Kevin Keasey

Managerial ownership and the performance of firms: Evidence from the UK

Given the governance issues arising from the separation of ownership from control, the ability to align managerial and shareholder interests via the managerial ownership of equity is an important topic of inquiry. The findings of the primarily US based literature suggest that management is aligned at low and possibly high levels of ownership but is entrenched (pursuing self interests) at intermediate ownership levels. This paper extends the US based literature in a number of important ways. First, the analysis is extended to the UK where there are important differences, as compared to the US, in the governance system. A comparative analysis of key differences between the US and UK governance systems suggest that management should become entrenched at higher levels of ownership in the UK. Some of the reasons for this suggestion are that in the UK management do not have the same freedom as their US counterparts to mount takeover defenses and institutional investors in the UK are more able to co-ordinate their monitoring activities. The empirical results of the paper confirm that UK management become entrenched at higher levels of ownership than their US counterparts. Second, the results from extending the analysis to consider different measures of firm performance and a more generalized form of the relationship confirm the general finding of the US literature of a non-linear relationship between firm performance and managerial ownership.

The Link between Dividend Policy and Institutional Ownership

This paper examines the relatively neglected link between dividend policy and institutional ownership. It is also the first example of using well-established dividend payout models to examine the potential association between ownership structures and dividend policy. Moreover, the paper presents the first results for the UK, where the institutional framework and ownership structures are different from those of the US. Using a UK panel data set, the role of institutional ownership in association to dividend payout ratios is analysed within the context of the dividend models of Lintner [American Economic Review, 46 (1956) 97], Waud [Journal of the American Statistical Association, 1996] and Fama and Babiak [Journal of the American Statistical Association, 63 (1968) 1132]. The results consistently produce strong support for the hypothesis that a positive association exists between dividend payout policy and institutional ownership. Furthermore, the results for an earnings trend model suggest a positive earnings trend component to the association between institutional ownership and the dividend payout ratio. In addition, there is some evidence in support of the hypothesis that a negative association exists between dividend payout policy and managerial ownership.

A note on the weak form efficiency of capital markets: The application of simple technical trading rules to UK stock prices - 1935 to 1994

Abstract Brock et al. (1992) found technical trading rules to have predictive ability with regards to the Dow Jones Index. The current paper considers whether this result can be replicated on UK data. The paper also considers whether investors could earn excess returns from technical analysis in a costly trading environment. The paper concludes that although the technical trading rules examined do have predictive ability in terms of UK data, their use would not allow investors to make excess returns in the presence of costly trading.

Multilogit approach to predicting corporate failure—Further analysis and the issue of signal consistency

This paper has two purposes. The first purpose is to examine how far the results of Peel and Peel [4] are replicable on a different data set. For the bi-nomial models, we obtain approximately similar within sample results to those of Peel and Peel (approximately 90% predictive accuracy one year prior to failure, to 70% predictive accuracy three years prior to failure). For the multilogit models we also note similar results to those of Peel and Peel; high predictive accuracy for healthy firms and failing firms one year prior to failure, poor predictive accuracy for failing firms for data two or more years prior to failure. The second, and more important purpose of the paper is to examine the whole issue of dating failure in more depth. Although Peel and Peel admirably brought the technique of multilogit analysis to the problem of predicting failure, the issues involved with using it to date failure were given little discussion. We discuss the role of signal consistency across various years of data when dating failure and then examine, on a case by case basis, how well a decision-maker could date failure for the present data set. Whilst noting that the notion of signal consistency is far from straightforward, we conclude for the present data set that healthy firms seem to give consistent patterns of signals. We further conclude that whilst this is not generally true of failing firms, a decision-maker could adopt a rule of thumb that would allow the successful dating of failures that occur in the near future. For more distant failures, we find dating would be a far more haphazard process.

Corporate governance in the public services: Concepts and issues

Public sector corporate governance distinguishes itself from its private sector counterpart by the considerable diversity of objectives and management structures in the former. There is a need to address performance as well as conformance issues in public sector governance.

The State of the Art of Small Firm Failure Prediction: Achievements and Prognosis

KEVIN KEASEY IS PROFESSOR OF accounting and finance at Leeds University, England, and Robert Watson is a member of the School of Management at University of Manchester Institute of Science and Technology, England. The main purpose of this paper is to review and assess the progress in developing small firm failure prediction models. It highlights a number of issues that are of particular importance in evaluating small firm failure prediction models and indicates where future research might be usefully directed. The authors conclude that while it is not yet clear whether they are worthwhile tools in many decision contexts, the present general models may provide material benefits as relatively cheap and simple-to-use preliminary screening devices for routine credit/lending decisions. This is because the classifications accuracy of even relatively simple quantitative models have been shown to outperform consistently human decision makers. If, however, predictive model is required as an input into more strategic decision making, then the utility of existing empirical models is much less certain.

Gambling with the house money in capital expenditure decisions: An experimental analysis

Abstract This paper extends the work of Thaler and Johnson ( Management Science , 1990, 36, no. 6, 643–660) on prior gains and losses in a business context. In support of their results, the current experimental analysis on capital expenditure decisions finds that prior gains shift behaviour towards risk seeking. The results do not, however, offer evidence of prior losses shifting behaviour towards risk aversion.

The Small Company Audit Qualification: A Preliminary Investigation

Abstract In recent years there has been much debate in the UK regarding the value and feasibility of the small company audit. The lack of formal internal control systems and the application of universal auditing standards has given rise to the use of a special ‘Small Company (Example 6) Audit Qualification’. However, doubts concerning the uniformity of practice between auditors has created difficulties for users in interpreting its meaning. This paper examines the extent to which a number of financial, organisational and auditor variables are able to explain the receipt of a ‘Small Company Audit Qualification’. The main empirical findings, using multivariate logistic analysis on a sample of 540 small company reports, are that companies audited by large audit practices, companies which had a prior year qualification, a secured loan, declining earnings, large audit lags and few non-director shareholders were more likely to receive an audit qualification than other companies.

Capital Structure, Management Ownership and Large External Shareholders: A UK Analysis

This paper examines empirically the effects of management ownership and ownership by large external shareholders on the capital structure of the firm from an agency theory perspective. The paper extends the US literature on the topic by examining the effect of interactions between management ownership and ownership by large external shareholders on the capital structure of UK firms. For a sample of UK firms, the paper provides empirical evidence that suggests the debt ratio is positively related to management ownership and negatively related to ownership by large external shareholders. Furthermore, the presence of a large external shareholder acts to negate the positive relationship between debt ratios and management ownership; in the presence of a large external shareholder, no significant relationship between debt ratios and management ownership exists. These findings are consistent with the hypothesis that the presence of large external shareholders affects the agency costs of debt and equity.

Further reflections on the nature of intuition-analysis and the construct validity of the Cognitive Style Index

Theoretical and empirical arguments that support the construct validity of the Allinson-Hayes Cognitive Style Index are reviewed in the light of Hodgkinson and Sadler-Smiths (2003) assertion that Allinson and Hayes (1996) incorrectly specified the nature of the Cognitive Style Index (CSI) as a measure of intuition-analysis predicated on a unitarist conception of the construct. It is concluded that Hodgkinson and Sadler-Smith fail to offer a robust challenge to either the theoretical or empirical arguments supporting the construct validity of the Cognitive Style Index.