John F. Pinfold

Book-to-market and size as determinants of returns in small illiquid markets: the New Zealand case

Abstract The paper highlights the difficulties in adopting investment strategies designed to exploit book-to-market and size effects on the New Zealand share market, which is small and illiquid by world standards. The small number of suitable companies listed on the market, and the high return volatility of individual equities make it difficult to reliably achieve superior returns. Excess returns due to size and book-to-market are highly volatile on a period-by-period basis due to the high volatility of individual shares combined with small portfolio size, which limits diversification.

Examining New Venture Failure Rates: A New Zealand Study

Abstract This article examines the controversy surrounding business failure rates, particularly those associated with start-up firms. Differences of opinion on the true rate of failure arise not only from differences in the definition employed, but also from the deficiencies present in many of the published studies. An improved methodology is used to conduct a nationwide study of the failure rates of New Zealand new ventures. The results demonstrate the all pervasive nature of the risk of starting a new venture, which differs little between small and large firms, affects all industries, all geographical locations, and all types of organisation. New evidence is presented showing the high rate of new business formation dictates the high level of business failure and provides a powerful argument against those who claim true failure rates are low.

The impact of introducing a pre‐close on the New Zealand share market

Purpose - The purpose of this paper is to investigate the July 2007 introduction of a pre-close call auction on the New Zealand stock market and its effect on share pricing quality and market manipulation. Design/methodology/approach - Market quality was tested using the methodology of Pagano and Schwartz, which is based on changes in market model Findings - The closing call auction improves the quality of share pricing and reduces the incidence of market manipulation. Practical implications - The paper confirms the effectiveness of the changes made to the method of closing the market for all firms in the market. Originality/value - The paper extends knowledge of the effectiveness of closing call-auctions. It is the first study in a low-liquidity market and of shares with very low liquidities. Such markets have lower pricing quality and are more vulnerable to market manipulation. The study establishes the effectiveness of closing auctions in this environment.

Examination of NZ Finance Company Failures: The Role of Corporate Governance

Recently any difficulty a financial institution found itself in seems to have been blamed on the global financial crisis. This paper, employing forensic case study analysis of finance companies in New Zealand rebuts this excuse. Instead, it is argued the large number of failures in New Zealand finance companies in the last four years was due to a failure of regulation and corporate governance, occurring well ahead of the global financial crisis.

ASYMMETRIC INFORMATION IMPACTS: EVIDENCE FROM THE AUSTRALIAN TREASURY‐BOND FUTURES MARKET

The effect of information flows on the return volatility of Australian 3-year Treasury bond futures is examined using linear and non-linear GARCH models. Results show significant asymmetric information effects, where bad news has a greater impact on volatility than good news and a non-linear Threshold ARCH(1,1) in mean model provides the most accurate estimation of return volatility. Diagnostic tests confirm this finding and out of sample forecasting error statistics verify that the Threshold ARCH(1,1) in mean model yields the lowest forecasting error. The Threshold ARCH(1,1)-M model is best at capturing the asymmetric information impact on the Australian three-year T-Bond futures return volatility. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd

Moderating Risk in New Zealand Retail Banks

The prudential regulation of banks in New Zealand relies heavily on the public disclosure of risk information. This work reports a significant relationship between deposit risk premiums and disclosure risk indicators, suggesting New Zealand’s disclosure regime is effective in moderating excessive risk-taking in banks. But, as the relationship is found to be strongest prior to publication, it cannot be attributed directly to market-discipline. Instead, it is suggested self-discipline, which is arguably more effective than either market or regulator discipline, is the driving force behind the bank risk-return relationship. This is not surprising as management, with ready access to timely and accurate information, is best placed to supervise and apply prompt corrective action. In New Zealand, bank directors are held personally liable for the accuracy of disclosure. While disclosure statements may not be widely read by depositors, it is likely they are scrutinized by competitors looking for any advantage. The finding that New Zealand’s disclosure regime is made effective by self-discipline is a significant and valuable contribution to the disclosure literature, especially in a time of financial turmoil when many are calling for greater official regulation and supervision of banks.