Hoa Luong, Abeyratna Gunasekarage and Pallab Kumar Biswas
This paper investigates the influence of CEO power on financial statement comparability using a multidimensional CEO power index and a comprehensive measure of financial statement…
Abstract
Purpose
This paper investigates the influence of CEO power on financial statement comparability using a multidimensional CEO power index and a comprehensive measure of financial statement comparability for ASX-listed companies.
Design/methodology/approach
This study applies ordinary least squares regression analyses to a sample of 3,562 firm-year observations spanning 2004–2015. A propensity score matching procedure, lagged regression models, instrumental variable two-stage least squares regressions and first difference models were performed for endogeneity correction and robustness purposes.
Findings
The results suggest that powerful CEOs are more likely to produce more comparable financial reports. We also analyse four dimensions of CEO power and find that the influence of CEO power on FS comparability mainly stems from ownership and expert power dimensions. Additionally, we report that the influence of CEO power on FS comparability is more pronounced for firms that operate under high market competition and industry-related shocks, but governance characteristics do not make a material impact on the uncovered relationship.
Practical implications
Given the pressure exerted by regulatory bodies on companies to reduce information asymmetry, the study’s empirical evidence offers valuable insights to policymakers, corporations and other stakeholders as it provides evidence on the importance of corporate leadership in improving FS comparability.
Originality/value
The extent to which CEO power is linked with the comparability of corporate disclosures is new to the literature. Investigating such a link is important because corporate disclosure is primarily a management practice that emanates from the board and generally affects the firm, its shareholders and other market participants.
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Hoa Luong, Abeyratna Gunasekarage and Syed Shams
This paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.
Abstract
Purpose
This paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.
Design/methodology/approach
This study applies ordinary least squares regression analyses to a sample of 1,429 acquisition observations announced by 986 unique Australian firms spanning the 2001–2015 period. Event study methodology was employed to capture the market reaction to acquisition announcements. Multinomial logit models, a two-stage least squares instrumental variable (IV) approach and propensity score matching (PSM) technique were performed for robustness and endogeneity correction purposes.
Findings
The results suggest that CPS has a positive and significant relationship with the announcement period abnormal return realised by acquirers, implying that executives are motivated to exert best efforts and support the CEO in making value-creating acquisitions. Further analyses reveal that management teams of high CPS firms demonstrate efficiencies in executing acquisitions. The positive relationship between the CPS and abnormal return is more pronounced in acquisitions of private targets, domestic targets and bidders with high-quality CEOs. These acquisitions make a significant contribution to the long-run performance of the firm, which provides support for the effort inducement hypothesis.
Practical implications
The study's empirical evidence implies that the strong governance environment in Australia and a highly monitored acquisition market and compensation contracts motivates executives to exert their efforts to make value-enhancing acquisitions.
Originality/value
This paper appears to be the first investigation that makes a link between CPS in different components (i.e. short-term, long-term and total pay) as proxy for tournament incentives and the outcomes of both public and non-public acquisitions in the Australian setting.
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Abeyratna Gunasekarage and David M. Power
This paper seeks to examine the long‐run financial and return performance of UK companies which are grouped according to whether or not they have changed their dividends and…
Abstract
Purpose
This paper seeks to examine the long‐run financial and return performance of UK companies which are grouped according to whether or not they have changed their dividends and earnings. Prior research has been conducted using US data and they are limited to extreme dividend changes such as dividend initiations and omissions. They have also arrived at contradicting results; some report a drift in performance, while others document evidence of mean reversion in performance. The current paper hopes to resolve this conflict using data for a large sample of UK firms which disclosed more general changes in dividends and earnings.
Design/methodology/approach
The aims of the paper are addressed using a stock market‐based study of share price performance and a detailed analysis of company performance based on financial ratios. These analyses are conducted from five years before to five years after the announcement of dividend/earnings news.
Findings
At the time of the announcements, share returns tend to be positive (negative) where companies have increased (decreased) the dividend and earnings. There is also evidence to suggest that the stock market has anticipated some of this news in the preceding 12 months. However, the dividend/earnings news does not appear to act as a signal of long‐term future company performance; companies which cut this dividend and reported lower earnings achieved the largest excess returns over the next five years. A similar mean‐revealing pattern existed in the financial ratios. Finally, most of the future long‐term share performance was attributable to the earnings rather than to the dividend news.
Research limitations/implications
The main implication of this research is that current dividend/earnings news is not a good guide to future company performance. Indeed, it is these firms which cut their dividends along with reporting a reduction of earnings which achieve excellent results over a subsequent five‐year period. Of course, there are a number of limitations with the research; it draws on data from two previous studies, looks only at the UK and does not consider sophisticated models of investors' expectations with regard to dividend and earnings information.
Originality/value
The main contribution of this paper is the long‐run analysis of UK company performance following joint dividend‐earnings announcements. The analysis is comprehensive in that it considers both stock market performance as well as financial ratio performance for a period of up to five years following the dividend‐earnings news. Thus, it should be of interest to most UK investors as well as to financial managers with large quoted firms. Academics will also be interested in the results since they shed some light on an existing debate in the literature.
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Nicholas Boone, Sisira Colombage and Abeyratna Gunasekarage
The purpose of this study is to examine whether the influence of block ownership on firm performance depends on the identity of the largest investor.
Abstract
Purpose
The purpose of this study is to examine whether the influence of block ownership on firm performance depends on the identity of the largest investor.
Design/methodology/approach
The authors analyse the data for New Zealand companies for the period from 2002 to 2007 and develop multiple regression models which test the influence of block ownership on firm performance subject to the identity of the investor. A two‐stage least square approach is employed to test the effect of possible reverse causality between block ownership and firm performance on the relationship found in multiple regression models.
Findings
The authors find that the concentrated ownership has a positive, albeit decreasing, association with firm performance. This relationship is conditioned on the identity of the largest investor. Those companies whose block investors were financial institutions performed better than their peers. The superior influence of financial investors on corporate performance did not disappear even when the endogeneity of this relationship was accounted for.
Originality/value
The main contribution of this paper is the finding of a differential influence of various identities of block investors on firm performance. It questions the role that some domestic block investors play in the governance of New Zealand companies and the reason why the financial system has allowed corporate entities to be the main shareholders of the majority of firms when they underperform relative to their peers.
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Abeyratna Gunasekarage and Hung Wan Kot
The purpose of this paper is to examine the profitability of return‐based investment strategies in the New Zealand stock market; 16 such strategies are examined for the period…
Abstract
Purpose
The purpose of this paper is to examine the profitability of return‐based investment strategies in the New Zealand stock market; 16 such strategies are examined for the period from January 1995 to December 2004.
Design/methodology/approach
The paper shows that, at the end of each month of the sample period, every security is ranked in ascending order using their past J‐month formation period cumulative return (J=3, 6, 9 and 12). Then these securities are allocated to three groups; group 1 represents the loser portfolio, while group 3 represents the winner portfolio. Finally, equally weighted average returns of winner and loser portfolios are calculated over the next K‐month holding period (K=3, 6, 9, and 12). The statistical significance of the returns earned from buying winners and shorting losers is tested in order to determine the profitability of proposed strategies.
Findings
The findings in this paper show that a strong momentum effect, rather than a reversal effect, is present in this market. For example, the strategy, which is based on a six‐month portfolio formation period and a six‐month holding period, generates a monthly return of 1.14 per cent. These strategies are most profitable when they are based on formation and holding periods of three‐to‐six months. Further analyses reveal that the profits generated by such investment strategies cannot be explained by either the small firm effect or the January effect.
Originality/value
The main implication of this paper shows that buying past winners and selling past losers is profitable in the short to medium run in New Zealand.
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Abeyratna Gunasekarage, David M. Power and Ting Ting Zhou
The purpose of this paper is to examine the long‐term relationship between the rate of inflation and the returns of real estate and financial assets traded in New Zealand markets.
Abstract
Purpose
The purpose of this paper is to examine the long‐term relationship between the rate of inflation and the returns of real estate and financial assets traded in New Zealand markets.
Design/methodology/approach
The question of whether these assets are good candidates to hedge inflation in the long run is addressed employing cointegration and causality tests on quarterly data for the period from December 1979 to December 2003.
Findings
A strong long‐term relationship was found between the returns offered by all types of real estate assets (i.e. residential, commercial, industrial and farm building) and the rate of inflation. However, such a long run relationship is not detected between the rate of inflation and the returns of financial assets (i.e. stocks, short‐term bills and long‐term bonds).
Research limitations/implications
The empirical findings reveal that the direction of causality is from inflation to real estate assets indicating that changes in property prices do not cause inflation in New Zealand; the cause of inflation is independent of the price movements for real estate assets. The real estate assets are found to offer an effective hedge against inflation in the long run. The same cannot be said for the financial assets, however.
Originality/value
This is the first New Zealand study which investigates the long‐term inflation hedging effectiveness of both real estate and financial assets. The findings should be of interest to most of the investors in New Zealand as the real estate assets play a significant role in their portfolio decisions.
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Syed M. M. Shams and Abeyratna Gunasekarage
– The purpose of this study is to examine whether the acquirers of private targets outperform their peers that acquire public targets in the long run.
Abstract
Purpose
The purpose of this study is to examine whether the acquirers of private targets outperform their peers that acquire public targets in the long run.
Design/methodology/approach
Using two samples of acquirers of private and public targets, this paper analyses their short-run market performance and long-run operating performance. Univariate analyses and multiple regressions are used to analyse abnormal stock returns and abnormal cash flow performances of bidders.
Findings
Acquirers of private targets earn significantly higher abnormal return than acquirers of public targets during the announcement period. Similarly, the long-run operating performance of acquirers of private targets is significantly higher than that of the acquirers of public targets. However, the performance difference between two groups is more pronounced when cash flows are scaled by the market value of acquirers.
Originality/value
This is the first Australian study to examine whether the long-run operating performance of acquirers depends on the organisational form of the target acquired.
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Kurt Hess, Abeyratna Gunasekarage and Martin Hovey
This paper aims to investigate the relationship between ownership structure and performance for a comprehensive sample of Chinese listed firms for the years 2000‐2004. In…
Abstract
Purpose
This paper aims to investigate the relationship between ownership structure and performance for a comprehensive sample of Chinese listed firms for the years 2000‐2004. In particular, the paper seeks to explore the effect of the dominance of state and private blockholders and control on firm performance. It aims to use a more differentiated approach than previous research on the subject, which has mainly focused on the effects of the pervasive state ownership on firm values. Accordingly, the main theme of the paper intends to relate to the analysis of the effects of private blockholders on firm value.
Design/methodology/approach
The paper tests the ownership‐performance relationship for the state and for sub‐samples with predominantly private shareholders. The paper uses both an ordinary least squares and a two‐stage least squares analysis, which treats ownership concentration as endogenous.
Findings
The paper finds evidence that large private blockholdings are to the benefit of firm value for the full sample. Conversely, for smaller samples of companies without or with very low shareholdings by the various state players, there is some evidence that large private block shareholdings might be to the detriment of firm value.
Originality/value
The study contributes to the literature by presenting a more comprehensive treatment of the ownership‐performance relationship of listed firms in China. The main theme of the paper relates to ownership concentration and the effects of private blockholders on the performance of firms, in addition to the endogeneity of ownership. It also contributes by utilising the alternative ownership classification system developed by the National University of Singapore.
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Abeyratna Gunasekarage and Debra K. Reed
The purpose of this study is to examine the character of any market response to the appointment of outside directors. The main propositions tested are: whether the stock market…
Abstract
Purpose
The purpose of this study is to examine the character of any market response to the appointment of outside directors. The main propositions tested are: whether the stock market responds unconditionally to these appointments or whether the market response is conditional on the degree of the agency problem faced by the firm and the affiliation of the appointees.
Design/methodology/approach
The authors use a New Zealand sample of the appointments of outside directors during the period from July 1999 to June 2004. The unconditional market response is examined analysing the abnormal returns generated by the appointing companies during the three‐day announcement period. The influences of the agency problem and the affiliation of directors are tested by employing multiple regressions.
Findings
The findings provide strong support for the second proposition; the market considers the degree of the agency problem faced by the firm and the affiliation of outside directors in responding to these appointments. The percentage of outside directors in the board emerged as the strongest governance mechanism which, together with firm size, posed a significant inverse influence on announcement period abnormal returns. A strong interaction effect between appointee status and the agency problem was not present.
Originality/value
The mere appointment of outside directors may not please the firm's investors. Such appointments are more useful for companies with severe agency conflicts; even if such a conflict is present, the affiliations that these outside directors have with the executives and the operations of the appointing companies may need to be considered in determining the value of such appointments.
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Yun Wang, Abeyratna Gunasekarage and David M. Power
This study examines return and volatility spillovers from the US and Japanese stock markets to three South Asian capital markets – (i) the Bombay Stock Exchange, (ii) the Karachi…
Abstract
This study examines return and volatility spillovers from the US and Japanese stock markets to three South Asian capital markets – (i) the Bombay Stock Exchange, (ii) the Karachi Stock Exchange and (iii) the Colombo Stock Exchange. We construct a univariate EGARCH spillover model that allows the unexpected return of any particular South Asian market to be driven by a local shock, a regional shock from Japan and a global shock from the USA. The study discovers return spillovers in all three markets, and volatility spillovers from the US to the Indian and Sri Lankan markets, and from the Japanese to the Pakistani market. Regional factors seem to exert an influence on these three markets before the Asian financial crisis but the global factor becomes more important in the post-crisis period.