Research in Finance: Volume 19

We find that, at low levels of insider ownership, the market's reaction to dividend increases becomes less positive, and to dividend decreases becomes less negative, as insider ownership increases. The price reaction is larger when insiders control voting on shares they do not own and lower if a family owns a block. The results are .stronger for firms with low values of Tobin's Q. Several tests indicate that these cross-sectional results are not a manifestation of the information content hypothesis. Instead, the findings support the hypothesis that dividend increases reduce the agency costs of free cash flow and vice versa.

Founder CEOs of poorly performing firms are less likely to be replaced than non founders. Furthermore, founder CEO firms are much more prevalent in our sample of poor performing firms than in the general population. We also report that simply replacing a founder CEO is not sufficient to increase long-term stock returns unless the founder leaves both the firm and the board. In addition founder CEO firms are less likely than non founder CEO firms to: (i) replace the CEO with a financier; (ii) experience financial distress; (iii) file for bankruptcy; (iv) restructure assets; or (v) be targeted for takeover.

This study examines the effect of several factors causally associated with CEO compensation on firm performance. Previous studies of the association between CEO compensation and firm performance lacked sufficient use of control variables in the examination of this association. This study used a comprehensive measure of firm performance (the relative excess value ratio) that has not previously been used in this context. The results indicate that: (i) short-term CEO compensation has a stronger positive association with firm performance (as measured by the relative excess value ratio) than Long-term CEO compensation; (ii) market-based longterm CEO compensation has a stronger positive association with firm performance than accounting-based long-term CEO compensation; and (iii) CEO stock options are more positively related to the firm performance than restricted stock CEO compensation.

This study utilizer systematic risk as measured by its accounting beta to proxy IPO ex ante risk for examining the relationship between risk and underpricing. Unlike the IPO's standard deviation for returns, the risk measure employed by Ritter (1984), a firm's accounting beta is an ex ante factor available to investors before the initial public offering. Utilizing accounting betas from 701 firms, our regression analysis corrected for heteroskedasticity shows a positive relationship between accounting beta and the subsequent degree of underpricing. Thus, our finding suggests that systematic risk, as measured by an accounting beta, is a good proxy for ex ante uncertainty.

The bank mergers of the 1990s often triggered upward adjustments in reported depreciation and goodwill amortization expenses, apart from any change in actual costs, due to the conventions of purchase accounting. Thus, conventional measurements underestimated the sizeable and long-lasting reductions in non-interest costs achieved following mergers.The largest reductions in reported post-merger bank costs occurred in labor expenses, which were not subject to accounting revaluations. Reported premises expenses jell considerably less than that of labor when buildings were revalued. Other non-interest expenses rose, partly because amortization increased due to the additional goodwill generated by mergers.

Based on annual data for medium-sized U.S. commercial banks from 1991 through 1998, we investigate both the decision of whether to participate in interest rate derivatives and, for those banks participating, the extent of their involvement as end users. We find the hedging of balance sheet positions is an important motivation for involvement in derivatives. In addition, the extent of involvement is directly related to a bank's capital position. These results pointing to the typical end user as a financially secure bank seeking to hedge unwanted risk argue against the need for any additional restrictions on derivatives activities.

The study examines the financial and regulatory factors that influenced the extent of derivative activity at twenty-five large international dealer banks during the 1995–1997 period. The findings indicate that their derivative activity is directly related to the size of the bank's capital ratio, asset size, maturity gap, and credit rating, but inversely related to bank profitability. The greater the opportunity for commercial banks to pursue investment banking activities the less incentive they have to expand their level of derivative activity. Banks that are allowed to make direct investment in industrial firms appear to have more opportunities to cross-sell various types of derivatives, such as swaps.

The purpose of this paper is mainly to review the existing substitute relationship between capital regulation and deposit insurance system in Taiwan. We conclude a converse relationship exists between variable deposit insurance system and risk-based capital regulation, decrease of one can substitute for increase of another. After examining the impact of regulatory changes on banks' returns and risks during the period 1985 to 2000 in Taiwan, we find out that reducing fixed insurance rate and adopting risk-based capital regulation, the improvement on banks' return to risk ratio is significant. However, it is not significant following the implementation of variable-rate system.

At the time of initiation, interest rate swaps are of zero market value to the counterparties involved. However, as time passes, the market value of the swap position of counterparty may become positive or negative. In this paper, we examine the market values and dynamic interest rate risks of existing swap positions using the one factor general equilibrium term structure model of Cox, Ingersoll and Ross (1985). The valuation and risk measurement framework of this paper should be useful in developing a value cum risk accounting method advocated by Merton and Bodie (1995) for better internal management and reporting purposes and for more effective regulation.

Using the duration measures defined by Bierwag (1996), we derive the formulae of duration far zero-coupon bonds, coupon bonds and bond portfolios under the Heath, Jarrow and Morton (1990) (HJM) term structure framework. The advantage in using Bierwag's duration measure is that it provides a one-to-one correspondence with the returns on interest rate sensitive securities. Hence, this duration measure can make the performance of risk management on interest rates better We also investigate the differences of duration for coupon bonds between our formula and the conventional Macaulay's measure. Finally, we show that the performance of dynamic immunization strategy is much better than that of static immunization strategy.

We show that if a lead-lag relation exists between the option and spot markets, the implied volatility in option prices can be biased depending on the level of the true volatility; that is, the higher the true volatility, the more upward biased the implied volatility will be. We then test the theoretical conjecture, using intraday transactions data of the S&P 500 stock index and its options. The empirical results show that the S&P 500 index option market leads the cash index, and that the bias of the implied volatility due to the lead-lag relation is statistically significant, confirming our theoretical conjecture.

Venture capitalists have both a pre- and post-investment role in their portfolio firms. If their pre-investment due diligence is non-verifiable, second opinion has to be obtained from those who can become syndicating partners and benefit from investment. But these partners are also potential competitors. Using a moral hazard model emphasizing information generation rather than information revelation, we study how these factors affect the “lead” VC's syndication decision and the efficiency of his decision. Moreover, the size and composition of VCs' network of contacts help determine the intensity of effort in due diligence and provide conditions for the choice of one VC over another.