Board independence and market reactions around news of stock option backdating

This study focuses on whether board independence explains stock price reactions to backdating and factors that explain backdating decision. Consistent with previous studies, we find negative stock returns around backdating news. Although our findings show that board independence variables fail to explain the incidence of backdating, our regression results show that stockholders consider these variables to be important. Abnormal stock returns around news of backdating are higher when firms have higher proportion of outside directors and when outside directors have lower stock ownership in the firm.     

Non-transferable non-hedgeable executive stock option pricing

To value non-transferable non-hedgeable (NTNH) contingent claims and price executive stock options (ESOs), we use a replication argument to translate portfolios with NTNH derivatives into portfolios of primary assets (only) with stochastic portfolio constraints. By identifying stochastic discount factors and finding subjective prices of NTNH European and American ESOs, for block and continuous partial exercise, we derive executives׳ optimal exercise policies, and use these to find objective prices/costs of ESOs to firms. Through numerical simulations, we obtain policy implications regarding ESOs׳ incentivizing efficiency. For the first time, we demonstrate that, unlike under block exercise, subjective prices under continuous partial exercise may be higher than objective ones. Moreover, volatility regimes and executives׳ “other wealth” are important in ESO pricing, and are thus essential to empirical executive compensation studies.     

Pricing executive stock options under employment shocks

We obtain explicit expressions for the subjective, objective and market value of perpetual executive stock options (ESOs) under exogenous employment shocks driven by an independent Poisson process. Previously, we obtain the executive's optimal exercise policy from the subjective valuation that is necessary for the objective one, or fair value. The perpetual ESO is compared with the true finite maturity ESO finding that the approximation is reasonably good. To illustrate the usefulness of the objective valuation for accounting purposes, we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity. Finally, the role of ESOs in the design of executives’ incentives is also discussed.     

Jump dynamics,spillover effect and option valuation

In this paper, we propose an affine discrete-time model that incorporates the jump process and spillover effect for valuing the 50 ETF options in China. Based on the proposed model, a closed-form solution is also derived for the new dynamics of underlying asset, which facilitates option pricing. The empirical results show that the proposed model offers greater economic benefit with reduced pricing errors than the traditional benchmark models, including the popular HNGARCH model of Heston and Nandi (2000), GARV model of Christoffersen et al. (2014), and BPJVM model of Christoffersen et al. (2015). Our finding is important for financial risk management and investment in Chinese derivatives market.     

Interpolation and backdating with a large information set

Existing methods for data interpolation or backdating are either univariate or based on a very limited number of series, due to data and computing constraints that were binding until the recent past. Nowadays large datasets are readily available, and models with hundreds of parameters are easily estimated. We model these large datasets with a factor model, and develop an interpolation method that exploits the estimated factors as an efficient summary of all available information. The method is compared with existing standard approaches from a theoretical point of view, by means of Monte Carlo simulations, and also when applied to actual macroeconomic series. The results indicate that our method is rather robust to model misspecification, although traditional multivariate methods also work well while univariate approaches are systematically outperformed. When interpolated series are subsequently used in econometric analyses, biases can emerge, but they are smaller with multivariate approaches, including factor-based ones.     

On the evaluation of poly-t density functions

Poly-t densities are defined by the property that their kernel is a product, or a ratio of products, of multivariate t-density kernels. As discussed in Drèze (1977), these densities arise as Bayesian posterior densities for regression coefficients under a variety of specifications for the prior density and the data generating process. We have therefore developed methods and computer algorithms to evaluate integrating constants and other characteristics of poly-t densities with no more than a single quadratic form in the numerator (section 2). As a by-product of our analysis we have also derived an algorithm for the computation of moments of positive definite quadratic forms in Normal variables (section 3). In section 4 we discuss inference on the sampling variances associated with the models discussed in Drèze (1977).     

Parametric Value-at-Risk analysis: Evidence from stock indices

We evaluate the performance of several volatility models in estimating one-day-ahead Value-at-Risk (VaR) of seven stock market indices using a number of distributional assumptions. Because all returns series exhibit volatility clustering and long range memory, we examine GARCH-type models including fractionary integrated models under normal, Student-t and skewed Student-t distributions. Consistent with the idea that the accuracy of VaR estimates is sensitive to the adequacy of the volatility model used, we find that AR (1)-FIAPARCH (1,d,1) model, under a skewed Student-t distribution, outperforms all the models that we have considered including widely used ones such as GARCH (1,1) or HYGARCH (1,d,1). The superior performance of the skewed Student-t FIAPARCH model holds for all stock market indices, and for both long and short trading positions. Our findings can be explained by the fact that the skewed Student-t FIAPARCH model can jointly accounts for the salient features of financial time series: fat tails, asymmetry, volatility clustering and long memory. In the same vein, because it fails to account for most of these stylized facts, the RiskMetrics model provides the least accurate VaR estimation. Our results corroborate the calls for the use of more realistic assumptions in financial modeling.     

Agency Problems in Diverse Contexts: A Global Perspective

abstract    Bruce, Buck and Main (2005 ) offer two criticisms of agency theory as a valid model of executive behaviour. First, they suggest that because researchers have failed to find a strong empirical link between executive pay and firm performance, and since this research generally rests on models derived from agency theory, then we must question the theory. Second, they suggest that agency theory is under-socialized and therefore lacks generalizability to settings where social solutions would seem to eliminate the agency problem. In our response we make three points. First, agency theory rests on an assumption of self-interest that does not necessarily reflect opportunism. Second, agency theory does not make any reference to pay-performance sensitivity, and the failure of this research can be attributable to a variety of problems with the research. Third, we agree that agency theory does not explicitly recognize contextual factors, but suggest that this abstraction from context, gives agency theory greater generalizability. Finally, we review the UK and German contexts discussed by Bruce, Buck and Main to show that socialized solutions do not prevent the occurrence of agency problems.     

Executive Compensation,Corporate Governance and Corporate Performance: A Simultaneous Equation Approach

This paper investigates the association between executive compensation and performance. It uniquely utilises a comprehensive set of corporate governance mechanisms within a three‐stage least squares (3SLS) simultaneous equation framework. Results based on estimating a conventional single equation model indicate that the executive pay and performance sensitivity is relatively weak, whereas those based on estimating a 3SLS model generally suggest improved executive pay and performance sensitivity. Our findings highlight the need for future research to control for possible simultaneous interdependencies when estimating the executive pay and performance link. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, executive pay and performance proxies. Copyright © 2013 John Wiley & Sons, Ltd.     

The pricing of credit risk derivatives

This paper considers the pricing of derivatives that protect holders of corporate bonds from a reduction in their value because of a deterioration in their credit quality. These derivatives are structured as either puts on the bond price or calls on the bond spread (above the risk free rate) in the context of models developed by Merton (1974) and Black and Cox (1976). The pricing properties of these options are derived using both analytical and numerical methods.     

Reputation and Corporate Social Responsibility Aberrations,Trends, and Hypocrisy: Reactions to Firm Choices in the Stock Option Backdating Scandal

Drawing on strategic corporate social responsibility (CSR) and reputation theory, this paper examines the market reaction to firm disclosures of involvement in the US stock option backdating scandal. We examine how a firm's prior signals regarding ethical behaviour and values, as demonstrated through CSR initiatives, may both ameliorate and exacerbate market reactions. CSR initiatives may buffer a firm against general wrong‐doing but expose it to greater scrutiny and sanction for related wrong‐doing. Our results show that firms with enhanced overall reputations for CSR are partially buffered from scandal revelations. However, we find that when firms possess an enhanced reputation for CSR associated with corporate governance, violations pertaining specifically to governance are viewed as hypocritical and more harshly sanctioned. We also find lower and negative market reactions for firms that delay but self‐disclose their involvement in the scandal. The study extends the emergent, related literatures on strategic CSR and reputation management, and documents dynamics in the relationship between corporate social and financial performance.     

Executive Pay Matters: Looking Beyond the CEO to Explore Implications of Pay Disparity on Non‐CEO Executive Turnover and Firm Performance

Using a longitudinal data set covering a span of 10 years, we investigate the impact of vertical and horizontal pay disparity on non‐CEO executive turnover and subsequent firm performance. Hypothesizing differential responses to pay disparity depending on a non‐CEO executive's responsibilities, we first categorize non‐CEO executives based on their job demands and their role in the organization (e.g., oversight, divisional). We then explore how pay disparity influences the relationship between executive category and turnover, and how the level of pay disparity impacts the relationship between turnover and firm performance. We find that executive category significantly impacts the likelihood of turnover, and also influences firm performance. Theoretical and practical implications are discussed. © 2015 Wiley Periodicals, Inc.     

Executive pay and performance: the moderating effect of CEO power and governance structure

This paper examines the crucial question of whether chief executive officer (CEO) power and corporate governance (CG) structure can moderate the pay-for-performance sensitivity (PPS) using a large up-to-date South African data-set. Our findings are threefold. First, when direct links between executive pay and performance are examined, we find a positive, but relatively small PPS. Second, our results show that in a context of concentrated ownership and weak board structures; the second-tier agency conflict (director monitoring power and opportunism) is stronger than the first-tier agency problem (CEO power and self-interest). Third, additional analysis suggests that CEO power and CG structure have a moderating effect on the PPS. Specifically, we find that the PPS is higher in firms with more reputable, founding and shareholding CEOs, higher ownership by directors and institutions, and independent nomination and remuneration committees, but lower in firms with larger boards, more powerful and long-tenured CEOs. Overall, our evidence sheds new important theoretical and empirical insights on explaining the PPS with specific focus on the predictions of the optimal contracting and managerial power hypotheses. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, pay, and performance proxies.     

Crossing the chasm with beacon products in the portable music player industry

Firms competing in new product categories face great technical and market uncertainty as they try to move from early adopters to mainstream markets (83, 93 and 111). While the management literature identified several factors that may contribute to adoption, the role of specific product models has been understudied. To address this gap, we studied portable digital music players (MP3 players) from 1987–2006 and tested the role of specific product models in market takeoff, convergence and product category evolution. We introduced the concept of beacon product, defined as a specific product model that has great appeal to customers and sends a strong signal about what they want.     

Carry-trades on the yen and the Swiss franc: are they different?

Using monthly data from 1986 to 2009 for 11 major currencies against the U.S. dollar (USD), we find that interest rate differentials between nine of these currencies are generally positive (sample mean of 0.86%) but are strongly negative for Japan (mean of ?2.78%) and for Switzerland (mean of ?2.22%). Investigating empirical models of nominal exchange rate changes we find for all panels that about 2% of real exchange rate misalignments are corrected in the following month. We also find important differences across samples and for the two carry-trade currencies the key results are as follows. First, interest rate differentials have a negative impact on exchange rates: higher paying currencies should appreciate, contrary to the ex-ante uncovered interest rate parity (UIP) condition. We find that this result is very robust to money supply (M1) differentials serving as instrumental variables to inflation rates. In addition, these two currencies depreciate slightly when money supply (M1) differentials increase. Second, dummy variables for periods of market turmoil suggest a particularly strong appreciation of these currencies against the USD, consistent with the unwinding of carry-trade activities.     

A network of options: Evaluating complex interdependent decisions under uncertainty

The present article provides a novel framework for analyzing option network problems, which is a general class of compound real option problems with an arbitrary combination of reversible and irreversible decisions. The present framework represents the interdependent structure of decisions by using a directed graph. In this framework, the option network problem is formulated as a singular stochastic control problem, whose optimality condition is then obtained as a dynamical system of generalized linear complementarity problems (GLCPs). This enables us to develop a systematic and efficient numerical method for evaluating the option value and the optimal decision policy.     

From skyhooks to walking sticks: on the road to nonrational decision making

The amount of information that should be processed to reach a rational solution is so vast that it overwhelms our limited memory and analytic capacity. To grapple at all with real problems, we must shrink them to mind size. As Nobel Laureate Herbert Simon has suggested, we must learn to "satisfice." Using examples and a case history of managerial succession, Agnew and Brown demonstrate the importance of nonrational factors in decision making. "Skyhooks," their first major concept, are composed of an individual's strong beliefs and biases that appear almost as acts of faith without any obvious foundation. They help the exceptional executive operate on a limited set of alternatives. But while skyhooks give direction, they do not provide the means to reach a destination. Simpler conceptual models, or "walking sticks," are necessary to cover the rocky trails. Agnew and Brown offer four walking sticks that can be applied to managerial succession problems. The first walking stick considers executive decision making in three parts--nonrational, semirational, and rational--and covers the conditions in which each component comes into play. The second helps examine human resources as fixed or fluid and as assets or liabilities to develop a schema for manpower accounting in executive succession. Playing vs. talking a good executive game is the topic for walking stick three. The concern here is to distinguish the real players--who can manage systems--from the mere talkers, who can manage only fragments of systems. The fourth walking stick draws on the law of resource gravitation and crystallization, a law with implications for trainers: You can't fashion management training to fit all comers; instead, you must tailor it to what the trainees already are and know.     

Non-linear volatility dynamics and risk management of precious metals

In this paper, we investigate the value-at-risk predictions of four major precious metals (gold, silver, platinum, and palladium) with non-linear long memory volatility models, namely FIGARCH, FIAPARCH and HYGARCH, under normal and Student-t innovations’ distributions. For these analyses, we consider both long and short trading positions. Overall, our results reveal that long memory volatility models under Student-t distribution perform well in forecasting a one-day-ahead VaR for both long and short positions. In addition, we find that FIAPARCH model with Student-t distribution, which jointly captures long memory and asymmetry, as well as fat-tails, outperforms other models in VaR forecasting. Our results have potential implications for portfolio managers, producers, and policy makers.     

Short-term spot rate models with nonparametric deterministic drift

Most studies assume stationarity when testing continuous-time interest-rate models. However, consistent with Bierens [Bierens, H. (1997). Testing the unit root with drift hypothesis against nonlinear trend stationary, with an application to the US price level and interest rate. Journal of Econometrics, 81, 29–64; Bierens, H. (2000). Nonparametric nonlinear co-trending analysis, with an application to interest and inflation in the United States. Journal of Business and Economics Statistics, 18, 323–337], our nonparametric test results support nonlinear trend stationarity. To accommodate nonstationarity, we detrend the interest-rate series and re-examine a variety of continuous-time models. The goodness-of-fit improves significantly for those models with drift-induced mean reversion and worsens for those with high volatility elasticity. The inclusion of a nonparametric trend component in the drift significantly reduces the level effect on the interest-rate volatility. These results suggest that the misspecification of the constant elasticity model should be attributed to the nonlinear trend component of the short-term interest-rate process.     

FAS 123R高管人员股票期权费用化的实施与影响——对我国的启示

美国财务会计准则FAS123R及中国新会计准则均要求股票期权费用化。股票期权费用化的会计处理一方面有助于减少过度的授予高管股票期权;但另一方面又会对公司业绩产生影响,在一定程度上弱化了股票期权的激励效果,留给管理层更多的操控盈余的空间。中国刚施行新准则不久,股票期权费用化的影响需要更多的实证研究,可能产生的问题需要准则制定机构及监管部门更多的关注。