Why Are Tickets For Different Movies Priced The Same?

Tyler Cowan at Marginal Revolution uses an economist's perspective to examine a lot of cultural issues. Today, he asks the question "Why Are All Movies The Same Price?:

Well, not the same price in all cases. Before 6 p.m. is cheaper, there are numerous dollar theaters, and not all films allow for discount coupons. Nonetheless a multiplex will charge the same ($9.50 in my case) for the number one movie and for a flop. Nor is the price more expensive for Saturday night, or during the summer when demand is higher. Can any economic model predict these results?

He provides eight possible reasons. Click here for the whole posting.

Here's one I never would have come up with - a movie ticket is a call option! See why at Voluntary Exchange.

Warren Buffet's Annual Letter

Berkshire Hathaway has just come out with their 2004 annual report. Warren Buffett's letter to shareholders is always worth reading, both for what he says and for the clarity and style with which he says it. A couple of sections deserve particular note:

Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.

There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.

He also mentions that BH has a big stockpile of cash ($43 Billion), and that they resisted the temptation to spend it (negative-NPV projects, anyone?):

I didn’t do that job very well last year. My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have. But I struck out. Additionally, I found very few attractive securities to buy. Berkshire therefore ended the year with $43 billion of cash equivalents, not a happy position. Charlie and I will work to translate some of this hoard into more interesting assets during 2005, though we can’t promise success.

This provides a good setting for discussing the agency problems related to free cash flow, managers' incentives to build empires, and so on (like I've said before, I'm an agency/governance kind of guy - unlike Haley Joel Osment, I see agency problems everywhere).

Click here for the whole letter.

On day 1 in my advanced corporate course, we go over a case based on a takeover executed done by Berkshire Hathaway. As a part of it, we go through Buffett's investment philosophy and compare/contrast it to commonly held finance theory. In his various writings, Buffett repeatedly mentions "intrinsic value".

It's also pretty instructive for students to read Berkshire's "Owners' Manual (starting on page 73 of the 2004 annaul report).

Academic Dishonesty, or "Would You Sleep With Me For $1 Million?"

The always enjoyable Tyler Cowan over at Marginal Revolution is blogging on academic plagiarism:

...nearly 24% of responding [journal] editors encounter one case of plagiarism in a typical year. In addition, the survey reveals that less than 19% of responding journals have a formal policy regarding plagiarism. Moreover, there is a great deal of variance in what is considered plagiarism and what an appropriate response to plagiarism should be. A majority of editors believe that the economics profession would benefit from a professional code of ethics.

Here is the paper. I believe I have been plagiarized twice during my career, each time by a well-known economist. Not word-for-word copying, but rather using a borrowed idea --and the major idea of the paper -- rather directly without attribution.

Click here for the whole article.

I personally know of several cases of plagiarism. In one case, an individual took almost the entire structure of another person's article and used it in his own. It's likely that one of the authors that was plagiarized will be the reviewer on the thief's piece. So, there will be some payback.

This is a clear case, but a second one is not so clear. In this case, the data was provided by one author as part of a project that never resulted in anything publishable. The coauthor subsequently took the data without the first author's permission and examined the same issue (using most of the ideas in the first piece but with a different methodology) from a different perspective, with new coauthors, and without getting the first coauthor's permission.

Finally, I am aware of a finance/econ department at a small school where three of the faculty were fired for falsifying data, submitting the same paper simultaneously to several journals (sometimes with extremely minor changes, sometimes without), and in general for being idiots.

There are people who "get it" and people who don't in every sphere. I make a big deal about cheating in my classes at the beginning of each semester. Although I can't mention this example in class because of political correctness, I'm reminded of an old joke where the millionaire asks a young lady if she'd sleep with him for a million dollars. She say, "sure". He then asks "How about for $50?". The young lady responds, angrily "what do you take me for?". The millionaire then says, "We've already established that. Now, we're just haggling over price".

Oh wait, they made a movie out of that.

I do have a price for my integrity (it has to do with my family, my marriage, etc...). However, I try to keep it high enough to discourage the window shoppers, and it's definitely higher than a publication.

Earnings Management By Banks

Business Week Online has this on earnings management by banks (compliments of The FInancial Accounting Blog):

Last year the banks had an easy way to juice their profits. All they had to do was allocate a little less money to loan-loss reserves -- the money they set aside to cover bad debt. As the economy has improved and defaults have slowed, many decided they didn't need as much in reserve as they did in 2003, and presto, their earnings per share would rise a few cents.

But investors who assume the profits are humming and decide to buy bank stocks could be in for a shock. In 2005 many banks won't have this profit source. Some have already pared loan-loss reserves as much as they reasonably can, analysts say. "A lot of banks may do this from time to time to meet estimates," says Brian Shullaw, senior research analyst at SNL Financial in Charlottesville, Va.

Academics have done dozens of studies on earnings management by non-financial firms over the years. There's been relatively little done, however on earnings management by banks (a few have been done on insurance companies, which also have to set aside loss reserves). This is surprising, since researchers often use the different regulatory environments faced by financial institutions as an interesting spin for examining issues faced on non-financial firms. However, since I don't do research in the area of financial institutions, there could be good reasons why the issue hasn't been done that I'm simply not aware of.

How Independent are Independent Directors?

As a corporate governance researcher, I tend to see principal-agent relationships everywhere. One that has received a lot of recent attention is the one between directors and shareholders. One of the good things to come out of the recent corporate scandals has been a greater push for board independence. The Wall Street Journal has a good piece in today's paper on how the definitions of what makes an "independent" director may not do a great job of defining independence. Here's a snippet:

The New York Stock Exchange and the Nasdaq Stock Market imposed the rules in the past 18 months to boost the number of directors who have no interest in overseeing the companies they serve beyond looking out for shareholders. But a review of 150 corporate filings by The Wall Street Journal highlights how exceptions and qualifiers in the rules have, in the view of some critics, limited their effectiveness.

Coca-Cola Co. counts billionaire Warren Buffett as an independent board member, even though he heads a company that does tens of millions of dollars of business with the soft-drink giant. Citigroup Inc. deems two directors independent, even though they have children employed by the financial giant. At BB&T Corp., in Winston-Salem, N.C., an attorney whose law firm works for the financial-services holding company heads the board committee that sets executive pay -- one of about 20 instances of "independent" directors employed by the public companies' outside law firms.

The rules, which cover companies listed on the NYSE and Nasdaq, were in part a response to fraud scandals at Enron Corp. and other companies that highlighted the risks of directors with financial relationships to their companies. Critics see such ties as potential conflicts, because directors might be tempted to allow their own financial interests to override shareholders'.

For the whole article, click here (subscription required).

A very timely and creative related academic piece "Back Door Links Between Directors and Executive Compensation", by Larcker, Richardson, Seary, and Tuna just showed up on the SSRN. In it, they define a measure of "back door influence" that extends the definition of director interlocks (where director A sits on the board of director B's company and director B sits on the board of director A's company) in a very interesting way. Their measure is similar to the "degrees of separation" game where you try to see how many connections you must make to link any actor to Kevin Bacon (click here for the Oracle of Bacon at the University of Virginia). A direct interlock would indicate one degree of separation. If the directors are not directly interlocked, but instead both sit on a third company's board, they have two degrees of separation. If they sit on two unrelated boards that share a third director, they have three degrees of separation, and so on.

Interestingly they find that

"... CEOs at firms where there is a relatively short back door distance between inside and outside directors or between the CEO and the members of the compensation committee earn substantially higher levels of total compensation (after controlling for standard economic determinants and other personal characteristics of the CEO and the structure for board of directors)..."

Click here for the abstract.

UPDATE: Welcome to all the folks from Professorbainbridge.com -- thanks for stopping by.

Excess Pension Cash

The New York Times highlights a fight that's brewing (although at a low temperature) about the right to tap excess cash in pension funds.It begins:

These are lean times for pension funds, and few companies report having more pension money than they need. But some business advocates have nevertheless begun urging Congress to let companies tap any surplus that appears in their pension funds, if and when the good times return.

"We think there needs to be access to the surplus," said Steven Kerstein, managing director of the global retirement practice for Towers Perrin, a large consulting firm.

A return to "reversions" - the removal of surplus money from pension funds - gives chills to pension rights advocates, who can recall the bitter fights waged over surplus pension money in the 1980's. Companies then had the ability to retrieve excess pension money more freely than now, and pension funds came to be used repeatedly to finance corporate raids - and the raids were often followed by layoffs and other cutbacks. As a result, Congress imposed a 50 percent excise tax on pension reversions in 1990. That was steep enough to make surplus pension money lose its allure.

Now consulting firms and business organizations say the excise tax should be lifted, or at least reduced.

Click here for the entire piece.

"What a weirdo. What's wrong with him?"

Arnold Kilng has a thought provoking piece over at Econlog titled "Why Be Normal" that explains why so many innovative ideas are dismissed out of hand. He writes.

Suppose you're interviewing a smart guy, without a college degree, and he offers you a money-back guarantee. You might think "What a great deal" and accept. But then again, you might start thinking "What a weirdo. What's wrong with him?"

And this, I propose, is the stumbling block to lots of worthwhile innovations. A person with an unconventional idea may have a point, but is also unlikely to be "normal." He may not fit it with other people. He may have problems with authority. He may be deviant in more ways than one!

For the full article, click here.