Institutional investors, risk/return and corporate governance : practical lessons from the Global Financial Crisis

The global grown in institutional investors means that firms can no longer ignore their influence in capital markets. However, not all institutional investors have the same motives to influence the firms they invest in. Institution investors' ability to influence management depends on the size of their investment and whether they have any business relations with the firm. Using a sample of Australian firms from 2006 to 2008, our empirical results show that the proportion of a company's shares held by institutional investors is positively associated with firm governance ratings, risk and profitability. This study shows that a positive association between risk and return is associated with large active institutional ownership, which we interpret as shareholders with sufficient power to pressure management to increase short-term profits.

Corporate governance and bankruptcy risk

We examine how firm characteristics, particularly the degree of firm complexity and the firm’s need for specialty knowledge, affect the relationship between corporate governance and the risk of bankruptcy. We find that having larger boards reduces the risk of bankruptcy only for complex firms. Our results also suggest that the proportion of inside directors on the board is inversely associated with the risk of bankruptcy in firms that require more specialist knowledge, and that the reverse is true in technically unsophisticated firms. The results further reveal that the additional explanatory power from corporate governance variables becomes stronger as the time to bankruptcy is increased, implying that although corporate governance variables are important predictors, governance changes are likely to be too late to save a firm on the verge of bankruptcy.

Institutional investors, risk/performance and corporate governance

Modern portfolio theory suggests that investors minimize risk for a given level of expected return by carefully choosing the proportions of various assets. This study sets out to determine the role of the institutional investor in monitoring risk and firm performance. Using a sample of Australian firms from 2006 to 2008, our empirical study shows a positive association between firm-specific risk, risk-management policy, and performance for firms with increasing institutional shareholdings. The study also finds that the significance of this association depends on the institutional investor's ability to influence management, which in turn depends on the size of ownership and whether the investee firm does not have potential business dealings with the investor. We also find that when firms are financially distressed, institutional investors engage in promoting short-term performance or exit rather than support long-term value creation. The results are robust while controlling the potential for endogeneity and using sensitivity tests to control for variants of performance and risk. These findings add to the growing body of literature examining institutional ownership and the importance of understanding the role of risk-management in the risk and return relation.

Study of the structure and function of the sheath of tropically adapted bulls and risk factors for preputial eversion and preputial prolapse

Preputial prolapse is an obvious condition affecting bulls from many breeds. Unfortunately, the losses in production and welfare concerns associated with preputial prolapse can remain undetected for long periods of time in the extensive beef areas of northern Australia where the bulls are not inspected regularly. Thus, there is a critical need to identify the structural factors predisposing to preputial prolapse in young bulls so that they can be culled early. Despite there being no firm scientific evidence of an association between preputial eversion and preputial prolapse, it seems logical that the increased exposure of the sensitive prepuce as a consequence of preputial eversion may increase the risk of bulls developing preputial pathology, in particular preputial prolapse. This may be particularly relevant in Bos indicus bulls as they have a more pendulous sheath and thus eversion of the prepuce may be associated with a greater risk of injury to the prepuce compared to that in Bos taurus bulls. Further, studies of preputial eversion in Bos taurus bulls have concluded that there is an association between polledness and increased prevalence and severity (length of everted prepuce and duration of eversion) of preputial eversion due primarily to the absence or poor development of the caudal preputial muscles. No similar definitive work in Bos indicus bulls has been conducted and thus anatomical studies reported in this thesis were conducted to determine if a similar association occurred in Bos indicus bulls. A survey of a sample of large beef breeding herds in northern Australia found that preputial prolapse is a significant problem in Bos indicus and Bos indicus derived bulls and affected both young and older bulls. The importance of preputial prolapse confirmed the value of further research into the causes of this problem. A series of anatomical studies confirmed that preputial eversion in Bos indicus derived bulls was not more prevalent in polled bulls than horned bulls and was not associated with deficiency of the caudal preputial muscles as was established in Bos taurus bulls. An anatomical study of Bos indicus derived bulls with preputial prolapse found that preputial prolapse occurred in horned bulls of varying ages and these bulls did not have any evidence of deficiency in the caudal preputial muscles. However, preputial prolapse was observed in young polled bulls that had poorly developed or absent caudal preputial muscles. It was concluded that deficiency of the caudal preputial muscles in polled Bos indicus derived bulls may predispose to preputial prolapse at an early age, but no predisposing anatomical factors were found for horned Bos indicus derived bulls. In these studies, preputial eversion and preputial prolapse were found in horned Bos indicus derived bulls that did not have any preputial muscle deficiency and it was noted that preputial eversion was not related to the length of the prepuce. Further studies confirmed that preputial eversion was linearly and consistently associated with position of the glans penis within the sheath in Bos indicus derived bulls, and movement of the glans penis towards the preputial orifice consistently resulted in preputial eversion in these bulls. A method to objectively measure the relationship between movement of the glans penis within the sheath and preputial eversion was developed. Studies in humans have linked function of some abdominal muscles to function of the pelvic organs. This relationship was investigated in Bos indicus derived bulls to determine whether the function of specific abdominal muscles affected position of the penis in the sheath. Using the method developed to objectively measure the relationship between penis movement and preputial eversion, the abdominal muscles that potentially were associated with movement of the glans penis or preputial eversion were examined but no significant relationships were observed. In the anatomical study of Bos indicus derived bulls not affected with preputial prolapse a more pendulous sheath was associated with increased prevalence of preputial eversion. This relationship was confirmed for horned and polled bulls in the penis movement studies. Bos indicus derived bulls with more pendulous sheaths evert their prepuces more than bulls with less pendulous sheaths thus increasing the risk of damage to the prepuce either from the environment, other bulls, or from them inadvertently stepping on the everted prepuce when they get to their feet. Culling Bos indicus derived bulls with more pendulous sheaths should reduce the incidence of preputial eversion and possibly preputial prolapse. The anatomical study of Bos indicus derived bulls that did not have preputial prolapse demonstrates that there are herds of bulls where the polled bulls do not have any evidence of deficiency of the caudal preputial iv muscles. There is a need to develop a practical and cost effective test to identify polled Bos indicus bulls that have a deficiency in their caudal preputial muscles.

Corporate philanthropy, reputation risk management and shareholder value: A study of Australian corporate giving

This study examines the role of corporate philanthropy in the management of reputation risk and shareholder value of the top 100 ASX listed Australian firms for the three years 2011-2013. The results of this study demonstrate the business case for corporate philanthropy and hence encourage corporate philanthropy by showing increasing firms’ investment in corporate giving as a percentage of profit before tax, increases the likelihood of an increase in shareholder value. However, the proviso is that firms must also manage their reputation risk at the same time. There is a negative association between corporate giving and shareholder value (Tobin’s Q) which is mitigated by firms’ management of reputation. The economic significance of this result is that for every cent in the dollar the firm spends on corporate giving, Tobin’s Q will decrease by 0.413%. In contrast, if the firm increase their reputation by 1 point then Tobin’s Q will increase by 0.267%. Consequently, the interaction of corporate giving and reputation risk management is positively associated with shareholder value. These results are robust while controlling for potential endogeneity and reverse causality. This paper assists both academics and practitioners by demonstrating that the benefits of corporate philanthropy extend beyond a gesture to improve reputation or an attempt to increase financial performance, to a direct collaboration between all the factors where the benefits far outweigh the costs.

Oligarchs, political regime changes, and firm valuation

This paper examines the impact of a regime shift on the valuation of politically powerful oligarch firms. Focusing on the Yeltsin-Putin regime shift in Russia, we find that the valuations of outside shareholders claims are significantly higher under the Putin regime than under the Yeltsin regime after controlling for industry and time effects. The findings suggest that the increasing cost of extracting private benefits outweigh the reduction in the value of political connections following the political regime change. The results are also consistent with changes in the risk of state expropriation. Our results show that effects driven by the political regime change complement the traditional view stating that increased ownership concentration improved the performance of Russian oligarch firms.

A Model for Creating Strategic Alliances. A Study of Inter-firm Cooperation in the North European ICT Sector

In this study, it is argued that the view on alliance creation presented in the current academic literature is limited, and that using a learning approach helps to explain the dynamic nature of alliance creation. The cases in this study suggest that a wealth of inefficiency elements can be found in alliance creation. These elements can further be divided into categories, which help explain the dynamics of alliance creation. The categories –combined with two models brought forward by the study– suggest that inefficiency can be avoided through learning during the creation process. Some elements are especially central to this argumentation. First, the elements related to the clarity and acceptance of the strategy of the company, the potential lack of an alliance strategy and the elements related to changes in the strategic context. Second, the elements related to the length of the alliance creation processes and the problems a long process entails. It is further suggested that the different inefficiency elements may create a situation, where the alliance creation process is –sequentially and successfully– followed to the end, but where the different inefficiencies create a situation where the results are not aligned with the strategic intent. The proposed solution is to monitor and assess the risk for inefficiency elements during the alliance creation process. The learning, which occurs during the alliance creation process as a result of the monitoring, can then lead to realignments in the process. This study proposes a model to mitigate the risk related to the inefficiencies. The model emphasizes creating an understanding of the other alliance partner’s business, creating a shared vision, using pilot cooperation and building trust within the process. An analytical approach to assessing the benefits of trust is also central in this view. The alliance creation approach suggested by this study, which emphasizes trust and pilot cooperation, is further critically reviewed against contracting as a way to create alliances.

The impact of stock option incentives on investment and firm value

This paper analyzes the relations among firm-level stock option portfolio incentives, investment, and firm value based on a sample of Finnish firms during the time period 1987 – 2000. Utilizing exact and complete information regarding stock option portfolio characteristics, we find some evidence that firm investment is increasing in the incentives to increase stock price (delta) and risk (vega). Furthermore, we find strong evidence of a positive relation between both incentive effects and firm value (Tobin’s Q). In contrast, when we allow for stock option incentives, investment, and firm value to be simultaneously determined, we find no evidence that investment is increasing in incentives. However, even after controlling for endogeneity, we find that both incentive effects arising from stock option compensation display a positive and significant effect on firm value. Finally, in contradiction to earlier findings, we observe that neither Tobin’s Q nor investment drives incentives.

Application of nonlinear filtering to credit risk

Merton's model views equity as a call option on the asset of the firm. Thus the asset is partially observed through the equity. Then using nonlinear filtering an explicit expression for likelihood ratio for underlying parameters in terms of the nonlinear filter is obtained. As the evolution of the filter itself depends on the parameters in question, this does not permit direct maximum likelihood estimation, but does pave the way for the `Expectation-Maximization' method for estimating parameters. (C) 2010 Elsevier B.V. All rights reserved.

Regional IAM: analysis of risk-adjusted costs and benefits of climate policies

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Inflammation markers are associated with Cardiovascular diseases risk in adolescents The Young Hearts Project 2000

Purose: The traditional approach for identifying subjects at risk from cardiovascular diseases (CVD) is to determine the extent of clustering of biological risk factors adjusted for lifestyle. Recently, markers of endothelial dysfunction and low grade inflammation, including high sensitivity C-reactive protein (hsCRP), soluble intercellular adhesion molecules (sICAM), and soluble vascular adhesion molecules (sVCAM), have been included in the detection for high risk individuals. However, the relationship of these novel biomarkers with CVD risk in adolescents remains unclear. The purpose of this study, therefore, was to establish the association of hsCRP, sICAM, and sVCAM with CVD risk in an adolescent population.
Methods: Data from the Young Hearts 2000 cross-sectional cohort study, carried out in 1999-2001, were used. From a total of 2,017 male and female participants, 95 obese subjects were identified and matched according to age, sex, and cigarette smoking, with 95 overweight and 95 normal-weight adolescents. Clustered CVD risk was computed using a sum of Z-scores of biological risk factors. The relationship was described using multiple linear regression analyses.
Results: hsCRP, sICAM, and sVCAM showed significant associations with CVD risk. hsCRP and sICAM had a positive relation with CVD risk, whereas sVCAM showed an inverse relationship. In this study, lifestyle factors showed no relation with CVD risk.
Conclusion: The results fit the hypothesized role of low grade inflammation and endothelial dysfunction in CVD risk in asymptomatic adolescents. The inverse relationship of VCAM, however, is hard to explain and indicates the complex mechanisms underlying CVD. Further research is needed to draw firm conclusions on the biomarkers used.

The Valuation Implications of Enterprise Risk Management Maturity

Enterprise Risk Management (ERM) is the discipline by which enterprises monitor, analyze, and control risks from across the enterprise, with the goal of identifying underlying correlations and thus optimizing the risk-taking behavior in a portfolio context. This study analyzes the valuation implications of ERM Maturity. We use data from the industry leading Risk and Insurance Management Society Risk Maturity Model over the period from 2006 to 2011, which scores firms on a five-point maturity scale. Our results suggest that firms that have reached mature levels of ERM are exhibiting a higher firm value, as measured by Tobin's Q. We find a statistically significant positive relation to the magnitude of 25 percent. Upon decomposition of the maturity score, we find that the most important aspects of ERM from a valuation perspective relate to the level of top–down executive engagement and the resultant cascade of ERM culture throughout the firm. Firms that have successfully integrated the ERM process into both their strategic activities and everyday practices display superior ability in uncovering risk dependencies and correlations across the entire enterprise and as a consequence enhanced value when undertaking the ERM maturity journey ceteris paribus.

Systemic risk for financial institutions in UK

Marginal Expected Shortfall (MES) is an approach used to measure the systemic risk financial institutions face. It estimates how significantly systemic events (poor market performance, out of 1.6 times Standard Deviation borders) are expected to affect market capitalization of a particular firm. The concept was developed in the late 2000s and is widely used for cross-country comparisons of financial firms. For the purposes of generalization of this technique it is often used with market data containing non-domestic currencies for some financial firms. That may lead to results having currency noise in them as it is shown for 77 UK financial firms in our analysis between 2001 and 2014.

Three essays on bankruptcy risk

Abstract Market prices of corporate bond spreads and of credit default swap (CDS) rates do not match each other. In this paper, we argue that the liquidity premium, the cheapest-to-deliver (CTD) option and actual market segmentation explain the pricing differences. Using the European transaction data from Reuters and Bloomberg, we estimate the liquidity premium that is time- varying and firm-specific. We show that when time-dependent liquidity premiums are considered, corporate bond spreads and CDS rates behave in a much closer way than previous studies have shown. We find that high equity volatility drives pricing differences that can be explained by the CTD option.

CEO Compensation, Compensation Risk, and Corporate Governance: Evidence from Technology Firms

Literature suggests that CEOs of technology firms earn higher pay than CEOs of non-technology firms. I investigate whether compensation risk explains the difference in compensation between technology firms and non-technology firms. Controlling for firm size and performance, I find that CEOs in technology firms have higher pay, but also have much higher compensation risk compared to non-technology firms. Compensation risk explains the major part of the difference in CEO pay. My study is consistent with the labor market economics view that CEOs earn competitive risk-adjusted total compensation.