Alan Gregory

Audit committee activity and agency costs

Abstract Menon and Williams indicate that many United States (US) over-the-counter (OTC) firms which form audit committees appear not to rely on them (cf. Menon, K., Williams, J.D. 1994. Journal of Accounting and Public Policy, 13(2), 121–139). Reliance on audit committees appears to depend upon board composition, while audit committee activity is associated with firm size. In this paper, we compare the US experience and evidence on audit committees and monitoring with the position in the United Kingdom (UK), where there has been a steady growth in the number of major companies voluntarily forming audit committees over the last 15 years (Collier, P.A. 1996. Accounting, Business and Financial History 6(2), 121–140). We contend that the dataset is best analyzed using the Heckman procedure (cf. Heckman, J.A. 1979. Econometrica 47(1), 153–161) which captures the two stages of the decision on audit committee activity. Our results show little support from the UK data for the findings of Menon and Williams (cf. Menon and Williams, 1994. Journal of Accounting and Public Policy 13(2), 121–139). However, consistent with their agency theoretic perspective of monitoring, we found that high quality (Big Six) auditors, and to some degree leverage have a positive relationship with audit committee activity. Contrary to an agency theoretic expectation, we found that audit committee activity is reduced in firms that combine the role of chairman and chief executive. On the basis of this result we explored the impact of insiders (executive directors) and found that their presence on an audit committee had a significant negative impact on audit committee activity. This result suggests that the emphasis placed by the US Securities and Exchange Commission (SEC) (Staff Report on Corporate Accountability, US Government Printing Office, Washington, DC, 1980, p. 491) and the Cadbury Committee (Committee on the Financial Aspects of Corporate Governance. 1992. Report of the Committee on the Financial Aspects of Corporate Governance. Gee, London) on the independence of audit committee members may be well founded. The reduction in audit committee activity that arises from the combination of the role of chairman and chief executive officer, and the presence of insiders on the audit committee, has important policy implications. Indeed, in the UK, both practices are the subject of recommendations in the Hampel Committee report Hampel Committee 1998. Committee on Corporate Governance. Gee, London.

Constructing and Testing Alternative Versions of the Fama-French and Carhart Models in the UK

The aim of this paper is to construct and test alternative versions of the Fama-French and Carhart models for the UK market. We conduct a comprehensive analysis of such models, forming risk factors using approaches advanced in the recent literature including value weighted factor components and various decompositions of the risk factors. We also test whether such factor models can at least explain the returns of large firms. Despite these various approaches, we join Michou, Mouselli and Stark (2007) and Fletcher (2010) in demonstrating that such factor models fail to reliably describe the cross-section of returns in the UK.

Performance and Performance Persistence of 'Ethical' Unit Trusts in the UK

We examine performance, and persistence in the performance, of UK ethical or SRI funds and find that performance appears to be time-varying, showing that conclusions on performance itself are influenced by whether a static or time varying model is employed. Given evidence that many UK funds which claim to be international in nature may exhibit home bias in their portfolio allocations, we also propose a new measure for performance of international funds that allows for this and show that such recognition has important implications for the conclusions drawn with respect to these funds. We find evidence that supports persistence in performance, particularly at longer time horizons. There is some evidence that for domestic funds, past winning SRI funds outperform losing SRI funds to a greater extent than their control portfolio counterparts.

An Analysis of Contrarian Investment Strategies in the UK

The performance of contrarian, or value strategies - those that invest in stocks that have low market value relative to a measure of their fundamentals - continues to attract attention from researchers and practitioners alike. While there is much extant evidence on the profitability of value strategies, however, most of this evidence pertains to the US. In this paper, we provide a detailed characterisation of value strategies using data on UK stocks for the period 1975 to 1998. We first undertake simple one-way and two-way classifications of stocks in which value is defined using both past performance and expected future performance. Using sales growth as a proxy for past performance and book-to-market, earnings yield and cash flow yield as measures of expected future performance, we find that that stocks that have both poor past performance and low expected future performance have significantly higher returns than those that have either good past performance or good expected future performance. Allowing for size effects in returns reduces the value premium but it nevertheless remains significant. We go on to explore whether the profitability of value strategies in the UK can be explained using the three factor model of Fama and French (1996). Broadly consistent with the results for the US, we find that using the one-way classification the excess returns to almost all value strategies can be explained by their loading on the market, book-to-market and size factors. However, in contrast with the US, using the two-way classification there are excess returns to value strategies based on book-to-market and sales growth, even after controlling for their loading on the market, book-to-market and size factors. Copyright Blackwell Publishers Ltd 2001.

Re‐assessing the long‐term underperformance of UK Initial Public Offerings

Previous work has identified that IPOs underperform a market index, and the purpose of this paper is to examine the robustness of this finding. We re-examine the evidence on the long-term returns of IPOs in the UK using a new data set of firms over the period 1985-92, in which we compare abnormal performance based on a number of alternative methods including a calendar-time approach. We find that, using an event-time approach, there are substantial negative abnormal returns to an IPO after the first three years irrespective of the benchmark used. However, over the five years after an IPO, abnormal returns exhibit less dramatic underperformance, and the conclusion on negative abnormal returns depends on the benchmark applied. Further if these returns are measured in calendar time, we find that the (statistical) significance of underperformance is even less marked.

Detecting Information from Directors' Trades: Signal Definition and Variable Size Effects

There have been three empirical studies examining the share price reaction following trades by directors of UK companies (King and Poell, 1988; Pope, Morris and Peel, 1990; and Gregory, Matatko, Tonks and Pukiss, 1994). All three of these UK studies used different definitions of ‘buy’ and ‘sell’ signals resulting from the transactions of directors and employ different controls to detect the presence of any ‘size effects’. We investigate whether the signal definition explains the different conclusions drawn by these earlier studies, and examine whether or not any observed abnormal returns are explicable by the small companies effect. We also investigate trading strategies based on holding a long portfolio of shares purchased or a short portfolio of shares sold by directors held until the end of the study period or until a ‘reserving event’ (e.g. a sale following a purchase by director[s] is observed).

Strategic management accounting: a UK hotel sector case study

Explores the use which is made of strategic management accounting in the hotel sector through case studies at six major UK hotel groups. Uses the definition of strategic management accounting – “the provision and analysis of management accounting data relating to business strategy: particularly the relative levels and trends in real costs and prices, volumes, market share, cash flow and the demands on a firm′s total resources”. The results demonstrate that the accounting function in hotel groups is becoming increasingly involved in strategic management accounting, both in planning and in ad hoc exercises on the market conditions and competitor analysis. The widespread adoption of strategic management accounting is consistent with the open and relatively homogeneous nature of the industry and the high degree of competitiveness among the hotel groups in the market.

Constructing and Testing Alternative Versions of the Fama-French and Carhart Models in the UK: FAMA-FRENCH AND CARHART MODELS IN THE UK

This paper constructs and tests alternative versions of the Fama–French and Carhart models for the UK market with the purpose of providing guidance for researchers interested in asset pricing and event studies. We conduct a comprehensive analysis of such models, forming risk factors using approaches advanced in the recent literature including value�?weighted factor components and various decompositions of the risk factors. We also test whether such factor models can at least explain the returns of large firms. We find that versions of the four�?factor model using decomposed and value�?weighted factor components are able to explain the cross�?section of returns in large firms or in portfolios without extreme momentum exposures. However, we do not find that risk factors are consistently and reliably priced.

Contrarian Investment and Macroeconomic Risk

It is now widely accepted that contrarian, or value investment strategies deliver superior returns. Gregory, Harris and Michou (2001) examine the performance of contrarian investment strategies in the UK and find that value strategies formed on the basis of a wide range of measures of value have delivered excess returns that are both statistically and economically significant. However, while value strategies appear to be profitable, the reason for their superior perform- ance is far from clear. Under the contrarian model, value strategies are profitable because they are contrarian to naive strategies such as those that erroneously extrapolate past performance, while under the rational pricing model, value strategies are profitable because they are fundamentally riskier in some sense. In this paper, we discriminate between these two possibilities by undertaking a comprehensive investigation of the relationship between the returns to value investment strategies and various macroeconomic state variables that in a multi-factor asset pricing model could reasonably be taken as proxies for risk. Moreover, we examine whether the returns to value strategies predict future GDP, consumption and investment growth over and above the contribution of the Fama and French (1993 and 1996) SMB, HML and market factors. While the SMB and HML factors behave in a manner consistent with the rational pricing model, we show that some value strategies in the UK are able to generate excess returns that do not seem to be related to known risk factors. Copyright Blackwell Publishers Ltd, 2002.

Stock Market Driven Acquisitions versus the Q Theory of Takeovers - The UK Evidence

Using a sample of UK mergers and acquisitions from 1985-2004, we show that equity over-valuation appears to play an important role in the determination of financing method. Our results are broadly consistent with the Sheifer and Vishny (2003) theory of market-driven acquisitions rather than a Q-theory explanation. In some contrast to the US results of Dong et al (2006) we find that over-valuation appears to be the more persuasive explanation for acquisition behaviour in the UK, although like them we cannot comprehensively reject a Q-theory explanation. Given the evidence in favour of the Shleifer-Vishny hypothesis, we argue that a selection model is necessary in when investigate the long run performance of acquirers, and present results which indicate that there is some evidence of high-Q acquirers performing better, but only amongst the cash acquirer sub-sample.