The Web Site of Victor Niederhoffer and Laurel Kenner
Dedicated to the scientific method, free markets, ballyhoo deflation, value creation, and laughter. A forum for us to use our meager abilities to make the world of specinvestments a better place
Write to us at: (address is not clickable)
Corporate Corruption, by Victor Niederhoffer
There is a glaring gap in the never-ending search of investors for ways to make money in the market -- we haven't paid enough attention to corruption. The thought comes to mind that many companies are tarnished by allegations of corruption and corporate scandal, and indeed it often turns out that the charges are true. However, in such cases, the basic business of the company is often sound. And once the corruption has ended, either a return to normalcy and less corruption or a merger might be in the cards. Consider a company like Tyco that before the corruption allegations in February 2002 sold at 60 and then during the height of the revelations slid to 8, and now after the trials and revelations is back to 35.
But of course this is an anecdotal approach and the market's big enough to find companies that prove any such working hypothesis. For every Tyco ready to appreciate 300%, there is an Enron or a Worldcom destined to recede to bankruptcy after a corruption allegation.
I started a systematic study of the predictive properties of corruption and scandal allegations by turning to a prospective study using Google. I found 32,000 entries under corruption, NYSE. But when I limited it to taking out the accompanying words, Grasso, or specialist, I came up with a mere 27,000. It's a start.
I would add that as P. J. O'Rourke said, corruption is not all bad, over and above its profit-making possibilities. He points out that it can improve the s-x life of accountants as they become much more interesting at cocktail parties, and of course they can raise their fees afterwards. Also, it can improve family relations as kids are into gangsta rap and prison apparel. The father can say such things as "we be thugs" every now and then.
Henry Gifford adds:
Perhaps some predictive value can be had by categorizing the corruption into categories. The corruption reports can perhaps be categorized as follows:
"We need new laws to make this illegal" (Enron) Read: Fraud already was illegal, but by implying said activity was legal, the govt. won't put anyone in jail, but won't encourage survival of the company either.
"I can't believe this was going on under my nose" Read: Arrangements have been made for one fall guy to take the rap while business as usual continues.
"Top Guy doing Perp Walk in handcuffs" Read: A shift in management is coming, perhaps things will not continue as before.
This looks only at the reporting, while ignoring any attempt to categorize the actual corrupt activity. Perhaps the news reports are more important to future share prices than the actual type of corruption, perhaps not.
Russell Sears offers:
I have found this site a good source, relatively without survival bias. Journalistic sensationalism leaning towards the mortally wounded. (The top 100 scandals, is retrospectively leaning towards the "blowups")
May I also suggest anecdotally that with reaction to Enron, World com came Sarbanes-Oxley which often made spitting on the sidewalk corruption. Rather than abrupt regime changes, may I suggest this is more cyclical or a pendulum swinging and correlated with credit spreads.
James Sogi on Corporate Corruption
Acknowledging the List writings of GZ and Tom Ryan, GZ recommended the Way of Go. Troy Anderson, author, suggests a method of analysis called "Reverse Forward" in which analysis of a situation does not progress along strictly temporal lines, rather uses a method called 'Tewari' which takes steps out of the usual order. Move backward to make forward progress or use reverse psychology. Solve a maze backward from the conclusion to find the best current move. Tom suggests 'turning the problem on its head". Read Full Entry!
For more of Victor Niederhoffer's writings, click here>>>