Investor pricing of CEO equity incentives

The main purpose of this paper is to explore CEO compensation in the form of stock and options. The objective of CEO compensation is to better align CEO-shareholder interests by inducing CEOs to make more optimal (albeit risky) investment decisions. However, recent research suggests that these incentives have a significant down-side (i.e., they motivate executives to manipulate reported earnings and lower information quality). Given the conflict between the positive CEO-shareholder incentive alignment effect and the dysfunctional information quality effect, it is an open empirical question whether CEO equity incentives increase firm value. We examine whether CEO equity incentives are priced in the firm-specific ex ante equity risk premium over the 1992–2007 time period. Our analysis controls for two potential structural changes over this time period. The first is the 1995 Delaware Supreme Court ruling which increased protection from takeovers (and decreased risk) for Delaware incorporated firms. The second is the 2002 Sarbanes–Oxley Act which impacted corporate risk taking, equity incentives, and earnings management. Collectively, our findings suggest that CEO equity incentives, despite being associated with lower information quality, increase firm value through a cost of equity capital channel.     

Institutional investors' holdings surrounding equity rights offerings

We examine shareholding surrounding Swedish rights offerings using detailed information on the ownership in firms. We analyze shareholding levels and their changes for domestic and foreign institutional investors. As institutional holdings change, domestic institutions increase their holdings more than foreign institutions. Our examination of low and high buying activities by institutional investors surrounding rights offerings shows no stock picking ability, thus not supporting the “smart-money hypothesis” (Gibson et al., 2004). We also find that investor domicile influences firm value following the offering. Overall, foreign investors exhibit a strong and opposite directional reaction to adverse selection costs than domestic investors.     

The currency risk factor in international equity pricing

Currency risk in the pricing of international equity returns is analyzed from an empirical viewpoint. The significance of the domestic market index, and the world index is also analyzed. The methodology is based on the Asymptotic Principal Components when an approximate factor structure is assumed. Monthly stock price returns for five countries are used. Thirty stocks are chosen from each country. Fifteen years of data is used. The U.S. Dollar is the numeraire. Exchange risk is generally not priced. The Domestic market index is always priced. The pricing of the World Index is mixed, i.e., it is priced in certain case and not in others.     

Corporate control rights and the long-run equity risk premium

We address the role of incomplete contracting in the equity market in a long-run growth model. Equity delivers control rights, but holding equity might lead to disutility, since the right to vote is costly to carry. We analyze voting power and its burden in a equilibrium growth model. One of our main contributions is that we test our ex ante equity premium model using data for 44 countries over the years 1989–2005. Higher capital productivity, inflation and valuation of leisure increase the ex ante equity premium, as does lower population growth.     

Foreign exchange risk pricing and equity market segmentation in Africa

This work is the first to investigate simultaneously the occurrence of unconditional currency risk pricing and equity market segmentation in Africa’s major stock markets. The multi-factor asset pricing theory provides the theoretical framework for our model. We find strong evidence suggesting that Africa’s equity markets are partially segmented. However, we find insufficient evidence to reject the hypothesis that foreign exchange risk is not unconditionally priced in Africa’s stock markets. This result is robust to alternative foreign exchange rate-adjusted return measures. These findings suggest that international investors can diversify into Africa’s equity markets without worrying about unconditional risks associated with foreign exchange rate fluctuations.     

Long-run performance of Spanish seasoned equity issues with rights

This paper analyzes the long-run effect on shareholders' wealth and firms' operating performance of the right offering decision in Spain. The evidence shows that the stock price of firms' issuing rights substantially underperform the different benchmarks employed. It has also been observed that these companies experience a decrease in accounting profitability for some pre- to postissue periods. An excessive optimism about the long-term prospects of equity issuers could explain these results.     

Political connections and the cost of equity capital

Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms' equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.     

The pricing of volatility risk in the US equity market

We analyze whether the pricing of volatility risk depends on the asset pricing framework applied in the tests, the specified volatility proxies, and the portfolio sorts used for spanning the asset universe. For this purpose, we compare the results using a macroeconomic and fundamental based asset pricing model using three proxies of volatility and uncertainty, using size/value sorted and industry sector portfolios. Our results reveal that the marginal pricing effect of the VIX volatility factor is strong and statistically significant throughout the models and specifications, while the effect of an EGARCH-based volatility factor is mixed, mostly smaller but with the correct sign. In most cases, the EGARCH factor does not impair the pricing effect of the VIX. The portfolio sorts have a substantial impact on the volatility premiums in both model frameworks. The size of the volatility risk premium is more uniform across the models if the industry sector portfolio sort is used. Finally, the size/value portfolio sort generates larger volatility risk premiums for both models.     

Shareholder rights, financial disclosure and the cost of equity capital

This study extends research into whether shareholder rights and disclosures of financial-related attributes are associated with firms' costs of equity capital. Using cost-of-equity-capital estimates derived from expected earnings growth valuation models, we find that firms with stronger shareholder rights regimes and higher levels of financial transparency are associated with significantly lower costs of equity capital. We also find evidence that greater financial disclosure and stronger rights regimes interact in reducing firms' costs of equity capital, such that the effect of a high level of one mechanism is minimal when it is combined with a low level of the other. Finally, we document that neither factor dominates the other in their associations, and that there are tradeoffs between disclosure levels and shareholder rights in their influence on firms' implied costs of equity capital. JEL Classification G30 · M10     

Political rights and the cost of debt

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.     

Heterogeneous time varying transaction costs and asset pricing in international equity markets

In this paper, we examine the time variation in transaction costs relative to excess returns, in a panel consisting of 10 international equity indices over the time period 1984–2005. This is undertaken by extending the consumption CAPM (CCAPM) model proposed by Campbell and Shiller (Rev. Financ. Stud. 1:195–228, 1988) to incorporate time varying proportional transaction costs. We rigorously address both the cross-country heterogeneity in the estimated model and endogeneity. We find strong evidence that suggests transaction costs should be included as an additional explanatory variable in the CCAPM. This leads to the conclusion that transaction costs should be included in asset pricing models as their stochastic process impacts directly on private consumption expenditure.

The effect of information releases on the pricing and timing of equity issues

With time-varying adverse selection in the market for new equityissues, firms will prefer to issue equity when the market ismost informed about the quality of the firm. This implies thatequity issues tend to follow credible information releases.In addition, if the asymmetric in information increases overtime between information releases, the price drop at the announcementof an equity issue should increase in the time since the lastinformation release. Using earning releases as a proxy for informativeevents, we find evidence supporting these propositions.     

Examining the forward pricing function of the Australian equity index futures contract

The relationship between the Australian equity index futures and spot prices is examined. Tests indicate that futures prices with one, two and three months to maturity are unbiased predictors of the spot and hence provide an efficient hedging mechanism for Australian equity index market participants, while six‐, nine‐ and twelve‐month futures prices are biased predictors of spot prices, indicating that speculative opportunities may exist in futures contracts for these time spreads. An analysis of the short‐run dynamic properties of the long‐run equilibrium relationship found that for all time spreads the futures prices respond to changes in the long‐run equilibrium, and for the twelve‐month contract, both futures and spot prices adjust to return to the long‐run equilibrium.     

The choice between rights and underwritten equity offerings: Evidence from Chinese stock markets

We study the choice and valuation effects of alternative flotation methods using a sample of Chinese firms that must meet the return on equity (ROE) thresholds set by the government to raise equity capital. The ROE requirement, although changed over time, seems to play an important role on the valuation and performance of seasoned equity offerings. The analysis of 219 rights and 75 underwritten offerings between 2000 and 2004 shows that Chinese firms that are not qualified for the flotation method with a higher ROE requirement suffer the most at announcement and experience significantly lower buy-and-hold abnormal returns than those that are qualified. Our results suggest that the freedom to choose their preferred flotation method may be valuable to firms that meet the higher ROE requirement. Finally, our probit models identify several determinants of the choice of flotation methods.     

Price informativeness and stock return synchronicity: Evidence from the pricing of seasoned equity offerings

We investigate what stock return synchronicity reflects in terms of price informativeness by examining its effect on the pricing of seasoned equity offerings (SEOs). Based on 5,087 SEOs from 1984 to 2007, we find a significantly negative relation between stock return synchronicity (estimated as the logit transformation of the R-squared statistic from a two-factor regression) and SEO discounts (the percentage differences between pre-offer day closing prices and offer prices). The negative relation is strongest when there is no analyst coverage, and it declines as analyst coverage increases. This shows that stock price is more informative when stock return synchronicity is higher and also that information asymmetry can be mitigated by analyst coverage. We further decompose stock return synchronicity into the market comovement and industry comovement components and find that both components are equally important in affecting SEO discounts.     

朱戈:创新环境权益定价,为低碳发展融资

"绿色发展"作为中共十八届五中全会提出的"五大发展理念"之一,已经成为中国经济转型的内在要求.为了落实绿色发展理念,北京市"十三五"规划纲要提出了"建设绿色低碳生态家园"、"加快建设全国科技创新中心"和"加快推进产业转型升级"等发展目标.在这样的政策背景下,北京产权交易所(简称:北交所)一直高度重视通过市场手段及金融工具推动节能环保和产业转型,服务于中国绿色发展大局.近年来,北交所的中央单位及市属单位产权交易服务业务中,节能环保及绿色发展项目已经成为业务开拓的重点之一,占比也不断提升.     

Foreign competition for shares and the pricing of information asymmetry: Evidence from equity market liberalization

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.     

The pricing of common exchange rate factors in the U.S. equity market

We extend Lustig et al. (Rev Financ Stud 24:3731–3777, 2011) and Brusa et al. (The International CAPM Redux, 2014) by examining if the common exchange rate factors, the dollar and carry factors, are priced in the US equity market. Our results suggest that while the carry factor has incremental pricing information relative to the US market factor, the dollar factor (or the trade-weighted exchange rate index) is redundant. Our results have important theoretical as well as practical implications. Theoretically, we suggest that financial economists take an endogenous perspective of exchange rates. Practically, we suggest that practitioners incorporate in the carry factor to measure the exposure of exchange rate risk.