Peter Verhoeven

Corporate governance, accounting and finance: A review

We review accounting and finance research on corporate governance (CG). In the course of our review, we focus on a particularly vexing issue, namely endogeneity in the relationships between CG and other matters of concern to accounting and finance scholars, and suggest ways to deal with it. Given the advent of large commercial CG databases, we also stress the importance of how CG is measured and in particular, the construction of CG indices, which should be sensitive to local institutional arrangements, and the need to capture both internal and external aspects of governance. The ‘stickiness’ of CG characteristics provides an additional challenge to CG scholars. Better theory is required, for example, to explain whether various CG practices substitute for each other or are complements. While a multidisciplinary approach to developing better theory is never without its difficulties, it could enrich the current body of knowledge in CG. Despite the vastness of the existing CG literature, these issues do suggest a number of avenues for future research.

Does size matter? A genetic programming approach to technical trading

Introduced in 1970 by Eugene Fama, the Efficient Market Hypothesis (EMH) has become a central proposition in the finance literature. If EMH holds, any trading strategy that relies on the assumption that past prices contain information that can be used to consistently earn abnormal profits should be fallacious. The mere fact that technical analysis, or the use of past prices to infer private information, is a common and seemingly lucrative practice among investment professionals has inspired many researchers to investigate the profitability of technical trading rules. Numerous performance studies have been conducted over the years, with widely varying results. Much of this variation in results can be attributed to differences in testing procedures (see Park and Irwin 2004 for an extensive review of this literature).x It has been contended that small-cap stocks are priced in a less efficient manner than large-cap stocks (Blume et al. 1994), so that small-cap pricing errors can more readily be exploited. This is linked to the fact that such stocks are less widely held by portfolio managers and do not receive the same level of attention by financial analysts. The lower level of research being conducted on small-cap stocks would suggest that they are relatively more susceptible to information asymmetry, experiencing more gradual price adjustments as the news is more slowly assimilated, relative to large-cap stocks.

Outsider Board Activity, Ownership Structure and Firm Value: Evidence from Korea

Using a sample of publicly listed firm in Korea from 2002 to 2006, this article examines the impact of board monitoring on firm value and productivity. We use outsiders attendance of board meetings as a proxy for board monitoring. Consistent with the commitment hypothesis, we find that outsiders attendance rate increases firm value, suggesting that attending board meeting itself is a strong signal that reflects outsiders intention to monitor insiders. While ownership of controlling shareholders negatively affects firm value, this relationship is not moderated by increased monitoring by outsiders. Our findings provide further evidence that the outside director system is less effective in chaebol-affiliated firms. Results also indicate that the effect of outsiders board monitoring activity on investors valuation of the firm is greater than on productivity improvement of the firm. Our conclusions are robust for possible endogeneity in the relationship between firm value and board attendance by outside directors.

Dividend Initiations and Long Run IPO Performance

Dividend initiations are an economically significant event that has important implications for a firm’s future financial capacity. Given the market’s expectation of a consistent payout, managers of IPO firms must approach the initial dividend decision cautiously. We compare the long-run performance of IPO firms that initiated a dividend with that of similarly matched non-payers, and find robust results that firms which initiated a dividend perform significantly better up to five years after the initiation date. Further tests show that the post-initiation firm performance is explained mostly by dividend theory of signalling rather than free cash flow.

Taking a leap of faith: are investors left short changed?

This chapter examines the compliance and performance of an international sample of faith-based ethical funds which screen their investment not only on risk and return but also on compliance with Islamic law – Islamic equity funds (IEFs). Using a set of stringent shariah screens similar to those of Morgan Stanley Capital International (MSCI) Islamic Index, we find less than one-third of the equity holdings of IEFs are shariah compliant. While most of the fund holdings pass the business screens, only about 38 per cent pass the total debt to total assets ratio screen. This finding suggests that, in order to overcome a significant reduction in the investment opportunity, shariah principles are compromised, with IEFs adopting lax screening rules in an attempt to achieve financial performance. Our matched firm approach shows that shariah screening reduces investment performance by an average of 0.04 per cent per month if benchmarked against matched conventional funds – this is a relatively small price to pay for religious faith. Cross-sectional regressions show an inverse relationship between shariah compliance and fund performance: every 1 percentage point increase in total compliance decreases fund performance by 0.01 per cent per month. However, shariah compliance fails to explain relative performance of the funds when matched with conventional funds.

Corporate governance and private placement issuance in Australia

In this study, we examine the effectiveness of corporate governance in mitigating dilution in the economic and voting interests of existing nonparticipating (retail) shareholders in private placements. Based on a sample of 2420 private placements in Australia from 2001 to 2012, we find support for this proposition through the influence of corporate governance on pricing negotiation and firms’ choice of issuing method in private placements. Specifically, firms with better corporate governance offer private placements with a smaller discount, and are more likely to include a share purchase plan, which protects nonparticipating shareholders from ownership dilution in the placement.

Information asymmetry surrounding earnings and dividend announcements: An intra-day analysis

This paper uses high frequency data to evaluate whether information asymmetry in the market is reduced subsequent to corporate earnings and dividend announcements. Changes in the level of information asymmetry due to the announcements are proxied by the rate of change in trading volume, bid-ask spread, cumulative abnormal returns, and order imbalance. Our results show that the release of earnings and dividend reduces information asymmetry, proxied by bid-ask spread and order imbalance. There is no significant change in trading volume. The significant change in cumulative abnormal returns suggests that the announcements have information content. Cross-sectional analysis shows that forecast errors and the timing of the announcements are somewhat related to the change in information asymmetry. Some interaction effects of earnings and dividend on the change in information asymmetry are documented.

Monitoring Style Drift: Evidence from Equity Funds

This paper provides the first evidence that the quality of fund stewardship matters to fund style drift. Based on 435 equity funds from 2008 to 2011, we find a negative association between overall stewardship and the holding-based measure of style consistency and style dispersion in the size dimension. In comparison, stewardship component measures, including fees, regulatory history, manager compensation, manager ownership, board quality, and corporate culture are more significant in explaining the various dimensions of style drift we explored. Our analysis shows that managerial compensation and ownership have opposing effects on style drift and should therefore be treated separately in tests of fund stewardship.

Do Fund Managers Keep Their Promises?: The Case of Shari’ah Equity Funds

This paper examines the compliance of a large sample of faith-based ethical funds – Shari’ah equity funds (SEFs). SEFs screen their investment for compliance with Islamic law, where riba (conventional interest expense), maysir (gambling), gharar (excessive uncertainty), and non-halal (non-ethical) products are prohibited. Using a set of stringent Shari’ah screens similar to those of Morgan Stanley Capital International (MSCI) Islamic, we find less than one-third of the equity holdings of SEFs are Shari’ah-compliant. While most (95%) of the fund holdings pass the business screens, only about 42% pass the total debt to total assets ratio screen. This finding suggests that, in order to overcome a significant reduction in the investment opportunity set, Shari’ah principles are compromised, with SEFs adopting lax screening rules in an attempt to achieve financial performance. An implication of our results is that SEF investors may be exposed to Shari’ah compliance risk since the fund managers do not always fulfill their fiduciary obligations as promised in the prospectus. While younger funds and funds that charge higher fees and are domiciled in more Muslim countries are more compliant, funds that have greater disclosure of the Shari’ah compliance framework are not necessarily so.

Women in leadership: an analysis of the gender pay gap in ASX-listed firms

This study provides evidence that after several decades of fighting for equal pay for equal work, an unexplained gender pay gap remains amongst senior executives in ASX-listed firms. After controlling for a large suite of personal, occupational and firm observables, we find female senior executives receive, on average, 22.58 percent less in base salary for the period 2002–2013. When executives are awarded performance-based pay, females receive on average 16.47 percent less in cash bonus and 18.21 percent less in long-term incentives than males. The results are robust to using firm fixed effects and propensity-score matching. Blinder–Oaxaca decomposition results show that the mean pay gap cannot be attributed to gender differences in attributes, including job titles. Instead, the results point to differences in returns on firm-specific variables, in particular firm risk.