Shams Pathan

Financial Constraints and Dividend Policy

Using a sample of US listed firms over the 1989–2012 period, we find that financially constrained dividend-increasing firms experience superior short-run abnormal stock returns, but suffer worse operating performance compared to similar unconstrained firms. More specifically, constrained firms in more competitive industries realize poorer long-run and operating performance. Likewise, constrained firms that increase dividends during the financial crisis also deliver inferior post-dividend-increase long-run return than do unconstrained firms. We also find evidence that constrained firms show worse stock market reaction to new equity issue announcements following dividend increase, but display a positive market response if they potentially have high investment growth opportunities. Our results are robust to alternative financial constraint proxies and abnormal return measures.

Does Skin in the Game Help? Bank Franchise Value, Managerial Incentives and ‘Going for Broke’

The roles bank franchise value (‘skin in the game’) and CEO ownership play in determining bank risk are studied for large United States Bank Holding Companies. We find robust evidence of a convex relation between bank risk and each of CEO shareholding and franchise value, indicating that increases in each are initially risk decreasing, but as franchise value and CEO ownership increases so too does bank risk. Further, we find that low levels of franchise value combined with high CEO ownership result in managerial incentives aligning with those of shareholders, resulting in increased bank risk (‘going for broke’ or asset substitution). We argue that these results are consistent with those of Robert Merton, but in the context of franchise value rather than bank capital and deposit insurance, and accordingly offer some policy recommendations for regulatory monitoring of bank risk that are consistent with these results.

Monitoring by Busy and Overlap Directors: An Examination of Executive Remuneration and Financial Reporting Quality

ABSTRACT We examine the influence of multiple board directorships and boards’ committee memberships on three board supervisory outcomes: executive remuneration, external auditor opinion, and earnings management. The study uses a panel of 122 non-financial companies listed on the Spanish Stock Exchange over the period 2004–2011. Our results show that firms with busy directors offer low executive remuneration and present a low probability of a qualified audit opinion. Furthermore, the results indicate that firms with overlap directors exhibit a higher probability of receiving a qualified audit opinion. Additionally, we find evidence that the overcommitment effects of busy and overlap directors are more evident for large firms. Overall, our findings suggest that busy (overlap) directors are beneficial (detrimental) to the monitoring capability of the board in the Spanish context.

Do Private Equity Target Firms Exhibit Less Effectual Governance Structures

We investigated the unique corporate governance structure of Australian private equity target firms to establish the disciplinary motive underpinning a corporate buy-out and tested our expectations using a sample of 43 publicly listed private equity target firms and a control sample of 182 conventional corporate targets, matched by year and industry, for the period 2001–2010. The findings provide evidence of a less effectual corporate governance structure for private equity target firms. In particular, our analysis reveals that, relative to our benchmark sample, private equity target firms have larger boards, more board meetings and a greater inside ownership. Similarly, our results show that the probability of a firm being a private equity target increases with board size, percentage of insider directors, board meetings and CEO ownership. Consistent with results from work elsewhere, private equity target firms appear to perform ex post reactive monitoring roles rather than ex ante proactive roles.

Managerial Incentives, Market Power and Bank Risk-Taking

We investigate the effects of managerial incentives and market power on bank risk-taking for a sample of 212 large U.S. bank holding companies over the period 1997-2004 (comprising 1,534 observations). Bank managers have incentives to prefer less risk, while bank shareholders prefer higher risk, and market power is the centerpiece of any bank regulation. However, the literature is inconclusive regarding the effects of managerial incentives and market power on bank risk-taking. Our results reveal a U-shaped relationship between bank risk-taking and CEO ownership (a proxy for managerial incentives) and between bank risk-taking and charter value (a proxy for market power). Particularly, we find that bank risk-taking initially decreases and then increases with both CEO ownership and charter value. These convex relations are robust for various bank risk-taking proxies, different estimation approaches to account for endogeneity, and several bank-specific control variables.

The risk implication of Sarbanes-Oxley Act of 2002: an empirical examination of the US financial services industry

This article examines the risk effect of the Sarbanes-Oxley Act of 2002 (SOX) for the US financial services (FS) industry. The major provisions of SOX relate to increased transparency of the financial reporting system and improved internal governance of firms. The overall results support that SOX reduced the total risk and idiosyncratic risk of FS firms, particularly of banks, savings and insurance companies. Yet, this article finds an increase in systematic risk of banks, savings and insurance companies. This outcome may be due to increased financial integration, innovation, globalization and deregulation.