Financial working capital - management and measurement

Unexpected changes in cash flow have started to occur more frequently after the financial crisis. The capital structures of companies have also changed, and financial flexibility as well as flexible asset management have therefore become more important. This thesis aims at presenting financial working capital management, a part of flexible asset management, as a possibility to gain financial flexibility and survive the changes. This thesis operates in the interface of corporate finance, strategic management and management accounting, and it has two main objectives: to examine financial working capital management and to develop measures of financial working capital. The research in this thesis has been conducted using archival research and design science. Qualitative comparative analysis and model building are used to formulate tools and strategies for financial working capital management. The tools are tested with simulations, case studies and statistical analysis. The empirical data is collected from companies listed in the Helsinki Stock Exchange. The results of this thesis indicate that there are several possible financial working capital management strategies. FOCAL matrix is created in the thesis to assist in the selection of a strategy. The results also imply that profitability can be improved by reducing financial working capital, which creates a need to change the financial working capital management strategy. Financial flow cycle, and its modification, is developed in this thesis to measure financial working capital. Financial working capital as a concept is presented in this thesis with an orientation towards the management view. New dimensions have also been produced to financial management and working capital management, while providing a holistic approach to financial flexibility. Financial working capital management strategies are presented to managers and practical tools are provided for decision-making.

Suomen laskusuhdanteiden vertailu: 1990-luvun laman ja 2000-luvun globaalin finanssikriisin vaikutukset kuluttajille

Suomessa merkittävimpiä talouden laskusuhdanteita ja talouskriisejä ovat sotien jälkeen olleet 1990-luvun alun lama sekä vuonna 2008 alkanut finanssikriisin jälkeinen taantuma. Näillä kahdella ilmiöllä on ollut laajalti vaikutuksia koko kansantalouteemme, ja luonnollisesti suomalaisten kuluttajien taloudellinen hyvinvointi on muuttunut ilmiöiden myötä. Yksilöiden aiempaa huonompi taloudellinen hyvinvointi laskusuhdanteissa aiheutuu laskeneista tuloista, työttömyydestä ja varallisuushintojen laskusta sekä edellä mainittujen seurauksista. Tämän tutkielman tavoitteena on analysoida ja vertailla 1990-luvun laman ja 2000-luvun globaalin finanssikriisin aiheuttamia taloudellisia vaikutuksia suomalaisille kuluttajille. Lisäksi tarkoituksena on selvittää, minkä eri tekijöiden kautta laskusuhdanteet vaikuttavat kuluttajiin ja miksi. Tutkielman empiirisessä osiossa käytetään pääasiassa Tilastokeskuksen tuottamaa kvantitatiivista materiaalia sekä analyysin rikastamiseksi erilaisia kvalitatiivisia tutkimustuloksia aiheesta. Tutkielman lopputuloksena voidaan todeta 1990-luvun laman vaikuttaneen suomalaisiin kuluttajiin voimakkaammin ja pitkäkestoisemmin kuin finanssikriisin aiheuttaman taantuman. Laman vaikutukset kestivät useita vuosia, ja palautuminen oli hidasta. Erityisen suureksi ongelmaksi nousi työttömyyden voimakas kasvu. Finanssikriisin myötä työttömyys reagoi bruttokansantuotteen laskuun nähden sen sijaan maltillisesti, eivätkä esimerkiksi kotitalouksien tulot laskeneet samalla tavalla kuin laman aikana. Lisäksi merkittävässä osassa 1990-luvun lamaa oli asuntomarkkinoiden hintakupla ja sen puhkeaminen, jolla oli voimakas vaikutus reaalitalouteen. Laskukausien toisistaan poikkeavat vaikutukset johtuvat pitkälti niiden syntyyn johtaneiden syiden eroista sekä valtion talouspoliittisista toimista laskukausien helpottamiseksi. Siinä missä 1990-luvun lama johtui pääasiassa Suomen sisäisistä poliittisista päätöksistä ja pankkisektorista, oli finanssikriisi Suomen ulkopuolinen globaalin rahoitusmarkkinoiden häiriö.

Impact of Product-harm Crisis on Brand Equity: the Moderating Role of Corporate Social Performance

There is an increasing amount of product-harm crisis in the past few years; and the impact of a product-harm crisis becomes more and more influential due to the high increasing speed of globalization. And it is believed that the negative damages to a firm leading to a loss of the intangible assets is bigger than other costs such as the cost of the product recall. Brand equity is a very important and valuable intangible asset for a firm; and it is particularly vulnerable during the crisis. And CSP (CSP) is a hot concept associated with product-harm crisis and brand equity. The aim of this study is to understand how product-harm crisis influences by simultaneously involving CSP as a moderator in a consumer-based level. An experimental study was conducted through an online questionnaire among 198 students in Finland. The questionnaire mainly assessed the consumers’ attitudes towards CSP and brand before/after a fictional product-harm crisis. The results shows that the brand equity was negatively related to the product-harm crisis. And the extent level of crisis’s severity was positively related to the loss of the brand equity; whereas, acknowledged blame was more useful to compensate the loss of brand equity in the low-severity crisis. CSP acted as a moderator role which could compensate the loss of brand equity caused by the product-harm crisis. Managerial implications are also offered for crisis managers, brand managers, and CSR managers.

Markkinointisuunnitelma B2B-konsulttiyritykselle

Kandidaatintyössä luodaan markkinointisuunnitelma Asset Vision Oy:lle. Työssä vastataan tutkimuskysymykseen sekä kahteen alakysymykseen: miten B2B-yritys voi lähestyä potentiaalisia asiakkaitaan, keitä ovat Asset Visionin potentiaaliset asiakkaat ja mitä keinoja yrityksellä on niiden saavuttamiseksi. Työ on rajattu Asset Visionin markkinointisuunnitelman luomiseen sekä sen soveltuvuuden tarkasteluun yritysten välisillä markkinoilla toimivan konsulttiyrityksen markkinoinnissa. Työn teoriaosiossa tarkastellaan kirjallisuuden avulla erilaisia markkinointisuunnitelman luomisessa tarvittavia teoriaviitekehyksiä markkinointialan kirjallisuutta sekä tieteellisiä artikkeleita hyödyntäen. Empiriaosiossa luodaan markkinointisuunnitelma Asset Vision Oy:lle. Asset Visionin tulee viestiä markkinoinnissaan lisäarvon luontia painottamalla markkinoinnissaan kilpailuetujaan laatua ja asiantuntijuutta. Yrityksen on oltava itse aloitteellinen ottamalla yhteyttä potentiaalisiin asiakkaisiin ja markkinoimalla myymiään palveluita. Suunnitelma soveltuu pienin täydennyksin käytettäväksi Asset Visionin markkinoinnissa. Lisäksi sitä voidaan käyttää lähtökohtana luotaessa markkinointisuunnitelmaa yritysten välisillä markkinoilla toimivalle konsulttiyritykselle. Tällaisen yrityksen on viestittävä markkinoinnissaan lisäarvon tuottamista asiakkaalle kilpailuetujen avulla.

Pricing of Liquidity Risks in London Stock Exchange

This thesis aims to investigate pricing of liquidity risks in London Stock Exchange. Liquidity Adjusted Capital Asset Pricing Model i.e. LCAPM developed by Acharya and Pedersen (2005) is being applied to test the influence of various liquidity risks on stock returns in London Stock Exchange. The Liquidity Adjusted Capital Asset Pricing model provides a unified framework for the testing of liquidity risks. All the common stocks listed and delisted for the period of 2000 to 2014 are included in the data sample. The study has incorporated three different measures of liquidity – Percent Quoted Spread, Amihud (2002) and Turnover. The reason behind the application of three different liquidity measures is the multi-dimensional nature of liquidity. Firm fixed effects panel regression is applied for the estimation of LCAPM. However, the results are robust according to Fama-Macbeth regressions. The results of the study indicates that liquidity risks in the form of (i) level of liquidity, (ii) commonality in liquidity (iii) flight to liquidity, (iv) depressed wealth effect and market return as well as aggregate liquidity risk are priced at London Stock Exchange. However, the results are sensitive to the choice of liquidity measures.

Osakeyhtiölain maksukykytesti pienissä osakeyhtiöissä - tilitoimiston rooli neuvonantajana

Osakeyhtiölakiin on vuodesta 2006 asti sisältynyt maksukykytesti (OYL 13:2), jonka tulkinnallinen epäselvyys on motivoinut useita tutkimuksia ja melko kriittistäkin kirjoittelua. Säännöksen tarkoituksena on ehkäistä osakeyhtiön velkojia uhkaava varojenjako velvoittamalla yhtiön johto huolellisuusvelvoitteensa nojalla arvioimaan varojenjaon vaikutukset yhtiön maksukyvyn säilymiseen. Oikeuskäytännön puuttuessa maksukykytestin toteuttamistapaan liittyy kuitenkin edelleenkin merkittävää epävarmuutta. Tämän tutkimuksen tavoitteena on pyrkiä selvittämään, miten osakeyhtiölain mukainen maksukykytesti pitäisi toteuttaa pienissä osakeyhtiöissä, joiden taloushallinto on kokonaan tai osittain ulkoistettu tilitoimistolle. Olennainen osa tutkimuksen tavoitetta on ottaa kantaa tilitoimiston rooliin maksukykytestin toteuttamisessa. Tutkimuksen johtopäätöksenä voidaan todeta, että yksityiskohtaisten tilinpäätöksen tunnuslukuihin perustuvien maksukykyarvioiden laatiminen maksukykytestin toteuttamiseksi on pienissä osakeyhtiöissä pääsääntöisesti tarpeetonta. Merkitystä tulisi sen sijaan antaa yhtiön johdolla olevalle hiljaiselle tiedolle, sillä yhtiön johto tuntee yrityksen tilanteen parhaiten ja kykenee siten myös arvioimaan tuleva kehitystä. Tilitoimiston rooliksi jää tällöin varmistaa, että asiakasyrityksen johto tuntee oman vastuuasemansa. Tutkimuksen perusteella tilitoimistot voisivat myös hyödyntää omaa asemaansa pienten yhtiöiden neuvonantajina nykyistä paremmin ohjeistamalla asiakasyrityksiään dokumentoimaan maksukykytestin hallituksen kokouspöytäkirjaan esimerkiksi osana hallituksen osingonjakoehdotusta.

Canadian investors and the discount on closed-end funds

Small investors' sentiment has been proposed by behaviouralists to explain the existence and behavior of discount on closed-end funds (CEFD). The empirical tests of this sentiment hypothesis so far provide equivocal results. Besides, most of out-of-sample tests outside U.S. are not robust in the sense that they fail to well control other firm characteristics and risk factors that may explain stock return and to provide a formal cross-sectional test of the link between CEFD and stock return. This thesis explores the role of CEFD in asset pricing and further validates CEFD as a sentiment proxy in Canadian context and augments the extant studies by examining the redemption feature inherent in Canadian closed-end funds and by enhancing the robustness of the empirical tests. Our empirical results document differential behaviors in discounts between redeemable funds and non-redeemable funds. However, we don't find supportive evidence of CEFD as a priced factor. Specifically, the stocks with different exposures to CEFD fail to provide significantly different average return. Nor does CEFD provide significant incremental explanatory power, after controlling other well-known firm characteristics and risk factors, in cross-sectional as well as time-series variation of stock return. This evidence, together with the findings from our direct test of CEFD as a sentiment index, suggests that CEFD, even the discount on traditional non-redeemable closed-end funds, is unlikely to be driven by elusive sentiment in Canada.

A stochastic dynamic programming approach for pricing options on stock-index futures

The aim of this thesis is to price options on equity index futures with an application to standard options on S&P 500 futures traded on the Chicago Mercantile Exchange. Our methodology is based on stochastic dynamic programming, which can accommodate European as well as American options. The model accommodates dividends from the underlying asset. It also captures the optimal exercise strategy and the fair value of the option. This approach is an alternative to available numerical pricing methods such as binomial trees, finite differences, and ad-hoc numerical approximation techniques. Our numerical and empirical investigations demonstrate convergence, robustness, and efficiency. We use this methodology to value exchange-listed options. The European option premiums thus obtained are compared to Black's closed-form formula. They are accurate to four digits. The American option premiums also have a similar level of accuracy compared to premiums obtained using finite differences and binomial trees with a large number of time steps. The proposed model accounts for deterministic, seasonally varying dividend yield. In pricing futures options, we discover that what matters is the sum of the dividend yields over the life of the futures contract and not their distribution.

Effect of executive compensation on firm performance

The paper finds evidence that the equity-based CEO pay is positively related to firm performance and risk-taking. Both stock price and operating performance as well as firm's riskiness increase in the pay-performance sensitivities (PPS) provided by CEO stock options and stock holdings. PPS can explain stock returns better as an additional factor to the Fama-French 3-factor model. When CEOs are compensated with higher PPS, firms experience higher return on asset (ROA). The higher PPS also leads to the higher risk-taking. While CEO incentive compensation has been perceived mixed on its effectiveness, this study provides support to the equity-based CEO compensation in reducing agency conflicts between CEOs and shareholders.

Are Idiosyncratic Skewness and Idiosyncratic Kurtosis Priced?

This thesis investigates the pricing effects of idiosyncratic moments. We document that idiosyncratic moments, namely idiosyncratic skewness and idiosyncratic kurtosis vary over time. If a factor/characteristic is priced, it must show minimum variation to be correlated with stock returns. Moreover, we can identify two structural breaks in the time series of idiosyncratic kurtosis. Using a sample of US stocks traded on NYSE, AMEX and NASDAQ markets from January 1970 to December 2013, we run Fama-MacBeth test at the individual stock level. We document a negative and significant pricing effect of idiosyncratic skewness, consistent with the finding of Boyer et al. (2010). We also report that neither idiosyncratic volatility nor idiosyncratic kurtosis are consistently priced. We run robustness tests using different model specifications and period sub-samples. Our results are robust to the different factors and characteristics usually included in the Fama-MacBeth pricing tests. We also split first our sample using endogenously determined structural breaks. Second, we divide our sample into three equal sub-periods. The results are consistent with our main findings suggesting that expected returns of individual stocks are explained by idiosyncratic skewness. Both idiosyncratic volatility and idiosyncratic kurtosis are irrelevant to asset prices at the individual stock level. As an alternative method, we run Fama-MacBeth tests at the portfolio level. We find that idiosyncratic skewness is not significantly related to returns on idiosyncratic skewness-sorted portfolios. However, it is significant when tested against idiosyncratic kurtosis sorted portfolios.

Are Idiosyncratic Skewness and Idiosyncratic Kurtosis Priced?

This thesis investigates the pricing effects of idiosyncratic moments. We document that idiosyncratic moments, namely idiosyncratic skewness and idiosyncratic kurtosis vary over time. If a factor/characteristic is priced, it must show minimum variation to be correlated with stock returns. Moreover, we can identify two structural breaks in the time series of idiosyncratic kurtosis. Using a sample of US stocks traded on NYSE, AMEX and NASDAQ markets from January 1970 to December 2013, we run Fama-MacBeth test at the individual stock level. We document a negative and significant pricing effect of idiosyncratic skewness, consistent with the finding of Boyer et al. (2010). We also report that neither idiosyncratic volatility nor idiosyncratic kurtosis are consistently priced. We run robustness tests using different model specifications and period sub-samples. Our results are robust to the different factors and characteristics usually included in the Fama-MacBeth pricing tests. We also split first our sample using endogenously determined structural breaks. Second, we divide our sample into three equal sub-periods. The results are consistent with our main findings suggesting that expected returns of individual stocks are explained by idiosyncratic skewness. Both idiosyncratic volatility and idiosyncratic kurtosis are irrelevant to asset prices at the individual stock level. As an alternative method, we run Fama-MacBeth tests at the portfolio level. We find that idiosyncratic skewness is not significantly related to returns on idiosyncratic skewness-sorted portfolios. However, it is significant when tested against idiosyncratic kurtosis sorted portfolios.

Latent Variable Models for Stochastic Discount Factors.

Latent variable models in finance originate both from asset pricing theory and time series analysis. These two strands of literature appeal to two different concepts of latent structures, which are both useful to reduce the dimension of a statistical model specified for a multivariate time series of asset prices. In the CAPM or APT beta pricing models, the dimension reduction is cross-sectional in nature, while in time-series state-space models, dimension is reduced longitudinally by assuming conditional independence between consecutive returns, given a small number of state variables. In this paper, we use the concept of Stochastic Discount Factor (SDF) or pricing kernel as a unifying principle to integrate these two concepts of latent variables. Beta pricing relations amount to characterize the factors as a basis of a vectorial space for the SDF. The coefficients of the SDF with respect to the factors are specified as deterministic functions of some state variables which summarize their dynamics. In beta pricing models, it is often said that only the factorial risk is compensated since the remaining idiosyncratic risk is diversifiable. Implicitly, this argument can be interpreted as a conditional cross-sectional factor structure, that is, a conditional independence between contemporaneous returns of a large number of assets, given a small number of factors, like in standard Factor Analysis. We provide this unifying analysis in the context of conditional equilibrium beta pricing as well as asset pricing with stochastic volatility, stochastic interest rates and other state variables. We address the general issue of econometric specifications of dynamic asset pricing models, which cover the modern literature on conditionally heteroskedastic factor models as well as equilibrium-based asset pricing models with an intertemporal specification of preferences and market fundamentals. We interpret various instantaneous causality relationships between state variables and market fundamentals as leverage effects and discuss their central role relative to the validity of standard CAPM-like stock pricing and preference-free option pricing.

Asymmetric Smiles, Leverage Effects and Structural Parameters.

In this paper, we characterize the asymmetries of the smile through multiple leverage effects in a stochastic dynamic asset pricing framework. The dependence between price movements and future volatility is introduced through a set of latent state variables. These latent variables can capture not only the volatility risk and the interest rate risk which potentially affect option prices, but also any kind of correlation risk and jump risk. The standard financial leverage effect is produced by a cross-correlation effect between the state variables which enter into the stochastic volatility process of the stock price and the stock price process itself. However, we provide a more general framework where asymmetric implied volatility curves result from any source of instantaneous correlation between the state variables and either the return on the stock or the stochastic discount factor. In order to draw the shapes of the implied volatility curves generated by a model with latent variables, we specify an equilibrium-based stochastic discount factor with time non-separable preferences. When we calibrate this model to empirically reasonable values of the parameters, we are able to reproduce the various types of implied volatility curves inferred from option market data.

Risk Aversion, Intertemporal Substitution, and Option Pricing

This paper develops a general stochastic framework and an equilibrium asset pricing model that make clear how attitudes towards intertemporal substitution and risk matter for option pricing. In particular, we show under which statistical conditions option pricing formulas are not preference-free, in other words, when preferences are not hidden in the stock and bond prices as they are in the standard Black and Scholes (BS) or Hull and White (HW) pricing formulas. The dependence of option prices on preference parameters comes from several instantaneous causality effects such as the so-called leverage effect. We also emphasize that the most standard asset pricing models (CAPM for the stock and BS or HW preference-free option pricing) are valid under the same stochastic setting (typically the absence of leverage effect), regardless of preference parameter values. Even though we propose a general non-preference-free option pricing formula, we always keep in mind that the BS formula is dominant both as a theoretical reference model and as a tool for practitioners. Another contribution of the paper is to characterize why the BS formula is such a benchmark. We show that, as soon as we are ready to accept a basic property of option prices, namely their homogeneity of degree one with respect to the pair formed by the underlying stock price and the strike price, the necessary statistical hypotheses for homogeneity provide BS-shaped option prices in equilibrium. This BS-shaped option-pricing formula allows us to derive interesting characterizations of the volatility smile, that is, the pattern of BS implicit volatilities as a function of the option moneyness. First, the asymmetry of the smile is shown to be equivalent to a particular form of asymmetry of the equivalent martingale measure. Second, this asymmetry appears precisely when there is either a premium on an instantaneous interest rate risk or on a generalized leverage effect or both, in other words, whenever the option pricing formula is not preference-free. Therefore, the main conclusion of our analysis for practitioners should be that an asymmetric smile is indicative of the relevance of preference parameters to price options.

Aggregations and Marginalization of GARCH and Stochastic Volatility Models

The GARCH and Stochastic Volatility paradigms are often brought into conflict as two competitive views of the appropriate conditional variance concept : conditional variance given past values of the same series or conditional variance given a larger past information (including possibly unobservable state variables). The main thesis of this paper is that, since in general the econometrician has no idea about something like a structural level of disaggregation, a well-written volatility model should be specified in such a way that one is always allowed to reduce the information set without invalidating the model. To this respect, the debate between observable past information (in the GARCH spirit) versus unobservable conditioning information (in the state-space spirit) is irrelevant. In this paper, we stress a square-root autoregressive stochastic volatility (SR-SARV) model which remains true to the GARCH paradigm of ARMA dynamics for squared innovations but weakens the GARCH structure in order to obtain required robustness properties with respect to various kinds of aggregation. It is shown that the lack of robustness of the usual GARCH setting is due to two very restrictive assumptions : perfect linear correlation between squared innovations and conditional variance on the one hand and linear relationship between the conditional variance of the future conditional variance and the squared conditional variance on the other hand. By relaxing these assumptions, thanks to a state-space setting, we obtain aggregation results without renouncing to the conditional variance concept (and related leverage effects), as it is the case for the recently suggested weak GARCH model which gets aggregation results by replacing conditional expectations by linear projections on symmetric past innovations. Moreover, unlike the weak GARCH literature, we are able to define multivariate models, including higher order dynamics and risk premiums (in the spirit of GARCH (p,p) and GARCH in mean) and to derive conditional moment restrictions well suited for statistical inference. Finally, we are able to characterize the exact relationships between our SR-SARV models (including higher order dynamics, leverage effect and in-mean effect), usual GARCH models and continuous time stochastic volatility models, so that previous results about aggregation of weak GARCH and continuous time GARCH modeling can be recovered in our framework.