The Long and Short Side of Real Estate, Real Estate Stocks, and Equity

This thesis consists of three studies in the investments field, which examines the interaction between long and short positions and their impact on market participants, prices and portfolio allocations. In chapter 2, I examine the optimal portfolio composition for institutional investors when considering liabilities. Institutional investors, by taking into account their short positions, which in effect are their liabilities, make different asset allocation decisions (long positions). Important in the optimization in excess of liabilities is the role of the asset classes in hedging the market value of liabilities. In chapter 3, I turn to the impact of short positions of market participants on prices by showing that limits to shorting lead to biased prices. In particular, I find that the presence of short sale constraints can explain the existence of a premium to Net Asset Value for Real Estate Investment Trusts. Miller (1977) argues that as short-sale constraints keep more pessimistic investors out of the market, prices tend to reflect a more optimistic valuation than they otherwise would. The results of 4 suggest that overpricing caused by the presence of short sale constraints is not solely due to restriction on negative information but also partly a result of capitalized lending income. I show that revenue associated with security lending is capitalization in prices, as investors are willing to pay a premium associated with lending fees.

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Empirical Studies in Financial Accounting

This dissertation contributes to the stream of literature that examines the role of accounting information in capital markets. The first two chapters deal with the economic consequences of changes in accounting regulations. The third chapter examines the relation between accounting information and asset prices. Chapter 1 studies the impact of International Financial Reporting Standards (IFRS) adoption on the cost of equity and liquidity of European banks. The adoption of IFRS is associated with lower cost of equity particularly for banks with low pre-adoption quality of information environment. Chapter 2 examines the effect of IFRS adoption on the risk exposure of banks in Europe. Our analysis shows an increase in the risk exposure of banks after the mandatory adoption of the new accounting standards. We provide limited evidence that the increase in risk exposure is more pronounced for banks that operate in countries where accounting numbers are more likely to be used for contracting purposes. Chapter 3 focuses on the relation between aggregate earnings changes and corporate bond market returns. Aggregate earnings changes are negatively related to investment-grade corporate bond market returns and unrelated to high-yield corporate bond market returns. Further, the earnings-returns relation is lower for high-rated and long-term corporate bonds. These findings suggest that aggregate earnings contain information about cash flows and discount rates. Overall, the essays in this thesis highlight the importance of changes in accounting regulations and the significance of accounting information for equity and debt investors.

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Agency Costs, Firm Value, and Corporate Investment

Often firms lack the necessary internal resources to pursue all profitable investment opportunities at their disposal. One of the most important roles of financial markets is to allocate resources from different economic agents to the firms that will better employ them, thereby enabling productive investment to take place. However, there are informational and incentive-related problems in financial markets that result in agency costs. These costs can hinder the efficient allocation of capital across the economy and, as a result, can impact economic growth. This thesis examines the mechanisms that investors and managers use to reduce the agency costs of outside financing and the impact of such costs on firms’ investment decisions and value. The first chapter shows that the voluntary disclosure of information can help overcoming the informational asymmetry between managers and investors. The second chapter provides evidence that institutional ownership of firms can improve firm decisions and increase firm value when coupled with the appropriate incentives. In particular, we show that stock illiquidity is a key incentive in this setting. The last chapter examines the impact of accessing the public debt market on corporate investment. The findings support the hypothesis that firms adjust their investment decisions to offset an increase in agency costs, which in turn enables them to access outside financing on more favorable terms.

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Corporate Governance, Firm Risk and Shareholder Value

This dissertation consists of three studies in the field of corporate governance. The research examines the impact of the way Dutch firms are managed and controlled on risk characteristics and the implications for shareholder value. The first study examines the relation between board interlocks and firm risk. In particular, we measure the effect of supervisory directors’ connectivity on firm risk. We find yet unknown aspects of connectivity and based on our findings the validity of the motivation behind recent Dutch civil law amendments can be questioned. In the second study we examine how firms adapted their communication with investors to the changing demands of the financial markets in the 1990s. Using Royal Philips NV as a case study we find that Philips’ communication was not able to satisfy the demands of the changing financial markets. As a consequence, its shareholders have suffered billion euro value losses. In the third study, we measure the effect of managers’ discretion offered by takeover defenses on shareholder wealth. Dutch firms are known for the frequent use of takeover defenses, protecting managers and providing them a relatively strong position towards shareholders. We find that acquisitions conducted by Dutch firms generate significant positive abnormal announcement returns, which suggests that shareholders have other means to control management.

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Behavioral Strategy: Strategic Consensus, Power and Networks

Organizations are embedded in a network of relationships and make sense of their business environment through the cognitive frames of their employees and executives who constantly experience battles for power. This dissertation integrates strategic management research with organizational behavior to illuminate managerial cognition, intra-organizational power and interfirm networks. The collection of the studies presented in the present dissertation provides further insights into measurement of cognition, consensus formation process, optimal power differences, and social network theory with assumptions grounded on social cognition, behavioral decision theory, psychology and organizational behavior. These studies offered a new method to measure, visualize and aggregate individual cognition to group and between group level with a strong emphasis on multiple dimensions of cognition, shed light on micro-processes on consensus formation in relation to within-group power differences and psychological safety, a novel model of strategic decision making, and a new behavioral construct that refined existing theories from a behavioral perspective. Each study on its own laid down responses to core research questions of behavioral strategy. Consequently, this dissertation extends strategic management along behavioral lines and equips scholars and practitioners with novel methods and theoretical insights with respect to cognition, power and networks.

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