The economic significance of CDS price discovery

© 2015 Springer Science+Business Media New York Between 2005 and 2009, we document evident time-varying credit risk price discovery between the equity and credit default swap (CDS) markets for 174 US non-financial investment-grade firms. We test the economic significance of a simple portfolio strategy that utilizes fluctuation in CDS spreads as a trading signal to set stock positions, conditional on the CDS price discovery status of the reference entities. We show that a conditional portfolio strategy which updates the list of CDS-influenced firms over time, yields a substantively larger realized return net of transaction cost over the unconditional strategy. Furthermore, the conditional strategy’s Sharpe ratio outperforms a series of benchmark portfolios over the same trading period, including buy-and-hold, momentum and dividend yield strategies.

Short-term debt maturity, monitoring and accruals-based earnings management

Most prior studies assume a positive relation between debt and earnings management, consistent with the financial distress theory. However, the empirical evidence for financial distress theory is mixed. Another stream of studies argues that lenders of short-term debt play a monitoring role over management, especially when the firm's creditworthiness is not in doubt. To explore the implications of these arguments on managers' earnings management incentives, we examine a sample of US firms over the period 2003-2006 and find that short-term debt is positively associated with accruals-based earnings management (measured by discretionary accruals), consistent with the financial distress theory. We also find that this relation is significantly weaker for firms that are of higher creditworthiness (i.e. investment grade firms), consistent with monitoring benefits outweighing financial distress reasons for managing earnings.

The real impact of stock market mispricing — evidence from Australia

Using a large panel of Australian firms, we investigate if mispricing in the stock market has an impact on firm-level investment. A significantly positive relation is documented between investment and theproxies for mispricing, suggesting that overpriced (underpriced) firms tend to overinvest (underinvest). Furthermore, we find that equity-dependent firms display a more pronounced sensitivity of investment to stock misvaluation than do nonequity-dependent firms. Taken together, our findings evidence that mispricing in Australian capital markets may have significant influence on the real economy, and the influence works though an equity-financing channel.© 2007 Elsevier B.V. All rights reserved.

An analysis of the association between firms' investment opportunities, board composition and firm performance

The purpose of this paper is to identify the variables that influence the board structure adopted by firms and the subsequent relationship to the firm's performance. The results of this study of 229 Australian firms show that firms' investment opportunities are strongly associated with a higher proportion of executive directors ("EDs") on the board. The results also show that the negative relationship between a firm's investment opportunity set ("IDS") and firm performance is weakened at higher levels of non-executive director board domination. These results have implications for policy setters and managers of firms with investment opportunities

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

This study investigates the effect of banks’ dual holding on bank lending and firms’ investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks’ lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms’ governance framework and ownership structure.

The association between the investment opportunity set and corporate financing and dividend decisions: some Australian evidence

Summarizes previous research on the investment opportunity set (IOS) using price-based and investment-based proxies and variance measures; and develops hypotheses on the relationship between IOS, debt/equity ratios and dividend policies. Tests them on 1990-1998 data from listed Australian companies and explains the methodology, which builds on Gover and Gover (1993) by including more recent proxy variables. Finds no significant results from low growth firms, although some high growth firms show lower debt/equity ratios and dividends. Questions the robustness of existing IOS proxies in the Australian context and calls for further research.

Investment opportunities and leverage: some Australian evidence on the role of board monitoring and director equity ownership

This paper tests the hypothesis that the negative relationship between investment opportunity set (IOS) and debt is moderated by board monitoring and director equity ownership. According to contracting theory, firms with high growth opportunities (high IOS) are associated with lower levels of debt as a result of the asset substitution and the under-investment problem. However, our hypotheses test the conjecture that the negative debt / IOS relationship will be moderated by the proportion of non-executive directors (NEDs) on the board and director equity ownership. NEDs provide higher monitoring which reduces management discretion while director equity ownership provides incentives for managers to maximize the value of the firm. More specifically, we expect that high growth firms with a higher proportion of non-executive directors and director equity ownership are less likely to be associated with asset substitution and under investment. Thus, the negative investment opportunity set / debt relationship will be weaker for firms with higher levels of non-executive directors and high director equity ownership. Data collected from Australian companies support both these two hypotheses. Results have significant implications for corporate finance theory.

How we finance our new and growing firms

Entrepreneurs are the engines that drive new companies and financing is the fuel that propels them. One form of that financing is called informal investing, sometimes called ''business angel activity'' (which we reserve for more professional and commercial investors). Informal investors use their own money and carry out their own due diligence to invest in the entrepreneurial opportunities of other entrepreneurs.

The importance of informal investing to New Zealand's new and growing firms

As part of the Global Entrepreneurship Monitor project, we asked 2,000 adult New Zealanders if they have made a personal investment in a new firm in the past three years as well as the magnitude of their supPort, the nature of the businesses they sponsored, and their relationship with
the recipient. We compared these data on informal investment to data on venture capital obtained from national sources. We are thus able to compare New Zealand's performance to cross-national measures. We also surveyed 20 key informants/experts on questions on financing.
In New Zealand, venture capital accounts for only 0.80/o of total investment in new and growing start-ups. Yet New Zealand is world-ranked in terms of informal investment. In New Zealand, informal investment activity is 3.5olo of the national GDP amount. New Zealand is also a world leader in the prevalence of informal investors (percentage in the adult population). Seventy-three percent of informal investors put their money into a relative's or a friend's business. Fifty-eight Percent of New Zealand's informal investors are female, quite the reverse of the world pattern.

When we compare Australia and New Zealandlo the rest of the GEM world, Australia ranks favourably with the GEM globat measures in terms of venture capital as a percentage of GDp, while New Zealand does poorly. Australia also does about 40olo better than New Zealand in terms
of the amount of VC invested in individual companies. But New Zealand is clearly higher in the measures of informal investment.

We conclude with implications for entrepreneurs, policy makers, educators, researchers, and journalists. In a nutshell, they should pay more attention to the critical role of the four F's - family friends, founders, and "foolish" investors - in start-up ventures. Informal investment is a critical component of New Zealand's entrepreneurial process and thus to its economic growth. Perhaps fifty superstars with extraordinary opportunities will receive financing from the New Zealand Venture Investment Fund to launch their businesses. Meanwhile, the vast majority of firms rely on the 4Fs - friends, family founders, and "foolish" lnvestors.

Dividend policy choice : do earnings or investment opportunities matter?

The aim of this paper is to analyse the influence of a company's level of earnings and growth opportunities in determining the dividend policy choice of Malaysian-listed firms. The analysis is based on a sample of 136 firms listed on the Bursa Malaysia Index over a period of six years, from 1990 to 1996. The evidence suggests that the payers are more profitable than non-payers. Likewise, investment opportunity, which is measured by (∂At /At-1) and (Vt /At), differed for both payers and non-payers. The regression estimates from Logit model suggest that the average coefficient for EATA is a significant determinant for firm's dividend policy choice in Malaysia. This is consistent with the supposition that profitable firms are more likely to pay dividends than less profitable firms. Although investment opportunities, the firm's size and leverage were not found to be statistically significant, they provided some explanation for the dividend policy choice.

Contracting-agency analysis of the association between firm risk, investment opportunity set, corporate governance and firm performance

Tests the efficiency of corporate controls (board monitoring and incentive contracts) for growth or risk firms. By exploring the implications of controls and studying their interactive effects on firm performance, this study demonstrates how and why different firms use corporate governance controls to align managers' and shareholders' interests.

Harvesting a 'lost' investment : case study of a financial innovation

In the field of Entrepreneurial research, financial innovations have been less studied and reported than product or process innovations. A case example is presented with implications for a large number of firms requiring financial restructuring as a precondition to attracting equity investmemnt. An insolvent asparagus exporter with high growth potential offered opportunity to test a model of financial restructuring and unlisted equity marketing, the ersatz venture capital (EVC) hypothesis. A business plan written in accordance with EVC prescriptions revealed the company's potential and attracted investors. It is argued that the approach may help solve two pressing problems of the Australian economy: re-vitalisation of businesses rendered insolvent by excessive debt and stimulation of a depressed venture capital market.

Consolidation within the Australian real estate investment trust sector : an evaluation of the impact on unitholder returns

Mergers and acquisitions within the Australian-real estate investment trusts (A-REITs) sector have become a noticeable trend in the last decade. Utilising
event study methodology, 36 successful A-REIT mergers and acquisitions
between January 1995 and December 2008 were examined. Both target and
bidding shareholders experience positive excess returns of 4.27% and 0.54%
respectively over the 41 day event window [−20, +20]. Analysis indicates that the
cumulative abnormal returns (CARs) for bidding firms are considerably greater
than previous research suggests. This study finds higher bidder CARs when scrip
or a combination of scrip and cash is used to finance the acquisition. We also find
that the relative size or the size of the acquirer have a positive and significant
impact on the excess returns of bidding A-REITs. This suggests that the
synergistic benefits from the acquisition are a result of economies of scale and
increased market power. There is also some evidence that the relative size and
method of payment influence the CARs of target firms during the event window.

Strategic people management of coal mining firms in Central Queensland

Purpose – This paper aims to propose a conceptual framework to explore the link between strategic human resource management (SHRM) and firm performance of the coal mining companies in Central Queensland (CQ), Australia.

Design/methodology/approach – The paper reviews literature relating to the process and issues of transforming human resource practices and industrial relations of the coal industry in Australia for the past decade. Theoretical development and empirical studies on the SHRM-performance linkage are discussed. Based on the literature review, the paper develops an integrated model for testing the relationship between SHRM and firm performance in the context of CQ's coalmines and proposes a number of research propositions.

Findings – Three perceivable outcomes are likely derived from application of this framework in the field. First, a testing of the linkage between strategic HRM and firm performance in the coal industry, using an integrated approach, would complement the empirical deficiency of treatments on the prior SHRM models. Second, data at firm level could be collected to develop a better understanding of how the adoption of strategic HRM practices in coal companies can affect firm performance. Third, the extent of flexibility practices, use of contractors and associated management practices could be identified.

Originality/value – The coal industry is central to economic development of regional Queensland. The industry contributes substantially to GDP via employment, investment and product export. An exploration of the impact of SHRM on the coal industry will likely result in identifying some best practices that could be potentially adopted in the wider business community to foster regional economic development in Australia and worldwide.