Tom Berglund

Estimating betas on daily data for a small stock market

Abstract This paper examines the properties of different market risk (beta) measures computed on daily data for a thin security market i.e. the Helsinki Stock Exchange in Finland. In accordance with the results by Dimson and Marsh (1983) the paper shows that differences in trading frequency between different stocks produce a serious bias towards what appears to be stability in estimated betas. Furthermore the paper shows that when betas are computed the exclusive use of stock prices based on actual trades will not solve the problem of a thin trading bias in measured stability of these beta estimates. In fact other methods proposed to cope with the thin trading problem seem to be at least as efficient as use of trade-to-trade returns. Finally betas corrected for differences in trading frequency are still shown to be statistically related for firm size.

Foreign Investors' Reaction to Lower Profitability – the Role of Information Asymmetry

Owners of firms in trouble are more exposed to moral hazard problems than owners of successful firms. Foreign owners who face higher costs to monitor the firm should be more vulnerable to these problems than domestic ones. Consequently, a downward revision in a firms expected future earnings should push foreign investors to sell their shares to a larger extent than domestic investors. We test this hypothesis on profit warnings issued at the Helsinki Stock Exchange. Our results reveal that in the wake of profit warnings foreign investors will predominantly sell, while domestic investors pick up the net sales by foreigners. Differences in the scale of the foreign investor sell-out reaction are explained by a number of variables. The most significant one is our proxy for the magnitude of surprise in the warning. The reaction also increases with the degree of perceived information asymmetry for the firm that issued the warning, while foreign members on the firms board have a moderating impact. By contrast, a number of general corporate governance-related variables have no statistically significant impact on the reaction.

Exchange Rate Devaluations and Peso Phenomena in Stock Returns

This paper analyzes how a prolonged external disequilibrium, that may arise if the exchange rate is pegged, will affect the stock market. It is shown that if the central bank refuses to adjust the peg in response to the disequilibrium, stock returns are expected to remain below their equilibrium level. If the central bank finally fails in its defense of the peg and there is a devaluation, this pre-devaluation peso phenomenon will be replaced by a post-devaluation peso phenomenon. Our empirical case rests on the dramatic experiences of the Finnish economy in the 1989-1994 period. We show that the pre-devaluation peso phenomenon is able to account for the seemingly anomalous pattern of systematically dropping stock prices prior to the decision to let the Finnish markka float in September 1992. We conclude that these kinds of patterns are likely to be present in time series of market returns especially for many so called emerging stock markets.

Regulatory response to the financial crisis in Europe: recent developments (2010-2013)

The purpose of this paper by the European Shadow Financial Regulatory Committee is to provide an account of the financial crisis in Europe during the period 2010–2013 and an analysis of how the relevant authorities reacted to the crisis. These actions included measures taken by central banks, governments or fiscal authorities, and by regulatory or supervisory bodies. In a previous study covering the regulatory developments during the financial crisis up until 2009, issues such as the implementation of Basel 3 rules in Europe and the (mostly ad hoc and unilateral) resolution mechanisms set in most European countries to fight the crisis were covered. This study focuses on developments that since 2010 and, in particular, the concerns and actions that emerged with the sovereign debt crisis in the euro area. In particular, the transition from the European Financial Stability Facility (EFSF) to the European Stability Mechanism (ESM) is assessed. Following these institutional developments, the focus after 2012 has progressively turned to the agreements and remaining challenges of the European banking union. These issues are jointly covered, along with some updates on the views of the ESFRC on recent advances in other areas, such as solvency regulation. All in all, we find that of the weaknesses of the global financial system remain to be addressed, and we believe that the banking union is one of the main tools and opportunities for an improved and efficient crisis management in Europe.

Incentives for complexity in financial regulation

Purpose - – The purpose of the paper is to find out which incentives are present for persons who are taking care of financial regulation in practice, and how these incentives impact their attitudes towards complexity of financial regulation. Design/methodology/approach - – Based on recent contributions, reasons behind the increase in complexity observed in financial regulation are discussed. The role of actual incentives for the persons involved in setting up and enforcing regulation is detailed. Findings - – Incentives for persons that impact drafting and implementation of financial regulation produce a bias towards excessive complexity. Additional complexity reduces the risk for being exposed to aggressive journalism and pressure from populist politicians. Increasing complexity of regulation will also benefit large players since the costs are largely fixed. Research limitations/implications - – Careful studies measuring the costs of increased complexity in terms of increased resource requirements are needed. Practical implications - – To reduce the bias towards excess complexity, a body consisting of knowledgeable persons with high integrity is required with an explicit mandate of scrutinising regulation in order to reduce, or at least not increase, complexity. This body must be empowered with sufficient discretion to tackle cases that lack precedents. Originality/value - – The paper introduces an explicit discussion of existing incentives on the regulator side of financial markets to increase the understanding of the issues involved in the increased complexity that we observe in the rules that are implemented to guide behaviour in financial markets.

The elusive marginal q

This article discusses problems with proposed methods to estimate firm specific marginal q-ratios, where marginal q measures the value impact of new investment. The article concludes that suggested methods are likely to produce biased estimates since they fail to separate fluctuations in the value of assets in place, from the ex-post value increase specifically caused by the undertaken new investment. The usefulness of attempts to separate efficiency of new investments from efficiency of managing the firms assets in place is questioned.

Employees on Corporate Boards

Employees in Swedish firms have the legal right to be represented on the company board. However, in a considerable share of Swedish listed firms, this option is not exercised. This paper asks why that is the case. We use a simple framework, based on rational choice by individual employees. Our sample consists of 226 listed non-financial Swedish firms in 2001-2007. The results are in line with our predictions. Employee board representation does not impact firm performance, neither positively nor negatively. The main driver of employee board representation is the number of eligible employees. Furthermore, employee board representation decreases with firm risk, slow growth, and internationalization. We conclude that when the law grants the right for employees to be represented on the board a simple model based on individual utility maximization provides an explanation for why the right is used in some firms and not in others.

Optimal jurisdiction of financial supervision

Purpose – This paper aims to discuss factors that affect the socially optimal jurisdiction of financial supervision in the presence of economies of scale in banking. Design/methodology/approach – Analysis of the trade-off between likelihood of “regulatory capture” of supervisors in a small jurisdictions and benefits of greater rates of financial innovation in a less-bureaucratized and more diverse supervisory organization. Findings – The challenge is to create a financial supervisory institution that should be powerful enough to close down even the largest financial institutions within its jurisdiction, while at the same time not becoming so large and omnipotent that it would stifle further development of firms in financial services. Research limitations/implications – Deeper understanding of minimum efficient scales in financial intermediation required, and of regulatory capture vs efficient information acquisition from regulated units. Practical implications – Basis for international (regional) cooperat...