Location Decisions of Domestic and Foreign-Affiliated Financial Advisors: Australian Evidence

We examine two views of the location choice of newly qualified personal financial advisors that recommend fund managers to retail investors. In one, sources of investment pools are the determinants of the location choice of financial advisors (the ‘source of funds’ hypothesis). In the other, investment advisors learn from and mimic the location of competing industries (the ‘knowledge spill-over’ hypothesis). We also investigate whether ownership structures, such as institutional and foreign affiliation, affect the location choices of advisors. Overall, advisor location is determined by considerations for the profitability of an area as a source of both investment funds and potential information spillovers from competitors. Institutional affiliation may result in differences in the set of relevant location choice factors, but does not detract from our main findings.     

Investment Decisions of Nonprofit Firms: Evidence from Hospitals

This paper examines investment choices of nonprofit hospitals. It tests how shocks to cash flows caused by the performance of the hospitals’ financial assets affect hospital expenditures. Capital expenditures increase, on average, by 10 to 28 cents for every dollar received from financial assets. The sensitivity is similar to that found earlier for shareholder‐owned corporations. Executive compensation, other salaries, and perks do not respond significantly to cash flow shocks. Hospitals with an apparent tendency to overspend on medical procedures do not exhibit higher investment‐cash flow sensitivities. The sensitivities are higher for hospitals that appear financially constrained.     

Banks and Corporate Decisions: Evidence from Business Groups

Banks who can influence clients' governance may steer those clients into mergers to reduce the banks' own risk. Empirical evidence based on Japan's mergers and acquisitions (M&As) during the country's 1990s banking crisis indicates that acquirers with stronger bank ties made acquisitions that they would not have normally made. These acquirers lost more shareholder value via mergers than acquirers with weaker bank ties. The banks' risk was reduced, while the banks' shareholders gained significant excess returns from their borrowers' mergers. This paper offers implications for corporate governance of firms with strong bank ties and advances the existing knowledge on business groups.     

Investment Decisions and Managerial Discipline: Evidence from the Takeover Market

This article focuses on the relative importance of boards of directors and the hostile takeover market in disciplining managers who make poor acquisition decisions. The evidence shows a weak inverse relationship between acquisition performance and the likelihood of becoming a takeover target, but only after it becomes clear that the internal control mechanism has failed. A forced turnover of a top executive was more likely in the 1990s, the more negative the abnormal return associated with an acquisition announcement. The relationship between forced turnover and negative acquisition returns is stronger when hostile takeover activity is less intense. Hence, it appears that being disciplined for making a poor acquisition is a function more of the internal control mechanism than of the workings of the takeover market.     

Labor and Corporate Governance: International Evidence from Restructuring Decisions

Our results highlight the importance of interaction among management, labor, and investors in shaping corporate governance. We find that strong union laws protect not only workers but also underperforming managers. Weak investor protection combined with strong union laws are conducive to worker–management alliances, wherein poorly performing firms sell assets to prevent large-scale layoffs, garnering worker support to retain management. Asset sales in weak investor protection countries lead to further deteriorating performance, whereas in strong investor protection countries they improve performance and lead to more layoffs. Strong union laws are less effective in preventing layoffs when financial leverage is high.     

Commonality in liquidity: Evidence from the Australian Stock Exchange

Several studies have reported strong evidence of commonality in liquidity in US markets. The present study uses the research design of Chordia et al. (2000) to examine commonality in liquidity for a broad sample of stocks listed on the Australian Stock Exchange (ASX). In contrast to previous research, there is some evidence of market‐wide commonality in liquidity for ASX stocks, but it is less significant and less pervasive than that observed in other markets. These results are consistent with explanations based on differences in market structure between the USA and Australia.     

Political Polarization Affects Households' Financial Decisions: Evidence from Home Sales

Political identity and partisanship are salient features of today's society. Using deeds records and voter rolls, we show that current residents are more likely to sell their homes when opposite-party neighbors move in nearby than when unaffiliated or same-party neighbors do. This is especially true when the new neighbors are politically active, consistent with an animosity between parties mechanism. We conclude that affective polarization is not limited to purely political settings and affects one of the household's most important financial decisions, their home transactions.     

Corporate Financing Decisions: UK Survey Evidence

Abstract:  Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in UK listed companies. A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory , but 60% claim to follow a financing hierarchy, consistent with pecking order theory . These two theories are not viewed by respondents as either mutually exclusive or exhaustive. Many of the theoretical determinants of debt levels are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry. Results also indicate that cross-country institutional differences have a significant impact on financial decisions.     

Corporate Governance and the Cost of Capital: Evidence from Australian Companies

The authors examine a sample of large Australian companies over a 10‐year period with the aim of analyzing the role that firm‐level corporate governance mechanisms such as insider ownership and independent boards play in explaining a company's cost of capital. The Australian corporate system offers a unique environment for assessing the impact of corporate governance mechanisms. Australian companies have board structures and mechanisms that are similar in design to Anglo‐Saxon boards while offering a striking contrast to those of German and Japanese boards. At the same time, however, the Australian market for corporate control is much less active as a corrective mechanism against management entrenchment than its U.S. and U.K. counterparts, making the role of internal governance mechanisms potentially more important in Australia than elsewhere. The authors report that greater insider ownership, the presence of institutional blockholders, and independent boards are all associated with reductions in the perceived risk of a firm, thereby leading investors to demand lower rates of return on capital. In so doing, the study provides evidence of the important role of corporate governance in increasing corporate values.     

The accuracy of the tick test: Evidence from the Australian stock exchange

In the absence of information regarding whether a trade is buyer or seller initiated, many researchers have employed the ‘tick’ rule as a proxy. These researchers have been supported in their endeavours by the work of Lee and Ready (1991) which suggests that the tick rule is 90% accurate. Unfortunately, the difficulty of securing data on this issue has made Lee and Ready's paper somewhat unique in that there have been few attempts to confirm their result in US markets and no attempts in other markets. The purpose of this work is to test the robustness of their result in the Australian securities market. Using cleaner intra-day data we mimic the Lee and Ready study to cast some doubt upon the robustness of their findings in different markets. Our results suggest an overall accuracy of approximately 74% as opposed to Lee and Ready's 90%. However, accuracy in excess of 90% is documented when zero ticks are excluded. Further analysis provides evidence that a volatile or trending market will decrease the accuracy of the tick rule. It is also demonstrated that the tick rule is less likely to accurately classify seller initiated trades and small buyer initiated trades.     

The Value Relevance of Corporate Social Responsibility Expenditure: Evidence from Regulatory Decisions

We examine the value relevance of the corporate social responsibility (CSR) expenditure of Bangladeshi banks from 2007–2014 in response to a regulatory directive on banking firms’ engagement in CSR activities. We find a positive association between CSR expenditure and a firm's market value. Evidence of an inverse U-shaped curvilinear association between CSR expenditure and market value suggests that the impact of CSR expenditure on a firm's market value has a certain limit. We also document that unexpected or abnormal components of CSR expenditure comprise value-relevant information. Our study provides empirical evidence to support the value relevance of CSR expenditure as an explanation for why firms should invest in CSR and why they should inform various stakeholders about their CSR activities.     

Ownership structure and divestiture decisions: Evidence from Australian firms

Divestitures create shareholder value by helping firms to optimize their portfolio of assets. However, firms may forego value enhancing divestitures because of agency problems. More specifically, large controlling shareholders may prefer to retain the assets in order to extract private benefits of control at the expense of minority shareholders. In this paper, we explore the role that other blockholders play in constraining the largest shareholder's influence. The results indicate that divestiture activity decreases with the ownership of the largest shareholder. The presence of another significant blockholder appears to curb this negative bias towards divestitures. Our findings provide an economic rationale for the higher performance of firms characterized by more balanced ownership structures. Involvement of family owners also appears to provide similar benefits.     

Foreign Ownership and Firm Value: Evidence from Australian Firms

The paper employs various measures of foreign ownership and investigates impact of foreign ownership on value of firms in Australia. We find that both, traditional measure and free float measure of foreign ownership has a positive and significant impact on firm value. We also find that foreign institutional holdings in Australian firms’ have a significant and positive impact on firm value. Results are robust to various econometric estimation techniques. Our results have implications for investors and corporate financial policies.     

International Corporate Tax Avoidance Practices: Evidence from Australian Firms

This paper examines the international corporate tax avoidance practices of publicly listed Australian firms. Based on a hand-collected sample of 203 publicly listed Australian firms over the 2006–2009 period (812 firm-years), our regression results indicate that there are several practices Australian firms use to aggressively reduce their tax liabilities. Specifically, we find that thin capitalization, transfer pricing, income shifting, multinationality, and tax haven utilization are significantly associated with tax avoidance. In fact, based on the magnitude and significance levels of the regression coefficients in our study, thin capitalization and transfer pricing represent the primary drivers of tax avoidance, whereas income shifting and tax haven utilization are less important. Finally, our additional regression results show that tax havens are likely to be used together with thin capitalization and transfer pricing to maximize international tax avoidance opportunities via the increased complexity of transactions carried out through tax havens.     

The Legal Origins of Financial Development: Evidence from the Shanghai Concessions

The primary challenge to assessing the legal origins view of comparative financial development is identifying exogenous changes in legal systems. We assemble new data on Shanghai's British and French concessions between 1845 and 1936. Two regime changes altered British and French legal jurisdiction over their respective concessions. By examining the changing application of different legal traditions to adjacent neighborhoods within the same city and controlling for military, economic, and political characteristics, we offer new evidence consistent with the legal origins view: the financial development advantage in the British concession widened after Western legal jurisdiction intensified and narrowed after it abated.     

Takeover targets and the probability of bid success: Evidence from the Australian market

The excess returns earned by takeover targets raises questions of efficiency in the market for corporate control. Brown and Raymond and Samuelson and Rosenthal explain the target share pricing process as a function of the probability of success of the takeover bid. We highlight weaknesses in this work, propose an alternative model, and apply it to 245 Australian takeovers from 1980 to 1993. We find, for targets of successful bids, considerable non-convergence to the bid price. This is consistent with speculative trading models whereby the reduction in dispersion of traders' beliefs leads to the evaporation of market liquidity.     

The True And Fair View: A Study Of Australian Auditors' Application Of the Concept

A fundamental requirement of Australian corporate reporting is that financial statements be "true and fair". This paper describes the history of the true and fair requirement in Australia, considers various meanings which have been attributed to the concept and examines the merits of eliminating the qualitative standard of the true and fair view. Special attention is given to auditors' definitions of the term, and how they design their audit testing of truth and fairness, as distinct from compliance with applicable accounting standards and other statutory disclosure requirements.     

Legal System and Trade Credit: Evidence from Emerging Economies

Using a large-scale, firm-level dataset from 68 emerging economies for the period of 2002–2006 compiled by the World Bank, we find that legal systems have a positive and significant impact on the provision of trade credit. This result is robust to the inclusion of conventional controls used in the literature, to alternate specifications that address endogeneity and measurement error problems, and to different measures of trade credit and legal systems. Legal systems have a larger impact on trade credit for firms with overdraft facilities than for those without overdraft facilities, and the impact of legal systems on trade credit is significant in more developed countries but not in less developed countries.     

Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s

Between 1995 and 1999, Italy experienced three episodes of fiscal reform during which different categories of non-debt tax shields were introduced, including a classical investment tax credit, a system of dual income taxation, and an investment tax credit restricted to equity financed investments. Using the balance sheets of a large sample of Italian companies, we construct a data set which allows us to evaluate the impact of the different fiscal interventions. We apply MacKie-Mason's (1990) method to study incremental financing decisions using discrete choice analysis. The analysis shows that the measures introduced were successful in reducing the advantage of debt financing relative to equity financing. We relate the findings to the current literature on the determinants of capital structure. JEL Code: G32, H25     

Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange

This paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution. We find a mean reassessment of stock value following short sales of up to −0.20 percent with adverse information impounded within fifteen minutes or twenty trades. Short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction; trades near information events precipitate larger price reactions. The evidence is generally weaker for short sales executed using limit orders relative to market orders.