The goal of this blog is to make academic finance
research accessible to a wide audience, in particular
people with non-finance backgrounds who might not
normally be interested in finance. This idea spun
out of the "Extra-Curricular Topics" I teach in my MBA
classes, a 10-minute interlude where I teach an
academic paper with significant real-world relevance.
In addition to academic research, I also aim to
feature real-world events (e.g. the current economic
outlook or an M&A deal).
Conflicts of Interest Among M&A Advisors
/0 Comments/in Corporate governance /by Alex EdmansThe Importance of M&A Mergers and acquisitions (M&A) are arguably the most important decision that a company makes. Successful mergers can transform a company by combining complementary assets, unleashing economies of scale or scope, or allowing it to enter new markets or geographies. However, mergers can also destroy billions of dollars of value. Daimler Benz […]
How Short-Term Activists Create Long-Term Value
/1 Comment/in Corporate governance /by Alex EdmansActivist hedge funds are often seen as the epitome of all that’s wrong with capitalism. They cut investment, fire employees, and break contracts to boost the short-term stock price, and cash out before the long-term value destruction comes to light. It’s certainly possible to find examples of this. And such stories make for good journalism […]
A Layman’s Guide to Separating Causation from Correlation … and Noticing When Claims of Causality are Invalid
/2 Comments/in Corporate finance, Corporate governance, Corporate social responsibility, Executive compensation /by Alex EdmansImagine you’re the Minister for Education, deciding how large to make a school district. Larger school districts offer parents more school choice. You look at data from thousands of school districts and find that, in larger districts, child performance is better. You’re tempted to infer that district size increases child performance. But, as we know, correlation doesn’t imply causation. […]
How Proxy Advisors Influence Voting Outcomes
/1 Comment/in Corporate governance /by Alex EdmansProxy advisors are playing an increasingly influential role in corporate governance, by providing investors with guidance on how to vote in director elections or for a manager- or shareholder-sponsored proposal (e.g. on corporate social responsibility or payout policy). Their influence is growing, in part, due to the rapid rise in index funds – since they […]
The UK’s Brexit Options
/0 Comments/in Brexit /by Alex EdmansThe UK voted for Brexit last June, but what does Brexit actually mean? The UK can pursue various options: staying in the Single Market, staying in the Customs Union, or forming a Free Trade Area. These are often used interchangeably as various forms of a “soft Brexit”, but there are important distinctions between them. The […]
CEOs Cut Investment To Sell Their Own Shares At High Prices
/2 Comments/in Corporate finance, Corporate governance, Executive compensation /by Alex EdmansOne of the most fundamental concerns with corporations is that they focus on short-term profit rather than investing for the long-term. This is a particular concern in the 21st century, where innovation is particularly critical for competitive success. Moreover, allegations of short-termism have serious social repercussions. Long-term investments, such as reducing carbon emissions, developing blockbuster drugs, or […]
Is Short Termism Really A Problem?
/2 Comments/in Corporate finance, Corporate governance, The world economy /by Alex Edmans“Myopia [short-termism] is a first-order problem faced by the modern firm. In the last century, firms were predominantly capital-intensive, but nowadays competitive success increasingly depends on intangible assets such as human capital and R&D capabilities (Zingales (2000)). Building such competencies requires significant and sustained investment. Indeed, Thurow (1993) argues that investment is an issue of […]
Conflicts of Interest Among Proxy Advisors
/3 Comments/in Corporate governance /by Alex EdmansThe Importance of Proxy Advisors Proxy advisors play a critical role in corporate governance. One important way in which shareholders exert governance – ensure that executives act in shareholders’ interest, rather than their own interest – is through voting. Votes can be for particular directors (who monitor executives), for or against a say-on-pay vote, or for […]
Corporate Governance in China
/1 Comment/in Corporate finance, Corporate governance, The world economy /by Alex EdmansChina will soon become the largest economy in the world, but many Westerners (myself included) know very little about it. Moreover, the vast majority of research on corporate governance is on the US. We often assume that these findings will apply throughout the world, but this assumption is unwarranted – the institutional setup is very […]
House of Commons Report on Corporate Governance
/0 Comments/in Corporate governance, Corporate social responsibility, Executive compensation /by Alex EdmansToday the House of Commons Select Committee on Business, Energy, and Industrial Strategy (BEIS) published its report on corporate governance, after extensive consultation of oral and written testimony from a wide range of stakeholders. I applaud the Select Committee for such an extensive, thorough job with an issue of national importance, and am personally grateful […]
Simplicity, Transparency, and Sustainability: A New Model For CEO Pay
/11 Comments/in Executive compensation /by Alex EdmansHow did BP CEO Bob Dudley get paid £14m in 2015, despite the stock price falling by over 15%? Because of a complex, opaque pay scheme known as a Long-Term Incentive Plan (“LTIP”). A LTIP pays the executive according to multiple performance measures – for example, stock price, profitability, and sales growth – at the end […]
Blockchains: How they work, and how they may transform the world
/1 Comment/in The world economy /by Alex Edmans(This post was originally featured in the Review of Finance Managing Editor’s blog, which summarizes the lead article of each issue in a non-technical manner.) We hear blockchains mentioned all the time, but very few people know what they actually are, how they work, and what effect they may have. The paper “Corporate Governance and Blockchains”, by David Yermack […]
The returns to investing in grass-roots sport and the distraction of Olympic medals
/0 Comments/in The world economy /by Alex Edmans“Unless we look more creatively about how we engage everyone in physical activity, we may win medals but we will be bottom of the league table on health and wellbeing” – Paralympian Baroness Tanni Grey-Thompson “Britain really has got sport upside down. Why spend billions on an Olympics when few kids in the country have […]
Why has CEO pay risen so much faster than worker pay?
/0 Comments/in Executive compensation /by Alex EdmansArguably the most convincing “smoking gun” evidence that CEO pay is excessive is how it’s risen much faster than median worker pay. In the U.S., CEO pay was $10 million, 350 times that of the average worker in 2013, compared to 40 times in 1980. This seems to debunk any argument that CEOs deserve their […]
Long-Term Executive Incentives Improve Innovation and Corporate Responsibility
/2 Comments/in Corporate social responsibility, Executive compensation /by Alex EdmansExecutive compensation needs to be reformed. But, most of the calls for reform focus on the wrong dimensions. They focus on the level of pay, or the ratio of executive pay to median worker pay – even though the evidence suggests that low ratios are linked to lower future performance. As I have argued in the Wall Street Journal […]
Why the MSCI Study Does NOT Show That Equity Incentives Backfire
/0 Comments/in Executive compensation /by Alex EdmansMSCI have released an impactful study entitled “Are CEOs Paid for Performance? Evaluating the Effectiveness of Equity Incentives”, purporting to show that equity incentives lead to poor long-term performance. In simple language, they just don’t work. This study has been highly influential and seized upon by the Wall Street Journal, CNN, and Fortune as “smoking gun” evidence that […]
Translating the New USS Pension Rules Into Plain English
/2 Comments/in Investment strategies /by Alex EdmansAndy Haldane, the Chief Economist of the Bank of England, said that pensions are so complex that even someone “moderately financially literate” like he can’t understand them. This complexity certainly applies to pension tax rules when combined with changes to the Universities Superannuation Scheme (for employees of UK universities): despite being a finance professor, it’s taken […]
How Virtually Every Pay Regulation Has Backfired
/4 Comments/in Executive compensation /by Alex EdmansFew topics make the public as angry as CEO pay. In the UK, the average FTSE 100 CEO earned £5.4m in 2015, 148 times the median worker. For US S&P 500 CEOs, these figures are even more extreme: $12.4m and 335 times. This pressures politicians to do something about CEO pay. Indeed, regulating pay might nowadays […]
Eight Common Myths About CEO Pay
/3 Comments/in Executive compensation /by Alex EdmansFew business topics capture the public’s interest – and ire – as CEO pay. Indeed, a major reason why executives carried little weight in the Brexit referendum was the belief that they are overpaid crooks. But, does perception actually match reality? The public’s view is largely shaped by what the media reports. And, the media […]
The Rational Response to Brexit
/12 Comments/in Brexit /by Alex EdmansThe Brexit vote was disappointing, for the reasons I wrote about in my earlier post. But, what’s done can’t be changed. What’s the best way to respond to it? It’s hugely tempting to accuse the Brexiteers of being racist or stupid. We share with glee how some admit that they were conned by Farage and […]
The Case for Remain
/2 Comments/in Brexit /by Alex EdmansToday is perhaps the biggest decision the UK will ever face. Under 18s will be most affected by this decision but can’t vote. Brits can. More important than which way we vote is that we should vote. I’m normally politically apathetic (only voted once) but this is such a key decision, I’ve spent hours researching the […]
Size Matters, If You Control Your Junk
/2 Comments/in Investment strategies /by Alex EdmansThe first stock market trading strategy ever discovered was the size anomaly. Banz (1981) found that small stocks outperform large stocks, even after taking into account their higher risk. This finding has had profound implications, such as the creation of small stock indices (since the returns of small stocks shouldn’t be compared to large stocks) and the […]
The Case for Brexit
/11 Comments/in Brexit /by Alex EdmansI’m strongly in favour of the UK remaining part of the EU. However, I recently went to a talk given by a Brexit supporter, to hear the other side. I believe that he/she gave some persuasive arguments. Even though I don’t agree with all of them, I thought to share them here, since it is important for […]
Higher Stock Returns When CEOs Own More Shares
/7 Comments/in Executive compensation, Investment strategies /by Alex EdmansExecutive compensation is a controversial topic. US CEOs earn 373 times the average worker, and so it takes them less than a day to earn the same as an average worker does in a whole year. But, despite attracting most attention and ire, the level of pay is actually not so important for firm value. Average […]
Top Five TEDx talks
/0 Comments/in Personal leadership /by Alex EdmansI previously posted my top ten TED talks. TEDx is similar to TED but is an independently organised event under the TED banner, similar to a franchise. Many famous “TED” talks are actually from an independent TEDx event, and most are unaware of the difference. Here are my favorites: 1) Why Work Doesn’t Happen at Work […]
Using Behavioral Economics to Keep Resolutions
/0 Comments/in Personal leadership /by Alex EdmansIn 2010, David Cameron set up the “Behavioural Insights Team” (nicknamed the “Nudge Unit”) to use behavioral economics to “nudge” individuals to take superior decisions for themselves and society, e.g. save more, register as organ donors, or give to charity. It uses Randomized Control Trials (RCTs) to find the method that best works – similar […]
Predicting Mutual Fund Performance Using (Legal) Inside Information
/2 Comments/in Investment strategies /by Alex EdmansHow does an investor choose which mutual fund to invest in? She’ll want a measure of the fund manager’s skill, and the most natural measure is his past performance. But, a ton of research has systematically found that past performance doesn’t predict future performance – it’s irrelevant in choosing a mutual fund. How can this […]
Dangers of Using a Company-Wide Discount Rate
/0 Comments/in Corporate finance /by Alex EdmansAny Finance 101 class will emphasize that the appropriate discount rate for a project depends on the project’s own characteristics, not the firm as a whole. If a utilities firm moves into media (e.g. Vivendi), it should use a media beta – not a utilities beta – to calculate the discount rate . However, a survey found that […]
If Money Doesn’t Buy You Happiness, You’re Not Spending It Right
/0 Comments/in Personal leadership /by Alex EdmansA good chunk of traditional finance research teaches us how to make money, such as optimal investment strategies. But, there’s very little on how to spend it. Studies show surprisingly little relationship between money and happiness. One interpretation is that things that make you truly happy can’t be bought – but money can allow people […]
Why Banks Should Use Less Debt Financing
/0 Comments/in Corporate finance /by Alex EdmansIn the aftermath of the financial crisis, there have been numerous calls for banks to finance themselves less with debt and more with equity, to reduce the risk of another crisis. But this has been met with great resistance by bankers. They argue that equity is costlier than debt, and so forcing them to use […]
How Corporate Credit Ratings Induce Short-Termism
/0 Comments/in Corporate finance /by Alex EdmansCredit rating agencies were under particular scrutiny in the recent financial crisis, as critics argue they gave too high ratings to securities that turned out to be toxic. One potential culprit is the “issuer-pays” model, where it is the company being rated that pays for credit ratings, which may encourage rating agencies to be overly-generous […]
Reforming CEO Pay – The Dangers of Short-Term Incentives
/0 Comments/in Executive compensation /by Alex Edmans(This post originally appeared on LinkedIn) Executive pay is a high-profile topic about which almost everyone has an opinion. Many shareholders, workers, and politicians believe that the entire system is broken and requires a substantial overhaul. But, despite being well-intentioned, their suggested reforms may not be targeting the elements of pay that are most critical for […]
Time Management Tips to Boost Your Productivity
/0 Comments/in Personal leadership /by Alex Edmans(A shorter version of this article was originally published in CityAM. A talk on time management and personal leadership is here.) At work, often the last thing you can do is work. Emails flood in, colleagues make urgent requests, and fires need to be fought. But, a few pointers can help us get the most out of each day. […]
The Effect of the 2014 World Cup on Stock Markets
/0 Comments/in Investment strategies /by Alex Edmans(Update 15 July) The 2014 World Cup is now over. After Argentina’s loss in the final, its market was up 0.2%, underperforming the world index which rose by 0.6%. Germany’s index rose 1.2% – the biggest gainer among the major European indices. Excluding the anomalous Brazil defeat (which is explained below), out of the 39 […]
World Cup fever: Why an England loss will wipe billions off the stock market
/0 Comments/in Personal leadership /by Alex Edmans(This article was originally published in CityAM. A brief, humorous, five-minute talk on the paper is here.) THE WORLD Cup, which starts today, will spark a huge range of human emotions, from the excitement of victory to the despair of defeat. The effect of football results on national mood is so strong that it can spill over […]
Underperformance of Companies Holding Meetings in Remote Locations
/0 Comments/in Investment strategies /by Alex EdmansIf a company has bad news that it wishes to hide, where will it hold its shareholder meeting? As far away as possible! That’s the hypothesis of an ingenious paper entitled “Evasive Shareholder Meetings”, by Yuanzhi Li (Temple) and David Yermack (NYU Stern) that I saw at the Rotterdam Workshop on Executive Compensation and Corporate Governance yesterday. […]
Profiting from momentum strategies – Part 2
/0 Comments/in Investment strategies /by Alex EdmansThe previous post concerned momentum – a strategy of buying past winners and selling past losers. It discussed how this strategy does well on average, but on rare occasions (recent market downturns and high market volatility) does very poorly. Another reason why momentum may perform poorly is because other investors are chasing the same strategy. One of […]
Profiting from momentum strategies – Part 1
/1 Comment/in Investment strategies /by Alex EdmansMomentum is arguably the most well-known trading strategy. A simple strategy of buying stocks that have done well over the past 6 months (“winners”), and shorting stocks that have done badly (“losers”), earns a 1%/month return over the next 6 months. While other trading strategies stop being profitable once they have been discovered (because investors start exploiting […]
Does corporate social responsibility improve firm value?
/0 Comments/in Corporate social responsibility, Investment strategies /by Alex EdmansBelow is an article I wrote two months ago for the World Economic Forum. Since it’s posted on the password-protected section of the WEF website, I reproduce it here. Does corporate social responsibility (“CSR”) improve firm value? When companies make decisions, should they care only about shareholders or should they take other stakeholders (e.g. employees, […]
Trading Strategies Based on Analyst Conference Calls
/0 Comments/in Investment strategies /by Alex EdmansThe idea from this blog came from the “Extra-Curricular Topics” I teach in my MBA classes, a 10-minute interlude where I teach an academic paper with significant real-world relevance. This expanded to an opt-in Google Group where I wrote to former students summarizing an interesting paper that I come across in a seminar or conference, […]
Top Ten TED Talks
/2 Comments/in Personal leadership /by Alex EdmansLondon is a great city, but one of its downsides is that it takes a long time to get to most places. The TED Talks app has significantly enriched my commutes. Here are my top ten TED talks: 1) The Family I Lost in North Korea, and the Family I Gained (Joseph Kim). Perhaps the most poignant TED […]
Davos in a Nutshell (Non-Economics Sessions)
/0 Comments/in Personal leadership, The world economy /by Alex EdmansPerhaps the most illuminating sessions in Davos were ones unrelated to economics, and thus gave me insights into topics that I would not normally get the chance to learn about. Here is a short summary. While these sessions were on quite different topics, one common theme to many was the “neuroplasticity” of the brain. The […]
Eradicating World Poverty: Inspiring a New Generation to Act
/0 Comments/in The world economy /by Alex EdmansThis is a summary of a Davos session on “The Post-2015 Goals: Inspiring a New Generation to Act” on the eradication of world poverty and the millennium development goals. It featured, among others, David Cameron, Bono, and Ngozi Okonjo-Iweala (the Nigerian Finance Minister and the most impressive person I heard at Davos): David Cameron: tackling […]
Davos in a Nutshell (Part 2)
/0 Comments/in The world economy /by Alex EdmansHere are key takeaways from additional sessions I attended in Davos. The last blog mainly covered sessions that were statements of fact (e.g. current economic indicators); here I cover sessions on which there was an exchange of opinions – in particular, different viewpoints around the world on what economic policies to adopt. Economic Policy Around […]
Davos in a Nutshell
/0 Comments/in The world economy /by Alex EdmansI was very fortunate to have had the opportunity to attend the World Economic Forum in Davos last week, co-leading a session entitled “Making Better Decisions” on behavioral economics. My focus is mainly on microeconomics, and so I was grateful to learn about the current macroeconomic climate from leading policymakers, executives, and commentators. I wanted […]