Abstracts of Volume 44, Number 2, May 2009
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Interactions between
Corporate Agency Conflicts
Alan V. S. Douglas
One Man Two Hats -
What’s All the Commotion!
Jay Dahya, Laura G. Garcia and Jos
van Bommel
Corporate
Sustainability Performance and Idiosyncratic Risk: A
Global Perspective
Darren D. Lee and Robert W. Faff
The “Best Corporate
Citizens:” Are they good for their shareholders?
Greg Filbeck, Raymond Gorman and
Xin Zhao
The Correlation
Structure of Unexpected Returns in U.S. Equities
R. Brian Balyeat and Jayaram
Muthuswamy
The Pricing of IPOs
Post Sarbanes-Oxley
Jarrod Johnston and Jeff Madura
Interactions between
Corporate Agency Conflicts
Alan V. S. Douglas
This paper examines simultaneous incentive conflicts between
shareholders, bondholders and managers. Manager-owner
conflicts arise from information asymmetries, and
interact with traditional shareholder-bondholder
conflicts (i.e. underinvestment and asset substitution
conflicts). Managers are aligned with the bondholders’
preference to avoid under-investment, but are aligned
with the shareholders’ preference for asset
substitution, to the extent that riskier investments
increase the manager’s information advantage. The
interactions between conflicts extend the agency cost
literature and facilitate empirical implications linking
the influence of each party to investment opportunities,
financial policy, compensation contracts, and firm
value.
Keywords: Manager-owner and
shareholder-bondholder incentive conflicts, information
asymmetries, managerial rents, corporate efficiency
One Man Two Hats -
What’s All the Commotion!
Jay Dahya, Laura G. Garcia, Jos
van Bommel
We examine performance in publicly listed U.K. companies over
a period that encompasses the issuance of the Cadbury
Committee’s Code of Best Practice, which calls for the
abolition of the combined CEO/COB position. We find that
companies splitting the combined CEO/COB position to
conform to the Code’s requirement did not exhibit any
absolute or relative improvement in performance when
compared to various peer-group benchmarks. We do not
necessarily scoff at mandated board structures, but the
evidence suggests that this particular legislature
coerced the abandonment of the combined CEO/COB position
and appears to be wide of the mark.
Keywords: Cadbury, CEO, Directors,
Governance, UK
Corporate
Sustainability Performance and Idiosyncratic Risk: A
Global Perspective
Darren D. Lee and Robert W. Faff
Does investing in sustainability leaders affect portfolio
performance? Analyzing two mutually exclusive leading
and lagging global corporate sustainability portfolios
(Dow Jones) finds (a) leading sustainability firms do
not underperform the market portfolio and (b) their
lagging counterparts outperform the market portfolio and
the leading portfolio. Notably, we find leading
(lagging) corporate social performance (CSP) firms
exhibit significantly lower (higher) idiosyncratic risk
and that idiosyncratic risk might be priced by the
broader global equity market. We develop an
idiosyncratic risk factor and find that its inclusion
significantly reduces the apparent difference in
performance between leading and lagging CSP portfolios.
Keywords: Sustainability;
corporate social performance; corporate financial
performance; idiosyncratic risk; global evidence; best
of sector
The “Best Corporate
Citizens:” Are they good for their shareholders?
Greg Filbeck, Raymond Gorman and
Xin Zhao
Since 2000, Business Ethics magazine has published a
list of the 100 Best Corporate Citizens. Our event study
finds significant positive abnormal returns for new
companies added to the annual listing on the press
release date of the survey, both initially and in
subsequent survey releases. Over longer holding periods,
the top 100 companies consistently outperform the S&P
500, yet are not significantly different from a matched
set of companies, with the exception of the initial
survey year (2000). However, a rebalancing strategy
based on new additions outperforms both the S&P 500 and
a matched portfolio.
Keywords: Socially responsible
investing, shareholder wealth, event study, investment
strategy
The Correlation
Structure of Unexpected Returns in U.S. Equities
R. Brian Balyeat and Jayaram Muthuswamy
We examine the correlations between unexpected market moves
and unexpected equity portfolio moves conditional on
market performance. We derive unexpected returns from a
two-stage regime switching model. The model allows for
time-varying expected returns where the market portfolio
alone dictates the regime switching process. Portfolios
exhibit a natural hedge where correlations during
extreme unexpected market downturns are generally
negative. During unexpected market upswings,
correlations increase. Using the unconditional analysis
would lead to overhedging during market downturns and
underhedging during market upswings. The adjustments to
the unconditional hedging strategy conditional on
extreme market movements frequently exceed +/- 10%.
Keywords: Large returns,
conditional correlation, equity portfolios,
diversification, portfolio performance,
heteroskedasticity, conditional beta
The Pricing of IPOs
Post Sarbanes-Oxley
Jarrod Johnston and Jeff Madura
The Sarbanes-Oxley Act (SOX) imposes new requirements for
firms going public. Many provisions of SOX should
improve the transparency of U.S. firms going public and
therefore reduce the uncertainty surrounding their
valuation. We find that initial returns of initial
public offerings (IPOs) in the U.S. have declined since
SOX. Furthermore, the aftermarket performance of IPOs
since SOX is significantly higher. While the expense of
public reporting has increased in the U.S. because of
SOX, the valuations of newly public firms at the time of
the IPO are subject to less uncertainty and smaller
aftermarket corrections.
Keywords: Initial public offering,
IPO, Sarbanes-Oxley, price discovery, valuation,
regulation
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