Angel Investing in Finland: An Analysis Based on Agency Theory and the Incomplete Contracting Theory

Wealthy individuals - business angels who invest a share of their net worth in entrepreneurial ventures - form an essential part of an informal venture capital market that can secure funding for entrepreneurial ventures. In Finland, business angels represent an untapped pool of capital that can contribute to fostering entrepreneurial development. In addition, business angels can bridge knowledge gaps in new business ventures by means of making their human capital available. This study has two objectives. The first is to gain an understanding of the characteristics and investment behaviour of Finnish business angels. The strongest focus here is on the due diligence procedures and their involvement post investment. The second objective is to assess whether agency theory and the incomplete contacting theory are useful theoretical lenses in the arena of business angels. To achieve the second objective, this study investigates i) how risk is mitigated in the investment process, ii) how uncertainty influences the comprehensiveness of due diligence as well as iii) how control is allocated post investment. Research hypotheses are derived from assumptions underlying agency theory and the incomplete contacting theory. The data for this study comprise interviews with 53 business angels. In terms of sample size this is the largest on Finnish business angels. The research hypotheses in this study are tested using regression analysis. This study suggests that the Finnish informal venture capital market appears to be comprised of a limited number of business angels whose style of investing much resembles their formal counterparts’. Much focus is placed on managing risks prior to making the investment by strong selectiveness and by a relatively comprehensive due diligence. The involvement is rarely on a day-to-day basis and many business angels seem to see board membership as a more suitable alternative than involvement in the operations of an entrepreneurial venture. The uncertainty involved does not seem to drive an increase in due diligence. On the contrary, it would appear that due diligence is more rigorous in safer later stage investments and when the business angels have considerable previous experience as investors. Finnish business angels’ involvement post investment is best explained by their degree of ownership in the entrepreneurial venture. It seems that when investors feel they are sufficiently rewarded, in terms of an adequate equity stake, they are willing to involve themselves actively in their investments. The lack of support for a relationship between increased uncertainty and the comprehensiveness of due diligence may partly be explained by an increasing trend towards portfolio diversification. This is triggered by a taxation system that favours investments through investment companies rather than direct investments. Many business angels appear to have substituted a specialization strategy that builds on reducing uncertainty for a diversification strategy that builds on reducing firm specific (idiosyncratic) risk by holding shares in ventures whose returns are not expected to exhibit a strong positive correlation.

The expiration day effect of indexoptions and index futures on the underlying shares

This paper studies the effect of the expiration day of index options and futures on the trading volume, variance and price of the underlying shares. The data consists of all trades for the underlying shares in the FOX-index for expiration days during the period October 1995 to the mid of yer 1999. The main results seem to support the findings of Kan 2001, i.e. no manipulation on a larger scale. However, some indication of manipulation could be found if certain characteristics are favorable. These characteristics include: a) a large quantity of outstanding futures or at/in the money options contracts, b) there exists shares with high index weight but fairly low trading volume. Lastly, there is some indication that manipulation might be more popular towards the end of the examined time period.

Executive Stock Options: Exercise Policy and Market Reaction

In this paper I investigate the exercise policy, and the market reaction to that, of the executive stock option holders in Finland. The empirical tests are conducted with aggregated firm level data from 34 firms and 41 stock option programs. I find some evidence of an inverse relation between the exercise intensity of the options holders and the future abnormal return of the company share price. This finding is supported by the view that information about future company prospect seems to be the only theoretical attribute that could delay the exercise of the options. Moreover, a high concentration of exercises in the beginning of the exercise window is predicted and the market is expected to react to deviations from this. The empirical findings however show that the market does not react homogenously to the information revealed by the late exercises.

Evaluating Option Pricing Models

This study evaluates three different time units in option pricing: trading time, calendar time and continuous time using discrete approximations (CTDA). The CTDA-time model partitions the trading day into 30-minute intervals, where each interval is given a weight corresponding to the historical volatility in the respective interval. Furthermore, the non-trading volatility, both overnight and weekend volatility, is included in the first interval of the trading day in the CTDA model. The three models are tested on market prices. The results indicate that the trading-time model gives the best fit to market prices in line with the results of previous studies, but contrary to expectations under non-arbitrage option pricing. Under non-arbitrage pricing, the option premium should reflect the cost of hedging the expected volatility during the option’s remaining life. The study concludes that the historical patterns in volatility are not fully accounted for by the market, rather the market prices options closer to trading time.

The Influence of World Factors on Finnish Stock Market Volatility

This paper investigates to what extent the volatility of Finnish stock portfolios is transmitted through the "world volatility". We operationalize the volatility processes of Finnish leverage, industry, and size portfolio returns by asymmetric GARCH specifications according to Glosten et al. (1993). We use daily return data for January, 2, 1987 to December 30, 1998. We find that the world shock significantly enters the domestic models, and that the impact has increased over time. This applies also for the variance ratios, and the correlations to the world. The larger the firm, the larger is the world impact. The conditional variance is higher during recessions. The asymmetry parameter is surprisingly non-significant, and the leverage hypothesis cannot be verified. The return generating process of the domestic portfolio returns does usually not include the world information set, thus indicating that the returns are generated by a segmented conditional asset pricing model.

Pricing Index Options with Stochastic Volatility

The objective of this paper is to investigate the pricing accuracy under stochastic volatility where the volatility follows a square root process. The theoretical prices are compared with market price data (the German DAX index options market) by using two different techniques of parameter estimation, the method of moments and implicit estimation by inversion. Standard Black & Scholes pricing is used as a benchmark. The results indicate that the stochastic volatility model with parameters estimated by inversion using the available prices on the preceding day, is the most accurate pricing method of the three in this study and can be considered satisfactory. However, as the same model with parameters estimated using a rolling window (the method of moments) proved to be inferior to the benchmark, the importance of stable and correct estimation of the parameters is evident.

From One Segment to a Segment of One - The Evolution of Market Segmentation Theory

The purpose of this study was to deepen the understanding of market segmentation theory by studying the evolution of the concept and by identifying the antecedents and consequences of the theory. The research method was influenced by content analysis and meta-analysis. The evolution of market segmentation theory was studied as a reflection of evolution of marketing theory. According to this study, the theory of market segmentation has its roots in microeconomics and it has been influenced by different disciplines, such as motivation research and buyer behaviour theory. Furthermore, this study suggests that the evolution of market segmentation theory can be divided into four major eras: the era of foundations, development and blossoming, stillness and stagnation, and the era of re-emergence. Market segmentation theory emerged in the mid-1950’s and flourished during the period between mid-1950’s and the late 1970’s. During the 1980’s the theory lost its interest in the scientific community and no significant contributions were made. Now, towards the dawn of the new millennium, new approaches have emerged and market segmentation has gained new attention.