Sports venue construction in the U.S. tends to happen in waves, roughly every three decades. Sports economists suggest another wave is happening now, with numerous proposed or approved venue construction projects around the country seeking or having secured public dollars, from Tennessee to Wisconsin to Nevada to Florida.  

Professional sports owners often justify asks of hundreds of millions in taxpayer dollars for new or revamped stadiums with estimates of huge economic returns for communities. It’s important that journalists covering these projects understand how public dollars are raised to pay for them and how to interrogate economic impact claims that teams produce.

Across the four biggest sports leagues in the U.S. — Major League Baseball, the National Football League, the National Basketball Association and the National Hockey League — there have been eight new venues built since 2020 at a total construction cost of roughly $3.3 billion, according to a September 2023 paper in the Journal of Policy Analysis and Management. About $750 million in public funds went toward those construction projects, not including bond interest, the paper finds.

Research conducted over decades indicates these investments almost never lead to massive economic gains for host cities. Legislators have since pushed the recent public contribution figure even higher. This includes $500 million to renovate the Milwaukee Brewers ballpark, more than $1 billion in bonds toward a new stadium for the NFL’s Tennessee Titans and $380 million for a new ballpark for the A’s, which are poised to move from Oakland to Las Vegas in 2028.

We recently published two pieces on public financing of sports venues: A research-based primer and research roundup and a short tipsheet for covering the topic.

To give journalists an even stronger foundation for their coverage of sports venue financing, The Journalist’s Resource co-hosted an hourlong webinar May 16 with Econofact, a nonpartisan, online publication out of The Fletcher School at Tufts University.

I co-moderated the panel discussion with Michael Klein, the William L. Clayton Professor of International Economic Affairs at Tufts and founder and executive editor of Econofact. The panelists were:

• Andrew Zimbalist, the Robert A. Woods Professor Emeritus of Economics at Smith College.
• Victor Matheson, a professor of economics and accounting at the College of the Holy Cross who specializes in sports economics.
• Alan Snel, the publisher of LVSportsBiz.com, a news outlet that covers the convergence of sports, business, stadiums and politics.

One takeaway: There are numerous examples of professional sports franchises that built their venues with little or no public investment.

“We have the Golden State Warriors playing in an entirely privately financed stadium in San Francisco,” Matheson said during the webinar. “We have SoFi stadium in [Los Angeles], almost entirely privately financed there, and that’s about a $5 billion stadium. I think one of the most important things to take from this hour is that public financing is not required.”

Here are 7 key tips from the webinar.

1. Ask these three questions about economic impact estimates. If team officials can’t explain their numbers, don’t report them.

Who commissioned the study?

“If it is a study that is paid for by the league or the team, that is not an economic impact study,” Matheson said. “That is a press release.”

Can I see a copy of the study?

While teams or municipalities may or may not release lengthy economic impact reports, public officials and journalists sometimes cite big number estimates from teams without scrutiny of the underlying analysis.

“You would be amazed by how many people say, ‘There is a study that says [the economic impact] is a billion dollars,” Matheson said. “But you can never get your hands on that study.”

What do economists think?

“Call an economist,” Matheson said. “You can find lots of us. Whatever your local jurisdiction is, there’s a sports economist there who teaches in your state or your local region who understands these issues who has a good local feel. Most of us have a good national feel as well.” 

If team representatives can’t justify estimates of economic growth, or show than an independent analysis exists, don’t report those estimates.

“The big problem with these gigantic economic impact numbers is that the methodology is not explained,” said Snel.

He noted that LVSportsBiz will not publish economic impact estimates unless team officials explain how they did their analysis. 

2. Note that when people spend money at a sports venue and nearby businesses, this often means they don’t spend that money elsewhere.

A new or revamped sports venue tends to shift economic activity, not create new spending, economic research shows.

Interview an economist or two to help explain to audiences how this works. The basic idea is that spending shifts within communities, or from one community to another. The underlying reason has to do with household budgeting.

“Most of the money spent at a sports facility is money that is part of people’s leisure budgets, and they have a certain amount of money that they can spend on various kinds of leisure,” Zimbalist said. “When they spend $200 or $500 taking their family to the ballpark, that’s $200 or $500 they don’t have to spend at the local bowling alley, at a local theater, at a local restaurant. That’s money being displaced, from spending in one part of the city to spending in another, and the net impact can be very close to zero.”

3. Ask hotel owners and rental car firms how they incorporate tax rate changes into their pricing. If public money is raised through hotel and rental car taxes, proponents may claim the tax burden will fall on tourists. But local businesses and franchises may bear some of the burden, too.

Tourists do not necessarily pay hotel and rental car taxes. Why? Because of something called tax incidence, which is how the burden of a tax is divided among consumer and producer — essentially, who pays the tax and at what proportion.

“It’s not always the person who buys the product who pays the tax,” Matheson said. “It can also be the person who sells the product.”

When legislators increase a hotel tax or pass a new one, hotel owners typically respond by adjusting their pricing in one of three ways:

• Raise prices and pass on the entire cost of the tax to consumers. That can hurt their ability to compete for convention and tourism business, Matheson said.
• Hold prices steady and pay the tax burden entirely, reducing profits.
• Some combination, where they pass some of the cost of the tax to consumers and eat the rest.

The same goes for rental car taxes, another sales tax commonly used to help finance stadiums. Local economic conditions will determine how the tax burden shakes out. In extremely competitive markets, businesses may be able to pass on the entire cost to consumers. Point is, it’s important to ask hotel owners and rental car firms how they incorporate tax rate changes into their pricing.

While officials may claim visitor taxes are a way to pass the cost to out-of-towners, the authors of the September 2023 paper note that local people also rent cars. And residents with lower incomes are more likely to use extended stay hotels and potentially have to pay the higher taxes.

4. Don’t forget that team owners stand to benefit most from these projects.

Teams seeking public financing naturally focus public statements on their estimates of community benefits, typically in the form of jobs created and consumer spending.

But team owners, by far, have the most to gain.

“The bottom line is, it’s the pro teams that are garnering the benefits of the revenues from the stadiums,” Snel said. He recommended journalists also report on how new or improved stadiums affect team valuations.

He pointed to the National Football League’s Raiders, which moved from Oakland to Las Vegas in 2020. The team was valued at $2.2 billion in 2019. That figure nearly tripled to $6.2 billion by the end of 2023.

There are a variety of reasons for the increase, Snel reports, including TV deals that generate tens of billions of dollars yearly across the NFL, and the sale of the Washington Commanders in 2023 for more than $6 billion, which set the market for premium franchises. But according to Forbes, $1.4 billion of the team’s current value is tied to the stadium itself, which was heavily subsidized with public dollars.

5. Learn about “leakage” and how it can affect economic impact estimates.

When people spend money at local businesses, there is less of what economists call “leakage” than when people spend with mega corporations like sports franchises.

This means every dollar spent at a local café has a better chance of staying within the local economy than money spent at a sporting event, which tends to “leak” out of the economy and into the savings accounts of team owners. The café owner, by contrast, uses revenue to, for example, pay staff, who also live and spend in the community, or for laundry services provided by another local businesses, or any number of other things.

“The proprietor of the local restaurant or bowling alley or theater tends to have a more moderate income and tends to live almost 100% of the year in that town,” Zimbalist said. “When you spend money at the restaurant, it tends to circulate and stay in the town more. When you spend money at a ballpark, it’s going to millionaires and billionaires. They generally don’t live in the town year-round.”

This ties back into those economic impact estimates. They’ll sometimes include a simple multiplier equation, suggesting money spent at sporting events “multiplies,” or circulates within the local economy, just like spending at the local café.

But sporting event spending tends to have less chance of staying in the local economy, compared with other types of entertainment spending.

Zimbalist explained that team owners “generally have much, much higher savings rates, so they take the money and they put it into the world’s money markets and the money doesn’t stay in the town for these and other reasons. So the leakages are much, much greater and, therefore, the multiplier, the sports multiplier, is much lower than a typical entertainment multiplier.”

6. Keep track of lease deals. When they expire, teams may come asking for more public money.

When covering a city that has a major professional sports franchise, or several of them, review lease agreements to figure out when team owners might ask taxpayers for help revamping their venue, or building a new one.

The National Sports Law Institute of Marquette University Law School has obtained dozens of lease agreements for professional baseball and football franchises, most of them from the 1990s and early 2000s.

The institute has summarized these agreements, available here. The summaries detail, among other things, the yearly rent the franchise owes the municipality, which may be set below market rates. They outline how much the public contributed toward sports venue construction and how much came from the team, along with whether the team or municipality is responsible for regular operating expenses and repairs.

“We had this huge wave of stadium construction in 1992,” Matheson said. “Most of those stadiums are associated with a 30-year lease deal. And because of that, these teams are tied to the stadiums for 30 years, which means that they really can’t start asking for a new stadium, start asking for new public subsidies, until those lease deals expire. But as soon as those lease deals expire, all of the bargaining power shifts to the teams and away from the taxpayer.”

7. If you don’t have time to do a deep dive, at least include these two “boilerplate necessities” in your reporting.

Journalists may not have time to do a deep investigation into how public money is being used to finance sports venue construction or renovation — especially broadcast journalists, who might only have a minute or two to cover a lot of ground.

Snel recommends reporters at least include these two “boilerplate necessities” in their coverage.

• Report the principal and interest on debt. If public money is raised through bonds, tell audiences about the interest on the principal that the city, county or state will have to repay. For example, Clark County, Nevada, took on debt of $750 million toward building the Raiders’ stadium. With interest, that number will grow over the next quarter century. The final tally will actually be north of $1.3 billion, Snel recently reported.
• Remind your audience that economic activity related to sporting events by and large goes back to team owners. “The beneficiaries are the teams,” Snel said. “They’re garnering the lion’s share of all the revenues.”

The post Public financing of sports venues: 7 reporting tips from our webinar appeared first on The Journalist's Resource.

When sports franchises want a new or revamped stadium, they often turn to taxpayers for help with financing. For example, in June 2023, Nevada legislators approved $380 million in public funding for a 30,000-seat ballpark for the Oakland A’s, who are expected to make the move to Las Vegas in 2028.

Proponents estimate the A’s stadium in Las Vegas will create thousands of jobs and have an annual economic impact of $1.3 billion — more on that in the video below.

But economic research for decades has found that, by and large, the fiscal returns for residents — in the form of increased economic activity and job growth — are far smaller than public expenditures, which have recently approached or exceeded half a billion dollars per stadium.

Learn about the research in our companion explainer and research roundup.

Journalists should look closely at the political context around these major financial commitments, and question estimated fiscal returns. This is not just a topic for sports or business journalists covering major professional teams — even minor league teams have meant financial hardship for towns that took on debt to attract them. Here are 4 tips to help you get started in your reporting.

1. Interrogate economic impact statements or fiscal estimates from franchise owners.

Teams often produce economic impact statements or fiscal estimates claiming that building new stadiums or revamping existing ones will result in a fiscal and jobs boom for a city or region.

What assumptions do these economic impact statements or fiscal estimates make? Do they fully explain how they arrived at their numbers? If not, will the team publicly provide those behind-the-scenes details? Know that franchises may not make their analyses public.

For example, reporter Jon Styf at digital news outlet The Center Square obtained a two-page document showing economic impact estimates from the state of nearly $1 billion per year from a proposed retail and housing development around a new stadium for the National Football League’s Tennessee Titans.

The document also included economic impact estimates of around half a billion dollars from other cities hosting major events, such as the Super Bowl. Styf reached out to economists to find out whether those estimates were reasonable — the economists questioned their credibility.

In short, avoid reporting team-published estimates at face value. Run them by an economist or two who study this topic. Reach out to the North American Association of Sports Economists for help finding experts. FieldofSchemes, a blog run by journalist Neil deMause that covers sports economics, is another place to look for informed perspectives on economic impact estimates.

2. Know that public financing for a sports stadium can happen either through a legislature or through a direct decision by voters.

The Las Vegas funding happened via lawmakers, for example.

While Kansas City voters in April 2024 voted down public funds for a new stadium for MLB’s Royals, 7 in 10 voters in Oklahoma City who cast ballots in December 2023 said yes to $900 million for a new arena for the NBA’s Thunder. (Dozens of local economists had urged Oklahoma Cityans to reject the measure.)

Public votes may go either way, and can be influenced by campaigns from local groups in favor or opposed — but the legislative pathway is almost always successful, says Kennesaw State University economist John Charles Bradbury.

3. Understand how states and localities finance stadium construction.

These may include municipal bonds or taxes, such as sales taxes, sin taxes on things like alcohol and tobacco, and visitor taxes on hotels and rental cars.

Officials may claim visitor taxes are a way to pass the cost to out-of-towners. As Bradbury and co-authors note in a September 2023 paper in the Journal of Policy Analysis and Management, local people also rent cars. And residents with lower incomes are more likely to use extended stay hotels and have to pay the higher taxes.

Hotel owners may also draw lower revenues as they reduce pre-tax prices in order to retain customers — or, they may raise prices, passing the tax to customers but deterring future bookings.

4. Scrutinize smaller localities issuing bonds for minor or major league stadiums.

Pearl, Mississippi, issued tens of millions of dollars in bonds to build a new ballpark for an Atlanta Braves minor league affiliate in the early 2000s.

But, due to lack of attendance and lower economic impact than boosters estimated, the city had trouble paying the debt.

Credit agencies reduced the city’s bonds to junk.

(They’ve since rebounded.)

Bonus viewing: Healthy journalistic skepticism of economic impact claims

Alan Snel, publisher of LVSportsBiz.com, expressed healthy journalistic skepticism about economic impact numbers from sports franchises on the Dec. 29, 2023 edition of public affairs show Nevada Week, which is produced by Vegas PBS.

Host Amber Renee Dixon asked Snel about economic impact estimates for a new ballpark for the A’s that representatives from economic advisory firm Applied Analysis had presented to state lawmakers.

“They said they expect a $1.3 billion economic impact per year from the stadium and generating about $17 million in total tax revenue each year,” Renee Dixon said. “Those numbers don’t sit well with you. Why is that?”

Snel explained those estimates were “based on certain expectations” about attendance. He then said he had recently interviewed Michael Crome, Chief Financial Officer of the Las Vegas Raiders, which moved from Oakland to Las Vegas in 2020. “And they came out with a press release saying that the stadium and the visitorship, thanks to the Raiders events and also the stadium events, generated $2.29 billion,” Snel said. “That’s nearly $2.3 billion in revenue.”

Snel continued, “And I said to the Raiders, if you want to sit down and explain the math, we will report that. And I think that’s responsible journalism. But just putting these broad, general multibillion dollar figures out there without explaining the math is just — it’s just not an accurate portrait of what’s going on.”

The post Covering sports stadium financing? Read these 4 tips. appeared first on The Journalist's Resource.

In June 2023, Nevada legislators approved $380 million in public funding for a 30,000-seat ballpark for the Oakland A’s, who are expected to throw their first pitch in Las Vegas in 2028 after Major League Baseball owners approved the franchise move in November.

It’s the latest public commitment of hundreds of millions of dollars for a professional sports stadium. In the U.S., most franchises in the four major sports leagues — MLB, the National Football League, the National Basketball Association and the National Hockey League — are valued at over $1 billion.

Across those leagues there have been eight new stadiums or arenas built since 2020, at a total construction cost of roughly $3.3 billion, according to a September 2023 paper in the Journal of Policy Analysis and Management. About $750 million in public funds went toward those construction projects, the paper finds.

When government dollars are allocated it’s usually through a legislature passing a law, or by public vote. Voters in Kansas City, for example, in April 2024 widely rejected a sales tax bump to pay for a new downtown stadium for MLB’s Royals.

“I like to say that you can fit a majority of the city council in the owner’s box but you can’t fit a majority of the electorate,” says Kennesaw State University economist John Charles Bradbury.

The approved public funding in Las Vegas represents about one quarter of the total cost of the planned stadium, pegged at $1.5 billion. Proponents estimate the A’s stadium in Las Vegas will create thousands of jobs and have an annual economic impact of $1.3 billion, news outlets have reported.

Economic research for decades has found that, by and large, the fiscal returns for residents — in the form of increased economic activity and job growth — are far smaller than public expenditures, which have recently approached or exceeded half a billion dollars per stadium.

This primer will help journalists understand the history of public financing for stadium construction and empower them to use academic research to interrogate claims that these projects mean big bucks for communities.

The research also finds:

• Journalists often report figures from press releases and economic impact statements without questioning the assumptions of those analyses.
• Of the dozens of stadiums built in the past two decades for the four largest American sports leagues, about 4 in 10 were financed at least in part with municipal bonds exempt from federal taxes — which places part of the financial burden of stadium financing on residents nationwide.
• Football and baseball stadiums may increase foot traffic to nearby businesses, but basketball and hockey arenas do not.
• Overall, stadiums tend to shift economic activity, not create new spending.
• Expansion teams are likely to favor markets that already have strong employment and business growth.

A coming stadium construction boom?

Las Vegas is hardly alone. Economists have found that every 30 years or so there’s a wave of public financing for building stadiums or revamping existing ones.

A construction boom may already be under way in the U.S.

For example, Wisconsin will provide $500 million to renovate the Milwaukee Brewers ballpark, and more than $1 billion in public bonds will go toward a new stadium for the NFL’s Tennessee Titans. And the MLB’s Tampa Bay Rays have asked St. Petersburg city councilors to approve more than $400 million for a new ballpark along with nearby infrastructure improvements.

If you’re covering public financing for sports franchises, you’ll want to know what the research says about this topic. This is critical to providing thorough coverage to audiences.

A brief history of public financing for sports stadiums

Modern stadiums were first constructed during the early and mid-1900s, around the two world wars.

“Sports venues were almost exclusively privately financed until the 1930s, when they became largely public ventures,” write the authors of a recent paper in the Journal of Policy Analysis and Management, featured in the research roundup below.

More stadiums were built as leagues expanded and teams moved cities throughout the 1960s and 1970s.

Another construction boom came in the 1990s, with many new stadiums replacing older ones, along with new venues for expansion franchises.

“The median public share of venue construction costs declined from 70% in the 1990s and 2000s to approximately half of construction costs in the 2010s,” write the authors of the Journal of Policy Analysis and Management paper. “Newly opened and planned venues in the 2020s have received roughly 40% of funding from taxpayers.”

While the share of public financing has fallen, the authors find that the amount of public money has risen, from a median of $168 million in public funds per stadium in the 1990s, to $350 million in the 2010s, to $500 million in the 2020s across the four major U.S. sports leagues.  

Even stadiums ostensibly built with private funds can come with public costs.

For example, the New England Patriots built Gillette Stadium in 2002 without direct public dollars, but the franchise benefitted from at least $70 million in state money for nearby road, sewer and other infrastructure improvements, according to the Boston Globe, which the paper authors cite.

Economic activity and stadiums: ‘A transfer of wealth’

While Fenway Park in Boston and Wrigley Field and Soldier Field in Chicago have stood for around 100 years, many stadiums built in the past 50 years have already been replaced for a variety of reasons, despite better construction materials and methods.

For example, the Texas Rangers’ ballparks have been replaced every 27.5 years, on average, while Atlanta Braves’ ballparks have been replaced after 26 years, on average. Among the major sports leagues, 31 stadiums and 31 arenas will be 30 years old or more by 2030, according to Bradbury and co-authors in the Journal of Policy Analysis and Management paper.

Journalists covering asks of public money for private sports projects should be aware of the large body of research on these public investments.

Despite perennial claims from team owners that building new stadiums or revamping existing ones will result in a fiscal and jobs boom for a city or region, research consistently shows that the hundreds of millions of public dollars that are often outlaid are not typically a sound investment.

“You might see a little bit of a resurgence in the area right around the stadium, but it comes at a cost to less commerce in the outlying area, which is exactly what we’d expect,” says Bradbury, who is the current president of the North American Association of Sports Economists. “This is just a transfer of wealth within the community.”

This transfer of wealth may indeed be the point for some city officials, as College of the Holy Cross economist Victor Matheson explains in an October 2018 essay, also in the Journal of Policy Analysis and Management.

For example, when the taxpayers of Arlington, Texas, finance local stadiums, such as for the Dallas Cowboys and the Rangers, the games those teams play move consumer dollars from other parts of the state to Arlington.

“While, again, regional economic activity is unchanged, Arlington’s economy benefits at the expense of other cities and towns in the area,” Matheson writes. He also notes that fiscal reports produced by sports franchises “have been shown to suffer from significant theoretical flaws that make their conclusions suspect at best, and simply false at worst.”

But Matheson argues that while the current level of public spending on sports stadiums is out of balance with the returns on those investment, in certain circumstances some level of public funding may be appropriate.

He points to the 2004 Athens Olympics as a catalyst for infrastructure development there, and a minor league baseball stadium in Worcester, Massachusetts, as providing the political impetus for $35 million in transportation funding from the state, including to make a particularly dangerous intersection near the ballpark safer.

“Obviously, it would be better for local taxpayers to get the needed infrastructure improvements without the wasteful expense of hosting the Olympics or building a baseball stadium, but government activities are not always without friction, and using a stadium project to spur other more useful infrastructure projects may be a second-best solution,” Matheson writes.

The cost-per-taxpayer of a stadium partially financed through public funds may be small in some cases, but it can also be relatively large. Oklahoma City Thunder ownership, for example, is contributing $50 million to build their new arena, compared with the public outlay of $900 million, which comes out to thousands of dollars per adult in the city.  

“People often ask me, they’ll say, ‘Well, you’re always against stadiums.’ And I’ll say, ‘Well, yeah, my guess is most pulmonologists are against smoking,’” says Bradbury. “I mean, the evidence is clear. And I think that journalists feel a need to cover all sides of an issue, and I totally understand that. But it’s about accurate coverage, not equal-balance coverage.”

Research roundup

Public Policy Toward Professional Sports Stadiums: A Review
John Charles Bradbury, Dennis Coates and Brad Humphreys. Journal of Policy Analysis and Management, September 2023.

The study: The authors break down a range of policy considerations for public funding of stadiums. They provide a history of stadium funding since the 1900s, examine research efforts to quantify intangible social benefits of sports teams, describe prominent public funding mechanisms and cast a critical eye toward news reporting.

The findings: With many large U.S. cities facing fiscal crises in the 1980s, government officials began to push the narrative of sports stadiums as economic drivers, “where each dollar spent generates more than one dollar of economic activity as it is recirculated within the community — thereby growing employment income, property values and tax revenues,” the authors write.

Economists began to study the issue around this time. By the turn of the century, “economists were largely in agreement that stadiums were poor public investments,” in terms of tangible benefits, like jobs and spending, “and more recent studies continue to confirm these findings.” Economists then began to explore whether there were intangible benefits to residents of a city with a professional sports franchise — the cultural pride from living in a “big league” city, for example.

One way economists do this is through something called the contingent valuation method, which surveys residents on what they would personally pay for their city to host a sports team. These individual values are then extrapolated to a wider population to put a dollar value on the intangible factors residents enjoy from simply having a professional franchise, whether they go to games or not. Based on results from seven studies conducted in the 2000s and 2010s, “non-use values” amount to “13% of total capital construction costs and 16% of public contributions,” suggesting that “intangible social benefits of hosting professional sports teams are well below levels needed to justify typical subsidies.”

In looking at news coverage of public subsidy proposals for sports franchises, the authors note that “economic impact estimates from advocacy reports may be repeated without external validation of credibility, and press release statements from stadium boosters are quoted in stories without critical assessment.”

The authors write: “As a potential institutional reform, communities should assess all stadium proposals through referendums and initiatives, a once-common practice which has declined over the last few decades. Public votes ensure that subsidies are congruent with voter preferences and allow time for careful consideration of all relevant costs and benefits, so that voters can make informed decisions.”

Growth Effects of Sports Franchises, Stadiums and Arena: 15 Years Later
Dennis Coates. Chapter from The Economic Impact of Sports Facilities, Franchises, and Events, October 2023.

The study: The author, who conducted foundational research with Brad Humphreys starting in the mid-1990s into how sports stadiums affect per capita income, returns to this question with another 17 years of data, from 1969 to 2011. This analysis adds hockey and soccer franchises in addition to MLB, NFL and NBA — along with the American Basketball Association, which merged with the NBA in 1976 — and covers all urban areas in the U.S., including those without a professional team.

The findings: Average personal income grew about 1.4% per year over the period studied, regardless of whether there was a sports stadium in the area. The economic effects of sports franchises account for less than 1.5% of local economic activity, measured by personal income, wages and salaries, and wages per job.

The author writes: “The results of this exercise are largely consistent with the findings of Coates and Humphreys and of numerous other studies that have found that the effect of sports franchises and stadium and arena construction on local economies is weak or nonexistent. Indeed, franchises, stadiums, and arenas may be harmful rather than beneficial to the local community.”

Do Local Businesses Benefit from Sports Facilities? The Case of Major League Sports Stadiums and Arenas
Timur Abbiasov and Dmitry Sedov. Regional Science and Urban Economics, January 2023.

The study: The authors explore a single economic consequence of sports stadiums — foot traffic to nearby retail and food establishments — in a single year, 2018, for MLB NBA, NFL and NHL franchises. Precise foot traffic for 92 sports facilities and surrounding businesses is from SafeGraph, a company that tracks “location data of mobile devices with installed participating applications,” the authors write.

They acknowledge that “the grounds for subsidizing professional sports are weak,” based on past research, but also cite news reports suggesting businesses near sports stadiums suffered curtailed revenue during the COVID-19 pandemic.

The findings: Every 100 visits to a baseball stadium generates 29 visits to nearby restaurants and similar establishments, and six visits to retail stores. The authors find similar results for football stadiums, but little business sale spillover for basketball and hockey arenas. The authors note that professional football and baseball games typically draw much larger crowds than basketball and hockey games.

Basketball and hockey games have a slight negative effect on foot traffic to health, finance and education-related businesses. The authors note that these sports often have arenas located in central business districts, which may lead people who are not going to a game to avoid those areas during game time.

The authors “find that a median sports facility generates approximately $11.3 million of annual additional spending for food and accommodation and retail businesses, with the aggregate spillovers varying substantially across facilities and sports.”

They do not account for negative effects of sports stadiums — such as increased crime, as explained in the next paper — or the revenue of nearby businesses compared with the public costs of building a stadium or improving an existing one.

The authors write: “Our results indicate that the chances of a community economically benefitting from a sports facility via the spillover channel are higher if the facility hosts a popular team and is visited frequently.”

The Impact of Professional Sports Franchises and Venues on Local Economies: A Comprehensive Survey
John Charles Bradbury, Dennis Coates and Brad Humphreys. Journal of Economic Surveys, September 2022.

The study: The authors review the findings of more than 130 studies on economic outcomes of sports stadiums published between 1974 and 2022, the bulk of them published since 2000.

The findings: Local economic activity is by and large unaffected by sports stadiums, “and the level of venue subsidies typically provided far exceeds any observed economic benefits,” the authors write. There is “deep agreement in research findings” that “sports venues are not an appropriate channel for local development policy,” they add.

Sports stadiums can lead to positive effects for communities, such as improved amenities, like pedestrian-friendly zones. But they also come with negative effects. For example, research links sports events with crime. The “positive association between crime and sporting events is perhaps the most robust empirical finding in the economic effects of sports literature,” the authors write.

Why do sports stadiums continue to garner public subsidies? Among other reasons, such as team owners threatening to relocate, the authors note that the benefits of sports stadium subsidies are concentrated in a few hands — namely and primarily the owners.

Costs, meanwhile, are spread across taxpayers. The public cost of Camden Yards in Baltimore came to $15 per local household per year, according to research from the Brookings Institution that the authors cite. They suggest this creates a situation in which wealthy beneficiaries have great incentive to lobby politicians and advertise in favor of subsidies, with little incentive to mobilize opposition because each taxpayer’s individual cost may be low.

The authors write: “Though findings have become more nuanced, recent analyses continue to confirm the decades-old consensus of very limited economic impacts of professional sports teams and stadiums. Even with added nonpecuniary social benefits from quality-of-life externalities and civic pride, welfare improvements from hosting teams tend to fall well short of covering public outlays.”

Tax-Exempt Municipal Bonds and the Financing of Professional Sports Stadiums
Austin Drukker, Ted Gayer and Alexander Gold. National Tax Journal, March 2020.

The study: Of the 57 stadiums built in the past two decades for the four largest American sports leagues, about 4 in 10 were financed at least in part with municipal bonds exempt from federal taxes. State or local governments issue the bonds, then the interest bond buyers earn is exempt from federal taxes, meaning “tax-exempt municipal bonds confer an indirect federal subsidy to the issuers,” the authors write. Bond buyers accept lower interest rates — saving interest payment dollars for states and localities — because they know they will get a tax break on their investment return.

NFL stadiums are the most expensive, with an average cost of $1 billion. But baseball stadiums are most heavily financed through tax-exempt bonds. On average, $466 million of baseball stadium costs are financed through such bonds. The authors examine the estimated value of those bonds issued since 2000.

The findings: The value of the federal tax exemption is $3.6 billion across the $16.7 billion worth of bonds issued to finance stadium construction, the authors estimate. But the estimated loss in federal tax revenue is considerably higher: $4.3 billion. The authors explain that the reason for the difference is that a portion of bond buyers would still buy those bonds at a lower return rate than the subsidy offers.

The authors write: “Most residents of, say, New York, Massachusetts, or California — unless they are avid fans — gain nothing from the Washington-area football team’s decision to locate in Virginia, Maryland, or the District of Columbia. Yet, under current federal law, taxpayers throughout the country ultimately subsidize the stadium, wherever it is located … Ultimately, the problem is one of rent seeking, since professional sports leagues are able to extract local and federal subsidies by exerting concentrated power while the costs of the subsidies are diffuse.”

Economic Development Effects of Major and Minor League Teams and Stadiums
Nola Agha and Daniel Rascher. Journal of Sports Economics, November 2020.

The study: The authors explore whether new stadiums for major and minor league teams affect economic development, measured by employment and business growth. They use Census Bureau data from 2004 to 2012 covering 871 markets. There were 65 new teams, 67 teams that departed a city and 68 new stadiums built during the period studied. The included top-tier professional leagues and their development affiliates are MLB, NFL, NBA, NHL, Major League Soccer, and the Women’s National Basketball Association. The WNBA saw three teams join and five leave the league but was the only professional league without a new arena during the period studied.

The findings: The authors note that much research has focused on the economic effects of major league venues. Stadiums and arenas built between 2000 and 2018 cost more than $40 billion total. Spending on minor league venues account for a sizeable chunk over that time — $9.6 billion, according to the authors, and many of those developmental team venues are in the same market as major league teams.

On the whole, new major league teams and new stadiums do not affect economic development, and the findings suggest teams tend to enter markets with strong employment and business growth. New minor league sports teams also do not tend to affect employment, but for markets between 100,000 and 499,000 people, the findings suggest that new minor league sports stadiums can lead to a slight uptick in new businesses.

The authors write: “Overall, we find no substantial evidence that entry of a new team or stadium is associated with any net gains related to economic development, other than for minor league team entry in smaller markets and employment effects limited to the period of construction.”

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Since Silicon Valley Bank collapsed on March 10, news outlets and federal legislators have brought attention to former president and CEO Gregory Becker’s sale of $3.6 million in company stock two weeks before the bank failed.

While Becker collected $3.6 million, the figure doesn’t represent his profit. Becker exercised an option to purchase the stocks he sold. A filing with the U.S. Securities and Exchange Commission shows Becker bought the stocks for $1.3 million on Feb. 27, then sold them for $3.6 million the same day.

When the other side of the ledger is accounted for, Becker pocketed $2.3 million before taxes, as columnist Brett Arends of MarketWatch wrote on March 11. Accuracy matters. Keep reading to learn more about covering insider trading reports.

What is an insider trading report?

The filing in question is called a Form 4, known as an insider trading report. Insiders must file a Form 4 when they buy or sell company shares.

The Securities and Exchange Commission defines insiders as certain executives, such as officers or directors, plus anyone who owns more than 10% of a publicly traded firm or anyone with access to information because of a relationship with a company insider.

Despite its name, the existence of an insider trading report does not indicate illegal insider trading happened. It simply indicates that an insider traded shares — and doing so is not necessarily illegal.

Form 4 filings are publicly available through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval system — EDGAR. Enter “SVB Financial Group” and the Form 4 from Becker that has received news attention appears as an “insider trading report” filed March 1.

In the interest of helping reporters and the public understand how to read a Form 4, we reached out to Robert Davidson, who heads the accounting and information systems department at Virginia Tech and has conducted extensive research on insider trading, financial reporting fraud and company risk management. Davidson helped us walk through Becker’s recent Form 4 as a case study. Use the annotated filing below to familiarize yourself with the Form 4s available through EDGAR.

When is insider trading illegal?

Insider trading prosecutions rely on what Securities and Exchange Commission regulators call “material nonpublic information.”

Simply put, information that would matter to investors and is not available to the public.

For example, the Securities and Exchange Commission in July 2022 accused a former FBI trainee of secretly viewing documents from a romantic partner, an attorney for a law firm representing the pharmaceutical firm Merck. The documents showed Merck was set to acquire another pharmaceutical company. The former FBI trainee told a friend about the impending deal, which had not been publicly announced, with the friend profiting $1.3 million in allegedly illegal trades using the inside information.

Conversely, a trade by an insider using information that is public would still constitute an insider trade, but it would not be illegal. It is generally an uphill climb for prosecutors to obtain a conviction on an allegedly illegal insider trade committed by a company officer, such as a chief executive, Davidson says.

Company officers almost always have inside information that the public does not know about, he notes.

“The difficulty for the SEC, or a judge, is in, ‘Is this private information you had the reason you made this trade?’” Davidson says. “There are a lot of other reasons an executive may make a trade. So simply trading while you possess the information is not illegal. If you were to trade because of it, it is.”

Insider trading cases are usually easier to prosecute when the insider does not work for the company, Davidson says. He points to a case he and Christo Pirinsky, a finance professor at the University of Central Florida, outline in a May 2022 paper on insider trading, published in The Accounting Review.

The case centered on a therapist working with a Lockheed Corporation executive, with the therapist making trades using information the executive revealed during counseling. In that case, the trades were “completely independent of the firm and it appears there is little the firm could have done to prevent a licensed therapist from abusing doctor-patient confidentiality,” Davidson and Pirinsky write.

What does Becker’s Form 4 tell us?

Here is the story that can be understood from Becker’s Form 4, the one showing stock sales worth $3.6 million on Feb. 27.

At the beginning of the day, Becker owned 92,552 Silicon Valley Bank securities in the form of common stock. Common stock is the typical type of security routinely traded on stock exchanges. Each of these securities represents an ownership share of the firm.

Becker exercised options to buy Silicon Valley Bank common stock at a price of $105 each, and he bought a total of 12,451 shares. An option is a contract between the firm and an employee, often an executive, that allows the employee to purchase company shares at a set price by a certain date. In this case, Becker’s option to buy the shares at $105 apiece would have expired on May 2.

“Executives routinely wait until their options are about to expire before they exercise them,” Davidson says.

The same day Becker acquired the $1.3 million worth of Silicon Valley Bank stock, he sold them on a stock exchange at a price of around $285 per share.

This sale of 12,451 Silicon Valley Bank shares was worth $3.6 million. Subtracting the acquisition cost of $1.3 million, we arrive at a pre-tax profit of $2.3 million. Becker began the day with 92,552 in Silicon Valley Bank common stock, and ended the day holding the same amount.

Here is another important thing to know, noted at the bottom of the filing: Becker put this trade into motion on Jan. 26, 2023. The trade was made Feb. 27, nine business days before the bank failed, but the plan to purchase the options and sell them was set 31 business days in advance of the collapse.

This trade was made ahead of time using a Rule 10b5-1 trading plan. This type of plan is meant to serve as an affirmative defense against insider trading allegations. Executives can and often do put these plans into motion months or years before stock sales happen.

Imagine a situation in which an executive moved ahead on Jan. 1, 2022 with a Rule 10b5-1 trading plan that says she will sell 5,000 in common stock two years later, on Jan. 1, 2024. In December 2023, her company announces a major acquisition that sends stock prices soaring. Weeks later, she makes a tidy profit. The executive can point to the trading plan as evidence the stock sale was adopted well before the acquisition.

Davidson stresses that intent is nearly impossible to determine on the basis of a single filing. Again, intent is the main thing when it comes to prosecuting insider trading: What is the overriding reason the executive made a trade? Becker’s options were due to expire soon, Davidson notes.

Also notable is that the Securities and Exchange Commission recently changed the parameters for a Rule 10b5-1 trading plan. These changes apply to trading plans made after April 1, 2023, and require directors and officers to separate the adoption and execution of a trading plan by at least 90 days.

This means Becker’s trading plan, with about one month between adoption and execution, would not have been allowed if it had been adopted just a few weeks later.

“It’s very difficult to infer intent without looking at a broader set,” Davidson says. “How many Form 4s have people been filing? How many shares are they trading?”

EDGAR search results show leaders at Silicon Valley Bank have filed more than 500 insider trading reports since January 2018. Here are a few outstanding questions about these reports worth exploring:

• How does the volume of transactions compare to other similarly sized banks?
• What is the dollar breakdown of stock purchases and sales within those over 500 insider trading reports?
• Which executives have traded the most and profited the most, and when?
• Was there a flurry of insider trading after July 2022, when the Federal Reserve Bank of San Francisco began closely reviewing Silicon Valley Bank governance practices?

Key resources

EDGAR search

SEC insider transaction codes

Form 4 filing rules

American Bar Association: Revocable Trusts

The post Insider trading: How to read an SEC Form 4 filing appeared first on The Journalist's Resource.

On March 10, Silicon Valley Bank, the banker of choice for many firms in the tech world, achieved ignominy as the second-biggest bank failure in U.S. history.

The recent images published by news outlets across the world of customers lining up outside the failed bank’s Santa Clara, California headquarters struck a familiar chord for those who know the long history of bank runs, which refers to large numbers of customers at once demanding their deposits.

This is what happened: As inflation rose over recent months, the value of the bank’s store of long-term U.S. Treasury bonds and mortgage-backed securities fell. Interest rate hikes meant to quell inflation made it more expensive for venture capitalists to borrow, which slowed incoming deposits.

So, Silicon Valley Bank had billions tied up in securities of declining value. And the bank had fewer deposits coming in. Bank executives tried to cut their losses to help make up for the slowing deposits and sold tens of billions worth of devalued securities.

Depositors noticed the bank’s troubles and tried to pull their money en masse.

The run was on, and Silicon Valley Bank didn’t have the cash to meet its obligations.

“The basic math is easy enough to understand: deposits went away, slowly and then all at once,” Semafor business and finance editor Liz Hoffman wrote on March 17.

Fallout from the Silicon Valley Bank failure is still playing out. The good news is that widespread runs on numerous other midsize banks have not materialized, so far.

But there has been collateral damage. Startups had to scramble to meet payroll. Construction was halted on an affordable housing project in San Francisco. The project’s financing deal with Silicon Valley Bank was set to close the day the bank failed, according to Dana Hull and Sarah Holder reporting for Bloomberg CityLab.

Globally, the major bad news is that instability from the tech bank’s downfall put banking giant Credit Suisse, already feeling the weight of recent scandals and mismanagement, teetering on the brink of collapse. Credit Suisse was bought on March 19 by rival UBS for just $3 billion in a sale forced by Swiss regulators.

Whether the current shock is a mere tough moment or sounds the opening bell of a global recession will be clearer in coming weeks. So far, central bankers in the U.S. have been willing to shore up hundreds of billions in losses.

What rattled SVB customers?

Trouble for Silicon Valley Bank began percolating in public on March 8, when the bank announced it was selling roughly $21 billion in securities at a $1.8 billion loss, while seeking to raise $2.25 billion in a public offering of company shares.

These actions rattled clients, who wondered why bank leaders felt they needed so much cash. Clients didn’t wait to find out: They wanted their money.

On March 9, customers initiated withdrawals worth $42 billion, leaving Silicon Valley Bank short nearly $1 billion. The Federal Deposit Insurance Corporation, the government institution that exists to maintain confidence in the banking system by federally insuring bank deposits, took over the bank on March 10.

Notably, the FDIC insures $250,000 worth of deposits per account holder, for both individuals and businesses. Nearly 94% of Silicon Valley Bank’s deposits exceeded this statutory limit, making the bank highly vulnerable to a run. Among the largest U.S.-based banks, Citibank has the biggest share of uninsured deposits at 74%, while Bank of America is lowest at 46%, according to data from S&P Global Market Intelligence. Overall, about 46% of domestic deposits, worth nearly $8 trillion held at large U.S. banks are not FDIC insured, according to S&P.

“The bank run was devastating for SVB, but the real problems that triggered this event were the underlying interest rate exposure and the slow withdrawal of deposits,” Harvard Business School finance professor Erik Stafford explained recently to HBS Working Knowledge senior editor Dina Gerdeman. “SVB was forced to issue a large amount of equity, which brought a lot of attention to their situation. There is now a lot of attention on the situation at all banks.”

Tech firms held deposits with the bank for various purposes, including operational needs, such as payroll. The bank in many ways looked like any other corporate bank, but leaders in tech thought of it as “their kind of bank,” as economist Paul Krugman put it in a recent New York Times column.

The Federal Reserve, the U.S. Securities and Exchange Commission and the Justice Department have opened investigations into what happened. Federal Reserve Board members have said they will release the investigation’s findings by May 1, while the existence of the other two investigations has only come out in news reports.

What happened next?

Tech CEOs on March 11 petitioned Treasury Secretary Janet Yellen and other government officials for help.

At stake: Not a bank, but American economic innovation, according to the more than 5,000 executives who signed the petition. “We are not asking for a bailout for the bank equity holders or its management; we are asking you to save innovation in the American economy,” they reasoned, in existential terms.

Then came the failure of New York City based Signature Bank, which served cryptocurrency investors. On March 12, it became the third-largest bank to fail in U.S. history.

Signature Bank was also taken over by the FDIC.

On March 12, the FDIC announced it had established two banks, called bridge banks, which would honor $175 billion worth of deposits in Silicon Valley Bank and $89 billion worth at Signature Bank. On March 19, Flagstar Bank, a subsidiary of New York Community Bancorp, bought roughly half of Signature Bank’s assets, while $60 billion worth of loans remain with the FDIC’s bridge bank.

And on March 16, a consortium of the largest banks in the country, including Bank of America, Citigroup and JPMorgan Chase, announced they would add $30 billion to the flailing (though not yet failing) First Republic Bank, headquartered in San Francisco.

This action echoes a bailout worth tens of millions of dollars spread across Wall Street and orchestrated over a century ago by financier J.P. Morgan — following the chaos of the Panic of 1907, which was also precipitated by a bank run. This private bailout was a direct precursor to the establishment of a public entity that could help address financial crises moving forward: The Federal Reserve System.

Has the FDIC done this before?

Legally, the federal government taking over the private banks and managing their operations is made possible through what is called a systemic risk exception. This exception was made law in 1991 and first used in 2008. Leaders at the FDIC and the Federal Reserve need to recommend the exception and the Treasury secretary, after consulting with the president, needs to agree to put the exception into action.

Despite the images of clients gathering outside Silicon Valley Bank’s headquarters in Santa Clara, this was a bank run for the Internet age. House Financial Services Committee Chairman Patrick McHenry called it the “first Twitter fueled bank run,” referring to panicky social media outbursts from analysts and venture capitalists the day before the bank failed and the government took it over.

In the U.S., bank failures have been rare in recent years, according to data from the FDIC. It had been well over a decade since a bank run caught the nation’s attention: The last significant withdrawal of bank deposits occurred during the start of the Great Recession, in the late 2000s.

Toward the end of 2008, for example, Wachovia and Washington Mutual banks “experienced heavy deposit outflows and other important liquidity pressures,” Federal Reserve historian Jonathan Rose recounts in a 2015 discussion paper, “Old-Fashioned Deposit Runs.”

Who is to blame?

This is one of the big questions journalists and others are trying to figure out. The prevailing narratives federal legislators are expressing through the news media are:

• Regulators, including at the Federal Reserve Bank of San Francisco, which oversees banking on the west coast, had enough legal authority to effectively supervise banks, but they did not do their jobs.
• A 2018 law, which relaxed regulations for smaller banks, coupled with other deregulatory measures, led to Silicon Valley Bank going under.

On the last point, Stafford, the finance professor, notes in HBS Working Knowledge that “We actually do not know much about SVB’s exposures, since they fell below the Fed’s threshold for annual collection of Form FR Y-14A Capital Assessments and Stress Testing.”

With less than $250 billion in assets, Silicon Valley Bank did not have to submit to regular stress tests, which the Federal Reserve uses to assess whether banks have enough cash on hand, or easy access to cash, to make it through financial challenges, such as a swarm of depositors demanding their money.

The core of the stress tests are hypothetical, economically damaging scenarios the central bank uses to see how banks’ balance sheets would fare. For the 2023 stress tests, the Federal Reserve will assess how banks would be able to weather unemployment peaking at 10% accompanied by volatility in securities markets.

Before the 2018 law, banks with more than $50 billion in assets had to submit to regular stress tests — though the Federal Reserve was given discretion to require more stringent oversight for individual financial firms worth between $100 billion and $250 billion.

Recent reporting from The New York Times’ Jeanna Smialek reveals supervisors at the San Francisco Fed warned Silicon Valley Bank multiple times since 2021 about the bank’s weaknesses. “But the bank did not fix its vulnerabilities,” Smialek writes. “By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls.”

What happened with risk at midsize banks?

After the deregulation bill became law in May 2018, the Federal Reserve began taking steps to loosen Volcker Rule restrictions. Named for former Federal Reserve chair Paul Volcker, the rule prohibited banks from making certain potentially risky investments, such as with hedge funds. The banking industry criticized the rule as an imposing regulatory burden for small banks — those with less than $10 billion in assets, which account for nearly all FDIC-insured banks, as New York University business professors Matthew Richardson, Kermit Schoenholtz and Lawrence White note in “Deregulating Wall Street,” published in October 2018 in Annual Review of Financial Economics.

For small banks, those with less than $10 billion in assets, deregulation reduced the costs of complying with regulation, according to a September 2022 paper in the Journal of Accounting and Finance by Arkansas State University professor Dwayne Powell.

Midsize banks, those with $50 billion to $250 billion in assets, also enjoyed reduced regulatory costs and higher profits following the 2018 deregulation. But they faced increased risk of failure as measured by available cash to meet demand, among other indicators, finds a January 2023 paper in the Journal of Financial Stability by economic researchers Dimitris Chronopoulosa, John Wilson and Muhammed Yilmaz.

But even if the Volcker Rule were still in place, it does not appear it would have directly prevented the run at Silicon Valley Bank. The rule did not restrict banks from investing in government bonds, as Richardson, Shoenholtz and White explain in their paper. Treasury bonds are one type of security that Silicon Valley Bank lost big on as inflation spiked.

What are some future policy considerations?

One point of interest among academic researchers that would be a consideration for federal legislators debating whether to tighten regulations is whether the failure of several medium-sized banks would represent less risk to the overall economic system than the failure of one large bank. In the parlance of banking, there are a few dozen banks globally that are “systemically important,” or too-big-to-fail.

The question is, would the economic fallout from the failure of a number of midsize banks be less bad than a single too-big-to-fail bank going under? “If the answer is no, then it is doubtful that medium-sized banks collectively should be subject to lower capital requirements or less stringent prudential regulation,” write Richardson, Shoenholtz and White.

In other words, the authors argue that if a few medium banks are as economically important as one big bank, those midsize banks should be regulated in a manner similar to the big banks. At the same time, regulatory measures should be laser-focused on reducing systemic risk, such as mandating stress tests, the authors write.

But stress tests need to be calibrated to policy and economic reality. Even if Silicon Valley Bank had been subject to regular stress tests, the Federal Reserve’s recent stress tests for larger banks did not incorporate interest rates hikes, note Santa Clara University economics professor Kris James Mitchener and Louisiana State University finance professor Joseph Mason, writing in the Wall Street Journal on March 15.

“If stress testing is meant to warn regulators about banks in advance of runs, the Fed needs to include scenarios that reflect its own policies,” Mitchener and Mason conclude. “Applying appropriate stress testing to large as well as midsize banks would help ensure that the next SVB isn’t a sitting duck waiting for a run.”

Another consideration for legislators and regulatory policymakers moving forward has to do with operational risks. This type of risk has to do with internal executive decisions. Wells Fargo fraudulently opening millions of customer accounts without permission from 2002 to 2016 is an example of an operational decision.

The failure of Silicon Valley Bank leaders to heed warnings from the Federal Reserve indicate operational risk is a potential problem for midsize banks as well as large ones. But operational risk is overall mostly an issue for larger banks, according to “Are the Largest Banking Organizations Operationally More Risky?” published August 2022 in the Journal of Money, Credit and Banking by Federal Reserve economists Filippo Curti and W. Scott Frame and University of Kansas finance professor Atanas Mihov.

“We show that larger [banks] experience higher operational losses per dollar of assets,” the authors write. “This relation is driven by losses from failures in obligations to clients, faulty product design, and business practices, and to a lesser extent by losses from the disruption of business or system failures. Past operational problems are persistent at the largest institutions, suggesting that size hinders efficient reformation and elimination of operationally risky practices.”

Further reading

“Why do banks invest in MBS?” Itamar Drechsler, Alexi Savov, and Philipp Schnabl. NYU Stern working paper, March 2023.

“Regulatory oversight and bank risk,” Dimitris Chronopoulos, John O.S. Wilson and Muhammed Yilmaz. Journal of Financial Stability, January 2023.

“Are the Largest Banking Organizations Operationally More Risky?” Filippo Curti, W. Scott Frame and Atanas Mihov. Journal of Money, Credit and Banking, August 2022.

“Quantitative Analysis of the Impact of The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 on the Cost of Regulatory Burden on Community Banks,” Dwayne Powell. Journal of Accounting and Finance, September 2022.

“Has ‘Too Big To Fail’ Been Solved? A Longitudinal Analysis of Major U.S. Banks,” Satish Thosar and Bradley Schwandt. Journal of Risk and Financial Management, February 2019.

“Deregulating Wall Street,” Matthew Richardson, Kermit Schoenholtz and Lawrence White. Annual Review of Financial Economics, October 2018.

“Regulatory Reform,” Andrew Metrick and June Rhee. Annual Review of Financial Economics, September 2018.

The post Silicon Valley Bank and deregulation: A research-based explainer appeared first on The Journalist's Resource.

There’s a big problem in the multi-trillion-dollar bond market, according to a recent National Bureau of Economic Research working paper: A substantial portion of bond funds might be riskier bets than they seem.

The authors analyzed a sample of 1,294 bond funds from the first quarter of 2003 through the second quarter of 2019. They find that about 30% of those funds were misclassified, making them appear safer than they really were.

“This misreporting has been persistent, widespread, and appears strategic — casting misreporting funds in a significantly more positive position than is in actuality,” write authors Huaizhi Chen, Lauren Cohen and Umit Gurun. “Moreover, the misreporting has real impact on investor behavior and mutual fund success.”

To the authors, this is an untold story of misplaced trust at financial services megafirm Morningstar, the go-to third-party source for investors analyzing the performance and risk of bond funds and other securities. To Morningstar, these academics have taken an unwarranted “leap in logic” in claiming that bond funds are misrepresenting the creditworthiness of their holdings.

Morningstar writes in a blog post response to the working paper that “the authors assert funds misreport to us the credit quality of bonds their funds hold. We do not agree with this leap in logic.”

Later this month, the authors plan to submit their working paper to the Journal of Finance.

Update: Morningstar published a more extensive response and analysis on December 19, 2019.

Overlooking oversight?

Bonds are loans. Companies, governments and other entities use them to raise money. Bond funds are collections of bonds. Investors sometimes like them because they spread risk — if a particular bond doesn’t do well, it doesn’t matter much because other bonds in the fund can pick up the slack. The financial jargon boils down to an old adage: Don’t put all your eggs in one basket.

The fixed-income investment market in the U.S. is huge. Bonds of all types are, by and large, fixed-income investment instruments. That simply means investors receive interest payments on a fixed schedule. The U.S. fixed-income market represents nearly $43 trillion in outstanding debt, up from $19 trillion in 2002, according to the Securities Industry and Financial Markets Association, a securities industry trade group. The fixed-income funds in the authors’ sample had a market value of about $125 billion.

All loans — whether bonds, home mortgages or payday loans — come with some level of risk that the lender won’t be paid back. In the same way that banks use a credit score to evaluate whether to give someone a car loan, investors evaluate bond funds based on their level of credit risk.

Thing is, everyone has a different appetite for risk. One investor might like to go free climbing in her spare time and won’t mind a bond fund made up of a bunch of risky bonds. Another investor might plan her day down to the minute and will want a bond fund without any risky bonds.

For investors to make decisions that jibe with their risk tolerance, they need accurate information. This is where Morningstar comes in. Knowledge is the product they sell. Morningstar seeks to help investors make sense of the massive fixed-income market and decide where to park their money. For a company that pulled down $1 billion in revenue and $183 million in net income in 2018, the stakes of providing accurate information are existential.

“The reliability of our data and analytics is critical to our success, and we value transparency and collaboration to support investors,” Morningstar wrote in its response to the working paper.

The core problem, according to the authors, is that bond funds self-report credit risk summaries, and Morningstar takes those summaries at face value. Credit risk is hardly the only information that Morningstar offers, but it is among the most important that investors consider. Morningstar takes bond funds at their word — according to the authors — though the firm also acquires additional information from the Securities and Exchange Commission that could shed light on the creditworthiness of funds’ underlying holdings.

“Morningstar’s business model is dealing with collecting data and summarizing it for investors,” says Chen. “We believe there is really no oversight in this process.”

Anomalous observations

Chen and his co-authors noticed something unusual in their sample. Bonds that Morningstar reported as being good credit risks were offering high payouts. High-risk bonds usually compensate investors for taking a chance on them by offering high interest rates. More risk, more reward. But the authors found some low-risk funds yielding high rewards.

Another anomaly: A low-risk fund should be made up of mostly low-risk bonds, while a high-risk fund should have more high-risk bonds. But nearly a third of all funds the authors examined had a mixture of bonds that didn’t correspond to the creditworthiness Morningstar was reporting.

For example, a hypothetical fund in the authors’ sample might report that 90% of its bonds are low-risk and 10% of its bonds are high-risk.

“Now this would be no issue if funds were truthfully passing on a realistic view of the fund’s actual holdings to Morningstar,” the authors write. “Unfortunately, we show that this is not the case.”

Half of funds in the sample that achieved the highest possible credit rating should have been categorized as riskier, according to the paper. Funds may include hundreds or even thousands of bonds, so it would not necessarily be an easy task for Morningstar to check the math on every bond fund.

Still, 99% of these “misstatements,” as the authors call them, characterized funds as belonging to a safer category.

“For some funds, this discrepancy is egregious — with their reported holdings of safe bonds being 100% while their holdings are only a smaller fraction of their portfolios,” the authors write.

They also find that fund performance and misreporting could be linked. Misreporting happened more often after bond funds had a few straight quarters of poor returns. When performance improved, bond funds were likely to stop being misclassified.

Furthermore, the authors find that misclassified funds attract more investor dollars because they appear more attractive than their peer funds. It’s like this: Say two funds have the same risk profile, but one of them offers higher yields — most investors would probably be apt to “follow the money.”

Look before you leap

In Morningstar’s blog post response to the working paper, the firm acknowledges variations between the creditworthiness data that bond funds submit and the firm’s own data on those funds. Morningstar diverges from the authors on why those differences exist. The firm places blame not on fund managers misreporting credit risk — the “leap in logic” — but on holdings it classifies as “not rated.”

The firm gives the example that bond issuers are often credit rated, while their securities are not. Here’s one way to think about what this means: Say a city issues a bond for a new city hall. The city might have an investment-grade credit rating, but the specific bond it issues for the new city hall won’t be rated. A bond fund manager might rate this bond highly, because the city itself has a high credit rating. Morningstar, however, in its breakdown of the fund’s holdings, wouldn’t rate that specific bond.

“As a result, Morningstar’s calculated data generally shows higher levels of not-rated bonds than those self-reported by asset managers,” the firm writes in its blog post.

Morningstar’s proprietary methodology assigns these unrated holdings a low credit rating. These unrated holdings are mucking up the authors’ data, according to Morningstar, and it claims the authors’ findings disappear when controlling for holdings that are not rated.

The authors disagree. They released a response, writing that they went back and removed unrated holdings from their analysis and still found “a significant number of misclassified funds.”

The authors declined requests from Journalist’s Resource to make their underlying data immediately public, but they clearly lay out their methodology in their working paper — so their results should, in principle, be replicable for those with a paid subscription to Morningstar. The authors have shared with other academics the credit rating data they compiled. If the paper is published in the Journal of Finance, it would include a replication package with the underlying data and programming code.

“It’ll take a year,” Chen says. “We try to make what we do as transparent as possible.”

Morningstar’s second big issue with the working paper, according to the firm’s blog post, is that the authors conflate “categories” and “style boxes.” Morningstar categories are a sort of shorthand for some critical fund information: “The categories make it easier to build well-diversified portfolios, assess potential risk, and identify top-performing funds.” The style box refers to the area marked “Credit Quality / Interest Rate Sensitivity,” in this screenshot:

The category in the above example is “U.S. Fund Short-Term Bond.” By Morningstar’s definition, this category should be “attractive to fairly conservative investors, because they are less sensitive to interest rates than portfolios with longer durations.”

The point is that categories say something about a fund’s risk. But Morningstar in its response to the working paper makes clear that the style box — where it says “credit quality” above — doesn’t factor into category assignments.

“But if M* Styles are not as important as indicated in M* rebuttal, why are they displayed so prominently?” writes one commenter in a Morningstar chat forum, using “M*” as an abbreviation for Morningstar.

“I agree it can be confusing,” responds Jeffrey Ptak, head of global manager research for Morningstar. “Here’s how I think of style-box vs. M* category classification. The style-box is a snapshot at a given point in time. The category classification is a portrait — I suppose you could say a time-lapse — of what the fund’s style has looked like over a period of time, which we typically define as 36 months.”

The authors counter that “our findings still hold when we compare the funds against the Morningstar category.” What matters, they write, is their analysis relies on risk information on underlying bond holdings.

After the National Bureau of Economic Research released the working paper in November, the authors say they heard from at least one investment management firm corroborating their findings. That firm initially agreed to speak with JR, but later declined comment.

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The U.S.-China trade war entered new territory when President Donald Trump last week ordered more tariffs on $300 billion worth of goods from China.

Ordering tariffs was nothing new. What was different was how China responded.

China allowed the exchange rate between the yuan and the dollar to cross a 7-to-1 threshold that many media outlets are calling “psychologically important.”

What does psychology have to do with currency exchange? A lot. And foreign exchange prices can have real consequences for things that really matter, like Americans’ retirement savings.

“The qualifier is ‘psychological,’” says Saule Omarova, who studies international finance and is director of the Clarke Program on the Law and Regulation of Financial Institutions and Markets at Cornell University. “There is nothing mandatory about a 7-to-1 exchange rate and there is nothing hardwired about it.”

How China and the U.S. affect currency exchange rates 

The People’s Bank of China is the central bank in China. Each day it sets an exchange rate for the renminbi — that’s what China’s currency is called. The yuan is the unit of measurement for the renminbi. But “yuan” is commonly used to refer to both the currency and unit of measurement.

The U.S. takes a more indirect approach in setting currency exchange rates. The central bank in the U.S., the Federal Reserve, sets the federal funds rate. This rate is the amount U.S. banks charge one another for short-term borrowing, and it’s the rate the Federal Reserve cut last week. It can affect interest rates on financial products, like home mortgages, and can affect prices in markets, such as the foreign exchange.

Even though the People’s Bank can set exchange rates for the yuan at any level, it must still consider the health of China’s economy. For example, a weaker currency can boost exports – to an extent. Keith Bradsher, Shanghai bureau chief for The New York Times, explains:

“Say you own a Chinese factory making lawn ornaments, and you sell a lot of pink flamingos to an American retailer. You price each at $1 — they may sell for far more in retail outlets in the United States, but shipping and storage account for most of that. When the renminbi is 6 to the dollar, that translates to 6 renminbi in sales.

But when the currency depreciates to 7 to the dollar, that $1 flamingo is worth 7 renminbi in sales to you. Or you can cut the price — say, from $1 to 85.7 cents — and still make your original 6 renminbi in sales. Your American competitor, who has to buy and sell in dollars, has to grudgingly cut prices to compete.”

If the People’s Bank is too aggressive in weakening the yuan, however, that can rattle markets, Omarova says.

Take what happened Aug. 5: after the yuan-dollar exchange rate ratio bumped up over 7 to 1 and the U.S. designated China as a currency manipulator, the Dow Jones Industrial Average dropped 767 points, losing almost 3% of its value.

A psychologically important threshold

Psychology kicked in because currency traders came to expect a certain level of stability in the price of the yuan. For more than a decade, the People’s Bank had kept its daily reference rate — those day-to-day changes in the yuan’s exchange rate — between 6 and 7 yuan per dollar.

“They’ve decided it’s probably the closest they can get to what might be, in economists’ expectations, the natural or proper rate of exchange between the dollar and renminbi,” Omarova says. “What they’ve been doing is managing the daily reference rate for 10 years, so it fluctuates but never breaks through this 7-to-1 threshold.”

When rates did break through on Aug. 5, it was a psychological shock to traders on the foreign exchange market. The exchange ceiling they had come to expect was no longer there.

Bigger than the Dow, bigger than psychology

Other than wealthy investors, people who care about the yuan-dollar exchange rate might include the tens of millions of Americans with 401(k) retirement plans. These plans are the major source of retirement savings for many Americans, and their value is tied to financial markets.

So, when a “psychologically important” threshold is crossed there can be real consequences for 401(k) plan holders. The effects on a particular 401(k) will depend on how assets are allocated — the balance a plan holder chooses between securities and bonds. But again, broadly, 401(k) values will take a hit when the Dow sinks. Bonds aren’t immune, though. Interest rates on long-term bonds also have fallen over the last week or so.

“What we need to realize is there is structural dysfunction in our financial system,” Omarova says. “Values of so many financial assets are ultimately tied to these particular pricing points that seem to be far removed from what we see on the surface.”

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Income inequality — broadly speaking, the gap between the earnings of the rich and of the poor — has widened in America over recent decades, scholars have shown. But amid all the debate about what’s to blame for the increasingly lopsided distribution, little is known about public opinion on policy changes.

An academic study worth reading: “Exposure to Rising Inequality Shapes Americans’ Opportunity Beliefs and Policy Support,” in Proceedings of the National Academy of Sciences, August 2017.

Study summary:

Americans, when they realize the extent to which their country’s poor are getting poorer and rich are getting richer, are keen to redistribute. So theorizes a team of scholars led by Leslie McCall of City University of New York. McCall and her colleagues believe that rising concern about income inequality is masked by the fact that few Americans, compared to residents of other rich countries, support redistributive social policies.

The authors hypothesize that as income inequality rises and becomes more apparent, Americans are becoming more skeptical of the “American Dream” — the idea that anyone who works hard can get ahead.

McCall and her colleagues designed three experiments to test Americans’ beliefs about the factors that cause some to thrive and some to struggle in the modern economy. After exposing a set of respondents to a nonpartisan news report about growing income inequality and another set to a non-related news article, they ask questions targeting so-called “opportunity beliefs.” These are the factors that help Americans get ahead, such as being born wealthy (a “structural” advantage) and hard work (an “individual” pursuit). Further tests exposed survey participants to a “rags-to-riches” story exemplifying the American Dream. The largest survey group was a nationally representative sample of 1,501 Americans.

Key takeaways:  

• Exposure to information about income inequality seems to make Americans more skeptical about the American Dream.
• Participants exposed to the story about income inequality were more likely to rate structural factors (family connections) as important to getting ahead and less likely to name individual factors such as hard work.
• Participants exposed to the story about income inequality and then to a story exemplifying the American Dream still rated structural factors as more important for getting ahead than individual hard work.
• Respondents exposed to the news story of income inequality were statistically more likely to support government intervention (such as social programs for the poor) and corporate intervention (such as reducing the differences in pay between executives and low-skilled workers).
• This same group was also less likely to say that low-income individuals are responsible for their situation or that inequality “does not need to be reduced.”
• These findings suggest that “beliefs about the opportunity structure in society may play an important role in shaping Americans’ evaluations of equity-enhancing policies in the wake of rising economic inequality.”

Helpful resources:

One of the best sources of economic data is the Federal Reserve Economic Database (FRED) at the Federal Reserve Bank of St. Louis. We discussed how to visualize that and other economic data in this tip sheet.

The Pew Research Center has a number of surveys on how Americans perceive income inequality.

The New York Times published an interactive chart in August 2017, based on the work of some topic economists, that explored the changing share of income accruing to the very top earners since World War II.

Other research:

An often-cited work on economic inequality was this 2014 paper in Science by Thomas Piketty and Emmanuel Saez: “Inequality in the Long Run.”

More recently, two 2017 papers in Economic Inquiry analyze the data from different angles: “Inequality and Growth in the United States: Why Physical and Human Capital Matter,” and “Estimating the Level and Distribution of Global Wealth, 2000-2014.”

A 2017 paper in the Journal of Personality and Social Psychology found people are happier when they live in more equal countries.

Journalist’s Resource has profiled related research on labor unions, the relationship between Medicaid and Medicare and income inequality, the role of globalization, income inequality in China, and debates over how a universal basic income could be either an efficient equalizer or a waste of cash.

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Let’s say your city needs cash to build a new school or sewer system. The budget lacks funds and the state government is only willing to pay a small share. What does your city do? Most likely, it issues a municipal bond.

Munis, as they’re known, enable a state, county, city, housing authority or other local government to raise money for public projects — usually infrastructure. But unlike the bonds private firms sell to raise cash, the interest is free from federal income tax, meaning, in effect, that munis are federally subsidized. They are also often exempt from local taxes. These tax benefits allow issuers (also known as borrowers) to attract investors at lower rates; in financial parlance, it makes borrowing cheaper for local governments.

There are about 50,000 municipalities issuing notes and bonds in the United States, according to government regulators; outstanding munis were worth over $3 trillion in the first quarter of 2017. That number grew rapidly in the 1980s and 2000s. But it has changed little since the Great Recession, possibly reflecting “a hesitation to engage in new long-term capital projects given the budget challenges and economic uncertainties facing municipal governments,” according to a 2016 report from the Congressional Research Service, Congress’s nonpartisan think tank.

There are two types of munis: “general obligation,” which means the municipality pays the interest with regular tax revenues, and “revenue bonds,” for projects like toll roads or sewer systems, which generate income that can be used to pay the interest. General obligation bonds are secured on the faith and credit of the issuing government. That municipality pledges to tax its citizens, if necessary, to pay back the lender. Revenue bonds (a little more than half the market) are not guaranteed. If the toll road does not attract enough drivers, the lenders could lose money.

Selling munis involves a number of steps: For example, a city draws up a plan to borrow money to build a school. It hires a financial advisor who affirms a fiduciary duty to put the city’s interests first (and must register with federal regulators). The city then hires an underwriter who determines how much the bonds are worth, how many should be sold, and takes the risk of holding all the bonds lest they do not sell. For its services, the underwriter takes a commission. The underwriter sells the bonds through a brokerage firm (such as Fidelity or BlackRock), which takes a small percentage commission for pairing the bonds with investors — individuals, corporations or mutual funds, for example.

The bondholder (the investor) then receives regular payments. At the end of the life of the bond, he or she receives back the principal.

Regulators and data

The city posts information for buyers (investors) on the Electronic Municipal Market Access (EMMA) website, which offers real-time data, disclosure documents and bond prices. EMMA is run by the Municipal Securities Rulemaking Board (MSRB), a regulator overseen by federal bodies including the Securities and Exchange Commission (SEC) and empowered by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Throughout the life of the bond, the city continues to update EMMA with information on its financial health. Meanwhile, investors trade the bonds on so-called “secondary markets” — trades that occur after the initial issuance, when bonds are often treated and traded like commodities.

For more on regulations, see the MRSB’s education resources. The SEC also publishes a detailed explainer on how the muni market works.

Tax implications

The tax exemption for investors helps local governments raise money: “In most cases investors would be indifferent between taxable bonds (e.g. corporate bonds) that yield a 10 percent rate of return before taxes and tax-exempt bonds of equivalent risk that yield a 6.5 percent return. The taxable bond interest earnings carry a tax liability (35 percent of the interest income in most cases), making the after-tax return on the two bonds identical at 6.5 percent,” explains the Congressional Research Service. In other words, local governments pay 3.5 percent less than corporations to borrow money.

This adds up, costing Washington an estimated $31.7 billion in foregone tax revenue in 2016, according to the federal budget. That number is expected to grow in the coming years, though under Donald Trump’s proposed budget it would grow more slowly than under Barack Obama’s.

For anyone who does not pay taxes in the U.S., munis are not a sensible investment. Foreigners can generally get a better return in a corporate bond or a U.S. Treasury bill and don’t benefit from the muni tax break.

Vocabulary

• Issuer – The municipality borrowing money; a.k.a. the borrower or the obligor. You can browse all the issuers by state inside the MSRB’s database. Dig a little and you can find what your local government has borrowed, at what rate, and all sorts of details on the municipality’s finances and creditworthiness inside each bond’s prospectus (example for Arlington, MA, here).
• Lender – The investor who loans money; a.k.a. the bondholder.
• Coupon – The annual interest paid on a bond, also known as the “coupon rate.” If a $1,000 bond pays $50 per year, the coupon rate is 5 percent. Because these payments are usually semiannual, that $1,000 bond at 5 percent will pay $25 twice per year.
• Yield – That’s the investment’s annual income. For our $1,000 muni at 5 percent, the yield is $50 per year. But, because bonds can be traded, that amount fluctuates depending on how desirable the bond is on the secondary market (see below).
• Maturity date – The date the municipality promises to pay back the principal. When these securities have maturity dates of less than one year, they’re known as “notes.” When the maturity is years away, they’re known as “bonds.” (A “security” is an investment intended to raise capital — generally, stocks and bonds are securities; bank accounts and futures contracts are not.)
• Primary market – Where newly issued securities are sold.
• Secondary market – The trading in bonds after they have been issued. Usually handled by a brokerage.
• Price – Richard Robb, who teaches capital markets at Columbia University, warns: “The expression ‘the price of a bond’ often leads to confusion. Bonds don’t have a single price. A dealer will bid at one price and offer at a higher price. ‘Price’ frequently refers to ‘mid-market.’ ‘Mid-market is the average of the bid and the ask prices.'”
• Default – When a borrower is unable to make a scheduled payment to a creditor. When this happens, the borrower usually files for bankruptcy protection to help negotiate with those creditors. When a default happens — think of Detroit and Puerto Rico — it makes big news. But muni defaults are far less common than corporate defaults, according to the MSRB. They occur 0.05 percent of the time compared to 2.73 percent.

For more, see the MRSB glossary.

Measuring risk

Ratings agencies score a corporation or government’s ability and willingness to pay, though not every municipality will be rated by each of the agencies. The main three are Fitch, Moody’s, and Standard & Poors (S&P). Each uses its own scale and offers a credit rating, which the SEC calls “an assessment of an entity’s ability to pay its financial obligations.”

Other resources:

The muni market grew rapidly in the 1980s and the 2000s, this chart from the St. Louis Federal Reserve Bank demonstrates.

This 2016 report by the Congressional Research Service discusses all manner of bonds that local governments can sell to raise money for different types of projects, and the federal tax relevancy. It also describes bond-related tax provisions in recent legislation.

The Census Bureau collects data on state tax receipts. These do not include information on bond issuances, but can be useful for making relative comparisons.

For an explanation of the differences between ratings agencies’ methodologies, check out this piece by Reuters, written when S&P, but not the others, downgraded the U.S. government’s investment rating in 2011.

Check out our related tip sheets on the federal budget, the national debt and Social Security reform.

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In the old days, according to popular allegory, you worked for a company most of your life. At retirement, that firm rewarded you with a pension, a guaranteed income for your golden years. These days, retirement planning is a bit more complicated. Fewer employers offer defined-benefit pension plans. Instead they require employees to parse byzantine literature and make life-altering choices for themselves. And more options are available than ever before.

One frequent choice nowadays is whether to make a direct contribution into a retirement account (such as a 401(k)) from each paycheck, which is sometimes matched by the employer. This amounts to transferring a current resource (cash that could be enjoyed today) into a hazy and distant figure (numbers on a piece of paper, for now). Between 1980 and 2000, the share of retirement savings that Americans contributed to such self-directed funds more than doubled, according to research published in the Proceedings of the National Academy of Sciences.

All this demands some financial knowledge. Yet large shares of the population are not financially literate, researchers have shown. Knowledge is expensive and paying for it – just like investing in human capital – can be a gamble. In short, Americans are increasingly responsible for planning their own finances in retirement, but they are not necessarily better prepared.

A 2017 study in the Journal of Political Economy, “Optimal Financial Knowledge and Wealth Inequality,” addresses how financial illiteracy impacts the amount of money on which retirees live.

The researchers, led by Annamaria Lusardi of George Washington University, simulate how people acquire financial knowledge and how they make decisions affecting their future economic security. By looking at these factors rather than external stimuli – such as one’s salary – they estimate that 30 to 40 percent of wealth inequality among retirees is a result of differences in financial knowledge.

Lusardi and her colleagues also argue that not everyone benefits from investing time or money on, say, retirement-planning courses. In some cases, people expecting traditional pension benefits have little need to invest in educating themselves. At other times, the opportunity cost is too high; late in life, there is too little time remaining to benefit from the knowledge.

Because Social Security benefits help many Americans without financial knowledge, Lusardi and her colleagues expect that any curtailing of this public pension benefit would lead more people to invest in financial literacy. In fact, for the time being, Social Security may “discourage the accumulation of financial knowledge.” That is true also in other countries that offer safety nets for retirees.

Helpful resources:

People are living longer than ever before. We’ve covered how that’s affecting government budgets. We have also covered research on income inequality and college debt. The National Bureau for Economic Research (NBER) has published papers on financial literacy and decision making, the importance of financial literacy, and on tapping into one’s Social Security benefits before age 62.

Researchers have also discussed the push in high schools to improve financial literacy because of the ballooning cost of college.

Social Security benefit data is available from the Social Security Administration here.

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“Follow the money,” the editor bellowed at the cub reporter. That’s something you hear a lot in newsrooms. And top reporters follow that advice.

Even if you are not working on a big investigation, a basic understanding of financial statements is essential for any reporter. They are a reliable source for news stories, and not just on the business beat. Understanding a company’s books helps you know which questions to ask about a company’s operations and business dealings, allowing you to look beyond the press releases.

If a company is publicly traded — its shares are bought and sold on a stock market — it must file extensive documentation with the Securities and Exchange Commission (SEC), a U.S. government body. The SEC was set up after the Great Depression and tasked with overseeing capital markets, ensuring transparency, fairness and protecting investors against fraud. It provides registration information, financial statements and other information through its EDGAR (electronic, data gathering, analysis and retrieval) database.

For an example, let’s look at The New York Times Company, the parent of the eponymous paper, which is traded on the New York Stock Exchange (NYSE) under the ticker symbol NYT.

EDGAR provides a number of forms for The Times. (When searching, sometimes you need to leave the article “the” off the beginning of a company’s name.) Here is what is available:

A company’s audited annual report — its 10-K — includes data and information on the company’s performance, including its organization, history, equity, earnings, subsidiaries and more. Under SEC regulations, it must be filed 60 days after the end of the company’s fiscal year. A 10-Q is a quarterly report (except for the fourth quarter, when it is a 10-K) that is generally not audited. The SEC requires more information in a 10-K. On the occasion when a company is unable to file either report, it must explain why in a form called an “NT” 10-K or 10-Q. Investopedia, a great resource, lists other forms here.

Journalists also can read a company’s official annual report, which is often nicely laid out and adorned with color photos. But the 10-K will offer more comprehensive information.

The New York Times Company’s fiscal year ends on Dec. 27. In this case, its most recent 10-K appeared on EDGAR on Feb. 24, 2016. You can find it by searching for the company in EDGAR and then scrolling down to the 10-K. Click “documents” and open the form listed at the top. You will get a long page of text and spreadsheets.

A 10-K gives a much better overview than quarter-to-quarter documents, because many businesses experience seasonal cycles. If you’re looking for specific information or key terms, use control-F or Apple-F to search.

Income statement and the bottom line

The income statement reports on a company’s performance over a given period, including revenues and expenses, inflows and outflows. The Times calls this a “statement of operations”; it is sometimes also known as a statement of earnings or a profit and loss (P&L) statement. The Times further breaks this down in a section called “Results of Operations.”

A firm has some freedom to choose how it presents information on its 10-K. There are often a number of terms for the same thing. Be aware that numbers often are abbreviated — for example, a value written as $1,575 could mean $1,575,000. Many journalists have stumbled over a set of three zeros. A key should explain how numerical values are presented.

To calculate “the bottom line,” (a.k.a. net income), subtract all expenses — the cost of doing business, taxes and interest payments, depreciation and other expenses — from revenues.

For the last four years, the Times has posted a profit. In 2011, it lost over $37 million. But does that mean the company is healthy? Newspapers are operating in a tough environment with print ad revenues declining and digital returns slow to offset the losses.

Circulation revenues grew from $824 million in 2013 to $846 million in 2015. In the same period, advertising revenues fell — from $667 million to $639 million. The Times chooses to break these numbers down further, showing that though the print advertising and classified revenues are falling, “other advertising revenue” is growing: “Other advertising revenue primarily includes creative services fees associated with our branded content studio; revenue from preprinted advertising, also known as free-standing inserts; revenue generated from branded bags in which our newspapers are delivered; and advertising revenues from our news services business.”

Balance sheet

The balance sheet reports a company’s financial situation at a single point in time. This statement will include assets, liabilities and equity (assets = liabilities + equity). At the Times:

Assets:

• Cash, cash equivalents and marketable securities — these are liquid.
• Property, plant and equipment (PP&E) — these are not liquid.

Liabilities:

• Total debt and capital lease obligations — what the company owes.

Equities:

• Total New York Times Company stockholders’ equity — what the company is worth to its shareholders.

MD&A

The Management’s Discussion and Analysis (MD&A) section outlines management’s take on the firm’s financial performance. The SEC requires these statements to help investors see the company as the managers do, providing a level of transparency not available for privately held firms.

This section is a helpful summary of the firm’s operations as well as its future plans and new products. Here we find comments on the shifting newspaper industry overall and the management’s strategy for tackling adverse situations. Profits and losses from other investments are discussed here, as well as the firm’s capital structure (its debt and equity). And consider other interesting tidbits that will help you craft a story: For example, at the Times the changing cost of newsprint is a factor. You learn this in the MD&A. Here, you also learn that the Times’ digital-only subscribers grew to over 1 million in 2015, a 20 percent increase.

Valuing a company — or how to compare companies

One quantitative way to analyze a firm’s financial health, or compare companies, is with ratios. Often expressed as percentages, ratios are calculated by crunching numbers from the financial statements. They are useful when compared to previous years, to different companies in the same industry or sometimes to the economy overall. Investopedia has a step-by-step tutorial on how to analyze 19 different ratios.

A few examples:

Return on Equity (RoE) — This ratio measures how efficiently a company is run, specifically how the management looks after funds the shareholders have invested. It is portrayed as a percentage and calculated by dividing the net income (from the income statement) by the average stockholders’ equity (from the balance sheet). Compare against companies in the same industry and against the market as a whole. (Data from Yahoo! Finance.)

• NY Times 5.72%
• tronc Inc. (formerly Tribune Publishing) -19.76%
• Gannet Company 9.64%
• Facebook 11.15%
• Google (Alphabet Inc.) 15%

Return on Assets (RoA) — This is a measure of how profitable a company is relative to its assets, the invested capital. Calculate by dividing net income by total assets (balance sheet). This is sometimes called return on investment (RoI). Because these numbers vary significantly between industries, it is more useful to compare companies within one industry or compare a single company across years.

The Debt-to-Equity (D/E) ratio compares the company’s total debt to the shareholders’ equity (how much the shareholders own). Debt-to-equity ratio = total liabilities / shareholders’ equity. Both figures are available on the balance sheet. At the Times, the ratio is 0.52, which is equal to the total debt and capital lease obligations ($431,228,000) divided by the total New York Times Company stockholders’ equity ($826,751,000). So, for every 52 cents of debt, shareholders have invested one dollar in the company. The company is taking on debt at half the rate its owners are investing in it. A lower debt-to-equity ratio indicates lower risk. By comparison, the owner of USA Today, Gannet Company, has a 1.29 ratio. By this measure alone, The New York Times Co. is in better financial shape. Facebook, with its favorable stock price, has a ratio of 0.117.

Cash flow statement

The cash flow statement details how a company manages its cash — or how liquidity is impacted by changes to a company’s balance sheets and income statements. It deconstructs spending into operating, investing and financing activities. This is useful for determining a company’s short-term viability and its ability to pay its bills.

The Times does not include a statement of its free cash flow (FCF): the cash it generated after accounting for the expenses necessary to run its business (operating cash flow minus capital expenditures). This is not required by the SEC.

By contrast, Facebook Inc. (FB :NASDAQ), a media company that had a very good fiscal 2015, is eager to boast about its free cash flow. Perhaps that’s because its FCF is impressive. In Facebook’s case, this means subtracting purchases of property and equipment ($2.5 billion) from net operating cash ($8.6 billion). Facebook calls FCF “one of the key financial indicators of our business performance over the long term. … [It] can provide useful supplemental information to help investors better understand underlying trends in our business.”

But FCF is not a substitute for other indicators or useful for making comparisons, because a company can choose how to define its FCF and because it does not reflect future commitments. Moreover, FCF can vary over time, depending on the business cycle or where the company is relative to plans for expansion.

Stock data online

More valuation information can be gathered from Yahoo! Finance, Google Finance or other aggregators. Like the income statement, the balance sheet and the cash flow statement, these websites offer loads of updated information on shares and trading as well as ratios for comparison. One headline figure is market capitalization (“market cap”), which is calculated simply by multiplying total shares by the value per share. When we say something is an X-billion-dollar company, this is the figure we’re using.

Debt

Other ratios — such as cash flow to debt — allow us to analyze the risk of bankruptcy. Debt alone is not a bad thing — it allows a firm to borrow against future profits and expand operations. But it can also present risks. Assessments from ratings agencies such as Standard & Poor’s and Moody’s Investor Services help determine the interest a company pays to service its debt.

Footnotes

The 10-K includes many other clues on how a company is run. Besides listing major shareholders, the narrative describes what kind of concerns the management has going forward and how it plans to address them. Do not overlook the footnotes. They are packed with information.

Footnotes are where firms discuss their accounting policies, their subjective decisions and where they disclose their tax rates and debt obligations. Here they discuss stock options and how senior employees benefit. They also discuss pension plans and disclose how much these may be over- or underfunded. (More on the Times’ pension problem below.)

Though executive compensation is not detailed in the 10-K, the footnotes tell you where to look: another document filed with the SEC, the Proxy Statement for the 2016 Annual Meeting of Stockholders.

Two highlights from the Times’ 10-K that could make stories:

• The Times has shed over 50 percent of its staff in the last four years. Staff fell from 7,273 in 2011 to 3,560 in 2015. Some of this is from attrition and buyouts. But the company comments and warns investors: “Over the last several years, we have taken steps to reduce operating costs across the company, and we plan to continue our cost management efforts. […] if we do not manage cost-reduction efforts properly, such efforts may affect the quality of our products and therefore our ability to generate future revenues. And to the extent our cost-reduction efforts result in reductions in staff and employee compensation and benefits, this could adversely affect our ability to attract and retain key employees.” Note, however, that during this period, The Times also sold The Boston Globe, About.com and other assets, which could explain some paring of staff.

• The Times’ pension plans have “significant underfunded liabilities.” That means the expected cost of future obligations exceeds the means to pay for them. In this case, the pensions were underfunded at the end of 2015 by approximately $520 million — qualified benefit plans by $273 million and non-qualified plans by another $247 million. The Times is offering lump-sum payments to some former employees to mitigate the liabilities, but nevertheless, “As a result of these required contributions, we may have less cash available for working capital [investments] and other corporate uses, which may have an adverse impact on our results of operations, financial condition and liquidity.”

Other countries:

Several other countries offer databases similar to EDGAR for firms listed on local stock markets, though filing requirements are different.

• Canada has SEDAR.

• The United Kingdom has Companies House.

• The European Union has struggled to create a centralized disclosure system, but the Committee of European Securities Regulators is reportedly working on it. Meanwhile, search through the country in which a company is listed on a stock exchange.

• The Frankfurt Boerse — the Frankfurt stock exchange — links to recent fillings by companies listed there.

• You can also use France’s Trade and Companies Register and the Tokyo Stock Exchange. And many more.

Other helpful resources:

• The SEC has a guide to financial statements for beginners.

• Investopedia is a popular resource among MBA students.

• Duke Professor Campbell Harvey’s Hypertextual Finance Glossary claims to be the largest financial glossary on the internet.

• The Economist has an excellent online glossary of economics terms.

• Journalism.co.uk has a primer on starting out in financial journalism.

• Journalist’s Resource has other tip sheets on economics and finance, such as this one on five stories to look for in financial statements and this one on types of SEC filings.

Journalist’s Resource would like to thank Suresh Nallareddy, professor of accounting and financial statement analysis at Duke University’s Fuqua School of Business, for his help preparing this tip sheet.

Keywords: financial accounting, financial statements, financial journalism

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