Rethinking Risk in International Financial Markets

This thesis aims to address many of the issues raised concerning the appropriate definition and measurement of risk. An alternative approach to the estimation of risk, and the risk-return trade-off in international financial markets is investigated. Rather than focusing on the deviation of returns as the appropriate measure for risk, the more relevant negative domain when defining risk is focused upon. The notion of downside risk is applied as a more appropriate measure for risk. The focus is on a variety of international financial markets and applications of downside risk are used for improving market risk and credit risk management models. A downside risk approach for portfolio management is also derived, providing a pragmatic approach to implementing an alternative risk measure into international finance.

Download Full Text

Dealing with Derivatives. Studies on the role, informational content and pricing of financial derivatives

The aim of this thesis is to improve the understanding of derivatives markets, which should ultimately lead to a better diversification of risks among market participants. The author first analyzes the impact of derivatives on the market quality of the underlying asset. With experiments and a theoretical model it is shown that derivatives generally make markets more efficient, although volatility may increase, depending on the exact market structure. Next, the author presents two methods that derive information about the underlying price process from traded options. The models approximate the option prices well and the extracted information explains future volatility better than historical data. Finally, a model for the valuation of options in electricity markets is presented that deals with the special characteristics of electricity spot prices and may serve to value electricity generation plants.

Download Full Text

Empirical Studies on Financial Intermediation and Corporate Policies

This thesis investigates the impact of financial intermediaries on capital structures, corporate governance structures and the performance of firms. Throughout the world, financial intermediaries have powerful and influential positions in financial markets. The intermediaries have both the incentives and the means to influence the financial policies of the firms and initiate governance changes in underperforming management teams. On the contrary, investors have limited ability to exercise control, even though they provide debt and equity financing to firms. This thesis comprises four empirical studies. In the first study, the author analyses the impact of information asymmetry between the U.S. firms and their lenders on firms’ choice of debt maturity. The second study shows how firm-bank relations in the form of shared board positions and equity ownerships influence capital structure decisions of Dutch firms. The following examination in the third study of Dutch managerial and supervisory board turnover further demonstrates the strong position of financial institutions in disciplining underperforming management. The fourth and final analysis in this thesis relates the dispersion in analyst forecasts to the differences in investor opinions and investigates how the heterogeneity of investor beliefs affects prices of European stocks.

Download Full Text

Empirical Studies on Cash Payments

Jeanine Kippers (1973) obtained her master´s degree in econometrics from the Erasmus University Rotterdam in 1997. In the same year she was employed by De Nederlandsche Bank. She participated in the preparations of the cash changeover from guilder to euro in 2002, and contributed to the development of a European cash distribution system and the restructuring of the national distribution system. During her employment at the central bank she started her research on currency use, which resulted in several papers that have been published or are currently under review. In January 2004 she joined the Pensionand Insurance Supervisory authority, as a policy advisor in the (international) field of insurance supervision.

Download Full Text

Banking across Borders

The study examines the internationalization strategies of the world’s largest banks between 1980 and 2000. These banks have dominated the internationalization of banking. For 44 banks, commonalities and differences are identified on the basis of a strategic typology developed for this study. The central research question deals with the effectiveness of internationalization. Using a self constructed internationalization database, differences are estimated between foreign and domestic performance, and the effects on shareholder return. A higher degree of internationalization has on average contributed negatively to bank performance. Similarly, shareholders have not gained by more internationalization. Banks who retreated from their internationalization or banks with a long established internationalization strategy generated the highest total shareholder return. Banks who (strongly) increased their internationalization generated the least returns. The study also addresses the future outlook for international banking - how will the internationalization of banks proceed? The potential for further financial deregulation in the home country, uncertainty on the international regulatory regime, and the business mix of the bank are likely drivers for the bank's future internationalization strategy and profitability enhancement.

Download Full Text

Empirical Studies on Asset Pricing and Banking in the Euro Area

In dit proefschrift staan de aandelenmarkten uit het eurogebied centraal. De belangrijkste conclusie, die als rode draad door het proefschrift loopt, is dat het Europese integratieproces een aantoonbare invloed heeft op de Europese aandelenmarkten. Deze these wordt vanuit verschillende perspectieven onderzocht. Nieuwe modellen voor de waardering van aandelen Een direct gevolg van deze algemene conclusie is dat modellen die gebruikt worden om de prijs van een aandeel te bepalen opnieuw bestudeerd moeten worden. Deze worden namelijk meestal getest op basis van een lange reeks van historische gegevens. Het is echter niet verstandig de verwachtingen te baseren op de historische gegevens alleen, omdat “de spelregels” in en tussen de aandelenmarkten uit het eurogebied veranderd zijn. Bijvoorbeeld, de introductie van de euro heeft als direct gevolg dat het wisselkoersrisico tussen eurolanden is verdwenen. Moerman test één van de meest gebruikte modellen voor het prijzen van aandelen (gebaseerd op het onderzoek van Fama en French) en laat zien dat het Europese model steeds meer terrein wint ten opzichte van een apart model voor ieder land. Hieruit kan geconcludeerd worden dat aandelenmarkten meer financiële integratie laten zien. Betere risicospreiding over sectoren dan over landen Veel pensioenfondsen en andere vermogensbeheerders proberen hun aandelenportefeuille zo slim mogelijk op te zetten door de beleggingen te spreiden, waardoor de verhouding tussen het rendement en het risico beter is. Onderzoek uit de jaren negentig toonde aan dat een spreiding over verschillende landen het meest succesvol was. Moerman laat echter zien dat deze resultaten heden ten dage niet meer opgaan voor het eurogebied. Door het integratieproces laten de aandelenindices van landen steeds meer dezelfde beweging zien, waardoor het spreiden minder diversificatievoordelen oplevert. Spreiding over verschillende sectoren is verstandiger. Gevolgen van deze andere aanpak Uit een rapport van de Europese Centrale Bank blijkt dat veel institutionele beleggers inderdaad hun landenaanpak voor het eurogebied hebben omgezet naar een sectoraanpak. Een direct gevolg hiervan is dat de portefeuillemanagers van deze investeerders, die proberen de index te verslaan, nu worden afgerekend op een sectorindex in plaats van een landenindex. Daardoor neemt de vraag naar de grotere bedrijven binnen een sector toe, omdat de portefeuillemanagers meestal niet teveel van de index mogen afwijken. In zijn proefschrift onderzoekt Moerman dit voor de Europese bankensector. Het blijkt dat de grotere aandelen in de bankensector inderdaad steeds meer op elkaar gaan lijken qua rendementen. Dit kan niet verklaard worden door de resultaten van banken, aangezien deze sterk verschillen, maar lijken dus afkomstig te zijn van veranderingen in de vraag door de wijziging in aanpak van grote beleggers. Dit geeft derhalve een extra motivatie voor banken om door middel van fusies tot het topsegment te behoren. “Een mogelijke strategie voor banken is om te streven bij de grootste banken binnen Europa te horen om zodoende goedkoper toegang tot kapitaal via de financiële markten te krijgen”, zo stelt Moerman. “Dit geeft een verklaring voor de overnamepogingen die momenteel plaatsvinden in deze sector, zoals het bod ABN op Antonveneta en de geruchten tussen HVB en Unicredito”.

Download Full Text

Essays on Firm Valuation and Value Appropriation

Wouter De Maeseneire (1977) obtained his Master’s degree in Applied Economics magna cum laude from Ghent University, Belgium, in 1999. He joined the Department of Corporate Finance at Ghent University and the Competence Centre Accounting and Finance at the Vlerick Leuven Gent Management School in September 1999. In September 2001, Wouter was awarded with a scholarship from the Fund for Scientific Research-Flanders (Aspirant). In September 2002 he also joined ERIM as a PhD candidate to carry out his doctoral research. His work has been presented at several international conferences e.g., at the conferences of the European Financial Management Association and of the Strategic Management Society. His current research interests include valuation, real options and private equity.

Download Full Text

Essays on Corporate Bonds

The introduction of the euro on January 1, 1999 created a large, single currency bond market by merging eleven separate bond markets. The euro-denominated corporate bond market has grown substantially ever since. The growth of corporate bond markets, both U.S. dollar and euro, and the defaults of large companies, such as Enron and WorldCom, spurred the development of credit risk models and their applications. More recently, modeling and estimating liquidity risk has generated a lot of research attention from both academics and practitioners. This thesis starts with an overview of the effects of the euro introduction for the Dutch fixed income market and continues with empirical research on corporate bond credit and liquidity risks. Credit risk concentrates on pricing of step-up bonds and on optimizing conditional Value-at-Risk of credit bond portfolios. Liquidity risk focuses on measuring corporate bond liquidity and estimating communality in liquidity between corporate bond, government bond and equity markets.

Download Full Text

Increasing Returns and Firm Performance: An Empirical Study

This thesis is about increasing returns: positive feedback effects in markets and firms. Positive feedback means that success causes further success and failure causes further failure. There are two market-based mechanisms of increasing returns, network effects and social interaction effects, and two firm-based mechanisms of increasing returns, scale effects and learning effects. Empirical research into the relations between these mechanisms and into the consequences of increasing returns for firm performance is relatively scarce. The aim of the researcher with this thesis is to fill part of this gap. Concepts taken from economics and management sciences are used, building on the industrial organization theory of the firm. Three empirical studies were conducted for which new measurement models were constructed and tested and for which primary and secondary data was collected and analyzed. The results show that the presence of increasing returns in the market influences firm performance, but always through the realization of increasing returns in the firm. This means that in an increasing returns market, management is an important factor determining firm performance. It is therefore essential for managers to understand the mechanisms of increasing returns in their markets and firms and for them to be able to act strategically upon those mechanisms. This will enable managers to exploit business opportunities arising from increasing returns and to avoid pitfalls, which should result in better firm performance.

Download Full Text

Market Information Sharing in Channel Relationships Its Nature, Antecedents, and Consequences

Willem Smit (Hendrik-Ido-Ambacht, 1972) is currently working as a Research Fellow at IMD - International Institute for Management Development in Lausanne, Switzerland. Prior to this, Willem graduated with a Master’s degree in Marketing from the Rotterdam School of Management, Erasmus University. He also studied management at McGill University in Montréal, Canada. After several years in business, he returned to academia and started his PhD at the Erasmus Research Institute of Management, Erasmus University Rotterdam. He has presented his research on marketing at different academic and professional conferences in both Europe and North America. All through his PhD research, Willem teamed up with three communities. First, he worked with the business community on several research and consulting projects, such as future retail formats of car dealers (with Automotive), online retailers’ market intelligence (with Thuiswinkel.org), future competitiveness of garden centers (with Dibevo), supplier involvement in the fashion industry, and soccer clubs’ fan loyalty (with Sparta and Excelsior). Second, he internationalized EPAR, the Erasmus University’s PhD Association, to better represent his fellow PhD candidates’ community and third, he served the academic community as an ad-hoc reviewer for Marketing Science, IMP conference, and Industrial Marketing Management. At IMD he expands the field in research on market-driven and market-driving channels. He also works closely with IMD faculty on related research themes such as supply chain management, collaborative market learning, and market orientation. For updates on his research: www.justtherightstuffontheshelf.com

Download Full Text

Pricing Models for Bermudan-Style Interest Rate Derivatives

Raoul Pietersz was born on 12 June 1978 in Rotterdam, The Netherlands. In 2000, he obtained a Certificate of Advanced Studies in Mathematics (Mathematical Tripos Part III), with distinction, from the University of Cambridge. Over the academic year 1999-2000, he was awarded a title of Cambridge European Trust Scholar, and a retrospective title of Scholar at Peterhouse, Cambridge. In the summer of 2000, he completed internships at UBS Warburg and Dresdner Kleinwort Wasserstein, in London. In 2001, he obtained a first class M.Sc. degree in Mathematics from Leiden University. His Master’s thesis entitled “The LIBOR market model”was completed during an internship at ABN AMRO Bank, in Amsterdam. Over the period 1997-2001, he was awarded the Shell International Scholarship for undergraduate studies. His Ph.D. research, under supervision of Antoon Pelsser and Ton Vorst, focuses on the efficient valuation and risk management of interest rate derivatives. He has published articles in The Journal of Computational Finance, The Journal of Derivatives, Quantitative Finance, Risk Magazine and Wilmott Magazine. He has presented his research at various international conferences. His teaching experience includes lecturing taught Master courses on derivatives at the Rotterdam School of Management. Since the start of the Ph.D. period, he has held a part-time position at ABN AMRO Bank, initially at Quantitative Risk Analytics, Risk Management. Since July 2004, he is a Senior Derivatives Researcher, developing front-office pricing models for interest rate derivatives, at Product Development Group, Quantitative Analytics, as part of Structured Derivatives.

Download Full Text

Essays on the Dynamic Portfolio Choice

This thesis deals with the subject of dynamic optimal portfolio choice. In the first two chapters we consider the problem usually encountered in the unconstrained portfolio choice, namely the hedging against adverse changes of state variables. In this context we focus on the interest rate risk hedging. We analyze the problem in question in both continuous and discrete time by applying the martingale approach to the optimal portfolio choice combined with Malliavin calculus. In the continuous time framework we provide an alternative derivation of optimal portfolio policies in the chosen model of financial markets and confirm the convergence of optimal portfolio policies simulated according to the Malliavin calculus method to their continuous-time counterparts. In the discrete time we confirm several properties of the optimal portfolios known from the continuous time analysis. Properties, which are not intuitive enough in continuous time are analyzed in the discrete time in more detail. The last two chapters are devoted to the problem of constrained portfolio choice. We investigate the problem of asset and liability management in the defined-benefit pension scheme with a stochastic liability. In the simulation exercise we compare the performance of several dynamic portfolio strategies against one another and fixed mixes in both complete and incomplete financial markets. We conclude that dynamic strategies are not superior to fixed mixes. The last part of this thesis covers an empirical investigation of constant proportion portfolio insurance (CPPI) strategies, for which theoretical properties are well known in the literature. We compare the theory against empirical results and CPPI against the alternative portfolio insurance strategy.

Download Full Text

Essays On Economic Cycles

Schumpeter’s line of thought of multiple economic cycles is further investigated. The existence of multiple cycles in economic variables is demonstrated. In basic innovations five different cycles are found. Multiple cycle structures are shown in various macro-economic variables from the United Kingdom, the United States of America and the Netherlands. It is remarkable that the lengths in years of the individual cycles are similar to the Fibonnaci sequence. This relationship has never been found before in the economy. This sequence is well known in the scientific fields of biology, physics and astronomy. It can also be observed in art, music and architecture. The existence of this relationship gives a new perspective on macro- economic relationships and economic growth. The multiple cycle approach is also applied to the Dutch economy. On the basis of a 5 and 11 year cycle present in the Dutch Gross Domestic Product (GDP) a long term forecast model is developed. At the same time a new real time indicator, also known as “nowcast indicator”, of Dutch GDP is developed. This indicator serves as a thermometer of the Dutch economy and is called the “Econometric Institute Current Indicator of the Economy” (EICIE). In contract to most other forecast models, which are much larger, this forecast model is based upon a single equation. The model is based on a single explanatory real variable, namely staffing data from Randstad Staffing Services.

Download Full Text

Corporate Bond Issuers

Willem Schramade was born in Woerden (Utrecht) on October 11, 1975 and grew up in Bodegraven, Rijen and Vlierden. In 1994 he obtained his Gymnasium diploma from the St. Willibrord Gymnasium in Deurne. Willem holds an MSc in Business Economics from Tilburg University, where he graduated in 2000 with a thesis on French IPOs, which ultimately (2006) resulted in a publication in the Journal of Corporate Finance. After brief spells at CPS in London and GE in Munich/Bergen op Zoom, Willem decided to go for the challenge of doing a PhD, and joined the ERIM PhD program in September 2002. He presented parts of his research at venues in Belgium, Denmark, Finland, Japan, the Netherlands, the UK and the US. The article version of Chapter 3 of his dissertation has been accepted for publication in the Pacific-Basin Finance Journal and he has several papers under review at academic journals. Willem’s teaching experience includes Corporate Finance and Financial Processes in the bachelor program of RSM Erasmus University as well as bachelor and master thesis supervision. Currently, Willem holds a dual position as a consultant for the Valuation & Strategy practice of PricewaterhouseCoopers in Amsterdam and as an assistant professor of Corporate Finance at the Erasmus School of Economics.

Download Full Text

Empirical Studies on Exchange Rate Puzzles and Volatility

This thesis consists of five empirical studies related to exchange rates. The first two studies deal with the fundamental theory of Purchasing Power Parity (PPP), which postulates that goods in different countries should have the same price when expressed in the same currency. The main conclusion of these studies is that the common use of a methodology with the restriction of homogeneous mean reversion in a panel of real exchange rates can have a dramatic impact on inferences made on the validity of the PPP hypothesis. The third and fourth study focus on the Uncovered Interest rate Parity (UIP), which is another fundamental economic theory. UIP states that the expected change in the spot exchange rate is equal to the forward premium. The linear models used in the third study are unable to capture the dynamics better than the benchmark random walk model. For the nonlinear models in the fourth study, however, UIP can not be rejected. The last study concerns the measurement of the volatility of exchange rates. The parsimonious multivariate Stochastic Volatility model is discussed that is estimated efficiently by using the distributional properties of the range-based volatility measure, which makes use of high and low prices. The estimated currency-specific volatilities that are extracted from the exchange rate volatilities are able to pick up some of the most saliant events in exchange rates. The five studies presented in this thesis offer a number of extended and enhanced empirical models that shed new light on the dynamics and determinants of exchange rates.

Download Full Text

The Economic Lot-Sizing Problem: New Results and Extensions

Wilco van den Heuvel (1979) obtained his master’s degree in Econometrics and Operations Research with honors from Erasmus University Rotterdam in 2002. In the same year he started with his PhD research. His main interests are in Operations Research and in particular in (extensions of) the classical economic lot-sizing problem. His research resulted in five papers published in Computers & Operations Research, European Jour- nal of Operational Research, International Journal of Production Research and Operations Research Letters. Finally, in 2005 he was awarded the Chorafas Prize, a prize to stimulate young researchers.

Download Full Text

On Hedge Fund Performance, Capital Flows and Investor Psychology

In a relatively short period of time, hedge funds have become major players in the financial markets. In 2004, the estimated total reached nearly 8000 funds, and the assets under management had risen to $1 trillion, from nearly $100 billion in 1994. The client base for hedge funds has expanded beyond foundations and endowments to company pensions, public pensions, and to less “sophisticated” investors. However, the increasing and widespread acceptance of hedge funds as an alternative investment vehicle is disconcerting if we consider their limited transparency and the restricted liquidity conditions imposed to investors. On these grounds, serious questions arise about investors’ ability to make the right investment choices in hedge funds. This book speaks to these concerns. The four essays presented here examine the investment process of investors, the underlying factors determining their choices and the implications for investors’ wealth and for hedge funds’ performance. Four main conclusions follow. First, that hedge fund managers exhibit, on average, persistence in their performance at quarterly horizons, justifying to some extent an active search for skilled managers; however, large informational asymmetries prevent investors from taking timely decisions and exploiting the persistence of good performing funds while incurring high opportunity costs. In contrast, investors are able to divest swiftly from the poor performers, which may have a moderating effect on the risk-taking incentives of managers. Finally, investors appear to misread the information available and overreact to persistence patterns, both at the individual fund level and at the style level. Overall, this study confirms a potentially suboptimal allocation of capital flows across hedge funds, calling for higher levels of transparency in the demand side for capital, and more cautious due diligence and increased prudence in the supply side.

Download Full Text

The Economic Virtues of SRI and CSR

Jeroen Derwall (1978) is an Assistant Professor of Financial Management at RSM Erasmus University, and Assistant Professor of Finance at Maastricht University, The Netherlands. He is also co-initiator of the European Centre for Corporate Engagement (ECCE). Before starting his doctoral research at ERIM, he studied at Maastricht University to obtain his Master’s degree in economics. His research has been published in international journals and presented at international academic meetings. His current research interest includes sustainable investment, empirical asset pricing, and mutual funds. 

Download Full Text

Macroeconomic Crisis and Firm Performance

Karen Watkins was born in Costa Rica, on April 15th, 1976. She studied Economics at the University of Costa Rica, and afterwards pursued the MSc in Economics and Finance degree at The University of Warwick, U.K.. Currently she is PhD Candidate in Finance at Erasmus University Rotterdam, The Netherlands. Her research interests are corporate governance, corporate finance, international finance, and health economics. Her academic inclination commenced during 1997, as teacher assistant for Microeconomics courses. Ever since, she has taught at different universities in Costa Rica, Mexico, and The Netherlands. She has been member of the Mexican Academia of Business Administration (ACACIA), and the Latin American and Caribbean Economic Association (LACEA), and has presented her work at several international conferences such as LACEA Annual Congress (both in Madrid and San Jose), and the Infiniti Conference on International Finance (Dublin). Nowadays Karen Watkins is university lecturer and researcher at UPAEP (Puebla, Mexico), as well as researcher for the Merck Company Foundation. She is married and has one child.

Download Full Text

Hierarchical Portfolio Management: Theory and Applications

Under his own preference, how should an investor coordinate the asset managers such that his aggregated portfolio is optimized? The efficiency of each managed sub portfolio and the aggregation of all the sub portfolios are the 2 main underlying problems considered in this dissertation. Contrary to popular believes, the tracking error volatility (TEV) optimization, commonly used to find the optimal active portfolio, often yields inferior portfolio choices. The results in this dissertation together with those in Jagannathan and Ma (2003) underscore how effective simple portfolio optimization techniques can be. In aggregating all the sub portfolios, the investor’s choice is limited if the managers only report the local optimal portfolio. Since the reported portfolios are the result of a stand-alone optimization within the sub portfolio while disregarding all the rest, each reported portfolio can only be optimal locally. A rational investor should and must demand for more choices than the locally optimal choice alone. Using simple examples in the single and multi period setting, this dissertation illustrates how significant the improvement in aggregated portfolio performance can be, both in terms of expectation as well as realization. Given the insufficiency of the TEV optimization, the inherent question is whether the active performance measures like the information ratio still suffice in judging a manager’s performance. As it turns out, the investor should be very careful when applying the active performance measures. Preferably, the Sharpe ratio should be used to judge the added value of a manager to the aggregated portfolio.

Download Full Text

Agent-Based Simulation of Financial Markets: A Modular, Continuous-time Approach

The dynamics of financial markets is subject of much debate among researchers and financial experts trying to understand and explain how financial markets work and traders behave. Diversified explanations result from the complexity of markets, and the hardly observable aspects of price formation mechanisms and of participants' motivation behind trading decisions. In an attempt to provide a better understanding of market dynamics, studies in the realm of agent-based computational economics represent markets from bottom-up. The aim of this thesis is to contribute to the understanding of market dynamics by extending the agent-based computational approach. In order to achieve our goal we propose a modular, continuous-time, agent-based trading environment, with individual, autonomous representation of market participants. In order to be able to develop such an environment we first analyze and compare real and artificial stock markets (ASMs). Based on this analysis we propose a conceptual framework to describe real markets. By enriching the framework with design and implementation issues we get a multi-dimensional taxonomy of artificial stock markets. ABSTRACTE, the proposed modular environment is an operational form of these frameworks. ABSTRACTE is aimed to embed the common aspects of real markets that exhibit big variations and are rarely represented in artificial stock markets. This environment provides the user with a flexible mechanism to implement many of the varying and hardly observable aspects of stock markets and traders' behavior. In this way it can contribute to the understanding of market dynamics as it can be used both as a test bed to replicate and evaluate existing market models, and to compare dynamics of multiple ASMs, as well as a tool to conduct experiments with new models and traders.

Download Full Text

Empirical Studies on Financial Markets: Private Equity, Corporate Bonds and Emerging Markets

This dissertation consists of five empirical studies on financial markets. Each study can be read independently and covers a specific market, either private equity, corporate bonds or emerging markets. The first study documents that risk factors cannot account for the significant excess returns of selection strategies based on value, momentum or earnings revisions indicators in the emerging equity market. The second study presents empirical evidence that security analysts do not efficiently use publicly available macroeconomic information in their earnings forecasts for emerging markets’ companies. The third study focuses on the emerging currency market and shows that a combination of macroeconomic variables and technical trading rules can be exploited to implement profitable trading strategies. Combining these two types of information improves the risk-adjusted performance. In the study on the corporate bond market we document that common risk factors do a good job in explaining the cross-section of returns on corporate bond portfolios with medium to long maturity, but significantly underestimate the returns on corporate bonds with a short maturity. Comparable evidence of a short-term corporate bond anomaly also shows up in portfolios of corporate bond mutual funds. In the last study we set out a commitment strategy that allows an investor in private equity to maintain a constant portfolio allocation to private equity given the uncertain nature of future cash flows and the limited liquidity.

Download Full Text

Empirical Essays in Corporate Finance and Financial Reporting

The thesis consists of four empirical studies in the areas of corporate finance and financial reporting. The first study examines CEOs’ familiarity with segments and how that familiarity affects their divestiture decisions. The results show that longer-tenured CEOs divest assets about half as often from familiar segments as from non-familiar segments. The study also shows that the familiarity effect is costly. The second study examines a firm’s selection procedure of financial advisors, including the choice of advisor nationality and experience, when making a cross-border acquisition. Characteristics of both the target and acquirer-nation, such as formalism, financial sophistication, and investor protection influence the acquirer’s choice of advisor nationality. Global- and target-country experience of an advisor serves as a substitute for the acquirer’s own cross-border acquisition experience, but advisors from either the target or acquirer nation create most value. The third study investigates management earnings forecasts disclosed by Dutch firms and how a cross listing in the US or UK influences managers’ forecast specificity choice and the ex post forecast errors. The results indicate that greater legal exposure and scrutiny causes firms to disclose less precise, but more accurate, forecasts. The final study examines analysts’ preferences for firms’ corporate financial reporting practices, which are confronted with the perceptions and actions of CFOs. Although we find that analysts’ views frequently correspond with those of CFOs, we also find some remarkable differences. Analysts tend to focus on long-term reporting strategies, while CFOs tend to make reporting decisions, and related investment and financing choices, with short-term consequences.

Download Full Text

Valuation, Capital Structure Decisions and the Cost of Capital

This thesis consists of six essays in Corporate Finance. In Chapter 1 we examine the relation between the quality of corporate governance and the value of excess cash for large European firms. We use ratings for Shareholder rights, Takeover defenses, Disclosure and Board structure as proxies for the quality of corporate governance. We find that the value of excess cash is negatively related to anti-takeover provisions only. Chapter 2 discusses the relation between corporate governance and the cost of debt. We find a negative relation between Disclosure and the cost of debt and uncover that this relation depends on the quality of Shareholder rights. This novel interaction effect is explained by our share rights or disclose hypothesis. In Chapter 3 and 4 we formulate the capital structure decision within a multi-criteria framework. We conclude that the capital structure decision is unfit for consideration as an optimization problem. Rather, it makes sense to solicit a variety of solutions from finance specialists that can be compared on criteria considered to be important. In Chapter 4 we discuss a merger and acquisition case as illustration. We compare different solutions generated by mutually independent financial experts on criteria which are relevant for the shareholders and for the management. In Chapter 5 we derive a general formula for the cost of government’s claim. We show that the present value of tax shields is equal to the difference between the present value of the expected taxes paid by the unlevered firm and those paid by the levered firm. In Chapter 6 the required return of intangible assets is determined for a variety of business sectors. The required returns are subsequently compared to several proxies used in practice. For most sectors, the levered cost of equity seems to be the best proxy.

Download Full Text

M&A in Japan: An Analysis of Merger Waves and Hostile Takeovers

The number of mergers between large companies has been low and hostile takeover cases have been rare in post-war Japan. Since the 1990s total M&A activity is increasing in number of cases and value, and coinciding with this trend, hostile tender offer attempts are also more frequent. Previous research argues that the low level of merger and hostile takeover activity is caused by three institutional elements within the Japanese society: the main bank system, the horizontal keiretsu, and the specific Japanese culture. Regarding mergers we examine whether the main bank system influences merger activity of companies. With two event studies we show that involvement of a main bank does not create shareholder wealth in mergers. The main bank appears to act in order to protect its own interests as creditor. With reference to hostile takeovers we show that it is important to make a distinction between greenmail and hostile tender offers. We build an institutional model and show that it is necessary to consider each institutional element from a broad and historical perspective. Finally, we indicate that the low number of hostile tender offers might be explained by the vertical keiretsu and trade association.

Download Full Text

Capital Structure, Strategic Competition, and Governance

This thesis consists of four studies on the interactions of capital structure and product market competition, and on several aspects of governance, firm financing and growth. The first study investigates how competitive behavior and market uncertainty affect the capital structure of a firm in the U.S. manufacturing. We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand samples. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. In the second study, we examine the joint determination of capital structure and market share in U.S. manufacturing firms. We provide evidence that in Cournot (Bertrand) competition, leverage negatively (positively) affects market share. Market share is shown to have a negative impact on leverage in Cournot firms, but no impact on leverage in Bertrand firms. Both studies highlight the role of firms’ competitive behavior in the product market in their capital structure decisions. The third study analyzes the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the world. We find that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of these determinants. Although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage. Finally, in the forth study, we provide a firm-level analysis of the relation between corruption, growth, and public governance in Vietnam. Our results indicate that corruption significantly hinders the growth of Vietnam’s private sector. However, corruption is not detrimental for the growth in state sector. Our study emphasizes the role of local institutions and governance factors in affecting corruption.

Download Full Text

Empirical Essays on Debt, Equity, and Convertible Securities

This dissertation consists of four empirical studies on firms’ financing decisions. In the first two studies, we investigate the debt-equity choice for a large number of U.S. firms. We find that firms prefer debt financing over equity financing in case a debt issue allows the firm to keep its investment grade rating. When the financing requirement becomes sufficiently large, firms are more likely to choose equity financing. We find that most firms repurchase debt instead of equity in case they have excess funds. The last two studies of this dissertation deal with convertible security design. Since convertible securities combine debt and equity characteristics, the specific structure of these instruments can provide further insight into the relevant costs and benefits of debt and equity. We find that taxes, the costs of refinancing, and the costs of managerial discretion are important drivers of convertible security design. We further find that the desire to manage earnings has been responsible for recent innovations in the convertible market. Convertible arbitrage drives the innovation of combining a convertible issue with a stock repurchase: the stock repurchase serves to mitigate the negative price impact that results from the short sales of arbitrageurs.

Download Full Text 

Capital Structure Determinants and Governance Structure Variety in Franchising

This thesis investigates two questions: the determinants of capital structure in franchising and its subsequent impact on the franchise financing decisions; and the efficient governance structure choice in franchising. We posit that firms franchise in order to benefit from the reduced franchisees’ operational risks by limiting the debt level, such that the franchisor can bear more debt and gain tax-deduction benefits. Specific hypotheses are based on various theories like resource-based view, agency theory, signaling theory and classical capital structure theories. We empirically find that as the franchisor requires franchisees to put more equity in the initial investment, the franchisor does bear a higher debt level and gains from tax deductibility of interest expenses. This effect is stronger when more units are franchised. Moreover, we also find evidence supporting our prediction that the franchisee’s leverage is positively linked with franchisor’s maturity. This suggests that as the franchisor imposes a higher level of franchisee’s leverage in order to screen capable franchisees, the franchisor also increases their maturity to reduce bankruptcy risks. This thesis also explores the impact of governance structure on the incentives to invest in specific assets for the franchisor as well as the distributors. Wholly-owned, wholly-franchised, and mixed franchise systems are considered. Circumstances are identified when a dual distribution governance structure uniquely allocates efficient ownership over assets. A necessary condition for the efficiency of a dual distribution governance structure is a positive systemic effect, not the value of the brand name or location (or other) differences between outlets. We find that whether dual distribution benefits are realized in a franchise or a cooperative franchise depends on whether most value is added upstream or downstream.

Download Full Text

Essays in Financial Accounting

This dissertation aims to contribute to the literature about the quality of accounting information by investigating its interaction with institutional factors (i.e., their external environment) in which firms operate, such as industry and stock exchange. The research topics of this dissertation include the motivation of earnings management (chapter 2), the consequence of accounting frauds on the failure rate of IPO firms (chapter 3) and the effectiveness of actions taken by standard setters to improve the quality of accounting information (Chapter 4). Chapter 2 focuses on firms’ industry environment and investigates whether industry valuation impacts management’s decision to manage earnings. Chapter 3 has been devoted to examine the consequence of large scale earnings management or accounting scandals on the firm’s external environment. Chapter 4 examines whether the uniform adoption of IFRS by EU countries in 2005 improves the quality of accounting information by investigating the changes in the quality of analyst forecasts.

Download Full Text

Corporate Social Performance: From Output Measurement to Impact Measurement

All organisations have social, environmental and economic impacts that effect people, their communities and the natural environment. Impacts include intended as well as unintended effects and negative as well as positive effects. Current practice in performance measurement tends to focus on measuring only a part of the total impact that organisations have on society. The research about what impact, as distinct from output and outcomes, organisational actions have upon the society remains largely unexplored in existing management and business & society research. Therefore, the objectives of this dissertation are to increase the understanding of social impact of organisations, and to propose a framework and methodology that facilitates social impact measurement. The social impact of different organizational activities is studied throughout this dissertation. The first study focuses on the social impact of Corporate Social Responsibility (CSR). The second study focuses on Strategic Philanthropy while the third study focuses on the social impact of an individual foundation, the Netherlands Heart Foundation. This variety of organisational activities is chosen to show that impact measurement is relevant in the profit sector as well as in the non-profit sector and is relevant for all kinds of organisational activities. Next to this, in a fourth study, different existing social impact measurement methods are collected, analysed and classified. The studies in this dissertation add to the existing body of research that focuses on corporate social performance and social impact measurement. It also informs management about the possibilities and limitations of social impact measurement.

Download Full Text

The Role of Analyst Conference Calls in Capital Markets

Many firms conduct a conference call with analysts shortly after the quarterly earnings announcement. In these calls, management discusses the completed quarter, and analysts can ask questions. Due to SEC requirements, conference calls in the United States are virtually always live webcasted. A growing number of investors listens in on conference calls, suggesting that calls are useful for investor decision-making. This research clarifies the role of conference calls by analysing a large sample of conference call transcripts, analyst forecasts, and contemporaneous stock market reactions. The study investigates why conference calls are useful. The analysis shows that managers who provide little information in their presentation are actively probed by analysts, and the discussion with analysts becomes longer. Hence, the interactivity of the call enriches the information environment. In a second study, evidence is presented that information about intangible assets is one of the items in conference calls that moves stock markets. This study also shows that managers use the conference call to learn about the information needs of analysts with respect to intangible assets. A third study, suggests that sell-side analysts do not voice their true beliefs on conference calls in an attempt to favour their buy-side clients. Collectively, these results provide evidence that conference calls with analysts enrich the information environment, but their usefulness may be restricted by analyst incentives.

Download Full Text

Empirical Essays on the Stock Returns, Risk Management, and Liquidity Creation of Banks

This thesis consists of three studies that respectively investigate the stock returns, risk management, and liquidity creation of banks. Chapter 2 focuses on the cross-section of bank stock returns and found that pricing factors such as leverage and beta, shown to be irrelevant to nonfinancial stocks, are important for pricing bank stocks. During the two decades prior to the subprime crisis, banks with high leverage have high stock returns. Beta appears to have a strong and convex relationship with bank stock returns. This chapter generally suggests that bank stocks seem to respond to a different set of pricing factors than other industries. Chapter 3 examines the drivers behind banks’ use of derivatives for hedging. Covering virtually all banks in the U.S. that have used derivative, one key finding of this chapter is that off-balance sheet loan commitment contracts, rather than on-balance sheet loans, determines the use of derivatives for hedging. Since loan commitment contracts are the primary channel of financing for commercial and industrial borrowers, this finding is consistent with the observation during the subprime crisis that the illiquidity of the financial market makes it difficult for firms to refinance their existing loans. Finally the last chapter of this thesis examines the liquidity creation of European banks and its relationship with bank equity capital, market power, and institutional context. Using a unique and comprehensive sample of European banks, this chapter shows that the impact of stronger capital base on bank liquidity creation is strictly negative. This means that capital regulations such as the Basel II Accord are likely to curtail banking activities and slow down economic recovery and growth. Next, this chapter shows that stronger creditor rights coupled with stronger market power reduces liquidity creation in developing countries, and vice versa for developed countries. This finding suggests that due to the less developed legal infrastructure, stronger creditor rights could be counterproductive in facilitating bank liquidity creation in developing countries.

Download Full Text

The Analysis of Mutual Fund Performance: Evidence from U.S. Equity Mutual Funds

We study the mutual fund performance for about 45 years. There are several key points that we can withdraw from this dissertation. First, to study the persistence of mutual fund performance, it is important to consider time-varying exposures because when they are ignored, the persistence will be overestimated or underestimated. Second, the popular investment strategy in literature is to use only past performance to select mutual funds. We find that an investor can select superior funds by additionally using fund characteristics (fund turnover ratio and ability). Importantly, this strategy also requires less turnover, which is more appealing from the economic point of view. Third, the average alpha of mutual funds is an indication of whether it pays off to invest in actively managed funds. We show that a substantial part of the variation in the average alpha can be explained by the average expense ratio, the ratio between skilled and unskilled funds, and combining the average turnover ratio with the skill ratio and trading costs. The latter demonstrates that average turnover hurts the average funds performance due to there not being enough skilled funds. Fourth, selecting mutual funds on only alpha or a single style timing skill leads to overestimating the loading on the selected characteristic and a negative bias towards other characteristics. By estimating for each fund simultaneously alpha and style timing skills over its complete ex-ante available history based on daily returns we achieve two important results, namely the estimated alphas and style timing loadings of the top decile are estimated more accurately; and the ex-post performance of the top decile is superior to that of deciles selected on a subset of characteristics, using monthly data or a shorter estimation window.

Download Full Text

Knowledge, Entrepreneurship and Performance: Evidence from country-level and firm-level studies

This book investigates the interrelations between knowledge and entrepreneurship, and their consequences with regard to economic performance. Both knowledge and entrepreneurship are recognized as new twin driving forces for economic growth. Recent studies suggest that neither knowledge nor entrepreneurship alone is sufficient to drive growth. Investing in new knowledge is only a necessary condition; new knowledge needs to be exploited and put into commercial use such that it can lead to higher levels of competitiveness and economic growth. Entrepreneurship is acknowledged to play an important role in this process. It is thus essential for economists and policy-makers to understand how knowledge and entrepreneurship relate to each other and why they lead to economic growth. The five empirical chapters included in this book provide new insights into aforementioned issues on the firm- and country-level. Chapter 2 is based on a country-level analysis and identifies the moderating role of entrepreneurship in turning knowledge into innovation, which may ultimately lead to economic growth. Chapters 3 through 5, taking a firm-level perspective, investigate how small and medium-sized enterprises (SMEs) manage their knowledge assets (including organization knowledge and human resources) to stimulate innovation performance. Chapter 6 pays special attention to the determinants of SME growth. The findings of the chapters indicate that entrepreneurship catalyzes the transformation of new knowledge into innovation on the one hand; and the other hand, knowledge plays a significant role in stimulating innovation performance and SME growth.

Download Full Text

The Relationship between Offshoring Strategies and Firm Performance: Impact of innovation, absorptive capacity and firm size

How do offshoring strategies impact firm performance? And how are innovation, absorptive capacity and firm size influencing this relationship? This research investigates how firms of varying size, well-established firms and growing firms may profit from relocating business activities to foreign locations. Offshoring strategies are conceptualized as consisting of both organizational attributes – i.e. function offshored, governance mode and location – and strategic attributes – i.e. cost, resource and entrepreneurial drivers. Data has been collected in Europe and the US in collaboration with (1) the Offshoring Research Network (ORN), (2) Statistics Netherlands (CBS) and Statistics Europe (Eurostat), and (3) business partners. First, the results show that firms of different sizes, i.e. small, medium-sized and large firms, may all profit from offshoring strategies. Different theories, among which transaction cost economics, the resource-based view and entrepreneurship theory, help to explain the different rationales these firms may have their respective strategies. Second, this research indicates that well-established firms do not – or not yet – move beyond cost advantages to improve their competitive position. By applying learning theory, innovation is shown to have an impact on the relationship between offshoring strategy, i.e. function diversity and governance diversity, and competitive position. Third, the knowledge-based view of the firm helps to demonstrate that companies realize additional firm growth by offshoring core functions, while the effect of outsource offshoring on firm growth is contingent upon absorptive capacity. Fourth, the changes over time that firms exhibit in their location choice are explained by way of internationalization theory. While nearshore experience is important for farshoring, experience with farshoring also increases the likelihood of nearshoring, which is an indication of the importance of experience.

Download Full Text

Financial Services and Emerging Markets

This study addresses the organization and strategy of firms in emerging markets with an explicit application to financial services. Given the relevance of a well-functioning financial system for economic growth, understanding the organization and strategy of firms contributing to the development of sound financial services appears of utmost importance for emerging markets. Throughout the study, two main providers of financial services are distinguished, namely banks and stock markets, which are examined in the emerging market context of Central and Eastern Europe and China, respectively. For banking, the general focus is on the adopted strategies of multinational banks to expand across the Central and Eastern European region. The main findings indicate that, based on the degree of host market uncertainty and competition, multinational banks adopt different expansion strategies. Furthermore, it appears that multinational banks expand most effectively by establishing new subsidiaries in countries adjacent to a country where the bank already has a presence. For stock markets, the central theme is how the decision of mainland Chinese firms on where to list their shares reflects the attractiveness of the stock markets within the financial centers of Shanghai, Shenzhen and Hong Kong. The findings suggest an increasing segregation in the strategic listing decisions that mainland Chinese firms make, which indicates that the financial centers of mainland China and Hong Kong have become more specialized and complementary over time.

Download Full Text

Extreme Dependence in Asset Markets Around the Globe

The dependence between large stock returns is higher than the dependence between small to moderate stock returns. This is defined as extreme dependence, and it is particularly observed for large negative returns. Therefore, diversification gains calculated from the overall dependence will overestimate the true potential for diversification during turmoil periods. This thesis answers questions on how the dependence between large negative stock returns can appropriately be modelled. The main conclusions of this thesis read that extreme dependence is often present, can become rather strong, should not be ignored, and shows substantial time-variation. More specifically, extreme dependence shows up as contagion, with small local crashes evolving into more severe crashes. In addition, due to financial globalization, and emerging market liberalization in particular, extreme dependence between regional stock markets has substantially increased. Furthermore, extreme dependence can vary over time by becoming weaker or stronger, but it can also be subject to structural changes, such as a change from symmetric dependence to asymmetric dependence. Using return data at the highest possible level of detail, improves the accuracy of forecasting joint extreme negative returns. Finally, this thesis shows how different econometric techniques can be used for modelling extreme dependence. The use of copulas for financial data is relatively new, therefore a substantial part of this thesis is devoted to new copula models and applications. Other techniques used in this thesis are GARCH, regime-switching, and logit models.

Download Full Text

Behavioral Finance and Agent-Based Artificial Markets

Studying the behavior of market participants is important due to its potential impact on asset prices and the dynamics of financial markets. The idea of individual investors who are prone to biases in judgment and who use various heuristics, which might lead to anomalies on the market level, has been explored within the field of behavioral finance. In this dissertation, we analyze market-wise implications of investor behavior and their irrationalities by means of agent-based simulations of financial markets. The usefulness of agent-based artificial markets for studying the behavioral finance topics stems from their ability to relate the micro-level behavior of individual market participants (represented as agents) and the macro-level behavior of the market (artificial time-series). This micro-macro mapping of agent-based methodology is particularly useful for behavioral finance, because that link is often broken when using other methodological approaches. In this thesis, we study various biases commented in the behavioral finance literature and propose novel models for some of the behavioral phenomena. We provide mathematical definitions and computational implementations for overconfidence (miscalibration and better-than-average effect), investor sentiment (optimism and pessimism), biased self-attribution, loss aversion, and recency and primacy effects. The levels of these behavioral biases are related to the features of the market dynamics, such as the bubbles and crashes, and the excess volatility of the market price. The impact of behavioral biases on investor performance is also studied.

Download Full Text

In Money we Trust? Trust Repair and the Psychology of Financial Compensations

Despite the importance of trust in economic relations, people often engage in behavior that may violate their interaction partner’s trust. Given that transgressions in economic relations often result in distributive harm for the victim (i.e. loss of economic resources), a common approach in these relations consists of the transgressor providing a financial compensation to the victim: if a customer has complaints about a product, he is reimbursed; when a company is being sued, it often tries to make a financial settlement with the victims. Strangely enough, the high prevalence of financial compensations as a restorative response contrasts sharply with how little is known about their effectiveness. Can financial compensations actually increase trust again and what are the factors that determine their effectiveness? By taking an experimental approach, this dissertation aims to provide some first, much needed empirical answers regarding the effectiveness of financial compensations in restoring trust. In this venture, it was not only studied how aspects of the compensation itself (e.g. size) determine their effectiveness, but also how specific characteristics of the violation, the victim and the transgressor impact victims’ reactions to a compensation. The findings of this dissertation show that even in economic relations, where violations have a clear, quantifiable distributive harm, the process of trust repair is not simply determined by the material, financial value of a compensation. Rather, this dissertation reveals how immaterial aspects such as intent in the violation, whether a compensation was imposed or voluntarily provided or whether or not an apology accompanied the compensation, are all crucial in determining the actual value that victims attach to a financial compensation.

Download Full Text

Econometric Advances in Diffusion Models

This thesis gives new and important insights in modeling diffusion data in marketing. It addresses modeling multiple series instead of just one series such that one can learn from the differences and similarities across products and countries. Additionally, this thesis addresses the current availability of higher frequency diffusion data. The two issues provide challenges for modeling of diffusion processes. In this thesis we provide solutions to these challenges, and we also suggest another look at some older issues with a particular focus on parameter estimation. In the first chapters we deal with the estimation of diffusion parameters for a single series. We start with an overview of currently used estimation methods and we suggest that a new method is needed. In fact, our new method does not suffer from bias as it properly incorporates the source of noise and the observational frequency. In the next chapters we focus on modeling high-frequency diffusion data, where we specifically address mixed-frequency diffusion data and seasonality. Finally, we propose a new approach to jointly modeling many diffusion series, where we allow for cross effects between products and countries.

Download Full Text