Bernt Arne Ødegaard

Governance and Performance Revisited

Using unusually rich and accurate data from Oslo Stock Exchange firms, we find that corporate governance matters for economic performance, that insider ownership matters the most, that outside ownership concentration destroys market value, that direct ownership is superior to indirect, and that performance decreases with increasing board size, leverage, dividend payout, and the fraction of non-voting shares. These results persist across a wide range of single-equation models, suggesting that governance mechanisms are independent and may be analyzed one by one rather than as a bundle. Several significant relationships change sign or disappear in simultaneous equation models. This apparent indication of optimal, firm specific governance systems may instead reflect weak instruments caused by underdeveloped theories of how governance and performance interact.

Equity trading by institutional investors: To cross or not to cross? ☆

The proliferation of market places and trading methods is a striking feature of current equity markets. A stated goal of all the new trading arrangements is to reduce transaction costs. We investigate costs in one particular new market place, the crossing network. A crossing network is a satellite trading place; it uses prices derived from some primary market, and merely matches on quantity. Using special features of a data sample from a large institutional investor, we provide evidence that low measured costs in crossing networks are offset by substantial costs of non-trading. The costs of non-trading, which are related to adverse selection in the networks, are not reflected in standard measures of transaction costs.

Liquidity at the Oslo Stock Exchange

We analyze the relationship between the long term development in liquidity at the Oslo Stock Exchange and the Norwegian economy for the period 1980 to 2007. We calculate different liquidity measures that captures various dimensions of liquidity over time and across industry groups. Overall, we find that the liquidity at the OSE has improved over the sample period. However, the improvement is most pronounced for the largest firms on the exchange. Interestingly, some measures indicate that the implicit cost of trading has been lower in earlier periods than it is today. Another important finding is that there is a strong counter cyclical relationship between proportional transaction costs measured by the relative spread and the business cycle measured by the output gap. The average relative spread also responds very quickly to the turning points of the business cycle. This result suggest that liquidity measures provide important real time information about the current state of the economy as well as market participants expectations about future economic growth.

The Diversification Cost of Large, Concentrated Equity Stakes: How Big is It? Is It Justified?

While the hypothesis that ownership concentration can affect the value of a company has seen a lot of empirical study, little light has been shed on a complementary problem, that these concentrated owners have a cost of their position due to an undiversified portfolio. Using a unique data set of the actual diversification of all Norwegian equity owners, we show that the largest owners of a corporation in fact have very undiversified equity portfolios, and that such owners have significant costs to their concentrated portfolios. At the level of risk of a benchmark portfolio, if they were to move from their present portfolio composition in risky assets to a well diversified portfolio, their returns would have increased by about 13 percentage points in annual terms. We ask whether this cost can be explained by estimated benefits of ownership concentration (private benefits), and show that extant estimates of private benefits are too low to offset our cost estimates.

Liquidity and Asset Pricing: Evidence on the Role of Investor Holding Period

We use data on actual holding periods for all investors in a stock market over a 10-year period to investigate the links between holding periods, liquidity, and asset returns. Microstructure measures of liquidity are shown to be important determinants of the holding period decision of individual investors. Average holding periods differ across different investor types. Turnover is an imperfect proxy for holding period. While both turnover and spread are related to stock returns, holding period is not.

The Duration of Equity Ownership

To date little is known about how long equity ownership lasts, what determines its length, and whether ownership duration is related to firm performance. Using a unique time series of equity holdings over eleven years, we find that on average the firms largest owner stays less than three years and stays longer than owners with smaller stakes. The duration of financial institutions and foreigners is shorter than that of individuals and industrial firms. We show that ownership duration is duration dependent as the probability of closing an equity position is a function of how long the owner has held the stake. Ownership duration appears to match the duration of the firms investment projects. We find no evidence that large owners vote by foot in the sense that bad news about earnings leads to duration ending. There is a negative relationship between ownership duration and a firms performance in general, but the sign and strength of this relationship differs across owner types. Long duration by financial institutions and industrial corporations is negatively related to performance, whereas the opposite is true for individuals. This suggests that long term ownership may improve firm performance if the monitoring is direct as opposed to delegated.

Long Swings in the Dollar and the Exchange Rate Exposure of Stock Returns

Theoretical models predict that firm behavior will differ under a depreciating relative to an appreciating currency regime. Consequently, the exchange rate exposure of a firms stock return should also depend on the currency regime. We assess these theoretical predictions by examining the exchange rate exposure of stock returns using an econometric model that allows for stock returns to switch between two different regimes. We find that the two implied stock return regimes correspond to periods of depreciation and appreciation of the dollar. Consistent with the theory, we find that exchange rate exposures of industry stock returns are different in depreciations relative to appreciations. Over half of our sample of 30 industries have a statistically significant exposure coefficient and these exposures are double the size of those estimated from single regime models. Almost all of the industries that are exposed have extensive international trade. Evidence is also presented that is consistent with theoretical predictions that the size of the exchange rate change is important in determining exposure.

Linear and Nonlinear Exchange Rate Exposure and the Price of Exchange Rate Risk

Current empirical research concludes that the effect of exchange rates on US stock returns is negligible. In contrast, we present new evidence that numerous US industries are exposed to exchange rates. The differences between our findings and those in the extant literature are a result of using a new methodological approach which takes account of exchange rate regimes based on periods of depreciation and appreciation. Within each regime we show that first, the markets own exposure to exchange rates should be taken into account before considering industry exposure, second, bilateral rates should be used as opposed to a currency basket, and third, the possible nonlinear nature of exchange rate exposure should be considered. We present new empirical evidence of important economic and statistical linear and nonlinear relationships between exchange rates and industry stock returns. The size and sign of exposure coefficients in each regime depends on the extent to which an industry imports and exports. We also present new results regarding the pricing of bilateral currency risk which we find to be statistically and economically significant. The expected return earned due to exchange rates is positive when the dollar is appreciating and negative when the dollar is depreciating.

Exchange Rate Regimes and Exchange Rate Exposures

We analyze the currency exposure of industries, using data for Norway. The Norwegian case is particularly well suited for investigating currency exposure issues, since it is a very open economy, has dollar denominated exports and ECU denominated imports, and has had three official exchange rate policy regimes over the sample period. At first glance, we find very little evidence of exchange rate exposure. This result is consistent with typical US studies. However, we proceed to show that the statistical and economic signifiance as well as the estimated sign of exposure coefficients are very sensitive to first, whether or not the exchange rate is orthogonalized with respect to the market portfolio, second, exchange rate regimes, and this, whether a currency basket or individual currencies are used. Taking account of these three issues we find strong support for stock returns having exposure to exchange rates.

Tick Size Wars, High Frequency Trading, and Market Quality

We explore an event where three stock exchanges (Chi-X, Turquoise, BATS Europe) in 2009 reduced their tick sizes (the minimum price increment in the limit order book) for stocks with a primary listing at the Oslo Stock Exchange (OSE). The OSE quickly responded by reducing its own tick sizes, before all markets agreed on a common tick size structure. Consistent with recent theoretical work by Buti, Consonni, Rindi, Wen and Werner (2015), we find that markets with small tick sizes capture market shares. However, inconsistent with Buti et al, we find little evidence that the observed changes to market shares are due to cross-market differences in tick size constraints. Instead, our empirical results suggest that the tick size affects the distribution of market shares through its impact on the trading behavior of high-frequency traders. Finally, we find that tick size reductions appear to have negative spill-over effects on the stock liquidity in markets that keep larger tick sizes.