Lars Helge Hass

Strategic Asset Allocation and the Role of Alternative Investments

This paper introduces a new framework for strategic asset allocation with alternative investments (buyouts, commodities, hedge funds, REITs, and venture capital). Our approach is not based on a utility function, but on an easily quantifiable risk preference parameter, λ. We account for higher moments of the return distributions within our optimization framework and approximate best-fit distributions. Thus, we replace the empirical return distributions, which are often skewed and/or exhibit excess kurtosis, with two normal distributions. We then use the estimated return distributions in the strategic asset allocation. Our results show in various out-of-sample analyses that our framework yields superior results compared to the Markowitz framework. Furthermore, our framework better manages regime switches, which tend to occur frequently during crises. To test our results for stability and robustness, we use, among other things time-varying correlation structures in the return distributions and weight restrictions for the asset classes.

The impact of fund inflows on staging and investment behaviour

This article demonstrates that increased inflows of capital into private equity and venture capital funds can influence the investment behaviour of fund managers by increasing staging intensity, increasing amount per financing round, and accelerating speed of capital allocation. These changes do not appear to be related to expectations of improved investment performance. The study extends the work of Gompers and Lerner who interpret these inflows as demand pressure for venture capital securities to drive up prices during periods of high inflows. Using a unique dataset, the study examines the effects of this pressure on investment behaviour.

What drives contagion in financial markets? : liquidity effects versus information spill-over

The objective of this paper is to study how contagion works in financial markets by identifying the mechanisms which drive the spill-over of shocks from one market to other markets. To address this question we use open-ended property funds (OPFs) as they offer a unique institutional setting which allows separating between liquidity and information spill-over. We find that that liquidity risk captures the observed discounts very well when the danger of potential future impairments is low. Once the impending NAV impairments become very likely, also this component matters and attributes for a fraction of the total discount.

Strategic distortions in analyst forecasts in the presence of short-term institutional investors

We document that analysts cater to short-term investors by issuing optimistic target prices. Catering dominates among analysts at brokers without an investment banking arm as they face lower reputational cost. The market does not see through the analyst catering activity and their forecasts lead to temporary stock overpricing that short-term institutional investors exploit to offload their holdings to retail traders. We also report evidence consistent with catering brokers being rewarded with more future trades channelled through them. Our study identifies a new source of conflicts of interest in analyst research originating from the ownership composition of a stock.

Foreign Experience and CEO Compensation

This paper investigates the relationship between a CEO’s foreign experience and CEO compensation. Our analysis is based on the constituent firms of the UK FTSE 350 index from 1999 to 2015. We find that foreign CEOs and national CEOs with foreign working experience receive significantly higher levels of total compensation compared to similar UK CEOs without such characteristics. The results are robust to the endogenous CEO selection using propensity score matching methods, as well as other modelling approaches. Our results show that pay premiums are attributable to the specialized foreign expertise and foreign networks of CEOs, which stem from foreign experience rather than broader general managerial skills. Highlights: • We study the effect of CEO foreign experience on CEO total compensation. • CEO foreign experience is associated with higher CEO total compensation. • The impact is attributable to specialized foreign expertise and foreign networks of CEOs.

Venture Capital and Material Weaknesses in Internal Control

The Sarbanes-Oxley Act requires management and board of directors to be involved in establishing and maintaining good quality internal control systems and the evaluation and disclosure of any deficiencies or weaknesses that could potentially result in a material error. We find that venture capital backing is negatively associated with disclosures of material weaknesses in internal control. We show that material weakness disclosure is much more likely to be informative for firms backed by VCs: material weakness disclosure is followed by subsequent financial restatements for VC-backed firms, but not other firms. Furthermore, we find that firms backed by more reputable VCs have more effective controls as evaluated by management and auditors.

Accounting Comparability and Corporate Innovative Efficiency

We predict that a firm’s greater accounting comparability with its industry peers facilitates its learning from those peer firms’ research and development (R&D) investments, allowing that firm to have greater innovative efficiency. We estimate accounting comparability using pro-forma capitalized R&D earnings that link lagged R&D expenditures to future profitability employing the Almon (1965) distributed lag model. We find that greater accounting comparability leads to enhanced ability to predict future cash flows generated by R&D investments of peer firms. In the cross-section, we observe the relation between accounting comparability and innovative efficiency is stronger if peer firms exhibit higher accounting (accrual) quality and are themselves successful innovators. In sum, this study shows that a shared qualitative characteristic of accounting, namely accounting comparability, is positively associated with innovative efficiency. JEL classifications: G12, G14, O32