Essays on Stock Option Compensation and the Role of Incentives and Risk (summary section only)

Managerial pay-for-performance sensitivity has increased rapidly around the world. Early empirical research showed that pay-for-performance sensitivity resulting from stock ownership and stock options appeared to be quite low during the 1970s and early 1980s in the U.S. However, recent empirical research from the U.S. shows an enormous increase in pay-for-performance sensitivity. The global trend has also reached Finland, where stock options have become a major ingredient of executive compensation. The fact that stock options seem to be an appealing form of remuneration from a theoretical point of view combined with the observation that the use of this compensation form has increased significantly during the recent years, implies that research on the dynamics of stock option compensation is highly relevant for the academic community, as well as for practitioners and regulators. The research questions of the thesis are analyzed in four separate essays. The first essay examines whether stock option compensation practices of Finnish firms are consistent with predictions from principal-agent theory. The second essay explores one of the major puzzles in the compensation literature by studying determinants of stock option contract design. In theory, optimal contract design should vary according to firm characteristics. However, in the U.S., variation in contract design seems to be surprisingly low, a phenomenon generally attributed to tax and accounting considerations. In Finland, however, firms are not subject to stringent contracting restrictions, and the variation in contract design tends, in fact, to be quite substantial. The third essay studies the impact of price- and risk incentives arising from stock option compensation on firm investment. In addition, the essay explores one of the most debated questions in the literature, in particular, the relation between incentives and firm performance. Finally, several strands of literature in both economics and corporate finance hypothesize that economic uncertainty is related to corporate decision-making. Previous research has shown that risk tends to slow down firm investment. In the fourth essay, it is hypothesized that firm risk slows down growth from a more universal perspective. Consistent with this view, it is shown that risk not only tends to slow down firm investment, but also employment growth. Moreover, the essay explores whether the nature of firms’ compensation policies, in particular, whether firms make use of stock option compensation, affects the relation between risk and firm growth. In summary, the four essays contribute to the current understanding of stock options as a form of equity incentives, and how incentives and risk affect corporate decision-making. By this, the thesis promotes the knowledge related to the modern theory of the firm.

Essays on Corporate Governance and the Quality of Disclosed Earnings: Across Transitional Europe

A growing body of empirical research examines the structure and effectiveness of corporate governance systems around the world. An important insight from this literature is that corporate governance mechanisms address the excessive use of managerial discretionary powers to get private benefits by expropriating the value of shareholders. One possible way of expropriation is to reduce the quality of disclosed earnings by manipulating the financial statements. This lower quality of earnings should then be reflected by the stock price of firm according to value relevance theorem. Hence, instead of testing the direct effect of corporate governance on the firm’s market value, it is important to understand the causes of the lower quality of accounting earnings. This thesis contributes to the literature by increasing knowledge about the extent of the earnings management – measured as the extent of discretionary accruals in total disclosed earnings - and its determinants across the Transitional European countries. The thesis comprises of three essays of empirical analysis of which first two utilize the data of Russian listed firms whereas the third essay uses data from 10 European economies. More specifically, the first essay adds to existing research connecting earnings management to corporate governance. It testifies the impact of the Russian corporate governance reforms of 2002 on the quality of disclosed earnings in all publicly listed firms. This essay provides empirical evidence of the fact that the desired impact of reforms is not fully substantiated in Russia without proper enforcement. Instead, firm-level factors such as long-term capital investments and compliance with International financial reporting standards (IFRS) determine the quality of the earnings. The result presented in the essay support the notion proposed by Leuz et al. (2003) that the reforms aimed to bring transparency do not correspond to desired results in economies where investor protection is lower and legal enforcement is weak. The second essay focuses on the relationship between the internal-control mechanism such as the types and levels of ownership and the quality of disclosed earnings in Russia. The empirical analysis shows that the controlling shareholders in Russia use their powers to manipulate the reported performance in order to get private benefits of control. Comparatively, firms owned by the State have significantly better quality of disclosed earnings than other controllers such as oligarchs and foreign corporations. Interestingly, market performance of firms controlled by either State or oligarchs is better than widely held firms. The third essay provides useful evidence on the fact that both ownership structures and economic characteristics are important factors in determining the quality of disclosed earnings in three groups of countries in Europe. Evidence suggests that ownership structure is a more important determinant in developed and transparent countries, while economic determinants are important determinants in developing and transitional countries.

Essays on Financial Analyst Forecasts and Recommendations

The trade of the financial analyst is currently a much-debated issue in today’s media. As a large part of the investment analysis is conducted under the broker firms’ regime, the incentives of the financial analyst and the investor do not always align. The broker firm’s commercial incentives may be to maximise its commission from securities trading and underwriting fees. The purpose of this thesis is to extend our understanding of the work of a financial analyst, the incentives he faces and how these affect his actions. The first essay investigates how the economic significance of the coverage of a particular firm impacts the analysts’ accuracy of estimation. The hypothesis is that analysts put more effort in analysing firms with a relatively higher trading volume, as these firms usually yield higher commissions. The second essay investigates how analysts interpret new financial statement information. The essay shows that analysts underreact or overreact to prior reported earnings, depending on the short-term pattern in reported earnings. The third essay investigates the possible investment value in Finnish stock recommendations, issued by sell side analysts. It is established that consensus recommendations issued on Finnish stocks contain investment value. Further, the investment value in consensus recommendations improves significantly through the exclusion of recommendations issued by banks. The fourth essay investigates investors’ behaviour prior to financial analysts’ earnings forecast revisions. Lately, the financial press have reported cases were financial analysts warn their preferred clients of possible earnings forecast revisions. However, in the light of the empirical results, it appears that the problem of analysts leaking information to some selected customers does not appear systematically on the Finnish stock market.

Essays on Managing Knowledge and Work Related Wellbeing

This study explores the relationship between Intellectual Capital and Maintenance of Work Ability. Intellectual Capital is the central framework for analysing the increasing knowledge-intensiveness of business life. It is characteristic of Intellectual Capital that the intersection of human capital, internal structures and external structures is essential. Maintenance of Work Ability, on the other hand, has been the leading paradigm for Finnish occupational health and safety activities since the late 1980s. It is also a holistic approach that emphasises the interdependence of competence, work community, work environment and health as the key to work-related wellbeing. This thesis consists of five essays that scrutinise the focal phenomena both theoretically and empirically. The conceptual model that results from the first research essay provides a general framework for the whole thesis. The case study in the second essay supports a division of intangible assets into generative and commercially exploitable intangibles introduced in the first essay and further into the primary and secondary dimension of generative intangibles. Further scrutiny of the interaction of generative intangible assets in essay three reveals that employees’ wellbeing enhances the readiness to contribute to the knowledge creation process. The fourth essay shows that the MWA framework could benefit knowledge-intensive work but this would require a different approach than has been commonly adopted in Finland. In essay five, deeper analysis of the MWA framework shows that its potential results from comprehensive support of the functioning of an organisation. The general conclusion of this thesis is that organisations must take care of their employees’ wellbeing in order to secure innovativeness that is the key to surviving in today’s competitive business environment.

Increasing Knowledge Focus - a Means for Entrepreneurs to Remain on a Growth Path: Essays on the Role and Nature of Knowledge Management in Finnish SMEs (summary section only)

This study explores the role and nature of knowledge management (KM) in small and medium-sized companies (SMEs). Even though the role of knowledge as a competitive advantage is commonly recognized in the SME sector, almost no attention has been paid to the managing and developing of knowledge in SMEs. This thesis consists of three different sub-studies that were reported in four individual essays. The results of the questionnaire study indicate that nearly all companies that responded to the questionnaire (N = 108) found intangible assets, i.e. knowledge resources to be their main source of competitive advantage. However, only less than a third of the companies actively deal with knowledge management. The results also indicate a significant correlation between activity in knowledge management and sustainable organic growth of the company. The interview study (N = 10) explored the context and motives of the SMEs for managing their intangible assets, and the concrete practices of knowledge management. It turned out that KM facilitated change management, clarification of the vision and new strategy formulation. All the interviewed companies were aiming at improved innovation process, new ways of doing business and attaining an increased “knowledge focus” in their business. Nearly all also aspired to grow significantly. Thus, KM provides a strategy for these SMEs to guarantee their survival and sustainability in the turbulent markets. The action research was a process to assess and develop intangible resources in three companies. The experienced benefits were the clarification of future focus and strategy, creation of a common language to discuss strategic issues within the company, as well as improved balance of different categories of intangible assets. After the process all the case companies had developed in the chosen key areas. Thus, by systematic knowledge management the implementation of new strategic orientation (knowledge focusing) was facilitated. The findings can be summarized in two main points. First, knowledge management seems to serve the purpose of change, renewal and new strategic orientation in the SMEs. It also seems to be closely related to organic growth and innovation. All of these factors can be considered dimensions of entrepreneurship. Second, the conscious development of intangible assets can increase the balance of different categories of intangible assets and the overall knowledge focusing of business. In the case companies, this in turn facilitated the path to the improved overall performance.

Sensemaking in the Third Space - Essays on French-Finnish Bicultural Experiences in Organizations and Their Narratives (summary section only)

Research on cross-cultural and intercultural aspects in organizations has been traditionally conducted from an objectivist, functionalist perspective, with culture treated as an independent variable, and often the key explanatory factor. In order to do justice to the ontological relativity of the phenomena studied, more subjectivist research on intercultural interactions, and especially on their relationships with the dynamics of cultural identity construction, is needed. The present research seeks to address this gap by focusing on bicultural interactions in organizations, as they are experienced by the involved individuals. It is argued that such bicultural situations see the emergence of a space of hybridity, which is here called a ‘third space’, and which can be understood as providing ‘occasions for sensemaking’: it is this individual sensemaking that is of particular interest in the empirical narrative study. A first overall aim of the study is to reach an understanding of the dynamics of bicultural interactions in organizations; an understanding not only of the potential for learning and emancipatory sensemaking, but also of the possibility of conflict and alienatory ordering (this is mainly addressed in the theoretical essays 1 and 2). Further, a second overall aim of the study is to analyze the reflexive identity construction of four young French expatriates involved in such bicultural interactions in organizations in Finland, in order to examine the extent to which their expatriation experiences have allowed for an emancipatory opportunity in their cases (in essays 3 and 4). The primary theoretical contribution in this study lies in its new articulation of the dynamics of bicultural interactions in organizations. The ways in which the empirical material is analyzed bring about methodological contributions: since the expatriates’ accounts are bound to be some kind of construction, the analysis is made from angles that point to how the self-narratives construct reality. There are two such angles here: a ‘performative’ one and a ‘spatial’ one. The most important empirical contributions lie in the analysis of, on the one hand, the alternative uses that the young expatriates made of the notion of ‘national culture’ in their self-narratives, and, on the other hand, their ‘narrative practices of the third space’: their politics of escape or stabilization, their exploration of space or search for place, their emancipation from their origin or return to home as only horizon.

Essays on labour demand and wage formation

The first essay in this thesis is on gender wage differentials among manufacturing sector white-collar workers. The wage differential is decomposed into firm, job (within-firm) and individ-ual-level components. Job-level gender segregation explains over half of the gap, while firm-level segregation is not important. After controlling for firm, job and individual characteristics, the remaining unexplained wage cap to the advantage of men is six per cent of men s mean wage. In the second essay, I study how the business cycle and gender affect the distribution of the earnings losses of displaced workers. The negative effect of displacement is large, persistent and strongest in the lowest earnings deciles. The effect is larger in a recession than in a recov-ery period, and in all periods women s earnings drop more than men s earnings. The third essay shows that the transition from steady employment to disability pension de-pends on the stringency of medical screening and the degree of experience-rating of pension costs applied to the employer. The fact that firms have to bear part of the cost of employees disability pension costs lowers both the incidence of long sick leave periods and the probabil-ity that sick leave ends in a disability pension. The fourth and fifth essays are studies on the employment, wage and profit effects of a re-gional payroll tax cut experiment conducted in northern and eastern Finland. The results show no statistically significant effect on any of the response variables.