Andrew K. Prevost

Determinants of board composition in New Zealand: a simultaneous equations approach

Abstract This paper models the composition of New Zealand boards of directors as a function of alternative corporate governance mechanisms, other control variables, and legislation designed to improve corporate monitoring. We find evidence that board composition and firm performance jointly impact each other in a positive manner. We document that the proportion of outsiders on the board is positively related to board size and is negatively related to future growth, nonlinearly related to inside ownership, and is not related to debt and ownership concentration. Firm performance is inversely related to firm size, positively impacted by future growth, and appears to be nonlinearly related to insider ownership. Passage of the new Companies Act in 1994 is associated with increased representation of outside board members. However, this increase is not associated with enhanced firm performance which may be a consequence of increased liability placed on directors.

Board Composition in New Zealand: An Agency Perspective

This paper looks at board composition determinants in New Zealand. We document that the proportion of outside board members is inversely related to insider equity ownership supporting the notion that these variables are substitute mechanisms in controlling agency problems. We also find that board composition is directly related to debt, ownership concentration, and profitability and inversely related to growth and firm size. There is evidence that firms with influential CEOs have lower outside board representation. Finally, we document that the passage of the legislation reforming company and securities laws in 1993 was associated with increased outside members on the board. Copyright Blackwell Publishers Ltd 2002.

Labor Unions as Shareholder Activists: Champions or Detractors?

This paper examines the impact of labor union shareholder activism through the submission of shareholder proposals during 1988-2002. We examine the effect of labor union sponsored shareholder proposals on announcement period returns, on the corporate governance environment of the firm including shareholder rights, board composition, and CEO compensation, and on long run shareholder wealth. We find that the efficacy of activism is related to union presence at targeted firms and shareholder support for proposals. Our findings, hitherto not reported elsewhere, contribute to the shareholder activism literature by implying that labor unions may be unique in their ability to spur such changes relative to other shareholder proponents.

Contrarian Investing in a Small Capitalization Market: Evidence from New Zealand

This paper investigates the performance of accounting-based contrarian investment strategies in the New Zealand market. The return patterns of these strategies are then related to risk-based and behavioral-based explanations of the contrarian anomaly. Based on our analysis of the risk-return characteristics of the various strategies, we attribute the first year underperformance and second year outperformance of the value portfolios to expectational errors caused by noise trading in the relatively illiquid New Zealand market. The longer two-year correction process is in contrast to the much larger and more developed U.S. and Japanese markets, where value stock price corrections have been found to occur more rapidly. This provides support for the conjecture that longer horizons are required for value strategies to pay off in imperfectly competitive markets than in competitive markets. Copyright 2002 by the Eastern Finance Association.

Block Trade Price Asymmetry and Changes in Depth: Evidence from the Australian Stock Exchange

This paper examines the price response to large block transactions on the Australian Stock Exchange during the 1999 sample period. We find asymmetry in the price reaction between buyer- and seller-initiated trades with respect to size and resiliency following the trade. We extend previous research by examining order book changes surrounding block trades and relating price effects to changes in book depth. Purchases are associated with persistent order book imbalance, while the sales imbalance is insignificant. Cross-sectional analysis demonstrates that price resiliency following a trade is related to the speed at which limit orders arrive to replenish book depth.

The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt

We examine how effort and risk incentives embedded in CEO equity incentives are related to the cost of debt and the role credit worthiness plays in this relationship. Our empirical approach addresses a number of unanswered questions in the literature by examining the sources and effects of co-movements in CEO incentives, whether the proportionality of these movements is rationally priced, and whether the effects are concentrated among bonds with greater likelihood of default. Our findings confirm that effort and risk incentives are rationally priced by bond market participants. We also show that significant cross-sectional effects are more pronounced for speculative bonds, implying that previously documented links between equity incentives and the cost of debt may not be generalizable to all debt issues.

Dividend Imputation and Shareholder Wealth: The Case of New Zealand

On April 1, 1988, New Zealand stopped the double taxation of dividends by implementing a full dividend imputation program. Because many believed that the tax advantage of debt had led to more highly leveraged firms subject to greater financial risk than was socially optimal, it was hoped the removal of incentives to finance with debt would result in a more efficient allocation of capital. The empirical results suggest that the shareholder wealth gain from dividend imputation was more than offset in firms with large debt levels. Moreover, an examination of debt ratios indicates debt levels declined in the post-imputation period. Copyright Blackwell Publishers Ltd 2002.

Board Networks and the Cost of Corporate Debt

This paper examines how the extent of industrial firms’ connectedness to other firms through board interlocks is associated with their bond yield spreads. We hypothesize that the transmission of more “soft” information about better connected firms would lower information asymmetries of such firms, potentially lowering the perceived riskiness of their bonds. Using bid-ask spread as a measure of information asymmetry and a sample of 5,402 bond-year observations over the 1994-2006 period, we find that greater connectedness is associated with statistically and economically significant lower bond yield spreads, ceteris paribus. Supporting the information flow hypothesis, we find larger benefits from greater connectedness for firms with higher information asymmetries and for firms with more extensive ties to financial firms. Overall, our findings suggest that firms obtain benefits from being better networked in the form of lower borrowing costs.

Shareholder intervention, managerial resistance, and corporate control: a Nash equilibrium approach

Abstract Anecdotal and empirical evidence suggest that some large shareholders initiate takeover attempts while others remain passive, and that target managements sometimes cooperate and sometimes resist. We model the takeover mechanism using a two-player game of incomplete information. The results of the paper are contained in three broad classes of equilibria: separating, pooling and partial pooling. The partial pooling equilibria offer the best match to the anecdotal evidence. In these equilibria, all strong and some weak investors attempt to takeover; some managers cooperate while others resist. The model offers various testable implications and links to the empirical corporate control literature.

Reporting Quality, SOX, and the Cost of Debt

This paper studies the heretofore unexamined effect of Sarbanes-Oxley Act of 2002 (SOX) on the spread-accruals relationship. We document that SOX has no impact on the overall spread-accruals relationship but, as hypothesized, it has a moderating effect on the discretionary (but not innate) component of accruals. The latter effect however is only revealed in the subset of firms characterized by high information quality risk in the pre-SOX period. The paper also adds robustness to prior findings by reconfirming the positive relationship between accruals and cost of debt but using a sample of seasoned debt issues with available secondary market prices. Earlier studies used historical costs of debt or focused only on newly issued debt. We also reconfirm that the accrual-debt cost relationship is stronger for innate than for discretionary accruals.