[BSHM meetings] Topics in the history of financial mathematics: early commerce to chaos in modern stock markets

This account provides an overview of the study day, entitled 'Topics in the History of Financial Mathematics: Early commerce to chaos in modern stock markets,' held by the British Society for the History of Mathematics jointly with Gresham College, at Gresham College, London on 25th April 2008. The series of talks explored the development of mathematics and mathematical techniques in a commercial and financial context.

Private equity, productivity and earnings

A detailed study in the USA shows that workers experience a relative fall in earnings after a takeover by private equity. Also, companies bought by private equity are at great risk of defaulting on their debts in the next 2 years.

Relational dimensions of corporate governance in translation: networked governance in China and India

The effectiveness of corporate governance mechanisms has been a subject of academic research for many decades. Although the large majority of corporate governance studies prior to mid 1990s were based on data from developed market economies such as the U.S., U.K. and Japan, in recent years researchers have begun examining corporate governance in transition economies. A comparison of China and India offers a unique environment for analyzing the effectiveness of corporate governance. First, both countries state-owned enterprise (SOE) reform strategies hinges on the Modern Enterprise System characterized by the separation of ownership and control. Ownership of an SOE’s assets is distributed among the government, institutional investors, managers, employees, and private investors. Effective control rights are assigned to management, which generally has a very small, or even nonexistent ownership stake. This distinctive shareholding structure creates conflict of interest not only between management (insiders) and outside investors but also between large shareholders and minority investors. Moreover, because both governments desire to retain some control—in part through partial retained ownership of commercialized SOEs, further conflicts arise between politicians and firms. Second, directors in publicly listed firms in both countries are predominantly drawn from institutions with significant non-market objectives: the government and other state enterprises, particularly in China, and extended families, particularly in India. As a result, the effectiveness of internal governance mechanisms, such as the number of independent directors on the board and the number of independent supervisors on the supervisory committee, are likely to be quiet limited, although this has yet to be fully evaluated. Third, because of the political nature of the privatization process itself, typical external governance mechanisms, such as debt (in conjunction with appropriate bankruptcy procedures), takeover threats, legal protection of investors, product market competition, etc., have not been effective. Bank loans have traditionally been viewed as grants from the state designed to bail out failing firms. State-owned banks retain monopoly or quasi-monopoly positions in the banking sector and profit is not their overriding objective. If political favor is deemed appropriate, subsidized loans, rescheduling of overdue debt or even outright transfer of funds can be arranged with SOEs (soft budget constraints). In addition, a market for private, non-bank debt is limited in India and has yet to be established China. There is no active merger or takeover activity in Chinese stock markets to discipline management. Information available in the capital markets is insufficient to keep at arm’s length of the corporate decisions. In light of the above peculiarities, China and India share many of the typical institutional characteristics as a transition economy, including poor legal protection of creditors and investors, the absence of an effective takeover market, an underdeveloped capital market, a relative inefficient banking system and significant interference of politicians in firm management. Su (2005) finds that the extent of political interference, managerial entrenchment and institutional control can help explain corporate dividend policies and post-IPO financing choices in this situation. Allen et al. (2005) demonstrate that standard corporate governance mechanisms are weak and ineffective for publicly listed firms while alternative governance mechanisms based on reputation and relationship have been remarkably effective in the private sector. Because the peculiarities are significant in this context, the differences in the political-economies of the two countries are likely to be evident in such relational terms. In this paper we explore the peculiarities of corporate governance in this transitional environment through a systematic examination of certain aspects of these reputational and relationship dimensions. Utilising the methods of social network analysis we identify the inter-organisational relationships at board level formed by equity holdings and by shared directors. Using data drawn from the Orbis database we map these relations among the 3700 largest firms in India and China respectively and identify the roles played in these relational networks by the particularly characteristic institutions in each case. We find greatly different social network structures in each case with some support in these relational dimensions for their distinctive features of governance. Further, the social network metrics allow us to considerably refine proxies for political interference, managerial entrenchment and institutional control used in earlier econometric analysis.

Sovereign rescheduling probabilities in emerging markets: a comparison with credit rating agencies' ratings

This study estimates default probabilities of 124 emerging countries from 1981 to 2002 as a function of a set of macroeconomic and political variables. The estimated probabilities are then compared with the default rates implied by sovereign credit ratings of three major international credit rating agencies (CRAs) – Moody's Investor's Service, Standard & Poor's and Fitch Ratings. Sovereign debt default probabilities are used by investors in pricing sovereign bonds and loans as well as in determining country risk exposure. The study finds that CRAs usually underestimate the risk of sovereign debt as the sovereign credit ratings from rating agencies are usually too optimistic.

Private equity and employment - the Davos/WEF/Harvard study

The World Economic Forum at Davos has published a major study showing that workplaces of firms taken over by private equity have 10% less employees 5 years after the takeover, than other similar workplaces. The rate of plant closures, opening, acquisitions and disposals is twice as high as in other firms, and the net effect is still a job loss of 3.6%-4.5% after only 2 years, compared with other firms. Firms taken over by private equity are also more likely to go bankrupt than publicly quoted firms.

Private equity: financial investors, public services, and employment

The report surveys the activity of private equity and other financial investors in the water, waste and healthcare sectors in Europe. It includes the appraisal of a WEF study on employment effects.

The future of energy: are competitive markets and nuclear power the answer?

The inaugural lecture of Professor Stephen Thomas at the University of Greenwich, 4th February 2010. It examines whether further pursuit of competition in energy markets and expansion in the role of nuclear power can be the main elements in a policy to meet goals of security, sustainability and affordability.