Do shocks to G7 stock prices have a permanent effect? : evidence from panel unit root tests with structural change

There is a plethora of studies that investigate evidence for the behaviour of stock prices using univariate techniques for unit roots. Whether or not stock prices are characterised by a unit root have implications for the efficient market hypothesis, which asserts that returns of a stock market are unpredictable from previous price changes. The extant literature has found mixed evidence on the integrational properties of stock prices. In this paper, for the first time, we provide evidence on the unit root hypothesis for G7 stock price indices using the Lagrangian multiplier panel unit root test that allows for structural breaks. Our main finding is that stock prices are stationary processes, inconsistent with the efficient market hypothesis.

Information leakage and informed trading around unscheduled earnings announcements

While there has been much judicial discussion regarding the competency of Australia's continuous disclosure regime with reference to contemporaneous international standards, there has to date been limited empirical analysis of the Australian system's effectiveness in preventing selective disclosure and information leakage. This paper presents an empirical study of information content and trading behaviour around unscheduled earnings announcements - comprising of profit upgrades, profit warnings and neutral trading statements - made by ASX-listed companies during 2004. The contention is that informed trading impacts on the stock returns and trading volumes of listed entities, and hence abnormal returns or trading volumes observed prior to an announcement provide evidence of information leakage. The paper models a range of factors that potentially influence firm disclosure practices and contribute to the level information asymmetry in the market during the pre- announcement period. Previous research has investigated the influence of firm size and information content in contributing to information leakage. This study further considers the variables of firm growth, capital structure and industry group.

The information content of directors' trades: empirical analysis of the Australian market

We examine the trading activities of directors in shares of their own companies on the Australian Stock Exchange during the July-December 2005 period. We find that directors of small companies in particular earn abnormal return after both their 'Purchase' and as well as their 'Sale' trade. Directors of these companies have an uncanny ability to time the market by trading when mispricing is greatest, and are able to predict the future performance of their firms in short run. For directors of medium and large companies, we find evidence that 'Sale' trades are the ones which work as loss avoiders. Outsiders recognise to some extent that directors' trades are informative, however they are slow to incorporate the new information into prices, refuting much of the market efficiency literature.

Does the type of derivative instrument used by companies impact firm value?

We explore the relationship between the type of derivative instrument used and firm value, in a sample of Australian firms. Specifically, we examine the impact of the corporate use of swaps, futures, forwards and options, and the extent of such usage, on firm value. Our findings suggest that a 'discount' is most severely imposed on users of swaps.

Top Taiwanese and Turkish companies and their engagement with corporate ethics

The objective of this paper is to describe and compare the current, emerging Taiwanese and Turkish interest in corporate ethical engagement. This paper is based upon a survey amongst the top companies operating in Taiwan and Turkey. There are major differences between the top Taiwanese and Turkish companies, where the Turkish companies appear to be more ethically engaged than the Taiwanese companies which came as a surprise to the researchers as Taiwan is a more substantially developed economy than Turkey and one may have assumed therefore more engaged with ethical practices.

Board structure and firm performance : evidence from India's top 500 companies

The objective of this paper is to investigate the relationship between internal governance structures in Indian companies and financial performance. The
study includes an examination of aspects of the effectiveness of boards of directors', including composition of the board, board size and aspects of board leadership including duality and board busyness.

Random walk versus multiple trend breaks in stock prices : evidence from 15 European markets

This letter extends research reported in Narayan and Smyth (2005) by employing multiple trend break unit root tests to examine the random walk hypothesis for 15 European stock market indices. The results provide strong support for the view that stock prices are characterized by a random walk.

The behaviour of US stock prices : evidence from a threshold autoregressive model

This paper investigates the behaviour of US stock prices using an unrestricted two-regime threshold autoregressive (TAR) model with an autoregressive unit root. The TAR model is applied to monthly stock price (NYSE Common Stocks) data for the US for the period 1964:06 to 2003:04. Amongst our main results, we find that the US stock price is a nonlinear series that is characterized by a unit root process, consistent with the efficient market hypothesis.

The existence and nature of risk management committees in Australian companies

A risk management committee (RMC), as a newly evolving sub-committee of the board of directors, functions as a key governance support mechanism in the oversight an organisation’s risk management strategies, policies and processes. However, empirical evidence on the factors associated with the existence and the type of RMCs remains scant. Using an agency theory perspective, this study investigates the association between board factors such as proportion of non-executive directors, CEO duality, and board size; as well as, other firm-related factors (e.g. auditor type, industry, leverage, and complexity), and (1) the existence of a RMC, and (2) the type of RMC (namely, a separate RMC versus one that is combined with the audit committee). Data was collected from the annual reports of the top 300 ASX-listed companies. The results, based on logistic regression analyses, indicate that RMCs tend to exist in companies with an independent board chairman and larger boards. Further, the results also indicate that in comparison to companies with a combined RMC and audit committee, those with a separate RMC are more likely to have larger boards, higher financial reporting risk and lower organisational complexity. The findings of this study provide additional information on the use and design of RMCs in a voluntary setting.

Mean reversion versus random walk in G7 stock prices evidence from multiple trend break unit root tests

This paper provides evidence on the random walk hypothesis in G7 stock price indices using unit root tests which allow for one and two structural breaks in the trend. Of the seven countries we find, at best, evidence of mean reversion in the stock price index of Japan. Thus, overall, our results support the random walk hypothesis. We also consider the implications of the identified structural breaks for movement in stock prices over time. Our main conclusion from this exercise is that the second break in stock prices has had a detrimental effect on movements in stock prices in the G7 countries.

Doing business in China : how Australian companies make their decisions when entering the Chinese market

This report describes and analyses the experiences of Australian businesses which have established operations or conduct business in China, both successfully and unsuccessfully. The information was collected over the period from August to November in 2007. It involved interviews with 43 respondents from 40 different Australian businesses across both manufacturing and service industries. The project was motivated by the increasing significance of China to Australia’s economy (such as the demand for Australian iron and coal exports and the transfer of much of Australia’s manufacturing operations there) and its extraordinary growth and development over the past 10 years. Using the contemporary modes of international expansion as a framework, the research considered companies which had entered China through Wholly Owned Foreign Enterprises (WOFEs), Joint Ventures, exporting and other forms such as licensing and agents. Most of the participants had located their operations in China in the eastern region, including Shanghai, Beijing, Guanzhou, Shenzhen and Tianjin.

Valuation and incentive effects of hurdle rate executive stock options

Traditional executive stock options are often criticized for inherently weak links between pay and performance. Hurdle rate executive stock options represent a viable improvement. However, valuing these options presents extraordinary analytic difficulties. With a constant dividend yield the strike price becomes a path-dependent function of the stock price and exact analytic valuation is intractable. To solve this problem, we apply the Monte Carlo valuation approach developed by Longstaff and Schwartz (Rev Financ Stud 4:113–147, 2001) to estimate the value of path-dependent American options. We also extend the methodology to incorporate the theoretical framework by Ingersoll (J Bus 79:453–487, 2006) to permit subjective valuation influenced by an executive’s risk aversion.

The cost of granting executive stock options with strike prices adjusted by the cost of capital

Purpose – The purpose of this paper is to estimate the cost of granting executive stocks with strike prices adjusted by the cost of capital.

Design/methodology/approach – In the paper a Monte Carlo simulation approach developed in Longstaff and Schwartz is used in conjunction with the subjective valuation model developed in Ingersoll to value these executive stock options that are subject to performance hurdles.

Findings – The paper finds that standard European Black-Scholes-Merton option values overstate the true cost to the firm of granting these executive stock options. The option values also decrease with a higher dividend yield, a higher performance hurdle, a longer vesting period, and a shorter maturity.

Research limitations/implications – While the study in the paper is limited to the valuation of executive options, the methodology can be used to study incentive effects of executive stock options that have a performance hurdle.

Practical implications – The approach used in this paper to estimate the cost of granting executive stock options is a clear improvement over standard European option pricing approaches that often result in biased estimates.

Originality/value – This paper presents a first attempt to integrate the Ingersoll utility-theoretic model and the Longstaff and Schwartz least squares Monte Carlo algorithm to estimate the subjective value and the objective cost of executive stock options with a performance hurdle. This valuation approach will be useful in the study of other types of executive compensation.