Long memory options: LM evidence and simulations

This paper demonstrates the impact of the observed financial market persistence or long term memory on European option valuation by simple simulation. Many empirical researchers have observed the non-Fickian degrees of persistence in the financial markets different from the Fickian neutral independence (i.i.d.) of the returns innovations assumption of Black–Scholes’ geometric Brownian motion assumption. Moreover, Elliott and van der Hoek [Elliott, R.J., van der Hoek, J., 2003. A general fractional white noise theory and applications to finance. Math. Finance 13, 301–330] provide a theoretical framework for incorporating these findings into the Black–Scholes risk-neutral valuation framework. This paper provides the first graphical demonstration why and how such long term memory phenomena change European option values and provides thereby a basis for informed long term memory arbitrage. By using a simple mono-fractal fractional Brownian motion, it is easy to incorporate the various degrees of persistence into the Black–Scholes pricing formula. Long memory options are of considerable importance in corporate remuneration packages, since stock options are written on a company’s own shares for long expiration periods. It makes a significant difference in the valuation when an option is “blue” or when it is “red.” For a proper valuation of such stock options, the degrees of persistence of the companies’ share markets must be precisely measured and properly incorporated in the warrant valuation, otherwise substantial pricing errors may result.     

Does corporate international diversification destroy value? Evidence from cross-border mergers and acquisitions

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990–2000. We find that, on average, acquisitions of “fairly valued” foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions result in a significant diversification discount of about 24% after accounting for the valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target.     

Managerial Ownership, the Method of Payment for Acquisitions, and Executive Job Retention

This study investigates how acquiring and target firm managers' preferences for control rights motivate the payment for corporate acquisitions. We expect that managers of target firms who value influence in combined firms will prefer to receive stock. One reason top managers desire influence is to enhance their chances of retaining jobs in the combined firm. Our analysis shows a strong, positive association between managerial ownership of target firms and the likelihood of acquisitions for stock. We also find that managers of target firms are more likely to retain jobs in combined firms when they receive stock rather than cash.     

On the Myth of “Anglo-Saxon” Financial Accounting

The term “Anglo-Saxon accounting” (ASA) is used by a number of academic writers on the subject of International Accounting to refer to an approach to financial accounting and reporting that is supposedly common to the UK and Ireland, the USA and other English-speaking countries including Canada, Australia, and New Zealand. While most of the writers we cite as using this term are continental Europeans, they also include an Englishman, J. Flower. The term is typically used to imply not just similar conceptual and technical approaches, but also a hegemonic alliance in the international politics of accounting regulation.This article seeks to establish that ASA in this sense is a myth. We do this first by critically examining four putative commonalities that are frequently attributed to the UK and USA approaches to financial accounting and that form the basis of the myth, and second by indicating the unfeasibility of such a hegemonic alliance within the IASC. A myth may have some factual foundations, but belief in it rests also on bases that are non-factual. So it is with ASA. In particular, analysis of the terms “true and fair view” (TFV) and “fair presentation (FP) in accordance with generally accepted accounting principles (GAAP)” shows that, far from their possessing a semantic equivalence that constitutes a commonality between UK and US financial reporting, their interpretation indicates a profound difference between the UK and US approaches. What UK and US financial reporting have historically shared is a micro- and capital market orientation that lends itself to international accounting regulation in a context of global capital markets. But with such an orientation now being generally accepted internationally, the differences between UK and US financial reporting are taking on an increased significance that this article seeks to highlight.     

A bright side of financial constraints in cash management

This paper tests whether financial constraints play a disciplinary role in cash dissipation in the presence of agency problems. We hypothesize that when firms have difficulty raising external funds, empire-building managers of cash-rich firms will be less likely to spend cash on negative NPV projects as compared to unconstrained managers. Empirically, we examine firm performance after cash dissipation and associate it with the degree of financial constraints. We find that cash spending by managers in financially constrained firms is associated with higher future profitability and stock returns compared to cash spending by managers in unconstrained firms. Further tests reveal that the positive effect of financial constraints on firm performance is not driven by differences in corporate governance. Financial constraints actually substitute for good governance in disciplining managers. We find that corporate governance improves the efficiency of cash dissipation in unconstrained firms, but not in constrained firms. Likewise, financial constraints' disciplinary effect is found to be concentrated in firms that are poorly governed.     

Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions

We test the proposition that corporate control considerations motivate the means of investment financing—cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership.     

我国地方国库现金管理运作方式及对货币调控的影响研究

摘要：本文以A市2007—2011年国库现金的月度数据为例，利用Miller-Orr模型对地方国库现金最佳持有量、操作方式和收益进行了深入分析。结果表明，如果国库资金较为充裕，则具备由金融机构进行现金管理的基础条件和操作可能。在保证最佳库存现金的前提下对闲置资金进行运作，能够提高资金的使用效率。但这给中央银行货币调控带来一定影响，必须采取建立中央银行与财政部门的分工协调机制及提高国库现金流预测能力等措施。     

FREE CASH FLOW AND PUBLIC GOVERNANCE: THE CASE OF ALASKA

In a widely cited 1986 article in the American Economic Review, Michael Jensen gave the concept of free cash flow (FCF) a new twist by redefining it as cash flow in excess of that required to fund all projects with positive net present values. Put another way, FCF represents funds available in the firm that managers may choose to hold as idle cash, return to shareholders, or invest in projects with returns below the firm's cost of capital. In redefining FCF in this way, Jensen converted FCF from a measure of economic income and value into a measure of corporate assets available for discretionary, and potentially value‐destroying, use by firm managers. And, as he argued in his important article, managers in mature businesses with substantial free cash flow have a tendency to destroy value by plowing too much capital back into those businesses or, often worse, making ill‐advised acquisitions in unrelated businesses. Several methods have been developed in financial markets and internal corporate governance systems to discourage managers from wasting FCF. Better monitoring by boards of directors, large ownership blocks, and properly aligned management compensation contracts are all parts of the solution. And the extraordinary increase in stock repurchases in recent years, invariably applauded by investors, is another illustration of the market's success in encouraging companies to address their free cash flow problems. But if the “FCF problem” of the private sector has attracted considerable attention from finance scholars, the problem is even more acute in the public sector, where FCF can be thought of as tax revenue in excess of what is required to finance well‐defined and generally accepted levels of public services. Unlike the private sector, in the public sector there are neither measures nor mechanisms by which to monitor and constrain wasteful spending by elected officials. In this article, the authors attempt to measure the costs to taxpayers of government FCF using the case of Alaska, which since 1969 has received a huge windfall of tax revenue from North Slope oil leases. After examining the state's public finances from 1968 through 1993, the authors offer $25 billion as a conservative estimate of the social losses from Alaska's waste of free cash flow during that 25‐year period.     

Corporate governance and firm cash holdings in the US

Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the US, weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.     

Financial Structure,Acquisition Opportunities,and Firm Locations

This paper investigates the relation between firms' locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high‐tech cities and growing cities maintain more financial slack. Overall, the evidence suggests that growth opportunities influence firms' financial decisions.     

The impact of foreign board membership on firm value

This study examines the effect of foreign (Anglo-American) board membership on corporate performance measured in terms of firm value (Tobin’s Q). Using a sample of firms with headquarters in Norway or Sweden the study indicates a significantly higher value for firms that have outsider Anglo-American board member(s), after a variety of firm-specific and corporate governance related factors have been controlled for. We argue that this superior performance reflects the fact that these companies have successfully broken away from a partly segmented domestic capital market by “importing” an Anglo-American corporate governance system. Such an “import” signals a willingness on the part of the firm to expose itself to improved corporate governance and enhances its reputation in the financial market.     

Effect of derivative accounting rules on corporate risk-management behavior

I examine the effect of the accounting standard for derivative instruments (SFAS No. 133) on corporate risk-management behavior. I classify a derivative user as an “effective hedger” (EH firm) if its risk exposures decreased after the initiation of the derivatives program, and as an “ineffective hedger/speculator” (IS firm) otherwise. I find that volatility of cash flows and risk exposures related to interest rate, foreign exchange rate, and commodity price decrease significantly for IS firms but not for EH firms, suggesting that IS firms engaged in more prudent risk-management activities after the adoption of SFAS No. 133.     

The effect of target managerial ownership on the choice of acquisition financing and CEO job retention

In this paper we report on our investigation into whether the level of target managerial ownership has an effect on acquisition financing choice and target CEO job retention. We find that cash is more likely used to finance acquisitions when target management ownership levels are high. This result is consistent with a reduced monitoring hypothesis, where bidding firm managers seek to avoid the formation of a large block holder that may become an active monitor. We also find evidence specific only to stock deals that the probability of target CEO job retention increases with the level of target managerial ownership. In these cases, it appears the potential benefits associated with retaining certain target managers outweighs any negative consequence associated with creating a new monitoring block.     

Modelling multiple term structures of defaultable bonds with common and idiosyncratic state variables

In this paper we develop a multi-factor “reduced-form” model that is general enough to capture simultaneously the dynamics of multiple term structures of corporate bonds, each with a different credit rating. In this way, we are able to fully incorporate a number of “stylised facts”, reported on a number of previous empirical studies. More specifically, we are able to estimate the different degrees of covariation between the term structure of each credit rating and the default-free yield curve. Furthermore, we report the differing sensitivities of the credit curves to a number of observable macro-factors that reflect changes in credit conditions, both domestic and international. Finally, the dependence of each credit curve on a number of idiosyncratic state-variables is also documented. Our results are based on two special cases of the model, estimated using US and UK corporate bond data.     

An “American Dream” theory of corporate executive Fraud

In this paper, we first describe a “Broken Trust” theory that was introduced by Albrecht el al. [Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2004). Fraud and corporate executives: Agency, Stewardship and Broken Trust. Journal of Forensic Accounting, 5, 109–130] to explain corporate executive Fraud. The Broken Trust theory is primarily based on an “Agency” theory from economic literature and a “Stewardship” theory from psychology literature. We next describe an “American Dream” theory from sociology literature to complement Albrecht el al.'s (2004) Broken Trust theory. Like the Broken Trust theory, the American Dream theory relates to a “Fraud Triangle” concept to explain corporate executive Fraud. Finally, we provide some anecdotal evidence from recent high profile corporate executive Fraud to explore the American Dream theory. We conclude our thoughts on corporate executive Fraud from a teaching perspective.     

The Method of Payment in Corporate Acquisitions,Investment Opportunities,and Management Ownership

This article examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership, but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher pre-acquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers.     

The effect of cognitive style and sponsorship bias on the treatment of opportunity costs in resource allocation decisions

The incorporation of opportunity cost is stressed in normative approaches to resource allocation decisions. Empirical evidence has revealed a variety of behaviours. A consequence of inappropriate treatment of opportunity costs is an incorrect assessment of the economic consequences of resource allocation decisions. Improved understanding of why some managers treat opportunity costs inappropriately permits identifying situations where the incorrect economic evaluations will lead to sub-optimal resource allocation and therefore provides a basis for remedial action. This study identifies two conditional factors which potentially influence the way managers respond to opportunity cost information.These factors are managers' cognitive style and whether or not managers sponsor a project (project sponsorship), and it is argued that they influence managers' decisions on opportunity costs in situations in which opportunity cost implications are implicit. In particular, the paper proposes, first, that in the absence of project sponsorship, managers with an “intuitive” style of “taking in data” will tend to incorporate opportunity costs in their economic decisions whereas those wiht a “sensation” style will not. Second, it is suggested that because sponsorship encourages managers to ignore negative economic signals (sponsorship bias) any effects of cognitive style will be moderated in conditions where sponsorship is evident.A laboratory experiment with managers as subjects was used to examine these propositions. The results indicated that intuitive managers tended to incorporate opportunity costs in their decisions whereas sensation individuals appeared to focus more on the directness of the relationship between expenditure and a project to determine the relevance of the cost. Opportunity cost implications tended not to be identified by the sensation group. Evidence was found that sponsorship moderated the influence of cognitive style on decisions to include opportunity costs.     

Auditors’ decision-making under going-concern uncertainties in low litigation-risk environments: Evidence from Hong Kong

This study examines the audit opinions issued by auditors in a low litigation-risk environment at a time of high economic uncertainty – that of Hong Kong in the period immediately after the Asian financial crisis of 1997. Empirical research using United States data has shown that, contrary to professional guidance which restricts the issue of “disclaimer of opinion” only to situations where existing uncertainties prevent the auditor from forming an opinion, auditors tend to use the “disclaimer” report (in the going concern context) to signal more extreme client firm’s distress. In the high litigation-risk environment of the US, researchers have attributed this tendency to the idea that “disclaimer of opinion” reports are used by auditors to provide some protection against potential legal liability. The results of this study provide evidence that, even in the low litigation-risk environment of Hong Kong, auditors still use “disclaimer” reports to signal more extreme client firm financial distress. Thus, the maintenance of a high litigation-risk environment does not appear to be a necessary pre-requisite for high quality audits.     

Insider ownership and corporate performance: Evidence from the adjustment cost approach

This paper examines the relation between insider ownership and corporate performance in the presence of adjustment costs and investigates how the adjustment costs are determined. In a model specification without adjustment costs, we find that insider ownership is significantly positively associated with corporate performance. But once we allow for adjustment costs, the relationship no longer exists. We find that insider ownership and corporate performance can be explained by their respective lagged values and that many firm characteristics that were previously useful in explaining these two variables turn out to be statistically insignificant. In addition, there is no evidence that insider ownership and corporate performance affect each other. This is consistent with the adjustment cost argument. It is also consistent with the “endogeneity” argument suggested by Demsetz [Demsetz, H. 1983. The structure of ownership and the theory of the firm. Journal of Law and Economics 26, 375–390.], Demsetz and Lehn [Demsetz, H., Lehn, K., 1985. The structure of corporate ownership: causes and consequences. Journal of Political Economy 93, 1155–1177.], and Demsetz and Villalonga [Demsetz, H., Villalonga, B., 2001. The ownership structure and corporate performance. Journal of Corporate Finance 7, 209–233.]. Finally, we document that the speed of adjustment of insider ownership is positively related to insiders' market timing but negatively to the number of insiders and that the speed of adjustment of Tobin's Q is positively associated with financial leverage and stock price volatility.     

A Corporate View of Research Needs in Corporate Finance

This paper reports the results of a survey of UK chief financial officers (CFOs) drawn from 72 large, 34 medium and 37 small companies on potentially important research topics in corporate finance. The paper suggests that there are gaps between extant academic research and the CFOs ‘needs for such research. The topics that the 143 CFOs would like to see on the research agenda include: the influence of tax laws on financial decision-making; investor reactions to companies concentrating on short-term gains to the almost total neglect of long-term benefits; effects of changes to the law on pension funds; cash flow planning and forecasting; regulators’ awareness of financial issues; and methods for determining the riskiness of a project. Of least importance to the CFOs are research on the significance of bankruptcy costs, influence of the City on corporate financial operations and impact of seasons on operational decisions. The degree of importance attributed to research topics seems to vary with firm size. In general, the findings of this study are similar to those from a survey of financial managers in the US.