Kenneth Small

Ownership Structure and Golden Parachutes: Evidence of Credible Commitment or Incentive Alignment?

Using a sample of S & P 500 firms, we find that golden parachutes are associated with concentrated external ownership, less concentrated internal ownership, and non-Delaware incorporation. We find little support that concentrated external owners use golden parachutes as credible commitment devices. The general multivariate results support the incentive alignment hypothesis, and reaffirm the view that golden parachutes are a mechanism used to align managerial and shareholder interests when there is a separation between ownership and control. (JEL G32)

The Hot Stock Tip from Debbie: Implications for Market Efficiency

In July and August 2004 thousands of messages were left on answering machines across the United States touting Maui General Stores (MAUG). Interestingly, these messages contained no material information, but the price of MAUG experienced a significant increase in value. According to the Securities and Exchange Commission (SEC), MAUGs market capitalization increased by more than

The Return Characteristics of Diamonds

100 million. However, the price of MAUG returned to its “pre-message” level after the firms CEO enters the market on the sell side, well before the SEC announced the messages as a scam. We discuss how this event expands our understanding of market efficiently.

Identifying the non‐normality premium of an investment

We outline the ethical considerations surrounding the trading of diamonds, the metrics used to value diamonds, the history of diamond trading, and the current market structure. We provide an analysis of the underlying risk and return characteristics of several individual diamond types. We show that diamonds exhibit low CAPM and Fama-French betas, and low correlations with gold, the S&P 500, long-term U.S. bond prices, and U.S. inflation.

The PowerShares Global Listed PrivateEquity Portfolio: Risk and Performance Analysis

Purpose - The purpose of this paper is to introduce a non-normality premium (NNP) to identify the extra return that will compensate an investor for a non-normal return distribution. The NNP quantifies the Design/methodology/approach - The NNP is patterned after the risk premium, the amount that compensates an investor for the risk of an investment. The theoretical NNP is examined on the margins with Taylor series approximation and applied to hedge fund data. Findings - An increase of 1 in the skewness has the same effect on an investor as an increase in the mean of 2.5 basis points per month. An increase of 1 in the kurtosis has the same effect on an investor as a decrease in the mean of 0.15 basis points per month. A sample of 716 hedge funds revealed that while 72 per cent statistically reject normality, only 29 per cent require more than a single basis point per month difference in the mean to compenscate an investor for the non-normality. Originality/value - The NNP allows for a valuation on the higher moments (skewness and kurtosis) of an investors return distribution. The evaluation is tailored to the individual through use of a utility function. Once applied to an alternative investment vehicle, it is learned that rejecting normality is not sufficient grounds to suspect that the non-normality is important to investors.

EVIDENCE ON BOARD SIZE AND ITS IMPACT ON CEO PAY-PERFORMANCE SENSITIVITY

The authors examine the risk and return characteristics of the PowerShares Global Listed Private Equity Portfolio (PSP) and benchmark its return to several domestic and international indices. They estimate annual Sharpe ratios for each index and the PSP to determine which offers the highest risk-adjusted return. In terms of raw non-risk-adjusted returns, the PSP is the worst-performing index in the study. When risk is considered through the use of the Sharpe ratio, the PSP underperforms most of the U.S.-based domestic indices; marginally outperforming only the S&P 500 Index. The authors also examine the coefficient of determination (R2) of the PSP using several regressors. They find that the broad U.S. market explains most of the variation in the returns of the PSP. The authors also show that once U.S. returns are controlled for, international factors explain less than 1% of incremental variation in the PSP’s returns. This finding is of particular interest because more than 59% of the PSP’s holdings are domiciled outside the United States.

Applying real options analysis to value the GM-Fiat strategic joint venture

Recent literature asserts that board size is one of the crucial determinants in board monitoring. We conjecture optimal board size leads to effective and efficient decision-making. Using a U.S. firm sample from year 1996 to 2005, we examine whether board size has any impact on one of the main tasks of board monitoring – appropriate compensation for CEOs. Specifically, we investigate if board size is associated with CEOs’ pay-performance sensitivity. Agency theory suggests top managers’ compensation be structured in alignment with shareholder wealth. If a board is vigilant, managers who create (destroy) wealth should be rewarded (penalized). By using value added models, we construct a new sensitivity measure of CEO compensation to wealth added per share. Our findings indicate that there is a non-linear relationship between board size and CEO pay-performance sensitivity. As the board size becomes bigger, the pay-performance sensitivity follows a pattern that first increases and then decreases. JEL Classification: G39

The impact of regulation fair disclosure on earnings management and analyst forecast bias

GM and Fiat entered a strategic joint venture (JV) in 2000 that lasted only five years, but set the stage for the resulting meteoric rise of Fiat, who in 2009 acquired Chrysler to become the second largest automobile producer in Europe. We apply real options analysis to value the strategic alliance between GM and Fiat and show how options, in this case a put option, can be used as currency when strong bargaining power exists. We also highlight some of the problems related to the inherent flexibility embedded in the GM-Fiat agreement. As a result, we suggest the need to create a customised model which mitigates the conflict between the conclusion of strategic analysis and the real option approach. Insights from options-based analyses should improve not only the estimates of asset value, but also the decision-making process. Like an engaged couple that never make it to the altar, correctly pricing the strategic options embedded in a JV contract will save money, time and missed opportunities.