Short-term Price Behavior and the Effect of Foreign Investors in Finnish Equity Markets (summary section only)

As globalization and capital free movement has increased, so has interest in the effects of that global money flow, especially during financial crises. The concern has been that large global money flows will affect the pricing of small local markets by causing, in particular, overreaction. The purpose of this thesis is to contribute to the body of work concerning short-term under- and overreaction and the short-term effects of foreign investment flow in the small Finnish equity markets. This thesis also compares foreign execution return to domestic execution return. This study’s results indicate that short-term under- and overreaction occurs in domestic-buy portfolios (domestic net buying) rather than in foreign-buy portfolios. This under- and overreaction, however, is not economically meaningful after controlling for the bid-ask bounce effect. Based on this finding, one can conclude that foreign investors do not have a destabilizing effect in the short-term in the Finnish markets. Foreign activity affects short-term returns. When foreign investors are net buyers (sellers) there are positive (negative) market adjusted returns. Literature related to nationality and institutional effect leads us to expect these kind of results. These foreign flows are persistent at a 5 % to 21 % level and the persistence of foreign buy flow is higher than the foreign sell flow. Foreign daily trading execution is worse than domestic execution. Literature which quantifies foreign investors as liquidity demanders and literature related to front-running leads us to expect poorer foreign execution than domestic execution.

Foreign Capital and Finland : Central government's first period of reliance on international financial markets, 1862-1938

The main objective of the study is to evaluate the Finnish central government s foreign borrowing between the years 1862 and 1938. Most of this period was characterised by deep capital market integration that bears resemblance to the liberal world financial order at the turn of the millennium. The main aim is to analyse the credit risk associated with the state and its determination by evaluating the world financial market centres perception of Finland. By doing this, the study is also expected to provide an additional dimension to Finland s political and economic history by incorporating into the research the assessments of international capital markets regarding Finland during a period that witnessed profound political and economic changes in Finnish society. The evaluation of the credit risk mainly relies on exchange-rate risk free time series of the state s foreign bonds. They have been collected from quotations in the stock exchanges in Helsinki, Hamburg, Paris and London. In addition, it investigates Finland s exposure to short-term debt and Moody s credit ratings assigned to Finland. The study emphasises the importance of the political risk. It suggests that the hey-day of the state s reliance on foreign capital markets took place during last few decades of the 19th century when Finland enjoyed a wide autonomy in the Russian Empire and prudently managed its economy, highlighted in Finland s adherence to the international gold standard. Political confrontations in Finland and, in particular, in Russia and the turbulence of the world financial system prevented the return of this beneficial position again. Through its issuance of foreign bonds the state was able to import substantial amounts of foreign capital, which was sorely needed to foster economic development in Finland. Moreover, the study argues that the state s presence in the western capital markets not only had economic benefits, but it also increased the international awareness of Finland s distinct and separate status in the Russian Empire and later underlined its position as an independent republic.

Dental Service Utilization, Dental Health Production and Equity in Dental Care: the Finnish Experience

This thesis is grounded on four articles. Article I generally examines the factors affecting dental service utilization. Article II studies the factors associated with sector-specific utilization among young adults entitled to age-based subsidized dental care. Article III explores the determinants of dental ill-health as measured by the occurrence of caries and the relationship between dental ill-health and dental care use. Article IV measures and explains income-related inequality in utilization. Data employed were from the 1996 Finnish Health Care Survey (I, II, IV) and the 1997 follow-up study included in the longitudinal study of the Northern Finland 1966 Birth Cohort (III). Utilization is considered as a multi-stage decision-making process and measured as the number of visits to the dentist. Modified count data models and concentration and horizontal equity indices were applied. Dentist s recall appeared very efficient at stimulating individuals to seek care. Dental pain, recall, and the low number of missing teeth positively affected utilization. Public subvention for dental care did not seem to statistically increase utilization. Among young adults, a perception of insufficient public service availability and recall were positively associated with the choice of a private dentist, whereas income and dentist density were positively associated with the number of visits to private dentists. Among cohort females, factors increasing caries were body mass index and intake of alcohol, sugar, and soft drinks and those reducing caries were birth weight and adolescent school achievement. Among cohort males, caries was positively related to the metropolitan residence and negatively related to healthy diet and education. Smoking increased caries, whereas regular teeth brushing, regular dental attendance and dental care use decreased caries. We found equity in young adults utilization but pro-rich inequity in the total number of visits to all dentists and in the probability of visiting a dentist for the whole sample. We observed inequity in the total number of visits to the dentist and in the probability of visiting a dentist, being pro-poor for public care but pro-rich for private care. The findings suggest that to enhance equal access to and use of dental care across population and income groups, attention should focus on supply factors and incentives to encourage people to contact dentists more often. Lowering co-payments and service fees and improving public availability would likely increase service use in both sectors. To attain favorable oral health, appropriate policies aimed at improving dental health education and reducing the detrimental effects of common risk factors on dental health should be strengthened. Providing equal access with respect to need for all people ought to take account of the segmentation of the service system, with its two parallel delivery systems and different supplier incentives to patients and dentists.

The Rocky Road of Social Sustainability : The Impact of Integrated Biodiversity Conservation and Development on the Local Realities in Ranomafana National Park, Madagascar

The objective of this study is to examine the social impacts of the integrated conservation and development project (ICDP) aimed at biodiversity conservation and local socio-economic development in the Ranomafana National Park (RNP), Madagascar. Furthermore, the study explores social sustainability and justice of the ICDP in Ranomafana. This ethnographically informed impact study uses of various field methods. The research material used consists of observation, interviews (key-person and focus group), school children's writings, official statistics and project documents. Fieldwork was conducted in three phases in 2001, 2002 and 2004 in twelve villages around the park, as well as in neighbouring areas of Ranomafana. However, four of those twelve villages were chosen for closer study. This study consists of five independent articles and a concluding chapter. Social impacts were studied through reproductive health indicators as well as a life security approach. Equity and distribution of benefits and drawbacks of ICDP were analysed and the actors related to the conservation in Ranomafana were identified. The children and adolescents' environmental views were also examined. The reproductive health indicators studied showed a poor state of reproductive health in the park area. Moreover, the existing social capital in the villages seemed to be fragmented due to economic difficulties that were partly caused by the conservation regulations. The ICDP in Ranomafana did not pay attention to the heterogeneity of the affected communities even though the local beneficiaries of the ICDP varied according to their ethnicity, living place, wealth, social position and gender. In addition, various conservation actors (local people in various groups, local authorities, tourist business owners, conservation NGOs and scientists) contest their interests over the forest, conservation and its related activities. This study corroborates the same type of evidence and conclusions discussed in other similar cases elsewhere: so called social conservation programmes still cannot meet the needs of the people living near the protected areas; on the contrary, they even have a reverse impact on the people's lives. A fundamental misunderstood assumption in the conservation process in Ranomafana was to consider the local people as a problem for biodiversity conservation. Major reasons for the failure of the ICDP in Ranomafana include a lack of local institutions that would have been able to communicate as equals with the conservation NGOs as well as to transfer the tradition of the authoritarian governance in conservation management together with the over-appreciation of scientific biodiversity, and lack of will to understand the local people's rights to use the forest for their livelihoods.

Intraday Dynamics of International Equity Markets

The increased availability of high frequency data sets have led to important new insights in understanding of financial markets. The use of high frequency data is interesting and persuasive, since it can reveal new information that cannot be seen in lower data aggregation. This dissertation explores some of the many important issues connected with the use, analysis and application of high frequency data. These include the effects of intraday seasonal, the behaviour of time varying volatility, the information content of various market data, and the issue of inter market linkages utilizing high frequency 5 minute observations from major European and the U.S stock indices, namely DAX30 of Germany, CAC40 of France, SMI of Switzerland, FTSE100 of the UK and SP500 of the U.S. The first essay in the dissertation shows that there are remarkable similarities in the intraday behaviour of conditional volatility across European equity markets. Moreover, the U.S macroeconomic news announcements have significant cross border effect on both, European equity returns and volatilities. The second essay reports substantial intraday return and volatility linkages across European stock indices of the UK and Germany. This relationship appears virtually unchanged by the presence or absence of the U.S stock market. However, the return correlation among the U.K and German markets rises significantly following the U.S stock market opening, which could largely be described as a contemporaneous effect. The third essay sheds light on market microstructure issues in which traders and market makers learn from watching market data, and it is this learning process that leads to price adjustments. This study concludes that trading volume plays an important role in explaining international return and volatility transmissions. The examination concerning asymmetry reveals that the impact of the positive volume changes is larger on foreign stock market volatility than the negative changes. The fourth and the final essay documents number of regularities in the pattern of intraday return volatility, trading volume and bid-ask spreads. This study also reports a contemporaneous and positive relationship between the intraday return volatility, bid ask spread and unexpected trading volume. These results verify the role of trading volume and bid ask quotes as proxies for information arrival in producing contemporaneous and subsequent intraday return volatility. Moreover, asymmetric effect of trading volume on conditional volatility is also confirmed. Overall, this dissertation explores the role of information in explaining the intraday return and volatility dynamics in international stock markets. The process through which the information is incorporated in stock prices is central to all information-based models. The intraday data facilitates the investigation that how information gets incorporated into security prices as a result of the trading behavior of informed and uninformed traders. Thus high frequency data appears critical in enhancing our understanding of intraday behavior of various stock markets’ variables as it has important implications for market participants, regulators and academic researchers.

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.

Corporate Governance in China (summary section only)

The negative relationship between economic growth and stock market return is not an anomaly according to evidence documented in many economies. It is argued that future economic growth is largely irrelevant for predicting future equity returns, since long-run equity returns depend mainly on dividend yields and the growth of per share dividends. The economic growth does result in a higher standard of living for consumers, but does not necessarily translate into higher returns for owners of the capital. The divergence in performance between the real sector and stock markets appears to support the above argument. However, this thesis strives to offer an alternative explanation to the apparent divergence within the framework of corporate governance. It argues that weak corporate governance standards in Chinese listed firms exacerbated by poor inventor protection results into a marginalized capital market. Each of the three essays in the thesis addresses one particular aspect of corporate governance on the Chinese stock market in a sequential way through gathering empirical evidence on three distinctive stock market activities. The first essay questions whether significant agency conflicts do exist by building a game on rights issues. It documents significant divergence in interests among shareholders holding different classes of shares. The second essay investigates the level of agency costs by examining value of control through constructing a sample of block transactions. It finds that block transactions that transfer ultimate control entail higher premiums. The third essay looks into possible avenues through which corporate governance standards could be improved by investigating the economic consequences of cross-listing on the Chinese stock market. It finds that, by adopting a higher disclosure standard through cross-listings, firms voluntarily commit themselves to reducing information asymmetry, and consequently command higher valuation than their counterparts.

Essays on the Determinants of International Portfolio Investments

Investors significantly overweight domestic assets in their portfolios. This behavior which is commonly called “home bias” contradicts the prescriptions of portfolio theory. This thesis explores potential reasons for the “home bias” by examining the characteristics of the investing and the target countries and features of the interaction between them. A common theme of the four essays is a focus on the importance of information about foreign markets in explaining the share of these markets in investors’ portfolios. The results indicate that the size of the equity ownership in another country strongly relates to the distance to the financial capital of that country, and to trade in goods with and direct investments (FDI) to that country. The first essay empirically investigates the relationship between trade in real goods and portfolio investments. Overall, the evidence indicates a substantial role for trade in reducing the information cost relating to portfolio investments. The second essay examines the implications of the launch of the European Monetary Union (EMU) on international portfolio investments. The evidence on the allocation of Finnish international portfolio investments is more consistent with an information-based than a diversification motive explanation. The third essay employs new data for a large number of countries and further explores the role of trade on international portfolio investments. The results indicate that trade provides important information especially on firms in countries in which the corporate governance structure and the information environment of firms generate less reliable information. The fourth essay examines the relationship between direct investments (FDI) and portfolio investments. In contrast to the predications of portfolio theory, it provides evidence that FDI is a complement rather than a substitute for portfolio investments.

Corporate Funding on the European Debt Capital Market

The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.

When sharing becomes a liability: An intellectual capital approach to describing the dichotomy of knowledge protection versus sharing in intra- and interorganizational relationships

The tension created when companies are collaborating with competitors – sometimes termed co-opetition - has been subject of research within the network approach. As companies are collaborating with competitors, they need to simultaneously share and protect knowledge. The opportunistic behavior and learning intent of the partner may be underestimated, and collaboration may involve significant risks of loss of competitive edge. Contrastingly, the central tenet within the Intellectual Capital approach is that knowledge grows as it flows. The person sharing does not lose the knowledge and therefore knowledge has doubled from a company’s point of view. Value is created through the interplay of knowledge flows between and within three forms of intellectual capital: human, structural and relational capital. These are the points of departure for the research conducted in this thesis. The thesis investigates the tension between collaboration and competition through an Intellectual Capital lens, by identifying the actions taken to share and protect knowledge in interorganizational collaborative relationships. More specifically, it explores the tension in knowledge flows aimed at protecting and sharing knowledge, and their effect on the value creation of a company. It is assumed, that as two companies work closely together, the collaborative relationship becomes intertwined between the two partners and the intellectual capital flows of both companies are affected. The research finds that companies commonly protect knowledge also in close and long-term collaborative relationships. The knowledge flows identified are both collaborative and protective, with the result that they sometimes are counteracting and neutralize each other. The thesis contributes to the intellectual capital approach by expanding the understanding of knowledge protection in interorganizational relationships in three ways. First, departing from the research on co-opetition it shifts the focus from the internal view of the company as a repository of intellectual capital onto the collaborative relationships between competing companies. Second, instead of the traditional collaborative and sharing point of departure, it takes a competitive and protective perspective. Third, it identifies the intellectual capital flows as assets or liabilities depending on their effect on the value creation of the company. The actions taken to protect knowledge in an interorganizational relationship may decrease the value created in the company, which would make them liabilities.

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.

Knowledge Transfer within Western Multinationals' Subsidiary Units in China and Finland - The Impact of Headquarter Control Mechanisms, Subsidiary Location and Social Capital (summary section only)

It is suggested that the ability and practices of how the multinational corporation (MNC) manages knowledge transfer among its geographically dispersed subsidiary units are crucial for the building and development of firm competitive advantage. However, cross-border transfer of valuable organizational knowledge is likely to be problematic and laborious, especially within diversified and differentiated MNCs. Using data collected from 164 western multinational companies’ subsidiary units located in China and Finland, this study aims to investigate cross-border knowledge transfer within the MNC. It explores a number of factors that influence the transfer of knowledge among units in the differentiated MNC. The study consists of five individual papers. Paper 1 investigates a range of organizational mechanisms that may positively influence a subsidiary’s propensity to undertake knowledge transfers to other parts of the corporation. Paper 2 explores the impact of subsidiary location on the motivational dispositions of knowledge receiving units to value and accept knowledge from subsidiaries located in economically less advanced countries. Paper 3 examines the influence of social capital variables on knowledge transfer in dyadic relationships between foreign-owned subsidiaries and their sister and patent units. Paper 4 provides some initial insights into potentially different effects of trust and shared vision in intra-organizational vs. inter-organizational relationships. Using a case study setting, Paper 5 explores means and mechanisms used in transferring human resource management practices to Western MNCs’ business units in China from a cultural perspective. The results of the study show that MNC management through choices regarding organizational controls can encourage and enhance corporate-internal knowledge transfer. It also finds evidence that more knowledge is transferred from subsidiaries located in an industrialized country (e.g., Finland) than subsidiaries located in a developing country (e.g., China). While the study has highlighted the importance of social capital in promoting knowledge transfer, it has also uncovered some new findings that the effect of trust and shared vision may be contingent upon different contexts. Finally, in Paper 5, a number of mechanisms used in transferring selected HRM practices and competences to the Chinese business units have been identified. The findings suggest that cultural differences should be taken into consideration in the choice and use of different transfer mechanisms.

Worksite Fitness Policy in an Intellectual Capital Framework

In a framework of Intellectual Capital (IC), the effects and interactions of a Worksite Fitness Program (WFP) policy was studied with a multidisciplinary approach. In a preliminary study, indicators for physical activity (PAI), physical fitness (PFI), activity in WFP on a regular (WFPI) and on a events basis (WFPE) were created in line with positive findings regarding the associations between physical activity and fitness patterns and sick leave, perceived health, and self-assessed work ability. The intensity of physical activity was found to be the most important variable to predict positive associations with the above mentioned wellness parameters. In four case study follow-up settings, the effects and interactions of physical activity and fitness patterns and the company’s WFP-policy on different elements of IC were studied. Qualitative methods were applied in constructing indicators and a descriptive IC measure for each case company. In cross-sectional and follow-up settings, several findings with respect to IC were found regarding physical activity in general and activity in WFP in particular. Findings were relatively strong in health and wellness related indicators in Human Capital, where, as also in Structural Capital indicators such as the company climate and employee-superior relationship, revealed positive associations. Physical activity patterns were found to act in minor role in Relational Capital. Overall, WFP was seen to be an integrated part of Structural Capital. From the viewpoint of Worksite Fitness Program as a phenomenon, this study positioned WFP as an active element of Intellectual Capital. The literature in the field of WFP emphasizes the role of WFP as an instrument to activate employees in physical activity, and thus promote their health and wellbeing. With the wider perspective the active and long range WFP policy can support a company’s Structural and Relational Capital in line with the fundamental role it has on Human Capital.

The Impact of New Capital Requirements on the Portfolio Decisions of Finnish Pension Institutions

This paper examines the potential impact of new capital requirements on asset allocations of Finnish pension institutions. We describe the new requirements and consider portfolio construction to minimize regulatory capital, given the investor’s preferred level of expected return. Results identify portfolio transactions that enhance expected return without increasing capital needs. Regulation calls for portfolio diversification and prudence in management, but this paper shows that market participants can exploit inconsistencies in regulation. Possible future consequences include capital outflows from the pension system and an unintended decrease in pre-funding of old-age pensions.

Intraday Linkages across International Equity Markets

Utilizing concurrent 5-minute returns, the intraday dynamics and inter-market dependencies in international equity markets were investigated. A strong intraday cyclical autocorrelation structure in the volatility process was observed to be caused by the diurnal pattern. A major rise in contemporaneous cross correlation among European stock markets was also noticed to follow the opening of the New York Stock Exchange. Furthermore, the results indicated that the returns for UK and Germany responded to each other’s innovations, both in terms of the first and second moment dependencies. In contrast to earlier research, the US stock market did not cause significant volatility spillover to the European markets.