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  • Li, Hongzhu (Svenska handelshögskolan, 2004-05-27)
    A better understanding of stock price changes is important in guiding many economic activities. Since prices often do not change without good reasons, searching for related explanatory variables has involved many enthusiasts. This book seeks answers from prices per se by relating price changes to their conditional moments. This is based on the belief that prices are the products of a complex psychological and economic process and their conditional moments derive ultimately from these psychological and economic shocks. Utilizing information about conditional moments hence makes it an attractive alternative to using other selective financial variables in explaining price changes. The first paper examines the relation between the conditional mean and the conditional variance using information about moments in three types of conditional distributions; it finds that the significance of the estimated mean and variance ratio can be affected by the assumed distributions and the time variations in skewness. The second paper decomposes the conditional industry volatility into a concurrent market component and an industry specific component; it finds that market volatility is on average responsible for a rather small share of total industry volatility — 6 to 9 percent in UK and 2 to 3 percent in Germany. The third paper looks at the heteroskedasticity in stock returns through an ARCH process supplemented with a set of conditioning information variables; it finds that the heteroskedasticity in stock returns allows for several forms of heteroskedasticity that include deterministic changes in variances due to seasonal factors, random adjustments in variances due to market and macro factors, and ARCH processes with past information. The fourth paper examines the role of higher moments — especially skewness and kurtosis — in determining the expected returns; it finds that total skewness and total kurtosis are more relevant non-beta risk measures and that they are costly to be diversified due either to the possible eliminations of their desirable parts or to the unsustainability of diversification strategies based on them.
  • Rokkanen, Nikolas (Svenska handelshögskolan, 2008-06-09)
    The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.
  • Gang, Ji (Svenska handelshögskolan, 2006-05-19)
    The negative relationship between economic growth and stock market return is not an anomaly according to evidence documented in many economies. It is argued that future economic growth is largely irrelevant for predicting future equity returns, since long-run equity returns depend mainly on dividend yields and the growth of per share dividends. The economic growth does result in a higher standard of living for consumers, but does not necessarily translate into higher returns for owners of the capital. The divergence in performance between the real sector and stock markets appears to support the above argument. However, this thesis strives to offer an alternative explanation to the apparent divergence within the framework of corporate governance. It argues that weak corporate governance standards in Chinese listed firms exacerbated by poor inventor protection results into a marginalized capital market. Each of the three essays in the thesis addresses one particular aspect of corporate governance on the Chinese stock market in a sequential way through gathering empirical evidence on three distinctive stock market activities. The first essay questions whether significant agency conflicts do exist by building a game on rights issues. It documents significant divergence in interests among shareholders holding different classes of shares. The second essay investigates the level of agency costs by examining value of control through constructing a sample of block transactions. It finds that block transactions that transfer ultimate control entail higher premiums. The third essay looks into possible avenues through which corporate governance standards could be improved by investigating the economic consequences of cross-listing on the Chinese stock market. It finds that, by adopting a higher disclosure standard through cross-listings, firms voluntarily commit themselves to reducing information asymmetry, and consequently command higher valuation than their counterparts.
  • Westman, Hanna (Svenska handelshögskolan, 2009-07-21)
    Banks are important as they have a central role in the financial system, where funds are channelled either through financial intermediaries, such as banks, or through financial markets, hence promoting growth in any economy. Recently, we have been reminded of the drawbacks of the central role of banks. The current financial crisis, which started out as a sub-prime mortgage crisis in the US, has become a global financial crisis with substantial impact on the real economy in many countries. Some of the roots to the current financial crisis can be sought in the changing role of banks and in bank corporate governance. Moreover, the substantial revitalising measures taken have been justified by the central role of banks. Not only are banks important, they are also very special. The fact that banks are regulated in conjunction with greater opacity, make bank corporate governance different from corporate governance in non-bank companies. Surprisingly little is, however, known about bank corporate governance, in particularly, in a European setting. Hence, the objective of this doctoral thesis is to provide new insights in this research area by examining banks from 37 different European countries. Each of the three essays included in the doctoral thesis examines a particular aspect of bank corporate governance. In the first essay the interaction between the regulatory environment a bank operates in and its ownership structure is explored. Indicators of the severity of the moral hazard problem induced by the deposit insurance system and implicit too-big-to-fail government guarantee, particular features of deposit insurance systems as well as legal protection of shareholders, legal origin of a country and level of integration to the European community are used in the analysis. The empirical findings confirm previous findings on the link between legal protection of shareholders and ownership structure. Moreover, they show that differences in deposit insurance system features can explain some of the differences in ownership structure across European banks. In the second essay the impact of management and board ownership on the profitability of banks with different strategy is examined. The empirical findings suggest that the efficiency of these two particular corporate governance mechanisms varies with the characteristics of the agency problem faced by the bank. More specifically, management ownership is important in opaque non-traditional banks, whereas board ownership is important in traditional banks, where deposit insurance reduces the monitoring incentives of outsiders. The higher profitability does, however, go together with higher risk. In the third essay the profitability and risk of commercial, savings and cooperative banks are compared. The empirical findings suggest that distinct operational and ownership characteristics rather than only the mere fact that a bank is a commercial, savings or cooperative bank explain the profitability and risk differences. The main insight from the three essays is that a number of different aspects should be addressed simultaneously in order to give the complexity of bank corporate governance justice.
  • Liu, Xing (Svenska handelshögskolan, 2012-11-05)
    The integration of European agriculture into the world economy has also accelerated price interaction between member states and the rest of the world during last decades. Consequently, the fluctuation in world market prices was more quickly transmitted to European member states, including Finland. Increasing price uncertainty and price volatility in agricultural products became more evident. The openness of regional agriculture such as EU and Finnish to the world is irreversible, and the international community needs timely and differentiated information on the situation in different places in order to respond appropriately. The theme of this dissertation concerns the properties of price linkage of agricultural commodities across space during the last decades. Such properties include hedging issues, price transmission and marketing margin in the agricultural commodity market. By understanding the issues, agricultural market participants, including farmers, processors, industries, consumers and policy makers can benefit from insights into these issues either in order to assess past actions and decisions or to derive guidelines for future action. In summary, this dissertation consists of 5 independent articles. Article 1 presents a case study on optimal hedging on Finnish wheat under both price and yield risks. The result shows that the forward contract might not be the best hedging tool for the farmers in Finland where the yield volatility per unit is bigger than price volatility. Article 2 presents an efficiency test of the CPO futures market in Malaysia for European participants using the cointegration technique. The results suggest that the futures market in Malaysia is not efficient for European participants, which indicates that they should be more cautious in using the hedging strategy in this futures market. Articles 3 focuses on the price transmission of the Finnish food market at vertical level, and Article 4 investigates horizontal price transmission of the Finnish meat market towards the European market in both symmetric and asymmetric ways. The result from Article 3 implies that the Finnish market is characterized by buyer power according to the measure of Lloyd et al. (2009). The result from Article 4 detects that the Finnish meat sector is integrated with EU benchmark countries symmetrically or asymmetrically. Moreover, the degree of integration and speed of adjustment of Finnish pork and beef towards the EU market are proved in different level. Article 5 presents an inventory model to investigate the relationship between price volatility and the inventory in the global wheat market. The results reveal that there is only a short-term significant relationship between price volatility and the inventory.
  • Délèze, Frédéric (Svenska handelshögskolan, 2014-08-15)
    Financial assets prices are not always in perfect equilibrium and deviate from their fundamental values. The dramatic rise and fall of the stock market raises concern about the rationality of sudden changes in stock valuations. The mispricing of assets contributes to financial crises, which can damage the overall economy. This dissertation analyses the effect of market imperfections at different time horizons. Starting at a macroeconomic level with a change of currency, the first essay analyses the impact of the introduction of Euro on interest rate sensitivity of European firms. We found that the connection between bond issuance and reductions in interest rate sensitivity is most significant among financially constrained firms, which suggests that financially constrained firms are the main beneficiaries of the relaxed public borrowing constraint in Europe after the introduction of euro. Releases of macroeconomic news announcements cause sudden price discontinuities, or jumps and co-jumps, on financial markets. The second essay attempts to explain the effect of US macroeconomic announcements on European equity, interest rate and foreign exchange markets at a high-frequency level. While European equity markets are more sensitive to US fundamentals, US macroeconomic announcements cause significant jumps and cojumps on all European asset classes. We found that European markets are highly co-integrated and observed a strong correlation between the type of news and the direction of the jumps. Motivated by the phenomenal success of some quantitative trading funds, the third essay describes a new pairs trading strategy, where the spread between two co-integrated portfolios is modelled stochastically. Taking into account transaction costs, the algorithm generates a systematic positive excess return based on a pure statistical arbitrage strategy. While very convenient, traditional asset pricing relies on two restrictive assumptions. First, asset returns are conventionally modelled with Gaussian-based distributions even though actual financial time series exhibit volatility clustering. The second assumption mainly affects market microstructure studies. Time series are sampled at regular interval of time and asset return distribution is used as the unique driver to model the price fluctuation of an asset over time. In reality, the time between two transactions, often called waiting-time, is stochastic and conveys important information about price formation. The two last essays relax the assumptions of log-normally of asset prices and model asset prices with a continuous-time random walk. The fourth article compares the Markovian and non-Markovian forms of the continuous-time random walk process and shows the relevance of the waiting-time distribution on price formation. The last article applies the framework to statistical arbitrage.
  • Ahmed, Sheraz (Svenska handelshögskolan, 2009-09-02)
    A growing body of empirical research examines the structure and effectiveness of corporate governance systems around the world. An important insight from this literature is that corporate governance mechanisms address the excessive use of managerial discretionary powers to get private benefits by expropriating the value of shareholders. One possible way of expropriation is to reduce the quality of disclosed earnings by manipulating the financial statements. This lower quality of earnings should then be reflected by the stock price of firm according to value relevance theorem. Hence, instead of testing the direct effect of corporate governance on the firm’s market value, it is important to understand the causes of the lower quality of accounting earnings. This thesis contributes to the literature by increasing knowledge about the extent of the earnings management – measured as the extent of discretionary accruals in total disclosed earnings - and its determinants across the Transitional European countries. The thesis comprises of three essays of empirical analysis of which first two utilize the data of Russian listed firms whereas the third essay uses data from 10 European economies. More specifically, the first essay adds to existing research connecting earnings management to corporate governance. It testifies the impact of the Russian corporate governance reforms of 2002 on the quality of disclosed earnings in all publicly listed firms. This essay provides empirical evidence of the fact that the desired impact of reforms is not fully substantiated in Russia without proper enforcement. Instead, firm-level factors such as long-term capital investments and compliance with International financial reporting standards (IFRS) determine the quality of the earnings. The result presented in the essay support the notion proposed by Leuz et al. (2003) that the reforms aimed to bring transparency do not correspond to desired results in economies where investor protection is lower and legal enforcement is weak. The second essay focuses on the relationship between the internal-control mechanism such as the types and levels of ownership and the quality of disclosed earnings in Russia. The empirical analysis shows that the controlling shareholders in Russia use their powers to manipulate the reported performance in order to get private benefits of control. Comparatively, firms owned by the State have significantly better quality of disclosed earnings than other controllers such as oligarchs and foreign corporations. Interestingly, market performance of firms controlled by either State or oligarchs is better than widely held firms. The third essay provides useful evidence on the fact that both ownership structures and economic characteristics are important factors in determining the quality of disclosed earnings in three groups of countries in Europe. Evidence suggests that ownership structure is a more important determinant in developed and transparent countries, while economic determinants are important determinants in developing and transitional countries.
  • von Nandelstadh, Alexander (Svenska handelshögskolan, 2003-10-24)
    The trade of the financial analyst is currently a much-debated issue in today’s media. As a large part of the investment analysis is conducted under the broker firms’ regime, the incentives of the financial analyst and the investor do not always align. The broker firm’s commercial incentives may be to maximise its commission from securities trading and underwriting fees. The purpose of this thesis is to extend our understanding of the work of a financial analyst, the incentives he faces and how these affect his actions. The first essay investigates how the economic significance of the coverage of a particular firm impacts the analysts’ accuracy of estimation. The hypothesis is that analysts put more effort in analysing firms with a relatively higher trading volume, as these firms usually yield higher commissions. The second essay investigates how analysts interpret new financial statement information. The essay shows that analysts underreact or overreact to prior reported earnings, depending on the short-term pattern in reported earnings. The third essay investigates the possible investment value in Finnish stock recommendations, issued by sell side analysts. It is established that consensus recommendations issued on Finnish stocks contain investment value. Further, the investment value in consensus recommendations improves significantly through the exclusion of recommendations issued by banks. The fourth essay investigates investors’ behaviour prior to financial analysts’ earnings forecast revisions. Lately, the financial press have reported cases were financial analysts warn their preferred clients of possible earnings forecast revisions. However, in the light of the empirical results, it appears that the problem of analysts leaking information to some selected customers does not appear systematically on the Finnish stock market.
  • Pöyry, Salla (Svenska handelshögskolan, 2014-08-05)
    The fundamental function of financial markets is to channel funds within an economy. To efficiently do so, financial markets need to generate asset prices that consistently incorporate all available information and reflect all non-diversifiable dimensions of risk. While perhaps elegant, perfect market functionality and efficiency can nonetheless be seen as an unattainable ideal. Financial market imperfections, such as those generated by asymmetric information or transactions costs, can easily distort the underlying financial markets mechanisms. The research questions that are addressed in this thesis are all related to phenomena that have been associated with, or explained by, financial market frictions or imperfections. This thesis consists of four separate essays that examine questions that would be irrelevant in a perfect market – that is, in a world with no predictability of returns, informational advantages or institutional weaknesses. At least, they would be irrelevant when considering the perfect market setting as described by financial economists up until the mid- 1980s. While the guiding principles may have been somewhat updated, it is nonetheless important to stress that recent findings do not necessarily conflict with the view that markets are reasonably efficient or driven by rational market forces. The first essay of this thesis examines the under-diversification of investors and its sources using data from the Finnish Central Securities Depository (FCSD) legal liability accounts. That is, is under-diversification rational and driven by informational advantages, or the result of the behavioral biases of investors? The former source relies on market inefficiency to justify its existence whereas the latter is an imperfection in itself. In the second essay, I examine the impact of market fragmentation on private investors using the same data source. It examines whether market functionality deteriorated for private investors as a result of a regulatory change (MiFID I) that enabled market fragmentation on a large scale, but did not guarantee equal access to all market venues across all investor types. In the third essay, we explore and document a novel and robust connection between firm-level asset changes and return momentum using US stock data. The momentum anomaly is one of the most robust documented return anomalies and is recognized as one of the biggest challenges to asset pricing research. While the existing theoretical literatures on risk-based or behavioral models do not offer a clear explanation to our empirical results, recent real options models appear to hold the most promise. In the last paper, we explore the relation between ownership structures and capital structures in Russia. This is a market plagued by severe institutional imperfections and inefficiencies.
  • Thurlin, Arto (Svenska handelshögskolan, 2009-05-25)
    Market microstructure is “the study of the trading mechanisms used for financial securities” (Hasbrouck (2007)). It seeks to understand the sources of value and reasons for trade, in a setting with different types of traders, and different private and public information sets. The actual mechanisms of trade are a continually changing object of study. These include continuous markets, auctions, limit order books, dealer markets, or combinations of these operating as a hybrid market. Microstructure also has to allow for the possibility of multiple prices. At any given time an investor may be faced with a multitude of different prices, depending on whether he or she is buying or selling, the quantity he or she wishes to trade, and the required speed for the trade. The price may also depend on the relationship that the trader has with potential counterparties. In this research, I touch upon all of the above issues. I do this by studying three specific areas, all of which have both practical and policy implications. First, I study the role of information in trading and pricing securities in markets with a heterogeneous population of traders, some of whom are informed and some not, and who trade for different private or public reasons. Second, I study the price discovery of stocks in a setting where they are simultaneously traded in more than one market. Third, I make a contribution to the ongoing discussion about market design, i.e. the question of which trading systems and ways of organizing trading are most efficient. A common characteristic throughout my thesis is the use of high frequency datasets, i.e. tick data. These datasets include all trades and quotes in a given security, rather than just the daily closing prices, as in traditional asset pricing literature. This thesis consists of four separate essays. In the first essay I study price discovery for European companies cross-listed in the United States. I also study explanatory variables for differences in price discovery. In my second essay I contribute to earlier research on two issues of broad interest in market microstructure: market transparency and informed trading. I examine the effects of a change to an anonymous market at the OMX Helsinki Stock Exchange. I broaden my focus slightly in the third essay, to include releases of macroeconomic data in the United States. I analyze the effect of these releases on European cross-listed stocks. The fourth and last essay examines the uses of standard methodologies of price discovery analysis in a novel way. Specifically, I study price discovery within one market, between local and foreign traders.
  • Blomkvist, Magnus (Svenska handelshögskolan, 2014-09-29)
    The recent financial crisis of 2007-2009 highlights the impact that financial markets can have on firm behavior. The effect of market states on asset prices is well documented. Until recently, market states have played a less significant role in the corporate finance literature. This dissertation aims to give further understanding concerning firms’ financing and investments during different market states. In the first essay, I study firm-specific factors behind merger waves. My evidence suggests that acquisition activity of financially constrained firms is an important determinant of the observed waves in the aggregate M&A activity. When capital liquidity increases, financially constrained firms are better able to obtain debt and equity financing to finance their investment opportunities. In contrast, financially unconstrained firms are indifferent to the overall capital liquidity and thereby do not have equally clustered M&A activity. In the second essay, I study the behavior of equity issuing firms during cold IPO-markets. I find that firms that go public during cold markets tend to stage their financing while firms that issue during hot markets tend to raise a larger amount financing, which is consistent with the market timing effect. In the third essay, I study whether the acquisition motive of equity issuance differs between firms going public in hot and cold markets.
  • Pettersson, John (Hanken School of Economics, 2015-07-02)
    The efficient market hypothesis stipulates that investors are unable to consistently gain risk adjusted returns with the information known to them at the time of the investment. The expected return, conditional on the information set known to investors, is determined from an assumed expected return theory (asset pricing model). However, it has previously been shown that past winners outperform past losers. A trading strategy taking a long position in previous winner stocks and a short in previous loser stocks earn positive statistically and economically significant risk-adjusted returns. These results are confirmed in international markets, but also in different asset classes. A number of alternative asset pricing models explaining momentum returns imply that momentum should be stronger among high uncertainty assets. Many of these alternative asset pricing models build on investor psychology. This premium, with higher momentum returns among high risk stocks has also been empirically documented. This dissertation evaluates some behavioral explanations to momentum returns by their implications. Behavioral explanations often imply that the momentum anomaly is stronger when uncertainty about information is high. Essay one confirms that there is an overreaction to information causing momentum to be high when uncertainty is high. However, when uncertainty is low momentum still exists, now caused by a slow incorporation of new information into asset prices. Contrary to what many behavioral models imply, the results in essay three suggest that uncertainty about information in the portfolio formation period does not cause a stronger momentum anomaly. Stock prices imply a larger under-reaction to positive and relatively reliable information, than to more uncertain information. Based on previous literature, the results in this study suggest that the driver of the return premium in high volatility assets is the general risk level of single stocks, and not uncertainty about portfolio formation period information. Using equity index futures data, essay two links time series momentum profits to volatility states. Time series momentum portfolio returns are driven by assets in a low volatility state. These results support the general finding that momentum is not caused by uncertainty about portfolio formation period information.
  • Nyberg, Peter (Svenska handelshögskolan, 2009-06-02)
    Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.
  • Djupsjöbacka, Daniel (Svenska handelshögskolan, 2006-02-13)
    In this thesis we deal with the concept of risk. The objective is to bring together and conclude on some normative information regarding quantitative portfolio management and risk assessment. The first essay concentrates on return dependency. We propose an algorithm for classifying markets into rising and falling. Given the algorithm, we derive a statistic: the Trend Switch Probability, for detection of long-term return dependency in the first moment. The empirical results suggest that the Trend Switch Probability is robust over various volatility specifications. The serial dependency in bear and bull markets behaves however differently. It is strongly positive in rising market whereas in bear markets it is closer to a random walk. Realized volatility, a technique for estimating volatility from high frequency data, is investigated in essays two and three. In the second essay we find, when measuring realized variance on a set of German stocks, that the second moment dependency structure is highly unstable and changes randomly. Results also suggest that volatility is non-stationary from time to time. In the third essay we examine the impact from market microstructure on the error between estimated realized volatility and the volatility of the underlying process. With simulation-based techniques we show that autocorrelation in returns leads to biased variance estimates and that lower sampling frequency and non-constant volatility increases the error variation between the estimated variance and the variance of the underlying process. From these essays we can conclude that volatility is not easily estimated, even from high frequency data. It is neither very well behaved in terms of stability nor dependency over time. Based on these observations, we would recommend the use of simple, transparent methods that are likely to be more robust over differing volatility regimes than models with a complex parameter universe. In analyzing long-term return dependency in the first moment we find that the Trend Switch Probability is a robust estimator. This is an interesting area for further research, with important implications for active asset allocation.
  • Ekholm, Anders (Svenska handelshögskolan, 2002-11-01)
    A functioning stock market is an essential component of a competitive economy, since it provides a mechanism for allocating the economy’s capital stock. In an ideal situation, the stock market will steer capital in a manner that maximizes the total utility of the economy. As prices of traded stocks depend on and vary with information available to investors, it is apparent that information plays a crucial role in a functioning stock market. However, even though information indisputably matters, several issues regarding how stock markets process and react to new information still remain unanswered. The purpose of this thesis is to explore the link between new information and stock market reactions. The first essay utilizes new methodological tools in order to investigate the average reaction of investors to new financial statement information. The second essay explores the behavior of different types of investors when new financial statement information is disclosed to the market. The third essay looks into the interrelation between investor size, behavior and overconfidence. The fourth essay approaches the puzzle of negative skewness in stock returns from an altogether different angle than previous studies. The first essay presents evidence of the second derivatives of some financial statement signals containing more information than the first derivatives. Further, empirical evidence also indicates that some of the investigated signals proxy risk while others contain information priced with a delay. The second essay documents different categories of investors demonstrating systematical differences in their behavior when new financial statement information arrives to the market. In addition, a theoretical model building on differences in investor overconfidence is put forward in order to explain the observed behavior. The third essay shows that investor size describes investor behavior very well. This finding is predicted by the model proposed in the second essay, and hence strengthens the model. The behavioral differences between investors of different size furthermore have significant economic implications. Finally, the fourth essay finds strong evidence of management news disclosure practices causing negative skewness in stock returns.
  • Rosenberg, Matts (Svenska handelshögskolan, 2004-05-07)
    Managerial pay-for-performance sensitivity has increased rapidly around the world. Early empirical research showed that pay-for-performance sensitivity resulting from stock ownership and stock options appeared to be quite low during the 1970s and early 1980s in the U.S. However, recent empirical research from the U.S. shows an enormous increase in pay-for-performance sensitivity. The global trend has also reached Finland, where stock options have become a major ingredient of executive compensation. The fact that stock options seem to be an appealing form of remuneration from a theoretical point of view combined with the observation that the use of this compensation form has increased significantly during the recent years, implies that research on the dynamics of stock option compensation is highly relevant for the academic community, as well as for practitioners and regulators. The research questions of the thesis are analyzed in four separate essays. The first essay examines whether stock option compensation practices of Finnish firms are consistent with predictions from principal-agent theory. The second essay explores one of the major puzzles in the compensation literature by studying determinants of stock option contract design. In theory, optimal contract design should vary according to firm characteristics. However, in the U.S., variation in contract design seems to be surprisingly low, a phenomenon generally attributed to tax and accounting considerations. In Finland, however, firms are not subject to stringent contracting restrictions, and the variation in contract design tends, in fact, to be quite substantial. The third essay studies the impact of price- and risk incentives arising from stock option compensation on firm investment. In addition, the essay explores one of the most debated questions in the literature, in particular, the relation between incentives and firm performance. Finally, several strands of literature in both economics and corporate finance hypothesize that economic uncertainty is related to corporate decision-making. Previous research has shown that risk tends to slow down firm investment. In the fourth essay, it is hypothesized that firm risk slows down growth from a more universal perspective. Consistent with this view, it is shown that risk not only tends to slow down firm investment, but also employment growth. Moreover, the essay explores whether the nature of firms’ compensation policies, in particular, whether firms make use of stock option compensation, affects the relation between risk and firm growth. In summary, the four essays contribute to the current understanding of stock options as a form of equity incentives, and how incentives and risk affect corporate decision-making. By this, the thesis promotes the knowledge related to the modern theory of the firm.
  • Pasternack, Daniel (Svenska handelshögskolan, 2002-08-11)
    Executive compensation and managerial behavior have received an increasing amount of attention in the financial economics literature since the mid 1970s. The purpose of this thesis is to extend our understanding of managerial compensation, especially how stock option compensation is linked to the actions undertaken by the management. Furthermore, managerial compensation is continuously and heatedly debated in the media and an emerging consensus from this discussion seems to be that there still exists gaps in our knowledge of optimal contracting. In Finland, the first executive stock options were introduced in the 1980s and throughout the last 15 years it has become increasingly popular for Finnish listed firms to use this type of managerial compensation. The empirical work in the thesis is conducted using data from Finland, in contrast to most previous studies that predominantly use U.S. data. Using Finnish data provides insight of how market conditions affect compensation and managerial action and provides an opportunity to explore what parts of the U.S. evidence can be generalized to other markets. The thesis consists of four essays. The first essay investigates the exercise policy of the executive stock option holders in Finland. In summary, Essay 1 contributes to our understanding of the exercise policies by examining both the determinants of the exercise decision and the markets reaction to the actual exercises. The second essay analyzes the factors driving stock option grants using data for Finnish publicly listed firms. Several agency theory based variables are found to have have explanatory power on the likelihood of a stock option grant. Essay 2 also contributes to our understanding of behavioral factors, such as prior stock return, as determinants of stock option compensation. The third essay investigates the tax and stock option motives for share repurchases and dividend distributions. We document strong support for the tax motive for share repurchases. Furthermore, we also analyze the dividend distribution decision in companies with stock options and find a significant difference between companies with and without dividend protected options. We thus document that the cutting of dividends found in previous U.S. studies can be avoided by dividend protection. In the fourth essay we approach the puzzle of negative skewness in stock returns from an altogether different angle than in previous studies. We suggest that negative skewness in stock returns is generated by management disclosure practices and find proof for this. More specifically, we find that negative skewness in daily returns is induced by returns for days when non-scheduled firm specific news is disclosed.
  • Maury, Benjamin (Svenska handelshögskolan, 2004-05-14)
    “Corporate governance deals with the ways in which suppliers of finance to firms assure themselves of getting a return on their investment” (Shleifer and Vishny (1997, p. 737). According to La Porta et al. (1999), research in corporate finance relevant for most countries should focus on the incentives and capabilities of controlling shareholders to treat themselves preferentially at the expense of minority shareholders. Accordingly, this thesis sets out to answer a number of research questions regarding the role of large shareholders in public firms that have received little attention in the literature so far. A common theme in the essays stems from the costs and benefits of individual large-block owners and the role of control contestability from the perspective of outside minority shareholders. The first essay empirically examines whether there are systematic performance differences between family controlled and nonfamily controlled firms in Western Europe. In contrast to the widely held view that family control penalizes firm value, the essay shows that publicly traded family firms have higher performance than comparable firms. In the second essay, we present both theoretical and empirical analysis on the effects of control contestability on firm valuation. Consistent with the theoretical model, the empirical results show that minority shareholders benefit from a more contestable control structure. The third essay explores the effects of individual large-block owners on top management turnover and board appointments in Finnish listed firms. The results indicate that firm performance is an important determinant for management and board restructurings. For certain types of turnover decisions the corporate governance structure influences the performance / turnover sensitivity. In the fourth essay, we investigate the relation between the governance structure and dividend policy in Finnish listed firms. We find evidence in support of the outcome agency model of dividends stating that lower agency conflicts should be associated with higher dividend payouts.
  • Al-Khail, Mohammed Aba (Svenska handelshögskolan, 2003-08-29)
    Investors significantly overweight domestic assets in their portfolios. This behavior which is commonly called “home bias” contradicts the prescriptions of portfolio theory. This thesis explores potential reasons for the “home bias” by examining the characteristics of the investing and the target countries and features of the interaction between them. A common theme of the four essays is a focus on the importance of information about foreign markets in explaining the share of these markets in investors’ portfolios. The results indicate that the size of the equity ownership in another country strongly relates to the distance to the financial capital of that country, and to trade in goods with and direct investments (FDI) to that country. The first essay empirically investigates the relationship between trade in real goods and portfolio investments. Overall, the evidence indicates a substantial role for trade in reducing the information cost relating to portfolio investments. The second essay examines the implications of the launch of the European Monetary Union (EMU) on international portfolio investments. The evidence on the allocation of Finnish international portfolio investments is more consistent with an information-based than a diversification motive explanation. The third essay employs new data for a large number of countries and further explores the role of trade on international portfolio investments. The results indicate that trade provides important information especially on firms in countries in which the corporate governance structure and the information environment of firms generate less reliable information. The fourth essay examines the relationship between direct investments (FDI) and portfolio investments. In contrast to the predications of portfolio theory, it provides evidence that FDI is a complement rather than a substitute for portfolio investments.
  • Antell, Jan (Svenska handelshögskolan, 2004-07-27)
    During the last few decades there have been far going financial market deregulation, technical development, advances in information technology, and standardization of legislation between countries. As a result, one can expect that financial markets have grown more interlinked. The proper understanding of the cross-market linkages has implications for investment and risk management, diversification, asset pricing, and regulation. The purpose of this research is to assess the degree of price, return, and volatility linkages between both geographic markets and asset categories within one country, Finland. Another purpose is to analyze risk asymmetries, i.e., the tendency of equity risk to be higher after negative events than after positive events of equal magnitude. The analysis is conducted both with respect to total risk (volatility), and systematic risk (beta). The thesis consists of an introductory part and four essays. The first essay studies to which extent international stock prices comove. The degree of comovements is low, indicating benefits from international diversification. The second essay examines the degree to which the Finnish market is linked to the “world market”. The total risk is divided into two parts, one relating to world factors, and one relating to domestic factors. The impact of world factors has increased over time. After 1993, when foreign investors were allowed to freely invest in Finnish assets, the risk level has been higher than previously. This was also the case during the economic recession in the beginning of the 1990’s. The third essay focuses on the stock, bond, and money markets in Finland. According to a trading model, the degree of volatility linkages should be strong. However, the results contradict this. The linkages are surprisingly weak, even negative. The stock market is the most independent, while the money market is affected by events on the two other markets. The fourth essay concentrates on volatility and beta asymmetries. Contrary to many international studies there are only few cases of risk asymmetries. When they occur, they tend to be driven by the market-wide component rather than the portfolio specific element.