004 05:18 PM | TrackBack
Comments

Sounds interesting, I'll have to get hold of it. Where was it again -- The Journal of Completely Unsurprising Revelations?

Posted by: Mrs Tilton at November 25, 2004 02:03 AM

Dear Brad,

Common words like "special ist" can no longer be sent as comments. The filtering system does not like this word, though I can not tell why.

Posted by: anne at November 25, 2004 06:52 AM

Also, it is time for Democrats to stop running campaigns with raising taxes as a promise. Tax reform and fairness can be a promise but not tax increases, not at this time.

Posted by: anne at November 25, 2004 06:56 AM

November 25, 2005

Violence Taints Religion's Solace for China's Poor
By JOSEPH KAHN - New York Times

HUAIDE, China - Kuang Yuexia and her husband, Cai Defu, considered themselves good Christians. They read the Bible every night before bed. When their children misbehaved, they dealt with them calmly. They did not curse or tell lies.

But when Zhang Chengli, a neighbor, began hounding them last year to leave their underground religious sect and join his, it seemed like a test of satanic intensity. He scaled the wall of their garden, ambushed them in the fields and roused them after midnight with frantic calls to convert before Jesus arrived for his Second Coming and sent them to hell.

Ms. Kuang poured dirty water on Mr. Zhang's head. Mr. Cai punched him. Yet Mr. Zhang persisted for months until the couple's sect intervened and stopped his proselytizing for good.

Mr. Zhang's body - eyes, ears and nose ripped from his face - was found by a roadside 300 miles from this rural town in Jilin Province, in northeastern China. The police arrested Mr. Cai and fellow sect members. One of them died in police custody during what fellow inmates described as a torture session.

China's growing material wealth has eluded the countryside, home to two-thirds of its population. But there is a bull market in sects and cults competing for souls. That has alarmed the authorities, who seem uncertain whether the spread of religion or its systematic repression does more to turn peasants against Communist rule.

The demise of Communist ideology has left a void, and it is being filled by religion. The country today has more church-going Protestants than Europe, according to several foreign estimates. Buddhism has become popular among the social elite. Beijing college students wait hours for a pew during Christmas services in the capital's 100 packed churches.

But it is the rural underclass that is most desperate for salvation. The rural economy has grown relatively slowly. Corruption and a collapse in state-sponsored medical care and social services are felt acutely. But government-sanctioned churches operate mainly in cities, where they can be closely monitored, and priests and ministers by law can preach only to those who come to them.

The authorities do not ban religious activity in the countryside. But they have made it so difficult for established churches to operate there that many rural Chinese have turned to underground, often heterodox religious movements.

Charismatic sect leaders denounce state-sanctioned churches. They promise healing in a part of the country where the state has all but abandoned responsibility for public health. They also promise deliverance from the coming apocalypse, and demand money, loyalty and strict secrecy from their members.

Three Grades of Servants, a banned Christian sect that claims several million followers, made inroads in Huaide and other northern towns beginning nearly a decade ago. It lured peasants like Yu Xiaoping, as well as her neighbor, Ms. Kuang, away from state-authorized churches. Its underground network provided spiritual and social services to isolated villages.

But it also attracted competition from Eastern Lightning, its archrival, which sought to convert Ms. Yu, Ms. Kuang and others. The two sects clashed violently. Both became targets of a police crackdown.

Posted by: anne at November 25, 2004 07:57 AM

Madrick's article includes some interesting facts, but they are irrelevant to his hypothesis. If you read him carefully, you see that he presents no evidence that the move to the Republicans was more pronounced among the rich than among the poor in 2004.

And even if he had presented such evidence, it could be taken only as (weak) evidence that the the rich appreciated the distributional effects of Bushism more than the poor did. It would not be a comment on the general public's perception of the economy's performance or of the political importance of that performance.

It would provide no challenge to the (possibly wrong) conventional view that Bush won by getting homophobes, religious nutbars and other stupid people out to the polls.

Posted by: Gerard MacDonell at November 25, 2004 08:03 AM

Anne,
The word "special ist" without the spaces contains the word "cial is" without the spaces. I suspect Lily ICOS would be disappointed to find the trademarked name of their perfectly legal drug would be filtered out... despite the fact that this trademarked name appears in tons of spam messages.

Posted by: tjallen at November 25, 2004 08:45 AM

November 25, 2004

Wal-Mart Bows to Trade Unions at Stores in China
By DAVID BARBOZA

SHANGHAI - It may be a big step for Wal-Mart, but a tiny step for China.

After years of opposing unions in the United States and around the world, Wal-Mart Stores said this week that it would allow a union at its operations in China.

But the decision appears to reflect a bow to Chinese law more than a change in Wal-Mart's approach to unionization worldwide.

And perhaps just as important, unions have a different role in China: they work in close concert with management - that is, when they are not the management itself - and traditionally with the Communist Party.

Analysts were perplexed by the announcement, which read: "Should associates request formation of a union, Wal-Mart China would respect their wishes."

Still, some said the move suggested that Wal-Mart might deal with worker issues somewhat differently than it had in the past. For years, the company has been harshly criticized for its labor practices.

The company, the world's largest retailer with about 5,000 stores worldwide, has not acknowledged a single union within its operations in the United States, and has vigorously opposed the formation of unions within Wal-Mart.

"This is a watershed event," said Eugene H. Fram, a professor of marketing at the Rochester Institute of Technology and a longtime observer of Wal-Mart's operations. "This is the first time they've given acceptance without saying 'let's go to a union vote.' " But many other analysts and union officials said it was unclear whether Wal-Mart, which has 40 stores and about 20,000 employees in China, intended to allow a real union to take shape here or whether a strong union could even be created, given the current status of labor organizations in China.

Unions in China operate very differently from independent unions in the United States or elsewhere. Rarely, for instance, do unions in China oppose management or press for higher wages or better working conditions, special ists say.

"Setting up a union won't make much difference on workers' wages because in most cases the union in China acts as a subsidiary to the employer and rarely represents the workers and fights for higher wages," said Fei Li, a retailing special ist at the School of Economics and Management at Tsinghua University in Beijing.

There have been small signs of independent union activity in China, however, which could be a challenge to the government-run unions. Workers in Guangzhou recently went to court to fight their company's decision to appoint a high-level manager as the head of the union.

And other labor groups have been pressing multinational companies to improve their working conditions.

Posted by: anne at November 25, 2004 08:47 AM

Anne,
The word that you rightly point out will not post, contains the name of a legal drug that is widely hyped. I suspect Lily ICOS would be disappointed to find the trademarked name of their perfectly legal drug would be filtered out... despite the fact that this trademarked name appears in tons of spam messages.

Posted by: tjallen at November 25, 2004 08:48 AM

November 25, 2004

Wal-Mart Bows to Trade Unions at Stores in China
By DAVID BARBOZA

SHANGHAI - It may be a big step for Wal-Mart, but a tiny step for China.

After years of opposing unions in the United States and around the world, Wal-Mart Stores said this week that it would allow a union at its operations in China.

But the decision appears to reflect a bow to Chinese law more than a change in Wal-Mart's approach to unionization worldwide.

And perhaps just as important, unions have a different role in China: they work in close concert with management - that is, when they are not the management itself - and traditionally with the Communist Party.

Analysts were perplexed by the announcement, which read: "Should associates request formation of a union, Wal-Mart China would respect their wishes."

Still, some said the move suggested that Wal-Mart might deal with worker issues somewhat differently than it had in the past. For years, the company has been harshly criticized for its labor practices.

The company, the world's largest retailer with about 5,000 stores worldwide, has not acknowledged a single union within its operations in the United States, and has vigorously opposed the formation of unions within Wal-Mart.

"This is a watershed event," said Eugene H. Fram, a professor of marketing at the Rochester Institute of Technology and a longtime observer of Wal-Mart's operations. "This is the first time they've given acceptance without saying 'let's go to a union vote.' " But many other analysts and union officials said it was unclear whether Wal-Mart, which has 40 stores and about 20,000 employees in China, intended to allow a real union to take shape here or whether a strong union could even be created, given the current status of labor organizations in China.

Unions in China operate very differently from independent unions in the United States or elsewhere. Rarely, for instance, do unions in China oppose management or press for higher wages or better working conditions, special ists say.

"Setting up a union won't make much difference on workers' wages because in most cases the union in China acts as a subsidiary to the employer and rarely represents the workers and fights for higher wages," said Fei Li, a retailing special ist at the School of Economics and Management at Tsinghua University in Beijing.

There have been small signs of independent union activity in China, however, which could be a challenge to the government-run unions. Workers in Guangzhou recently went to court to fight their company's decision to appoint a high-level manager as the head of the union.

And other labor groups have been pressing multinational companies to improve their working conditions.

Posted by: anne at November 25, 2004 08:51 AM

Back to the actual topic of Brad's post,

The paper concludes:
These findings are consistent with the hypothesis that underpricing is, in part, compensation for expected post-IPO analyst coverage from highly ranked analysts.

I hope Elliot Spitzer reads this paper, and its footnotes...

Posted by: tjallen at November 25, 2004 08:58 AM

TJAllen

Thank you for explaining. I had not heard of the letters in question as the name of a drug. Also, the word "bet ting" is being filtered. Again, I am so sorry about the double post. What a curious looking glass day.

Posted by: anne at November 25, 2004 09:01 AM

TJAllen

The paper concludes: These findings are consistent with the hypothesis that underpricing is, in part, compensation for expected post-IPO analyst coverage from highly ranked analysts.

I hope Elliot Spitzer reads this paper, and its footnotes...


Were it not for this comment I would have missed the importance of the study. There is an interesting premise here that I took as so much a matter of fact as not to be even questioned. Underpricing is meant to insure analyst coverage; favorable coverable at that. Thank you!

Posted by: anne at November 25, 2004 09:14 AM

anne,
The paper notes the coincidence of underpriced IPOs and lead underwriters with all-star analysts who sell those IPOs.

But coincidence is not causality, and other evidence would be needed to distinguish a "payoff" for positive coverage vs. an earned profit from hard work.

For example, it might be that the lead underwriter and its all-star analyst did not intentionally underprice the stock, and the good performance of the IPO is a result of the hard work advertising and selling the stock. Nothing illegit there (maybe).

But the other explanation is that the IPO was intentionally underpriced by the lead underwriter, and the difference between the underprice and the fair price was a "payoff" to the lead underwriter and its all-star analyst for the positive coverage provided.

In fact, I'm not yet sure how to distinguish these cases (given the public evidence). Maybe hidden emails will reveal intent... Elliot?

Posted by: tjallen at November 25, 2004 10:29 AM

There does not have to be any formal agreement, simply an understanding that under-pricing an IPO will foster favorable coverage. After all, under-priced shares of stock should be covered favorably by analysts. Though a company's interest is as much revenue from an IPO as possible, every original shareholder wants the stock price to climb.

Posted by: anne at November 25, 2004 10:52 AM

Maybe star analysts get to pick the best companies. Since star analysts (or any analyst) can only cover a limited number of companies but get the first pick they are not weighted down by IPO candidates that the shop may need to cover but are not strong companies.

I'm not sure if this still goes on, but star analysts were often brought in by the banking teams as part of a package deal (i.e., if you pick our bank to underwrite the IPO our hotshot will cover you).

Posted by: jeet at November 25, 2004 04:58 PM

thanks for the pointer!

here is the link to the pdf. if you dont have access to the Journal of Finance you have to hurry to download it while its still scheduled for an forthcoming issue. i guess the material in the published issues are still subscribers only.

http://www.afajof.org/Pdf/forthcoming/CliffDenisIPO.pdf

Posted by: Mats at November 26, 2004 12:21 AM

Unions for Walmart: the Chinese communist government has a sense of humor. This amuses them no end. They are also sending signals to America: we will be the serfs serving them, they will have good wages and great wealth and etc.

About the IPO stuff: this is what happens when corruption becomes terminal, all economic activities become warped by insider deals that mask underlying serious problems, think "Enron" here.

Posted by: Elaine Supkis at November 26, 2004 04:32 AM
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