Hisham Farag

The influence of CEO demographic characteristics on corporate risk-taking: evidence from Chinese IPOs

ABSTRACT We investigate the influence of Chief Executive Officers’ (CEOs’) demographic characteristics (e.g. age, board experience, professional experience, education and gender) on corporate risk-taking for a sample of 892 IPOs floated in both the Shanghai and Shenzhen Stock Exchanges. Using fixed effects and system Generalized Method of Moments models we find that younger and shorter tenured CEOs and those with postgraduate qualifications are more likely to consider risky decisions. We also find a highly significant and positive relationship between CEO previous board experience and corporate risk-taking. Interestingly and consistent with the recent literature, we find that female CEOs are not risk averse compared with their male counterparts. Moreover, we find that corporate risk-taking is higher the greater the proportion of state ownership. Finally, our study may provide useful insights to shareholders as they generally seek to hire the most talented CEOs with the relevant set of skills to achieve shareholders’ objectives and improve the Chinese competitiveness in the global market.

Investor overreaction and unobservable portfolios: evidence from an emerging market

We use the system GMM to explore both cross sectional variations and time-series effects within the post-event period for losers and winners portfolios. Some of these effects are not observable, but ignoring them lays the estimation open to bias from concealed heterogeneity amongst companies and periods. Using daily data on a sample of companies which experienced dramatic 1-day price changes, we find strong evidence of price reversal. We also find that unobservable portfolios outperform traditional size portfolios.

Do Private Equity-Backed Buyouts Respond Better to Financial Distress than PLCs?

The paper uses a new, hand-collected data set of 93 private equity (PE)-backed buyouts and 96 PLCs that became financially distressed over the period 1995–2008 to investigate empirically whether PE-owned companies (buyouts) in financial distress (Receivership/Administration) have better recovery rates (RRs) for secured debt (SD) than their publicly-owned (PLC) counterparts and, if so, why. We find that the RRs of buyouts (amount recovered in proportion to SD outstanding) are in fact about twice that of PLCs during this period. Administration, surprisingly, has no effect on debt-RRs but seems significantly to reduce the time to recovery. A larger number of creditors which in theory should reduce RRs, again has no impact, nor does company size. Intriguingly, however, higher leverage consistently reduces the RR as (we hypothesise) more leveraged buyouts need to have recourse to lower quality assets for security. Finally, the time in recovery is negatively related to the date of distress onset (later years have shorter durations) and to the size of the firm (a concave relationship).

Stock market regulation and news dissemination: evidence from an emerging market

Stock market efficiency is associated with news being spread immediately in the market. The literature, however, offers two competing theories to explain this phenomenon. One theory, the mixture of distributions hypothesis (MDH) claims immediate dissemination, while the other, the sequential information arrival hypothesis (SIAH) argues for sequential dissemination, or effectively market inefficiency. The present paper provides a critical test of the two theories using emerging market data, specifically from Egypt, and finds evidence to validate both hypotheses, conditional on the regulatory regime (price limit versus circuit breaker). Using generalized method of moments estimation on 10 years of daily data on the EXG 30 market index, our results show that within the price limit window, news proxied by trading volume, spreads instantaneously to all market participants, consistently with the MDH. Within subsequent circuit breaker window, however, new information leaks out to all market participants only over a period of several days, consistently with the SIAH. We find this switch is moreover associated with an increase in price volatility. Thus, not only is the market less-efficient after the switch, it is also more volatile.

Corporate governance in Islamic financial institutions: what have we learnt?

Given the recent developments and growth in the Islamic finance industry during the last decade, this chapter investigates the main corporate governance characteristics of Islamic financial institutions (IFIs). Corporate governance has attracted the attention of business communities around the world after the global financial crisis. However, governance in IFIs is unique, due to the complex principal_agent problems. Therefore, governance of IFIs has gained even more attention than conventional financial institutions as a result of the concept of risk-sharing born by investment account holders (IAHs). The chapter also highlights the main regulatory bodies governing IFIs in addition to the governance mechanisms in IFIs and the principles of Shari’ah governance. Finally, the chapter analyses the main findings of academic research on the fundamental differences between conventional financial institutions and IFIs, and the main challenges facing the development of the Islamic finance industry.

Firm Size, Serial and Non-Serial Acquisition, and Stockholder Wealth

We find that first-time acquisitions and repeat acquisitions should be separated when examining the ‘size effect’ in acquiring firm returns. First, the lower returns to larger acquirers are driven by repeat acquisitions. Second, larger and better performing firms are especially likely to do repeat acquisitions. First-time acquisitions are more defensive in nature. Third, failure to account for self-selection in the acquisitions market induces downward bias in the returns to larger repeat acquirers. Fourth, repeat acquirers, and especially larger repeat acquirers, do relatively smaller acquisitions. Our results suggest that larger repeat acquirers do not disadvantage their shareholders when announcing acquisitions.We find that first-time acquisitions and repeat acquisitions should be separated when examining the ‘size effect’ in acquiring firm returns. First, the lower returns to larger acquirers are driven by repeat acquisitions. Second, larger and better performing firms are especially likely to do repeat acquisitions. First-time acquisitions are more defensive in nature. Third, failure to account for self-selection in the acquisitions market induces downward bias in the returns to larger repeat acquirers. Fourth, repeat acquirers, and especially larger repeat acquirers, do relatively smaller acquisitions. Our results suggest that larger repeat acquirers do not disadvantage their shareholders when announcing acquisitions.

Monitoring corporate boards: evidence from China

China’s listed companies have two-tier boards comprising of a supervisory board and a board of directors. The supervisory board has the responsibility to oversee and monitor the board of directors. Similarly, the role of the independent non-executive directors (INEDs) is to advise and monitor directors. In this paper, we investigate the main board structure hypotheses namely the scope of operations, monitoring and negotiation hypotheses for a sample of Chinese Initial Public Offerings floated on both the Shanghai and Shenzhen stock exchanges. Our results provide evidence to support the three hypotheses. Interestingly, we find that the larger the size of the board of directors, the larger the supervisory board size. Moreover, we find that the higher the proportion of INEDs, the smaller the supervisory board size and this implies that INEDs are perhaps a substituting mechanism for the supervisors’ monitoring role. Finally, we argue that as the Chinese governance structure combines both the German and the Anglo-Saxon models, this creates a conflict between the two boards with respect to the monitoring role. Our results, therefore call for a comprehensive reform in the Chinese governance mechanism.

Corporate Governance and Diversity in Chinese Banks

The world economy experienced a deep recession in the wake of the global financial crisis in 2008. Early warnings of a crisis began in the United States after the credit boom in mid-2007 and the meltdown of subprime mortgages and securitized products (Ivashina and Scharfstein, 2010).The crisis hit the vast majority of developed economies by the contagion effect. Consequently, a large number of financial institutions collapsed or were bailed out by governments during the global financial crisis, for example, RBS and HBOS in the United Kingdom, and Dexia, Fortis, Hypo Real Estate, and UBS in continental Europe (Erkens et al., 2012).Therefore, major concerns about bank governance were raised—in particular, board composition and directors’ characteristics, board independence, and risk management, and improving these was seen as a means of improving financial performance (Jose et al., 2011).

Long-term Overreaction, Regulatory Policies and Stock Market Anomalies: Evidence from Egypt

The main objective of this article is to examine the long-term overreaction for all listed shares in the Egyptian Stock Exchange. I find evidence of long-term overreaction which is not due to size effect. Therefore, a contrarian strategy by buying losers and selling winners is likely to be profitable. The findings also suggest that the overreaction phenomenon in the Egyptian stock market is not sensitive to the length of the formation period. Interestingly, I find a link between the regulatory policies and long-term overreaction as I find no evidence of investor overreaction within the strict price limit regime. On the other hand, the overreaction phenomenon is clear during the circuit-breaker regime. The findings also show that the overreaction phenomenon in the Egyptian Stock Exchange cannot be attributed to the seasonality effect.

Financial restructuring and recovery in private equity buyouts: the UK evidence

A large literature has adumbrated the value-added role of private equity (PE) firms in backing buyouts. The present paper examines a different and hitherto unexplored issue: the role of financial restructuring in PE buyouts in the UK both before and after the financial crash of 2007. The UK evidence indicates that while PE buyouts had greater financial risk than comparable public limited companies (PLCs), they (1) already contained provisions to optimize recovery rates under insolvency, raising their recovery rates significantly relative to controls; and (2) rapidly adjusted the capital structures of new deals in response to the changes in financial and economic climate from 2007 onward resulting in failure rates somewhat lower than PLCs and non-PE buyouts. Non-PE management buyins (MBIs) by contrast have much higher failure rates than any other category throughout the 12-year period. Our analysis offers important implications for policymakers. First, it shows that there has been greater adjustment over time in the leverage and cash position of buyouts than for other private companies and matched PLCs. Second, policymakers need to recognize that while PE buyouts are highly leveraged, non-PE-backed buyouts are more or less well managed. Third, ceteris paribus, PE-backed deals are not riskier than the population of non-buyouts; active involvement by PE firms in helping portfolio companies deal with trading difficulties plays an important role. Fourth, the governance mechanisms in PE buyouts result in greater preservation of value when a portfolio firm enters formal bankruptcy than is the case for PLCs.