Links of the Month

A Fama-French Trilogy of Working Papers

Few processes are as critical to free market capitalism as the provision of capital to new enterprises; the nature, returns, and risks of these enterprises lie at the core of our economic system. A recent trio of papers from Fama and French speak to these issues:

• Who issues new equity? Almost everybody. In a very recent working paper, Fama and French note that new-share issuance, particularly by established firms, is endemic. (This article, incidentally, compliments a study done by Rob Arnott and myself demonstrating a fairly steady overall 2% annual dilution of existing common-stock shares, a working version of which was published here a few years back.)

• In a paper recently accepted in the Journal of Financial Economics, the authors uncover a startling discontinuity in the performance of initial public offerings (IPOs) over the past few decades: they are becoming more like lottery tickets and less like ongoing operations. Between 1973 and 1990, the ten-year death rate for new issues rose from one in six to almost half. At the same time, the dispersion of future profitability of these issues increased dramatically. In other words, while you’re much more likely to buy a deadster, a few of these issues will do very well indeed.

• Finally, in another recent working paper, Fama and French wonder if, perish the thought, people actually buy stocks for other than financially rational reasons. This is not exactly a revolutionary concept; what is new and interesting is that the authors formalize the hypothesis and set it up for future testing. The relevance of this hypothesis to the IPO process is obvious.

A New Book by Kotlikoff and Burns

I normally don't go in for doom and gloom, but The Coming Generational Storm by economist Larry Kotlikoff and finance writer Scott Burns should be on every citizen’s bookshelf. The health and income needs of the baby boomer generation—the "pig in the python"—are going to soon tear through our society’s social fabric like a razor through silk, and it’s only a matter of time before the younger folks paying the bills throw up their hands and say "enough!"

Kotlikoff and Burns are equal-opportunity offenders, sparing neither Democrats, who never saw a social welfare scheme they didn’t like, nor beast-starving Republicans. Both authors are genuinely funny men; there are points in the book where you won’t know whether to laugh or cry. Buy it, read it, and enjoy it. You'll be informed and forearmed.

Copyright © 2004, William J. Bernstein. All rights reserved.

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