Sean Pinder

What were they thinking? Reports from interviews with senior finance executives in the lead-up to the GFC

The impact of the Global Financial Crisis (GFC) on capital markets has demonstrated that corporate stakeholders (including shareholders, lenders and independent board members) need to be far more aware of the decision-making processes followed by corporate executives. Gaining insight into these processes is difficult at any time, yet attempting to uncover (in any meaningful sense) how executives reached critical decisions in the lead-up to the GFC is almost impossible in hindsight. This article overcomes this problem in that it reports the results of interviews conducted with senior Australian finance executives in the lead-up to the GFC. These interviews were designed to elicit granular explanations for the rationale underpinning major corporate finance decisions, and their timing and subjects provide a unique ex ante profile of the perceptions of senior executives in large firms as the GFC developed. The most significant finding is that the corporate executives shared a decision framework with core features similar to those of financiers that are thought to have contributed to the GFC, particularly permanently increasing asset prices, easy liquidity and safety in powerful risk management techniques. Our findings have strong implications for independent board members who – at least in hindsight – failed to identify and mitigate risks from systemic reliance on appreciating markets and the inevitability of mean reversion.

The value of liquidity: Evidence from the derivatives market

Abstract This paper documents the systematic overpricing of warrants relative to options. Models are developed in order to explain the cross-sectional variation in the relative pricing of these securities. Results indicate that relative pricing differences (RELDIFF) are related to various proxies of liquidity including days-to-maturity, relative trading volume and the mandated presence of market makers in the options market. The identity of warrant-issuers is also found to be significant in explaining relative pricing, possibly reflecting disparate levels of credit risk or it may be a manifestation of the different characteristics relating to the underlying shares upon which the warrants are issued. The paper also documents the impact that the change from floor trading to electronic trading had on the price formation process in the Australian Options Market.

An empirical examination of the impact of market microstructure changes on the determinants of option bid–ask spreads

Abstract This paper examines the determinants of bid–ask spreads in the Australian Options Market before and after it switched from a quote-driven floor-traded market to an order-driven screen-traded market. This study reports that both put and call option bid–ask spreads are positively related to the options value, its remaining term-to-maturity, its absolute hedge ratio and the volatility of returns from the underlying asset and negatively related to the level of trading activity in that option series. The study also reports that spreads are generally less when market makers are obliged to maintain continuous quotes in the market. The paper also finds that following the change in trading regime, both call and put option spreads became more sensitive to the absolute value of the options delta. This finding is consistent with previous theoretical and empirical work from equities markets that has suggested that a switch to an electronic trading regime results in an increase in the adverse selection component of the bid–ask spread. There is also some limited evidence that suggests that the switch to electronic trading resulted in call option spreads being less sensitive to the return volatility of the underlying asset but more sensitive to the options price.

A refutation of the existence of the other January effect

Cooper et al. report US evidence of the other January effect, where returns in January are shown to have predictive power for returns over the subsequent 11 months. We re-examine the latest sub-period that they examine and find that the results using excess returns are not unique to January and that the effect for January is not apparent for raw returns. Further, using excess (raw) return data for 38 (44) other countries, limited support is found for the other January effect, with eight (five) of the remaining 11 months demonstrating a statistically significant effect in at least as many countries as exhibited the other January effect. Further, there is no evidence to suggest that different tax-year ends across countries can explain the result.

Australian Evidence on the Determinants and Impact of Takeover Resistance

In the present paper, we examine the determinants and impact of target bid resistance on the wealth of target shareholders and the takeover process in Australia. We find that bid resistance increases target shareholder wealth in the post-announcement period and that the probability of bid hostility increases with the targets size, decreases with the targets performance and is unrelated to the size of the premium offered by the bidder. We also find that bid hostility decreases the probability of bid success, increases the probability of bid revision and has no effect on the probability of competing bidders entering the market.

Narratives in Managers’ Corporate Finance Decisions

This article uses the extended case method to explore senior executives’ corporate finance decisions. We quantified firm’s finance practices using a mail survey, and then – to resolve puzzles in managers’ decision processes – conducted face-to-face interviews with chief finance officers of large listed firms. The interviews identified six themes as consistent influences on finance decisions: pressures imposed by clienteles; constraints on resources; risk management; heuristics; real options; and sustainability. We conclude that managers are logical and rational in their decisions, but employ a wider range of criteria than assumed in conventional finance theories.

Australian government sector initial public offerings

The paper examines the initial pricing of all Australian government sector initial public offerings (IPOs) that have been made over the last six years. A statistically significant first-day average abnormal return of approximately 8% is found. Contrary to overseas findings, there is no evidence that these government sector IPOs were more underpriced than Australian private sector IPOs.

Capital Gains Tax, Supply-Driven Trading and Ownership Structure: Direct Evidence of the Lock-In Effect

This study investigates the effect of differential capital gains tax rates on investor trading and share prices in a unique market setting that facilitates the resolution of conflicting prior evidence of holding period tax incentives. In particular, we examine whether the concessionary tax treatment of long‐term capital gains increases the supply of shares that qualify for long‐term status, thereby causing downward price pressure. We find evidence of abnormal seller‐initiated trading following the 12‐month anniversary of listing for IPO firms that appreciate in price (‘winners’) and report no such evidence for firms that decline in price (‘losers’). Consistent with the tax concessions being greater for individual than institutional investors, we report that abnormal seller‐initiated trading is mitigated by higher levels of ownership by institutional investors. We also report limited evidence, for winners, of declining share prices upon qualifying for long‐term tax status.

Evidence of managerial opportunism in Australia

Purpose - The purpose of this paper is to test for managerial opportunism, specifically the backdating of executive options, in Australia. Design/methodology/approach - The paper analyses the return behaviour associated with a sample of 161 unscheduled options granted by Australian firms. Specifically, the authors test for differences between a subsample of grants that had late-filed notices (and hence may be subject to backdating) versus those that had notices filed on-time. Findings - Consistent with backdating, it is found that these abnormal post-grant returns persist for a sub-sample of late-filed grants but not for a sub-sample of grants with same-day filing. Furthermore – the authors find even stronger results for option grants made by firms with a history of late-filing but for which no notice was filed with the Australian Securities Exchange. This paper is the first to demonstrate these effects in a setting subject to the IFRS requirement that the fair value (rather than the intrinsic value) of executive options be expensed. Originality/value - This paper is the first to demonstrate these effects in Australia and further in a setting subject to the IFRS requirement that the fair value (rather than the intrinsic value) of executive options be expensed.

The Pricing of Low Exercise Price Options

This paper examines the pricing of Low Exercise Price Options (LEPOs) listed on the Australian Stock Exchange. The cost of carrying model is used to calculate theoretical prices which are then compared to the price at which actual trades occurred. The results indicate that LEPO trades, that are unaffected by dividends, may be underpriced relative to the underlying shares. A possible reason for this may be the difficulty associated with short‐selling shares in the Australian market.