Her-Jiun Sheu

Comprehensive Disclosure of Compensation and Firm Value: The Case of Policy Reforms in an Emerging Market

We set out in the present study to examine the market value of comprehensive disclosure of information relating to the compensation paid to directors and executives. Under the theory of self selection, firms with higher levels of board independence will tend to provide comprehensive disclosure of compensation, thereby leading to lower agency conflicts. Since the authorities in Taiwan chose to adopt a policy of gradual enforcement of compensation disclosure, firms are provided with discretion with regard to any greater levels of transparency that they may choose to provide. We therefore exploit this unique natural experimental setting to examine the effects of compensation disclosure on market value. The evidence indicates that the market provides a higher valuation only to those firms which elect to voluntarily disclose comprehensive information on their compensation practices. However, we also find that even where such disclosure is in excess of the minimum mandatory requirements, lower levels of transparency in the overall disclosure of compensation practices are of very little help with regard to the creation of market value.

Excess Cash Holdings and Investment: The Moderating Roles of Financial Constraints and Managerial Entrenchment

Our study investigates the relationship between excess cash holdings and investment behaviour under two dimensions of financial constraints and managerial entrenchment, based upon a sample of Taiwanese firms operating in an environment characterized by poor legal protection for investors, with data covering the years 2000–2006. We find that excess cash is significantly correlated with capital expenditure, particularly for firms financially constrained and with severe managerial entrenchment. However, the evidence shows that excess cash is insensitive to R&D expenditure under these two dimensions.

Cross-sectional relationships between stock returns and market beta, trading volume, and sales-to-price in Taiwan

Abstract This study explores the cross-sectional relationship between market beta, sales-to-price, trading volume and stock returns, on Taiwan Stock Exchange from July 1976 to June 1996. Our results show that market beta, trading volume, and sales-to-price seem to have a joint role in explaining the cross-section of average returns. We also find a highly significant conditional relationship between beta and cross-sectional stock returns. These results provide support to continue using beta as a measure of market risk. Finally, our results indicate that the trading volume and sales-to-price effects in average returns are due to investor overreaction.

Linking Diversification Strategy to Performance

Abstract The financial services industry is undergoing global restructuring to become bigger and more sophisticated. This paper aims to explore the relationship between diversification strategy and performance of financial holding companies (FHCs) for a small open economy, such as Taiwan. We employ a two-stage production process including profitability and marketability performance using the method of data envelopment analysis (DEA). Our empirical result shows that: (1) profitability efficiency of low-degreed diversifiers is greater than that of high-degreed ones; (2) concerning diversification type, the related diversifiers perform better in the profitability model than the unrelated diversifiers; (3) however, the unrelated diversifiers perform marginally better in the marketability model than the related diversifiers. It is concluded that the relationship between diversification strategy and an FHCs performance is not only single-faceted, it depends on the degree or type of diversity as well as the perspectives of profitability or marketability efficiency.

Evaluating R&d Projects with Hedging Behavior

OVERVIEW: Many scholars suggest that, in general, successful R&D involves the systematic reduction of unique risk. Consequently, firms should adopt diversification or hedging behavior to reduce risk when investing in R&D projects. These projects can be evaluated through a real option method while considering the hedging behavior of firms. However, conventional real option methods may over- or under-state a projects value because they are apt to be influenced by the R&D firms subjective expectations of the future market or technological prospect. The method proposed in this paper, which incorporates the hedging behavior of firms, would provide a more reasonable assessment of R&D projects, and would not be influenced by the arbitrary judgment of project evaluators. Additionally, the results imply that the effective management of investment diversification can not only reduce the unique risk faced by firms, but also enhance the value of these R&D projects.

A fuzzy multiple objective programming to DEA with imprecise data

A fuzzy multiple objective programming approach to data envelopment analysis (DEA) of imprecise data is proposed in this paper. The problems involving a mixture of imprecise and exact data for all decision making units (DMUs) could be resolved and the discriminating power of imprecise DEA (IDEA) is enhanced. Although Cooper et al. have developed IDEA to overcome the issues of imprecise data, the discriminating power is not satisfactory since too many efficient DMUs are derived. Chiang and Tzengs approach using fuzzy multiple objective programming techniques is adopted to enhance the discriminating power of IDEA. The same data set of Cooper et al. is employed to illustrate the merit of our approach.

Options Trading Based on the Forecasting of Volatility Direction with the Incorporation of Investor Sentiment

Using options price data on the Taiwanese stock market, we propose an options trading strategy based on the forecasting of volatility direction. The forecasting models are constructed with the incorporation of absolute returns, heterogeneous autoregressive-realized volatility (HAR-RV), and proxy of investor sentiment. After we take into consideration the margin-based transaction costs, the results of our simulated trading indicate that a straddle trading strategy that considers the forecasting of volatility direction with the incorporation of market turnover achieves the best Sharpe ratios. Our trading algorithm bridges the gap between options trading, market volatility, and the information content of investor overreaction.

Systemic risk in Taiwan stock market

Recent financial crises resulted from systemic risk caused by idiosyncratic distress. In this research, taking Taiwan stock market as an example and collecting data from 2000 to 2010 which contained the 2001 dot-com bubble and the 2007--2009 financial crisis, we adopt the CoVaR model to empirically explore the impact of sector-specific idiosyncratic risk on the systemic risk of the system and attempt to investigate the links between financial crises, systemic risk and the idiosyncratic risk of a sector-specific anomaly. The result showed sector-specific marginal CoVaR, i.e., ΔCoVaR, perfectly explained Taiwan stock market disturbance during the 2001 dot-com bubble and 2007--2008 financial crisis. Thus, by identifying the larger ΔCoVaR sectors, i.e. the systemic importance sectors, and by exploring the risk indicators, independent variables, of these systemic importance sectors, investors could practically employ the sector-specific ΔCoVaR measure to deepen the systemic risk scrutiny from a macro into a micro prudential perspective.

Credit Evaluation for Small and Medium-sized Enterprises by the Examination of Firm-specific Financial Ratios and Non-financial Variables: Evidence from Taiwan

A credit evaluation model for SMEs in Taiwan based on the characteristics of financial as well as non-financial data is proposed in this paper. While most financial distress prediction models use financial ratios as predictive variables, this study also integrates non-financial data as predictive variables. Kuo and Li (1999) proposed that certain firm-specific financial ratios have informational content. Moreover, the introduction of non-financial variables does enhance the models discrimination power. The proposed credit evaluation model makes it easier to classify successful or failed SMEs.

On the importance of asymmetries for dynamic hedging during the subprime crisis

Asymmetric responses to news in volatilities and correlations are important characteristics of many financial asset returns. This study investigates the asymmetries on spot and futures and extends the work of Kroner and Sultan (1993) using the Asymmetric Dynamic Conditional Correlation (ADCC) model introduced by Cappiello et al. (2006). In particular, the performance of asymmetric hedges during the subprime crisis period is of much interest to investors since futures provide them a convenient tool for managing the market risk. The results on FTSE100 and DAX30 markets show that the ADCC model not only can provide better descriptions on the data, but can also improve the hedging performance for both in-sample and out-of-sample periods, illustrating the importance of modelling asymmetries for futures hedging.