Performance of Finnish Mutual Funds: A Decomposition Approach

Mutual funds have increased in popularity among Finnish investors in recent years. In this study returns on domestic funds have been decomposed into several elements that measure different aspects of fund performance. The results indicate that fund managers in the long run tend to allocate fund capital between different stock categories in a profitable way. When it comes to the short term timing of their allocation decisions they are however unable to further improve overall performance. The evidence also suggests that managers possess the ability to pick above average performing stocks within the individual stock categories. During the investigated period most funds returned more than a broad benchmark index even after fees and indirect costs were taken into account.

Share Repurchases, Dividends, and Executive Options

This paper reports empirical results on the determinants of the authorization decision for share repurchases and dividends in Finland. We use a data set with precise data on share repurchases as well as characteristics for the option programs. Contrary to the U.S., we use a data set where 41% of the options are dividend protected, which allows us to separate between the "option funding" and "substitution / managerial wealth" hypothesis for the choice of the distribution method. We find that foreign ownership is the main determinant for share repurchases in Finland and attribute this relationship to tax factors. We also find evidence in support of both the signaling and agency cost hypotheses for cash distributions, especially in the case of share repurchases. Finally, we find a significant difference between companies with and without dividend protected options. When options are dividend protected, the relationship between dividend distributions and the scope of the options program turns to a significantly positive one instead of the negative one documented on U.S. data. This gives some support for the substitution / managerial wealth hypothesis as a determinant for the choice of the distribution method.

Evaluating the Predictability of the Volatility Smile Using Return Distributions

In this paper, we examine the predictability of observed volatility smiles in three major European index options markets, utilising the historical return distributions of the respective underlying assets. The analysis involves an application of the Black (1976) pricing model adjusted in accordance with the Jarrow-Rudd methodology as proposed in 1982. Thereby we adjust the expected future returns for the third and fourth central moments as these represent deviations from normality in the distributions of observed returns. Thus, they are considered one possible explanation to the existence of the smile. The obtained results indicate that the inclusion of the higher moments in the pricing model to some extent reduces the volatility smile, compared with the unadjusted Black-76 model. However, as the smile is partly a function of supply, demand, and liquidity, and as such intricate to model, this modification does not appear sufficient to fully capture the characteristics of the smile.

Cobreaking of Stock Prices and Contagion

Financial crises have shown that dramatic movements in one financial market can have a powerful impact on other markets. The paper proposes to use cobreaking to model comovements between financial markets during crises and to test for conta-gion. It finds evidence of cobreaking between stock returns in developed markets. Finding cobreaking has implications for the diversification of international investments. For emerging mar-ket stock returns the evidence of cobreaking is mainly due to the non-financial event of the 9/11 terrorist attacks in 2001. Fi-nancial crises originating in one emerging market do not spread to other markets, i.e., no contagion.

Examining and Modeling the Dynamics of the Volatility Surface

The objective of this paper is to investigate and model the characteristics of the prevailing volatility smiles and surfaces on the DAX- and ESX-index options markets. Continuing on the trend of Implied Volatility Functions, the Standardized Log-Moneyness model is introduced and fitted to historical data. The model replaces the constant volatility parameter of the Black & Scholes pricing model with a matrix of volatilities with respect to moneyness and maturity and is tested out-of-sample. Considering the dynamics, the results show support for the hypotheses put forward in this study, implying that the smile increases in magnitude when maturity and ATM volatility decreases and that there is a negative/positive correlation between a change in the underlying asset/time to maturity and implied ATM volatility. Further, the Standardized Log-Moneyness model indicates an improvement to pricing accuracy compared to previous Implied Volatility Function models, however indicating that the parameters of the models are to be re-estimated continuously for the models to fully capture the changing dynamics of the volatility smiles.

The Effect of Obesity on Wages and Employment: The Difference Between Having a High BMI and Being Fat

In this paper, we re-examine the relationship between overweight and labour market success, using indicators of individual body composition along with BMI (Body Mass Index). We use the dataset from Finland in which weight, height, fat mass and waist circumference are not self-reported, but obtained as part of the overall health examination. We find that waist circumference, but not weight or fat mass, has a negative effect on wages for women, whereas all measures of obesity have negative effects on women’s employment probabilities. For men, the only obesity measure that is significant for men’s employment probabilities is fat mass. One interpretation of our findings is that the negative wage effects of overweight on wages run through the discrimination channel, but that the negative effects of overweight on employment have more to do with ill health. All in all, measures of body composition provide a more refined picture about the effects of obesity on wages and employment.

Board Effectiveness in Small Firms

Purpose: This study investigates boards of directors in small firms and explores the link between board effectiveness and the composition, roles and working styles of the boards. Design/methodology/approach: The study analyses data from a telephone survey of boards in 45 small firms. The survey included both the CEO and the chairperson of the board. Findings: The study identifies three groups of small firms: ‘paperboards’, ‘professional boards’, and ‘management lead’ boards. Results show that board composition, board roles and board working style influence board effectiveness in small firms. Research limitations/implications: Although the present study has found a link between board effectiveness and the role, composition and working style of boards of small firms, other potentially influential factors are also worthy of investigation; for example, the personal characteristics of the individuals involved, generational factors in family firms, and the situational circumstances of various firms. Practical implications: The study reveals that, in practice, the management team and the board are substantially intertwined in small firms. Originality/value: The main contributions are that the study explores how boards in small firms actually function and gives a detailed account of their composition and roles.More insight into this issue is important given the overemphasis within the governance literature on input-output studies using samples of large publiclylisted firms.

What is A Virtual Service?- Broadening the Perspective on Technology-Based Services

This article expands the discussion of the impact of technology on services and contributes to a broader comprehension of the nature of virtual services. This is done by discovering dimensions that distinguish physical services from virtual services, i.e. services that are distributed by electronic means and where the customer has no direct human interaction with the service provider. Differences in the core characteristics of services, servicescape and service delivery are discussed. Moreover, dimensions that differentiate between virtual services are analysed. A classification scheme for virtual services is proposed, including the origin of the service, the element of the service offering, the customisation process, stage of the service process performed, and the degree of mobility of the service.

Towards a Dynamic Communication Model: A Useful Tool in Relationship Communication

In order to bring insight into the emerging concept of relationship communication, concepts from two research traditions will be combined in this paper. Based on those concepts a new model, the dynamic relationship communication model, will be presented. Instead of a company perspective focusing on the integration of outgoing messages such as advertising, public relations and sales activities, it is suggested that the focus should be on factors integrated by the receiver. Such factors can be historical, future, external and internal factors. Thus, the model put a strong focus on the receiver in the communication process. The dynamic communication model is illustrated empirically using it as a tool on 78 short stories about communication. The empirical findings show that relationship communication occurs in some cases; in some cases it does not occur. The model is a useful tool in displaying relationship communication and how it differs from other communication. The importance of the time dimension, historical and future factors, in relationship communications is discussed. The possibility of reducing communications costs by the notion of relationship communication is discussed in managerial implications.

Tests for Cointegration Rank and the Initial Condition

Many economic events involve initial observations that substantially deviate from long-run steady state. Initial conditions of this type have been found to impact diversely on the power of univariate unit root tests, whereas the impact on multivariate tests is largely unknown. This paper investigates the impact of the initial condition on tests for cointegration rank. We compare the local power of the widely used likelihood ratio (LR) test with the local power of a test based on the eigenvalues of the companion matrix. We find that the power of the LR test is increasing in the magnitude of the initial condition, whereas the power of the other test is decreasing. The behaviour of the tests is investigated in an application to price convergence.

What Determines Stock Option Contract Design?

This paper analyzes factors driving the design of stock option plans for Finnish firms. We examine determinants of the scope of plans, exercise price, target group, and dividend protection. The scope is found to be negatively related to Tobin’s Q and positively related to proxies for monitoring costs. The scope is also greater in broad-based plans, and in plans with dividend protection. Prior stock return is found to be negatively related to the size of the premium (out-of-the-moneyness), whereas dividend protection increases the premium. The results also suggest that investment intensity, cash flow, and monitoring costs are associated with the likelihood of granting premium (out-of-the-money) stock options. Furthermore, the likelihood of granting broad-based plans is increasing in institutional ownership and cash flow constraints, and decreasing in firm size. Broad-based plans are also more likely among firms in growth industries. We find support that the likelihood of dividend protection is decreasing in foreign ownership. In addition, firms paying zero-dividends are less likely to include dividend protection, whereas higher unsystematic risk is associated with a greater likelihood of including dividend protection.

Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design

This paper addresses several questions in the compensation literature by examining stock option compensation practices of Finnish firms. First, the results indicate that principal-agent theory succeeds quite well in predicting the use of stock options. Proxies for monitoring costs, growth opportunities, ownership structure, and risk are found to determine the use of incentives consistent with theory. Furthermore, the paper examines whether determinants of stock options targeted to top management differ from determinants of broad-based stock option plans. Some evidence is found that factors driving these two types of incentives differ. Second, the results reveal that systematic risk significantly increases the likelihood that firms adopt stock option plans, whereas total firm risk and unsystematic risk do not seem to affect this decision. Third, the results show that growth opportunities are related to time-dimensional contracting frequency, consistent with the argument that incentive levels deviate more rapidly from optimum in firms with high growth opportunities. Finally, the results suggest that vesting schedules are decreasing in financial leverage, and that contract maturity is decreasing in firm focus. In addition, both vesting schedules and contract maturity tend to be longer in firms involving state ownership.

Organizing (with) Thirdness. A Dialogic Understanding of Bicultural Interactions in Organizations

This conceptual paper examines bicultural interactions in organizations as they are experienced by the involved individuals. Notions from Bakhtinian dialogism are used in order to conceptualize the sensemaking opportunities provided by the encounter with a cultural otherness. It is argued that in such bicultural situations, because of the lack of intimate understanding of the other culture, the third element in the dialogic relation - ‘thirdness’, i.e. the relation itself, without which there would be no sensemaking potential - may be lacking as a result of the distorting combination of projected similarity and stereotyping, added to certain counterproductive organizational dynamics. Therefore, it is suggested that, to make the bicultural work interaction the rewarding relation it could be, thirdness should be coordinated by management in a way that can transcend the spontaneous negative dynamics of the confrontational situation. If management was to fail to organize (with) thirdness appropriately, bringing in a third party could be a possible alternative in order to initiate the necessary mutual understanding that should eventually lead to a fruitful work interaction.

Finnish-French Fundamental Cultural Antagonisms in Organising

Seeking to challenge the belief that within-West cultural differences should be seen as insignificant in organisations, this paper seeks to demonstrate how two given Western European ‘organising cultures’ (i.e. Finnish culture and French culture, as they are expressed in the process of organising) can contrast, if not conflict, with each other. Further, it aims to help the reader realise what kinds of fundamental ‘cultural antagonisms’ these contrasting organising behaviours may come from, to help her/him understand ‘the other culture’ better, and thus allow for a first step towards an improvement of Finnish-French intercultural interactions in organisational contexts. After shortly introducing what should be understood here as ‘cultural antagonisms’, the paper addresses four fundamental Finnish-French antagonisms, regarding the vision of the organisation (‘functionalist vs. personalist’), the relative importance of ‘consensus vs. dissensus’, the typical trade-off between reliability and flexibility, and the striking differences in communication, respectively. These four fundamental antagonisms are found to be closely interrelated and integrated, serving as explanation, justification and legitimisation for each other. That does not mean, however, that differences, however striking they may be, should merely be a threat to co-operation: some implications introduced at the end of the paper suggest that, provided people are aware of them, cultural antagonisms can also be seen as opportunities for a more fruitful work interaction.

Shareholder/Stakeholder Value Management, Company Growth and

There has been considerable discussion in the literature about the relative merits of shareholder value management and stakeholder value management, but relatively little empirical research has been reported concerning the relationship between these types of management and financial performance. The present study puts forward a hypothesis that true shareholder value management also encompasses stakeholder value management. This combination of shareholder/stakeholder value management is hypothesised to be associated with superior financial performance and sales growth. Using a sample of chief financial officers' ratings of the contemporary management accounting techniques economic value added and the balanced scorecard to represent the two management types, the study found evidence in support of the hypothesis.