Institute of Contemporary Financial Studies - Research

Summary

"At the conclusion of the book The Myth of the Rational Market, Fox (2009: 308) writes that "the rational market theories have fallen apart" and "financial markets have fallen apart." During the 20th century, the Dow Jones Industrial Average provided an average return of 11% per annum with only one decade, the 1930's, showing a loss. The market continued to increase in the first decade of the new millennium, but then something changed. The Dow Jones Industrial Average plunged from 14,164.53 on October 9, 2007 to 8,451.19 one year later and to 6,594.44 on March 5, 2009, a decline of 53.44 (http://finance.yahoo.com).  Further, on October19, 2008, a record 11.5 billion shares were traded as opposed to the average daily volume of approximately 5 billion shares. On that day, and others in mid-October, 2008, investors were desperate to get out of the market which caused a selling panic and the equity markets went into a drastic freefall. Traditional financial theory said that these phenomena should not have happened, but they did." - Tom Harvey

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"The objective of this chapter is to help readers understand theories of portfolio management. Investment, as opposed to consumption, is the commitment of funds that the investor believes will appreciate in value over time and will provide a return that is sufficient for assuming risk and for exceeding the effects of inflation." - Tom Harvey

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"Between 1929 and 2000, the U.S. stock market averaged an annual return of about 11 percent, with the 1930s being the only decade to show a decline. As the 21st century opened, the Dow Jones industrial average stood at 11,357.51 and continued to rise until October 2007, when it hit its peak at 14,164.53." - Tom Harvey

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This paper examines whether post-merger board composition affects the premiums paid to target shareholders. Using a sample of 207 stock-for-stock mergers from 1996 to 2004, we show that target merger premiums vary inversely with target director representation on the post-merger board. We also provide some evidence that both inside and outside target directors may trade shareholder wealth for board seats in the combined firms. However, we do not find board ownership moderates the relation between target merger premiums and post-merger board composition. Consistent with previous studies of management incentives in mergers, our empirical evidence supports the non-perfect agency theory. That is, target directors may sacrifice target shareholder interests to obtain a seat on the post-merger board.
Hongxia Wang

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Managerial discretion defines the working environment of a manager. We hypothesize that boards tend to appoint younger (older) CEOs in firms with high (low) managerial discretion. We further propose that the relation between managerial discretion and successor CEO age may be moderated by the age of board members, the origin of the successor, and the successor's designated heir status. Using a sample of 629 successions occurring between 1994 and 2005, we find empirical evidence that supports our first hypothesis for the total sample and the sample of successions with voluntary turnover...
Hongxia Wang

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We examine the role of managerial discretion in setting CEO pay at succession. Using a sample of 656 successions from 1994-2005, we provide evidence that a successor CEO's pay level is positively and significantly associated with the level of managerial discretion. However, outside succession moderates the link between managerial discretion and pay level. We further find that the moderating effect of a successor's origin is contingent upon the bargaining power of the board of directors for the total and forced turnover samples. As for the pay structure of a successor, the results of our total sample and forced turnover subsample provide evidence that managerial discretion positively relates to the proportion of risk-based pay and outside succession has a moderating effect on this relation, and the moderating effect depends on the board bargaining power. As for the voluntary turnover sample, the pay structure of the new CEO is mainly determined by the pay structure of the predecessor and the board bargaining power. This study enriches existing research on managerial discretion and succession by linking CEO bargaining power at succession with the theory of managerial discretion.
Hongxia Wang

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In the past three decades, corporate governance research has experienced a tremendous evolution. Interest in corporate governance in general is growing given the changes in the business environment and the recent worldwide governance reforms in the new millennium. Empirical studies document that poor governance hurts stock market performance (Gompers, Ishii, and Metrick, 2003) and operating performance (Core, Guay, and Rusticus, 2006). Recent studies and the popular press have noted several trends in corporate governance, such as more independent boards; more incentive-based pay for outside directors; more public, exchange, and government scrutiny; and increased institutional stock ownership (Huson, Parrino, and Starks, 2001). Using a theoretic model, Hermalin (2005) further finds trends toward more diligent boards, more outside CEOs, short CEO tenure, more efforts/less perquisite consumption by CEO's, and greater CEO compensation. Research in areas of corporate boards, CEO turnover, and compensation provides extensive empirical evidence supporting the trends predicated by the Hermalin Model.
Hongxia Wang

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Using a sample of CEO turnover from 1999 to 2005, we find that CEOs become significantly more risk averse following the passage of the Sarbanes-Oxley Act, SOX. Their increased risk aversion may serve as an explanation for why CEO tenure is not significantly shortened and forced CEO turnover is not more likely post-SOX, as we document in this paper. In addition, we provide evidence that financial restatements have some effects on CEO tenure and the probability of forced CEO turnover. This may be due to intensified monitoring activities by the board and the financial press in the post-SOX era, but we cannot contribute all of it to SOX. In some occasions, SOX seems to weaken the effect of board monitoring on CEO tenure and the effect of firm performance on CEO risk aversion. Though the increased monitoring level post-SOX contribute to the increased CEO risk aversion, little impact is found from the SOX-mandated accuracy and transparency of financial reporting.
Hongxia Wang

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The Russian Financial crisis of 1998 occurred in large part due to poor fiscal planning, a dependency on commodities (predominately on oil), a lack of a strong enforceable tax system, and some contagion effects from the 1997 Asian financial crises. These issues, coupled with concern over political cronyism, connected lending by banks, and other more covert corruption, not only formed to bring about a great fiscal collapse, but also served as a carrier for future doubt as the crisis came to an end. This paper attempts to trace these five issues throughout the period from prior to the crisis, in the immediate aftermath, and finally up to present day. Given the advantage of hindsight, the causes of the 1998 crisis in Russia are well known and understood. However, the questions regarding how the country has managed fiscally since 1998 still remain. This paper provides a short review of the 1998 crisis along with the determining factors that created it, and then attempts to shed some light on the current fiscal situation in Russia and to reveal the possible future for this large eastern block country. There are many points leading up to the crisis that need to be understood. Of these, this paper outlines those that seemingly had the most dramatic causal relationship to the crisis and follows these issues up to present day. The intent of the paper is not to focus on the currency collapse, but rather to provide a snapshot of the current state of the Russian financial system in the light of the collapse. Chuck Bryant

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Effective management of inward Foreign Direct Investment (FDI) is the primary key to lift the economy out of its emerging status into a major player in the global economy. It is a multifaceted process that begins with broad-based development of the necessary factors to attract the desired types of FDI, continues through managing the investment to register increased productivity, and concludes with a satisfied investor willing to make further investment in the country. In the state of Russia, management of FDI has been anything but effective. While the country has many of the necessary factors to attract FDI, research confirms that the state has done little to actually acquire FDI at levels on par with its potential. Furthermore, available data confirms that productivity, as measured by national GDP, does not show satisfactory increases when compared with the level of investment. This focus of this paper is threefold: first to investigate recent literature in regards to Russia's FDI attractors (potential); second to compare Russia's increases in productivity as measured by GDP, against the investment potential (performance); and finally to pose probing questions regarding the impact of corruption on both Russia's ability to attract FDI and Russia's ability to manage it to increase productivity.
Chuck Bryant

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The history of the breakup of the Soviet Union has far reaching impacts throughout both Eastern Europe and the world. Both politically and economically, change has been the norm as the countries that made up the former USSR, strive for independence and economic stability. Of the independent countries making up the Commonwealth of Independent States (CIS), Ukraine is a potential powerhouse. But in the 12 years since declaring independence, Ukraine has failed to create efficient markets for trade and in fact, has remained at the top of the "mostly unfree states" list. The energy sector is a major contributor and driver for the Ukrainian economy. The focus of this paper is the company chartered with developing, controlling, and delivering nuclear power throughout the country - Energoatom...
Chuck Bryant

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