耶鲁大学金融市场英文文本Financial-MarketsLecture-11-Transcript.doc

Financial Markets: Lecture 11 Transcript Professor Robert Shiller: I believe that we still have on, for Friday, Stephen Schwarzman. He said he would do it. I always worry about people who have such important businesses because some big deal may become in crisis or something; people like that have trouble sometimes adhering to a schedule. As far as I know were getting him, so I hope that you will all be able to come this Friday, here, at the usual time. If theres any problem with his appearing I will email you. As you know, Stephen Schwarzman is a graduate of Yale College and hes one of the great stories of our century. He created just about the biggest private equity firm from scratch in 1985 and I guess they just went public and they have a huge market cap. Theyre comparable to one of the biggest old line investment banks in New York. He just-he and Peter Peterson-just created it so I think it will be very interesting to hear him. Again, youll have a chance to question him about what hes done. I put on the reading list The New Yorker article thats out right now. Well actually, I guess it came out a couple of weeks ago, but its up on our syllabus. I think I might want to take it down before he comes. Im going to turn-Im going to reflect on this because he may not be pleased with the article. Its a very hard-hitting critical article. He had to be a tough businessman to arrive where he is. The New Yorker article talks about the price of his condo-or co-op-in New York, which set some record, and so they tell things like that. I was just yesterday in London and people like to gossip about things like that. The limo driver was driving me to the airport and was pointing out the scenes in London. He said, you know that building? Some Arab Sheikh just paid one hundred million pounds for that apartment-that penthouse apartment-in that building and the same Sheikh is ordering a Airbus for his-one of these big Airbus airplanes-for his personal plane and hes having it plated with gold leaf. Did you hear this story? Does anyone-is this true? This limo driver told me this yesterday; he said its going to cost him five hundred million pounds or something like that to do this. These are gossip. The real substance is what the man does-or woman does-for the world. So, I gleaned here a list of some of the charities that-Stephen Schwarzman is a major philanthropist. He set up something called The Blackstone Foundation from the Blackstone Group and hes a major donor or collaborator with the Frick Collection, The Whitney Museum, Phoenix House, The Red Cross, The Inner City Scholarship Fund, New York City Outward Bound, and the Asia Society. I think thats the real thing we should talk about, not the size of his penthouse. So, I might try to find a more even-handed account and put that up on the website. Incidentally, theres sort of a resemblance between him and David Swensen in thewell, first of all, theyre both phenomenally successful, but they both are emphasizing alternative investments. Theyre not straight-laced old-fashioned; theyre willing to take experiments. I think he should be very interesting; thats Friday at 9. I want to talk about the stock market today and I thought I would keep it more or less basic because I think-I want to emphasize basic concepts. A lot Im going to talk about is Modigliani-Miller but Im not going to get too deep into it, maybe in your review sections you can get more technical. Im going to just talk about it in the very intuitive, direct terms. What are stocks? I think the idea of a stock must have been invented independently at many times in history. The word shares is the fundamental word. Suppose you are starting a business with somebody-it could be at any time in history-Babylonia or something-this must have happened. A group of people starts a business and they say, lets divide up the proceeds. Thats very direct, isnt it? If were all working together we divide up the proceeds. That means were allocating shares. Now, I dont know how far back it goes but it must be that in ancient times some people would say, all right youre going to be doing more work or youre contributing more to this enterprise, well give you a bigger share of the profits. Thats so basic, it must have happened a million times and thats the basic idea of the stock market. All it is is that weve got it much more high-flown and much more legalized than-the basic idea is that you have to have shares in something-a business-and the idea goes back clearly to ancient Rome. Lets consider a business as sort of a person who is owned, like a slave, who is owned by other people. In law, the word person doesnt mean what you think it means. Theres-in law, a natural person is you and me; people, real flesh and blood individuals are called natural persons. But when we say person, it also-thats more general-it also includes corporation. The word corporation comes from the Latin, corpus, meaning body, so its an embodiment. We create an entity that, in the eyes of the law, is like an individual. It may be owned by other individuals but it has its own rights and responsibilities as if it were a person. In ancient Rome, corporations were called publicani-thats Latin; the publicani were companies like we have today. According to the research of Ulrike Malmendier at Stanford, she thinks that the stock market in ancient Rome was done on the street-on the Roman Forum-and she can tell you where. When you go to Rome, you can walk and see whats left of their stock market. It never flourished really until relatively modern times. The idea, of course, is that we have a legal entity-a corporation-that issues shares that are either given to people or purchased by people and the idea is that shares represent contributions. You give shares to someone who is contributing to the enterprise. You can-when you set up a corporation there are different kinds of relationships that people might have with a corporation. One of them is as a shareholder and the shareholder gets a share-is entitled to a share-of the profits. There are also employees who get wages and thats very different. They have a labor contract that specifies how much they will get. Then you have debtors and other people with other relationships. The fundamental one is the shareholder because the shareholder owns the corporation. As its evolved in modern times, the corporation has a charter or bylaws. When you create a corporation you write up a contract, which specifies the rules of the corporation; its like a constitution for the corporation. Also, the law of the state in which the corporation is chartered also puts restrictions on what can be in the bylaws. Notably, its typically required that its one share, one vote and that theres a-it would be also required that there be an annual meeting-at least once a year, a shareholder meeting-and then the shareholders can vote on relevant issues. One of the most important issues then is to elect a board of directors. The state law probably requires that a corporation have a board of directors, but its also something that can be defined at the time that you create the corporation in the bylaws. Its not something you can do just whatever you want. State law has requirements for the board of directors and-Im just going to talk in very basic terms. The usual structure is one shareholder, one vote. At the annual meeting, the shareholders can come and elect a board and the board then is in charge of the company. The board hires the president or chief executive officer and other top officers of the company and they serve as employees of the board. The theory is that the shareholders are in control because they elect the board and the board hires the president and its democratic. Im going to come back to it; it doesnt always work out as perfectly as you want. Now theres basicallythere are important distinctions between two kinds of corporations. Theres for-profit and non-profit. Ive been describing a for-profit corporation, which is the usual variety. Non-profit corporations will also have a board of directors but they will not have any shareholders. Theres a fundamental difference in the charter and the way the government reacts to them. The non-profit organization or corporation is set up to advance some cause and it is not owned by anyone. The share price, you could say, is identically zero. Actually, you cant say what the share price is because there are zero shares and they have a zero price, so the value of the price per share is zero over zero and you cant define it. Yale University is a non-profit corporation; the price of a share in Yale University is undefined-its zero over zero. It has a board that runs it, but the board is not liable to shareholder vote. Well actually, we have some voting among alumni I guess, but its not a for-profit corporation. Im going to be talking about for-profit. Now, the critical thing to understand about a corporation is that in order to value a share in a corporation you absolutely have to know the number of shares outstanding. If I own one thousand shares in a company, what does that mean? It doesnt mean anything until you know how many shares are outstanding because if I own one thousand shares and then you look it up and find out how many shares are outstanding-there are one thousand-you say, hey I own the whole company. Its mine if I own one thousand shares and there are one thousand outstanding. What if you own one thousand shares and there are ten million outstanding? Well, then that means that you own one ten-thousandth of the company. Did I divide right? Thats a very important lesson to keep in mind. People dont usually know how many shares are outstanding in the company that they invest in. Thats because, in a sense, theyre trusting to analysts. Ultimately, analysts are supposed to keep track of this. When they look at the price of a company, how do we know whether the price at which youre buying is reasonable? They must be looking at some measure of the value of the company and dividing by the number of shares and then that gives them some idea of what the share is worth. But its absolutely essential-so the shares only mean something as a relation to their total number of shares. Companies routinely do what are called splits. They may do a two-for-one split; that means, if you held one thousand shares you get a letter saying, congratulations you now own two thousand shares. Dont be too jubilant because when they do a split they do it to every single shareholder. So, you now have two thousand shares, but now there are twenty million shares outstanding in the company so the ratio is unchanged. You might ask, well why do they do splits? Well, its just to keep the numbers-theres actually not a very good reason to do splits. Theres no reason not to do splits either because its just changing the units of measurement. But typically, in the United States, they do splits to keep the price of a share somewhere in the $20 to $40 range; theres interesting literature on why they do that. Maybe its a tradition, maybe its to keep the value kind of in a familiar range or a small-they dont want them to get too expensive because people cant-small investors cant afford them anymore. Who knows, but the point is its different in different countries. So the total number of shares is almost-the tendency to do splits is a cultural thing; its of no real significance. Warren Buffett doesnt do splits with his Berkshire Hathaway and there are other companies that-I guess Google doesnt do splits, isnt that right? Is that right or are you saying no? Actually, I dont remember, but they havent done one yet. What is the price per share, do you know? This is getting a little high-$550 a share is kind of high because most people will buy-this is part of our tradition. Most people will buy shares in whats called round blocks, thats a hundred shares. So, if its $550, that makes $55,000 for a one round lot. I cant multiply while Im standing up. Most companies do splits because that might close the-you might have been thinking about investing in Google but you could still-you could just say, I want to buy ten shares or five shares and the broker will do it for you, but they might charge a higher commission. Thats the lesson. Theres a term-I should write some of my terms down-a very important term in finance and thats dilution. If the company increases the number of shares through a split that is not dilution because it doesnt really mean anything. When you do a split, youre changing the number of shares for everybody, so it can have no effect on the ratio for anybody; its just purely appearance. Dilution occurs when the company changes the number of shares asymmetrically-not changing it for everybody. The typical example of dilution is: the board of directors has hired a CEO for the company and they want to motivate the CEO. They can pay the CEO a salary or they can give shares to the CEO-thats quite standard because they feel that that makes the CEO a shareholder. Its like another form of compensation and that compensation might have different attractiveness, so they give the person a package-both a salary and some shares. You see, if they give the-if they merely give shares to the CEO without increasing your shares, then you are being diluted because its raising the total and its reducing the ratio. Now, if a company sells shares, it issues new shares-it can do that at any time. When you start a company you might have had-maybe when Peter Peterson and Stephen Schwarzman founded The Blackstone Group they gave each of them five hundred shares-Im just making that up-but obviously theres going to be more shareholders as time comes in. One thing that people can do to get in is to buy shares. If the company issues new shares by selling them to the public, its not obviously dilution. Of course its lowering your share of the company, but offsetting this is that the company is taking in money from the person who bought the shares and so it doesnt dilute you. Well, you could say it dilutes it but it doesnt lower the price of your investment, in general. It could, depending on a lot of factors. Dilution occurs-the term specifically refers to changes in a number of shares that affect, adversely, existing shareholders. Another common term is a stock dividend. Well first of all, I should talk about dividends. The stock market-I was going to talk about stock dividends, but I better talk about dividends first. In for-profit companies, people are investing in the company for profit. How do they get the profit? Well, the company-the board of directors-decides if and when to pay dividends to the shareholders and then the law of the state would say that they must treat them all equally. They made some money and now they want to take it out and spend it. They have to do it equally to all shareholders; thats called paying a dividend. They can do it on rare occasions, or they can do it whenever they feel like it, or they can do it regularly; its often done quarterly. When I set up a company-Case Shiller Weiss, Inc.-typical of young start up companies, we didnt pay a dividend. We gave shares to almost all of our employees as part of their compensation and we hoped that would motivate them and make them feel a part of the company but we never paid them a dividend. I remember one time I was talking to our CEO and he said, you know maybe we should pay at least one dividend because our employees are forgetting that they own these shares. So, we paid one dividend and I dont know how much excitement it generated, but thats the-Student: Does this mean that share price will drop by $2 after a $2 dividend? Immediately after the payout dividend, the share-the price of the share should go down, right?Professor Robert Shiller: Yes, hes asking after a firm pays a dividend that should lower the-you were asking whether it should lower the price of a share. Yes, you are absolutely right. If the company pays out money, the value of the company should have just gone down by the amount they paid out, but the number of shares hasnt changed. That means that the price of each share should decline by the amount they paid out divided by the number of shares. Theres a term for that-they call it going ex-dividend. So the company-it used to be you could look on-you can still see this. Some of these are still listed on The New York Stock Exchange page; on the day that a stock goes ex-dividend, theyll have a little x by its price. The reason they put that there is so that people dont get alarmed. A lot of people watch the price of their share everyday-some people get neurotic about it-and then suddenly it drops by $2 a share and they say, oh my God Im worried. They call up their broker and say, whats wrong? Then the broker has to explain, no didnt you see the x there? It just went ex-dividend, so it doesnt mean anything. The ex-dividend date is not the date that you actually received the dividend, but its called the ex-dividend date, which the company decides on that date anyone who was a stockholder of record gets the dividend and the guy after that, you dont get that dividend. Thats an important-this really does happen, stocks really do drop in price on ex-dividend date. Now incidentally, thats an interesting question that you bring up, because-should I pay any attention to dividend dates as an investor? The answer is generally not because if you buy the stock before it goes ex-dividend, you get-you have to pay a higher price, but you get the dividend. If you wait until the next day, you pay a lower price but you dont get the dividend. Unless there are some tax effects, which migh