Agency theory and the influence of equity ownership structure on corporate diversification strategies

We articulate the agency theory view of managerial decision making and its implications for corporate diversification strategies. From agency theory, we generate testable predictions for the relation between equity ownership structure and diversification strategies and review the existing evidence on this relation. On balance, the evidence strongly supports the view that ownership structure influences corporate strategy. Copyright © 1999 John Wiley & Sons, Ltd.     

A reconsideration of the link between vertical externality and managerial incentives

Previous research revealed that the strategic role of delegation contracts disappears if two quantity‐setting firms outsource input production to a monopolistic supplier. I show that this role is restored if the assumption of a downstream duopoly is relaxed. Thus, delegation contracts allow downstream profit‐maximizing owners to commit their firms to a behavior that differs from their preferences. This behavior varies nonmonotonically with the number of firms in the downstream market. Corresponding deviations from profit maximization are larger if the upstream monopolist makes a price precommitment. But little to no deviation occurs if the number of firms is large.     

Mean square error for the Leland–Lott hedging strategy: convex pay-offs

Leland’s approach to the hedging of derivatives under proportional transaction costs is based on an approximate replication of the European-type contingent claim V _T using the classical Black–Scholes formula with a suitably enlarged volatility. The formal mathematical framework is a scheme of series, i.e., a sequence of models with transaction cost coefficients k _n =k ₀ n ^−α , where α∈[0,1/2] and n is the number of portfolio revision dates. The enlarged volatility [^(s)]_n\widehat{\sigma}_{n} in general depends on n except for the case which was investigated in detail by Lott, to whom belongs the first rigorous result on convergence of the approximating portfolio value Vⁿ_TV^{n}_{T} to the pay-off V _T . In this paper, we consider only the Lott case α=1/2. We prove first, for an arbitrary pay-off V _T =G(S _T ) where G is a convex piecewise smooth function, that the mean square approximation error converges to zero with rate n ^−1/2 in L ² and find the first order term of the asymptotics. We are working in a setting with non-uniform revision intervals and establish the asymptotic expansion when the revision dates are t_iⁿ=g(i/n)t_{i}^{n}=g(i/n), where the strictly increasing scale function g:[0,1]→[0,1] and its inverse f are continuous with their first and second derivatives on the whole interval, or g(t)=1−(1−t) ^β , β≥1. We show that the sequence n^1/2(V_Tⁿ-V_T)n^{1/2}(V_{T}^{n}-V_{T}) converges in law to a random variable which is the terminal value of a component of a two-dimensional Markov diffusion process and calculate the limit. Our central result is a functional limit theorem for the discrepancy process.     

Value relevance and timeliness of transitional goodwill-impairment losses: Evidence from Canada

Focusing on transitional goodwill-impairment losses (losses) recorded by Canadian firms following the adoption of revised standards on purchased goodwill, we investigate the value relevance and timeliness of mandatory changes in accounting principles accounted for using the retroactive method. We find a negative relationship between reported losses and share price. Such a finding is consistent with investors perceiving losses as being sufficiently reliable measurements of a reduction in the value of goodwill to incorporate them in their valuation assessments. We find also that investors put a higher valuation weight on losses reported by firms that are expected to record a loss. In addition, we show that investors perceive that there are reduced opportunities for managerial discretion when there is a more effective audit committee. Finally, our results show that returns lead losses, i.e., that losses represent a catch-up adjustment to reflect the cumulative effect of using the impairment approach for the first time. Overall, our evidence supports U.S. standard setters' decision, through SFAS 154, to favour enhanced comparability and consistency over the potential costs of frequent restatements. Our results also show that fair-value measurements can be relevant even when the financial statement elements of interest are inherently bound to measurement error and subject to significant managerial discretion. They support the notion that reliability is about faithful representation, not precision.     

An investigation into the financial characteristics of dividend initiating firms

Dividend announcements are said to have an informational content concerning the value of the firm. Most studies on dividend announcements have involved models to predict change or to analyze that informational content. The purpose of this study is to establish the financial characteristics of firms that initiate or significantly increase dividends. One hundred firms were selected for study. Fifty of the firms had recently either initiated or significantly increased dividends; the other fifty were selected at random. Significant differences were found in the financial characteristics of the two groups. The results were generally consistent with previous studies and finance theory. There were however, two genuine surprises. The dividend initiating firms possessed lower levels of liquidity and activity than firms selected at random. This suggests that dividends may not be paid to dispose of excess cash, but to provide shareholders with some tangible reward in periods of low liquidity and little activity.     

Bayesian inference for the mover–stayer model in continuous time with an application to labour market transition data

This paper presents Bayesian inference procedures for the continuous time mover–stayer model applied to labour market transition data collected in discrete time. These methods allow us to derive the probability of embeddability of the discrete‐time modelling with the continuous‐time one. A special emphasis is put on two alternative procedures, namely the importance sampling algorithm and a new Gibbs sampling algorithm. Transition intensities, proportions of stayers and functions of these parameters are then estimated with the Gibbs sampling algorithm for individual transition data coming from the French Labour Force Surveys collected over the period 1986–2000. Copyright © 2003 John Wiley & Sons, Ltd.     

Technical analysis compared to mathematical models based methods under parameters mis-specification

In this study, we compare the performance of trading strategies based on possibly mis-specified mathematical models with a trading strategy based on a technical trading rule. In both cases, the trader attempts to predict a change in the drift of the stock return occurring at an unknown time. We explicitly compute the trader’s expected logarithmic utility of wealth for the various trading strategies. We next rely on Monte Carlo numerical experiments to compare their performance. The simulations show that under parameter mis-specification, the technical analysis technique out-performs the optimal allocation strategy but not the Model and Detect strategies. The latter strategies dominance is confirmed under parameter mis-specification as long as the two stock returns’ drifts are high in absolute terms.     

Institute for the future's study of the UK, 1978–1995

The method used expert opinions (collected through interviews), scenario generation, and a simple econometric model. Some methodological innovations are reported; eg aids to assist experts in thinking ahead, and in how scenarios are generated and aggregated.