CEO compensation, option incentives and information disclosure

This paper examines the impact of information disclosure on the valuation of CEO options and the incentives created by those options. Prior executive compensation research in the US has made assumptions about key input variables that can affect the calculation of option values and financial incentives. Accordingly, biases may have ensued due to incomplete information disclosure about noncurrent option grants. Using new data on a sample of UK CEOs, we value executive option holdings and incentives for the first time and estimate the levels of distortion created by the less than complete US-style disclosure requirements. We also investigate the levels of distortion in the UK for the minority of companies that choose to reveal only partial information. Our results suggest that there have to date been few economic biases arising from less than complete information disclosure. Furthermore, we demonstrate that researchers using US data, who made reasonable assumptions about the inputs of noncurrent option grants, are unlikely to have made significant errors when calculating CEO financial incentives or option wealth. However, the recent downturn in the US stock market could result in the same assumptions, producing exaggerated incentive estimates in the future.

Corporate tournaments and executive compensation: evidence from the UK

This study tests the implications of tournament theory using data on 100 U.K. stock market companies, covering over 500 individual executives, in the late 1990s. Our results provide some evidence consistent with the operation of tournament mechanisms within the U.K. business context. Firstly, we find a convex relationship between executive pay and organizational level and secondly, that the gap between CEO pay and other board executives (i.e., tournament prize) is positively related to the number of participants in the tournament. However, we also show that the variation in executive team pay has little role in determining company performance.

Managing brand portfolios:How strategies have changed

The stock market response to corporate scandals and the use of the internet by pressure groups have sensitized boards to the risk of reputation loss. Particularly at risk are companies using corporate brands whose fame and spread makes them particularly vulnerable. This study looks at these and other pressures on branding and investigates if and how leading companies have responded in the deployment of their brand portfolios. A repeat audit of the use of brand portfolios by leading companies using exactly the same method used over a decade ago reveals much change. Brand structures of the 20 companies investigated have indeed changed but not uniformly in extent or direction.

Information processing and the UK weekend effect:Do investors cut their losses on Mondays?

This paper complements earlier work by the author that shows that the pattern of information arrivals into the UK stock market may explain the behaviour of returns. It is argued that delays or other systematic behaviour in the processing of this information could compound the impact of information arrival patterns. It is found, however, that this does not happen, and so it is the arrival and not the processing of news that is most important. © 2004 Taylor & Francis Ltd.

Financial liberalization and dynamics of firm-level financing and investment decisions in the Southeast Asian countries

This thesis examines the dynamics of firm-level financing and investment decisions for six Southeast Asian countries. The study provides empirical evidence on the impacts of changes in the firm-level financing decisions during the period of financial liberalization by considering the debt and equity financing decisions of a set of non-financial firms. The empirical results show that firms in Indonesia, Pakistan, and South Korea have relatively faster speed of adjustment than other Southeast Asian countries to attain optimal debt and equity ratios in response to banking sector and stock market liberalization. In addition, contrary to widely held belief that firms adjust their financial ratios to industry levels, the results indicate that industry factors do not significantly impact on the speed of capital structure adjustments. This study also shows that non-linear estimation methods are more appropriate than linear estimation methods for capturing changes in capital structure. The empirical results also show that international stock market integration of these countries has significantly reduced the equity risk premium as well as the firm-level cost of equity capital. Thus stock market liberalization is associated with a decrease in the cost of equity capital of the firms. Developments in the securities markets infrastructure have also reduced the cost of equity capital. However, with increased integration there is the possibility of capital outflows from the emerging markets, which might reverse the pattern of decrease in cost of capital in these markets.

Internet financial reporting in Saudi Arabia: users' perceptions and disclosures

This thesis investigates corporate financial disclosure practices on Web sites and their impact. This is done, first by examining the views of various Saudi user groups (institutional investors, financial analysts and private investors) on disclosure of financial reporting on the Internet and assessing differences, if any, in perceptions of the groups. Over 303 individuals from three groups responded to a questionnaire. Views were elicited regarding: users attitude to the Internet infrastructure in Saudi Arabia, users information sources about companies in Saudi Arabia, respondents perception about the advantages and disadvantages in Internet financial reporting (IFR), respondents attitude to the quality of IFR provided by Saudi public companies and the impact of IFR on users information needs. Overall, it was found professional groups (Institutional investors, financial analysts) hold similar views in relation to many issues, while the opinions of private investors differ considerably. Second, the thesis examines the use of the Internet for the disclosure of financial and investor-related information by Saudi public companies (113 companies) and look to identify reasons for the differences in the online disclosure practices of companies by testing the association between eight firm-specific factors and the level of online disclosure. The financial disclosure index (167 items) is used to measure public company disclosure in Saudi Arabia. The descriptive part of the study reveals that 95 (84%) of the Saudi public companies in the sample had a website and 51 (45%) had a financial information section of some description. Furthermore, none of the sample companies provided 100% of the 167 index items applicable to the company. Results of multivariate analysis show that firm size and stock market listing are significant explanatory variables for the amount of information disclosed on corporate Web sites. The thesis finds a significant and negative relationship between the proportion of institutional ownership of a companys shares and the level of IFR.

Liquidity and portfolio optimisation

This thesis presents research within empirical financial economics with focus on liquidity and portfolio optimisation in the stock market. The discussion on liquidity is focused on measurement issues, including TAQ data processing and measurement of systematic liquidity factors (FSO). Furthermore, a framework for treatment of the two topics in combination is provided. The liquidity part of the thesis gives a conceptual background to liquidity and discusses several different approaches to liquidity measurement. It contributes to liquidity measurement by providing detailed guidelines on the data processing needed for applying TAQ data to liquidity research. The main focus, however, is the derivation of systematic liquidity factors. The principal component approach to systematic liquidity measurement is refined by the introduction of moving and expanding estimation windows, allowing for time-varying liquidity co-variances between stocks. Under several liability specifications, this improves the ability to explain stock liquidity and returns, as compared to static window PCA and market average approximations of systematic liquidity. The highest ability to explain stock returns is obtained when using inventory cost as a liquidity measure and a moving window PCA as the systematic liquidity derivation technique. Systematic factors of this setting also have a strong ability in explaining a cross-sectional liquidity variation. Portfolio optimisation in the FSO framework is tested in two empirical studies. These contribute to the assessment of FSO by expanding the applicability to stock indexes and individual stocks, by considering a wide selection of utility function specifications, and by showing explicitly how the full-scale optimum can be identified using either grid search or the heuristic search algorithm of differential evolution. The studies show that relative to mean-variance portfolios, FSO performs well in these settings and that the computational expense can be mitigated dramatically by application of differential evolution.

One date, one break?

This paper demonstrates that the conventional approach of using official liberalisation dates as the only existing breakdates could lead to inaccurate conclusions as to the effect of the underlying liberalisation policies. It also proposes an alternative paradigm for obtaining more robust estimates of volatility changes around official liberalisation dates and/or other important market events. By focusing on five East Asian emerging markets, all of which liberalised their financial markets in the late, and by using recent advances in the econometrics of structural change, it shows that (i) the detected breakdates in the volatility of stock market returns can be dramatically different to official liberalisation dates and (ii) the use of official liberalisation dates as breakdates can readily entail inaccurate inference. In contrast, the use of data-driven techniques for the detection of multiple structural changes leads to a richer and inevitably more accurate pattern of volatility evolution emerges in comparison with focussing on official liberalisation dates.

The role of national culture in advertising's sensitivity to business cycles:an investigation across continents

The authors conduct a systematic investigation into the cyclical sensitivity of advertising expenditures in 37 countries, covering four key media: magazines, newspapers, radio, and television. They show that advertising is considerably more sensitive to business-cycle fluctuations than the economy as a whole. Advertising behaves less cyclically in countries high in long-term orientation and power distance, but it is more cyclical in countries high in uncertainty avoidance. Furthermore, advertising is more sensitive to the business cycle in countries characterized by significant stock market pressure and few foreign-owned multinational corporations. The authors provide initial evidence on the long-term social and managerial losses incurred when companies tie ad spending too tightly to business cycles. Countries in which advertising behaves more cyclically exhibit slower growth of the advertising industry. Moreover, private-label growth is higher in countries characterized by more cyclical advertising spending, implying significant losses for brand manufacturers. Finally, an examination of 26 global companies shows that stock price performance is lower for companies that exhibit stronger procyclical advertising spending patterns.

Testing for financial crashes using the Log Periodic Power Law model

Many papers claim that a Log Periodic Power Law (LPPL) model fitted to financial market bubbles that precede large market falls or 'crashes', contains parameters that are confined within certain ranges. Further, it is claimed that the underlying model is based on influence percolation and a martingale condition. This paper examines these claims and their validity for capturing large price falls in the Hang Seng stock market index over the period 1970 to 2008. The fitted LPPLs have parameter values within the ranges specified post hoc by Johansen and Sornette (2001) for only seven of these 11 crashes. Interestingly, the LPPL fit could have predicted the substantial fall in the Hang Seng index during the recent global downturn. Overall, the mechanism posited as underlying the LPPL model does not do so, and the data used to support the fit of the LPPL model to bubbles does so only partially. © 2013.

Illiquidity shocks and the comovement between stocks:new evidence using smooth transition

This paper extends the smooth transition conditional correlation model by studying for the first time the impact that illiquidity shocks have on stock market return comovement. We show that firms that experience shocks that increase illiquidity are less liquid than firms that experience shocks that decrease illiquidity. Shocks that increase illiquidity have no statistical impact on comovement. However, shocks that reduce illiquidity lead to a fall in comovement, a pattern that becomes stronger as the illiquidity of the firm increases. This discovery is consistent with increased transparency and an improvement in price efficiency. We find that a small number of firms experience a double illiquidity shock. For these firms, at the first shock, a rise in illiquidity reduces comovement while a fall in illiquidity raises comovement. The second shock partly reverses these changes as a rise in illiquidity is associated with a rise in comovement and a fall in illiquidity is associated with a fall in comovement. These results have important implications for portfolio construction and also for the measurement and evolution of market beta and the cost of capital as it suggests that investors can achieve higher returns for the same amount of market risk because of the greater diversification benefits that exist. We also find that illiquidity, friction, firm size and the pre-shock correlation are all associated with the magnitude of the correlation change. © 2013 Elsevier B.V.

Trade marks and performance in UK firms:evidence of Schumpeterian competition through innovation

This paper uses novel data on trade mark activity of UK manufacturing and service sector firms to investigate whether trade marks improve the profitability and productivity of firms. We first analyse Tobin`s q, the ratio of stock market value to book value of tangible assets. We then investigate the relationship between trade mark activity and productivity, using a value added production function. Finally we examine interactions between firms IP activity, to explore creative destruction and growth via innovation. We find trade marks are positively related to both Tobin`s q and to productivity. Also in the short run greater IP activity by other firms in the industry reduces the value added of the firm, but this same competitive pressure has later benefits via productivity growth, also reflected in higher stock market value. This describes the Schumpeterian process of competition through innovation, restraining profit margins while increasing product variety and quality.

Intellectual property activity by service sector and manufacturing firms in the United Kingdom, 1996-2000

This paper provides evidence from a newly constructed database of UK firms about the extent of their intellectual property acquisition activities over five years. We focus on service sector firms, which have not previously been studied, with comparisons for firms in manufacturing and other sectors, such as agriculture. The measures of IP include both trade marks, which are most important in services, and patents, which are predominantly sought by manufacturing firms. The analysis includes patents and trade marks applied for via both the UK and European routes. While IP assets sought through the UK Patent Office remained strong, more services firms were seeking European Community trade marks and more manufacturing firms were seeking patents via European Patent Office through time. Firm characteristics that are positively correlated with IP activity include larger firm size, stock market listed status and high product market diversification.

Multivariate FIAPARCH modelling of financial markets with dynamic correlations in times of crisis

This paper applies the vector AR-DCC-FIAPARCH model to eight national stock market indices' daily returns from 1988 to 2010, taking into account the structural breaks of each time series linked to the Asian and the recent Global financial crisis. We find significant cross effects, as well as long range volatility dependence, asymmetric volatility response to positive and negative shocks, and the power of returns that best fits the volatility pattern. One of the main findings of the model analysis is the higher dynamic correlations of the stock markets after a crisis event, which means increased contagion effects between the markets. The fact that during the crisis the conditional correlations remain on a high level indicates a continuous herding behaviour during these periods of increased market volatility. Finally, during the recent Global financial crisis the correlations remain on a much higher level than during the Asian financial crisis.