Published quarterly by UCLA Anderson School of Management
Professor J. Fred Weston
Mention the name J. Fred Weston in the halls at UCLA Anderson and you will hear the words "father of finance" soon after. A member of the UCLA faculty since 1949, this renowned scholar led Anderson's finance area or business economics area for 28 years, from the late 1950s to the mid 1980s. Complete article>
|Finance Faculty Take Two Prizes in One Competition
Francis Longstaff (left) Wins Barclays Global Investors Michael Brennan Award for Arbitrage Study. Mark Garmaise Named Runner-Up for Best Paper. Complete article>
Professor Kevin McCardle Honored for Community Service
The Los Angeles Westside neighborhood surrounding the UCLA campus is among the most affluent in the world. Nonetheless, some of its youngest residents have not learned to crawl, because their homes have no floor space on which to practice. Complete article>
Anderson & Microfinance: Like a Peace Corps with Laptops
And when Anderson's Jan Nicholas ('06), Ravi Sreerama ('06) and Sonya Krawczyk ('06) opened the door, they found themselves in Nairobi, Kenya. Their task: Analyze the savings habits of Kenyans and use the data to facilitate more transactions on the microfinance level. Complete article>
Working Together to fight an Epidemic in Africa
Mention the name J. Fred Weston in the halls at UCLA Anderson and you will hear the words "father of finance" soon after. A member of the UCLA faculty since 1949, this renowned scholar led Anderson's finance area or business economics area for 28 years, from the late 1950s to the mid 1980s.
An expert in the areas of corporate finance, mergers, acquisitions and restructuring, he is perhaps best known in management education circles for his now-classic book, Managerial Finance (Dryden Press, 1962). He has authored some 31 books, 147 journal articles, and chaired some 32 doctoral dissertations. One of his students went on to win the Nobel Prize.
Weston's list of credits and activities is far-reaching and too extensive to print in full. Highlights include the following: He has served as president of the American Finance Association, the Western Economic Association and the Financial Management Association. In 1978, he was selected as one of five outstanding teachers on the UCLA campus, and in 1994 he received the Dean's Award for Outstanding Instruction at UCLA Anderson. He served as an associate editor on 14 journals and has consulted businesses and governments on financial and economic policies since 1950. In addition, he has been selected as a Fellow of the American Finance Association, the Financial Management Association, and the National Association of Business Economists. And since 1968, Weston has been director of the UCLA Research Program on Takeovers, Restructuring and Governance.
With the launch of Anderson's Center for Finance & Investments (CFI), Assets sat down with Weston to speak about his long and impressive career, which has revolutionized the field of finance.
As a long-time member of the UCLA Anderson faculty - and one of the world's leading authorities in the finance industry - it must be very gratifying to see the launch of the Center for Finance & Investments.
The creation of the CFI institutionalizes the long-term interactions between our finance area and the multiple audiences that we serve. The CFI is based on the solid foundation of leadership of our finance group in research and teaching. All surveys of publications in finance demonstrate that Anderson is a leader in fundamental research with a long record of informing and improving business practices and government policy. That research has continuously been expanding the frontiers of knowledge in financial economics.
Anderson's finance area is the only one in the country that has four active professors who are past presidents of the American Finance Association, the premier academic finance organization. We have many chaired professorships in the finance area because competition from other universities requires that these professors have chairs to keep them at UCLA.
Your emphasis of late has been on mergers & acquisitions (M&A). Can you speak about some of your recent research and findings?
My work on mergers has resulted in findings that have been of considerable value to business firms and for government policy. My work extends the previous literature on mergers and takeovers in four dimensions:
- The analysis of M&As is broadened to include mergers, acquisitions, takeovers, tender offers, alliances, joint ventures, minority equity investments, licensing, divestitures, spin-offs, split-ups, carve-outs, leveraged buyouts, leveraged recapitalizations, dual-class recapitalizations, reorganizations, restructuring, and recontracting associated with financial distress and other adjustments.
- These multiple forms of M&As are analyzed in a multiple-period framework.
- Within the framework of the firm's strategic planning processes, management selectively adds capabilities and resources in related areas to achieve competitive superiority in the product-markets in which the firm operates.
- Continuous interactions are required between strategic planning processes and the M&A activities.
M&A decisions reflect two main forces. One, they need to adjust to changes in their industry. Two, new forms and sources of competition. Firms engage in internal investments, mergers, divestitures, alliances, licensing, etc in programs over a continuing succession of years to strengthen their managerial capabilities and resources in relation to the product-market areas in which they enter and exit over time. Acquisitions of privately owned targets represent the majority of acquisitions by numbers and by values and have positive returns to buyers.
Within this framework, concepts that represent best practices have been presented in our various M&A programs. It has also led to consulting assignments with many firms, demonstrating that these fundamental approaches do work in practice.
In the early ‘70s, the Research Program in Competition and Business Policy (under your direction) was among the first to publish research on the implications of the globalization of markets. What are your impressions of the modern marketplace?
My Research Program in Competition and Business Policy was formed in 1968 to increase understanding of the nature of competition and how firms, industries, and markets operate. The emphasis in the Research Program in Competition and Business Policy was to relate the underlying economics of an industry to the characteristics of the national and international economies. Between 1968 and 1999 our research produced 196 publications and supported 41 graduate students for the completion of their Ph.D. programs.
The central intellectual contribution of our considerable econometric studies relate to the role of large firms in the world economy. The idea can be conveyed by reference to the recent review by economist Paul Krugman in the New York Times of May 7, 2006. His article was titled "The Pin Factory Mystery." In 1776 Adam Smith published the "Wealth of Nations." Smith recognized the great productivity increases from the division of labor. He gave the example of a pin factory whose workers, by specializing, could produce more than if each one tried to do several jobs. Smith also argued that competition between firms can harness self-interest to the common good in a market economy like "an invisible hand." But the pin factory represents economies of size and scale resulting in large firms "until each industry is dominated by just a few players," and hence "monopoly."
Our empirical research demonstrated that industries with a small number of large firms were still highly competitive. The evidence shows that such industries achieved low prices over time, had a good record of innovation, and were industries in which higher productivity produced favorable wage trends. Competition between the few also led to changes in market shares. For example, in the 1950s General Motors accounted for half of the world automobile production as the largest firm. Today Toyota appears to be overtaking GM as the number one firm and GM faces the risk of bankruptcy. In addition, desperate efforts at achieving competitive strength continue at Ford, Daimler, Nissan, etc. Our econometric studies demonstrated that this kind of competition took place in industries generally. In the 1960s legislation was introduced in the U.S. Congress to break up "dominant firms" like GM, International Harvester, U.S. Steel. I testified against this legislation predicting that market forces and particularly the rising foreign competitors would pose great challenges to our leading firms.
Your now-classic book "Managerial Finance" has had far-reaching impact on the industry. What are your thoughts on modern research in finance?
The developments in financial research reflect strong competitive forces in the market. My "Managerial Finance," first published in 1962, emphasized the impact of economic forces on business decisions. The use of debt by firms benefits from "trading on the equity" and tax advantages. But it also increases the risks of inabilities to finance growth opportunities and other financial constraints. The subsequent rise of financial options such as calls and puts led to a wide range of financial innovations. A truly infinite number of securities can be created by combining various forms of debt, equity and options. Research opportunities in finance have therefore been magnified.
Francis Longstaff Wins Barclays Global Investors Michael Brennan Award for Arbitrage Study
The dream opportunity for any investor would be the chance to earn huge profit that is absolutely guaranteed. Until recently, the entire financial community assumed all that was necessary to achieve this goal was to identify and take advantage of an arbitrage, a mispricing in the marketplace. Frances A. Longstaff, professor and area chairman of the UCLA Anderson finance department, shook this established foundation with his recent research and received the 2005 Barclays Global Investors Michael Brennan Award for his efforts.
Holder of the Allstate Chair in Insurance and Finance, Longstaff explains that over the last decade or so there have been many new types of investments developed, primarily hedge funds. These are vehicles designed specifically to make the most of those seemingly too-good-to-be-true openings to buy cheap and then sell rich further down the line. However, in the late 1990s, there were a number of spectacular failures in the industry.
"Disastrous losses were sustained almost over night at funds run by high-profile managers with very impressive credentials, including Nobel Prize winners," Longstaff says. "The assumption was that it must have been a fraud or a scam, because they couldn't have been using true arbitrage, or there would have been no way to lose."
With a great deal at stake, about $1.18 trillion in hedge funds at the moment, Longstaff decided to study the situation. With co-author, former UCLA Anderson finance professor Jun Liu, Longstaff created a hypothetical arbitrage situation to simulate performance and got some surprising results. The findings demonstrated for the first time that instead of the promised incredible growth from these incorrectly valued offerings, losses could be more that 75 percent of the value of the portfolio.
"Our mathematical model used ideal circumstances, which could only be worse in the real world," says Longstaff. "This proved that these highly leveraged investments can run into serious trouble if the position cannot be held until the appropriate bailout point. Being forced out of these supposedly ‘sure things' early can be a catastrophe."
Before this investigation, no one understood how risky arbitrage could be. So, Longstaff explains there is no way to tell in the short run what actually happened with the failed funds. The money mangers may have been doing everything correctly, according to the accepted thinking at the time, or as some accused, engaging in rampant speculation.
The ground-breaking nature of these revelations contributed to Longstaff's work catching the attention of the editorial board for The Review of Financial Studies (RFS). "Losing Money on Arbitrage: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities" was selected as the best paper published in RFS during the previous year. The honor is named for the journal's first editor, UCLA Anderson emeritus professor Michael J. Brennan, and Barclays Global Investors, the world's largest institutional money manager. The recipient receives a $20,000 cash prize.
Mark Garmaise Named Runner-Up for Best Paper
Mark J. Garmaise, assistant professor of finance at UCLA Anderson, was named runner-up for the 2005 Barclays Global Investors Michael Brennan Award. This is the second consecutive year that his research in real estate finance has been recognized by the editorial board of The Review of Financial Studies in the journal's annual best paper competition. Garmaise won the award in 2004.
One of the major themes on which Garmaise focuses his work, the financial structure underlying real estate transactions, impacts a basic need we all share. Despite this obvious relevance, Garmaise chose the topic, in part, because it has been historically understudied. He also sees the clarity of its well defined assets as an ideal testing ground for exploring his financial hypotheses. Both of his award-winning papers offer practical implications for the financing of commercial real estate in the United States.
Co-authored by Tobias J. Moskowitz, who earned his doctorate from UCLA Anderson in 1998, "Confronting Information Asymmetries: Evidence from Real Estate Markets," was honored this year. It investigates the effect of discrepancies in what is known about market values between local owners and/or brokers and potential buyers, who might be from different geographical areas. It is one of only a few studies on this issue that is based on observable effects from real-world experience.
"Unlike California, the tax assessment value of all properties in many areas is re-evaluated yearly and made available to the general public," says Garmaise. "The quality of this information varies greatly from one area to another, but as we expected, in locales where the accuracy is high, there tend to be more transactions between brokers and non-brokers, as well as more out-of-town buyers. However, we were surprised to find that it does not affect the financing of the transactions."
Garmaise won best paper in 2004 with "Informal Financial Networks: Theory and Evidence." This study also was done with Moskowitz; results showed that the informal relationships commercial property brokers have with lenders strongly influence access to financing. That is, clients who hire brokers are much more likely to be successful in getting bank loans.
Encourages colleagues to volunteer
The Los Angeles Westside neighborhood surrounding the UCLA campus is among the most affluent in the world. Nonetheless, some of its youngest residents have not learned to crawl, because their homes have no floor space on which to practice. Children of the working poor, they live in overcrowded apartments, which house several families. And they are the lucky ones, who have not yet been forced out onto the street.
Kevin McCardle, professor of decisions, operations & technology management, helps the region's homeless and needy through his work with the St. Joseph Center (http://www.stjosephctr.org/), and UCLA has honored his efforts with the Rosenfield Distinguished Community Partnership Prize. Service to the community is part of the university's mission, and the award recognizes faculty and staff whose collaborations with local charities make meaningful improvements in the lives of Southern Californians. Its $25,000 award is divided between the UCLA and community partners.
"I can't say enough about how necessary and thoughtful and wonderful the center's work is," says McCardle. "And it speaks for itself. I often conduct tours of the facility, and it never fails to make an impression. Most people get much more involved than they ever anticipated."
Even without a tour, McCardle manages to engage many of his UCLA Anderson colleagues in support of the center. During this past holiday season, members of the school community adopted all of its often-overlooked senior citizen and homeless veteran clients. McCardle also has recruited fellow faculty members to volunteer regularly. Steven Lippman is on the audit committee with McCardle, and Bill Broesamle is a case manager for the elderly.
McCardle sees a correlation between academia and the commitments required to complete programs at St. Joseph's. "The center aims to find long-term sustainable solutions," he says. "They work hard to keep the poor in the housing they have, because, like higher education, it can take five-to-seven years to move the homeless off the street. They go through temporary and then long-term shelters to Section 8 assistance and finally back into regular housing. They celebrate with a graduation ceremony, much like college students who can take five-to-seven years to complete advanced degrees."
The citation for the prize also credits McCardle's advocacy of volunteerism within his field. As other professions routinely do, he believes business school faculty should assist non-profits. Their expertise can help to make the most of limited resources, he says. In an editorial for the journal of his profession's largest society, McCardle encouraged his colleagues to adopt "the stance of professionals who take seriously their role in public life." In response, the group's next meeting will include its first-ever pro bono service session.
Like a Peace Corps with Laptops
And when Anderson's Jan Nicholas ('06), Ravi Sreerama ('06) and Sonya Krawczyk ('06) opened the door, they found themselves in Nairobi, Kenya. Their task: Analyze the savings habits of Kenyans and use the data to facilitate more transactions on the microfinance level.
Though not necessarily a new discipline, microfinance has emerged as a hot topic of late. The term usually refers to the way in which small loans to poor people made by local financial institutions in even poorer countries can significantly enhance one's quality of life. The range of services to those who qualify run from savings, to borrowing and lending, to micro-entrepreneurship.
Anderson's involvement in microfinance came about as the result of a "confluence of events," most of which were driven by students themselves, says Professor Bhagwan Chowdhry, director of the school's Center for International Business Education & Research (CIBER). Whether it's an Applied Management Research (AMR) project, an independent study, or a new undergraduate course, microfinance has " taken on a life of its own" at Anderson, he says.
"Many MBA students are interested in social issues," adds Professor Robert Spich, CIBER's faculty director. "And some will find new careers open up. Clearly, there are alternative ways to use an MBA. Microfinance is one potential place. It's like a Peace Corps with laptops."
The Class of ‘06's Nicholas, Sreerama and Krawczyk comprise just one of several AMR teams in recent years to take their laptops on a global mission. Upon landing in East Africa, the group first had to find out what was important to poor, rural Kenyans, and then identify ways that financial institutions could better respond to their needs.
"It was incredibly challenging to work in a developing country, given that we're used to working in highly-developed Southern California," says Nicholas. "We take for granted things that simply don't exist in other parts of the world. In the U.S., for example, the key issues [related to banking] are interest rates, access to ATMs, points and convenient branches. We needed to find out what was important to these people."
The group associated itself with a researcher in Nairobi and set off to interview microfinance clients in Kenya, to poll them on their preferences, to see why they chose the savings products they did and to develop a study to determine which factors were top priority. The team spent a month traveling the East African nation. Some of that time was spent in Nairobi (where there hotel provided armed guards for short trips to nearby restaurants), the rest in more rural areas, such as the Great Rift Valley and the Mt. Kenya region. They came away with a conjoint study with some surprising results.
According to Nicholas, the most important thing Kenyans are looking for is access to a line of credit. Kenyans face the same life emergencies all people face. They have to deal with unforeseen health problems and broken personal items. While Americans may rely on credit cards in emergencies, most Kenyans only have access to savings. Banks willing to offer access to a line of credit was key for Kenyans in choosing a financial institution in which to place their funds. Study participants also noted they were tired of waiting in long lines at banks, and desired electronic access to their money. It makes sense. Kenya is an all-cash economy. Many Kenyans live far from cities where banks are located, and to access saved money, they have to travel first, then wait hours on end to make withdrawals.
Upon returning to campus, the AMR team shared their study with a professor in UCLA's African Studies Department. They also sent a copy to their research partners in Kenya. And while the work has yet to net any major results, the project did illuminate the fact that it doesn't take a whole lot of money to produce life-altering results.
"We met so many people whose lives had been changed by microfinance," says Nicholas. "One man borrowed 20 dollars and bought a camera. He used it to take wedding pictures and made enough money to buy a bike, so he could travel more easily. By the time we met him -- four loans later -- he had a car and a sound system to use at the weddings. And he was letting another guy use his car as a taxi, taking a cut of the profits. He started with 20 dollars five years ago, and now he earns four to five times the national average."
CIBER's Chowdhry says that he and Professor Spich are committed to further academic pursuit in microfinance. To that end, a portion of CIBER's recent $1.4 million Department of Education grant will be used to fund future AMR projects around the world.
UCLA Anderson teams with Johnson & Johnson to Train HIV/AIDS Service Providers
Allied with Johnson & Johnson, Anderson experts traveled to Kenya to present the first Johnson & Johnson/UCLA HIV/AIDS Management Development Institute. The curriculum was customized for East African agencies and organizations coping not only with an unprecedented health care crisis, but the massive relief effort that crisis has spawned. Approximately 30 participants attended the institute with the goal of enhancing the quantity and quality of services they provide in an increasingly complex and decentralized system.
"As organizations scale up their efforts to do more to meet the enormous health and social challenges that the AIDS epidemic has caused, they find that they lack the requisite management and organizational skills and techniques," says Faculty Director Victor Tabbush. "Building their management capacity is Anderson's contribution in this crucial area."
That contribution would not be possible without strategic partnerships. The Johnson & Johnson/UCLA HIV/AIDS Management Development Institute is the latest in a series of sponsored Johnson & Johnson management programs at UCLA Anderson. The institute was offered in cooperation with the African Medical and Research Foundation (AMREF) and the Global Business School Network. Classes were held at AMREF's Nairobi headquarters, and the cost of the program (plus food and lodging) was provided to participants by the sponsors. The intensive, one-week program was designed and taught by Anderson faculty with the assistance of faculty from East African universities.
Tabbush was joined in Africa by UCLA Anderson Senior Associate Dean Al Osborne; Professor Kumar Rajaram; alumnus Jeff Luck (‘86), associate professor of health services at the UCLA School of Public Health; and Gayle Northrop (‘96), owner and principal of Northrop Non-Profit Consulting, a firm specializing in strategy, organizational development and group process facilitation.
Six essential areas of management comprised the institute coursework: organizational planning, operations management, health care systems, program evaluation and monitoring, leadership and human resources, and financial management. Participants were required to produce a Community Health Care Improvement Project. This action implementation plan prepared them to apply the learned curriculum at their home organizations, thereby greatly increasing overall productivity and effectiveness in the field. A key goal also was to help the East African organizations achieve financial sustainability.
UCLA Anderson Dean Judy Olian notes, "As a leading school of management, we are very keen to share our expertise with a range of organizations. We are especially grateful to Johnson & Johnson for allowing us the privilege to become involved with management programs in Africa that are improving the quality of care for those affected by the AIDS epidemic."
To date, the Johnson & Johnson family of companies has generously supported UCLA Anderson with gifts directed to the Head Start/Johnson & Johnson Management Fellows Program, the Johnson & Johnson/UCLA Health Care Institute and the Johnson & Johnson/UCLA Health Care Executive Program. These Johnson & Johnson-sponsored programs are managed through the Harold and Pauline Price Center for Entrepreneurial Studies at UCLA Anderson. For additional information on future programs, contact the Price Center at 310-825-2985.
Anderson Assets welcomes input from alumni and the UCLA Anderson community for letters to the editor, articles, or ideas on themes.