Business and Its Publics/Section 21

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Business and Its Publics, Section 21 - Spring 2009

Instructions: For key terms not contained in the course Glossary:

1. Click on "edit this page" (above).

2. One student will enter a business term, followed by his/her name and Cohort name. For example, EPS (J. Jones, NOLITA).

3. Another student will provide the definition for the term, followed by his/her name and Cohort name. For example: "Earnings per share: A company's earnings divided by..." (A. Smith, BROOKLYN)

4. Professors from the Inquiry and Discourse sessions will occasionally enter terms that require definitions.


"Due Diligence" (S. Barocas)

Due diligence is a process done by hedge funds, mutual funds, investment banks and any other type of investor that is planning on investing in a security or company. The process involves reading through quarterly and annual earnings reports, listening to conference calls, researching analyst reports and even calling up the company to ask them questions. The point of this in depth research is to understand the strengths, weaknesses, opportunities and threats to the company's future earnings. The process can take as long as a few months or as little as a few days, which may be deemed inadequate by some. The purpose is not only to ensure that the investor makes sound investments, but to protect from litigation in the case that the investment is a bad one. (M Khanarian, Financial District)


"Non-Contractable Quality" (M. Chien, Financial District)


"Vertical Integration" (W. Tenenbaum, Financial District)

In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies are united through a hierarchy with a common owner. Usually each member of the hierarchy produces a different product or service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel. Andrew Carnegie actually introduced the idea of vertical integration. This led other businessmen to use the system to promote better financial growth and efficiency in their companies and businesses. (R. Raghunath, Financial District)


What is the difference between Capital markets and Financial markets? (W. Tenenbaum, Financial District)

"The Capital Markets are a subset of the Financial Markets. A Financial market is any place where buyers and sellers transact products from stocks, to bonds, currencies, commodities, derivatives etc. The Capital Markets are a system where institutions (governments, corporations etc...) can raise capital either through the stock market (equity financing) or the bond market (debt financing) to meet their needs. (Khanarian, FD)


"Industry Group" (V. Garcia, Financial District) A way of classifying individual stocks or companies, based on common types of business. There is no official standard for industry group classification. Investor's Business Daily has a proprietary model that is popular and Reuter's Baseline uses another. Some general industry group classifications are drug retailers, forestry products and semiconductor equipment. (J. Bieber, Financial District, information from investopedia)


"Economies of Scale" (M. Nacario, Financial District) Situation in which a firm's output can be doubled for less than a doubling of the cost. (X. Zhang, Finanacial District, glossary definition from Micro text book)


"Liquidation" (S. Kim, Financial District) When a business sells all of its assets in order to discharge its liabilities (S. Luo, Financial District)


"Corporate Downsizing" (C. Bark, Financial District)

Organizational restructuring involving outsourcing activities, replacing permanent staff with contract employees, and reducing the number of levels within the organizational hierarchy, with the intention of making the organization more flexible, efficient, and responsive to its environment. (S. Kim, Financial District)


"Keynesian Welfare State System" (C. Bark, Financial District)


"sustainable development" (S. Luo, Financial District)

Development that meets the needs of the present without compromising the ability of future genrations to meet their own needs. (S. Kim, Financial District)


What is the difference between insolvency and bankruptcy? (Khanarian, FD)

Insolvency is a business's judgment that they do not have the assets to pay off their debts. While bankruptcy refers to a court of law ruling that a company cannot pay off their debts and possibly enforcing laws to repair the situation. (J. Bieber, Financial District)


"collective bargaining" (S. Kim, Financial District)

Collective bargaining is a process organized by workers in which they discuss their respective work environment with their employers. In this way, they can improve their work environment, pay, employee benefits, etc. It is also a practice in which representatives from unions and companies meet to negotiate a new labor contract. (M. Chien, Financial District)


"corporate governance" (S. Kim, Financial District)

Corporate governance is a set of customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. It also includes provisions that can affect a corporation's stakeholder relations and involved. (M. Chien, Financial District)


"Stress Test" (M. Nacario, Financial District)

A stress test in its general sense is when certain parameters are specified and then predictions are made regarding whether the body could survive that sample scenario. Recently, Treasury Secretary Geithner unveiled his stress test for the nation's banks. The Treasury estimates an average unemployment rate of 8.9% in 2009 and 10.3% in 2010. furthermore, a 3.3% contraction in GDP is predicted as well as a further 22% decline in housing prices. If under these conditions, the bank is still well capitalized, then it has passed the test while banks deficient of capital in this scenario will fail. (Khanarian, FD)

In the financial markets, "stress tests" are often conducted to evaluate the resilence of a portfolio of investments against crashes. Traders/quants and other risk managers will ask questions such as "what happens if the Dow Jones drops 15% in a day?" Then they will plug in these disastrous predictions into their model and see how they will affect their investment. One very interesting (and more philosophical) aspect about "stress testing" is how much "stress" you should subject your portfolio to? 5%? 10%? or 50%? Banks used to choose the number base on historical data with the underlying assumption that whatehver has not happened in the past(say the current crisis) will not happen in the future. Such assumption is flawed. Before the Black Monday in 1987, no one stress test 20% drop because such a crash seemed inconceivable. However, by eliminating such a possibility, banks made their models more susceptible to rare events. (Chen Chen FD)


"Utilitarianism" (M. Chien, Financial District)

"Utilitarianism"'s philosophy roughly is about giving the greatest amount of utility to greatest number of people. An action that (unfairly) damages a few but brings overall benefit is deemed desirable under utilitarianism. An interesting notion about utilitarianism is "what is utility?" Many people think utility is equivalent to happiness or pleasure; but the latter two are actually two distinct ideas and may lead to very different path of action. According to Wikipedia, the definition is as follow : "Utilitarianism is the idea that the moral worth of an action is determined solely by its contribution to overall utility: that is, its contribution to happiness or pleasure as summed among all persons. It is thus a form of consequentialism, meaning that the moral worth of an action is determined by its outcome: put simply, the ends justify the means." (Chen Chen FD)


Employee Free Choice Act (EFCA)

The Employee Free Choice Act (EFCA) (H.R. 1409, S. 560) is pending legislation in the United States. Its text states that it would "amend the National Labor Relations Act to establish an easier system to enable employees to form, join, or assist labor organizations, to provide for mandatory injunctions for unfair labor practices during organizing efforts, and for other purposes."[1] The latest version was introduced into both chambers of the U.S. Congress on 10 March 2009.[2]

In order for a workplace to organize under current U.S. labor law, the card check process begins when an employee requests blank cards from an existing union, and requests signatures on the cards from his colleagues.[3] Once 30% of the work force has signed the cards, the employer may decide to hold a secret ballot election on the question of unionization.[3] In practice, the results of the card check are not presented to the employer until 50 or 60% of employees have signed the cards to help ensure winning the election.[3] If the majority of votes favor the union, the National Labor Relations Board will certify it as the exclusive representative of the employees for the purpose of collective bargaining.

If enacted, EFCA would require the NLRB to certify the union as the bargaining representative without directing an election if a majority of the bargaining unit employees signed cards; however, employees may still request a secret ballot election if 30% of employees petition for one. The EFCA would, according to Christopher Beam, "allow the employees—rather than the employer—to decide whether to hold a secret-ballot election." (Chen Chen FD; Source: wikipedia) PS: Thanks to Alan for correcting my misconception


Liquidity (M. Chien, Financial District)

Liquidity refers to the ease at which an asset could be converted to cash while having minimal effect on the price of the asset. Stocks and money market funds are considered to be "highly liquid" while real estate is an asset that can take weeks or months to "liquidate." Because liquidity is important for many investors, there exists a "liquidity premium" which is the extra price an investor is paying for having liquidity in the asset they own. (Michael Khanarian, FD.)


Bear Market Rally (S. Kim, Financial District)

Often when an equity market is in a sustained downward trend there are occasionally sharp increases in stock prices (sometimes as great as 20%) The reasons for bear market rallies are often unknown, but usually driven by traders who believe stocks have fallen too greatly and therefore aggressively buy. When examined from a longer term perspective, bear market rallies do not counter the existing downwards trend. (Khanarian, FD)


Equity Market Rally (S. Kim, Financial District)


Toxic Asset (S. Kim, Financial District)

There is no exact definition of a toxic asset, however it generally refers to an asset that no longer remotely resembles the original value of the asset. A mortgage backed security, for instance, may start as a normal asset, but becomes toxic when a number of the underlying loans become delinquent and the payments stop coming. A credit default swap may also become toxic if the counter-party backing the contract goes bankrupt, such as what happened with Lehman Brothers. In theory toxic assets can regain value and no longer be considered toxic, however banks often choose to simply write them off their books if recovery seems unlikely. (Khanarian FD)


Public-Private Partnership (Khanarian, FD)

A Public-Private Partnership is a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility. (S. Kim, Financial District)


Equity Share (S. Kim, Financial District) Equity Share refers to the federal agency’s, state’s, or (sub)contrator’s share of participation in the value of property that is sold, transferred, or retained by an entity. It is calculated as the participation in the acquisition cost of the property multiplied by either the sales proceeds (if sold) or the current fair market value (if transferred or retained). (www.twc.state.tx.us/business/fmgc/fmgc_appa_glossary.doc) (S. Luo FD)

Adversarial Collaboration (S. Luo FD) An investigation carried by two disagreeing parties, who agree to collaborate on conditions (time frame, location, number of trails)that satisfies both parties. It is hoped that both parties would then accept the results of the investigation as "fair" and settle the dispute.(http://www.uea.ac.uk/env/cserge/pub/wp/edm/edm_2003_07.htm) (S. Luo FD)

Use Allowances (S. Luo FD)