David Hillier

Time Varying Beta Risk: An Analysis of Alternative Modelling Techniques

This paper investigates the performance of three different approaches to modelling time-variation in conditional asset betas: GARCH models, the extended market model of Schwert and Seguin (1990) and the Kalman Filter algorithm. Using daily UK industry returns, we find the simple market model beta to be as efficient as the more complicated GARCH type models. However, the Kalman Filter algorithm incorporating a random walk parameterisation dominates all other models under the mean-square error criterion. Finally, we provide strong evidence that a combination of the methods under investigation may lead to considerably more powerful estimators of the time-variation in conditional beta. Copyright Blackwell Publishers Ltd 2000.

Are trading bans effective? Exchange regulation and corporate insider transactions around earnings announcements

There is considerable controversy on the role of corporate insider trading in the financial markets. However, there appears to be a consensus view that some form of regulation concerning their activities should be imposed. One such constraint involves a trading ban in periods when corporate insiders are expected to be advantaged vis-a-vis the information flow. This paper directly tests whether constraints of this kind are effective in curtailing insider activity through a study of the trading characteristics of UK company directors. The London Stock Exchange Model Code (1977) imposes a two-month close period prior to company earnings announcements. We find that although the close period affects the timing of director trades, it is unable to affect their performance or distribution. Directors consistently earn abnormal returns irrespective of the period in which they trade. They tend to buy after abnormally bad earnings news and sell after abnormally good earnings news. Moreover, there are systematic differences in the trading patterns of directors surrounding interim and final earnings announcements. It appears that many corporate insiders have private information and exploit this in their trading activities. As a result, one can conclude that trading bans do not impose significant opportunity costs on the trading of corporate insiders.

Firm Performance and Managerial Succession in Family Managed Firms

This paper investigates whether the family status of a companys top officer affects managerial replacement decisions. We report evidence that family-managed companies are characterized by higher levels of board control and potentially weak internal governance systems. Family CEOs are less likely than non-family CEOs to depart their position following poor performance. Stock prices react favorably and operating performance improves when companies announce the departure of a family CEO. Overall, our evidence suggests that shareholders benefit when a powerful CEO leaves their position in the company.

Employee Layoffs, Shareholder Wealth and Firm Performance: Evidence from the UK

We examine the financial performance of UK listed companies surrounding the announcement of permanent employee layoffs. We find that poor operating and stock price performance, increased gearing, and threats from external markets for corporate control precede employee layoffs. Layoff announcements elicit a significantly negative stock price reaction, which is driven by announcements that are reactive to poor financial conditions. We also find that layoffs result in significant increases in employee productivity and corporate focus. We conclude that layoffs represent an efficient response to poor financial conditions, but that their occurrence is strongly dependent on pressure from external control markets.

Gold factor exposures in international asset pricing

The purpose of this paper is to examine the role of gold in modern international asset pricing. We find that although the real premium on gold has been negative since the beginning of the 1980s, many industries still have a significant exposure to the commodity. Moreover, this exposure is stable and consistent over the 20 years of the study. Asset pricing tests reject the null hypothesis that the market and gold factor exposure of the worlds industries are jointly equal to 0, providing fresh evidence that gold still retains its importance in todays economy.

An Analysis of Changes in Board Structure During Corporate Governance Reforms

This study examines the evolution of company board structure during a period of corporate governance reform. Using data over a time period following the publication of the Cadbury Report (1992) we present evidence of an increase in the independence of UK boards, as measured by an increased willingness to employ independent non-executive directors, and to separate the positions of the CEO and the Chairman of the Board. In examining the determinants of these changes, we find that boards change more readily in response to changes in managerial control, equity issuance and corporate performance than changes in the firm-specific operating environment of companies.

The market reaction to auditor resignations

Abstract Under UK company law, external auditors who resign must warn shareholders and creditors of any matter that ought to be brought to their attention. Auditor resignations and the subsequent change in auditor are informative corporate events. Resignation from office is likely to be a costly signal for the audit firm, particularly when the client is a quoted company. Our analysis of daily data suggests that there is a negative reaction to the auditor resignation on the date of the resignation letter, even though very few auditors indicate there were problems of which the shareholders and creditors should be made aware. This provides backing for the statutory rules on disclosure of the auditor resignation. We also find that the extent of the market reaction on the day of the resignation is related to the size of the resigning audit firm.

Insider trading, tax-loss selling and the turn-of-the-year effect

We examine the turn-of-the-year effect (January effect) in UK listed securities and find that it is significant but not persistent through time. In contrast to the US studies, equities of all sizes are affected. Although important, we reject the hypothesis that seasonalities in insider trading are the main determinant of the turn-of-the-year effect. In addition, the tax-loss selling hypothesis, which is commonly thought to be a cause of the January effect in the US, is tested with the April year-end for UK investors. We find evidence of excess abnormal share price returns. However, this does not impact upon excess abnormal share price returns in January. Our results are important because they provide an insight into stock return seasonality in the UK and reject some widely held beliefs on this issue.

Firm Performance, Entrenchment and Managerial Succession in Family Firms

This paper investigates the role of the family status of a companys top officer in managerial replacement decisions for a sample of 683 UK companies over the period 1992 to 1998. We report evidence that family firms are characterised by higher levels of board control, and weak internal governance in the form of independent company board structures. Consistent with a managerial entrenchment hypothesis, we find evidence that family CEOs are less likely to be removed from their position following poor performance than non-family CEOs. This relationship occurs even after controlling for the ownership of the companys top executive, suggesting that family status conveys additional power to the companys top officer in excess of that implied by their shareholding alone. Stock prices react favourably when companies announce that departure of a family CEO, but only when these directors are replaced by a non-family successor. We also report evidence of increases in operating performance following the departure of a family CEO, which are not witnessed following non-family CEO departures amongst our sample companies. Finally, we also find growth in company sales and employment following family CEO departures in excess of that witnessed following non-family CEO departures, indicating an untapped potential that family CEOs were unable to exploit prior to their departure. Overall, our results appear consistent with a managerial entrenchment hypothesis of the family status of a companys CEO, whereby the cash flows that shareholders expect to receive following their replacement are in excess of those anticipated under the family CEO.

Asset sales and firm strategy : an analysis of divestitures by UK companies

This paper examines the financial causes and consequences of the decision to sell-off non-financial assets as part of a new or ongoing restructuring programme by UK non-financial companies between 1993 and 2000. We report that asset sales follow a period of declining operating returns and tend to occur in diversified companies with high levels of financial leverage. Stock prices respond positively to asset sale announcements. This arises due to improvements in operating returns and a decline in financial leverage and corporate diversification subsequent to the disposal. Our findings suggest that asset sales represent an effective operational response to a firms poor financial condition. However, we also find that a managers decision to sell assets is strongly influenced by the explicit threats to their control from lenders and competition from product, labour and takeover markets.