Ethics
Behavioral finance
Doing deals
- The role of the corporation in community issues
- The role of the corporation in choosing locations, making decisions that affect workers in various cities (where to build a plant, where to shut down a plant)
- Law, morals, and ethics. Is it always right to obey the law? Who decides?
Behavioral finance
- Investors overestimate precision of private info.
- People attribute investment profits to their own abilities, losses to external noise.
- Market underreacts to Seasoned Equity Offerings; prices drift over 90 days.
- Private opinions are overweighted, so public info is underweighted, implying underreaction to public info.
- Private info overweighting explains why BM forecasts return.
- Public info underweighting explains return drift.
- People extrapolate from small sequences but shouldn't (no law of small numbers).
- Trend chasing is bad.
- Don't buy or sell on news without looking at the price.
- Regress returns on past intangible component of return (that which is unexplained by accounting performance) rather than tangible component; intangible component is high when price has risen due to something other than fundamentals, so it's a contrarian indicator (like share issuance/IPO).
- Momentum strategies work best for smaller firms, lower analyst coverage, past losers.
- Optimist analysts do more buys than pessimists do sells (upward price pressure).
- Investor sentiment does affect individual stocks that are hard to value and hard to arb (small, young, no profit, no dividends, high growth, distressed, volatile stock returns).
Doing deals
- Economics of alternative energy deals
- Large economies of scale; in large scale projects, get better execution and support from bigger bank financing.
- Put together right management team.
- License proven technology.
- Partner with the right people.
- Finance with maximal debt and government guarantees and programs.
- Banks are willing to accept risk when have big technology partners with prior experience.
- Could finance next development phase with others’ money; ask future partners/investors whether if they owned some technology, would they invest and at what pricing (tested this before did deal).
- Truly unique part of what investor got in this deal: access to exclusive license and knowledge to really build the thing; both really blocking things.
- Risk: figure out what is really new versus what now new.
- Assign risk to the parties to lay off as much risk as possible.
- Focused their time on how to lay off as much of the new technology risk to others as possible
- Get others to guarantee their work. If they don’t, they have the right to go to other people.
- Pit the bank against the tech provider; bank won’t lend unless tech provider will guarantee (via liquidated damages); always say bank is asking for more (even if not).
- Get some very large names around table as quickly as possible because large utilities like talking to big names only.
- For banks, reliability is more important than newness.
- Struggle with tech vendors for “good” while vendor wants “perfect.”
- Large companies driven by earnings; if they spend money and it doesn’t create earnings, then it’s a negative EPS potential.
- When they were negotiating with big companies, they knew big companies wouldn’t be willing to put up development risk and didn't want income flowing through to consolidated income statement so actually preferred smaller ownership stake.
- They knew they could mark the deal up because put together critical components (license, management team, relationship with tech provider to get it built).
- Take in investor money only when need at last possible minute so don’t need to pay interest out and maximize IRR.
- The way to get large corporation to do something you want is to withhold payment until end of quarter.
- Utilized milestone concept
- When people would miss milestones, they would renegotiate the contract and push them.
- If you’re not as big as they are, you must manage them.
- Figure out structure and assign liability throughout the chain.
- Key to getting financing: many years operating history and knowing that the technology works.
- Use and ask for liquidated damages whenever possible.
- Deal is pretty much like specialized real estate.
- Power plant is like someone who rented the entire building (power utility they’re selling the power to); if you deliver the power, they’ll pay.
- Single tenant is rated as lower risk.
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