Dissertations / Theses on the topic 'Fields of Research – 350000 Commerce, Management, Tourism and Services – 350300 Banking, Finance and Investment'

This research examines how the interval of observation affects the assessment of risk in stocks. I do this by analysing the economic and statistical significance of the worst returns on stocks, and by analysing the relationship between the interval of observation and factors which are thought to affect the return on stocks. This research shows the interval of observation used to assess the risk in stocks is important and the conclusions change considerably depending on how the data is drawn. In addition, the results indicate an investor’s time horizon is important in deciding their asset allocation and the style of investment should be suitable for the time horizon selected.

This dissertation investigates the information considerations of volatility, pricediscovery and the relationship change in volume and volatility resulting from index derivatives transactions on financial markets in Australia. The impact of information on volatility was investigated in the essay one, as volatility is a key factor for accurately pricing derivative securities. I assessed the forecast accuracy, unbiasedness and information content of volatility forecasts, based on implied volatility and conditional volatility models for the S&P/ASX 200 Index Options market in Australia. The conditional volatility models produce the most accurate forecasts and are robust when forecasting into short time horizons. Essay two, investigates the information content of the index and option markets in the price-discovery process. Based on the above volatility results, the long-run equilibrium relationship between the share price index and the implied price of the share-price-index option was investigated. Causality was determined to show which market leads the other. Information share measures were used to gauge the contribution of the share price index and index option markets to the price-discovery process. Unambiguous evidence shows the index market leads the options market and the former contributes more to price-discovery than the latter. In essay three, I investigate the dynamic relationship between the future price volatility of the S&P/ASX 200 Index and the trading volume of the S&P/ASX 200 Index Options to explore the informational role of option volume in predicting price volatility. I found the contemporaneous call options volume have a significant strong positive feedback effect on the implied volatility, but the contemporaneous feedback effect of volume on the TARCH volatility is insignificant. The contemporaneous feedback effects from the implied volatility and the TARCH volatility to the call options volume are positive, significant and strong.

Numerous value relevance investigations use the Ohlson (1995) model to empirically explore the value relevance of accounting variables such as earnings and goodwill amortisation by employing equity price as the dependent variable, but do not incorporate the most recent prior period’s equity price as an additional explanatory variable. The Ohlson (1995) model and the efficient market literature indicate that, since share prices represent the present value of future permanent earnings in an efficient market, the most recent prior period’s equity price should be a crucial variable for explaining the current price in value relevance models. This thesis therefore outlines how the Ohlson (1995) model incorporates the most recent prior period’s price as a potentially important value relevant explanatory variable, and reformulates the Ohlson (1995) model to demonstrate how the empirical specification of value relevance regression models can be greatly improved by including the most recent prior period’s price as an additional explanatory variable. We revisit the Jennings, LeClere, and Thompson (2001) empirical specification used to study whether goodwill amortisation is value relevant and potentially informative with respect to future earnings to illustrate the improvement to the Ohlson (1995) value relevance model empirical specification. When the model specification is improved by including the most recent prior period’s price as an additional explanatory variable, trailing earnings are shown, using time series, cross-sectional, and returns-based analysis, to be at best marginally value relevant when empirically explaining share prices in value relevance regression models. The thesis also indicates that goodwill amortisation should not be deducted from earnings in accounting statements because the presence of goodwill amortisation is significantly positively (not negatively) related to equity prices. This effect is eliminated when the most recent prior period’s price is included as an additional explanatory variable in the regression analysis, thus indicating that goodwill amortisation information as well as trailing earnings information have already been incorporated into the most recent prior period’s price. The thesis further indicates that value relevance studies that use the Ohlson (1995) model should use, for econometric reasons, change in price or else returns, not the price level, as the dependent variable. When returns are used to test the value relevance of goodwill amortisation, firms that report positive goodwill amortization actually have higher subsequent returns, a result that could possibly be due to the fact that growing firms tend to possess goodwill when they use acquisitions to expand. Results obtained when using returns to test whether goodwill amortisation is value relevant therefore extend the existing literature, since the prevailing expectation in the accounting literature is that goodwill amortization either represents a reduction in the value of goodwill over time or is not value relevant.

The Chinese stock market has experienced tremendous growth and development over the past years. It is now the second largest stock market in Asia (after Japan). The increasing numbers of stock investors and the generally upward trend of the local stock indexes transform the Chinese stock market into one of the most actively traded stock market. This study examined the “pricing errors” of the Chinese stock market. The intrinsic values of equities, which can be compared to actual index prices, were estimated using the dividend discount model. Using a database of daily dividend based index prices of Shanghai composite index 180 and Shenzhen composite index 100 from July 2002 to June 2005, our study shows the stocks were undervalued during the sample period, on average, by approximately 0.09% and 1% for Shanghai and Shenzhen composite indexes respectively. The result reveals during July 2002- June 2005, the Chinese stock markets were close to the real value. Another objective of this study is to examine the impact of the economic conditions on the “pricing errors” of Chinese stock market. We find that the Chinese stock markets are much price momentum driven. The relationships of the economic factors and the deviation between the estimated cost of equity (based on CAPM) and the implied cost of equity (based on the actual index prices) showed similar results. We conclude that the Chinese stock markets do not sufficiently reveal local economic conditions.

The corporate governance best practice code (Code) of the New Zealand Exchange (NZX) came into effect on October 29, 2003. However, so far there is no systematic study of compliance with and impact of NZX Code on the performance of NZX companies. This study attempts to provide some answers to the perceived knowledge gap. The NZX Code recommends certain governance mechanisms to enhance corporate performance. The mechanisms analysed in this study are the percentage of independent directors, duality, presence of board subcommittees (audit, remuneration, and nomination), and the performance evaluation of board and individual directors. This thesis examines the possible relationship between recommended governance structures and the performance of NZX companies for the years 2003 (pre-Code) and 2007 (post Code), using data from the same 89 companies for each year. Although the number of companies adopting the NZX structures has increased, the rate of full compliance of the Code remains disappointingly low, rising from 5.6% in 2003 to just 22.5% in 2007. Probably due to the small sample size relative to the number of independent variables, and the problem of co-linearity, the multiple linear regression results do not seem to be conclusive and may be unreliable as the basis to form any formal statistical inference. However, treating the 89 companies as the whole population (89 out of 90), and using a simpler and more descriptive statistical tool to analyse the impact of individual independent variables on firm performance, the 2007 results show a consistent pattern of a positive relationship between Code compliance and firm performance, assuming all other factors being constant. This positive relationship is further reinforced by dividing the population into the various industry groupings as classified by the NZX, which also results in a consistent pattern of companies which comply fully with the Code structures financially outperforming companies that only partially comply with the Code during 2007. Surprisingly, listed companies adhering to the Chairman/CEO dual role do not seem to have impacted negatively on firm performance, contrary to agency theory expectation.

Throughout twentieth century, it has become increasingly common for executives to be remunerated with stock options, contracts which allow the recipient to buy company stock at a predetermined price, thus giving the incentive to maximize the stock price in order to increase the value of the stock option contract. Not only has stock option compensation become increasingly prevalent to executives at most major listed companies, but also to employees at all levels of the firm, both big and small. However, along with the growth in popularity, stock option compensation also became a topic of contention, not only among the general public, but among lobbyists, legislators and academics. This thesis aims to provide a better understanding of stock option compensation practice, with a particular emphasis on the United States, where stock option compensation is most prevalent. The thesis is divided into three chapters: the first chapter deals with establishing a foundational understanding of stock option practice and possible drivers through investigating the literature on the history of stock option compensation practice in the US. The second chapter develops a holistic theoretical model of an optimal stock option compensation package to possibly explain some practice currently considered as excessive. Then lastly, the third chapter empirically tests the validity of possible drivers of executive stock option policy in recent times in an attempt to identify whether current practice is optimal or not. The first chapter is primarily a literature review, covering a series of events over the history of stock option compensation in the US, ranging from its early beginnings in the early twentieth century until the present day. Included in the coverage of significant events are: legislation impacting tax benefits for corporate and for recipients; “landmark” events such as the first case of “broad-based” option compensation resulting in companies following a standard business practice; trends in the stock market; academic theory of the development of agency theory which supports the use of tools such as equity based compensation, and the development of major option valuation models; the possible impact of accounting standards; and the possibly impact of major bankruptcies or unethical behavior directly or indirectly tied to executive stock option compensation. The second chapter follows with a theoretical approach to understanding stock option compensation trends by analyzing the major benefits and costs associated with stock options. The model developed differs to most other existing optimization models as it does not focus on one set of benefits or factors, rather a more holistic approach is taken. Using a holistic approach, this model also helps explain how levels of compensation that are considered excessive under an optimisation model based only incentive benefits, can actually be optimal for the firm once other costs and benefits are incorporated. The model also aims to provide an alternative explanation to the managerial power hypothesis to explain why the buoyancy of the market may be positively correlated with compensation levels. This is explained by the impact of the buoyancy of the market on the likelihood of stock option exercise, and the costs and benefits either unconditional, partially conditional or conditional on options being exercised. In addition, smaller companies are also found to benefit from stock options more than larger firms due to some of the unconditional benefits, in particular, the ability to attract higher quality talent which can also help small firms fulfil untapped potential. Lastly, the model also provides useful insight into the appropriateness of using of foregone option premiums as the economic opportunity cost of granting stock options. The third chapter aims to empirically test the impact of several factors brought up in Chapter One that may help explain changes in compensation that occurred at the turn of the century. These major factors analyzed are: 1) the bull market prior to and the bear market following the market crash of 2000, 2) changes in accounting standards for equity based compensation, and 3) possible public perception of corruption following several major bankruptcies associated with poor ethics in 2002. Mixed evidence is found regarding the impact of market cycles. These findings include cycles to be linked to granting options out-of-the-money, a general inverse relationship with the levels of stock option compensation with the buoyancy of the market, expected for companies managing incentives, and finally there are indications companies ceased granting options based on poor company stock price performance prior to 2001. Other findings indicate the possible influence of accounting standards on economic decisions as well as the broad impact of events surrounding 2001-2, even though they have no economic impact. On the one hand, decreases in stock option compensation levels is shown to be linked to accounting decisions, however, there is insufficient evidence to support the argument that firm-wide decision making to cease granting stock options completely was based on accounting decisions.

With the intense competition and increasing globalization in the financial markets, bank management must develop customer-oriented strategies in order to compete successfully in the competitive retail banking environment. The longer a bank can retain a customer, the greater revenue and cost savings from that customer. However, customers are also more prone to changing their banking behaviour when they can purchase nearly identical financial products provided by the retail banks. In order to stay competitive, bank managers need to understand the factors that influence and determine consumer’s bank switching behaviour. With China's accession to the World Trade Organization (WTO), their financial services market was liberalized and deregulated. As a result, customers have a greater choice between domestic and foreign banks. Furthermore, the emergence of the internet allows customers to access financial products without limitation, and increases the Chinese retail banks’ ability to prevent customers’ switching banks. This study identifies and analyses the factors that influence bank customers’ switching behaviour in the Chinese retail banking industry. The findings reveal that Price, Reputation, Service Quality, Effective Advertising, Involuntary Switching, Distance, and Switching Costs have an impact on customers’ bank switching behaviour. The results also reveal that the Young Age and High Income Groups are more likely to switch banks. In general, the results of this research allow service marketers and practitioners to develop and implement services marketing strategies to decrease customer defection rates, and in turn, increase bank profits. Furthermore, this research provides useful information for future researchers who study switching-behaviour in the banking industry.

This study will validate several key results from previous studies of bank loan announcement effects by using the data from Hong Kong market following the 1997 Asian crisis. Banks are believed to play a unique role in financial market which could effectively reduce the problem of information asymmetry and moral hazard. Banks could access borrowers’ inside information which is not available to other participants. Thus bank loan announcements convey valuable information to the market, and market response of the stock price should be positive. However, because of the significant reform in both financial market and information market, the valuation of bank loan announcement conveyed need to be reconsidered. This study investigates whether banks are still “unique” in the financial market or whether they are like middlemen between borrowers and investors. Data used in this study is collected from the Hong Kong Stock Exchange Index, and a standard event study with the market model is applied in the research to conduct the empirical analysis. The results suggest bank loan announcements are associated with significantly higher positive abnormal returns than non-bank loan announcements. Based on the market model of event study, market response is found to be significantly positive for loan syndication, short maturity loan and borrower’s debt ratio, and negatively related to firm size and loan size. Bank loans with refinancing and capital expenditure and no specific purpose have significantly higher positive abnormal returns, and borrowers with property and industrial industry type have more significant positive abnormal returns compared to other industry type. The findings also suggest the Hong Kong stock market is efficient in both strong and semi-strong form for bank loan announcements. A strong evidence of information leakage problem is found for non-bank loan announcements. The results are generally consistent with the existing literature.

This dissertation contains three empirical studies that examine the effect of investor protection on three different aspects of corporate governance: mergers and acquisitions, US cross-listings, and convergence of information environment around the world.1 The first study investigates the relation between investor protection and the choice of acquisition form (partial versus full acquisition). I argue that if private benefits are a motivation for mergers and acquisitions, an acquirer is more likely to bid for a controlling fraction (but not a hundred percent) of a target firm in countries with weak investor protection because in these countries private benefits of control are an important asset. The empirical results support this argument: compared to full mergers, partial acquisitions are the preferred form of acquisition when target countries do not effectively protect minority investors. Partial acquisitions are also more common among foreign acquirers from countries with poor legal systems. Finally, I show that firm-level corporate governance of the target firm is negatively related to the likelihood of partial acquisition. The second study examines the effect of investor protection on domestic liquidity for cross-listed firms. If US cross-listing can improve a firm’s information environment because of more stringent disclosure requirements in the US, I expect the information improvement to be reflected in a reduction in domestic liquidity costs. The empirical results are consistent with this prediction: local bid-ask spreads and price impact (a proxy for the cost of adverse information) significantly decrease while local trading volume significantly increases one year after US cross-listing. In addition, the liquidity improvement is larger for cross-listed firms that are from poor investor protection countries, and that are listed on the NYSE. The results in the second study are consistent with the “bonding” argument by Coffee (2002). The third study tests Coffee’s (1999) prediction of a convergence in corporate governance around the world. Since information environment is a key factor of corporate governance, it is important to see if there is a convergence in information environment across countries over the past two decades. Using various common proxies for information environment, I show that the quality of information environment generally improves through time, but the improvement is larger for developed markets and countries with better institutional quality. In the third study, I also reproduce the main results in Bailey, Karolyi and Salva (2006), and Fernandes and Ferreira (2008). These studies report similar divergence in information environment for cross-listed firms post-US-listing, but fail to control for the quality of information environment in the domestic market. After we control for this market effect, we do not find support for their results: there is no improvement in information environment for cross-listed firms, and no difference in the change between developed and emerging countries. 1 The second and third empirical studies are co-authored work with my supervisor, Professor Henk Berkman. For consistency, I use the first person ‘I’ throughout the dissertation.

This thesis examines the profitability of the oldest known form of technical analysis, candlestick trading strategies. Unlike traditional technical analysis which is based around close prices, these strategies generate buy and sell signals that are based on the relationship between open, high, low and close prices within a day and over consecutive days. Traditional technical analysis, which has been the focus of previous academic research, has a long-term focus with positions being held for months and years. In contrast, candlestick technical analysis has a short-term focus with positions being held for ten days or less. This difference is significant as surveys of market participants indicate that they place 50 per cent more importance on technical analysis for horizons of a week than they do for horizons of a year. Candlestick technical analysis was developed on rice data in Japan in the 1700s so the tests in this thesis, using Dow Jones Industrial Index (DJIA) component stock data for the 1992 - 2002 period, are clearly out of sample tests. These tests are more robust to criticisms of data snooping than is the existing technical analysis literature. Proponents of technical analysis in the Western world would have had the opportunity to have become aware of candlestick trading strategies by this study's timeframe and would also have had the opportunity to source the data and software necessary to implement these strategies. So, a direct test of market efficiency is possible. This was not achievable by authors of many previous papers, who used data starting in the early 1900s and techniques that could not have been implemented at that time. Using an innovative extension of the bootstrap methodology, which allows the generation of random open, high, low and close prices, to test the profitability of candlestick technical trading strategies showed that candlestick technical analysis does not have value. There is no evidence that a trader adhering to candlestick technical analysis would out-perform the market.

This paper tests the relation between pricing efficiency and liquidity, with and without, the effects of asymmetric information. First, we show that informed trading is negatively related to liquidity. This result is consistent with previous researches, which find that informed trading reduces liquidity. Second, this report explores the direct relation between price efficiency and liquidity by applying a cross-sectional regression. The result indicates that liquidity associated with asymmetric information effects enhances pricing efficiency. The cross-sectional relation between relative informational efficiency and liquidity combed with informed trading is significantly positive. Third, we find that pure liquidity trading also contributes to price informativeness. The positive relation between relative informational efficiency and liquidity unrelated to asymmetric information cannot be rejected.

Bank loan ratings are employed to investigate the interrelationship between the rating agencies and banks. Valuation effects of rating announcements on investors in the market are also examined. Similar functions are performed by rating agencies and banks, however, it is found that investors perceive information provided by rating agencies and banks differently. In the first essay, the results indicate that investors recognise the value of rating agencies in the presence of banks as information providers and monitors. The value of rating agencies relies on their recognition of deteriorating prospects in a firm's financial position, as the market reacts significantly to bank loan rating announcements of placement on CreditWatch with negative implications and downgrades. In the second essay, the results indicate that investors recognise the value of high quality banks in the presence of rating agencies as information providers and monitors. When the deteriorated firms are associated with high quality banks, the negative reaction toward announcements of negative placement and downgrade is mitigated. This indicates that investors are willing to trust high quality banks' speciality in information and monitoring, and reassess the value of deteriorated firms. In the third essay, the results show that the value of rating agencies; via announcements of negative placement and downgrade; also expands to non-rated firms smaller than the rated firms, in the same industry. Announcements of negative placement indicate firm-specific deterioration and, therefore, smaller rival firms benefit from the change in competitive balance. From the announcements of downgrade, however, smaller rival firms experience contagion effect.

While much of the previous research on mutual funds has concentrated on finding the relationship between the investment style, the past performance and the future performance of funds, very few of the studies have paid attention to the effect of a mutual fund manager’s execution of investment style on fund returns. Using return-based analysis methodologies for measuring the style consistency of Chinese mutual funds, this thesis demonstrates that the less style-consistent funds tend to produce higher future risk-adjusted returns than more consistent mutual funds, even after controlling for past performance and net asset value (NAV). Further, these findings are robust across mutual fund investment style classifications, test period intervals (one-year or one-quarter interval), and the model used to calculate the expected returns (four-factor model and Sharpe’s style analysis model). This thesis also documents the performance-persistency effects that exist in Chinese mutual funds, which remain persistent even under the condition of style consistency. More importantly, the research discovered that at a time of change in the Chinese stock market, the negative correlation between style consistency and future performance becomes weaker. The study concludes that style consistency does matter for mutual funds’ future risk-adjusted returns and that there is a significant negative correlation with mutual funds’ future risk-adjusted performance in the longer term (i.e., over the entire test period). Moreover, this connection is distinct from those related to the past risk-adjusted performance and NAV of mutual funds. It is also clear that a significant negative correlation between style consistency and the future risk-adjusted return does exist in Chinese stock and asset allocation mutual funds, even after adjusting for the investment style of the fund. Finally, this thesis provide a mutual funds picking strategy for investors base on the main findings of this study, which can provide significant positive alpha at each year during the test period.

This thesis explores issues related to bank switching costs, in the context of the New Zealand banking market. Switching costs comprise the range of economic costs faced by customers changing bank, including monetary switching costs, the loss of the relationship with bank staff, and needing to learn new systems. An important effect of switching costs is customers become locked in to their bank, which has implications for market competition, and this raises questions about the need for a regulatory response. The study comprised a mail survey to 2983 people drawn from New Zealand electoral rolls, with a response rate of 34%. The survey instrument was a questionnaire of 70 questions in four sections: banking relationships, switching behaviour, switching costs, and demographic information. Nine categories of switching costs were used: Learning, Search, Monetary Loss, Benefit Loss, Personal Relationship, Brand Relationship, Service Disruption, Uncertainty, and Hassle. These categories are found to be appropriate. Furthermore, the three higher order categories of Procedural, Financial and Relational found by Burnham, Frels and Mahajan (2003) are confirmed. Although prior studies have recognised different switching costs, there has been limited work to understand whether they differ in their impact on attitudes and behaviour around switching. Different switching costs are found to have different effects. The study also examined whether the experience of switching matches the perception, and found switching is easier than expected. Furthermore, customers who have switched banks have different perceptions of switching costs to those who have not. Customers are different, and their attitudes and needs should therefore vary. Prior research has found differences in attitudes towards financial issues based on the family life cycle, but the relationship between switching costs and family life cycle has not been explored. This thesis finds perceptions of switching costs and switching behaviour vary significantly between life cycle groups, which appears in part to be related to associated changes in the complexity of the banking relationship. Four recommendations for regulators are generated from the results of the study. These include recommending greater acknowledgement of the existence and effect of switching costs, and investigation of bank account number portability.

The New Zealand economy in the period up to 2006 provides an opportunity to assess an alternative disclosure based approach to the prudential regulation of deposittakers, in a market free of many of the distortions which arise from traditional regulatory schemes. The overall objective of this research has been to assess the effectiveness of the prudential regulation of New Zealand financial institutions and judge if the country is well served by it. Analysis of New Zealand’s registered bank sector suggests public disclosure adds value to New Zealand’s financial system. However, the significant relationship found between disclosure risk indicators and bank risk premiums was not as a result of market discipline, rather it is argued self-discipline was the mechanism, demonstrating bank management and directors are discharging their duties in a prudent manner. A feature of the New Zealand disclosure regime for banks is the significant responsibilities placed on bank directors; directors are then held accountable for their actions. Findings in the management of banks were in contrast to non-bank deposittakers, where disclosure was judged to be ineffective, and of no practical use due to its poor quality. The management of non-bank deposit-takers appeared to receive very little oversight from depositors, their trustees or official agencies. As a result, many appear to have managed their institution in their own interests, with little consideration given to other stakeholders. Failures which occurred in NBDTs from 2006 resulted from deficiencies in the prudential regulation of these deposit-takers, demonstrating the severity of asymmetric information and moral hazard problems which can arise if prudential regulation is not correctly designed and management interests are not aligned with other stakeholders. The New Zealand disclosure regime will never guarantee a bank will not fail, nor should it try to do so, but it should assist the functioning of a sound and efficient financial system. To this end, it is recommended that the Reserve Bank, in re-designing the regulatory framework for NBDTs, hold the management and directors of NBDTs similarly accountable, while also incorporating regular disclosure and minimum prudential standards. Governments have an important role to play in ensuring the financial system is efficient.

This thesis extends the 52-week high momentum literature, which was first published by George and Hwang in 2004, by stressing the parameters of the trading strategy to investigate its robustness. George and Hwang, in their seminal paper, find that the ratio of a stock’s close price to its 52-week high price is a good predictor of future returns. The thesis stresses various parameters of the strategy - such as the percent of total stocks bought and sold each period – and applies the strategy over different time periods – such as bull and bear markets. The study finds that the strategy is more profitable over the later half of the data set due to underperformance in bear markets such as the 1929 market crash and subsequent Great Depression. The results also show a significant difference in profitability between bull and bear market periods. The second half of the thesis looks at a new area in momentum, the absolute 52-week high. The strategy buys stocks whose price has increased over the previous six months, and who also close to their 52-week high price. Stocks are only bought (sold) if their price has increased (decreased) over the past six months and is close to (far from) the 52-week high price. The aim is to cut out stocks that are considered to be underperforming in the 52-week high momentum strategy, leaving only true winner and loser stocks. This strategy was found to increase the strength of the 52-week high momentum strategy, and the results show that there is no longer a significant difference between bull and bear market returns.