Ideoblog

End of message

The W$J says that putting "EOM" at the end of emails tells the recipient not just that there's no more to the message, but that she doesn't need to reply saying she got it. 

This sounds great, but is it really a convention?  If so, it hasn't reached my world, since I haven't seen a single such message in my many emails.  This means that I have to keep sending these follow ups so as not to appear rude. PLEASE ADVISE!

Outsourcing Indian shares

The  W$J reports today on US listings of shares of Indian techonology companies, including Infosys.  The story says these shares are trading in the US at a significant premium over Bombay prices "because of the small number of shares in circulation." The story also says that investors are buying in India and selling here to cash in on the spread. 

The story got my attention because of my work on cross-listing  here (my published article) and here (my more recent and extensive working paper).   The dominant theory of cross-listing seems to be that companies cross-list in the US or other strong securities markets because exposing themselves to stronger law and enforcement "bonds" their disclosures to investors. Companies may also cross-list to reach investors in foreign markets who incur substantial costs of trading in the domestic market.

The WSJ story suggests that the Indian companies are trading here for liquidity reasons.  Under a bonding explanation, the companies would be selling more shares in India to capitalize on the bonding the company is getting from trading in the US.  But there are apparently barriers to trading Indian shares from here, so the companies reach more investors in the US. 

But the story raises some questions. Greater liquidity may not fully explain the really big premiums in the US.  US investors may not be able easily to trade the Indian shares directly, but are the transaction costs of arbitrage really that high?

And I really don't understand what the size of the US float has to do with the size of the US premium. The capital assets pricing model suggests that shares are fungible -- investors can get the same risk/return tradeoff by substituting shares of other companies. 

Possibly someone can explain.

Holiday viewing: The Aviator

Because of my prejudice against movie theatres, it will be awhile before I can see Martin Scorsese's The Aviator.  Nevertheless, I can at least tentatively classify it according to the criteria in Wall Street and Vine, my paper about business in film.  I perform this service for those who will be visiting theatres over the holidays and want some guidance to the business issues therein.

As I point out in my paper, Hollywood doesn't dislike business generally -- only evil capitalists.  So you might think that The Aviator would have a negative take on Howard Hughes, one of the richest capitalists of all. But there is a category of "good" businesses in film that are not run by cold-hearted capitalists.  As I say in Section 3.D.3:

The good businessman is often a kind of artist, and often one who works in the industry filmmakers know best. Here, business is clearly a creative force freed from capitalists’ narrow vision. In this kind of film, the businessman is a mighty creator, engaged in the noblest form of work – filmmaking, or something analogous to it.

And so with Howard Hughes, who brought dash to all of his dealings, including his main fling in the airline industry, and dabbled in the noblest profession.  So this is like other capitalist-as-artist movies, including The Bad and the Beautiful, Jurassic Park, Giant, and, of course, the greatest of all films in this genre, Citizen Kane.

The closest fit of all is the miniscule sub-genre that also includes Coppola's Tucker: The Man and His Dream.   For, like Tucker, Hughes had a run-in with government, which tried on behalf of Hughes' competitor (Pan-Am) to bring him down. The government succeeded with Tucker, in a securities fraud case, but failed with Hughes.

I wonder in my paper why government is not more often the villain.  Perhaps it is only when government gets in the way of artist-businessmen.  When government messes with those other businesses -- the ones that feed and clothe us and make life easier -- it is usually the good guy.

Hopefully those who see the movie before I do can give me appropriate additions and corrections.

Wall Street and Vine

The latest draft of my article on how business is portrayed in film, with a new catchy title, is on my web page.  Still a work in progress, but this reflects lots of recent thinking and helpful comments since the summer.   Note that SSRN still has the old version, Film and Firms.  I hope to correct that before too long.

Partnership social responsibility

Just in time for your holiday reading, a draft of my paper for the UCLA/Sloan corporate governance conference, January 28-29, is on my web page: Partnership Social Responsibility. Here's the abstract:

Social responsibility theorists assume that profit-maximization is incompatible with broader social interests, so that managers should be free to serve society generally rather than exclusively shareholders. In fact, markets powerfully constrain anti-social corporate conduct. It follows that managers would serve society’s interests best by focusing on long-term profit-maximization. However, the corporate form inherently gives managers significant slack to diverge from profit-maximization. The solution is to fundamentally change the governance structure of publicly held firms toward a partnership-type model that reduces managers’ control over the firm’s cash. This move is facilitated by the shift toward thicker markets, which decreases firms’ need to lock assets up in a strong and durable corporate entity. The main impediment to such a change is the corporate tax, which gives managers incentives to retain earnings.

DIDVD: Shakespeare-Wallah

Shakespeare-Wallah (IMDB, Amazon) is a very early, and the first widely distributed, Merchant-Ivory production.  It's a film about criss-crossing cultures.  A British Shakespeare troupe, including a mother, father and daughter, have been traveling around India since colonial times. They are slowly losing their once-enthusiastic audiences, replaced by film (the beginnings of Bollywood) and sport. The daughter is romanced by an upper-class playboy whose own culture is also disappearing. 

The misty photography, atmospheric sets, music (by famed director Satyajit Ray), near-perfect script (by Ivory and Jahbvala) capture this passing of the glorious old and entering of the tacky new.  In particular -- a scene in the former wine cellar of a decaying club, with hundreds of empty holes where the wine used to be; the decaying theatres, dressing rooms and dusty roads where the troupe spend their lives.

Why does it seem to be so hard for modern filmmakers to film stories that have a natural dramatic arc, whose events suit the characters and ideas?   

No, you don't see many films like this anymore.  I spent my youth seeing sad British movies of the 60's -- Girl with the Green Eyes, Taste of Honey, Seance on a Wet Afternoon.  They didn't end happily.  Of course, reality doesn't end happily -- we die.  Not that a film -- even a documentary -- can be "real."  But it can tell us useful things about reality. Film companies today must assume that we need always to escape from these things. But why should they?  Rare films like Lost in Translation (which Shakespeare-Wallah reminded me of, with star-crossed lovers lost in a foreign culture) still sell tickets.

New feature: Desert island DVDs

Readers of this blog know that my interests include film.  See the film archive of this blog, and my paper (revision posted soon) and (discontinued) blog on how business is portrayed in film. I have been thinking for some time about expanding my coverage of film.  After all, Professor Bainbridge does wine, and on the radio, too. If I don't know as much about films, I have truly wasted my life. More importantly, as a public service.  I have found in reading film reviews, comments, etc, that PEOPLE NEED MY GUIDANCE!

Anyway, here are the rules. 

1. I don't see current movies.  That, too, is a public service, because it became clear that I would gruesomely kill the next loud purveyor of stupid thoughts who had the misfortune to sit behind me in a theatre (is it an inflexible rule that volume and quantity of words relate inversely to intelligence?).

2.  I will review only the best of the oldies in random order.  As the title indicates, these are films you would take to a desert island with you for repeated viewing (if you had an electrical outlet or killer battery life).

3.  I will tell you the real truth about the movies.  This will enable you to disregard other, erroneous, commentary.

4.  I will not give you basic information about the movies, other than date and links to IMDB and Amazon.

More on drug trials

Holman Jenkins in today's W$J has more on my topic of a few days ago -- the problems of drug trials. Bottom line:  we can't rely on the trials, we can no longer rely on prescribing doctors, and the Internet is inevitably going to bypass them anyway. So the answer is for consumers to trust the brand and the advertising that backs it.

  Benjamin Klein and Keith Leffler noted the power of branding long ago in The Role of Market Forces in Assuring Contractual Performance, 89 J. POL. ECON. 615 (1981).  The money the seller spends in supporting the brand, particularly including advertising, constitutes a sort of "bond" that the manufacturer forfeits for poor performance. 

It may not be perfect protection, but it's looking better every day compared to the protection consumers are getting from government.

Fairness opinions

The W$J reports on problems with so-called "fairness opinions" that boards get, at great cost, to protect their deals from judicial second-guessing. 

Although the article focuses on potential conflicts of interest, there are also obvious problems with the inherent subjectivity of the opinions, and the temptation to say what the party buying the opinion is paying you to say (i.e., that the price is "fair").

The article doesn't say why companies spend all this money on this dubious product. Try Smith v. Van Gorkom, 488 A. 2d 858 (1985), in which the Delaware supreme court held a board liable for a lot of money for not jumping through all the right hoops in recommending a merger for a significant premium over current market.  Among other things, the court criticized the board for relying on insiders as to the price.  Obvious solution -- bring in an "outside" investment banker to say what the insiders are saying.

As to the value of these opinions, in commenting on Van Gorkom Dan Fischel observed: “I wish someone would pay me several hundred thousand dollars to state that $55 is greater than $35.” The Business Judgment Rule and the Trans Union Case, 40 Bus. Law. 1437, 1453 (1985).

The reason the courts make judgments about this is that they believe that somebody has to ensure the board is doing its job.  Since the court can't easily second-guess the price, the next best thing is to make sure the board follows the right procedure.  The problem is that the court can't necessarily judge the procedure any better than it can judge the price.

The answer is to make sure there's an active market for corporate control. If companies are auctioned freely, we don't have to worry as much about getting somebody's opinion as to what the price should be. 

Now, takeovers can be costly, but if companies want takeover protection they can insert it in the charter, as Google has with its dual-class stock.  States can enact "standard form" provisions that companies can adopt.

The real problems are federal laws such as the Williams Act and anti-trust laws, and rigid state fiduciary rules that essentially leave it up to incumbent managers whether and at what price the company will be sold. Until we do something about that, we're going to have to accept second-best ways of protecting the shareholders. Like fairness opinions.

The new capitalists

This WaPo article is one of several that discusses a forthcoming hedge fund that plans to cash in on an anti-Coke boycott -- that is, drive the stock down through the boycott, then cover shorts.

Well, I suppose we capitalists should welcome the social responsibility crowd to our fold.  But we should also issue a warning -- act like a business, get regulated by a business.  In other words, you better watch what you say about Coke (which denies the boycotters' charges against it). And don't expect to get First Amendment protection -- after all, if you're "commercial," it's "commercial speech." 

I expect to have more to say about all this later in this space and in a brief article I'm writing for the Washington Legal Foundation.