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Article
Publication date: 21 April 2010

Avanidhar Subrahmanyam

When agents first become active investors in financial markets, they are relatively inexperienced. Much of the literature focuses on the incentives of presumably…

Abstract

When agents first become active investors in financial markets, they are relatively inexperienced. Much of the literature focuses on the incentives of presumably sophisticated informed agents to produce information, and not on the nave agents. However, unsophisticated agents are important aspects of financial markets and worth analyzing further. In this paper, we provide a theoretical perspective that addresses the issue of how many nave traders would one expect in a financial market where policy makers try to educate the nave agents.We show that such policy balances the effects of nave trades on corporate investment and liquidity, as well as the monetary cost of increasing financial sophistication. The optimal proportion of nave agents varies with the value of information, the noise in private signals, and the inherent sensitivity of corporate investment to prices.We also show that the policy tool of encouraging insider trading can deter nave investors and thus improve corporate governance and the efficacy of corporate investment.

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Review of Behavioural Finance, vol. 2 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 27 July 2021

Mariam Jamaleh and Abha Shukla

Financial internationalization is of particular importance to emerging country firms. Its significance arises from the impact of institutional void and related agency…

Abstract

Purpose

Financial internationalization is of particular importance to emerging country firms. Its significance arises from the impact of institutional void and related agency problems (common to emerging markets) on the internationalization path of these firms. Building on concepts from international finance, agency theory and institutional theory, this paper aims to examine the main aspects of financial internationalization by emerging country multinationals, namely, cross-listing, foreign ownership and foreign independent directors.

Design/methodology/approach

This paper follows a multiple case study approach which is a good fit for the exploratory nature of this research. The interest is to examine the context-driven financial internationalization of each case firm and replicate the firm-level information to find a common strategy.

Findings

The findings suggest that financial internationalization by emerging country multinationals starts mainly as these firms plan to enter advanced country markets. It is a dynamic process that entails interaction between financial internationalization and real internationalization, as well as among different aspects of financial internationalization. Cross-listing comprises the first stage of the process. Then, foreign ownership, particularly foreign institutional investments, would increase gradually in response to advances in financial and factor markets. Recruiting foreign independent directors seems to be adopted last, possibly out of fear of losing control of strategic decisions.

Originality/value

This paper presents a unique perspective that delineates different stages of the process of financial internationalization by emerging country multinationals. This complements the efforts to explain the distinct path of internationalization followed by these firms and supplements scarce literature by including emerging multinationals from India where the matter has not yet attracted proper attention.

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Qualitative Research in Financial Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1755-4179

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Book part
Publication date: 1 December 2004

Sarah W. Peck

This study investigates whether block acquisitions lead to changes in board and CEO compensation characteristics and finds that block purchasers do not play a significant…

Abstract

This study investigates whether block acquisitions lead to changes in board and CEO compensation characteristics and finds that block purchasers do not play a significant role in improving the firm’s governance practices. However, the majority of professional investors have sold their block within a year, suggesting that they do not own their stock long enough to alter governance policies nor to benefit from such changes. For the smaller number of firms where a new blockholder maintains their investment for more than a year, the use of equity based CEO compensation increases while the use of cash based compensation decreases.

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Corporate Governance
Type: Book
ISBN: 978-0-76231-133-0

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Book part
Publication date: 19 September 2014

Christian Landau

We investigate whether active involvement of private equity firms in their portfolio companies during the holding period of a later-stage private equity investment is…

Abstract

We investigate whether active involvement of private equity firms in their portfolio companies during the holding period of a later-stage private equity investment is related to increased levels in operating performance of these companies. Our analysis of unique survey data on 267 European buyouts and secondary performance data on 29 portfolio companies using partial least squares structural equation modeling indicates that private equity firms, that is, their board representatives, can increase operating performance not only by monitoring the behavior of top managers of portfolio companies, but also by becoming involved in strategic decisions and supporting top managers through the provision of strategic resources. Strategic resources, in particular expertise and networks, provided by private equity firm representatives in the form of financial and strategic involvement are associated with increases in the financial performance and competitive prospects of portfolio companies. Operational involvement, however, is not related to changes in operating performance. In addition to empirical insights into the different types of involvement and their effects, this chapter contributes to the buyout literature by providing support for the suggested broadening of the theoretical discussion beyond the dominant perspective of agency theory through developing and testing a complementary resource-based view of involvement. This allows taking into account not only the monitoring, but also the more entrepreneurial supporting element of involvement by private equity firms.

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Expert briefing
Publication date: 4 March 2021

Late-phase bull equity markets invariably spawn a new generation of novice, casual traders. The surge in popularity of free stock trading apps such as Robinhood, combined…

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DOI: 10.1108/OXAN-DB259956

ISSN: 2633-304X

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Article
Publication date: 9 July 2020

Nils Teschner and Herbert Paul

The purpose of this research is to study the impact of divestitures on shareholder wealth. This study covers selloffs of publicly traded companies in Germany, Austria and…

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Abstract

Purpose

The purpose of this research is to study the impact of divestitures on shareholder wealth. This study covers selloffs of publicly traded companies in Germany, Austria and Switzerland (DACH region) during the period 2002–2018. It aims to understand the overall effect of selloffs on shareholder wealth as well as the impact of important influencing factors.

Design/methodology/approach

This study is part of capital market studies which investigate shareholder wealth effects (abnormal returns) using event study methodology. To determine the significance of abnormal returns, a standardized cross-sectional test as suggested by Boehmer et al. (1991) was applied. The sample consists of 393 selloffs of publicly traded companies with a deal value of at least EUR 10m.

Findings

The findings confirm the overall positive impact of selloffs on shareholder wealth. The average abnormal return on the announcement day of the sample companies amounts to 1.33%. The type of buyer, the relative size of the transaction as well as the financial situation of the seller in particular seem to influence abnormal returns positively.

Originality/value

This study investigates shareholder wealth creation through selloffs in the DACH region, a largely neglected region in divestiture research, but now very relevant due to increasing pressure of active foreign investors. Sophisticated statistical methods were used to generate robust findings, which are in line with the results of similar studies for the US and the UK.

Details

European Journal of Management and Business Economics, vol. 30 no. 1
Type: Research Article
ISSN: 2444-8451

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Article
Publication date: 1 December 2002

Halina Frydman, Roman Frydman and Susanne Trimbath

This paper examines whether financial buyers are more likely to initiate takeovers of inefficient firms. We show that they indeed are and thus conclude that takeovers by…

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755

Abstract

This paper examines whether financial buyers are more likely to initiate takeovers of inefficient firms. We show that they indeed are and thus conclude that takeovers by financial buyers play a potentially beneficial role in the allocation of corporate assets in the US. economy. Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001). In order to illustrate efficiency enhancements introduced by financial buyers, we select Forstmann Little’s acquisition of General Instrument for a brief case study. We show that their aggressive programs of cost management substantially improved the efficiency of General Instrument. Moreover, it allowed General Instrument to expand research and development to become the global leader in high definition television.

Details

Managerial Finance, vol. 28 no. 12
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 January 2013

Lisa M. Victoravich, Pisun Xu and Huiqi Gan

The purpose of this paper is to examine the association between institutional investor ownership and the compensation of executives at US banks during the financial crisis period.

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2057

Abstract

Purpose

The purpose of this paper is to examine the association between institutional investor ownership and the compensation of executives at US banks during the financial crisis period.

Design/methodology/approach

This paper uses a linear regression model to examine the association between institutional ownership and the level of executive compensation at US banks.

Findings

Institutional investors influence executive compensation at banks with the impact being most pronounced for the CEO. Ownership by the top five investors is associated with greater total compensation. Active investors have the strongest impact on executive compensation as evidenced by a positive association between active ownership and both equity compensation and total compensation. As well, active ownership is negatively associated with bonus compensation. The paper also finds that passive and grey investors influence compensation but to a less significant extent than active investors.

Research limitations/implications

The results suggest that the monitoring role of active and passive institutional investors is different in the banking industry. As well, institutional investors were likely a driving factor in shaping the compensation packages of the top executive team during the financial crisis period.

Practical implications

Stakeholders at banks should be aware that not all types of institutional investors act as effective monitors over issues such as controlling the amount of executive compensation paid to the highest paid executive, the CEO. Prospective investors should consider the type of institutional investor that owns large blocks of equity when making an investment decision. Namely, the interests of existing institutional investors may differ from their own interests.

Originality/value

This paper provides a new perspective on the monitoring roles played by different types of institutional investors. Furthermore, it provides a more comprehensive analysis by investigating the role of institutional investors in shaping the compensation packages of CEOs and other top executives including chief financial officers (CFOs) who play a vital role in risk management at banks.

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Book part
Publication date: 26 February 2016

Desmond Pace, Jana Hili and Simon Grima

In the build-up of an investment decision, the existence of both active and passive investment vehicles triggers a puzzle for investors. Indeed the confrontation between…

Abstract

Purpose

In the build-up of an investment decision, the existence of both active and passive investment vehicles triggers a puzzle for investors. Indeed the confrontation between active and index replication equity funds in terms of risk-adjusted performance and alpha generation has been a bone of contention since the inception of these investment structures. Accordingly, the objective of this chapter is to distinctly underscore whether an investor should be concerned in choosing between active and diverse passive investment structures.

Methodology/approach

The survivorship bias-free dataset consists of 776 equity funds which are domiciled either in America or Europe, and are likewise exposed to the equity markets of the same regions. In addition to geographical segmentation, equity funds are also categorised by structure and management type, specifically actively managed mutual funds, index mutual funds and passive exchange traded funds (‘ETFs’). This classification leads to the analysis of monthly net asset values (‘NAV’) of 12 distinct equally weighted portfolios, with a time horizon ranging from January 2004 to December 2014. Accordingly, the risk-adjusted performance of the equally weighted equity funds’ portfolios is examined by the application of mainstream single-factor and multi-factor asset pricing models namely Capital Asset Pricing Model (Fama, 1968; Fama & Macbeth, 1973; Lintner, 1965; Mossin, 1966; Sharpe, 1964; Treynor, 1961), Fama French Three-Factor (1993) and Carhart Four-Factor (1997).

Findings

Solely examination of monthly NAVs for a 10-year horizon suggests that active management is equivalent to index replication in terms of risk-adjusted returns. This prompts investors to be neutral gross of fees, yet when considering all transaction costs it is a distinct story. The relatively heftier fees charged by active management, predominantly initial fees, appear to revoke any outperformance in excess of the market portfolio, ensuing in a Fool’s Errand Hypothesis. Moreover, both active and index mutual funds’ performance may indeed be lower if financial advisors or distributors of equity funds charge additional fees over and above the fund houses’ expense ratios, putting the latter investment vehicles at a significant handicap vis-à-vis passive low-cost ETFs. This chapter urges investors to concentrate on expense ratios and other transaction costs rather than solely past returns, by accessing the cheapest available vehicle for each investment objective. Put simply, the general investor should retreat from portfolio management and instead access the market portfolio using low-cost index replication structures via an execution-only approach.

Originality/value

The battle among actively managed and index replication equity funds in terms of risk-adjusted performance and alpha generation has been a grey area since the inception of mutual funds. The interest in the subject constantly lightens up as fresh instruments infiltrate financial markets. Indeed the mutual fund puzzle (Gruber, 1996) together with the enhanced growth of ETFs has again rejuvenated the active versus passive debate, making it worth a detailed analysis especially for the benefit of investors who confront a dilemma in choosing between the two management styles.

Details

Contemporary Issues in Bank Financial Management
Type: Book
ISBN: 978-1-78635-000-8

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Article
Publication date: 6 October 2021

Rupali Misra, Puneeta Goel and Sumita Srivastava

Even after appreciating multi-faceted merits of retail participation in stock markets and extensive efforts by policymakers and financial service industry to increase it…

Abstract

Purpose

Even after appreciating multi-faceted merits of retail participation in stock markets and extensive efforts by policymakers and financial service industry to increase it, the present low retail participation in Indian stock markets is cause of grave concern. The purpose of this paper is to identify plausible drivers and deterrents of prospective and current household individuals through a multi-stage qualitative enquiry.

Design/methodology/approach

Two qualitative studies are conducted. In Study 1, scholarship of stakeholders is engaged through participative diamond model to propose behavioural classification of retail investors based on two-parameter framework. In Study 2, behavioural substructures of retail investors that drive or deter investment intentions and actions are identified through in-depth interviews.

Findings

Financial self-efficacy, past experience (own or peer group), financial eco-system, operational literacy, higher charges by financial experts and low liquidity in the hands of the investors are some key factors that influence investment intension and action of individual investors. Though digital platforms have helped to overcome hurdles faced by an investor but its availability, awareness and ease of use still remain a concern.

Practical implications

The inductive findings of this study uncover some important take-aways for the financial service industry – improve operational literacy, digital awareness, ease of use and incorporate risk assessments in client portfolios – and for the policymakers – improve investment eco-system through digital availability, financial literacy workshops focussed on operations.

Originality/value

To the best of the authors’ knowledge, this study is one of the initial attempts to adopt a multi-stage qualitative enquiry to propose behavioural classification of retail investors and uncover reasons that drive or deter individual investors’ intentions and actions in the context of Indian stock market. Moreover, this study provides necessary impetus to analyse and improve operational literacy (instead of financial literacy) and financial eco-system for higher retail participation.

Details

Qualitative Research in Financial Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1755-4179

Keywords

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