Finance

THE NICETIES of corporate finance rarely attract the attention of activists. It is rarer still that those at either end of the political spectrum agree on the need for change. When it comes to the tax system’s preferential treatment for debt over equity, however, both the left-wing Tax Justice Network and the fiscally conservative Tax Foundation agree that the “debt bias” needs correcting. But the degree of consensus belies the difficulty of getting it done.Most countries that levy taxes on corporate profits treat debt more favourably than equity, largely because they allow interest payments, like other costs, to be deducted from tax bills. That gives companies a huge incentive to borrow, rather than to fund themselves through equity. In America, Britain, Germany and Japan, debt-based finance is taxed at rates that are 3.8-6 percentage points lower than those on equity investments, according to the OECD. The result is more indebtedness than would otherwise have been the case. According to the Securities Industry and Financial Markets Association, the value of outstanding debt securities amounts to $123trn, exceeding the $106trn in listed equities globally. The IMF estimated in 2016 that the debt bias explained as much as 20% of investment banks’ total leverage.The bias affects a swathe of firms, from small and unlisted family affairs to the world’s biggest public companies; and higher debt loads in general leave them more exposed to economic shocks. But, because trouble at highly leveraged lenders can easily throw the rest of the financial system into turmoil, researchers have tended to concentrate on the effects on banks. Total earnings are often thin relative to the large flows of interest payments made to and by lenders, and removing the tax deductibility of interest could make some of them unprofitable.The debt bias grows as corporate taxes rise, posing headaches for governments hoping to shake down profitable companies to plug fiscal holes. It has therefore not gone unnoticed by the authorities—though recent attempts to restore balance have been marginal. A rule that came into effect this year in America caps debt-interest tax-deductibility at 30% of a company’s earnings before interest and taxes, as part of President Donald Trump’s 2017 tax reforms. The EU is mulling a “debt-equity bias reduction allowance” , the details of which are yet to be made public.What would wholesale reform look like? In a paper published in 2017, Mark Roe of Harvard Law School and Michael Tröge of ESCP Business School put forward some ideas. One is to treat debt less preferentially. They imagine a bank with $50bn in gross profits and $40bn in interest payments. With full deduction for interest and a corporate-tax rate of 20%, the bank would pay tax of $2bn, and have an incentive to rack up debt. But if the interest deduction were removed altogether, a tax rate of 20% would wipe out the bank’s entire net profit. One solution would be to withdraw deductibility, but to lower the tax on gross profits. A rate of 7% in that scenario would yield as much to the taxman, and pose the same burden to the bank, as a 35% tax on net profits.Another option, which may be more politically viable than cutting tax rates, is to make issuing equity more attractive. The researchers propose a version of an allowance for corporate equity (ACE), which would make some share of a bank’s equity—above its regulatory requirements—as tax-friendly as debt. If a bank had $100bn in equity above what it was required to issue, an allowance of 5% would reduce its taxable profit by $5bn, the same way that $100bn in debt with an interest rate of 5% would be treated. The principle could be applied just as easily to non-financial firms.Indeed, some European countries, such as Italy and Malta, have introduced ACE schemes for a wider set of companies. The OECD reckons that Italy’s tax bias in favour of debt is now less than a percentage point. The European Commission finds that the country’s scheme has reduced the leverage ratio of manufacturers by nine percentage points, with a larger effect on smaller firms.Reducing the bias, then, is not impossible. But working out whether reform will upset the vast edifice of debt financing will be much harder to do, especially in the larger markets of America or the wider EU. (Italy’s scheme covers only newly issued equity for this reason.) The preference for debt is deep-rooted enough that ripping it out could have large, enduring effects on portfolios around the world. Serious change may not come as quickly as the activists hope.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.Read more from Buttonwood, our columnist on financial markets:The faster metabolism of finance, as seen by a veteran broker (Jan 15th)Why gold has lost some of its investment allure (Jan 8th)Why capital will become scarcer in the 2020s (Jan 1st)This article appeared in the Finance & economics section of the print edition under the headline “Conflict of interest” More

Check out the companies making headlines before the bell:
Travelers (TRV) – The insurance company reported a quarterly profit of $5.20 per share, well above the $3.86 consensus estimate, with revenue also beating analyst forecasts. Travelers benefited from stronger results in investment income and underwriting, and its stock added 2.5% in the premarket.

American Airlines (AAL) – American gained 1.3% in premarket trading after it reported a quarterly loss of $1.42 per share, 6 cents narrower than anticipated. The airline also reported better-than-expected revenue as American’s results were helped by strong holiday demand.
Signet Jewelers (SIG) – The jewelry retailer saw its stock surge 5.9% in the premarket after it said total holiday season sales rose 30.4% and same-store sales jumped 25.2%.
United Airlines (UAL) – United Airlines lost $1.60 per share for the fourth quarter, narrower than the $2.11 loss that analysts were anticipating. Revenue topped forecasts, and United said the spread of the omicron Covid-19 variant hurt short-term bookings, yet it expects that negative impact to be temporary. United fell 1.4% in premarket trading.
Ford (F) – Ford lost 2% in the premarket after Jefferies downgraded the automaker’s stock to “hold” from “buy.” Jefferies said the optimism over Ford’s electric vehicle plans drove the stock higher than was justified and left very little potential upside.
Regions Financial (RF) – The bank’s stock tumbled 4.9% in premarket trading after it reported lower-than-expected quarterly earnings, with revenue matching analyst estimates.

Electronic Arts (EA) – Electronic Arts could be the next attractive target in the gaming sector following Microsoft’s (MSFT) deal to buy Activision Blizzard (ATVI), according to a column in today’s Financial Times. Electronic Arts rose 1% in the premarket.
Discover Financial Services (DFS) – Discover reported a quarterly profit of $3.64 per share, 5 cents below estimates, with revenue also falling short of analyst forecasts. The stock fell 3% in premarket action.
Alcoa (AA) – Alcoa reported adjusted quarterly earnings of $2.50 per share, beating the $1.90 consensus estimate, with revenue essentially in line with expectations. Alcoa benefited from rising aluminum prices, and its stock added 1.9% in the premarket.
Casper Sleep (CSPR) – Casper Sleep surged 12.9% in premarket trading after shareholders approved a deal to take the mattress company private. The transaction is expected to be completed next week.

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A trader on the floor of the New York Stock Exchange.
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U.S. equities futures were little changed Wednesday after another choppy trading session as investors remained cautious amid rising rates and the Nasdaq dipped into correction territory.
Futures tied to the Dow Jones Industrial Average slipped by 28 points, or 0.08%. S&P 500 futures fell 0.17% and Nasdaq 100 futures inched about 0.2% lower.

United Airlines shares fell about 2.5% in extended trading after the company reported its quarterly results and warned that omicron has dented bookings and will delay its pandemic recovery.
In regular trading, the Dow fell for the fourth day in a row, by 339 points, or 0.9%. The S&P 500 also fell 0.9%. The Nasdaq Composite closed down by 1.15% and now sits about 10% from its November record.
This year’s turbulence in tech stocks, set off by a spike in yields in the first week of January, continued Wednesday as the 10-year U.S. Treasury yield hit a high of 1.9%. It started the year at about 1.5%.
Brad McMillan, chief investment officer at Commonwealth Financial Network, acknowledged that the turbulence could last for some time but said investors shouldn’t panic about interest rate increases and that they’re normal as the economy returns to normal.
“The economy and markets can and do adjust to changes in interest rates,” McMillan said. “This environment is a normal part of the cycle and one we see on a regular basis. The current trend is perhaps a bit faster than we’ve been seeing, but it is a response to real economic factors—and, therefore, normal in context.”

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In addition to growth stocks, banks also pulled back Wednesday, despite strong earnings reports from Bank of America and Morgan Stanley, both of which saw shares rise.
Big regional banks Regions Financial and Fifth Third will report earnings Thursday before the bell, as well as American Airlines, Union Pacific and Baker Hughs. Netflix is the big name to watch Thursday. The streaming giant is set to report its quarterly results after the bell.
In economic data, investors are expecting numbers on jobless claims and existing home sales Thursday.

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The SEC is considering changing the rules under which hedge funds disclose that they have acquired 5% of a public company’s stock.
“I would anticipate we’d have something on that,” said SEC Chairman Gary Gensler because the current rule allows a 10-day buying period during which the public doesn’t know there’s a big player buying up shares.
Gensler made the hedge fund disclosure comments during a virtual Q&A at the Exchequer Club in Washington, D.C.

Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), speaks during a Senate Banking, Housing and Urban Affairs Committee hearing in Washington, D.C., U.S., on Tuesday, Sept. 14, 2021.
Bill Clark | Bloomberg | Getty Images

Securities and Exchange Commission Chairman Gary Gensler said Wednesday that the regulator is eyeing tighter disclosure deadlines for hedge funds building sizable stakes in companies.
The agency is considering changing the rules under which hedge funds disclose that they have acquired 5% of a public company’s stock, Gensler said during a virtual Q&A at the Exchequer Club in Washington, D.C..

The so-called Schedule 13-D filing is currently set at 10 days, which gives hedge funds more than a week to keep buying in secret.
“I would anticipate we’d have something on that,” Gensler said, adding that he is worried about “information asymmetry,” because the public doesn’t know there’s a big player buying up shares during the 10-day period.
“Right now, if you’ve crossed the 5% threshold on day one, and you have 10 days to file, that activist might in that period of time, just go up from five to 6% or they might go from five to 15%, but there’s nine days that the selling shareholders in the public don’t know that information,” Gensler said.
The 13D disclosure rule was passed in the 1960s to protect corporate management by informing them of activities from activist shareholders and corporate raiders. In other words, big investors wouldn’t be able to accumulate big stakes in secret to take over a company without giving it a chance to defend itself.
Critics of the rule have claimed that the 10-day deadline is already too tight and that hedge fund managers have a tougher time making a profit if they must reveal their strategies to the public so soon.
“It’s material nonpublic information that there’s an activist acquiring stock, who has an intent to influence and generally speaking, there’s a pop if you look at the economics from the day they announced … there’s usually a pop in the stock at least single-digit percent,” Gensler said. “So the selling shareholders during those days don’t have some material information.”

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Pampers Diapers, which are manufactured by Procter & Gamble, are displayed in an Associated Supermarket in New York.
Ramin Talai | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
SoFi – Shares of the mobile financial services company surged 13.7% after the company won long-sought regulatory approval to become a bank holding company. SoFi will acquire California community lender Golden Pacific Bancorp, a deal announced last year, and operate its bank subsidiary as SoFi bank.

UnitedHealth Group – UnitedHealth shares rose 1.4% midday, then retreated slightly to close 0.3% higher, after the health insurer’s fourth-quarter report beat earnings expectations. The company reported an adjusted profit of $4.48 per share, 17 cents above the Refinitiv consensus estimate. UnitedHealth’s revenue also topped forecasts.
Morgan Stanley — The bank stock climbed 1.8% after the firm posted better-than-expected fourth-quarter profits on strong equities trading revenue. Unlike its rivals, which disclosed soaring compensation costs for Wall Street personnel in the quarter, Morgan Stanley kept a lid on expenses.
Procter & Gamble – Shares of the consumer goods company rose 3.4% after it reported earnings topping Wall Street estimates. The company posted earnings of $1.66 per share, 1 cent higher than the Refinitiv consensus estimate. P&G also beat revenue expectations and raised its 2022 forecast.
US Bancorp — Shares of U.S. Bancorp fell 7.8% after a weaker-than-expected fourth-quarter earnings report. The company posted profit below the consensus expectation from analysts surveyed by Refinitiv. Net interest income also came in lower than the StreetAccount estimate.
State Street — Shares of the asset manager fell 7.1% despite State Street reporting better-than-expected results for the fourth quarter on the top and bottom lines. However, the company’s revenue from servicing fees came in below analysts’ expectations, according to FactSet’s StreetAccount. Additionally, State Street announced that the CEO of its Global Advisors business will retire this year.

Sony – Sony shares fell 5% after Microsoft on Tuesday announced a deal to buy video game maker Activision Blizzard for $68.7 billion. The acquisition would increase competitive pressure on Sony’s PlayStation operation.
Electronic Arts – Electronic Arts shares added 2.2% after an upgrade to overweight from Atlantic Equities. The firm said shares are attractive as a standalone company after Microsoft announced it would buy Activision Blizzard.
Las Vegas Sands — The casino and gaming stock gained 1.9% on Wednesday following an upgrade to buy from neutral by UBS. The investment firm said in a note to clients that the new gambling regulations in Macao should benefit incumbents like Las Vegas Sands.
Lennar — Shares of homebuilder stocks fell after downgrades from KeyBanc. The firm downgraded Lennar, KB Home and Toll Brothers to underweight and cut its rating on D.R. Horton to sector weight. Lennar slid 4.4%, D.R. Horton fell 3.3%, KB Home dipped 3.9% and Toll Brothers dropped 4.7%.
— CNBC’s Tanaya Macheel, Yun Li and Jesse Pound contributed reporting

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JGI/Jamie Grill | Tetra images | Getty Images

Most Americans are still struggling to build solid savings accounts nearly two years into the coronavirus pandemic.
Some 56% of Americans are unable to cover an unexpected $1,000 bill with savings, according to a telephone survey of more than 1,000 adults conducted in early January by Bankrate.

“Emergency savings and the $1,000 threshold are really an indication of how much people are struggling, that they are that close to the edge financially,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.

Instead of drawing on their emergency savings funds, many Americans would have to go into debt to foot an unexpected $1,000 bill, either by asking family and friends for a loan, taking a personal loan from a bank or charging a credit card.
Barriers to saving
To be sure, the 44% of Americans who could cover a $1,000 emergency expense from their savings is the highest percentage in eight years, according to Bankrate.
In addition, some adults fare better than others in building and keeping solid emergency savings. Nearly 60% of those with college degrees could cover a $1,000 expense, as could more than half of people who make $50,000 a year or more.
More from Invest in You:If you are quitting a job, here are some options for health insuranceHere are the top jobs in the U.S. — and how to land themThis company just decided to give employees a 4-day workweek permanently

Still, rising costs are also making it difficult for Americans to save. Inflation surged 7% in the last year, the fastest pace in 40 years, according to the U.S. Bureau of Labor Statistics’ December consumer price index release. Nearly all costs measured by the index increased in December, with the prices of shelter, used cars and trucks, energy and food boosting the measure most.
Nearly half of Americans said that higher costs are keeping them from saving more, according to Bankrate.
“Just about every expense to run a household has gone up,” said Tania Brown, a Lawrenceville, Georgia-based certified financial planner and founder of FinanciallyConfidentMom.com. In addition, she added that parents may be especially struggling if their children are in and out of school due to Covid, which not only impacts budgets but how much some can work each week.
How to build savings this year
For people who want to continue saving or start working on building an emergency fund now, it likely means they’ll need some creative budgeting, Brown said.
“To me, the biggest contributing factor in finances is behavior,” she said, adding that if you can make shifts to your spending habits, it will help you save.
That may mean making cuts to cable and streaming platform subscriptions or deciding to buy less meat at the grocery store, in order to save money. People could also sell clothes they’re no longer planning to wear and make changes to their homes to save on energy bills.

It may also be time for people to diligently shop for deals and start using coupons to keep costs down, or even commit to a no-spend period, Brown explained.
“For the stuff that’s not that important, cut mercilessly,” she said.
Once you’ve made cuts, you should also be intentional about where that extra money is going. Make sure you’re sending every found dollar to an emergency savings fund or to pay down debt, Brown said.
“Your lifestyle can’t creep up with the changes,” she said. “There has to be almost an obsession, a compulsion with prioritizing savings and serious intentionality on where you spend money.”
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Here are the numbers: Earnings of $2.01 a share vs. estimate $1.91 a share, according to Refinitiv.
Revenue: $14.52 billion vs. estimate $14.6 billion

James Gorman, chairman and chief executive officer of Morgan Stanley, speaks during a Bloomberg Television interview in Beijing, China, on Thursday, May 30, 2019.
Giulia Marchi | Bloomberg | Getty Images

Morgan Stanley on Wednesday posted better-than-expected fourth-quarter profits on strong equities trading revenue and as the firm held the line on compensation costs.
Here are the numbers:

·        Earnings: $2.01 a share vs. estimate $1.91 a share, according to Refinitiv.
·        Revenue: $14.52 billion vs. estimate $14.6 billion
Unlike its rivals, which disclosed that compensation costs for Wall Street personnel soared in the quarter, Morgan Stanley kept the line on expenses. The bank posted $5.49 billion in compensation expenses, below the $5.98 billion estimate of analysts surveyed by FactSet. Within its securities division, the bank said compensation fell from a year ago because of deferred compensation plans “linked to investment performance.”
The bank said that equities trading revenue rose 13% from a year ago to $2.86 billion, roughly $400 million higher than the $2.44 billion FactSet estimate. The improvement was driven by rising prime brokerage revenue and a $225 million gain on a strategic investment.
Investment management also topped estimates, rising 59% to $1.75 billion because of the bank’s Eaton Vance acquisition. Analysts had expected $1.66 billion.

Meanwhile, wealth management revenue rose 10% to $6.25, essentially matching the $6.28 billion estimate, on rising asset management fees and growth in lending to clients.
Investment banking revenue rose 6% to $2.43 billion, just under the $2.54 billion estimate, on higher advisory fees from mergers activity. And fixed income trading generated $1.23 billion in revenue, a 31% decline from a year earlier and below the $1.47 billion estimate.
Shares of the bank climbed 1.6% in premarket trading.
Trading in particular has begun to return to more normal volumes, if results from Goldman Sachs and JPMorgan Chase are any indication. Morgan Stanley has the No. 1 ranked equities trading business globally.
It’s also a top player in mergers advice, particularly in the technology and communications realms.
One area that should prove resilient is wealth management, which typically relies on fees based on assets under management that have been climbing along with rising markets.
Shares of the bank have dropped 4.2% this year, underperforming the 8.6% gain of the KBW Bank Index.
JPMorgan and Citigroup each reported the smallest earnings beats in the last seven quarters, and Goldman Sachs missed estimates for fourth quarter profit because of elevated expenses. Wells Fargo has been the sole bright spot so far in bank earnings after it gave targets for higher interest income and lower expenses.  
This story is developing. Please check back for updates.

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Check out the companies making headlines before the bell:
Bank of America (BAC) – Bank of America shares rallied 3.2% in the premarket after it beat estimates by 6 cents with a quarterly profit of 82 cents per share. Revenue was slightly below forecasts, but the bank’s overall performance was helped by strength in investment banking.

UnitedHealth Group (UNH) – UnitedHealth earned an adjusted $4.48 per share for the fourth quarter, 17 cents above estimates, and the health insurer’s revenue also topped forecasts. UnitedHealth saw particular strength from its Optum unit’s drug benefits management business.
Morgan Stanley (MS) – Morgan Stanley jumped 3.5% in the premarket after beating estimates by 10 cents with a quarterly profit of $2.01 per share, and revenue essentially in line with forecasts. Results got a boost from robust deal advisory fees on a very active quarter for merger and acquisition deals.
Procter & Gamble (PG) – P&G added 1% in the premarket after beating estimates on the top and bottom lines for its fiscal second quarter and raising its organic growth outlook. P&G beat estimates by a penny with a profit of $1.66 per share, as consumers shrugged off price hikes for the company’s household staples.
Sony (SONY) – Sony fell 3.9% in premarket trading on top of a 7.2% skid Tuesday. The drop followed news of Microsoft’s (MSFT) deal to buy video game maker Activision Blizzard (ATVI) for $68.7 billion, a transaction that would increase competitive pressure on Sony’s PlayStation operation.
Alliance Data Systems (ADS) – Alliance Data lost 1.7% in premarket action, following news that warehouse retailer BJ’s Wholesale (BJ) is moving its co-branded credit card account to Capital One (COF). Alliance is also being sued by BJ’s, which claims the store credit card specialist is slowing down the transfer process. Alliance said it believes it is in full compliance with its contract.

SoFi Technologies (SOFI) – SoFi surged 18% in premarket action after the financial technology company won regulatory approval to become a bank holding company.
Zogenix (ZGNX) – Zogenix soared 65.9% in the premarket after agreeing to be acquired by Brussels-based biopharmaceutical company UCB for $26 dollars per share, compared with the $15.64 Tuesday closing price for Zogenix. UCB would also pay an extra $2 per share if the Zogenix drug fintepla – a treatment for a rare type of epilepsy – wins EU approval by the end of 2023.
Tegna (TGNA) – Tegna is close to finalizing a $9 billion deal to be bought out by private equity firms Apollo Global Management and Standard General, according to sources familiar with the situation who spoke to the New York Post. The paper said the TV station operator was initially holding out for a roughly $500 breakup fee if the deal did not receive FCC approval in a timely manner, but has now backed off that demand. Tegna rallied 4.9% in the premarket.
ASML (ASML) – ASML shares rose after reporting a better-than-expected fourth-quarter profit. The Dutch chipmaker also issued an upbeat 2022 sales growth forecast, with shares adding 2.2% in premarket trading.
Pearson (PSON) – Pearson raised its full-year forecast amid strength across its education publishing portfolio and better-than-expected prospects for U.S. higher education courseware. Pearson shares jumped 7.2% in the premarket.

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