Phillip J. McKnight

Internal and External Governance Mechanisms: Their Impact on the Performance of Large UK Public Companies

This paper analyses the relationship between internal and external corporate governance mechanisms and the performance of UK companies within the context of the Cadbury Committees Code of Best Practice. The results show, first, that the market for corporate control is an effective governance mechanism that may be regarded as a substitute for the other mechanisms. Second, there is a weak relationship between the internal governance mechanisms and performance. Third, there is also little evidence that with firms in the top and bottom performance deciles have different internal governance characteristics. The results therefore raise questions about the efficacy of imposing prescriptive internal governance mechanisms on companies, particularly given that the market for corporate control has been shown to be an effective means of reducing agency costs.

Top Executive Pay in the United Kingdom: A Corporate Governance Dilemma

This study represents a first attempt in the UK literature to split total pay into salary, annual bonus and share options for the purpose of empirically verifying how each is related to executive performance. As predicted from earlier studies on total pay, salaries were found primarily determined by firm size. Contarary to prior research, however, our findings suggest a pronounced link does exist between performance and pay over both the short- and long-term. This is manifested particularly by the magnitude of the coefficient estimates found between changes in shareholders return and changes in executive share options. This finding strongly suggests that the leverage executives achieve, on average, in their rewards as share prices increase may well be substantial; a finding that has not been captured in previous research on executive remuneration and which is of considerable relevance to the current corporate governance debates.

Security Analysis, Agency Costs and UK Firm Characteristics

In this paper we appraise the monitoring activity of security analysis from the manager-shareholder conflict perspective. Using a data set of more than 7000 firm-year observations for manufacturing firms tracked by security analysts over the 1988-1994 period, our evidence supports the view that security analysis acts as a monitoring mechanism in reducing agency costs associated with the separation of ownership and control. However, we also find that security analysts are more effective in reducing managerial non-value maximizing behavior for single-focused than multi-segment (diversified) firms. In addition, the shareholder gains from the monitoring activity of security analysis are found to be larger for focused than for diversified firms.

An Empirical Analysis of the Impact of Corporate Governance Mechanisms on the Performance of UK Firms

The agency model provides a number of ways to address the problems raised by the separation of ownership and control in public limited liability companies. In its Code of Best Practice, the Cadbury Committee proposed a variety of monitoring mechanisms which, if implemented, should improve corporate governance. As part of the Code, it was recommended that firms should have adequate non-executive director representation. They should also appoint an audit committee, the primary purpose of which was to monitor the auditing controls of the company. The extent to which these structures influence performance is analysed. In addition, we analyse the structure and calibre of audit committee membership and its effect on the performance of 312 large UK quoted companies. The effectiveness of the market for corporate control is investigated by means of take-over intensity by sector. We find that neither the independence of the committee membership nor the quality of the committee members has an effect on performance. However, we find that take-over intensity is negatively related to performance. This suggests that external control mechanisms are more effective than internal ones. When performance is split into deciles, there is some evidence that non-executive director independence and the market for corporate control are substitute governance mechanisms.

CEO Age and Top Executive Pay: A UK Empirical Study

This study examines the implications that CEO age has onexecutive pay regarding data collected in a UK setting. Whereprior research has typically focused on total pay (salary plusbonus), this study offers a more complete conceptual model bysplitting pay into salary, annual bonus, and share options. Indoing so, we found that the relationship between CEO salaries andage are significantly related with this association weakeningover time. Another interesting finding not captured by priorresearch was that the relationship between CEO age and bonusappears to be non-linear in nature. Figures 2 which depicts thisnon-linear function suggest at about age 53, the proportion ofbonus as a percentage of salary begins to decrease at anincreasing rate. As a whole, these findings suggest corporate paycommittees should consider family and the financial circumstancesof the executive when designing remuneration schemes.

Investor Reactions, Social Implications and Layoff Announcements in the UK: A Comparison between Periods

This study examined the effect of layoffannouncements on shareholder wealth. Second, itfurther discusses the social implications oflayoffs and the extent to which investorreactions towards layoffs may have changed overtime. Details of layoff announcements for UKlisted companies were gathered for the periods1980 to 1984 and 1990 to 1995 inclusive.Comparative to prior U.S. findings, the resultsshow that UK investors do respond negatively toannouncements categorised as reactive. Twofindings not established by prior researchwere: (1) UK investor reactions appear to bemuch more sensitive to layoffs in the 1990s asopposed to the 1980s, and (2) UK investorsappeared increasingly sensitive toward layoffscompared to their US counterparts.

Underwriting Relationships and Analyst Independence in Europe

This paper examines the accuracy of security analysts’ earnings forecasts and stock recommendations for firms in 13 European countries. We document at least three key findings. First, we find strong evidence that lead and co-lead underwriter analysts’ earnings estimates and stock recommendations are significantly more optimistic than those provided by unaffiliated analysts. Second, we find that lead and co-lead underwriter analysts’ earnings forecast and stock recommendations are significantly more optimistic for underwriter stocks than for those they provide for other stocks. Third, we also find evidence that these biases found within earnings forecasts and stock recommendations are not driven by one particular country. In short, these findings suggest that affiliated analysts are more optimistic perhaps to maintain investment banking relations.

Momentum Strategies, Information Diffusion, and Investor Conservatism in Asian-Pacific Region

This study performs an out-of-sample test on momentum effects in nine Asian-Pacific stock markets from 1990 to 2002. We find little evidence on the existence of intermediate stocks return momentum. Specifically, the unrestricted momentum trading strategies appear profitable only in major developed countries but not in the emerging countries in our samples. We further investigate momentum effects through two behavioural theories: Hong and Stein’s (1999) gradual-information-diffusion model and Barberis et al.’s (1998) investor conservatism bias model. Our results support Barberis et al. (1998) model but reject the Hong and Stein’s information diffusion hypothesis. It shows the profitability of momentum strategies is positively related to analyst coverage but negatively related to analysts’ forecast dispersion. We argue that investors’ psychological conservatism biases reflect slow updating of their beliefs and underrate the importance of new information. Interestingly, we also find that book-to-market is more important than dispersion and dispersion is more important than size in explaining momentum returns.

Insider employee stock option trading and stock prices

We examine the information content of insider employee stock option trading and its value to market investors using a US dataset. There should be no presumption that option trading would not convey valuable information and indeed, the exercise of option rights is likely to signal insider knowledge. Our results from Granger-causality tests suggest that the actions of directors, officers (senior management) and the other groups, such as company lawyers, do indeed have predictive power for future returns. However, the actions of large shareholders have no additional information content over that which is publicly available. Evidence from predictive regressions largely supports these results, but is often weaker in significance. This seems to arise as the Granger-causality approach utilises a longer lag length and suggests that it takes time for the market to assimilate the information from insider actions. Overall, the results suggest that any outsider who can mimic the behaviour of certain insider groups could benefit in predicting future returns. Finally, the results confirm the belief that the market is unlikely to be strong-form efficient and that this is particularly true with smaller firms. In contrast, larger firms appear to be priced more efficiently than smaller ones.

The impacts of stock characteristics and regulatory change on mutual fund herding in Taiwan

This article analyses the trading activity of Taiwanese open-end equity mutual fund herding behaviour over the period of 1996–2008. We found evidence of both directional and directionless herding. We also found that sell-side fund herding leads to price stabilization, whereas buy-side herding results in prices adjusting slowly. We found that the abolition of qualified foreign institutional investor (QFII) has reduced directionless and sell-side herding but has had no effect on buy-side herding.