Financial development, corporate governance and cost of equity capital

This paper explicitly examines the interactive impact of country level legal and financial development, and firm level governance attributes on the cost of equity capital. Using a comprehensive sample of 7380 firm years drawn from 22 developed countries, we show that firm level governance attributes affect the cost of equity capital only in the Common Law countries with high level of financial development. Our study is the first to highlight the complementary effects of legal origin, financial development and firm level governance attributes in influencing the cost of equity capital

Natural disasters: blessings in disguise?

This study examines the impact of natural disasters on market returns and on several industries that are likely to be affected by the disasters. We find that different natural disasters have different impacts on the returns of the market and on those of industries. Our evidence suggests that while earthquake, hurricane and tornado could negatively affect market returns several weeks after the events, other disasters such as flood, tsunami and volcanic eruption may have limited impact on market returns. We also find that construction and materials industry is positively affected by natural disasters but nonlife and travel industries are likely to suffer when a natural disaster strikes

Characteristics of Venture Capital Firms and Investment Appraisals: Australian Evidence

This study examines the characteristics of the venture capital industry in Australia. Our analysis is based on responses by thirty-two venture capitalist firms to a comprehensive questionnaire conducted in 2001. We observe that, on average, a venture capital firm has been operating for five years and consists of six investment executives with two specialist investment executives. Each firm has, on average, two formal layers in its investment decision-making process indicating two checkpoints to control risk. With respect to investment appraisal issues, it was noticed that the valuation methods based on discounted cash flows, recent transaction prices for acquisitions in the sector and capitalized maintainable earning (EBIT multiple), are the most important valuation techniques. It was further found that the resolution of information asymmetries through the overall coherence of the business plan and the venture capitalist’s own due diligence report were important across the industry when preparing a valuation. Venture capital firms sought to meet a standard benchmark rate of return on equity, on average, the target rate of return was 29% p.a. after tax. Several factors that would lead to vary targeted rates of returns were investigated as well

The relationship between insider trading and volume-induced return autocorrelation

As was establihed in Llorenteetal (2001) the dynamic relationship between return and volume is a function of information asymmetry. This study extends their analysis by linking the volume induced return auto correlarion coefficients with the level of disclosed insider trading. Using New Zealand data, we document a strong link between the sustainability of tradegenerated price changes and the extent of insidertrading. This relationship is robust to alternative econometric specifications and remains significant even after controlling for conventional measure of information asymmetry such as bid-ask spreads size ananalyst following. This suggests that volume induced autocorrelation may be a suitable criterion on which to rank firms on the level of private information trading. --Insidertrading,return autocorrelation

Elements of Effective Insider Trading Laws

While countries have been more than willing to regulate insider trading it is an open question as to whether this has resulted in improvements for those markets. In particular lawmakers have had to largely structure the legal regimes with little guidance as to what makes an effective insider trading law. We seek to address this by examining the aspects of a legal regime that result in reductions in information trading and trading costs. Employing a sample of 18 countries we compare specific and quantifiable aspects of the legal regime with the measures of transactions costs in a sample of up to 70 randomly selected companies per market. We find that stronger laws result in reductions in the cost of informed trading. Particularly we find that broader laws laws that employ financial rather than criminal damages and laws that are enforced by strong public regulators perform best. These results should help to enlighten regulator attempts to create strong and effective insider trading law