N EWS F ROM T H E F I N AN C I A L E CONOM I C S I N S T I T U T E AT C L A R EMONT MCK ENNA CO L L E G E

In This Issue:PG 2: 2014-2015 BMGI/Larson Fellows

PG 3: FES Presentations

PG 4 & 5: Fall 2014 FEI Research Analysts

PG 6: Summer 2014 FEI Research Analysts

PG 7: Summer RAs Continued; SouthernCalifornia Finance Conference

PG 8: Director’s Report Continued;Upcoming Events

TheExchangeTheExchange

THE FEI BEGINSits second decade thisyear. By all measuresthe first decade was agreat success.Starting with justthree graduatesreceiving theFinancial EconomicsSequence

certification in 2005, the annual numbersrapidly grew to near 30 per year. Morerecently the number of Sequence graduateshas declined, but including those obtainingthe BA/MA degree, overall interest in financeremains strong. Through Spring 2014, 174CMC graduates earned the Sequencecertification. Over the same period, theresearch experience for undergraduatesworking as Research Analysts in the FEIComputer Lab has been a key component ofthe Institute activities. Each semester since2005 roughly 15-20 students have worked inthe lab, and as of Spring 2014, 97 CMCgraduates had experience as FEI RAs.

Starting the second decade, interest inthe various aspects of FEI programmingremains keen. Over the summer, eightstudents worked in the FEI Lab as RAs. Thisfall, 44 students attended the annualInformation Session at the start of the schoolyear, and 51 students applied to be RAs.Currently 17 students are working onprojects with faculty, including oneBMGI/Michael Larson Asset ManagementFellow. Four students provide tutoringthrough the lab covering Bloomberg (by asecond BMGI Fellow), Excel, Stata, andPython programming. In just a few weeks,we will depart with 15 CMC students (10juniors and 5 sophomores) for the annualNew York City Networking Trip jointly

sponsored by the FEI and the Robert DaySchool. The CMC Student Investment Fundcontinues its activities, and Professor EricHughson continues to guide them throughhis course (Econ 194A) which is now in itsfourth year. Currently, 40 students across thefour classes have expressed their intent to theRegistrar’s Office to complete the FinancialEconomics Sequence, including 13 seniors,15 juniors, 9 sophomores, and 3 freshmen.

As reported by the previous AssociateDirector, Professor Hughson, in the Fall2013 newsletter, the FEI and RDS boardswere merged and various activities of the twoorganizations were folded together. Uponassuming the duties of FEI Director, Icommitted to the RDS Board to undertake anew strategic plan over the coming year, withthe aim of focusing the Institute activities onareas of greatest impact. We do not expect toprovide much detail on this before next fall,but already several changes are in process.

As part of the new regime, BrianDennis, the Director of Administration andPrograms in the Robert Day School, isworking closely with me on programplanning. We expect this change in

VOLUME 18, FALL 2014CMC PRESIDENTHiram E. Chodosh

RDS BOARD OF ADVISORSPeter Barker ’70 P’01 (Co-Chair)

JP Morgan Chase & Co. (Retired)

James B. McElwee ’74 P’12 (Co-Chair)Independent Venture Capitalist

Gary Birkenbeuel ’80 Ernst & Young

J. Baxter Brinkmann P’16 The Brinkmann Corporation

Jose Campos ’91 Deloitte & Touche LLP

Heidi Nelson Cruz ’94 Goldman Sachs & Co.

Nicholas P. Daifotis ’79 P’17 RBC Capital Markets, LLC (Retired)

Alan M. Delsman ’68 Deutsche Bank AG

Christopher Dodds P’13 P’15 The Carlyle Group

Russell Greenberg ’79 Altus Capital Partners

Brent R. Harris ’81 Pacific Investment Management Company

Christopher D. Harris ’98 Damitz, Brooks, Nightingale, Turner, and Morrisset

Alan C. Heuberger ’96 BMGI

Stella Ho ’97 Moelis & Company

Andrew J. Kaiser P’13 Goldman Sachs Bank USA

Christine Huk Mann ’87 Goldman Sachs & Co.

I. Joseph M. Massoud ’89 Anholt Services (USA) Inc.

Susan Matteson-King ’85 Allianz Global Investors

Therese Mrozek P’15 Weston Presidio

Thomas B. Neff ’76 FibroGen, Inc.

John R. Shrewsberry ’87 Wells Fargo Bank

Robert P. Thomas ’99 The George Kaiser Family Foundation

Julius Wang P’14 P’15Samena Asia Managers

FEI DIRECTORJoshua Rosett

ASSISTANT TO THE DIRECTORTerri L. Van Eaton

Directors’ Reportby Joshua Rosett

The Financial Economics Institute fosters education and research in financialeconomics by offering a unique undergraduate curricular program, theFinancial Economics Sequence, supporting state-of-the-art databases, andencouraging student-faculty interaction on research.

Joshua Rosett

See Director’s Report on page 8

2 THE F INANCIAL ECONOMICS INST ITUTE

2014-2015 BMGI/Michael Larson Asset Management FellowsThe BMGI/Michael Larson Asset Management Fellowship Program offers financial support and research experience for juniorsand seniors at Claremont McKenna College who are interested in careers involving asset management and investmentmanagement. The recipients of this year’s scholarships are:

Philip Crawford ’15 Phil, a native ofNorthbrook, IL, isa senior at CMCpursuing aBachelor’s degreein Economicsalong with hisMaster’s degree inFinance as a partof the Robert Day

School’s four year BA/MA program. He isalso a Robert Day Scholar. On campus, he isthe CEO of the CMC Student InvestmentFund and captain of the Claremont CougarsMen’s Lacrosse Team. This past summer,Phil interned at Morgan Stanley in NewYork, where he will be returning full-time asa Derivative Sales Trader. In his free time,Phil enjoys archery, sports gambling, andspending time at the Scripps Pool.

Brian Delaney ’16 Raised in Darien,CT, Brian is ajunior at CMCwhere he isenrolled in theRobert DaySchool’saccelerated 4-yearBA/MA Programin Economics (BA)

and Finance (MA). In addition to being aBMGI/Michael Larson Asset ManagementFellow and a Robert Day Finance Scholar,he constitutes one-half of Professor AnandaGanguly’s research team as a researchanalyst at the Financial Economics Instituteand is a teaching assistant for Professor EricHelland’s Principles of Economic Analysisclass. Inherited from his time editing hishigh school newspaper, Brian’s fascinationwith journalism coupled with hisentrepreneurial background prompted himto co-found the Claremont College’s firstonline entrepreneurial magazine, TheVanguard, with backing from CMC’sCenter for Innovation andEntrepreneurship. He spent last summerworking as an analyst for Harvest CapitalCredit (NASDAQ: HCAP), an LBOfinancing and specialty lending business

development company associated with TheJMP Group. In his free time, Brian enjoysfishing, skiing, and New York sports.

Andrew Dodds ’15 Andrew is a seniorat CMC majoringin Economics andHistory. Inaddition to being aBMGI/MichaelLarson AssetManagementFellow, Andrew isalso a Robert Day

Scholar in the BA program and has tutoredStatistics and Econometrics for the RobertDay School of Economics and Finance forthe past two years. Born and raised inPiedmont, California, Andrew enjoysplaying basketball, reading non-fiction, anddiligently following his fantasy footballteam. During the past two summers, heworked for the TCW Group in downtownLos Angeles and for Investment TechnologyGroup in downtown New York where heworked in the Equity Research Department.Next year, he will be joining Dodge & Coxas a Research Associate working on theteam covering beverage companies, tobaccocompanies, and cement companies.

Brian Eckhardt ’16 Brian, originallyfrom Scottsdale,AZ, is a junior atCMC majoring inEconomics whilealso pursuing aMaster's degree inFinance. Aroundcampus, he isinvolved with the

Student Investment Fund and the RoseInstitute of State and Local Government.Last summer, he worked as an InvestmentsAnalyst with Hawk Ridge Management, along-short equity hedge fund based in LosAngeles. After freshman year, he interned asa Project Analyst with MeMD, atelemedicine startup company. In his freetime, Brian enjoys playing the trumpet andimproving his golf game.

Edward Leathers ’15 Ed Leathers wasborn in Bend, OR,but raised inMarin County, CAfor most of his life.He is currently asenior majoring inEconomics-Accounting andGovernment. On

campus, he serves as Managing Director ofthe Media & Telecommunications IndustryGroup in the Student Investment Fund, andalso, through the FEI, works as a researchanalyst for Professor Eric Hughson. Afterhis sophomore year, he interned as asummer analyst at a small hedge fund inChicago and interned last summer as asummer analyst for the TechnologyInvestment Banking Group at Wells Fargoin San Francisco. He is looking forward togoing back to Wells Fargo as a full timeanalyst after graduation. Some of hisinterests include reading philosophy,snowboarding, playing the piano, and MLBbaseball.

Cameron Whiting ’15 Cameron is asenior fromSeattle, WA,pursuing aBachelor’s degreein Economics anda Master’s degreein Finance. He isan active memberin the Student

Investment Fund, a tutor at the FinancialEconomics Institute, and a Robert DayScholar in Finance. In the past, he hastutored intermediate macroeconomics forthe Robert Day School and contributed as aresearch assistant at the Lowe Institute ofPolitical Economy. During his summers, hehas interned at Morgan Stanley WealthManagement, taken classes at the LondonSchool of Economics, and worked as a tourguide in Saint Malo, France. Last summer,Cameron worked as an investment analystintern at Cascade Investment in Kirkland,WA. After graduation, he will be moving toSan Francisco to work as a financial analystat ICONIQ Capital. Cameron is an All-American swimmer for the CMS Stags andenjoys playing guitar.

CLAREMONT MCKENNA COLLEGE 3

THE FINANCIAL ECONOMICS SEQUENCE IS PART OF the Robert Day School of Economics and Finance. The curriculum ofthe Sequence is designed for students interested in pursuing careers inthe financial sector and/or graduate education in economics, finance,and related fields.

The Sequence has a rigorous quantitative focus and is designed tocomplement majors in economics, economics-accounting, andmathematics, as well as dual majors having an economics component.In addition, the Sequence is complementary to the courseworkrequired for the undergraduate Robert Day Scholars Program, andprepares students for the Master’s Program in Finance of the RobertDay School. Under the auspices of the Financial Economics Institute(FEI), students complete the Sequence, which is noted on thetranscript, thereby attesting to their solid understanding of thediscipline.

We currently have thirteen FES seniors who will be graduatingduring the 2014-2015 academic year. Four of these seniors gave theirFES oral defense presentations at the end of the fall semester. In orderto receive the Financial Economics Sequence notation on theirtranscript, students must complete a major research project in the areaof financial economics, the project may be the student’s senior thesis,and make an oral presentation

The following is a list of the students who made theirpresentations this semester along with the titles and Abstracts of their theses:

ELAN BERNSTEIN

The Impact of Credit Default Swap Introduction on Firm Systematic Risk

“This paper empirically explores how the introduction of CreditDefault Swap (CDS) trading affects firm systematic risk. By treatingthe introduction as an event study and imploring propensity scorematching and difference-in-differences analysis, this research findsthat firm exposure to market risk increases after the introduction ofCDS instruments, controlling for higher debt levels. These findingschange, however, in times of financial crisis when the impact of CDStrading actually reduces systematic risk. These results show that CDSintroduction enables a firm to more dramatically change its exposureto systematic risk in comparison to its counterpart to reflect marketconditions.”

BRADEN CROCKETT

The Impact of Tenants Default Risk and Transactional Variables on Value: An Empirical Model of Single Tenant Net Leased Retail Assets

“I present an empirical model that is based upon the finding of boththe conceptual and empirical models of previous research. I firstcontrol for independent property, location, macroeconomic andcapital market specific variables on the dependent variables that takeson the form of both the cap rate and sales price. Next I introduce two

new variables that represent the transaction constraint and the defaultrisk of the tenant. I find that the variable market which represents thetime an individual property is on the market is statistically significantand has a negative coefficient of when regressed on sales price and apositive coefficient when regressed on the cap rate. When the marketvariable is further broken into bins, I found that the time on themarket does not negatively impact a property unless it is in fact on themarket for over 2 years. When the variable representing a tenant’sdefault risk is regressed on the cap rate I found the tenants probabilityof default to be statistically significant with a negative coefficient. Thisresult is counter intuitive and most likely represents the data set beingcontrolled for investment grade credit rated tenants.”

BORIS CHUN YIN LO

The Effect of Institutional Shareholding on the InformationalEfficiency of Stock Prices: Evidence from the Hang Seng Index

“This paper uses survey data by the Hong Kong Stock Exchange(HKEx) from 1991-2013 to test the role that institutional ownershiphas on the relative informational efficiency of stock prices in the HangSeng Index, using the R2 of stock prices as a measurement ofefficiency. This paper finds that on the aggregate level, the presence ofinstitutional ownership is positively associated with R2, reflecting anegative effect on the level of information incorporated into stockprices. However, in isolating foreign institutions, the relationship withR2 reverses, and I find a positive correlation with the informationalefficiency of stock prices. Moreover, this paper finds that a periodcharacterized by high growth in institutional shareholding does notnecessarily correspond to a greater level of improvement in theinformational environment of stock markets. The results however,lack significance, perhaps due to the shortcomings of the survey datawhich is limited to 21 annual observations when incorporating a t-1year lag. With more observations we would expect a substantialincrease in the significance of the coefficient on our explanatoryvariables.”

T. CONNOR SCHLEGEL

Strategic Risk-Taking in Tournaments through the Lens of PGAMatch-Play

“This paper builds on Ozbeklik and Smith’s (2014) empirical studyexamining the risk-taking behavior by competitors competing inmatch-play, head-to-head, and single-elimination tournaments. Iexamine just shy of 7,000 holes from the World Accenture Match-playTournament. Match-play tournament format provides a clean mediumto examine how risk-taking strategies change by competitors over thecourse of a competition (holes remaining), based on relative ability ofcompetitors, relative score (lag or lead), and on projects (holes) thatare risk inducing. My findings have direct implications for manycorporate settings from corporate promotional tournaments toresearch and development expenditures to bidding wars between rival firms.” ▲

Fall 2014 Financial Economics Sequence Oral Defense Presentations

4 THE F INANCIAL ECONOMICS INST ITUTE

Financial Economics InstituteFall 2014 Student Research Analysts

During the Fall 2014 semester, twenty-one student Research Analysts were hired to work at the FEI. The following is a listof students, their faculty advisors, and a brief description of the research projects in which they were involved or the typeof tutoring they provided:

u GABRIEL AYALA ’16 is the Excel tutor at the FEI.

u AVIV CASPI ’16 is working with Professor Eric Helland on aproject researching expert witness admissibility standards inpharmaceutical lawsuits and examining the most effective legalarguments for denying or admitting an expert witness. He is thePython programmer and tutor at the FEI.

u JESSE CRABTREE ’16 is working with CGU Professor Paul Zak todetermine the socioeconomic effects of alcohol consumption. He isalso working on a second project with Zak, helping to build aneconomic model projecting movie revenues.

u BRIAN DELANEY ’16 is working on a project with ProfessorAnanda Ganguly investigating how individuals discern betweenrelevant and reliable information when buying and selling stocks.

uMEGHAN FUELLING ’16 is working on a project with ProfessorEric Helland examining the nature of arguments in Daubertmotions to exclude expert testimony.

u JI YOUNG HUH ’15 is working on a project with Professor EricHelland examining the nature of arguments in Daubert motions toexclude expert testimony.

uMICHAEL IRVINE ’16 is working with Professor Eric Helland on aproject researching expert witness admissibility standards inpharmaceutical lawsuits and examining the most effective legalarguments for denying or admitting an expert witness.

u CHRISTOPHER JACKSON ’17 is working with CGU Professor PaulZak developing an experiment testing under what circumstances asubject is placed in order to elect to utilize an algorithm to solve aproblem versus one’s own decision-making.

u TOOBA KARIM ’16 is working with Professor Matthew Magilkeexamining whether investors react to the confirmatory nature ofaccounting information. The vast majority of existing accountingresearch focuses on the predictive value of accounting informationand how investors react to this component. They intend to focus,instead, on the confirmatory value (or feedback value) of accountinginformation and examine how much investors value this componentof relevance. Additionally, they intend to examine if there are certainindustries and firm characteristics that lend themselves to investorsvaluing the confirmatory component relatively more than others.

uMIN JUN “MJ” KIM ’15 is working with Professor RichardBurdekin performing an event study about the Chinese SuperLeague and the funding of increased transfer spending by Chineseenterprises and revising a paper about NHL salary determinationbased on not only skills, but also on fighting ability.

u BENJAMIN LAWSON ’15 is working with Professors MitchWarachka and Marc Weidenmier to analyze how stock pricedissemination, through tickers across the U.S., affects marketefficiency.

u ED LEATHERS ’15 is working with Professor Eric Hughson on theCongressional Insider Trading project, which examines the stockreturns of Congressmen and whether these findings indicate insidertrading.

u SEOHYUN “RACHEL” LEE ’17 is working on a project withProfessor Eric Helland examining the nature of arguments inDaubert motions to exclude expert testimony.

uWOO HYUN “ANDREW” NAM ’15 is the Stata tutor at the FEI.

u XIAOYANG QIAN ’17 is working on a project with Professor EricHelland examining the nature of arguments in Daubert motions toexclude expert testimony.

u ISAAC THOMAS ’15 is working on a project with Professor AnandaGanguly investigating how individuals discern between relevant andreliable information when buying and selling stocks.

u CAMERON WHITING ’15 is the Bloomberg tutor at the FEI.

u ALBERT XU ’17 is working with Pomona College Professor GarySmith on two projects. The first is investigating the theoretical andpractical importance of taking into account the full term structureas opposed to a single discount rate while valuating stocks. Thesecond project looks into whether or not investors overreact tonews by an analyzing the Dow Jones Industrial Average since 1928.

u SOYEON “NIKKI” YEA ’15 is working with Professor Sven Arndton a project entitled, “The Relationship between Exchange-RateExpectations and Balance-of-Payments Adjustment in Economieswith Internationally Integrated Finance Markets.”

u ANDREW YEH ’17 is working with Professor Eric Hughson ondeconstructing the factors of momentum returns with a leaningtowards non-idiosyncratic factors. They are hoping to use thismodel in order to understand the phenomenon “momentumcrashes.”

u ZHONGYI “JOEY” YU ’17 is working with Professor Jeffrey Floryevaluating the effects of micro-finance on food security issues inMalawi and is also working on a project on deriving appropriatesubsidy levels and solar panel financing schemes in rural Argentinafor an ongoing World Bank electrification project.

CLAREMONT MCKENNA COLLEGE 5

MEGHAN FUELLING ’16 JI YOUNG HUH ’15 MICHAEL IRVINE ’16 CHRISTOPHER JACKSON ’17

TOOBA KARIM ’16 MIN JUN “MJ” KIM ’15 BENJAMIN LAWSON ’15 ED LEATHERS ’15

GABRIEL AYALA ’16 AVIV CASPI ’16 JESSE CRABTREE ’16 BRIAN DELANEY ’16

CAMERON WHITING ’15 ALBERT XU ’17 SOYEON “NIKKI” YEA ’15

ANDREW YEH ’17

SEOHYUN “RACHEL” LEE ’17

WOO HYUN “ANDREW”NAM ’15

XIAOYANG QIAN ’17 ISAAC THOMAS ’15

ZHONGYI “JOEY” YU ’17

6 THE F INANCIAL ECONOMICS INST ITUTE

ANDREW ATWONG ’16 Faculty Advisor: Professor Ananda GangulyProject: Quartile Regressions and Predictions of Financial StatementErrors• Compiled firm-level financial data from the Compustat database via

WRDS• Verified and edited Compustat data on target companies’ full

financial information• Consolidated and coded company misstatement data from three

independent databases into Excel• Processed and summarized academic papers from related research

ALEX HWUNG ’16Faculty Advisor: CGU Professor Paul ZakProject: The Influence of Trust (Ofactor) on Financial Performance• Compiled a list of public firms, including those on Fortune’s “100

Best Companies to Work For” • Gathered data on key performance indicators and standardized the

results to represent firm performance relative to industry• Designed an index of environmental measures to evaluate the level

of ‘Trust’ within a firm • Conducted analyses of various regressions to determine the

relationship between a firm's performance and its level of ‘Trust’ asmeasured by the Ofactor index

MIN JUN “MJ” KIM ’15 Faculty Advisor: Professor Richard BurdekinProject 1: Chinese Super League and the funding of increased transferspending by Chinese enterprises• Searched, summarized, and translated articles and policies about the

CSL reforms and major events • Gathered data about the transfer market and club finances to

identify historical trends of the CSL • Used STATA to perform an event study based on the stock prices of

the publicly traded Chinese companies that own CSL clubsProject 2: Assessing the Impact of the Chinese Stimulus Package at

Home and Abroad: A Damp Squib? • Helped to revise the paper by identifying and analyzing additional

industry sectors • Searched, summarized, and translated articles and policies about the

post November 2008 stimulus• Ran necessary regressions to analyze the significance of the post

November 2008’s stimulus on the additionally identified industrysectors

BENJAMIN LAWSON ’15 Faculty Advisor: Professor Mitch WarachkaProject: Information Dissemination and Stock Market Efficiency• Collected and organized data on stock price information

dissemination from the NYSE archives and found correlations tocorrect for missing data

• Gathered HQ location, asset value, market value, cash flow, etc. ofNYSE traded firms 1926-1988

• Wrote multiple VBA programs to categorize hundreds of thousandsof data points for firms spread across different industries and thirtyyears

• Created transition matrices for firms crossing terciles in assets, sales,and PPE to help conclude Tobin’s Q project using Excel, Stata, andMatlab

YICONG “NICOLE” LIN ’16Faculty Advisor: Professor Joshua Rosett (joint work with ProfessorRichard Smith, UC Riverside)Project: Research Productivity in Finance and Accounting Scholarship• Collected and cleaned data on authors for two calendar years (2003

and 2013) from eighteen selected journals in finance and accountingfrom different sources and designed STATA to sort and merge thesedata sources

• Obtained a source useful as the population of researchers in financeto provide a baseline life-cycle distribution, assisting further researchon research productivity pattern over life-cycles of finance andaccounting scholars

Financial Economics Institute2014 Summer Research Analyst Internship Projects

Back row, left to right:Andrew Yeh ’17,Andrew Atwong ’16,Benjamin Lawson ’15,Min Jun “MJ” Kim ’15,and Albert Xu ’17.Front row, left to right:Bai Xue ’16, AlexHwung ’16, and Yicong“Nicole” Lin ’16.

CLAREMONT MCKENNA COLLEGE 7

• Provided basic statistical summaries (STATA & Excel) of the rawdata as feedback, helping guide the development of the databases

• Applied advanced statistical techniques to analyze how finance andaccounting research productivity is correlated with some observableindicators (author productivity and affiliation rankings, year of PhD,school granting PhD etc.)

ALBERT XU ’17Faculty Advisor: Professor Eric HellandProject 1: Unintended Consequences of Products Liability: EvidenceFrom the Pharmaceutical Market• Gathered all available data from FDA Adverse Event Reporting

System (AERS) database and helped write code to append data sets• Reformatted and aggregated data using STATAProject 2: The Role of Expert Evidence in Pharmaceutical Litigation• Analyzed the role and consistency of the Daubert Standard on the

admissibility of expert witnesses in pharmaceutical litigations• Designed coding summary and procedure to code motions to

exclude expert testimonies and their corresponding responses andopinions

• Compiled and helped code 350 cases from Public Access to CourtElectronic Records (PACER) database in order to createcomprehensive summary and economic regression model

BAI XUE ’16 Faculty Advisor: Professor Sven ArndtProject: The Relationship between Exchange-Rate Expectations and

Balance-of-Payments Adjustment in Economies with InternationallyIntegrated Financial Markets and high capital mobility• Collected and organized balance of payment statistics including

capital flow variables, trade balance variables and other financialaccounts of Canada, Euro Zone, Germany, Japan, Switzerland, theUS and the UK since 1995 from IMF

• Constructed correlation matrix and ran regressions using Excel todetermine the relationship between capital flow variables, tradebalance variables and financial account variables

• Conducted unit-root tests using Stata to determine whether capitalaccounts are non-stationary

• Performed time series analysis and created graphs to analyze thetrends of capital inflows and outflows

ANDREW YEH ’17

Faculty Advisor: Professor Eric HughsonProject: Momentum Crashes• Compiled and organized 96 years of stock return related data• Back tested momentum-driven stock strategies under varying time

periods and pre-conditions, observing typical momentum profits andoccasional momentum crashes

• Derived long-run volatility from 1896-2012 price data andvolatility's connection to momentum profits and crashes

• Analyzed momentum effect’s prominence in industry investmentswith specific focus on the financial industry

ON FRIDAY, OCTOBER 24, ANDSaturday, October 25, the FinancialEconomics Institute sponsored the secondannual Southern California FinanceConference at Claremont McKennaCollege. Organized by CMC ProfessorsMitch Warachka and Eric Hughson, thepurpose of the conference was to furtherinteractions between members of theClaremont Colleges community withinterests in finance and respected financeacademics from universities throughoutSouthern California. There were abouttwenty participants who attended the two-day conference. In the two three-hoursessions, five papers on a variety of topicsin academic finance were presented anddiscussed by participants from CMC,Loyola Marymount, UC Irvine, UCLA,UC Riverside, UC San Diego and USC.

One theme of the conference wasmarket efficiency. For example, in Who arethe Smartest Investors in the Room? Evidencefrom U.S. Hedge Fund Solicitation,

Professor Chris Schwarz of UC Irvineargued that not all investors were equalwhen it came to identifying profitableinvestment opportunities among hedgefinds. Perhaps more surprising was afinding in Being Surprised by theUnsurprising: Earnings Seasonality and StockReturns, where Professor Tom Chang ofUSC and his coauthors demonstrated thatthe market chronically underreacts to thehigh earnings displayed by seasonal firmssuch as large retailers in the fourthquarter of the year. Other conferencehighlights were Professor Richard Smith,UC Riverside, and CMC Professor JanetSmith’s discussion of which universityendowments are invested in a sociallyresponsible fashion (private collegeendowments); UCSD Professor ChrisParsons’ paper on why accounting fraud ismainly a local phenomenon, influencedlargely by social networking behaviorwithin a particular geographic region; andLMU Professor Micah Officer’s analysis

of when it was optimal for acquiring firmsto retain target firm CEOs after a merger.

In addition to the sessions, theconference featured a lunchtime talk atthe Marian Miner Cook Athenaeum(which also doubled as an FEI SeminarSeries talk) featuring Professor Ivo Welchfrom UCLA. In his talk, “CorporateCapital Budgeting,” Professor Welchargued that the study of finance in theclassroom focuses too much on what wedon’t know. He started the talk byexplaining that the present value of aproject was the discounted risk-adjustedvalue of its expected future cash flows.Instead of focusing on discounting andthe appropriate risk adjustment, which heargued were poorly understood, he arguedthat time in the classroom was betterspent understanding how firms generaterevenue and how to generate better cashflow forecasts. ▲

2014 Southern California Finance ConferenceBy Eric Hughson, the Don and Lorraine Freeberg Professor of Economics and Finance

VISIT OUR WEBSITE AT: http://www.claremontmckenna.edu/fei/

The Exchange newsletter is published by the Financial Economics Institute at Claremont McKenna College. If you would like copies of previous issues, e-mailFEI@cmc.edu or write to the Financial Economics Institute, Claremont McKenna College, 500 E. Ninth Street, Claremont, CA 91711 with your request.

8 THE FINANCIAL ECONOMICS INSTITUTE AT CLAREMONT MCKENNA COLLEGE

Bauer Center, Room 321500 East Ninth Street

Claremont, CA 91711-6400Phone: (909) 607-0042 Fax: (909) 607-0088

E-mail: FEI@cmc.eduWebsite: http://www.claremontmckenna.edu/fei/

administration will enhance cooperationbetween the FEI and RDS. Brian will alsoplay a key role in developing the newstrategic plan. We are already workingtogether on an assessment of the dataofferings made available through the FEI andthe creation of a new Institute website. Weadded two new data offerings this fall, one oninternational data and one on deal activity.Look for the new website sometime nextspring. This semester, both Brian andMichelle Chamberlin from the RDS staffworked on the NYC Networking Trip.

One change which took place at thebeginning of the fall semester was theaddition of a student Python tutor to the FEILab. In the Spring 2014 newsletter, ProfessorHughson noted the fine thesis on municipalbond pricing written by Carter Wilkinson,for which Carter won the Best FinanceThesis award. An interesting aspect of histhesis was Carter’s use of data collected fromthe web using a Python-based web crawler.We believe Carter’s work shows the way toinnovation in our approach to studentresearch. In order to enhance the tutoringofferings of the FEI in this direction, this fallAviv Caspi ’16 was hired as a Pythonprogrammer/tutor and he has helped otherstudents with similar efforts, and we areexploring additional avenues to bringcomputer science, big data, and new methodsof analysis to the Institute.

Special thanks go to MichelleChamberlain, Director of External Relationsat the RDS, who has organized a great NewYork City Networking Trip for January 2015.Students will arrive on Sunday, January 11,and participate in numerous scheduled firmvisits, dinners, and alumni events throughThursday, January 15, with Friday reservedfor interviews and sight-seeing opportunities.Along with the firm visits, we will visit thefloor of the New York Stock Exchange and

the 9/11 Memorial Museum. Last month, with organizational aid

from Lizzie Fitzpatrick of BMGI, the FEIhosted an event bringing together theStudent Investment Funds from CMC,Harvey Mudd College, and Scripps College.A four-person team from each SIF pitched acompany to a panel composed of CMCgraduates Michael Larson ’80, AlanHeuberger ’96, John O’Brien ’02 andWilliam Knowles ’13, all of BMGI; and ErikAnderson ’80 of WestRiver Capital, Inc. Theopportunity to present before and receivecomments from this panel was highlyvaluable for the student teams from all threecolleges, as well as for the many otherstudents in attendance.

In another important change related toBMGI, this year both the BMGI/MichaelLarson Asset Management Fellowshipstipends and research support amounts weresubstantially increased, benefitting severalstudents each year. We are grateful for boththe participation in the pitch event notedabove and BMGI’s generosity in supportingour students.

This fall, the FEI also sponsored thesecond annual Southern California FinanceConference organized by Professors MitchWarachka and Eric Hughson. Theconference featured keynote speakerProfessor Ivo Welch of UCLA as a luncheonspeaker at the Athenaeum, where he spokeabout corporate capital budgeting. A themeof the conference was market efficiency.More detail on the conference is provided inProfessor Hughson’s summary of theconference in this newsletter.

Before closing, I want to take a momentto thank Terri Van Eaton for her great workat the FEI. Her interaction with the studentsis critical for making the FEI Lab a success,and over the past several months, hercomprehensive knowledge of the Instituteand good cheer imparting it to me has beenindispensable as I have started work at my

new post with the FEI.Finally, I would like to thank the RDS

Board and numerous others for theircontributions to the FEI. The FEI providesmany valuable experiences for our students,including networking, tutoring, opportunitiesto work with faculty, and access to data,hardware, and a space to work, but none ofthese would be possible without the generoussupport of many individuals. ▲

Director’s Report from page 1

Upcoming Events

New York City Networking TripJANUARY 11–16, 2015Ten CMC juniors and five CMCsophomores will visit prestigious firmsin NYC to gain exposure to various jobopportunities in the financial marketsand to establish relationships withCMC alumni working at thesecompanies. Visits this year will includeITG, Goldman Sachs, Moelis & Co.,Deutsche Bank, Bloomberg, Lazard,Greenhill & Co., Fred Alger, JPMorgan, Millstein, Morgan Stanley,PNB Paribas, Atalaya CapitalManagement LP, Credit Suisse, and atour of the New York Stock Exchange.

Claremont Finance ConferenceFEBRUARY 13, 2015The Executive Committees of theStudent Investment Funds of CMC,Pomona College, and Scripps College,are coordinating and hosting theannual finance conference. TheKeynote Speaker will be ShawWagener, Chairman of CapitalInternational. This year, theconference and panels will focus oninvesting strategies when U.S. equitiesmarkets are at record highs. Moredetailed information will bedistributed in January.