Hiring Celebrity CEOs: Fragile Fame

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The original story appeared on Barron’s on April. 26th. 

Like Hollywood and Corporate America, Chinese companies have been paying up for celebrity talent. But the Chinese may not be getting much bang for the yuan.

In a recent academic study that examined costs and benefits of hiring star CEOs in China, researchers found that companies paid more for big dogs with celebrity status than for run-of-the-mill, unknown execs. Martin Conyon of the University of Pennsylvania, Lerong He of the State University of New York’s College at Brockport, and Xin Zhou of Fudan University defined star status in China as membership in one of China’s leading political organizations.

 

Credit: Barron's Art Department

Photo Credit: William Waitzman for Barron’s

Short Term: For about nine months a celebrity CEO in China had a positive impact on the share price, which then faded like fame itself. 

They discovered that for about nine months a celebrity hire had a positive impact on a company’s share price, which then faded like, well, fame itself. “It is economically rational for Chinese firms to hire a star CEO,” noted the paper, which crunched a decade of data since 2000 for almost 600 firms listed on Chinese exchanges. At least, until it’s not.

This may be bigger than just China. Other researchers have found comparable phenomena in the celebrity-crazy U.S. After short-term market reactions to star hires, the net long-term benefits proved dismal. Ulrike Malmendier of the University of California, Berkeley, and Geoffrey Tate of UCLA found negative share performance at companies whose CEOs won prestigious business awards. Unfavorable results also followed when CEOs assumed outside board seats or wrote a book, and was worst at firms that had weak corporate governance. You get what you pay for, but it may not be exactly what you want.

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New Life for Old Heroes: Fire-Hose Chic

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The original article appeared on Barron’s on April.12, 2014.

Consider this piece of data from today’s powerful fire hose of information: U.S. fire departments discard so many fire hoses annually that if you hooked them all together, they’d stretch from New York to San Francisco and back, with enough leftover hose to reach Dallas. That’s a lot of fire hose put out to pasture. These high-pressure hoses may have sprung leaks or lost some flexibility, but they’re hardly about to decompose. Made of synthetic fibers and tight webs of wire, a fire hose can live for many years after it’s tossed on the garbage heap, morphing in the process from heroic tool to just another environmental villain.

Photo Credit: William Waitzman for Barron’s

Luckily, some private companies are responding to the plight of old fire hoses. Oxgut Hose, based in California, salvages hoses and hands them off to local designers and artisans, who fashion surprisingly sleek home furnishings from them—chairs, loungers, hammocks, mats, and more. HoseWear, based in Estonia, makes handbags, belts, and iPad covers from old hoses. A British outfit, Elvis & Kresse, produces wallets, notebooks, and cuff links.

This cottage industry may never lack for raw material. Though data on discarded fire hose is hard to come by, the New York Fire Department alone decommissioned 7,033 fire hoses in 2012. Since the standard hose length is 50 feet, that comes to 66.6 miles. Gotham’s 11,000 firefighters represent 1% of the nation’s total, so assuming the city’s retired hose is 1% of America’s, that amounts to 6,600 miles. That’s a lot of waterproof cuff links.

Hedge-Fund Research: Transparently Short

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The original story appeared on Barron’s on March.15th, 2014.

Traditionally, hedge funds profited on proprietary research and fought to maintain that edge as long as possible. Lately, however, some short-sellers have been freely posting investment research on the Internet. Are they crazy? If a recent working paper by Alexander Ljungqvist and Wenlan Qian, respectively of New York University and the National University of Singapore, is any indication, they might be crazily successful.

Photo Credit: William Waitzman for Barron’s

The pair studied 332 reports by shorts like Citron Research, Bronte Capital, Asensio & Co., and 14 others. The first-day market impact of reports from research outfits Muddy Waters and Alfred Little produced an average decline of 18%. In the three months following publication, the share prices of 113 U.S.- listed companies targeted by the short-sellers fell by an average of 22%, net of market movements, and by 57% over 12 months. Even after accounting for short-sale fees, the scholars figured the shorts that went public made a three-month profit of 18%.

One fund they studied was Kerrisdale Capital, which says it made its investors attractive amounts of money by exposing fraudulent U.S.-listed Chinese companies in 2010 and 2011. Now the New York firm mainly covers U.S. firms. Recent Kerrisdale research on Unilife (ticker: UNIS), a York, Pa.-based pharmaceutical firm, cited a history of missed deadlines and a murky supply chain for the firm’s short position. Unilife stock fell from nearly $5 on the report date to about $4.25 over the next few days. “We generally had a good experience sharing our research with the public,” says Kerrisdale CEO Sahm Adrangi.

Taxing Olympic Medalists: Winners’ Curse

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The original story appeared on Barron’s on March. 1st, 2014.

U.S. Olympic medalists coming home confronted a reality chillier than the slushy slopes of Sochi: the tax man. Winners must pay taxes both on their hard-earned medals and on the little-known and, globally speaking, chintzy cash rewards that go with them.

Who knew? The U.S. Olympic Committee rewards U.S. winners $10,000 for a bronze medal, $15,000 for a silver, and $25,000 for a gold. A gold medalist who falls into the highest tax bracket would have to shell out $9,900 to the Internal Revenue Service in federal taxes alone.

Photo Credit: William Waitzman for Barron’s

Then there are the medals themselves. Based on recent commodity prices, a gold medal (which is actually mainly gold-plated silver) is worth about $550, which adds a couple of hundred dollars to the bill.

Not surprisingly, the Olympic tax has drawn criticism. “Taken together—the tax on Olympic athletes and the tax on income earned abroad—it can be said the U.S. officially earned the gold for having one of the most backward and illogical tax codes in the world,” says Justin Sykes, an analyst with Americans for Tax Reform. Texas Republican Rep. Blake Farenthold has revived a bill exempting U.S. medalists from the taxes. A similar bill in 2012 never came to a vote.

To add insult to injury, the American prize money is dwarfed by what athletes from some other countries get. Azerbaijan, for instance, boasts the biggest bonus, at over a half-million bucks for gold. Of course, Azerbaijan only sent four athletes to Sochi, and they brought home no medals. So much for incentives.

ReWind: Why Bo Xilai’s trial was in Jinan

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In the settling dust of the trial of the disgraced Chinese politician Bo Xilai late last year, one question still lingers, or banned for Chinese media and largely ignored by/confused for Western media: Why Bo was tried in Jinan, Shandong Province? He has almost no known connections to that province, neither professionally nor personally. Western media cite the randomness and impartiality of a third-party province to ensure justice, but why Jinan, why can’t it be any other 33 municipalities in China?

The answer lies in the regional military alliance to the central government.

There are seven military regions in China, the branch in Jinan being one. The former general in the Jinan Military Region, Fan Changlong, is an outlier among all the generals–He is loyal to the military chief incumbent, whoever that person is, rather than dead-heartedly loyal to the former military chief, Jiang Zengmin, like the rest of the generals, according to YuanBo net, an insider news website routinely blocked by the China government for shocking party-insider coverage. The website is believed to be backed by activists located in Hong Kong and overseas.

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Fan Changlong, Former Jinan Military Region General, Vice Chairman of the Central Military Commission, reports to Xi. Photo Credit: Xinhua Net

This kind of loyalty was transferred to the current Chinese president/Military Chief, Xi Jinping, to whom Fan is only second to in the military ranks in China. There was a rumored coup in Beijing by Bo Xilai affiliates trying to take Xi’s place, which was of course immediately crushed. But gun powder appears to be the ultimate decision maker and assurance for political events in China, so putting Bo’s trial in a military region where Xi has absolute power over is the safest bet for a new leader still cleansing the ranks of non-loyal members.

Fan made headlines back in 2012 when he was promoted to his current position of Vice Chairman of the Central Military commission. Fan was only a regional general at the time. Such a promotion broke traditions that only limited number of Central Military Commission members were up for such a step-up.

The reason for how Fan was able to jump to the top of the ladder in such short period of time dates back to 2008 when the earthquake in Sichuan province shock the spin of the nation.  Immediately after the earthquake, then premier Wen Jiabao hopped on an airplane southbound hoping to mobilize the local military for the rescue. But all the generals of Military Regions were still cult-like loyal only to Jiang Zemin, despite the official account that the Military Chief title had already been transferred to the Hu/Wen administration. Wen was able to get only 2,000 local mercy solders to the site. All the generals tried to delay the effort saying that it would take them at least 72 hours to get the force ready–72 hours for a troop to show up in such emergency would have the equivalent functionality of a body removing team, not a rescue team–well, all the generals, except for Fan from the Jinan Military Region.

Fan called Wen on the airplane asking if Wen needs his troops for rescue–the only floating log in rapids–the rest is history. Despite an estimated casualty of close to 70,000, the Wen administration was widely appraised for its swift rescue effort, better than how the Bush administration reacted to the Hurricane Katrina, at least.

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Fan meets the chairman of the U.S. Joint Chiefs of Staff, Martin Dempsey. Photo Credit: Xinhua Net.

So there you have it–Fan was promoted to the second-ranking military officer in the country after his shrewd move aligning with the ministration incumbent rather than behind-the-scene powers. Fan has since gained greater responsibilities including representing China’s military force during multiple high-ranking military officers visited China-such as Mymmar’s president U Thein Sein and chairman of the U.S. Joint Chiefs of Staff, Martin Dempsey last year. Fan is for sure a person to watch as Xi continues to roll out his reforms, as Fan has already been and will continue to be used as an important executor and guarantor for Xi’s power.

Xi gives season’s greetings from his not-so-oval office

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Chinese president Xi gave his New Year’s greetings speech from his office, instead of from a podium like his predecessors,  the first time as many can remember. The place of the speech, instead of the neatly scripted content,became the focus of media and analysts. State media even made out what’s in the pictures on the bookshelves behind him.  Indeed, from reining in on governmental corruption (most recently Sichuan’s party leader) and unnecessary spending, to proposals of loosening up on the nation’s one child policy, Xi has exhibited signs of transparency and reform since the start of his tenure.

Xi has assumed more power than the country’s previous leaders, first being the consolidated power of party, state and military, which had been traditionally held on by previous leaders for a certain period of time even after new presidents have come in. Xi is now also gradually taking on the economic power, a duty that traditionally belongs to the country’s premier, now Li Keqiang. Xi is said to be behind the economic reform plan dished out at the Third Plenum that includes plans to grant farmers more rights and financial reforms such as the possibility of establishing municipal bond markets. Xi also presents himself to the outside as the country’s money leader, as he held dinner with British Prime Minister David Cameron during his visit to China this month when billions of Pounds worth of deals were signed. This defied customs since Cameron is not his country’s No.1 leader. Li’s meeting with Cameron was dialed down to only a lunch.

Xi addresses the nation from his never-seen-by-public office. Photo credit: CCTV.

Xi addresses the nation from his never-seen-by-public office. Photo credit: news.cn.

This president for sure boosted the nation’s confidence and pride when he directed military moves around the conflict Diaoyu island zone with Japan. The dispatch of an aircraft carrier, Liaoning, and the close passing-by an American cruiser was probably one of the boldest moves the Chinese leadership has taken defending its claimed territory in recent history.

Despite all signs of advance, Xi still remains conservative on some of the bottom lines that characterize a state rather than a democracy. Foreign journalists from various media outlets couldn’t get their visas renewed (now resolved) after leaks indicating Bloomberg News pulled an investigative story into China’s top leaders’ wealth. An article by the New York Times looking at JP Morgan’s ties with previous premier’s daughter didn’t help the situation either. Britain’s Cameron even protested to Xi about banning a British reporter from attending the news conference during his visit. Chinese leadership needs to realize that unreasonable secrecy and restless attempts to protect reputation don’t go with rapid growth and development of a nation. Citizens need knowledge in order to make informed decisions. It does make sense the leadership doesn’t want the door flung open too wide too fast, but it also needs to give its citizens credit and basic trust, because they will eventually get there, whether by force or by controlled progression.

Shortly before the end of last year, the Ministry of Culture banned an online video game “Battle Field 4” together with all the news reports about the banning of it, citing violent graphics. I can’t really blame the administration for this, given the violent car bombing in the Tian’an men Square earlier and recent unrest in the country’s far west. However, would the banning of an obscure video game really help? Is it worth it to carry yet another mark on forehead for being the stumping and unyielding state force?

Economic advance should and will be the center of this country’s policies and executions in the new year. With a slower GDP growth and decrease in manufacturing, Xi, with the rest of the leadership, faces drastic challenges, boosting domestic consumption, tackling daunting governmental debt and improving the environment, to name a few, and as usual, as the world looks on.

Key Detroit Projects Appear on Track, But Contractors Have Questions

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This article was originally published on Engineering News Record on 07/24/2013.

Although Detroit’s Chapter 9 bankruptcy filing on July 18 is the largest in U.S. history with about $18 billion in liabilities, it is not expected to affect several key urban projects, project officials say. But state contractors are concerned about work even with some funding tied to private investors.

The city’s proposed $650-million arena for the Red Wings hockey team would be supported by $367 million in private investment and $283 million in public funding, says a statement from developer Olympia Development. The public contribution would come partially from a state economic development fund and from property taxes collected by the Detroit Downtown Development Authority.

“Property taxes, even though collected by the city, are not impacted, either,” says Bill Nowling, a spokesman for Detroit Emergency Manager Kevyn Orr, who has been overseeing the city’s finances since March. The authority is listed as one of Detroit’s 20 largest unsecured creditors, according to the U.S. Bankruptcy Court for the eastern district of Michigan, Detroit. The city owes the authority about $33.6 million, although further loan details were not disclosed. Also apparently shielded is a $137-million streetcar line, according to a local press report.

Another signature downtown project, the $279-million upgrade of the Cobo Center exhibition and event space, is being managed by the Detroit Regional Convention Facility Authority, a regional and state entity.” Cobo receives no funding from the city government for either the capital project or our day-to-day operations,” says agency CEO Patrick Bero. “The capital project is fully funded through a private-placement bond financing provided by a consortium of banks.” Work is now 60% complete at the center, which is set to host in January the giant North American International Auto Show, which could attract up to 800,000 attendees, he says.

“Detroit is open for business, despite the city government’s financial troubles,” says Larry Alexander, CEO of the Detroit Metro Convention & Visitors Bureau. He notes the opening, earlier this month, of a 367-room Crowne Plaza hotel downtown. Under the restructuring proposal, the city will spend $1.5 billion more over the next 10 years on public safety, according to Alexander.

But the Associated General Contractors of America-Michigan awaits clarification on whether the city has funds in place to execute other current and planned projects. “At this point, there are a lot of question marks,” says President Bart Carrigan. “Detroit isn’t enjoying a heyday of public construction, so the hope is it can continue to manage projects it has under way.” AGC-Michigan will lobby to ensure industry interests are represented if the U.S. Justice Dept. appoints a committee of unsecured creditors for the case. “There are so many layers to this, including contractors, subcontractors and suppliers,” Carrigan points out. “Like a Chapter 11 bankruptcy, the goal is to communicate the industry’s unique needs to decision-makers.”