Lessons Learned from Week 4 of Fall Quarter

Ethics

• Good managers can very easily make bad decisions due to several rationalizations: won't get caught, within the realm of law, what's allowed or typically done
  
• Complexities in the decisions of laying off staff and interplay with affirmative action policies. One approach is a staged strategy where the initial round is according to one criteria like performance and the next is according to a different objective like diversity.
  
• Building a good board: diversity of perspective, independence, skin in the game
  

Behavioral Finance

• Analyst recommendations are a contrarian indicator, especially if employees of the underwriter
  
• IPOs typically underpriced to give kicker to client on sell side and to give profit to preferred clients who buy on asset management side
  
• In long run, IPOs underperform
• Managers game EPS by manipulating earnings; way more times that EPS comes in a penny above a threshold than a penny below a threshold
• Investors overreact to high-strength, low-weight recommendations and underreact to high-weight, low-strength recommendations
  
• Can only make money investing if you have some informational advantage or understand sentiment better than others
  
• Value works better than glamour
  
• Avoid doing what the herd does
  
• Stock rising witho good financial backing will not continue to rise for long
  
• Value stocks: ROE + steady earnings growth + many positive earnings surprises; low debt; healthy or growing profit margins; not a homogeneous product; competitive advantage; public for at least 10 years; low P/B and P/E (P/B < 1); PEG < 1; current assets > current liabilities (can pay current bills)
  
• Stocks heavily purchased by small investors do badly in following periods
  
• Find proxies for retail sentiment (naive investors); contrarian indicator
  
• High asset growth stocks underperform relative to low asset growth (naive extrapolation/overreaction)
  
• High accounting accruals is bad sign (boosting income artificially)
  
• Piotroski f-score works well, implies market not efficient; uses 20% of stocks with highest B/M ratios
• f-score: sum of 9 binary signals (not risk related); healthy companies, less risky/non-interesting companies are undervalued but more profitable
  
• High B/M can mean undervaluation or distress. f-score separates undervaluation from distress, works as investing strategy.
  
• More evidence for non-efficient market than efficient market
  
• Psychological biases affecting investors: confirmation bias, hindsight bias, representativeness, anchoring, conservatism, availability bias, overconfidence
  

Doing Deals

• Employment compensation issues
  
• Severance
  
• Say for pay
  
• Individual benefits
  
• Cause vs. non-cause termination
  
• Change of control terms in executive employment contracts
  
• Perks
  
• Benefits
  
• Restricted stock vs. restricted stock units vs. incentive stock options vs. non-statutory stock options