Peter L. Swan

Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange

This paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution. We find a mean reassessment of stock value following short sales of up to - 0.20 percent with adverse information impounded within fifteen minutes or twenty trades. Short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction; trades near information events precipitate larger price reactions. The evidence is generally weaker for short sales executed using limit orders relative to market orders. Copyright The American Finance Association 1998.

Australian Chief Executive Officer Remuneration: Pay and Performance

International studies document strong evidence that chief executive officer (CEO) remuneration is positively correlated with corporate performance. Prior Australian studies, however, find no positive link between CEO pay and market performance. In the present paper we re-examine the association between Australian CEO remuneration and firm performance using standard empirical models from the international literature. We find that in every respect the Australian evidence is consistent with international findings for firms of the USA, UK and Canada. In particular, we document CEO pay-performance association as positive and statistically significant.

The economics of corporate governance: Beyond the Marshallian firm

It is now customary to view the corporation as nexus of explicit and implicit contracts. Governance determines how the firms top decision makers (executives) actually administer such contracts. We survey recent theory and evidence on executive behaviour and incentives and reject the standard assumption of shareholder-wealth-maximisation, either in its strict sense or in the sense implied by standard principal-agent models. Explanations for this state of affairs as an inefficient, rent-seeking outcome are contrasted with efficiency explanations, particularly those that explicitly consider the diverse claims of employees, customers, and suppliers as well as those of investors.

The Durability of Goods and Regulation of Monopoly

This paper reconsiders the proposition put forward by many economists that monopolies would produce less durable assets than would competitive firms. The key assumption made is that assets are desired for the services they provide. It is shown that, as all firms desire to minimize the cost of providing any given service, monopoly and competitive firms will select the same degree of durability. Although this result is proved for goods subject to exponential decay, the result can be generalized to an arbitrary decay function. A number of earlier writers reached mistaken conclusion basically because of their neglect of the initial demand for the good. Durability choice by a monopolist is unaffected by price or demand conditions so long as the firm is permitted to operate in the elastic portion of the demand curve. Price regulation will have no effect on the choice of durability unless an attempt is made to force the firm to operate in the inelastic portion of the demand curve. If this attempt is made, output will remain unchanged and costs will be increased so as to satisfy the unit cost mark-up constraint. In this case, the regulator should ensure that durability remains unaltered at the previous level.

Market Structure and Technological Progress: The Influence of Monopoly on Product Innovation

I. Introduction and summary, 627. — II. Assumptions, 629. — III. The monopoly and purely competitive decisions, 631. — IV. The generality of the results, 633. — V. Some concluding remarks, 635. — Appendix (to Section III), 636.

Governance through Trading: Institutional Swing Trades and Subsequent Firm Performance

Using unique daily fund-manager trade data, we examine the role of institutional trading in influencing firm performance. We show that short-horizon informed trading by multiple institutional investors effectively disciplines corporate management. Our focus is on short-term “swing” trades, sequences with three phases (e.g., buy-sell-buy). We find swing trades increase stock price informativeness, are profitable after costs, and improve market efficiency. This increase in stock price informativeness is associated with subsequent firm outperformance. Trades are most beneficial with optimal stock holdings that reflect the information acquisition incentives of investors as well as liquidity costs.

How Brokers Facilitate Trade For Long-Term Clients in Competitive Securities Markets

In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses. We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients. An implication is that brokers who sustain such losses should charge higher fees to long-term clients for trades where the broker merely receives a commission. This prediction is supported by an analysis of brokerage rates on the Australian Stock Exchange. By contrast, market makers who make trading profits charge lower agency fees to large, long-term clients. Copyright 1995 by University of Chicago Press.

Performance Thresholds in Managerial Incentive Contracts

Performance thresholds are commonly used in executive compensation contracts. We examine the contractual nonlinearity associated with performance thresholds and its incentive implications. Incorporating a performance threshold into a standard principal-agent model of a linear contract, we show that pay schemes using a performance threshold are optimal. By truncating a linear scheme at poor performance, the threshold mitigates agency costs associated with the downside risk of production. Examining CEO compensation data, we find evidence of the role of performance thresholds. As a consequence of under-threshold performance, the tobit estimator is shown to increase pay-performance sensitivity, notably improving upon the standard OLS estimator.

Participation rules for Pareto-optimal clubs

Abstract This paper presents a unifying framework for the club participation problem using compensating variation measures of willingness-to-pay for membership. With more prospective club members than the equilibrium club population, Pareto-efficient participation rules are derived which depend upon whether or not individuals are assured of club access. Sale of lottery tickets offering club membership is shown to be a socially superior club participation allocation mechanism to sale of vouchers guaranteeing membership. The willingness-to-pay format readily encompasses the Buchanan case where all prospective club members are assured of club participation.

The interaction between financial and employment contracts: A formal model of Japanese Corporate Governance

Abstract Decision making in large Japanese corporations traditionally gives substantial weight to the interests of employees and of main bank investors, but not to those of small shareholders. This paper shows how such a governance system is uniquely suited to provide employees with incentives both to exert individual efforts and to cooperate with one another. The critical element of the system is shown to be a substantial concern for the welfare of workers and of creditors, with relatively little involvement by shareholders. The potential for overwork due to performance measurement error is also highlighted.