Vesa Puttonen

Asset allocation in Finnish pension funds

This paper empirically examines the strategic asset allocation and the asset/liability issues in the Finnish defined benefit pension funds. The results indicate that there is a relationship between the liability structure and the asset allocation. While pension funds with younger participants have more equity exposure, more mature pension funds have more fixed income investments. Wide dispersion in asset allocations is also found between the funds. One fund holds its entire portfolio in fixed income securities, whereas other funds have none or only few fixed income holdings. Equity investments also vary dramatically, ranging from 0% to over 70% of the asset allocation. The same applies to investments in a sponsor, real estate investment, and money market investments. A portion of these different asset allocations is explained by the liability structure, but another part remains unexplained. The other variables affecting strategic asset allocation of a pension fund are not obvious, but they could include factors such as regulatory environment, historical reasons, mean-variance optimization instead of ALM, sponsors own preferences or pension funds irrationality. Analyzing these factors would be a fruitful topic for further research. Additionally, international comparisons would be a fruitful topic for further investigation.

Should Good Stocks Have High Prices or High Returns

Using a design involving a between-subjects experimental manipulation, this study surveyed 742 Finnish financial advisers about requiring a risk premium in one mode and about expected returns in the other mode. Company-level risk factors (e.g., leverage) caused an increased return requirement in the first mode but led to lower return expectations in the second mode. Sensitivity to the form of the question revealed an inconsistency in the advisers’ perception of risk and return. Advisers seemed to associate safe stocks with relatively lower discount rates (and thus higher valuations) but also with higher return expectations. This inconsistency may contribute to the overpricing and subsequent inferior performance of glamour stocks. Giving consistent advice is a necessary condition for providing valuable client service. Investors often expect “good” companies to deliver above average returns (where “good” can be variously defined). Asset-pricing theory, however, says that any “good” characteristic that is priced by the market (e.g., low leverage) is associated with lower, not higher, return expectations. Empirically, stocks commonly deemed good do not seem to provide superior returns and, indeed, may provide inferior returns. Do market participants rationally choose to hold beliefs that go against both asset-pricing theory and empirical evidence? Or are they confused by the logic of risk and return? In the latter case, their preferences and expectations might be unstable and could reverse as a result of manipulating the way that the question is posed. To test our hypothesis of labile expectations, we studied financial advisers’ perceptions of company characteristics and expected returns. We sent an online survey to Finnish professional investment advisers and obtained 742 responses (representing a 68 percent response rate). We used a between-subjects experimental manipulation. In one experimental mode (the expected returns mode), we asked about the impact of a set of company characteristics on return expectations. In the other mode (the required returns mode), we asked whether the respondents would require higher returns given a particular company characteristic: leverage, growth prospects, stock liquidity, or analyst following. We found that the advisers expected poor stocks to provide low returns and good stocks to provide high returns. At the same time, in the other experimental mode, the majority of advisers associated all the poor stock characteristics with risk and required higher returns for bearing that risk. For example, 86 percent of the advisers in the required returns mode required a risk premium for investing in highly leveraged companies but only 13 percent of the advisers in the expected returns mode expected such companies to provide higher returns. Furthermore, an overwhelming 68 percent of the advisers in the expected returns mode expected such companies to provide lower returns. These results show that advisers expect good stocks to have high prices (low discount rates) and high future returns at the same time. These inconsistent expectations may contribute to the overpricing and subsequent inferior performance of glamour stocks: Requiring less of a risk premium for such stocks boosts current prices; but at the same time, expecting higher returns sets the stage for future disappointments. More generally, the value added from advice may be compromised if the advisers are subject to the same biases as the individual investors. Giving consistent advice is a necessary condition for providing valuable client service.

On the causality and co-movements of scandinavian stock market returns

This paper reports some tests of Scandinavian stock market indices. Firstly, Granger causality tests of daily Swedish, Norwegian, Danish and Finnish stock returns are performed. Secondly, the effects of world-wide returns on these four Scandinavian markets are analysed. Some causality between Scandinavian markets is observed. The Swedish market is found to be the leading one of the four, while the other three appear to have no significant influence on other markets. Thus, the results do not indicate full integration of information between Scandinavian stock markets. The world-wide returns seem to have significant leading effects on Scandinavian market returns. This may be due to the growing international capital movements across countries and stock exchanges. The ongoing internationalization may well have significant effects on the returns behaviour of Scandinavian stock markets, in particular in Norway, Denmark and Finland.

‘The True and Fair View’ of Executive Stock Option Valuation

ABSTRACT We compare the market values of executive stock option (ESO) trades with their Black & Scholes (1973) model values calculated following the major accounting standards, SFAS No. 123r and IFRS2. Our results show major underpricing compared to the traditional B&S method values. This should be considered while applying SFAS No. 123r and IFRS2 for estimating fair values. Especially time to expiration has a major influence on the undervaluation suggesting that the possibility of a change in corporate structure lowers the cost of ESOs to shareholders.

Advertising and mutual fund asset flows

Purpose – The paper aims to examine the effect of advertising on mutual fund cash flows in the Finnish fund market.Design/methodology/approach – The papers unique data set allows the observation of the effects of monetary advertising spending and the choice of advertising media.Findings – The paper finds that neither past years performance nor advertising alone is sufficient to produce increased cash flows. However, advertising together with past performance is found to significantly affect cash flows. The positive effect of advertising is limited to the use of non‐perishable advertising media. Additionally, it is found that fund families spending proportionately more on advertising receive higher asset flows.Originality/value – The data are unique in that they can identify fund families that advertise, and also how much they spent on advertising in a given year and the dollar amount spent on five different media types. Obviously, having also fund level data available would enable more thorough analysis.

The linear and non-linear dependence of stock returns and trading volume in the Finnish stock market

This paper investigates the dynamic linkages between stock returns and trading volume in a small stock market, i.e. the Helsinki Stock Exchange in Finland during the period 1977–88. Both linear and...

External corporate governance and performance: evidence from the Nordic countries

We examine the influence of anti-takeover provisions on valuation, stock return and operating performance using data from an extensive sample of publicly listed Nordic companies during the time period of 1999–2004 (similar to Gompers, Ishii, and Metrick 2003 [Corporate governance and equity prices. The Quarterly Journal of Economics 118: 107–55] in the US). We collected data from nine of the most commonly used provisions. The results suggest that anti-takeover provisions have a negative impact on valuation, no effect on stock return, and a positive influence on operating performance. Analysing the influence of each reveals dual-class stock to be the single most important provision dummy contributing to the negative valuation, though the discount decreases over the years.

International price discovery in Finnish stock index futures and cash markets

Abstract This paper investigates empirically how the information of the worlds stock markets is reflected in the thin Finnish stock index futures and cash markets. The world-wide returns seem to have a significant leading ability for predicting Finnish stock index futures returns. However, this kind of causal relation is not observed between the world-wide and stock market returns. The Finnish stock index futures returns then show significant Granger causality with Finnish stock market returns, the stock market being the lagging one. The relationship is improved by allowing the association between markets to be different for positive and negative returns. The findings of this study suggest short selling restrictions and other market frictions to be a significant factor leading to a delay in the pricing process in the stock market.

Dynamic linkages between stock prices, accrual earnings and cash flows: a cointegration analysis

This paper investigates the dynamic linkages between stock market prices, accrual earnings and cash flows using Finnish data. We find that stock returns lead accounting returns rather than vice versa. Thus, the thin Finnish stock market appears to produce important information about the future success of Finnish companies for decision making purposes. In addition, the cointegration analysis performed here indicates that the inclusion of the so-called error correction term based on non-stationary price variables significantly improves the observed association between stock market and accounting variables. Thus, in future research, the long-term adjustment between stock market and accounting variables should be analysed more carefully when investigating the causality between accounting earnings and stock markets.

Sequential information arrival in the Finnish stock index derivatives markets

This paper investigates the hypothesis of sequential information arrival in the Finnish stock index futures and options markets. With no short selling restrictions in the derivatives markets, no causality relationships between returns and trading volume are observed. However, by using the so-called call-put signal, based on call and put volumes, causality between returns and volume is found supporting the hypothesis of sequential information arrival. In addition, it is discovered that the increased volume in stock index options relative to index futures has significantly increased their importance in the intermarket price discovery process.