Valuing Employee Stock Options

Best book, so far written on the valuation of employee stock options. The text is dedicated to bridging the gap between the academic literature and the practical implemation issues that arise in ESO valuations. There is also demo software that can be used to value ESO.

Valuing Employee Stock Options, Johnathan Mun, Wiley Finance, 2004.

25% of racial wage gap is due to prejudice: University of Chicago Professors find

Kerwin Kofi Charles and Jonathan Guryan, "Prejudice and Wages: An Empirical Assessment of Becker's The Economics of Discrimination," published in the Journal of Political Economy, Vol. 116, No. 5, October, 2008, pp. 773-809.

Abstract: We test the predictions from Becker's (1957) seminal work on employer prejudice and find that relative black wages (vary negatively with the prejudice of the marginal "white" in a state, (b) vary negatively with the prejudice in the lower tail of the prejudice distribution but are unaffected by the prejudice of the most prejudiced persons in a state, and (c) very negatively with the fraction of a state that is black. Our estimates suggest that one-quarter of the racial wage gap is due to prejudice, with nontrivial consequences for black lifetime earnings.

Study: Tort reform increase the death rate of elderly, lower-income, and minorities

Using medical malpractice tort reforms and state-level data from 1980-2000, two Emory University Law Professors, PAUL H. RUBIN, JOANNA M. SHEPHERD, examine empirically whether tort reforms have disproportionate effects on different demographic groups. They find that the impact of tort reform varies substantially among demographic groups.

Their results suggest that women, children, and the elderly do not enjoy tort reform’s benefits as much as men and middle-aged people.

The research further suggest that these individuals may be harmed by tort reform

Source:

Rubin, Paul H. and Shepherd, Joanna M. (2008) "The Demographics of Tort Reform," Review of Law & Economics: Vol. 4 : Iss. 2, Article 3. Available at: http://www.bepress.com/rle/vol4/iss2/art3

Quality of school matters

Economics of Education Review
Volume 27, Issue 5, October 2008, Pages 588-602
Mark C. Long
College quality and early adult outcomes

Abstract: This paper estimates the effects of various college qualities on several early adult outcomes, using panel data from the National Education Longitudinal Study. I find that college quality does have positive significant effects on most outcomes studied using OLS. While there is some evidence of positive selection bias in the OLS results, the alternative methods rarely produce findings that are significantly different from the OLS estimates. Furthermore, alternative methods have their own limitations, which are discussed. Across methods of estimation, there is solid evidence of positive effects of college quality on college graduation and household income, and weaker evidence of effects on hourly wages.

The author compares results from:
...ordinary least squares with three alternative methods of estimation, including instrumental variables, and the methods used by Dale and Krueger [(2002). Estimating the payoff to attending a more selective college: An application of selection on observables and unobservables. Quarterly Journal of Economics, 117(4), 1491–1528.] and Black and Smith [(2004). How robust is the evidence on the effects of college quality? Evidence from matching. Journal of Econometrics, 121, 99–124.]. I

Value of housework by gender, income, and race

In injury and death cases, the value of lost household work that would have been performed by the injuried or deceased is frequently an issue. In these cases, the value of the lost household work is determined by first calculating how many hours the person would have normally performed. Second, the market value of the lost household services experienced by the person is calculated. The market value of the household services is determined by the average hourly wage of individuals who perform similar services in the labor market. The total value is found by multiplying the value and number of hours performed.

The question is does the person's gender, income level, and race matter in the calculation?

The answer is yes, yes, yes.


In a Princenton working paper titled: Does Household Work Matter Anymore?
Comparisons of Household Production and the Distribution of Income in the United States
in 1965-66 and 2003' the authors, Cathleen D. Zick, Ph.D., W. Keith Bryant, Ph.D., and Sivithee Srisukhumbowornchai, M.S. provide some insights.

They find that the value of household production is:

* higher for women
* decreases as income goes up (less hours worked)
* African-American and Hispanic males have fewer household production hours
* Hispanic females work more household production hours

See also:


Bryant, W.K., C.D. Zick, and H. Kim. 1992. The dollar value of household work. Ithaca, NY:
Conrell University, College of Human Ecology.

2007 American Time Use Survey is released

The American Time Use Survey, which is used by economist to measure the amount of time spent on household services, was recently released by the BLS.

http://stats.bls.gov/news.release/pdf/atus.pdf

Tall people are smarter than short people

New economic study confirms what Randy Newman are ready knew:

Tall people have higher self-esteem, social dominance, and now a new economic study finds that tall people have higher cognitive ability. Interesting work. Full CIte:

Journal of Political Economy, 2008, vol. 116, no. 3]
© 2008 by The University of Chicago. All rights reserved.

Stature and Status: Height, Ability, and Labor Market Outcomes
Anne Case and
Christina Paxson
Princeton University

Summary: The well-known association between height and earnings is often thought to reflect factors such as self-esteem, social dominance, and discrimination. We offer a simpler explanation: height is positively associated with cognitive ability, which is rewarded in the labor market. Using data from the United States and the United Kingdom, we show that taller children have higher average cognitive test scores and that these test scores explain a large portion of the height premium in earnings. Children who have higher test scores also experience earlier adolescent growth spurts, so that height in adolescence serves as a marker of cognitive ability.

Predatory lending is a myth

In recent years, a number of lenders have been hit with predatory-type lending lawsuits. In these lawsuits, which have mainly involved automobile finance companies and mortgage lenders, the complaint usually alleges that the lender took advantage of a particular group and charged them higher than normal rates. Payday lenders, which make unsecured loans based on a borrowers paycheck, are frequently in the media and criticized for the triple digit APRs that they charge borrowers for short term loans.

A new study by Edward Lawrence and Gregory Elliehausen, suggest that pay lenders are in fact not bad and satisfy a financial need for a segment of the population. (Analysis of Payday Loan Customers, Contemporary Economic Policy, Vol. 26, No. 2, April 2008, 299-316)

Using a national survey of payday loan, finance company, and credit card users the authors find:

- That most payday loan customers report a positive experience with payday lenders
- Most payday loan customers are aware of the cost of the loan (in terms of the finance charge; but not the APR however)
- Payday loan customers are not captive borrowers and instead use other types of credit as well.
- The use of payday loans is consistent with studies of income and life time earnings that suggest the use of payday loans fills a financial need, instead of imposing a cost, for borrowers

Overall the study is interesting but limited. For example, the survey used by the authors was provided by payday loan companies and did not actually address a number of the issues that policy makers are concerned about concerning predatory pricing. Moreover, there is no way to determine if the high APR charged on payday loans contributes in any part to the financial condition of the payday loan borrowers. In addition, the one regression model, that looks at and controls for many different factors, in the paper actually suggests that payday loans may be a problem and create a circular pattern of debt situation for some borrowers

Women who wait earn more

Hot Research Friday!

Women who delay childbearing earn more money than women who have children at earlier ages. Kasey Buckles (2008), "Understanding the Returns to Delayed Childbearing for Workign Women" (AER 2008, 98:2, 403-407) finds that there is a raw return of approximately 3 percent per year of childbearing delay. The author finds that about 90% of the delay premium is explained by differences in observable characteristics such as education and occupation.

In short, women who delay are more educated, more skilled and more likely to be in professional careers.

Undocumented workers receiving workers compensation benefits

Gregory Presmanes and Seth Eisenberg article, 'Hazardous Condition: The Status of Illegal Immigrants and Their Entitlement to Worker's Compensation Benefits', review state worker's compensation laws across the country. They find that many states have adjudicated the issues and have generally found that illegal immigrants have a general entitlement to worker's compensation benefits.

According to the article, CA, CO, CT, FL, KS, LA, NJ, NC, OK, OR, PA, and TX have all recognized the general rights of illegal aliens to receivig worker's compensation benefits.

Finance companies overcharge African-American automobile loan borrowers

Hot Research Friday!

Charles, Hurst, and Stephens (2008) article, "Rates for Vechicle Loans: Race and Loan Source" (AER, 2008 98:2,315-320), finds that finance companies, such as GMAC, charge African-American more than similarly situated White borrowers at finance companies. Some of their statistical models point to differences as large as 120 basis points (1.2%) higher rates for African-American borrowers.

The authors do not find a similar differential for African-American borrowers at banks. They also find that most of the difference in rates is between similarly situated African-American high interest rate borrowers and White hihg interest rate borrowers.

Katrina evacuees lower native worker wages

Hot Research Friday.

Molly Fifer McIntosh article 'Measuring the Labor Market Impacts of Hurricane Katrina Migration", finds that Hurricane Katrina migration depressed wages of native Houstonians 1.8%. Her work also found that the evacuees lower the probability of a Houston native being employed by 0.5 percentage.

In short, there are significant albeit modest, labor market effects associated with the Hurricane Katrina evacuees migration to Houston.

Immigrant Latino workers hit hard but still working

The Pew Hispanic Center (on 6/4/2008) released Latino Labor Report, 2008: Construction Reverses Job Growth for Latinos. Using data through the first quarter of 2008, the report finds the economic downturn having a disproportionate impact on Hispanic workers. especially Mexican immigrants and recent arrivals, have been hurt the most by the slump in the construction industry.

There are no signs Latino immigrants are leaving the U.S. labor market but they now play a smaller role in the growth of the Hispanic workforce than in recent years.

The report is available at the Pew Hispanic Center's website, http://www.pewhispanic.org/.

Returns to college continue into later life..

Traditional wisdom suggests that individual wages will increase over a person's working life. However, the increase in wages will decrease over time. Traditionally, it has been shown that in later life the earnings profile actually slopes down. That is the person's wage will actually fall in later life.

New research contradicts this findings for college graduates.


Title: Cohort Analysis of US Age-Earnings Profiles
KOSEI FUKUDA Bulletin of Economic Research, Vol. 60, Issue 2, pp. 191-207, April 2008

Abstract: Aggregate data on US earnings, classified by period and by age, are decomposed into age, period and cohort effects, using the Bayesian cohort models, which were developed to overcome the identification problem in cohort analysis. The main findings, obtained by comparing college and high school graduates, are threefold.

First, the age effects show a downward trend for the age group of 45-49 onwards for high school graduates but do not show any such trend for college graduates.

Second, the period effects show a downward trend for high school graduates but reveal no such trend for college graduates.

Third, the cohort effects are negligible for both college and high school graduates.

Hispanic women in the labor force

New Pew Center research shows demographic trends for Hispanic women with a focus on the differences between U.S. born Hispanic women, and non-Hispanic women.

http://pewhispanic.org/files/factsheets/42.pdf

Undocmented workers only hurt other undocumented workers new research says

In "The Labor Market Experience and Impact of Undocumented Workers" by
JULIE L. HOTCHKISS and MYRIAM QUISPE-AGNOLI....

The authors find that a greater share of undocumented workers in an industry has a statistically significant negative impact on the wages of documented workers. In addition, undocumented workers have significantly lower labor supply elasticity, likely as a result of their limited employment and grievance opportunities. Furthermore, the inflow of undocumented workers does more to displace earlier hired undocumented workers than it does to displace documented workers.


This paper differs from of undocument worker studies, like Steward, Raub and Elliott (2007), that use survey data like the Mexican Migration Project (MMP), in the way in which
unauthorized individuals are identified. The paper uses State for GA administrative data to identify invalid social security numbers used by employers. The downside is that the their is little person level data so wage penalty equations are ran at the industry level.

See: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1109169

Bayesian v. Frequenist analysis of employment discrimination

In the article 'Hierarchical Models for Employment Decisions', Joseph Kadane and George Woodworth (Journal of Business and Economic Statistics, April 2004, Vol 22. No.2) advocate the use of Bayesian analysis to assist the trier of facts in the determining if the employer had discriminated against the protected groups of workers.

Conceptually, the Bayesian statistical analysis approach turns the traditional approach to analyzing statistical evidence of discrimination upside down. The traditional approach, or what statisticians refer to as the frequentist approach, begins by assuming that no discrimination has occurred and the employment decisions were made in a age, race, or gender neutral manner. From that point, the data is used to determine the likelihood that a age, race, or gender neutral employment process would have generated the employment outcomes that are at issue in the lawsuit.

In short, the frequenist approach ask:

'Assuming that the defendant is utilizing a age, gender, or race neutral employment process, what is the probability that the unbiased employment process could have generated the observed employer's employment decisions?'


If there is a very small probability that a neutral employment process would have generated the outcome then it may be inferred that discrimination has occurred.

The Bayesian approach turns the approach around and upside down The Bayesian approach ask the question:

'Given that we observe the defendant's employment decision outcomes, what is the likelihood that the employment decision was age, race or gender neutral?'

If there is a small probability that the data is consistent with a neutral employment process, then it may be inferred that some type of discrimination has occurred.

What are the pros and cons of each approach? To be discussed....!

Majors and starting salaries

Wall Street Journal reports the average starting by major.

http://mungowitzend.blogspot.com/2008/04/4-with-bullet.html

Do undocumented workers push out native born workers?: New Research

George Borjas, Jeffrey Grogger, and Gordon Hanson have a new paper, that attempts to debunk the finding of recent research by Ottaviano and Peri (2007). Ottaviano and Peri find that immigration can cause native wages to increase (not decrease) due to strong complementarities between native and immigrant labor.

Borjas, Grogger, and Hanson argue that the Ottaviano and Peri results are fragile. Their work suggests that dropping out one section of the data causes the Ottavian and Peri finds to disappear,

The Ottaviano and Peri data includes currently enrolled high school juniors and seniors. They classify these high school juniors and seniors as part of the "high school dropout" workforce. Their finding of immigrant-native complementarity disappears if the analysis excludes these high school juniors and seniors.Things that seem too good to be true usually aren’t.


Immigrant-Native Complementarity Revisited, by George Borjas: Here’s the abstract to the new paper:

Measuring objectivity in selecting a portfolio

New Research:

Risk-Adjusted Performance as a Rigorous Approach to Removing Subjectivity from Expert Assessments of Suitability

Abstract:

A broker has an obligation to ensure that his client incorporates suitable assets into his portfolio. Greater objectivity can be brought to assessments of suitability by comparing the performance of the aggrieved investor's portfolio to a benchmark portfolio using the Modigliani & Modigliani risk-adjusted performance measure. The applicable counterfactual benchmark could be either a ``market" portfolio or a suitable alternative portfolio. The calculation of confidence intervals associated with the measured difference in risk-adjusted returns is demonstrated. Castaneda-like standards can be used as criteria for whether defendant's actions negatively impacted portfolio performance rather than outside events.

Recommended Citation
Rodriguez, A. E. and Shapiro, Steven J. (2007) "Risk-Adjusted Performance as a Rigorous Approach to Removing Subjectivity from Expert Assessments of Suitability," Journal of Business Valuation and Economic Loss Analysis: Vol. 2 : Iss. 2, Article 3. Available at: http://www.bepress.com/jbvela/vol2/iss2/art3

Question of the day: How do you handle personal consumption deductions for high wage earners?

In injury and death cases, personal consumption, or the amount the deceased would have consumed personally on services and personal upkeep products, must be taken out. This is well known. There is a lot of information on the spending patterns of lower income, middle income and even upper middle income individual earners. According the personal consumption for the deceased in an injury or wrongful death case involving these persons can be determined with a relatively high degree of certainty.

However for the top 1% or more ($200k or more a year) of earners there is little data available for the group. In short, social scientists know very little about the spending patterns of this group, so determining the personal consumption factor for the deceased in a case involving a very high wage earner is difficult.

Most tables of personal consumption factors does not have factors for income levels over $150,000. See for example the Patton Nelson tables, which are relied upon routinely in injury and wrongful death damage calculations.

For this group, one of two assumptions can be made. One, some economists just assume that earners with income greater than $150,000 have personal expenditure habits that are the same as the top earners in the available data.

The problem with this approach is that the statistical models that estimate personal consumption, show that personal consumption factor decreases as the income level increases.

According, other economists use the equations shown in the research papers to directly calculate the personal consumption factor for the deceased specific income. Using this approach for example would suggest about a 3.5% personal consumption factor for a person (with only a wife) earning $2.0 million a year. In contrast, the highest earners in the available data spend 10.0% on personal expenditures.

Which is correct?

New economic damages legal research

Proving and Defending Damage Claims: A Fifty-State Guide
by The Honorable James J. Brown, Wendy FleishmanList Price: $210.00ISBN: 0735562687ISBN-13:

Description (from book website)
Today, the standards for assessing the different types of damages vary greatly from state to state. Tort reform nationally has had a significant impact on tort damages. In addition, many states have codified the law concerning claims for damages arising from medical malpractice, consumer rights, wrongful death, and products liability.

Proving and Defending Damage Claims: A Fifty-State Guide is the one reference that will help you accurately assess and pursue damages-- from drafting or defending a complaint to arguing damages at trial.

Fifty-state surveys that provide quick and reliable answers to questions about recoverable damages. Analysis to help you calculate recoverable damages for particular causes of action.
Reliable insights into the framework of punitive damages, including their availability and limitations.
And much more.

New collateral source rule research

"The Collateral Source Rule and Medicaid Plaintiffs: Eliminating Windfalls and Double Recovery"Thomas Jefferson Law Review, Vol. 30, 2007Contact: REBECCA F. ANDERSON Independent

http://ssrn.com/author=781664FullText:http://ssrn.com/abstract=974966

ABSTRACT: This Note examines damages awards for past medical expenses ofMedicaid plaintiffs and the collateral source rule's role in determiningthose damages. The traditional collateral source rule's substantivecomponent prohibits any reduction in the plaintiff's recovery for benefitsor payments the plaintiff receives from collateral sources, i.e. any sourceother than the defendant. The rules evidentiary component excludes admissionof any evidence of collateral sources. Two primary criticisms of the rule are: (1) windfalls to Medicaid plaintiffs when they recover more than Medicaid paid on their behalf, and (2) double recovery by Medicaid.

Resolving the difficulties of the rule requires a two-step solution. First, states should adopt a "real reasonable value"approach to the collateral source rule by allowing the parties to introduce evidence of the amounts billed for the services,amounts paid by Medicaid to satisfy the obligation, and evidence of automatic reimbursement to Medicaid.

Secondly, states should adopt two requirements in the handling of medicalexpenses for Medicaid plaintiffs: notify the state Medicaid agency when the plaintiff files suit against a defendant involving medical expenses paid by Medicaid and if the plaintiff recovers for medical expenses, the state Medicaid agency should automatically be reimbursed the amount they paid on plaintiff behalf after a pro rata reduction for their share of legal costs....

New Daubert article: The Failure of the Daubert Revolution

Expert Witnesses, Adversarial Bias, and the (Partial) Failure of the Daubert Revolution
DAVID E. BERNSTEIN George Mason University - School of Law
February 2007George Mason Law & Economics Research Paper No. 07-11


Abstract: This manuscript raises two questions that have been surprisingly missing from the voluminous law review literature on expert evidence since the landmark Daubert decision.

First, what is the underlying rationale for the replacement of the old qualifications-only, let-it-all standard for expert testimony with Daubert/Federal Rule of Evidence 702's requirement that all expert testimony be subject to a stringent reliability test?

Second, once we have identified this rationale, has the "Daubert revolution" succeeded on its own terms?
JEL Classifications: K00, K13

Working Paper Series

Suggested Citation
Bernstein, David E., "Expert Witnesses, Adversarial Bias, and the (Partial) Failure of the Daubert Revolution" (February 2007). George Mason Law & Economics Research Paper No. 07-11 Available at SSRN: http://ssrn.com/abstract=963461

Beauty and the labor market: Part II

Study finds that the 'beauty penalty' on an workers earnings can be harsh, according to a recently published Rice University study. Like numerous other economic studies of the labor market, this new experimental economics study suggests that people that are deemed to be attractive by their peers earn more. The interesting twist in this study however was people who were deemed to be attractive were tended to be penalized more harshly when expectations were not met.

The authors of the economic study, “Judging a Book by Its Cover: Beauty and Expectations in the Trust Game,” suggest that this type of stereotyping can lead to a new and different type of employment discrimination that can impact promotions and terminations and scapegoating and other kinds of behaviors that take place every day.

Expanding the basic life tables in an economic damage calculation

(or where you live can kill you...)

New Harvard study finds that where a person lives can have a significant impact on a person life expectancy. For example, persons in locales where the education level and income level are relatively higher tend to have longer life expectancies. The effects can be dramatic in some instances. For example, individuals in counties with large college populations such as Travis County (TX), (UT-Austin) can have up to a three year longer expected life span than others living in more rural areas.

The study publishes the data by county. This study could, in some circumstances, significantly change the final bottom line economic damage number in an injury or wrongful death case.

The full citation for the study is:

Murray CJL, Kulkarni SC, Michaud C, Tomijima N, Bulzacchelli MT, et al. (2006) Eight Americas: Investigating Mortality Disparities across Races, Counties, and Race-Counties in the United States. PLoS Med 3(9): e260

The journal is a peer-reviewed but freely available to all.

Cost of rearing children - new data

Since 1960, the U.S. Department of Agriculture has provided estimates of expenditures on
children from birth through age 17. For the overall United States, child-rearing expense estimates ranged between $10,220 and $11,290 per year for a child in a two-child, married-couple family in the middle-income group.

Here is a link to the latest child-rearing expenses. Click here.

By the numbers: Will it or won't it go to trial...

Something to consider when deciding who to use and how much to spend when retaining an economic expert:

Most times your economic expert will NOT be needed to provide testimony at either a deposition or trial.

Survey results show that:

About 20 percent of cases require a deposition of the expert
About 12 percent of cases require actual trial testimony by the expert.

Source:
Expert Communications
----Expert Witness Marketing and Training 140 Island Way, #288 Clearwater, FL 33767 Tel 727-467-0700 Fax 727-467-0800
Find additional articles and resources for the expert consultant at http://www.expertcommunications.com/

Smoking and economic damages

Most studies show smoking will reduce a person's life expectancy by about 10 years. Depending on the case, however the reduced life expectancy may not have a significant impact on the economic damages in the case.

Below is a discussion of frequently cited studies on smoker's mortality (thanks Beth Berridge) from an forensic economics listserve

The "top guy" who has published a number of articles on smoking mortality is Robert A. Hummer. A key article with him as lead author is "Adult Mortality Differentials Associated with Cigarette Smoking in the USA", Population Research and Policy Review 17:285-304, 1998.

This article examines all-cause mortality - this is important because most articles tend to focus on deaths from lung cancer or from cardiovascular disease, which is misleading because smoking results in elevated mortality for many other reasons. The authors do not develop life expectancy values, but they do calculate mortality rates by age and sex and underlying cause of death.

A person familiar with actuarial concepts could use this article to develop a life expectancy calculation for a "current heavy smoker" or for a "current light smoker". In this calculation, the smoker's mortality rates would be rated up for the all-cause mortality (total) shown in the appropriate tables from pages 292-293.

More proof that size DOES matter...taller workers earn more money...

The authors of a new study called The Effect of Adolescent Experience on Labor Market Outcomes: The Case of Height", found that taller workers make more money. They said:

"Taller workers receive a wage premium....Net of differences in family background, the disparity is similar in magnitude to the race and gender gaps...Controlling for teen height essentially eliminates the effect of adult height on wages for white males. The teen height premium is not explained by differences in resources or endowments. The teen height premium is partly mediated through participation in high school sports and clubs. "


Paper available from the SSRN Electronic Paper Collection:
> http://papers.ssrn.com/paper.taf?abstract_id=552885
The authors:

NICOLA G. PERSICO
University of Pennsylvania
Department of Economics
ANDREW POSTLEWAITE
University of Pennsylvania
Department of Economics
DAN SILVERMAN
University of Michigan at Ann Arbor - Economics
Department
National Bureau of Economic Research (NBER)

Criminal activity and lost earnings capacity calculations

The questions

Situation 1

When you are completing a vocational analysis and determining the next best vocational avenue for a person, what impact does a prior conviction have? By this I mean, what impact does the fact the time served was 10 years ago or just 6 months ago (and lets assume the person served more than 6 months)? Does the severity of the crime (possession of drugs or aggravated robbery) play a part? And what about the age of the former convict and at what age the time was served?

Situation 2

What would you vocational rehabilation experts do if the plaintiff committed a felony after the incident in which he was injured and is now serving, say, a 10 year sentence? In other words, the incident had nothing to do with the commission of the felony, but being in prison eliminates his ability to mitigate. Do you ignore the fact that he is in prison? Do you make an assumption as to what he could have mitigated absent the incarceration? Do you look at any earnings in prison, not that $0.30 per hour makes much of a difference. I am talking about a person who by now could have completed retraining and been placed in a job that would mitigate nearly all of his losses because his injuries weren't all that bad.