tag:blogger.com,1999:blog-8152901575140311047.post3370358181220770487..comments2024-03-18T10:18:19.736-04:00Comments on Musings on Markets: Alibaba's Governance by Politburo: Corporate Governance and ValueAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-8152901575140311047.post-81705081135392962932014-10-06T10:29:20.989-04:002014-10-06T10:29:20.989-04:00Dear Professor Damodaran,
I appreciate your musin...Dear Professor Damodaran,<br /><br />I appreciate your musings on the market. I have even taken your Investment Philosophy Course on www.symynd.<br /><br />I would like to know if you have considered a musing of the FNMA case? Much has been written (http://seekingalpha.com/article/2542235-fannie-mae-legal-ruling-expedites-endgame?uprof=45) about it. Your musing would provide great insight. You don't need to post this comment. <br />Sincerely, <br />Liz Wong Anonymoushttps://www.blogger.com/profile/11994884310222980496noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-13722536312719130572014-09-22T09:51:56.565-04:002014-09-22T09:51:56.565-04:00I would like to propose another mechanism by which...I would like to propose another mechanism by which some investors might believe that a dictator increases value. In your equation, you assume that a change in corporate governance will approach the ideal - but perhaps a change in corporate governance would be for the worse instead of the better. We've all seen cases where an incumbent politican we liked was voted out by a challenger whose positions we liked less. So instead of assuming that a change will give us the optimal value, let's say there is a probabily p that a change will occur, and a probability q that the change will be for the better if it occurs (and thus 1-q that a change will be for the worse). Suppose that as a "cynical" investor, I believe that q < 0.5 - if a change in management occurs, it will probably be for the worse. Therefore I am inclined to pay a premium for companies where the probability of a change occurring at all is lower - and thus I will more highly value less democratic companies provided the current management seems reasonably competent.Terranhttp://www.consistent.org/terran/noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-84964741372303173072014-09-18T10:11:41.950-04:002014-09-18T10:11:41.950-04:001. On the 40% margin, it is a climb down from the ...1. On the 40% margin, it is a climb down from the current 50% margin and if they stay focused on Chinese online merchandising (and advertising), I don't see why their margins will collapse. If they try to go global and enter other tech businesses, all bets are off.<br />2. The fact that the CEO is a large stockholder mitigates some of the corporate governance issues, but only if he is fully invested only in this company. To the extent that Jack Ma has other economic interests (he owns Alipay), it is possible that what's good for Jack Ma may not be in your best interests as a stockholder.<br />3. As for legal recourse, the prospectus seems to suggest that you cannot claim recourse in the US courts (though you can try). If the only legal recourse you have is in the Chinese courts, God help you!Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-38876974324797917002014-09-17T20:14:47.360-04:002014-09-17T20:14:47.360-04:00Aswath- Quite an in depth analysis and comparison,...Aswath- Quite an in depth analysis and comparison,none of this is mentioned or reported on CNBC or CNN. If Chinese government did take over ownership rights would the Cayman shell company have any legal recourse?<br /> Thanks for a valuable lesson on Baba and corporate governance.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-17016876112530107692014-09-17T04:59:18.162-04:002014-09-17T04:59:18.162-04:00Professor,
If the CEO is a large stockholder, do ...Professor,<br /><br />If the CEO is a large stockholder, do you factor that into the discount/premium?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-68172562205299405592014-09-17T00:00:46.135-04:002014-09-17T00:00:46.135-04:0040% margins forever appear to be a bit stretched. ...40% margins forever appear to be a bit stretched. Alibaba might face stiff competition in the coming decade from all corners. Did you have something in mind for keeping those margins prof?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-57399088421109062212014-09-16T20:57:04.632-04:002014-09-16T20:57:04.632-04:00Anonymous,
You are right. You can be crooked and w...Anonymous,<br />You are right. You can be crooked and wise, and that may increase value, but I was not really looking at the crooked/law abiding axis in this post. That is entitled to its own analysis. In this one, the two axes are dictatorial/democratic and competent/incompetent and as I note, all four combinations are in play. Your worst case combination is dictatorial/incompetent but the question I leave open is whether you prefer a dictatorial/supremely competent(at the moment) or a democratic/moderately competent combination.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-44620735472667236872014-09-16T17:00:53.214-04:002014-09-16T17:00:53.214-04:00Fascinating. I love the probabilistic approach he...Fascinating. I love the probabilistic approach here.<br /><br />Can you re-post the image of the probability distributions? It's not readable.<br /><br /> It seems the premise you give is that corporate governance equates with wise decision makings. Can't you be wise and crooked? Management could still execute in a great fashion (wise) and just outright steal/misappropriate the property (not wise).<br /><br />Say, you have this growing company and it's payment arm (Alipay) is the crown jewel but it's politically sensitive, and you just divested it from your company without any consultation of your actual investors? Would that be both wise and crooked? In the US, at the very least the IRS would be after you to make sure the valuation was correct, that the right taxes were paid on it, etc. Nothing like that's going to happen in China of course.<br /><br />We've had our alleged reckless CEOs in the past (Aubrey McClendon of Chesapeake), but no one realistically thinks that the US government will expropriate property or allow management to commit outright fraud, malfeasance, or misappropriation without heavy consequences. <br /><br />Rule of Law is key, beyond management skill. All China has is "rule by the gun." And no joking, I can see Jack Ma ending up against a wall some day if he crosses the wrong people in the communist party. But it won't be because he defrauds western investors. It will be because Chinese retail savers lose their savings in Yu'e Bao (http://www.institutionalinvestor.com/Article/3346365/Investors-Sovereign-Wealth-Funds/Yue-Bao-Wow-How-Alibaba-Is-Reshaping-Chinese-Finance.html#.VBihCy5dVSk) <br /><br />Google (or every closely held newspaper in the history of the US, or many family companies in Europe) are triumvirates/ dictatorships / multi-class ownership structures etc, but *in democracies with a solid judicial system and respect for law.*<br /><br />With Google, sure, you can't get a controlling interest without owning those special class shares. But if management committed malfeasance/misappropriation, you'd have rights under our legal system. Nothing like that exists in China, where the actual assets reside. The written law means nothing in that country.<br /><br />Incompetence is not the biggest risk here. It's fraud. If we had a probability distribution for % of profits misappropriated from shareholders, we'd could add that into crystal ball and see what the true value to a shareholder is.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-9413087793869465142014-09-16T15:54:35.892-04:002014-09-16T15:54:35.892-04:00Ben,
True. Makes the choice between a powerful CEO...Ben,<br />True. Makes the choice between a powerful CEO and corporate governance a lot harder, doesn't it?Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-2601254376326083972014-09-16T13:52:18.896-04:002014-09-16T13:52:18.896-04:00Meanwhile,Google is run by a triumvirate that just...Meanwhile,Google is run by a triumvirate that just created a new share class to ensure their continued rule, and Facebook is a (benevolent?) dictatorship. Ben Reynoldsnoreply@blogger.com